TaxTMI 
TaxTMI 
1960 (3) TMI 49
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..... 2 were its stock-in-trade or were capital investments. The assessee sustained losses on sales of the shares in set No. 2 in the two accounting years. The assessee claimed that the shares were stock-in-trade and the losses must be taken into account in computing profits and losses of its business. The department disputed the assessee's claim and contended that the losses were capital losses arising from sales of investments. The Tribunal held that the shares in set No. 2 were investment shares and were not stock-in-trade of the assessee up to February 21, 1940, that the shares were converted by the assessee into stock-in-trade on February 21, 1940, that the sales prior to that date should be treated as sales of capital investments, that the losses arising on sales after that the date should be allowed to the assessee and that such losses must be computed on the basis of the difference between the market prices on February 21, 1940, and the sale prices. The question referred to the court is as follows: "Whether on the facts fund by the Tribunal its inference that the shares in set No. 2 were investment shares and not stock-in-trade up to February 21, 1940, was justified i....
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....of transactions in jute and hessian as member of the East India Jute, Association Ltd. Set No. 4 was kept in the name of Suganchand Bagri, No. 11 and related to transactions in shares with the members of the Calcutta Stock Exchange Ltd. Set No. 5 was kept in the name of Suganchand Bagri, No. 1, and related to transactions in shares with persons other than members of the Calcutta Stock Exchange Ltd. There was a disruption of the Hindu undivided family. The deed of dissolution of the Hindu undivided family is dated October 11, 1938. On the disruption of the Hindu undivided family its business including its assets was taken over as a going concern by a firm consisting of Suganchand and his four sons. The firm was constituted by a partnership deed dated February 15, 1940. The partnership deed recites that the partnership came into existence on the Ramnavami day in the year 1938, that is to say, at the commencement of the Samvat year *[1951] 20 I.T.R. 572 (S.C.). 1995. The Hindu undivided family made an application to the Income- tax Officer under section 25A(1) of the Indian Income-tax Act for recording the partition. On such application the Income-tax Officer passed an order on Janua....
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.... of ₹ 27,604. In the return for the assessment year 1941-42 the assessee claimed to deduct losses amounting to ₹ 6,760 arising from sales of shares in set No. 2 during Samvat year 1997 ending on April 4, 1941. The nett loss of ₹ 6,760 consisted of losses of ₹ 9,767 and profits of ₹ 3,007. The Income-tax Officer following his previous decision held that the losses were of a capital nature and by separate orders dated September 21, 1943, disallowed the assessee's claim for deduction of these loses. On appeal the Appellate Assistant Commissioner following the decision of the Appellate Tribunal, by the two separate orders dated November 13, 1944, held that the losses should be allowed in computing the profits of the assessee's business in shares and that the assessment should be revised accordingly and set aside the order of the Income-tax Officer disallowing the losses. The Department preferred two appeals to the Appellate Tribunal. On May 28, 1945, the Calcutta Bench of the Tribunal recommended formation of a larger bench. Accordingly a larger bench of the Tribunal consisting of three members was formed. By order dated January 28, 1947, the Appel....
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....ell settled. If the findings of fact do not justify the legal conclusion the High Court must interfere. In Venkataswami Naidu and Co. v. Commissioner of Income-tax [1959] 35 I.T.R. 594, 602 (S.C.)., P.B. Gajendragadkar J. delivering the unanimous judgment of the Supreme Court observed: "In dealing with findings on questions of mixed law and fact the High Court would no doubt have to accept the findings of the Tribunal on the primary questions of fact; but it is open to the High Court to examine whether the Tribunal and applied the relevant legal principles correctly or not; and, in that since, the scope of enquiry and the extent of the jurisdiction of the High Court in dealing with such point is the same as in dealing with pure points law." Under section 66 of the Indian Income-tax Act the Appellate Tribunal can be required to refer questions of law arising out of their order. On such a reference the findings of fact by the Tribunal must generally be regarded by the High Court as conclusive. But there are well recognised exceptions to this rule, and a finding of fact cannot be regarded as conclusive if there is no evidence to support it or if it is perverse and not rati....
