TMI Blog1977 (8) TMI 166X X X X Extracts X X X X X X X X Extracts X X X X ..... esponding assessment years A.Ys. 1948-49 and 1949-50) the assessee acquired 77 and 81 ordinary shares respectively of a Mill Co. In S.Y. 2006, corresponding assessment year being A.Y. 1951-52, it acquired 79 preference shares of the said Mill Company as bonus shares. So far a sales of share during the aforesaid period are concerned, the Tribunal has characterised them as very nominal since the assessee sold in S.Y. 2006 only 1 1/2 preference shares out of its holding. This was the extent of the activity of the assessee upto S.Y. 2006. 4. Then comes S.Y. 2007, corresponding assessment year being A.Y. 1952-53. One Mathurdas Mangaldas Parekh was a partner of the assessee at the material time. It appears that the had a running account with the assessee whereunder he was indebted to the assessee in the sum of ₹ 6,02,075/- at the commencement of the said year. The assessee purchased from the said Mathurdas at market price shares worth ₹ 5,86,500/- during the course of the said year and in that manner and to that extent the debt due by the said Mathurdas to the assessee firm was satisfied. The said Mathurdas retired the firm in the course of the same year. Amongst the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. 2014 74 - 6. 2015 numerous - 7. 2016 2 - 8. 2017 47 - 9. 2018 2 - 10. 2023 175 - 11. 2024 1 - Be it noted that so far as the aforesaid purchases are concerned, the Tribunal has given are confined only to the names of the company and number and class of shares purchased. It has, however, not found as to what was the face value of those shares or what was the cost of their acquisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses so in the case of sales, the Tribunal has not found as to what was the book value of shares or as to what was the sale price realised by the assessee. All that the Tribunal has said in the course of its order was that except for S. Yrs. 2008 and 2018, the transactions were not substantial. 7. We now reach S.Y. 2025 which is the relevant year for the purpose of this case. During this year, no shares were purchased by the assessee. However, the assessee sold the following shares out of its holding :- Ordinary Preference 1. Aryodaya Ginning and - 2. Rajnagar Mills 140 - 3. The Jubilee Mills Ltd. 3000 - 4. Girdhardas Harivallabhdas Mills 128 - . The assessee realised in all a sum of ₹ 2,36,109/- as sale proceeds of the abovementioned shares. Be it noted that amongst the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the sale of shares as business income and worked out the net profit on sale of shares at ₹ 84,052/- and assessment to income-tax was made on the said basis. 10. The assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner found : (1) that having a bird's eye view of the transactions in shares from S.Ys. 2007 to 2025, it appeared that there were only purchases of shares and receipt of bonus shares through those years and that the sales were very rare; (2) that sales of shares to outsiders were undertaken sometimes in peculiar circumstances, namely, in order to settle accounts; (3) that there were other disposals of shares but they were not in favour of outsiders but in favour of co-parceners at the time of partition and in favour of ex-partners at the time of retirement from the firm; and (d) that the mere circumstance that the assessee had shown the share-holding as its business assets in the past was not sufficient to draw an inference against the assessee that it was not held as an investment in as much as proceeding for assessment to income-tax estoppel were inapplicable. In view of the aforesaid fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gone right upto the Tribunal to obtain the decision that it was a dealer in shares. Besides, over a period of number of years the assessee was treated as a dealer in shares. Expenses were allowed to be deducted and losses were allowed to be set off against dividend income. The Taxing Authority had thus changed its position to its prejudice by reason of the representation that the assessee was a dealer in shares. When the assessee earned in the year under consideration good profit on sale of shares it cannot be allowed to change the stand and say that it was not a dealer in shares and that all the past assessments were wrong. Two other contentions of the assessee before the Tribunal were (i) that the Jubilee Mills' shares were not held by it for business purpose and (ii) that their sale was not in ordinary course of business but it was undertaken as a part and parcel of the transaction of transfer of the Jubilee management of the Mills. The assessee, in support of the second submission, produced before the Tribunal an agreement relating to such arrangement. The Tribunal found that the first contention was not raised at any prior stage and no attempt was made before any of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decide the matter almost as satisfactorily as an attempt to find reasons. Such a gamble, however, has no place in judicial process and the conclusion therein must be reached one way or the other on premises supportable by reasons founded on well-settled principles. 14. With these prefatory remarks, let us begin with the citation of the oft quoted passage of Lord Justice Clerk in California Copper Syndicate vs. Harris, (cited with approval in C.I.T. vs. Sultej Cotton Mills Supply Agency Ltd. wherein the line between capital sales and sales producing income has been drawn in the following words : It is quite a well-settled principle in dealing with questions of assessment of income-tax that where the owner of an ordinary investment chooses to realise it and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit .... assessable to income-tax. 