Raja Bahadur Kamakhya Narain Singh versus Commissioner of Income.Tax, Bihar and Orissa

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A

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RAJA BAHADUR KAMAKHYA NARAIN SINGH

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v.

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COMMISSIONER OF INCOME.TAX, BIHAR AND ORISSA

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September 1, 1969

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B

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(J. NI. SHELAT AND C. A. VAIDJALINGAl>I, JJ.]

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Capitlil or Jnco1ne-Purchase and sale of gold and shares-Principles far deciding whether profit on transactinns is revenue or capital receiplQuestion is of 1nixed fact and law-High Court in reference not bctrred jru1n going into findi11gs of Tribunal 011 such question on the ground th(lt it iJ one of fact and therefore final.

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c The assessec inherited a vast cst:.1te c·on'iisting of ngricl1\tural and othei land as also Government sc:urities worth Rs. 40 Ines. In 1937 he attained majority and control of the estate from the Cvurt of Wurds. In the account· ing year 1938-39 he sold some of those smtritics at a profit. Thereafter he opened on account i11 the Imperial llnnk of India i11 the name of his wile nnd called it "nccornlt of 48 lacs l1011ting in the shat'c market.'' In Sopt,mber 1939 he purchmd shares worth Rs. 34.14 Ines out of the said fund but sold them, •A•in at a profit in the venrs 19;9, 1940 ond 1941. The D profits on the said snles of share• were •uhjectcd to tax by the I ncomc-i.1x Offie<r in lhc yenrs 1939-40, 1940-41 and 1941-42. The 'frihunal however held that the ""essee was not ·n denier in shares nnd held th•! profits not to be taxable. Dctwccn lune and Novcmb·or 1940 the usscsscc purcham1 gold for Rs. 28,47,380/- from out of the sale prooocds of the aforcs:iid shares. This gold was sold nt n profit in the accounting periodi:i rel,~vnnt to the 1945-46 and 1946-47 r:s'iessment years. \Vith th<.:! sale proceeds certain shares including 7,025 shares of Karanpura Dcvclopn1oent Co. Ltd. E were purchased, most of \Vhich were sold at a profit. Certain VichJrv Bonds were purchased ·and resold within two 1nonthi;;, The lncon1c-t:ix Officer subjected the profits from the sales of gold an<l Karanpur shares to tax in the assessment years 1945-46 and 1946-47. The Tribunal on considering the whole pattern of transactions from 1938 onwards came to the 1conclusion that the said profits were rightly taxed. The High Court upheld the view of the Tribunal holding inter alia, that the findings were of F fact and not arrived at without evidence so that no interference \Vas warranted in reference proceedings. The. assessee appealed.

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HELD : ( 1) When' a transaction is not in the ordinary lines 'of an assessee's business the facts must be properly assessed to discover whether it was in the nature of trade. The test often applied is-has the assessee made his shares and securities the stock-in-trade of a business? [171 G; 172 HJ

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G

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(ii) Since in the present case the Tribunal had the advantage, of examining the assessee's tranr.1.ctions during the whole period i.e. right from 1938-39 to 1944-45 and thus had more comprehensive picture of all the transactions, there would be no bar to its coming to a conclusion different from that arrived at in the ear1ier years, if the acts <1nd conduct of the assessee taken as a whole throughciut the period pointed to a different conclusion. [174 A-BJ

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H (iii) On the facts and circumstances of the case, however the finding of the Tribunal, concurred in by the High Court, that the transactions in question were in the, nature of trading transactions, was not justified. [174 C-D]

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(1970] 2 S.C.R.

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SUPREME COURT REPORTS

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164

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(a) It is a notorious fact that in 1940 the fortunes of the allies were none too bright. The conversion by the assessee of his entire share holdin~ into gold in that year was consistent with his case that he did so because of the nervousness engenCered by ·the breaking out of the war, the initial German victories, and the fall of France. The fact that the assessee did not invest all his cash would not mean, as the Tribunal thought, that his case about the purchases of gold was not correct. [174 D-FJ

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The Tribunal also failed to give due significanoe to the fact that the assessee who started with the plan of getting at least net 7% yield, put a very large part of his funds into gold, an altogether sterile security, and retained it for 4 year!'l The price of gold' began to ris~ in 1941 and was at its peak in 1943. The fact that the assessee did not sell his gold then but only in October 1944 when the. price had fallen showed that it was only after the fortunes of war had turned in favour of the allies and confidence restored that he felt it safe to invest his money in income-bearing securities. The further fact that he sold practically the whole of his stock of gold in October 1944 lnstead of reselling it bit by bit after the price was rising since 1942 was inconsistent with the hypothesis -that the object with which the gold was purchased was to trade in it. [174 G-H; 175 A-DJ

