1980 (4) TMI 19 - HC - Income Tax

Court rules sale of shares as capital gains, not business income. Revenue to bear reference costs.

Commissioner Of Income-Tax, Bombay City II Versus Hindustan Industrial Agencies Pvt. Limited

Commissioner Of Income-Tax, Bombay City II Versus Hindustan Industrial Agencies Pvt. Limited - [1982] 135 ITR 436, 17 CTR 43, 4 TAXMANN 204 Issues Involved:1. Whether the sum of Rs. 61,449 for the assessment year 1963-64 is assessable as business income or should be considered only for purposes of computing capital gains.2. Whether the surplus of Rs. 38,175 for the assessment year 1964-65 realized on the sale of 2,500 shares is assessable as business income or should be considered only for purposes of computing capital gains.Issue-wise Detailed Analysis:Issue 1: Assessment Year 1963-64Question: Whether, on the facts and in the circumstances of the case, the sum of Rs. 61,449 is assessable as business income or should be considered only for purposes of computing capital gainsRs.Facts and Arguments:- The assessee-company, engaged in the business of electric motors and diesel oil engines, purchased 1,015 shares of the Electric Company in 1956 and later acquired an additional 3,150 shares.- In December 1961, the Electric Company issued fresh capital, and the assessee-company was entitled to 2,082 right shares but retained only 772, selling the rights to the remaining shares for Rs. 61,449.- The ITO and AAC treated this amount as business income, arguing that the market value of the shares had increased, indicating a profit motive.- The Tribunal, however, held that the right to subscribe to right shares was capital and the profit from its disposal should be considered capital gains unless the shares were stock-in-trade or the rights were disposed of in a trading transaction.Judgment:- The High Court agreed with the Tribunal, stating that the mere intention to resell for profit does not convert an investment into a trading activity.- The court emphasized that the right shares are in the nature of capital and the profit from their sale does not necessarily indicate a trading activity.- The court referenced Supreme Court rulings, particularly Raja Bahadur Kamakhya Narain Singh v. CIT, to support the view that the mere realization of an investment at an enhanced price does not constitute business income.- Consequently, the sum of Rs. 61,449 was held to be capital gains.Issue 2: Assessment Year 1964-65Question: Whether, on the facts and in the circumstances of the case, the surplus of Rs. 38,175 realized on the sale of 2,500 shares is assessable as business income or should be considered only for purposes of computing capital gainsRs.Facts and Arguments:- In the accounting year ending on 31st May 1963, the assessee sold 2,500 shares of the Electric Company for Rs. 2,97,500.- The ITO and AAC treated the surplus as business income, arguing that the transaction was an adventure in the nature of trade.- The Tribunal, however, found that the shares were not stock-in-trade and the transactions did not have the characteristics of trading.Judgment:- The High Court agreed with the Tribunal, noting that the sale of shares within a closed group and the lack of trading characteristics indicated that the transactions were not in the nature of trade.- The court referenced Supreme Court rulings, including CIT v. Sutlej Cotton Mills Supply Agency Ltd., to support the view that the mere intention to resell for profit does not convert an investment into a trading activity.- The court emphasized that the sales were within a closed group and did not involve outsiders, supporting the conclusion that the transactions were not trading activities.- Consequently, the surplus of Rs. 38,175 was held to be capital gains.Conclusion:Both questions were answered in the affirmative and in favor of the assessee. The sums of Rs. 61,449 and Rs. 38,175 were held to be capital gains and not business income. The revenue was ordered to pay the costs of the reference.