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 ... Wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is. The concept underlying the word business was further expounded by the Supreme Court in State of Gujarat vs. Raipur Manufacturing Co. Ltd., in the context of the Sales-tax Law. It was there observed at page 5 and 6 as under :- The expression business though extensively used in taxing statues, is a word of in-definite import. In taxing statues, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive, and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinary be entered into with a profit-motive. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of a transaction See Griffiths vs. J.P. Harrison (Watford) Ltd. If the transaction, since the inception appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it has been treated as furnishing a valuable guide-line See. Juggilal Kamlapat vs. C.I.T. This circumstances, though relevant, is, however, not decisive and the transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale. See. Raja Bahadur Kamakhya Nrain Singh vs. C.I.T., C.I.T. vs. Sutlaj Cotton Mills supply Agency Ltd., 19. The second test that is often applied is as to why and towards for what purpose the sale was effected subsequently. If the object and purpose of the sale is quite inconsistent with the motive which should animate those who direct the fortunes of a trading company when they are effecting sales of that company's stock-in-trade, then such conduct might, in certain cases along with other circumstances, show that the whole transaction of purchase and sale was not in the course of a trading enterprise. A trader would ordinarily dispose of his stock-in-trade in the regular course of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proved, it may be a relevant circumstance for the purpose of determining the nature of activities of an assessee. (See also in this connection Kishan Prasad Co. Ltd, vs. C.I.T.) 23. Last but not the least-rather the most important test applied is as to the volume, frequency, continuity and regularity of transactions of purchase and sale in the class of goods concerned. If there is repetition and continuity, if the magnitude of transaction bears any reasonable proportion to the strength of the holding, then an inference can readily be drawn that the activity is in the nature of a business. In Raja Bahadur Visheshwara Singh vs. C.I.T., it was held that if there was evidence inter alia as regards the substantial nature of transactions, the magnitude of the shares purchased and sold and the ratio between the purchases and sales and the holdings, the conclusion can justly be reached that the assessee was dealing in shares as a business. But this test again, like other tests, is not conclusive, for, it has been held that the transactions in securities and shares, if not frequent but of very large amounts, would point in the direction of the activity being in the nature of business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the basis of the totality of facts so found and upon the application of correct legal principles, it had to reach the ultimate conclusion. We are constrained to say, however, that in the instant case certain essential facts have not been found by the Tribunal and, consequently, it has failed to apply certain relevant test. Besides, as we shall immediately point out, it has misdirected itself in law by taking into account an irrelevant consideration and by allowing itself to be persuaded to take the view that it did by misguiding the effect of one circumstance which, though relevant and important, was not decesive. 27. Let us first deal with the aforesaid circumstance which really appears to have weighed with the Tribunal in arriving at the conclusion that it did and which, in sub-stance, seems it is only on account of the fact that this circumstance loomed large on the face of the record and that it was treated as more or less decisive, that the Tribunal failed to find all essential facts and to apply many of the other relevant subsidiary tests in proper perspective and to arrive at a correct decision on a balanced consideration of all the facts and circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s business and that it was only later on that a revised return was filed claiming that they were its investments; (4) that when in some of the years the Department attempted to treat the assessee as an investor, the assessee fought the matter in appeal and in one case went upto the Tribunal to obtain a decision that the assessee was a dealer in shares and that all the shares were its stock-in-trade; (5) that expenses were claimed and allowed against dividend income and so were losses, and profits were taxed as business income; (6) that there was nothing to justify the decision that though the assessee was a dealer in shares in the past, it ceased to be a dealer before the year of account; and (7) that the Department had changed its position to its prejudice by reason of the representation of the assessee that it was dealer in shares and by allowing losses and expenses against income from those shares and that when the assessee has earned good profit out of sale of shares in the account year, it could not be allowed to change the stand and say that it was not a dealer in shares and all past assessments were wrong. It is in the light of these findings that the Tribunal decided aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case which is contained in para of its order, it appears to us clear that it is this approach which played a decisive role in its ultimate conclusion on this point and to that extent, its decision is vitiated. 