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....not a profit of trade." These observations were approved in Bolson and Son Ltd. v. Farrelly(6). Again in British South Africa Co. v. Commissioner of Income- tax(7) Viscount Simon observed: "For the purpose of assessment to income-tax (and here there appears to be no distinction between British and Northern Rhodesian tax) the proceeds of sale of an asset are brought into account if the sale is in the course of the taxpayer's trade or business. Thus, if it is his trade or business to make and to see, or to acquire and to sell, shoemaking machinery, then the proceeds of sale of such machinery are brought into account: if it is his trade to make and sell shoes and for that purpose he owns and uses shoe-making machinery, then if he sells such machinery, the proceeds of such sale are not brought into account. In the former case the machinery is sometimes called "floating" or "circulating" capital, in the latter "fixed" capital". The onus is upon the assessee to establish that the shares in set No. 2 were stock-in-trade and the losses on sales of the shares were business losses. (1)[1959] 35 I.T.R. 594 (S.C.). (2)[1959] 37 I.T.R. 288 (....
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.... 1996. Annexure "F" and "F-1" of the remained report show diverse sales of shares from set No. 2 in Samvat years 1996 and 1997. These documents suggest active trafficking in the shares from set No. 2 by the assessee firm since it came into existence. The dealings in the shares included in set No. 2 during the two accounting years were truly acts done in the carrying on of a business in shares. In Californian Copper Syndicate v. Harris [1905] 5 Tax Cas. 159 at 166., Lord Justice Clerk observed: "But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on or carrying out, of a business." The principles stated in that case were proved in Commissioner of Taxes v. Melbourne Trust Ltd.(1), Rees Roturbo Development Syndicate Ltd. v. Ducker(2), Venkataswami Naidu land Co. v. Commissioner of Income-tax(3) and Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax(4). The case last cited was approved by the Supreme Court in Sardar Indra Singh and Sons Ltd. v. Commis....
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....ares in set No. 2 were acquired by the assessee firm for the purposes of trade and were held by it as stock-in-trade since it came into existence at the commencement of Samvat year 1996, i.e., since March 29, 1939. The Tribunal however refused to draw the inference that the shares in set No. 2 were this stock-in-trade of the assessee firm prior to February 21, 1940, for two reasons. They said that: "(a) In view of the past history and the past conduct of the assessee Hindu undivided family (b) and in view of the fact that the shares were kept in set No. 2 which also included the assessee firm's capital, we are definitely of opinion that the shares in set No. 2 were the assessee's capital and not is stock-in-trade." I will firstly consider the second of the two reasons given above. The Tribunal said that set No. 2 contained assets like gold, silver, jewelry and mortgage. The Tribunal then observed that "if a person records his shares in a set of books which deals with capital assets, it stands to reason to say that the shares are his investment shares, particularly when he is a dealer in stocks and shares and has other sets of account bulks for shares which....
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....he date of disruption of the Hindu undivided family annexed to the remand report dated June 5, 1948, which is made part of the statement of case show that shares in numerous companies found in set No. 4 were also to be found in set No. 5. This fact does not show that the shares in either set No. 4 or set No. 5 were not stockin-trade. Similarly, the fact that shares in set No. 2 were to be found in sets Nos. 4 and 5 does not show that the shares in set No. 2 were not stock-in-trade. I will now consider the second reason given by the Tribunal. The Tribunal found that after the assessee firm took over the business in shares as a going concern there was no change in the manner in which the business had been carried on and what the Hindu undivided family did in the past was relevant material for ascertaining the intention of the assessee firm. The Tribunal looked at the past history and the past conduct of the Hindu undivided family and found that the profits or losses of set No. 2 had not been returned in the past and on that finding they rejected the contention of the assessee firm that the shares in set No. 2 were the stock-in-trades of the Hindu undivided family. But they observed ....
