TMI Blog1986 (5) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... interfere with the order of the High Court. - - - - - Dated:- 8-5-1986 - Judge(s) : R. S. PATHAK., SABYASACHI MUKHERJEE JUDGMENT The judgment of the court was delivered by SABYASACHI MUKHARJI J.-These appeals by certificate arise from the judgment and decision of the High Court of Bombay, dated August 10, 1971, in Income-tax Reference No. 124 of 1963. The question involved in these appeals is familiar in direct tax laws. The points in controversy are short. But the adjudication is pending for long. Assessment years involved are 1957-58 and 1958-59. The High Court disposed of these references on August 10, 1971, and in 1986, i.e., nearly after 28 years of the years of assessment, we are posed with the question whether in respect of certain transactions in those years, the assessee was a dealer or an investor and consequentially whether the income arising from the sale of shares by the assessee is to be taxed on revenue account or capital account. The question that the High Court had to answer was as follows: " Whether, on the facts and in the circumstances of the case, the assessee was a dealer in shares in the accounting periods relevant to the assessment years 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also sold shares of Guest Keen Williams and India Cement in 1958-59. During all these years, the purchases and sales of equity shares of the said company were more marked than the purchase and sale of other shares. Besides the sale of equity shares of the said company and shares of other companies stated above, the assessee had also sold some of his original shares of the said company held by him. On these facts, the assessee contended before the Income-tax Officer that the assessee was only an investor and not a dealer in shares but this contention was rejected by the Income-tax Officer and the Appellate Assistant Commissioner. Aggrieved by the said decision of the Appellate Assistant Commissioner, the assessee filed second appeal before the Tribunal. Before the Tribunal, it was contended on behalf of the assessee : (1) that the assessee never purchased equity shares of the said company from any outsider or any stranger except in a few cases from close friends or from members of the staff just to accommodate them; (2) that the shares that were acquired by the assessee were only right shares issued by the company to its existing shareholders (3) that the assessee had to meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Tribunal nor anything established to the contrary. According to the Tribunal, therefore, if the assessee was under no obligation to acquire right shares, there was no necessity for him to apply for and obtain right shares except to make profits on their sales. According to the Tribunal, it is far from the conduct of a prudent and reasonable man like the assessee to expect him to sell away his capital assets to meet the recurring personal expenditure. The frequent acquisition of right shares at par coupled with the fact that even some of the original holdings were sold, was against the assessee's intention of nursing his investments, according to the Tribunal. The Tribunal noted that, according to the Appellate Assistant Commissioner, such an activity was " self-destructive purpose by self-cancelling activity ". The Tribunal was in agreement with the view of the Appellate Assistant Commissioner and came to the conclusion that it was the idea of huge profits that the assessee was making by sale of shares of the said company that compelled him to acquire right shares frequently and in large numbers notwithstanding the fact that he was indebted to the bank and he was having an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstant case which is under appeal before this court. Therefore, it was not, according to the counsel for the Revenue, on any divergence of finding or any different inference being drawn from the said findings but because of the decision of the Bombay High Court and out of deference to it, the assessee had to be treated as an investor. The findings of the Tribunal for those two years are also the subject-matter of Special Leave Petitions Nos. 8292 and 8293. These will have to be disposed of along with these appeals. The High Court in the impugned judgment answered the question in favour of the assessee and held that the assessee was not a dealer in shares. In this case, the facts have been enumerated and tabulated in the statement of the case. The Tribunal on those facts came to the conclusion that the assessee was for the relevant two years a dealer in shares. The High Court, however, in answer to the question held to the contrary and held that the assessee was only an investor in shares. In the background of these facts, two questions arise, which the courts have to deal with in these types of transactions. The first question is whether the finding of the Tribunal or the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real question as Lord Reid said was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step-the purchase of the shares was not taken as, or in the course of, a trading transaction. It was further reiterated in that decision that where question of inference from certain facts found by the Tribunal arises, unless the court comes to the conclusion that the inference drawn by the Tribunal could not be reasonably drawn at all, then it is not proper to interfere with that finding of fact. How a question of this nature should be viewed has been indicated by this court as early as 1958 in