TMI Blog1968 (2) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... andra Kapur by their father guardian R. N. Kapur ... 400 Air Lines Hotel Ltd. ... 100 ------------ 5,000 ------------ The company was by its memorandum of association empowered to carry on in India and elsewhere the business of " agency in all its branches and to act as managing agents for other companies in India or in any other country or place " (clause 1), to carry on and transact every kind of agency business (clause 2) and " to act as managers or managing agents of any corporation whether limited or unlimited " (clause 3). The company was also authorised by clause 6 of its memorandum of association " to invest and deal with the money of the company not immediately required upon such securities and in such manner as may from time to time be determined by the directors and to place any such moneys on deposit with bankers or financial or mercantile houses or companies " and by clause 7 ".... to hold, dispose of and deal in Government securities and stock, shares and securities of any other company". Thus, the company had authority, inter alia, to act as managing agents of other companies and to carry on and transact every kind of agency business and, on the other h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business by one or the other party. The facts relating to the transactions which are the subject-matter of the question referred are as follows : We have already shown how the control of the Arthala Tea Estates, Ltd. was obtained and its managing agency acquired by the assessee-company by 9th April, 1951. On the 12th April, 1951, the board of directors of the assessee-company passed the following resolution (we reproduce only the material part) : 2. Since we will be shortly taking over the managing agency of the Arthala Tea Estates Ltd. to make it more remunerative to us as managing agents : Resolved to purchase some other South Indian tea company's shares with a view to take over the managing agency as and when possible. 3. Resolved further that the company hereby authorise the directors to buy as many shares as possible of the New Glen Morgan Tea Estates Ltd. now appearing attractive at a discount in pursuance of the above object of securing managing agency of this company once a majority is obtained. 4. Further resolved that the directors be authorised to buy these shares from time to time as and when available, at a rate not exceeding Rs. 1-12-0 per share." Purs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return but was later on withdrawn as an erroneous claim made by the assessee. The facts regarding the transactions of another company, which is also the subject-matter of the question referred, viz., the Amalgamated Coffee Estates Ltd., are as follows : On 25th January, 1952, the board of directors of the assessee company passed the following resolution : " Shri R. N. Kapur brought to the notice of the board that with a view to acquire the managing agency of the Amalgamated Coffee Estates Ltd. he had a talk with H. H. General Mrighendra Shum Shere Jung Bahadur Rana at Bombay during his visit a week back to acquire his holdings in the above company. He states that the Rana said that he would be interested to sell his holdings of Amalgamated Coffee Estates, that is to say, 6,000 ordinary and 6,000 preference and Rs. 60,000 face value debentures on the advice of Mr. K. U. Advani, Share Broker, Bombay. Resolved to authorise Mr. R. N. Kapur to arrange to buy the above lot in full for the company at Rs. 5-8-0, Rs. 6-8-0 per share and Rs. 93-8-0 for debentures, being the minimum reported acceptable to the holder, with a brokerage of Rs. 6,000 to the broker Mr. Advani... " Purs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can still hold particular investments on capital account, that the realisations of such investments would not be in the course of business and the resultant profits would not be taxable as income. So far as the New Glen Morgan Estates Ltd. was concerned, he pointed out that, even after acquiring 1,42,800 shares of that company, the assessee had only acquired 44% of the total capital of that company and it had no control over that company. He also pointed out that the memorandum of association permitted the company to deal in shares and that these transactions were made pursuant to that power. He concluded: " Therefore, the turning of investment to account was not merely incidental but was the essential feature of the business, dealings in shares being among the appointed means of the company's gains. On going through the transactions relating to the assessee-company in the purchase and sale of shares, it is clear that the company was interested in buying large blocks of shares not exactly with a view to obtain a controlling interest in the company's management, but the real purpose of such transactions was to dispose of the blocks of shares to intending purchasers whose intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectors decided to dispose of the entire holdings in the Amalgamated Coffee Estates Ltd. He held that the minutes of the board of directors and the other circumstances show that the shares were purchased not with a view to trading in them, but with a view to acquiring a controlling interest in that company and that the record also showed that the assessee cannot be considered as a dealer in shares. The department appealed against this order to the Income-tax Appellate Tribunal at Bombay and they have substantially upheld the order of the Appellate Assistant Commissioner. So far as the shares of the New Glen Morgan Estates Ltd., they held, " From its inception (the assessee-company) till April 12, 1951, when it acquired its first managing agency in Arthala Estates, it had no business at all. It had no doubt borrowed, but such borrowing has been for the purpose of purchasing shares with the sole object of exploring for (sic) managing agencies. It is but natural that in some cases it may fail to achieve its object. In the acquisition of shares in New Glen Morgan Co. Ltd., it cannot be denied that it had set out with this object. The directors' resolution and the higher prices paid ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were made with a view to acquiring the managing agency of a company, or whether they were merely purchased and sold with a view to dealing in these shares, we do not think that the question of the length of time during which the assessee held those shares is at all decisive, so long as the intention of the assessee in dealing with those shares is established or clear and the reason impelling the sale of those shares within that time is clear. It is not correct to say in the present case that, though those shares were sold within, say, a month and a half after they were purchased, there is no evidence to show that they