Tax Management India. Com
                        Law and Practice: A Digital eBook ...

Category of Documents

TMI - Tax Management India. Com
Case Laws Acts Notifications Circulars Classification Forms Manuals SMS News Articles
Highlights
D. Forum
What's New

Share:      

        Home        
 

TMI Blog

Home List
← Previous Next →

1964 (4) TMI 135

is nominees and is thus controlled by the said Mulraj. The assessee is a dealer in shares, both in forward and ready market. It was incorporated some time in the early forties. In the year 1942 Mulraj Kersondas obtained control of the Elphinstone Spinning and Weaving Mills (hereinafter referred to as the Elphinstone Mills). He also acquired the managing agency of the Elphinstone Mills for a consideration of ₹ 6 lakhs. There was also another private limited company known as Chidambaram Mulraj & Co. Ltd., and the shareholders of this limited company were Mulraj and his nominees, including the present assessee. In the year 1943, Mulraj assigned the managing agency of the Elphinstone Mills to Chidambaram Mulraj & Company. During the years 1942 to 1948, the dealings in shares of the assessee-company included dealings in shares of the Elphinstone Mills also and the profit and loss even in the dealings of the Elphinstone Mills was taken by the assessee to its revenue account during these years. At the end of the year 1948, the assessee held 5,137 ordinary shares and 1,131 preference shares of the Elphinstone Mills. During the years subsequent to the year 1948, the assessee d .....

X X X X X X X

Full Text of the Document

X X X X X X X

ills. Out of the consideration of ₹ 45 lakhs which Mulraj received from K.D. Jalan he paid over a sum of ₹ 10 lakhs to the managing agents and distributed the balance of ₹ 35 lakhs amongst 25,000 ordinary shares and 10,000 preference shares, paying ₹ 80 for every ordinary share and ₹ 150 for every preference share. The assessee-company who had a holding of 8,693 ordinary shares and 2,317 preference shares received a total amount of ₹ 10,42,990. However, the total receipts as shown by the books of account of the assessee was only ₹ 10,37,775, there being no explanation for the discrepancy of ₹ 5,215. The profit on the sale of shares as worked out in the assessee's books was ₹ 2,34,231. The assessee in its accounts however did not show this surplus in its profit and loss account, but took it to the capital reserve account and showed it as a capital reserve in its balance-sheet. In the assessment of the assessee for the assessment year 1954-55, the Income-tax Officer treated the amount of ₹ 2,34,231 as the income of the assessee from the sale of shares and brought the said amount to tax. He did not accept the assessee' .....

X X X X X X X

Full Text of the Document

X X X X X X X

7; 2,34,231 was the income of the assessee?" In the application made by the assessee requesting the Tribunal to make a reference under section 66(1) it had prayed for the reference of certain other questions also. The Tribunal however had declined to refer those additional questions suggested by the assessee on the ground that the question which it had framed and was referring to this court was sufficient to bring out the entire controversy between the parties. A notice of motion was taken out by the assessee in this court in which it was prayed that this court may direct the Tribunal to make a supplemental statement referring to this court certain other questions on the ground that the Tribunal was wrong in taking the view that the question it had framed was sufficient to bring out the entire controversy between the parties. On that notice of motion, this court was pleased to take the view that the entire controversy between the parties had not been brought out by the question which had been framed and referred to by the Tribunal and it was, therefore, necessary to call for a supplemental statement on two more questions of law which arose on the order of the Tribunal. This co .....

X X X X X X X

Full Text of the Document

X X X X X X X

as taxed as business profit and loss was claimed as a business loss. During the years 1949 to 1953 there had been no transactions of sale of shares of the Elphinstone Mills on the part of the assessee, excepting a solitary instance in the year 1952 when 160 shares were sold to Lady Thakercy at par value. On the other hand, there had been some further addition to its holding in the said shares by the assessee during these years. Apart from the circumstances, however, that there has been no sale of the shares during these years, there is nothing else to indicate that the assessee had changed its attitude towards these shares or that it had converted its holding in these shares from stock-in-trade to capital. The Tribunal was of the view that an inference that the holding in these shares was regarded by the assessee as on capital account was not capable of being drawn from the circumstances that there had been no sale effected by the assessee during the years subsequent to 1949, because there was a slump in the price of shares in the market during those years and the Tribunal was also of the view that the circumstance that the assessee added to its holding during those years also did .....

