Investment company surplus from share sale not business profit but capital receipt; relief granted under section 49B.

The High Court held that the surplus from the sale of shares by the investment company was not assessable as business profit but as capital receipts. The assessee was granted relief under section 49B on the total dividend amount of Rs. 5,07,503, rejecting the revenue's argument for a lower relief amount. The Court affirmed the Tribunal's findings, emphasizing that the mere change of investments does not automatically convert capital receipts into business income. Dipak Kumar Sen, J., supported the judgment, highlighting that not all surplus revenue receipts arise from business transactions for an investment company.

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Issues Involved:
1. Whether the surplus derived by the assessee from the sale of its shares in the relevant previous years was assessable as business profit.
2. Whether the assessee was entitled to the relief under section 49B of the Indian Income-tax Act, 1922, on the total amount of Rs. 5,07,503 as claimed by it and not on Rs. 4,54,356 as computed by the Income-tax Officer.

Detailed Analysis:

Issue 1: Assessability of Surplus as Business Profit

The primary question was whether the surplus from the sale of shares by the assessee, an investment company, should be treated as business profit or capital receipt. The Tribunal had found that the assessee was not a dealer in shares but an investor. The Tribunal noted that for the first eight years, there were no sales, and subsequent sales were made for specific reasons, such as aligning with the policy of investing in companies managed by Andrew Yule & Co. The Tribunal concluded that the surplus from the sale of shares was not business income but capital accretion.

The Tribunal's decision was based on the consideration of the entire facts and circumstances, including the objects clause of the memorandum of association and the pattern of investments and sales. The Tribunal emphasized that the mere change of investments does not automatically convert capital receipts into business income unless there is clear evidence of trading activity, which was absent in this case.

The revenue's contention, citing various precedents, was that the sale of shares was part of the assessee's normal trading activity, and thus the surplus should be considered revenue receipts. However, the Tribunal found that the facts did not support this view, as the sales were not part of the assessee's regular business activities but were changes in investment.

The High Court upheld the Tribunal's findings, stating that the facts found by the Tribunal were not challenged as perverse or based on no evidence. The Court agreed that the surplus amounts were capital receipts and not assessable as business profits.

Issue 2: Relief under Section 49B of the Indian Income-tax Act, 1922

The second issue was related to the quantum of relief under section 49B(b)(ii) of the Indian Income-tax Act, 1922. The assessee received Rs. 5,07,503 as dividend (agricultural) in the assessment year 1961-62. The Income-tax Officer had granted relief at 20% on Rs. 4,54,356, allocating Rs. 53,147 as the proportionate expenditure on the said dividend income. The Tribunal, however, held that the relief should be calculated on the entire amount of Rs. 5,07,503.

The Court examined section 49B, which provides relief to shareholders receiving dividends from profits assessed to agricultural income-tax. The section specifies that the relief should be calculated on the portion of the dividend attributable to profits assessed to agricultural income-tax. The Court found that the Tribunal's interpretation was correct and that the relief should be granted on the full amount of Rs. 5,07,503.

The revenue's argument that the relief should be limited to the portion of the dividend that had suffered tax under the Act was rejected. The Court referred to the Kerala High Court's decision in Commissioner of Income-tax v. A. V. Thomas & Co. Ltd., which supported the view that the relief should be on the total dividend attributable to agricultural income-tax profits.

Conclusion

The High Court answered both questions in the affirmative and in favor of the assessee. The surplus from the sale of shares was not assessable as business profit but as capital receipts. The assessee was entitled to relief under section 49B on the total dividend amount of Rs. 5,07,503. No order as to costs was made.

Separate Judgment by Dipak Kumar Sen, J.

Dipak Kumar Sen, J., concurred with the judgment and added that the nature of transactions by an investment company does not automatically make all surplus revenue receipts. The Tribunal's finding that the transactions were not in the course of the company's business was crucial, and the revenue's contention that any dealing in shares by an investment company is a business transaction was not accepted.

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