TaxTMI 
TaxTMI 
1980 (9) TMI 10
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....y Dr. and Mrs. Ghosh. Dr. Ghosh carried on his research work on antibiotics and Mrs. Ghosh, who was also technically qualified, assisted her husband in this regard. The company over the years had made considerable progress in the technical field. The previous year under consideration was the financial year ended on March 31, 1961, so far as the assessment year 1961-62 was concerned. In this period both Dr. and Mrs. Ghosh effected sales of certain shares. According to them, the surplus which arose was assessable only as capital gains and they showed such surplus as income from capital gains. In the case of Dr. Ghosh, the ITO accepted that the surplus arising out of the sale of 1,145 equity shares, acquired prior to 1944, and 14,000 deferred shares, acquired prior to 1946, represented capital gains. There were also sales by Dr. Ghosh of 20,000 equity shares which it is stated in the assessment order were acquired in September, 1960, and sold a few days thereafter. The surplus from such sales was assessed as business income. In the case of Mrs. Ghosh, the ITO accepted that the surplus arising out of the sale of 6,000 ordinary shares and 19,000 deferred shares which represented h....
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.... 19,000 shares Rs. 19,000 ---------------------------------------------------------------- Total 7,325 shares Rs. 73,250 33,357 shares Rs. 33,357 ---------------------------------------------------------------- The joint holdings of the two assesses was thus only to the extent of Rs. 1,06,607 out of the paid-up capital, referred to, of Rs. 6,22,440. The company needed fresh capital for its penicillin plant and could not secure the same itself and was thus unable by itself to complete the penicillin plant. Both the assesses had become old and Dr. Ghosh, who was 70 years of age, had a breakdown in health so that he became physically unable to attend to the day-to-day affairs of the company and on account of his illness both the assesses wanted to retire, and sold out their shares. They had devoted the best part of their lives to the development of the company and they wanted to hand over the company to a worthy successor who could ably and efficiently run the company. The assesses had then started (from May 28, 1960) negotiation with Dr. Vikram Sarabhai of the Sarabhai group. At this st....
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....of the same, namely, that the appellant being old and infirm and was unable to manage the day-to-day affairs of the business of the company and with an end in view to transfer the controlling interest to some other group of industries who could only ably manage the said affairs of the company and ensure its development that the transaction was contemplated and completed was not considered satisfactory in Dr. Ghosh's case and not wholly unreasonable in respect of appellant's old holdings (STC) (as also old holdings) in Mrs. Ghosh's case. (2) That the appellants had considerable power and influence in the affairs of the company and manipulated his/her position to get the shares allotted in his/her favour only after negotiations regarding sale of his/her investment had been concluded or reached a concluding stage with full knowledge of the outcome of the deal, viz., decent profit. (3) That the past records of the appellants show that the appellants had not made a similar transaction. (4) That in the financial year 1963-64, the appellants had made similar transaction. (5) That the appellant (Mrs. Ghosh) as managing director owned substantial shares in the company since last....
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....i) Resolution dated June 23, 1960, of the board of directors of the company offering 62,250 ordinary shares to the existing shareholders. (iv) Letter dated July 11, 1960, of N. N. Taneja, on behalf of Sarabhai Chemicals, stating that their offer would be open up to June 31, 1960. (v) Letter dated July 18, 1960, from Dr. Ghosh to Dr. Vikram Sarabhai extending the offer up to June 15, 1960, and stating that he had explained to Taneja the necessity for him (Dr. Ghosh) to continue as consulting technical adviser. (vi) Letter dated July 27, 1960, from Taneja to Dr. Ghosh, relating to arrangements to go over to Bombay. (vii) Letter dated August 9, 1,960, from Dr. Vikram Sarabhai to Dr. Ghosh in reply to the letter of July 18, 1960, informing him that they accepted to purchase from Dr. & Mrs. Ghosh 56% controlling interest in the company in terms of para. (i) of the letter of 18th June, 1960 (referred to in item (ii) above). (viii) The minutes of discussions of a meeting at Calcutta held on August 16, 1960, between Dr. & Mrs. Ghosh on the one part and Dr. Sarabhai and Messrs. Gidwani and Taneja on the other, where the letter of August 9, 1960, (item (vii) above) was conside....