X X X X X X X

Full Text of the Document

X X X X X X X

ging agency company of the Elphinstone Mills. The assessee itself was a shareholder of the managing agency company and, therefore, also interested in the managing agency. The assessee-company had purchased shares of the Elphinstone Mills not with a view to deal with them as a dealer in shares but with a view to support the managing agents of the Elphinstone Mills and to maintain control over the Elphinstone Mills. Mr. Palkhivala has also argued that even if the assessee could not be regarded as having been an investor in the shares of the Elphinstone Mills right from the inception, at any rate, from the year 1949 onwards it has regarded its holding in the shares of the Elphinstone Mills as an investment in order to secure support to the managing agency of the said mills and consequently at the material time when the shares were sold they were not a part of the stock-in-trade of the assessee. Now the argument of the learned counsel that the assessee was an investor in the shares of the Elphinstone Mills right from the inception cannot bear any scrutiny. The assessee was admittedly a dealer in shares. It had dealt in shares, including the shares of the Elphinstone Mills during its bu .....

X X X X X X X

Full Text of the Document

X X X X X X X

ing control. During the years 1943-48, the assessee purchased shares of the mills and also sold them. There is however nothing to indicate that there was any other purpose in the said purchases and sales, except the purpose of the business of the assessee. If the shares were being purchased for the purpose of giving support to the maintenance of control over the Elphinstone Mills by the group of Mulraj Kersondas, the assessee-company would not have indulged in sales of shares to a considerable extent as we have pointed out earlier. During the years 1943-48, a large number of shares have also been sold by the assessee. Thus, in 1944, 2,000 shares have been sold and in 1947-48, 1,000 shares have been sold in each year. During all these years, the profits and losses in these shares have been treated on the same footing as the profits and losses in other shares by the assessee. Having regard to these circumstances, namely, the dealings both in purchases and sales of the shares of the mills and the conduct of the assessee in treating the profits and losses as business profits, we cannot agree with Mr. Palkhivala that the assessee was an investor right from the beginning or that its atti .....

X X X X X X X

Full Text of the Document

X X X X X X X

esent case which would support the case of Mr. Palkhivala that the assessee was an investor in these shares from 1948 onwards. It is the argument of Mr. Palkhivala that, although the assessee was a dealer in shares, his considerable purchases in the shares of the Elphinstone Mills was with a view to support the managing agents of the mills, since the assessee itself had an interest in the managing agency company being one of its shareholders. Mr. Palkhivala argues that that is the finding of the Income-tax Officer and the Appellate Assistant Commissioner and his complaint is that the Income-tax Tribunal has ignored this vital aspect. According to Mr. Palkhivala, if the holding of the shares of the Elphinstone Mills by the assessee was with a view to give support to the managing agents as held by the Income-tax Officer and the Appellate Assistant Commissioner, then on the principle of the decisions in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 49 (SC) and the unreported decision of this court in Income-tax Reference No. 41 of 1952 decided on the 11th of March, 1953, the holding of the assessee in the shares of the Elphinstone Mills would be on capital a .....

X X X X X X X

Full Text of the Document

X X X X X X X

mainly by the illness of Mulraj Kersondas who was suffering from a heart attack and high blood pressure at the material time and there was, therefore, no profit motive in the sale of the shares by the assessee. Now, the facts on which the Appellate Assistant Commissioner accepted the observation of the Income-tax Officer that the main idea of the assessee in purchasing the shares was to support the managing agents were the facts that the assessee was not a dealer in ready shares and was not authorised to do so by its memorandum of association. Both these facts, however, were basically wrong because the assessee was as a matter of fact a dealer in shares and its memorandum of association had clearly and specifically authorised it to deal in shares. Assuming, therefore, that the acceptance of the said observation of the Income-tax Officer by the Appellate Assistant Commissioner could be regarded as a finding of fact arrived at by him, the said finding was clearly vitiated because it was based on facts which were contrary to the record. The finding of the Appellate Assistant Commissioner that the sale was motivated by the illness of Mulraj Kersondas was equally erroneous, because as .....

X X X X X X X

Full Text of the Document

X X X X X X X

hat the assessee was acquiring shares for the purpose of supporting the managing agents. There is nothing on record to show that during the years 1949-53 when no sales were effected, it was necessary to conserve the holding in the shares of the Elphinstone Mills because the managing agency was in any way threatened. The learned counsel says that, at the time when the managing agency was acquired, there was obviously no need to make any use of the holding of the assessee in the shares of the mills because the assessee at that time had hardly any shares; and subsequent to the acquisition of the managing agency until it was relinquished in 1943, there is nothing on record to show that at any time the managing agency had felt its existence either precarious or in need of support. There is considerable force in these submissions of the learned counsel for the revenue and having regard to all the circumstances of the case the contention of Mr. Palkhivala that the assessee had acquired its holding in the Elphinstone Mills' shares with a view to support the managing agency is not supported by any material on record. That being so, we cannot agree with Mr. Palkhivala that the Appellate .....