32. The Tribunal, in the second place, failed to appreciate that the fact the assessee had treated its shareholding as stock-in-trade in the past and the Department had assessed the income from such shareholding as business income in preceding years was not conclusive in the subsequent assessment years. The principle of res judicata is not applicable to assessment proceedings, as observed in Durga Prasad Mores's case (supra). similar observations are also to be found in Raja Bahadur Visheshara Singh vs. C.I.T. In that case, one of the contentions was that having regard to the contrary finding of the Appellate Tribunal in respect of an earlier assessment, it was not open to the Appellate Tribunal in respect of sub-sequent assessment to hold that the profits and the transactions of sale and purchase of shares and securities to profit of business and, therefore, liable to be taxed. The Supreme Court, while repelling the said contention, held that it was wholly unsubstant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veral years after objecting to its inclusion in one year was a circumstance which the taxing authorities were entitled to take into consideration. All that we are saying is that the Tribunal could not have shut up the plea of the assessee, placed for its consideration in the course of the present assessment proceedings, on the ground that it was not open to the assessee to make a volte face and to take an inconsistent stand. 33. The Tribunal, in the third place, erred in law in not properly appreciating the true effect of the treatment given by the assessee to its share-holding in the past years as the stock-in-trade on the legal aspect which it was called upon the consider, namely, whether the income from such shares and securities was business income in the current assessment year. It was held in Ramnarain Sons (P) Ltd. vs. C.I.T. at page 533 that merely because the assessee in that case had entered the shares of a particular mill in its statement of shares in which trading transactions were carried on could not alter the real character of the acquisition. Even though the assessee in that case was a dealer in shares, it was found, on a totality of circumstances, that the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee was therefore, entitled to give an explanation as to its earlier conduct and to urge that it had taken the stand that it did under a mistake or error. This is what the assessee actually did and we have seen the explanation that it offered. On a perusal of the findings is Para 22 of the order of the Tribunal, it would appear that the Tribunal ommitted to apply its mind to the merits or demerits of the said explanation standing by itself and divorced from the consideration of the principal of approbate and reprobate. In any case, without first recording a specific finding on the question whether it accepted or rejected the explanation on its own merits the Tribunal proceeded to consider the question of estoppel and its reasoning is so inextricably interwoven, so far as both these aspects are concerned, that it is difficult, if not impossible, to appreciate : (i) whether it has ultimately rejected the explanation on merits, or (ii) whether even assuming that the explanation was considered and rejected on merits, how far its mind was influenced in the process by the irrelevant consideration of estoppel, or (iii) whether it has altogether refused to consider the explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trade and with the expectation, object or intention of re-selling the share-holding at profit, or whether it was an essential element of the money-lending activity of the assessee, or whether it was a mere investment. 37. In S.Y. 2007 comes the next acquisition of shares which is in considerable bulk. In the said year, the assessee purchased from one of its partners who had a running account with it and who was indebted to it in the sum of ₹ 6,02,075/- at the material time, certain shares at the market value of ₹ 5,86,500/- and in that manner and to that extent it wiped off the debt due by the said partner to the assessee. In view of the peculiar circumstances under which the acquisition was made it was necessary for the Tribunal to find whether the transaction was entered into at that stage with a view to carrying on trading activity in shares or on account of compulsive force of circumstances which left the assessee with no alternative but to settle its account with its partner in the manner that it did. Mere ownership of property, even if it was purchased from a source which was originally employed in business, would not automatically and necessarily make such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly an independent test which has to be satisfied in all cases and that even the later stage of whole operation might show that the first step-the purchase of shares was taken as or in the course of a trading transaction. Still, however, this was a relevant inquiry to be made in the circumstances aforementioned and the Tribunal could not have omitted to make necessary inquiry and consider what effect those circumstances had in the light of the explanation offered by the assessee with regard to its treatment of the share holding. 40. The Tribunal, in the second place, failed to find basic facts and consider and record a finding on the question as to why and how and for what purpose the sales of shares were effected during the period with which is concerned itself and from time to time even during the earlier years. The latter peculiar facts and circumstances of this case and it would have thrown light on the nature and character of the activity of the assessee. It may be noted, in this connection, firstly, that the Tribunal has found that no sales were effected in S. Ys. 2010 to 2014 2016, 2019, and 2021 to 2023. In S. Ys. 2015 2017, 2020 and 2024 there were sales only of 8, 3, 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o arrive at division of properties amongst three co-parceners at the time of the partition of the Hindu Undivided Family when the Tribunal was reversing the decision of the Appellate Assistant Commissioner, it was necessary for it to find whether such conclusion drawn by the Appellate Assistant Commissioner was justified on record and, if so, whether such sales could be said to be commercial sales. It is difficult to appreciate as to how, in the absence of any finding on these essential questions of fact, the Tribunal could have reached the conclusion that it arrived at. 41. So far as the sales effected during the year under consideration are concerned, the Tribunal has found as a matter of fact that the main shares on which the assessee earned profit were the ordinary shares of Jubilee Mills. It may be recalled that the assessee originally acquired 6000 ordinary shares of the said Mills from its partner in S.Y. 2007 and that the said share-holding was substantially augmented by acquisition of bonus shares is one of the subsequent years. The mills during the year of account. 