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....t the shares were not stock-in-trade. It is essential to remember the basic facts: (a) There were no sales of the shares in set No. 2 directly from set No. 2 until Samvat year 1995. In that year 125 Imperial Bank shares were sold directly from set No. 2 and the profit of ₹ 2,750 was declared in the return for the corresponding assessment year 1939-40. This fact appears from item No. 7 of the enumeration of evidence, paragraph 8(v) of the assessment order for 1939-40 dated September 10, 1943, and paragraph 7 of the order of the Appellate Assistant Commissioner dated December 25, 1943. The profits and losses on the subsequent sales in Samvat years 1996 and 1997 directly from set No. 2 were declared by the assessee firm in the returns for the assessment years 1940-41 and 1941-42 (b) From time to time there were transfers of shares in set No. 2 from that set to sets Nos. 4 and 5. Such book transfers were shown as loans by set No. 2 at certain prices. This fact appears from the Tribunal's order dated May 10, 1950, and the remand report dated June 5, 1948. (c) The shares transferred from set No. 2 used to be sold and delivered to customers under outstanding contracts of sale in....
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....urned it was very necessary to ascertain whether the loans were made at the cost price or the market price. The Tribunal did not consider that question at all. By their order dated May 10, 1950, they simply found that the loan was at a price and that the repayment of the loan was at the same price. Item No. 7 of the enumeration of evidence in the statement of case and the remand report show that the transactions of loan were not uniform in character and that the loan price was sometimes the cost price and sometimes the market price. By order dated September 24, 1955, the court, thereof, asked for the true meaning of item No. 7. In the further statement of the case the Tribunal stated that the question whether the loan was the cost price or the market price had not been considered in detail by the Tribunal. They also stated that item No. 7 was inaccurately stated in the statement of case. But clearly item No. 7 is not wholly incorrect for it is supported by the assessment order dated September 10, 1943. And in the context of item No. 7 and the admission that the question had not been considered in detail by the Tribunal the statement in the further statement of case that the Tribuna....
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....ers are in our opinion a clever device to evade proper taxation." Did they realize the implication of these observations? Taxable profits arise on sale of stock-in-trade and not on sale of capital investments. Devices to evade taxation are adopted to avoid taxation of profits arising on sales of stock-in-trade. There was no end to conceal non-taxable capital gains. The Tribunal rightly ruled that a trader cannot loan to himself his own stock-in-trade. But they overlooked that neither can be trader loan to himself his own investments. A loan of shares at a price is a contradiction in terms. A loan is not a sale. There is no price in a loan transaction. Book entries show the conduct of the assessee. They show how the assessee treated the transactions in his own books. But in this case they do not show an unequivocal intention of the family to treat the shares as investment shares. Even if the book entries show uniform treatment of a property as capital investment they are not conclusive and other circumstances may show that the property is stock-in-trade. In Emro Investments Ltd. v. Alter[1955] 35 Tax Cas. 305, a limited company was found to carry on a trade of buying and se....
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.... v. Commissioner of Income-tax.).[1954] 25 I.T.R. 265 (S.C.). Both Mr. Meyer and Mr. Pal have invited us to draw out own conclusions from the materials on the record. The court is, therefore, faced with the difficult task of ascertaining the relevant material and of drawing its own conclusions. The difficulty is increased by the fact that the Tribunal has not stated the basic facts clearly. The matter is further complicated by the fact that the Tribunal has from time to time made contradictory and accurate statements. (a) The statement of case, the further statement of case, the remand report, the assessment order for 1939-40 and the appellate order dated May 10, 1950, contain conflicting and contradictory statements with regard to the question whether the loans by set No. 2 to sets Nos. 4 and 5 were at the cost price or at the market price and with regard to the evidence on that question. (b) in item No. 13 of the enumeration of evidence in the statement of case it is stated that there was no evidence that the assessee firm converted the investment shares into stock-in-trade. This statement is inaccurate and is contradicted by paragraph 11 of the Appellate Tribunal's order dat....