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....d Premchand themselves had purchased 10,000 shares of the company at par and this clearly showed that in the higher price paid to the assessee there was a clear profit received by the assessee. The last submission was that even if it is assumed that a controlling interest was acquired and sold by the assessee, looking to all the circumstances, and the short space of time involved, the acquisition and parting with the controlling interest was an adventure in the nature of trade and the surplus was assessable as business income. Support for the argument was sought to be derived from the decision of the Supreme Court in Ramkumar Agarwalla and Brothers v. CIT [1967] 63 ITR 622. On behalf of the assessee, it was submitted that it was the total effect of all the relevant factors that determined the character of a transaction. It was stated that Dr. and Mrs. Ghosh were the founders of the company and they had kept on working with the company from 1934 to 1960. In 1960 Dr. Ghosh, who was about 70 years old, wanted to retire after long service and so also Mrs. Ghosh. Due to the advances in technology the company required large funds if the company was to make any progress. Dr. Ghosh d....
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....d technology and also having sufficient funds would subscribe to the shares knowing the intrinsic worth of the company and its future prospects and others would not subscribe. After the take over by the Sarabhai group, the dividends, it was stated, went up to 20%. Regarding the submission on behalf of the Department that Karamchand Premchand themselves had also made purchases of shares at par and, therefore, need not have paid a higher price for purchasing shares from the assessees, it was stated that the higher price was paid to the assessees for getting the controlling interest. While on this aspect, it was submitted that as the controlling interest was acquired and disposed of, in the hands of the assessees the surplus would be only a capital receipt. As the facts were materially different in Ramkumar Agarwala's case [1967] 63 ITR 622 (SC) relied on by the Department, the ratio of that case, it was stated, had no application to the present matter. The acquisition of a controlling interest, and parting with the same, by the assessee, it was submitted, was only to fulfil the agreement with the Sarabhai group which was legally enforceable. Referring to the decision in the cas....
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....bmitted that the inference to be drawn in the present case also would be that the assessee was trying to realise an existing capital asset and the surplus would be nothing but capital gains. The next decision to which attention was drawn was that of Ramnarain Sons (P.) Ltd. v. CIT [1961] 41 ITR 534, where the Supreme Court had held that by purchasing shares at a price far in excess of their market price to facilitate the acquisition of the managing agency a capital asset was acquired, and the loss incurred on the sale of some of those shares was a capital loss. Similarly, it was submitted, relying on the ratio in CIT v. National Finance Ltd. [1962] 44 ITR 788 (SC), which was again a case where shares were purchased at higher value for acquiring a controlling interest. Adverting to the source of the funds with which the acquisition of the shares were made, it was submitted that the payment of application money was out of the assessee's own funds. This was so because even the loan taken was against the assessee's own fixed deposits. The payment of allotment money was no doubt by the purchasers but looking to the transaction as a whole, this, it was submitted, could not impress the....
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....he Tribunal held that there was no evidence to suggest that the assessees who had nurtured the company did not act for furthering the interests of the company. The Tribunal stated that it could not be said that the dominant interest of the assessees was to make a personal gain out of the acquisition and transfer of new shares. On June 23, 1960, the directors passed a resolution offering further shares to the existing shareholders. This included the 62,250 new equity shares of Rs. 10 each. In pursuance of the resolution, a letter was issued to all the existing shareholders on July 8, 1960, offering the new shares to them. It was ascertained by the Tribunal that 67 persons (including the two assessees) offered to subscribe to the new shares. From the minutes of the meeting held by the assessees with Dr. Sarabhai on August 16, 1960, it was noticed that the number of equity shares applied for was 2,338. Dr. and Mrs. Ghosh were to arrange to obtain out of the balance of the offer of new shares, the number which would give them an absolute majority of voting rights. The number of persons who offered to subscribe to the shares, in the view of the Tribunal, was clearly indicative of suf....
