Shares acquired to secure managing agency treated as capital assets, so sale proceeds were taxed as capital gains.

Profits from the purchase and sale of shares were treated as capital gains because the shares were acquired as part of a transaction to obtain the managing agency of the companies, not as stock-in-trade. The board resolutions, the premium paid over market quotations, the surrounding negotiations, and the reasons for sale all showed that the dominant object was acquisition of the managing agency. Shares so acquired assumed the character of a capital asset, and their realisation gave rise to capital account profit or loss rather than trading income.

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Issues: Whether the profits arising from the purchase and sale of shares were capital gains or trading profits.

Analysis: The shares were acquired pursuant to board resolutions stating that they were being purchased with a view to acquiring the managing agency of the respective companies. The surrounding circumstances, including the manner of acquisition, the higher prices paid over market quotations, the subsequent negotiations, and the reasons recorded for sale, showed that the dominant object was acquisition of the managing agency and not dealing in shares as stock-in-trade. Where shares are purchased as part of a transaction to acquire a managing agency, the shares take the character of a capital asset and the profit or loss on their realisation is on capital account.

Conclusion: The profits were capital gains and not trading profits; the answer to the referred question was in the affirmative, in favour of the assessee.

Ratio Decidendi: Shares acquired as an integral part of obtaining a managing agency are capital assets, and gains on their sale are capital gains when the dominant intention is acquisition of the agency rather than trading in shares.

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