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....ion whether the Hindu undivided family held the shares in set No. 2 as stock-in-trade. In Commissioner of Inland Revenue v. Sneath.).[1932] 17 Tax Cas. 149, 163 (C.A.). Lord Hanworth, M.R., observed: "I am therefore of opinion that the assessment is final and conclusive between the parties only in relation to the assessment for the particular year for which it is made. No doubt, a decision reached in one year would be a cogent factor in the determination of a similar point in a following year, but I cannot think that it is to be treated as an estoppel binding upon the same party for all years." The order dated August 8, 1944, was passed by the Tribunal after mature deliberation. There was strenuous contest. The matter came up before the Tribunal twice and the final order was passed on August 8 1944. The department acquiesces in the finding and did not ask for a reference. I will now consider the materials on the record touching the question whether the shares in set No. 2 were the stock-in-trade of the Hindu undivided family. Items Nos. 10 and 11 of the enumeration of evidence in the statement of case refer to the history of the past assessment of the Hindu undivided ....
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....ration of evidence in the statement of case refers to evidence showing that the shares in set No. 2 were not purchased with borrowed funds. But it does not also appear that the shares in sets Nos. 4 and 5 were acquired with borrowed money. Absence of purchase with borrowed funds does not appear to be the distinguishing feature of the shares in set No. 2. (2) Item No. 4 of the enumeration of evidence in the statement of case refers to evidence showing that the shares in set No. 2 where not purchased from funds of the a business carried on by the Hindu undivided family. This supposed evidence was not referred to and was not considered in the order of the Tribunal dated May 10, 1950. The only material on this point is the statement in the remand report of the Income-tax Officer that "it will be seen from the above recapitulation...that these holdings had not been acquired...from the funds of the business." The proceedings recapitulation of facts do not refer to any material in support of this statement. On the other hand there is material showing that set No. 2 held the liquid assets of the business in shares viz., its cash in bank. This material is to be found in paragraph ....
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....nk. I will now notice the special features of the case indicating that the shares were the stock-in-trade of the Hindu undivided family during Samvat year 1995: (1) Though by reason of the order passed under section 25A(1) of the Indian Income-tax Act the Hindu undivided family is deemed to continue during Samvat year 1995 for the purposes of the Act, paragraphs 5 and 9 of the statement of case show that in reality since commencement of Samvat year 1995 the Hindu undivided family had come to an end and a partnership consisting of the members of the family had come into existence. In judging the intention of the members of the family during Samvat year 1995 we must take into account the fact that in reality they held the shares in set No. 2 as partners for the purposes of their partnership business. (2) The surplus of ₹ 2,750 arising on a sale of shares from set No. 2 During Samvat year 1995 was held by the Tribunal to be business profits arising from sale of stock-in-trade of the business in shares carried on by the family. I will now notice the materials from which a general inference that the shares were stock-in-trade of the Hindu undivided family may be drawn: (1) Th....
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....r but were part of the business in shares. In Rees Roturbo Development Syndicate Ltd. v. Ducker[1928] A.C. 132 at 138, 141-42; 13 Tax Cas. 366. the main business of the company was the granting of manufacturing licences under its patents but it always contemplated the possibility of sale of its interest in the foreign patents. The company sold its rights in a foreign patent. During the twenty-two years of its existence this was the only sale of patent rights. The surplus arising on the sale of the foreign patent was held to be trade profit and the claim of the company that the surplus was a capital asset and not a profit of its circulating capital was rejected. The family used to hold the shares in set No. 2 for appreciably long periods of time. While the shares were so retained they used to earn dividends. But throughout the relevant period the shares in set No. 2 were the subjects of trading through sets Nos. 4 and 5. In Gloucester Railway Carriage and Wagon Co. v. Inland Revenuex Commissioners[1925] A.C. 469 (H.L.)., a decision ready cited, Lord Dunedin observed at pages 474-75 that: "A wagon is none the less sold as an incident of the business of buying and selling becau....