were sold off because the assessee-company failed in its object of securing the managing agency of the New Glen Morgan Estates Ltd. The whole transaction was initially entered into pursuant to the resolution of the board of directors dated 12th April, 1951. That resolution is sufficiently clear and indicates what was the intention of the company. It was not alleged at any time that this resolution was passed as a mere device or a cloak to cover business operations nor was that the argument before us. On the contrary, counsel for the department based his argument on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore the extra rate sanctioned and the extra rate per share actually offered would, in our opinion, clearly indicate an object other than the mere object of making profit in the way of business from these shares. To commence with, therefore, it is clear that the intention of the company was to buy these shares only with a view to acquiring the controlling interest in the New Glen Morgan Estates Ltd. shares and thereby acquiring its managing agency. The question then arises whether at any time the company appears to have changed its intention and to have intended to deal in these shares only by way of business. In this respect, Mr. Joshi, on behalf of the department, strongly stressed the absence of any resolution of the board of directors sanctioning the sale of these shares and he urged that by contrast the same company had passed a resolation when it decided to sell off its shares of the Amalgamated Coffee Estates Ltd. Why then should it not have passed a similar resolution in regard to these shares ? He urged that that fact has not been taken into account by the Tribunal, nor, has due weight been given to it by the Appellate Assistant Commissioner. He also stressed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agents and their friends were found to hold over 50% of the shares of New Glen Morgan Estates Ltd." The minutes also record that R.N. Kapur brought to the notice of the board that with a fortnight's offer, a firm of Bombay brokers had promised him to secure a good price for the 97,300 shares and the company resolved "to authorise R. N. Kapur to negotiate on the above basis". In doing so, no doubt, R.N. Kapur stipulated that a commission be paid to him at the rate of annas 4 per share, but that is neither here nor there. It is not a fact which is relevant for consideration in determining what was the intention of the company in relation to its dealing with these shares. The resolution not merely furnishes authority for the sale of the shares of the company so far as the first lot is concerned, but what is more, it gives the reason why they were sold. The reason was that it was impossible for the assessee-company to acquire the managing agency of the New Glen Morgan Estates Ltd., because their then existing managing agents themselves were already holding more than 50% of the capital of that company. In the face of this impossibility it was futile to continue to hold the shares of N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... romptly replied by a letter dated the 30th April, 1952, reminding Kapur of the earlier telegrams exchanged between them. The last telegram sent by Davar to Kapur was categoric: "Thanks yesterday's offer without prejudice based actual cost: regret no bargaining possible, A. R. Davar." Davar did not go back upon this telegram in the letter dated April 30, 1952, nor did he express his willingness to sell the shares on any other terms. On the other hand, in this letter Davar informed Kapur that the company was in a bad way and that their managing agents, Messrs. Viramani and Viswanathan, had mismanaged the whole company and had swindled over Rs. 50 lakhs and hoped that as soon as Kapur took over the company, he would be able to finance it liberally and manage it efficiently. At the same time he indicated that the door was still open for negotiations because in the final paragraphs he has stated that he was sending his son to Bombay to discuss matters with Kapur. It appears that Davar had set on foot proceedings whereby the mismanagement in the company had been exposed and the auditors of the company, Messrs. Krishnaswami and Jaganathan, were dealt with for misconduct and were ordered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th those shares after the purchase clearly indicate that their whole intention was to purchase the shares with a view to acquiring the managing agency and not with a view to dealing with those shares in the way of business. At the time of sale also, we have shown that in the case of the first lot of shares of New Glen Morgan Estates Ltd. as well as the second lot of the Amalgamated Coffee Estates Ltd., appropriate resolutions were passed by the board of directors and each resolution clearly explains the reason why those shares were being sold so abruptly. In the case of New Glen Morgan Estates shares it was clear that the objective failed because the then managing agents already had held more than 50% of the shares of the company and it was impossible for the assessee-company to get hold of the managing agency. The main objective having failed, these shares were naturally sold off. So far as the Amalgamated Coffee Estates shares are concerned, it is clear not only from the resolution authorising their sale, but also from the correspondence to which we have adverted and the alarming reports in The Hindu that the company was in a very bad way and acquiring the managing agency of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of their return, the shares were even of lesser value and the assessee claimed Rs. 6,646-12-0 loss on its holdings of Alagappa Textiles (Cochin) Ltd. When this was pointed out to the assessee, the assessee, however, promptly withdrew this claim admitting that the claim as to the loss on the sales of these shares was incorrectly made. That withdrawal was allowed. We can see no reason why this correction of their return by the assessee should not be accepted at its face value. It was a owed an acted upon by the department, but apart from that, we may also point out that the question as to the dealings with the shares of Alagappa Textiles (Cochin) Ltd. cannot affect the issue as to the dealings of the assessee-company with the shares of the New Glen Morgan Estates Ltd. or the Amalgamated Coffee Estates Ltd. The assessee-company had under its memorandum of association ample authority both to act as managing agents and acquire managing agencies as well as to buy and sell shares or deal in shares by way of business. Therefore, it may be that the shares of Alagappa Textiles (Cochin) Ltd. were purchased by way of business--we do not hold that--but we fail to see how it can nece ..... X X X X Extracts X X X X X X X X Extracts X X X X
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