1960 (12) TMI 3 - SC - Income Tax

Purchase of large share block to secure managing agency is capital transaction; loss on sale capital, not trading.

SC dismissed the appeal, affirming HC's rulings that the acquisition of the managing agency via purchase of a large block of shares was a capital, not ... Acquisition of the managing agency - Nature of loss suffered on purchase and sale of shares - carry on business as brokers, managing agents and dealers in shares and securities - whether a transaction is or is not an adventure in the nature of trade - Held that:- The appellants had undoubtedly purchased the shares of the Dawn Mills with money borrowed at interest, but that circumstance by itself does not evidence an intention to trade in the shares. Nor is the fact that the appellants are dealers in shares and their memorandum of association authorises them to carry on business in shares of any importance in the circumstances of the case. The appellants by entering the shares of the Dawn Mills in their statement of shares in which trading transactions were carried on could not alter the real character of the acquisition. The appellants were undoubtedly dealers in shares ; but the transaction in the Dawn Mills shares was ex facie not a business transaction. The only reason for entering into the transaction, which could not otherwise be regarded as a prudent business transaction, was the acquisition of the managing agency. If the purpose of the acquisition of a large block of shares at a price which exceeded the current market price by a million rupees was the acquisition of the managing agency, the inference is inevitable that the intention in purchasing the shares was not to acquire them as part of the trade of the appellants in shares. The High Court was right in holding that the acquisition of the managing agency was an acquisition of a capital asset and the loss incurred by sale of the 400 shares was of a capital nature. The High Court was also right in dismissing the notice of motion for an order directing the Tribunal to refer the question suggested by the appellants. If the acquisition of the shares was not acquisition of a stock-in-trade, but of a capital asset, the appellants, by valuing the shares at cost or market price whichever was lower, could not bring the difference between the purchase price and the valuation made by them into their trading account. Appeal dismissed. Issues:1. Whether the acquisition of the managing agency of a company was in the nature of a 'business' carried on by the assessee-companyRs.2. If the acquisition was in the affirmative, whether the loss suffered on the purchase and sale of shares was of a revenue or capital natureRs.Analysis:1. The High Court answered the questions referred by the Income-tax Appellate Tribunal regarding the nature of the acquisition of the managing agency. The Tribunal held that the managing agency was acquired as part of the appellants' business activity. The shares of the company were bought in the regular course incidental to the business of acquiring the managing agency. However, the High Court determined that the shares acquired were a capital asset, and the loss incurred from the sale of shares was of a capital nature, not a revenue loss. The High Court dismissed the notice of motion taken out by the appellants.2. The Tribunal found that the shares of the company were not the stock-in-trade of the appellants but were purchased to acquire the managing agency. The shares were acquired for obtaining control over the managing agency, and the acquisition of shares was integrated with the acquisition of the managing agency. The High Court agreed that the acquisition of the managing agency was a capital asset, and the loss from the sale of shares was also of a capital nature. Therefore, the appellants could not bring the difference between the purchase price and the valuation into their trading account.3. The court considered the intention of the assessee in the transaction, emphasizing that the shares were not acquired for trading purposes but to facilitate the acquisition of the managing agency. The court noted that even though the shares were purchased with borrowed money and the appellants were dealers in shares, the transaction was not a business transaction but a capital acquisition. The court concluded that the shares were not acquired as part of the trade in shares but as a capital asset for acquiring the managing agency.4. The court discussed the legal principles surrounding the determination of whether a transaction is an adventure in the nature of trade. It was highlighted that the intention of the assessee and the legal requirements associated with the concept of trade or business are crucial factors. The court cited precedents to support the distinction between dealing in shares as a trader and investing in shares as an investor. The court emphasized that the acquisition of shares in this case was not for trading but for a capital purpose, i.e., acquiring the managing agency.5. In conclusion, the court upheld the decision of the High Court that the acquisition of the managing agency was a capital asset and the loss from the sale of shares was of a capital nature. The court dismissed the appeal with costs, affirming that the appellants could not claim the difference between the purchase price and the valuation as a trading loss since the shares were not acquired as stock-in-trade but as a capital asset for acquiring the managing agency.