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....hoshes. On a consideration of the entire evidence, to summarise, the facts which the Tribunal found are that Dr. and Mrs. Ghosh had nurtured the company from its infancy and had been associated with the company for well over a score of years. They had become old and they wanted to retire. For this purpose, they wanted to dispose of their shareholding barring perhaps a few shares which they wanted to hold for sentimental reasons. Neither of the assessees, excepting for their association with the company, had ever done any business on their own. They had also never sold any shares previously. The Ghoshes, and through them the company, was in possession of technical know-how of high order. The company, however, was short of funds to achieve its object of manufacturing antibiotics, etc. The company was thus in urgent need of financial collaboration and there was evidence of such need prior to the start of negotiations by the assessees with the Sarabhais. The existing shareholders did not have or were unwilling to put in adequate fresh funds. A party, viz., the Sarabhais, who could provide the requisite financial collaboration was found. The Sarabhais, however, insisted on acquiring ....
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....d to part with them to Karamchand Premchand. However, the purchase of the new shares cannot be attributed to an act which was completely of their own volition. Unless they had sufficient shares to pass on a controlling interest they would not have been able to sell their existing shares. The company required funds and unless a controlling interest was given, the Sarabhais were not willing to enter into any financial collaboration. The assessees had kept the company informed of their negotiations with the Sarabhais. If the company, which required funds, could have secured for itself a more advantageous deal, it is only to be assumed some efforts in that regard would have been made by the company for which there is no evidence. The presence of the intention to resell, which was there even before the purchase does not, in the circumstances we have set out, in our view, give the transaction the stamp of an adventure in the nature of trade. 49. As observed by the Supreme Court in CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65, profit motive in entering into a transaction is also not decisive in making it one which is an adventure in the nature of trade. Such was also the observation of thei....
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....of the assessees and there were no borrowings from outsiders for this purpose. The total issue of debentures by the company was for Rs. 15,00,000. In terms of the trust deed dated 21-9-1962, the debenture-holders had the option, at any time after the expiry of 6 months from the date of issue of the debentures, but not later than one year from the date of such issue, by giving one calendar month's notice, to exchange the said debentures into fully paid up equity shares. The rate of conversion was one debenture to be exchanged for 10 fully paid equity shares of Rs. 10 each. The assessees, exercised on 10-10-1963, which was within the stipulated time, such option. Out of the equity shares obtained, 3,500 shares (equivalent to 350 debentures) were sold by Dr. Ghosh for Rs. 1,09,500 and 4,000 shares (equivalent to 400 debentures) were sold by Mrs. Ghosh for Rs. 1,24,000. The surplus which accrued to each of the assessees was as under: Purchase Price Sale Price Surplus Rs. &....
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....ve took the Tribunal through the facts and submitted that, in view of the legal principles relied on by him in arguing the appeals for 1961-62, the transactions clearly bore the impress of an adventure in the nature of trade. 51. The learned counsel for the assessee, on the other hand, submitted that the pattern of investment in the past showed that the assessees were always looking for a fixed return. Whenever they invested money it was in the shape of fixed deposits in banks. When the company issued the debentures to the tune of Rs. 15 lakhs, the assessees made some investments therein as it provided for a fixed rate of yield of 6 1/2%. There was a clause permitting conversion at the option of the assessees. The option, however, had to be exercised within a stipulated period. The assessees exercised the option within this period and secured equity shares. However, in consonance with their avowed object of having a fixed return, they did not want to hold the shares, though the prospects of dividend were attractive (the dividend declared for the year ended 31-3-1962 was 20%) and so shares were sold and funds invested so as to secure a fixed return. The submission of the learn....
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....the circumstances of the case, the Tribunal is right in holding that the surplus arising out of sale of shares was assessable as capital gains and not as business income ? " In the facts and circumstances, it is to be seen whether the findings of the Tribunal that the transaction in question was not an adventure in the nature of trade can be justified in law. But we have been reminded by Mr. Sanjoy Bhattacharya, the learned advocate for the assessee, as to the scope of this court of reference to interfere with the findings of the Tribunal. According to him, if the Tribunal considers the evidence and, after applying the correct test or principles of law, comes to a conclusion and if that cannot be described as unreasonable or perverse, there is no scope for interference. He relies on the decision of this court in CIT v. East Coast Commercial Company Ltd. [1970] 75 ITR 8 (Cal) and also in the case of this court in CIT v. Produce Exchange Corporation Ltd. [1963] 50 ITR 308 (Cal). The Supreme Court also gave a similar warning in the case of CIT v. Ashoka Marketing Company [1972] 83 ITR 439. As to the characteristics or test to be applied for coming to a decision on the point befo....