42. Now, with regard to the sale of these shares, it was inter alis submitted by the assessee before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal by the assessee, therefore, had a bearing on the question with which the Tribunal was concerned. The question which then arises is whether the Tribunal was right in law in taking the aforesaid view on the admissibility of additional evidence. 45. Now, in this connection, it is well-settled that s. 254(1) confers the upon the Tribunal wide powers in dealing with the appeals preferred to it. The jurisdiction of the Tribunal is undoubtedly restricted to the subject matter of the appeal. But once it is shown that a particular claim of contention was the subject matter of the appeal before the Tribunal, the law authorises the Tribunal to pass such orders in relation to such claim or connection as it thinks fit. All questions, whether of law or of fact, which relate to the assessment of the assessee may ordinarily be allowed to be raised by him in appeal, even though they may not have been raised before the Income-tax Officer, if grant of relief to him would be available on the determination of such questions (See C.I.T. vs. Sayaji Mills Ltd. In the present case, the question whether the profits realised by the assessee on the sale of various shares including the Jubilee Mills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to adduce evidence either on points specified by them or not specified by them. The said Rule provides that in any of those three cases, for reason to be recorded, the Tribunal may allow the production of additional evidence. We are not concerned in the present case with a case falling in the third category and we need to say no more about it. Since the provisions of the said Rule are in pari materia with the provisions of order 41, Rule 27 of the Code of Civil Procedure, we way refer to some of the decided cases relating to Order 41, Rule 27(1)(b) C.P.C. in order to appreciate the nature of the power conferred under Rule 29 upon the Tribunal, in so far as the first two categories of cases are concerned. 46. In Parsottim vs. Lal Mohar the Privy Council, while discussing whether additional evidence can be admitted under Order 41, R. 27 (1)(f) observed :- It may be required to enable the Court to pronounce judgment or for any other substantial cause, but in either case it must be the Court that requires it. This is the plain grammatical reading of the sub-clause. The legitimate occasion for the exercise of this direction is not whenever before the appeal is heard a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the exercise of power under the first part of Rule 29 and accordingly, in the context of exercise of such power, the following principles should be borne in mind : (1) The discretion given to the Tribunal to receive and admit additional evidence is not an arbitrary one but is a judicial one circumscribed by the limitations specified in Rule 29; (2) The Tribunal has the power to allow additional evidence if it requires such evidence to enable it to pass orders, that is to say, when it finds that there is any lacuna or defect which needs to be filled up so that it could pronounce an order; (3) The Tribunal has the power to allow additional evidence also if it requires such evidence for any other substantial cause, that is to say, even in cases where the Tribunal finds that it is able to pronounce judgment on the state of the record as it is, may still allow additional evidence to be brought on record if it consider that in the interest of justice something which remains obscure should be filled up so that it can pronounce its order in a more satisfactory manner (4) Such requirement in either case must be of the Tribunal and it will not arise ordinarily unless some inherent lac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the light of the aforesaid legal position, let us examine whether in the instant case the discretion in the matter of rejection of additional evidence was exercised in a judicial manner and bearing in mind the aforesaid statutory guide-line. On behalf of the assessee, it was urged that the additional evidence produced by it ought to have been admitted if the Tribunal was satisfied about its genuineness and proof and after giving an adequate opportunity to the other side to rebut such evidence, on the ground that it was required in the interest of justice, so that the appeal before the Tribunal could have been decided in a more satisfactory manner. The assessee's submission was that there was a lacuna in the evidence and such omission was required to be filled up in the interest of justice so that the Tribunal could adequately deal with the contention of the assessee in respect of a different treatment being meted out to the sale proceeds of the Jubilee Mills' shares. The attempt in other words, was to invoke that part of Rule 29 which authorises the Tribunal to admit additional evidence for any other substantial cause . The assessee urged that the Tribunal, instead of con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Tribunal could not have omitted to apply its mind to this material aspect. 