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TMI Blog1971 (8) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... ares from his holding in the subsequent years ending 31st of March, 1958, and he was assessed for these years also as an investor. We understand that the Income-tax Officer has reopened the assessments of 1957-58 and 1958-59 but with that we are not concerned here. We are concerned in this reference with assessment years 1959-60 and 1960-61 which correspond to the accounting years ended the 31st of March, 1959, and the 31st of March, 1960, respectively. The Income-tax Officer took the view that the assessee was an investor till the 31st of March, 1954, but that from the financial year 1954-55 the assessee had purchased and sold shares of the company with frequency and had become a dealer. The profits realised by the assessee during the two assessment years on the transactions in the shares of M/s. Larsen Toubro Ltd. and of certain other companies was, therefore, brought to tax as a revenue receipt. This view was confirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. At the instance of the assessee the Tribunal has referred the following question for our opinion : " Whether, on the facts and in the circumstances of the case, the assessee was a dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the light of the assessee's intention having regard to the legal requirements which are associated with the concept of trade and business (see Oriental Insvestment Co. Ltd. v. Commissioner of Income-tax and Ramnarian Sons (P.) Ltd. v. Commissioner of Income-tax). It must however be borne in mind that there is no formula of universal application for determining this question and every case has to be decided on its own facts. Very often, the course of transactions falls fairly on one side of the line or the other and the facts found by the Tribunal are susceptible of a clear inference. The border-line cases, however, present difficulty, particularly when, as in this case, an assessee assessed as an investor over a course of years is stated to have converted his investments into stock-in-trade. The transactions of the assessee may be divided into two categories in order to concentrate attention on what is directly and immediately relevant for determining the question referred to us. The assessee held shares of M/s. Larsen and Toubro as well as of other companies and during the relevant period he had entered into transactions of purchase and sale in regard to shares of both varieti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------------------------------------------------------------------------------- 31-3-1946 1,875 ------ 31-3-1947 53,486 ------ 31-3-1948 250 50 31-3-1949 ------- ----- 31-3-1950 1,500 31-3-1951 1,600 31-3-1952 ----- ------- 31-3-1953 ----- ------- 31-3-1954 144 ------- --------------------------------------------------------------------------------------------------------------------------------------- From out of the shares included in column two above, the last three acquisitions, namely, of 250 shares, 1,600 shares, and 144 shares were of right shares. It may be recalled that 53,486 shares were allotted to the assessee against his interest in the partnership firm when that firm was converted into a private limited company, while 1,875 shares were purchased by him for cash consideration. The following table shows the holding of the assessee in M/s. Larsen & Toubro from April 1, 1954, to 31st March, 1960, the shares sold by him during that period and the price realised by the sale : ------------------------------------------------------------------------------------------------------------------------------ Financial year No. of Valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 1959-60 and 1960-61, the assessee was, what he always was, an investor. That he acquired the right shares and sold them at a profit or that he renounced the rights and made a profit is not sufficient to mike him a dealer in shares if, otherwise, he was not a dealer. Normally, a trade is carried on with a view to profit, and transactions that yield profit are only too readily treated as trading transactions. However, the point of the matter is not whether a profit has resulted by the sale of shares, for that profit could be a gain in the capital by the realisation of an investment ; or, a sale may yield no profit in the shape of a difference between the cost price and the selling price and yet the transaction could be a trading transaction if it appeared that the seller had sought his profits through other avenues. The frequency of transactions and the fact that acquisitions were made with the help of borrowed funds are, undoubtedly, factors to be taken into account but they also are no more decisive of the true nature of the transaction than the circumstance that the transaction has in fact yielded a profit. In G. Venkataswami Naidu & Co. v. Commissioner of Income-tax the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital may open up new avenues to the company for making larger profits. But, it is in consideration of a consequential depreciation in the value of old shares that law gives to the existing shareholders the right to obtain the new shares or to renounce that right, Section 81 of the Companies Act, 1956, provides, to the extent it is material, that if a company proposes to increase its subscribed capital by allotment of further shares, such shares shall be offered to the existing shareholders of equity shares and the offer shall be deemed to include a right to renounce the shares. The right to receive the new shares is, go to say, embedded in the old shares. That is why in Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-tax , the Supreme Court held that the met capital gain or loss to the assessee, who had renounced her right to obtain the right shares, was the "difference between the value of the capital asset and the cash in her hands after she had renounced her right and realised the cash value in respect of it, and the value of the capital asset including the right which she possessed just before these new shares were issued and before she realised any cash in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sesse did was to acquire the right shares in order to prevent depreciation of his investment and he decided to sell the right shares and to renounce, some of the rights as he had to find money to acquire the right shares issued from time to time. It is undoubtedly true that these transactions yielded a profit but it is wholly unrealistic to say that the transactions were dominated by a profit motive. Therefore, the gain which the assessee made cannot be brought to tax as a revenue receipt. It is urged on behalf of the revenue that even assuming that the assessee was actuated by a desire to prevent an erosion of his capital, he had achieved that purpose when he acquired the right shares and he did not have to sell those shares for preventing a depreciation of his investment. The sale of the shares, according to the revenue, was effected merely with a view to making profits and for no other purpose. We are unable to accede to this contention. One of the important factors to be taken into account in matters of this nature is whether the first step was taken in the entire process of acquisition and sale with a view to trading or whether the first step was taken in order to protect an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is the second year of assessment involved in the reference, he was entitled to acquire 12,402 shares but he acquired only 11,000. If the dominant intention of the assessee was to trade in the shares, he would have normally acquired all that was offered to him and not something less. It would appear that the shares had a ready market and were saleable at a premium, as shown by the figures of profit which the sales yielded. The fact that the assessee denied to himself a clear opportunity to make a larger profit does not bear out the theory that he wanted to convert his investment shares into stock-in-trade. In coming to the conclusion that the assessee is a dealer in shares the Tribunal was influenced by the circumstance that the assessee had sold his original holding also at a large profit. The sale of the old shares, however, is, rightly, not stressed before us. The form of the argument in this court was that if the matter had rested with the sale of old shares, the assessee could have been treated as an investor but the acquisition of right shares and their sale coupled with the renunication of rights showed that he had turned a dealer in shares. We have dealt with this latter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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