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....at they are based on misappreciation of evidence. There is yet a third class of cases in which the assessee or the revenue may seek to challenge the correctness or the conclusion reached by the Tribunal on the ground that it is a, conclusion on a question of mixed law and fact. Such a conclusion is no doubt based upon the primary evidentiary facts, but its ultimate form is determined by the application of relevant legal principles. The need to apply the relevant legal principles tends to confer upon the final conclusion its character of a legal conclusion and that is why it is regarded as a conclusion on a question of mixed law and fact. In dealing with the 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 had applied the relevant legal principles correctly or not; and in that sense, the scope of enquiry and the extent of the jurisdiction of the High Court in dealing with such points is the same as in dealing with pure points of law. " Their Lordships followed the principle enunciated in Sree Meenakshi Mills v. CIT....
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....ion to the capital. If a transaction is in the assessee's ordinary line of business there can be no difficulty in holding that it is in the nature of trade. But the difficulty arises where the transaction is outside the assessee's line of business and then, it must depend upon, the facts and circumstances of each case whether the transaction is in the nature of trade." At p. 712 of the report, it is also stated that the capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment. Mr. Pal also cites the decision of the Supreme Court in the case of Dalmia Cement Ltd. v. CIT [1976] 105 ITR 633 and argues that if the intention of resale was there from the beginning and was really the dominant intention to part with the shares at a profit, the inevitable conclusion would be that the transaction was in the nature of trade. Thereafter, Mr. Pal refers to certain English cases in support of his contention that if the intention be resale at a profit, the natural presumption would be that the transaction is an adventure in the nature ....
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.... was employed by a building company at a salary of J520 a year. Early in 1962, one of the directors told him that the company would be prepared to sell for @15,000, a plot of 6 1/4 acres, which had planning permission but had not been developed because of drainage difficulties; it was producing no income from rents. The respondent asked, if he could buy it if he could raise the price and was told that he could. His capital amounted to @2,250. It was his intention to resell the land as soon as possible and not to develop it himself. The respondent did not advertise the land for sale or place it in the hands of agents, but he approached three companies, and also investigated the possibility of borrowing the purchase price from relatives with the idea of selling when the problem of drainage was solved. On 28th March, 1962, he contracted to sell the land to one of the above mentioned companies for @25,000; on 5th April, 1962, he contracted to buy it from the building company. He had never before sold property which he had bought for that purpose. Mr. Pal refers to the judgments of Mr. Justice Goff at p. 467 of the report. His Lordship summarised as follows: In the first place, it was f....
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.... the company must be properly assessed to tax. According to Mr. Bhattacharya, the facts of the case were entirely different and this had no application to the present case. Reference is also made by Mr. Pal to the case of Turner v. Last [1965] 42 TC 517, 523 (Ch D). In this case, Cross J. observed that having regard to the affidavits of final financial position and to the fact that there was quick resale and above all to the fact that the Commissioners heard him to give evidence it could not be said that there was no evidence upon which they could come to the conclusion that he was not telling the truth when he had said that he did not resell the Green Field. In conclusion, his Lordship observed as follows; " Of course, the mere fact that when you buy property, as well as intending to use and enjoy it, you have also in your mind the possibility that it will appreciate in value, and that a time may come when you may want to sell it and make a profit on it, does not of itself make you a trader; but if the position is that you intend to sell it as soon as you can to recover the cost of the purchase, the position is obviously very different and that is what the Commissioners, ....
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....C Sess), where it was argued on behalf of the Revenue that a profit made in a transaction which was in the nature of an investment in the hope and expectation of a rise in price, may be an accretion of capital, but that if at the time of the purchase the purchaser had resolved to sell the property in the event of a profit being made, and instructions had been issued to his agents accordingly, the transaction could not have been treated as an investment, but was truly an adventure in the nature of a trade, and the profit thus made must be treated as an income. This argument was not accepted as valid." Thus, on an analysis of the cases referred to above, it appears that there is no general or universal test, according to the learned advocate, for arriving at the conclusion that the character of a transaction can be judged solely on the application of any absolute rule, principle or test, but every case is to be judged by its own facts and circumstances. It has already been mentioned while stating the facts that the Tribunal observed that both Dr. Ghosh and Mrs. Ghosh became ill and they wanted to retire by disposing of their holdings barring a few shares which they wanted to ho....