53. The Tribunal, in the third place, failed to consider a very important question in the true legal perspective, namely, the volume, frequency, continuity and regularity of transactions purchases and sales of shares and to record essential findings of fact having a bearing on the said aspect. This question was also specifically placed for consideration before the Tribunal on behalf of the parties and still the Tribunal failed to find basic facts and to record a specific finding whether, having regard to the volume, frequency, continuity and regularity, the assessee could be said to be carrying on business as a dealer in shares. We have, while narrating facts, given particulars with regard to the nature and extent of the activity of the assessee over a period of 22 years in the field of purchase and sale of shares. We have there pointed out the findings of the Tribunal on this aspect of the case are confined only to number and class of shares purchased and sold and the names of the respective companies. The Tribunal failed to record any finding on the magnitude of the shares purchased and sold and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion whether the test of volume, frequency, continuity and regularity is satisfied. The circumstances, namely, (i) that a large chunk of shares was acquired from an ex-partner in liquidation of his debt, (ii) that a substantial portion of the shareholding was parted with in favour of the heirs of a deceased partner nearly 11 years later, (iii) that there were only occasional purchases and not substantial sales in the remaining years, (iv) that amongest the shares purchased were included also the right shares which might have been acquired either to trade or to protect investment, (v) that a large part of the investment was allowed to be locked up for a number of years (18 years) before it was liquidated in the year of account and (vi) that sale of shares appears to have resulted, except in the last year, not in substantial profits but many times in losses, might appear prima facie and without more to militate against the conclusion being drawn that the activity of the assessee satisfied the test of business. It hardly needs to be re-emphasized that the line which separates a case in which an investor gains a sum as and by way of enhancement of value of security by realising i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. It was in this connection particularly emphasised that the largest single acquisition of shares was made by the assessee in course of its money-lending business by wiping out nearly wholly, if not wholly, the debt of one of its partners to whom the monies were lent by it and that a large chunk of the share-holding of the assessee was parted with in favour of the heirs of one of its deceased partners, with a view to settle their claim. The purchases and sales, in the circumstances of the case, clearly indicated that they were effected in the usual course of the carrying on of the business of money-lending and they were in the nature of normal steps in the course of carrying on of such business. In such cases, proceeded the argument an inference should readily be drawn that the income realised from the sale of the shares was business income and was liable to be taxed accordingly. 57. As against this stand adopted on behalf of the Revenue, the contention on behalf of the assessee was that this was a wholly new case and that it was not open to the Revenue to make out such case for the first time in this Reference. In the alternative, it was contended that it was in any ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made on behalf of the assessee that the question posed above falls for consideration. 59. Now, it is well-settled that : (1) it is not necessary, in order to constitute profits from the sale of shares as business income, to establish that the surplus resulted from such a course of dealing in securities which by itself amounted to the carrying on of a business of buying and selling securities; (2) it would be enough if such sales were effected in the usual course of carrying on the business or, if the realisation of securities was a normal step in carrying on the assessee's money-lending business; (3) mere ownership of properties, even if purchased from a source which was originally employed in the money-lending business, does not automatically make such properties part of such business; (4) once the properties were purchased by the money-lender, they became of his absolute ownership and any subsequent loss arising on resale of these properties was loss on capital invested in purchase of property and not invested in the money-lending business; (5) the question in each case is, therefore, primarily a question of fact and it is for the Revenue to establish that the properties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of burden mights arise since the onus may shift at some stage, from one party to another. It would thus appear that none of the essential facts on the basis of which this fresh approach could be made are found by the Tribunal and that having regard to the fact that the assessee had no opportunity to meet such a case, to permit the Department to take up such a stand at this stage, might result in injustice. In our opinion, therefore, it would not be possible and, at any rate, just and proper to answer the question referred to us on this alternative basis. 61. In such circumstances, two courses are now open to us : (1) to call for a supplementary statement of the case from the Tribunal, or (2) to decline to answer the question raised by the Tribunal and to leave the Tribunal to take appropriate steps to adjust its decision under S. 260(1)in the light of the answer of this Court. As observed by the Supreme Court in C.I.T. vs. Indian Molasses Co. P. Ltd., if the Tribunal is directed to submit a supplementary statement of the case, it will be restricted to the evidence on the record and it may not be entitled to take additional evidence and the same may result in injustice. Following ..... X X X X Extracts X X X X X X X X Extracts X X X X
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