G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594. The question there was whether sale of a land to a company could be treated on the facts and circumstances of the case as an adventure in the nature of trade. There, on the facts, this court upheld the findings of the Appellate Tribunal in affirming that the assessee knew that it would be able to sell the lands to the managed company whenever it thought it profitable to do so; that the assessee had purchased the four plots of land with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round that it is a conclusion on a question of mixed law and fact is no doubt based upon the primary evidentiary facts, but its ultimate form is determined by the application of relevant legal principles. The need to apply the relevant legal principles tends to confer upon the final conclusion, its character of a legal conclusion. In dealing with findings on questions of mixed law and fact, the High Court, however, has to accept the findings of the Tribunal on the primary questions of fact; but it is open to the High Court to examine whether the Tribunal had applied the relevant legal principles correctly or not; and in that sense, the scope of enquiry and the extent of the jurisdiction of the High Court in dealing with such points was the same as in dealing with pure points of law, and not beyond that. Before considering other cases, it may be appropriate to refer to the report of the Royal Commission on Taxation of Profits and Income of England, which was presented to Parliament of the United Kingdom in June, 1955. There, the Royal Commission considered whether a simple test could be evolved that would separate taxable cases from non-taxable ones. The Royal Commission noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceptionally the subject of investment. Again property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does. (2) The length of the period of ownership. Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But there are many exceptions to this as a universal rule. (3) The frequency or number of similar transactions by the same person. If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date, a presumption arises that there has been dealing in respect of each. (4) Supplementary work on or in connection with the property realised. If the property is worked up in any way during the ownership so as to bring it into a more marketable condition; or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. For, when there is an organised effort to obtain profit, there is a source of taxable income. But if nothin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f law or want of evidence to support a finding were both questions of law. This court observed as to what are the characteristics of the business of dealing in shares or that of an investor was a mixed question of fact and law. What is the legal effect of the facts found by the Tribunal and whether as a result the assessee could be termed a dealer in shares or an investor was a question of law. As was observed by Venkatarama Ayyar J. in Shree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 (SC), that in between the domains occupied respectively by question of fact and law, there is a large area, in which both these questions run into each other, forming, so to say conclaves within each other. These are mixed questions of law and fact. The instant case is one. In the case of Stanley (Surveyor of Taxes) v. Gramophone and Typewriter Ltd. [1908] 5 TC 358, the Court of Appeal in England had dealt with that question. The Court of Appeal in England observed at 374 of the report as follows : " It is undoubtedly true that, if the Commissioners find a fact, it is not open to this court to question that finding unless there is no evidence to support it. If, however, the Commissioners state t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... glish courts was to be preferred. Lord Radcliffe observed that without any misconception of law appearing on the face of the case stated, the facts found may be such that no person acting judicially and properly as to the relevant law could have come to the determination reached. We have noted Lord Reid in 1. P. Harrison (Watford) Ltd. v. Griffiths (H. M. Inspector of Taxes) [1962] 40 TC 281 (HL) saying that intention at the time of the purchase was a relevant and often a conclusive factor whether the resale was in the nature of an adventure in trade or not. But in Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242, this court referred to the observations of Lord Dunedin in the case of Leeming v. Jones [1930] 15 TC 333 ; 355 (HL), where the House of Lords observed that the fact that a man did not intend to hold an investment might be an item of evidence tending to show whether he was carrying on a trade or concern in the nature of trade in respect of his investments, but per se it led to no conclusion whatever. In the case of Ramnarain Sons (P.) Ltd. v. CIT [1961] 41 ITR 534 (SC), this court observed that in considering whether a transaction was or was not an adventure in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the new shares was a right which was embedded in her old shares and consequently when she realised the sum of Rs. 45,262.50 by selling her right, the capital gain should be computed after deducting from that amount the value of the embedded right which became liquidated. It was held that the appellant was entitled to deduct from the sum of Rs. 45,262.50, the loss suffered by way of depreciation in the old shares, The question was again considered by this court in Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486. There this court on the facts came to the conclusion that the assessee dealt with the shares of Mcleod and Co. and the allied companies as stock-in-trade, and that these were, in fact, purchased even initially not as an investment but for the purpose of sale at a profit and, therefore, the transactions amounted to an adventure in the nature of trade, and the profit derived by the appellant from the sale of shares was, therefore, revenue receipt and as such liable to incometax. It was held that the decision of the Department in the earlier years that the transactions were in the nature of change of investment was not binding in the proceedings for assessment d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the inference reached by the Tribunal should not be interfered with. In order to determine the question involved in the instant appeals, certain features will have to be borne in mind. All the right shares were acquired directly as right shares at par from the company. It was further urged that as chairman, the assessee was duty bound to support the issue of new shares by the company. Sales were made to reduce his overdraft, according to the assessee. The sales were also made to purchase a house in Denmark and for which permission had been obtained from the Reserve Bank of India to remit Rs. 1 lakh. This would appear from the assessment order for 1959-60. It was further emphasised that the market price was lower on the date of sale and there was no profit motive. The Income-tax Officer, however, held that profit was the intention of the assessee for the acquisition of the shares. The shares acquired after April 1, 1954, were held as trading stock. This date was chosen by the Income-tax Officer because from this date, the assessee started selling as well as buying shares on a large scale. Therefore, according to the Revenue, this indicated dealings in shares. It may be noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive of portfolio management. This did not mean that every investor must invest in growth stocks; this would be inconsistent with many investors' needs. A fund can be built up from reinvested income as well as through the purchase of growth shares. A large fund does provide more income for the investor than a small fund. Many investors have increased the capital value of their funds through reinvested dividends and interest income. Some wanted income, some capital gains, and some a combination of both. In spite of these variations, several objectives should be considered as a basis to a well-executed investment programme. The guiding principles establish the indifference curve of risk versus return for the investor. The various other authorities to which our attention was drawn highlight this aspect. In Business Finance-F. W. Paish and R. J. Briston, sixth edition, at page 115, it was observed how issue of right shares depreciates the value of the original shares. It was thus observed : " Since the price to be paid for the new shares is substantially below the current market price of the existing ones, the price per share of the enlarged issue will normally be below the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee as a matter of free choice. The assessee acquired, according to the High Court, those shares because if the assessee did not do so, his capital would erode. But as is apparent from the facts noted before, he had to find so much more money in order to acquire the shares and it was not always prudent to permit the overdraft account to swell. Having regard to all the facts as noted by the High Court and referring to the relevant decision, the High Court was of the view that the true object in this case was to prevent depreciation in the value of his investment. The assessee also in this case, as we have noted before, renounced some of his rights to get the right shares. The High Court was of the view that the true intention of nursing the investment has not been appreciated by the Tribunal. Therefore, in the light of the facts, the Tribunal's inference was not one justified on the facts and circumstances of this case. At the outset, it must be stated that the Tribunal in its order has noted that according to the assessee, the contention of the assessee was that with a view to keep the overdraft within reasonable limits and with the prime object of nursing his inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the investments. Therefore, bearing the principles of the different cases which we have set out hereinbefore and considering the motive in the light of the transactions and the intention with which the shares were acquired, nature of the shares, the question has to be judged whether there has been trading in shares or, in the words of Lord President Clyde, whether there was plunge in the waters of trade, in buying shares or acquisition of shares. (see Balgownie Land Trust Ltd. v. IRC [1929] 14 TC 684 (C Sess.). The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This is a mixed question of law and fact. The entirety of the said facts have been dealt with both by the Tribunal as well as the High Court. The High Court observed that there was nothing on record to show as to what extent and for what measure, the overdraft account was utilised for acquiring right shares nor indeed there was anything to show the gain which was likely to result which in fact resulted to the assessee by paying interest on the borrowed fund. Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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