X X X X X X X

Full Text of the Document

X X X X X X X

ale of shares simpliciter. The offer which Mulraj Kersondas made to K.D. Jalan on the 25th of September, 1953, comprised of four items, namely, the sale of 25,000 ordinary shares and 10,000 preference shares, procuring of the resignation of the present directors of the Elphinstone Mills, securing the appointment of persons of the choice of K.D. Jalan as directors of the company and obtaining the resignation of the present managing agents of the Elphinstone Mills. The consideration of ₹ 45 lakhs for this offer was a composite consideration for all these four items. After the offer was accepted by K.D. Jalan and the payment of ₹ 45 lakhs was paid by him to Mulraj Kersondas, the latter appropriated ₹ 10 lakhs out of the aforesaid ₹ 45 lakhs to one of the four items, namely, the relinquishment of the managing agency. He paid that amount to the managing agents, M/s. Chidambaram Mulraj & Co. Ltd., who had relinquished the managing agency according to the directions of Mulraj Kersondas. Deducting this amount of ₹ 10 lakhs from the total consideration of ₹ 45 lakhs the remaining ₹ 35 lakhs was the consideration of the remaining three items, nam .....

X X X X X X X

Full Text of the Document

X X X X X X X

be valuable to the purchaser. K.D. Jalan, when he considered the offer and accepted it, did so in view of the power and other advantages which he was getting along with the purchase of shares. It can no doubt be said that from the point of view of Jalan what he was paying for was not for the price of the shares simpliciter, but also for certain other valuable rights. The price of ₹ 45 lakhs which he paid was, therefore, a composite payment, which he was making for the shares and for the control which he was thereby acquiring. The relinquishment of the managing agency of the Elphinstone Mills was a valuable and important matter from the point of view of K.D. Jalan. There can be no doubt whatever that, in agreeing to the price, he was taking into consideration the value of the relinquishment of the managing agency. Mulraj Kersondas on receipt of the consideration appropriated a sum of ₹ 10 lakhs to the relinquishment of the managing agents and paid over that amount to the managing agents by way of compensation for loss of their office. The other two items, namely, the resignation of the present directors and the appointment of the new directors of the choice of K.D. Jalan .....

X X X X X X X

Full Text of the Document

X X X X X X X

however to consider the matter from the point of view of the assessee and what we have to see is what the assessee parted with and what the assessee got. It must be remembered that the assessee itself had no controlling interest in the Elphinstone Mills. It was not the managing agent of the Elphinstone Mills and its holding in the shares of the Elphinstone Mills was only to the extent of 13 per cent. which could not give it any controlling power. Mr. Palkhivala has stated that, although the assessee itself had not a sufficiently large holding to give it any controlling power, it was a member of the Mulraj Kersondas group and it was working in concert with Mulraj who had considerable controlling power and interest. Mr. Palkhivala argues that the transaction entered into by Mulraj Kersondas with K.D. Jalan, although entered into by Mulraj alone, was as a matter of fact a transaction on behalf of the entire group of Mulraj Kersondas, including the present assessee. What was being offered by Mulraj Kersondas to K.D. Jalan was on behalf of the entire group and therefore also on behalf of the assessee. The group had a built-in power which it was proposing to transfer to K.D. Jalan under .....

X X X X X X X

Full Text of the Document

X X X X X X X

imself. It may be that out of the consideration of ₹ 45 lakhs received by Mulraj Kersondas, if he had so chosen, he could have kept apart a certain sum for the other items before distributing the price of the shares. But the circumstance that Mulraj Kersondas has not done so would not make any part of the price, which the assessee had received in return, anything else than the price of the shares. From the point of view of the assessee's business, the entire sum received by it from Mulraj Kersondas was a price of the shares disposed of by Mulraj Kersondas, and consequently, the whole of the excess over the cost price of the shares of the assessee is the profit of the assessee in its business in shares. In our opinion, therefore, no part of the amount of ₹ 10,42,990 received by the assessee from Mulraj Kersondas can be regarded as consideration for any other valuable rights, excepting the price of the shares sold by it. In the result, therefore, our answer to the questions referred to us by the Tribunal arising for determination in the present reference are as follows: With regard to the first question our answer is in the affirmative and with regard to the second qu .....

X X X X X X X

Full Text of the Document

X X X X X X X

 

 

← Previous Next →

 

 

|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || Database || Members || Refer Us ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.
|| Blog || Site Map - Recent || Site Map ||