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TMI Blog1967 (3) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1950, the company raised a further loan of Rs. 11,50,000 from Bharat Fire and General Insurance Company. Both the Rohtas Industries Limited and the Bharat Fire and General Insurance Company belong to the Dalmia-Jain group of companies. The loan of Rs. 11,50,000 was paid off in the following manner : (1) The assessee-company issued 50 redeemable mortgaged debentures of Rs.10,000 each to the Bharat Fire and General Insurance Company; Rs. 5,00,000 and (2) Rs. 6,50,000 were paid off in cash by the sale of 11,950 second preference shares through Messrs. Rajpal Chadha and Company. The preference shares were purchased by the Bharat Fire and General Insurance Company. Rs. 6,50,000 ------------------------ 11,50,000 ---------------------- This sale of shares resulted in a loss to the company to the extent of Rs. 4,80,988 on 6th of October, 1951. This loss was ultimately transferred to the profit and loss account of the company for the year ending 31st of December, 1951. In the revenue account, the loss was described as : " To loss on sale of joint Stock company shares. " In the assessment year 1952-53, the company, before the Income-tax Officer, claimed that this loss being a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sell these shares in the subsquent years and purchase new shares in their stead if at all he had the intention of dealing in shares. For him to have waited till the value fell from Rs. 100 per share to Rs. 59-12-0 per share tends to suggest that these shares were held by way of investment and the appellant was hoping for the declaration of dividends. There is no continuity of transactions to justify an inference of a business, while a profit making motive cannot be concluded either at the time of the purchase or the sale or in the intervening period. The appellant holding tight the shares for a period of four years without any charge whatsoever, clearly shows that the shares were held by way of investments, just like the National Savings Certificates. The loss claimed is, therefore, clearly a loss on the sale of investments, which is a capital loss and was rightly disallowed. " Against the decision of the Appellate Assistant Commissioner, the company preferred an appeal to the Income-tax Appellate Tribunal, Delhi Bench , "C". The Appellate Tribunal rejected the appeal with the following observations : "After having carefully considered all the aspects of the case, we are of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, has referred the question of law set out in the opening part of this judgment. Mr. G. C. Sharma, who appears for the company, contends that the company is carrying on the business of manufacturing and selling biscuits. The buying and selling of shares is also a part of the business of the company. Therefore, the buying and selling of shares is a commercial transaction. The loss in the sale of shares has occurred in the trading activity of the company during the course of carrying on of business. Therefore, the loss is a trading loss. It is maintained that it is not the company's case that, by itself, the sale of shares was a trading transaction. But as the company was engaged in business and the company could carry on the business of buying and selling shares, the sale of shares would, per se, be a business activity without anything more. In support of his contention, the learned counsel has relied upon the majority decision of the Privy Council in Griffiths (Inspector of Taxes) v. J. P. Harrison (Watford) Limited, and particularly on the following observations of Lord Guest : " I, therefore, conclude that neither the fact that the company intended to make a loss nor the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any had the power to invest in shares. The facts proved on the record clearly negative the suggestion that the purchase and sale of shares was a trading transaction. In fact, it was an investment transaction. A new issue of shares of a sister concern was purchased by borrowing money from a sister concern. The shares were, later on, sold to a sister concern in order to clear off the liability of the sister concern. The transaction of buying and selling of shares did not, in any manner, partake of a business transaction in the real sense. It is, therefore, strenuously maintained that the Tribunal had come to a correct decision that the purchase and sale of shares in the instant case was not a trading transaction. The question, whether a particular transaction is a trading transaction or a capital transaction has always vexed the courts. There has been lot of divergence of judicial opinion and in each case the decision has turned on its own peculiar facts. The decisions cited at the bar are merely illustrative guides and do disclose the general principles that have to be kept in mind in arriving at the conclusion whether the transaction pertains to the domain of revenue or capital. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is truly the carrying on, or carrying out, of business. The simplest case is that of a person or association... buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which from their very inception are formed for such a purpose, and in these cases it is not doubtful that where they make a gain by realisation, the gain they make is liable to be assessed for income-tax. Sometimes a company is formed to realise the assets of a former trader and it is then difficult to resist a finding that the company is trading, as the acquisition of assets for the purposes of sale is an activity which includes the necessary elements of trading. On the other hand a company may be formed to acquire and hold land or other property in exactly the same way as an individual investor, and a subsequent sale by the company of all or part of its property at a profit does not necessarily imply that it has engaged in trade. There is, however, one significant difference between an individual and a company in that the latter's objects have to be stated in its memorandum of association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he circumstances whether a transaction is or is not within the cornpany's powers has no bearing on the nature of the transaction or on the question whether the profits arising therefrom are capital accretion or revenue income." The following observations of Veeraswami J. in Commissioner of Incometax v. Kasturi Estates Private Ltd. are also to the same effect : " Where the assessee is a company, while no conclusion can properly be based solely on the objects or powers of the company as found in its memorandum and articles, they are relevant matters which should be taken into account and kept in view in determining the character of the transaction in which the company has engaged. The objects and powers may be to carry on a trade or business but their existence does not ipso facto mean that they have been used. What is necessary is to examine the intrinsic nature and character of the transaction itself in the light of the objects and powers of the company and the surrounding circumstances and facts. " In this connection, reference may also usefully be made to the following observations of Shah J. in Commissioner of Income-tax v. P. K. N. Company Ltd. " As already observed, deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vest it so that they might realise it at a considerable profit. It is also to be noticed that they invested it in the sister company whose shares went up in the market, thus resulting in a double advantage to themselves " Yet I am not prepared to go to that length in view of the clear pronouncement of the Supreme Court to the contrary. The fact, that the company could engage in share business, has to be taken into account; but, that by itself, as already said, is not conclusive of the question that every transaction in shares would necessarily be a trading transaction. The fact that the company could engage in the purchase and sale of shares, has been taken into account by the Tribunal along with the further fact that the company could also invest in shares according to clause 60 of the memorandum. The Tribunal has further taken into account a number of factors; for instance : " (1) that the purchase of shares was not in line with a scheme of profitmaking but was a scheme for enjoying a steady dividend income from investment in preference shares; (2) that the purchase and sale of shares was a solitary transaction in the history of the company; (3) that the Rohtas Company did d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again purchased certain securities. The details of sales and purchases have been furnished in annexure " A " to the statement of the case. The assessee claimed before the Income-tax Officer that there was a loss of Rs. 30,847-14-0 as a result of these transactions in the purchase and sale of these Government securities. The claim was rejected by the Income-tax Officer and an appeal preferred by the assessee to the Appellate Assistant Commissioner was also dismissed. The assessee then took the matter in second appeal before the Appellate Tribunal. It was argued before the Tribunal on behalf of the assessee that the transactions in the purchase and sale of Government securities were authorised by the memorandum of association. The Tribunal did not accept this argument and held that the dealings in Government securities were not authorised by the memorandum of association. The Tribunal also took the view that, even if the dealings were intra vires of the company, it could not be said that the transactions were performed by the assessee-company in the ordinary course of its business. Accordingly, the Tribunal disallowed the claim of the assessee for setting off the loss of Rs. 30,847- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s supported by proper evidence and it is also not shown on behalf of the assessee that the Tribunal has misdirected itself in law in reaching this finding. For these reasons, I hold that, in the facts and circumstances of the case, the assessee-company was not entitled to claim that the loss of Rs. 30,847-14-0 suffered by it in its dealings in Government securities in the assessment year 1950-51 was loss which could be set off against other income of the assessee. " It will also be useful at this stage to refer to certain decisions wherein certain guiding principles have been laid down to determine whether a particular venture is in the nature of trade or otherwise. In Californian Copper Syndicate's case Clerk J. observed as follows : " What is the line which separates the two classes of cases may be difficult to define and each case must be considered according to its facts; the question to be determined being---Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profitmaking ? " In G. Venkataswami Naidu and Company v. Commissioner of Income-tax Gajendragadkar J. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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