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(b) The fact that the account in the Imperial Bank opened in 1939 was called "Rs. 48 lacs floating in the share market" was given undue significance by the Tribunal. Properly viewed it only meant that the assessee wanted to set apart this fund for tr,ansactions in shares and securi- ties and not mix up his other capital and the income arising from his estate. [175 D-EJ

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( c) The sale of the Victory Bonds within two months of their purchase \-'Ould not invest the transaction with the stamp of trade or busine~ for they were only purchased to show to the authorities that his estate had made a contribution to the war effort. [175 E-Gl

A

B

c

D

E

(d) The Karanpur shares were purchased by the assessee with a vie,w to 1tetting control over the company's management by procuring 51 % of its total shares. When that plan failed he sold these sh~res. In these circumstances the transaction could not be considered to be on revenue account. [175 G-H; 176 DJ

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Kishan Pramd & Co. Ltd. v. C.i.T., (1955) 27 l.T.R. 49 and C.l.T. v. National Finance Ltd. ( 1962) 44 J.T.R. 788, applied.

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( e) The expression 'adventre in the nature of trade' implies the exist ence of certain elements in the transactions which in Jaw would inTest them with the character of trade or business. The question the.refore \Vhether a particular transaction is an adventure in the nature of trade is a mixed question of law and fact and the court can re,view the Tribunal's finding thereon. Therefore in the present case the ·High Court was wrong in treating the Tribunal's decision as a finding of fact and refusing to interfere on that ground. [171 A-CJ

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F

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G

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Venkataswami Naidu &: Co. v. C.l.T., (1959) 35 I.T.R. 594, 603, 604 and Liquidators of Pursa Ltd. v. C.I.T., (1954) 25 I.T.R. 265, referred to.

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CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 481 and 482 of 1966.

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Appeals 'by special leave from the judgment and order, dated April 15, 1963 of the Patna High Court in Misc. Judicial Cases Nos. 342 and 346 of 1954.

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H

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KAMAKHYA NARAIN v. C.I.T. (She/at, J.) !65

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A S. T. Desai and D. N. Mukherjee, for the appellant (in both the appeals) .

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Jagadish Swarup, Solicitor-General, S. K. Aiyar, R. N. Sachthey and B. D. Sharma, for the respondent (in both the appeals)

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8 'Ille Judgme.nt of the Court was delivered by

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Shelat, J. These two appeals, under special leave, arise from two References to the High Court of Patna under s. 66(2) of the Income Tax Act, 1922 and relate to the assessment years 1945-46 and 1947. In the first appeal, the question arising for deterc mination is whether, on the facts and circumstances of the case, the surplus receipt of Rs. 13,43,469/-, realised as a result of the sale of gold, is assessable as income, or profits or gains for the assessment year 1945-46 under s. 4(3) (vii) of the Acl. In the 2nd appeal, Jwo questions arise for determination; one relates to the surplus receipt of Rs. 33,481/- arising out of the sale of some more gold, and the second relates to the receipt of Rs. 88,522/- realised D by tlie assessee as a receipt as a result of sale of certain shares. All the three questions raise the common problem whether the said tr?.nsactions in gold and shares were by way of realisation of investment or were adventures in the nature of trade or business.

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The assessee was at all material times a landholder deriving E large income from agriculture, royalties of minerals and income from forests forming part of his estate. Prior to 1937, when, he was a minor, his estate was under the management of a Court of Wards. · On attaining majority, the estate, which included Government securities of the value of about Rs. 40 lacs, was handed over to him on August 19, 1937. During tlie account year 1938-39 he sold the whole lot of these securities and realised F Rs. 44,25,088/-, the sale thus resulting in an excess of Rs. 4,55,305/-. This excess amount was assessed as profit by the income-tax officer for the assessment year 1939-40. But on appeal against the assessment order, the Appellate Tribu,n'al set side that ?rder on a finding that the said sale was by way of a change in mvestment, and therefore, was not a transaction in the nature of G trade or _business. On March 23, 1939, the assessee opened an account m the Imperial Bank of India initially with Rs. 46 lacs which included the said sale proceeds of Rs. 44 lacs and odd and to which on March 27, 1939 he added Rs. 2.60 lacs. The account was opened in the name of his wi.fe and was called "Account of R~. 48 lacs floating in the share market". In September 1939, the H assessee purchased shares and debentures of the value of Rs. 34.14 lacs ~rom out of the funds in the said account. He, however, sold certam shares for Rs. 5,75,723/- in October 1939 and then the rest of them in 1940 and 1941 realising Rs. 29,S8,677/and

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SUPREME COURT REPORTS

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166

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[l 97U] 2 S.C.R.

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Rs. 64,201/- respectively. The first sale fetched a profit of Rs. 1,17,064/- the second a profit of Rs. 25;133 a:::1 the third a loss of Rs. 1,642/-. The income-tax officer brought to tax the two surpluses in the assessments for the assessment years 1940-41 and 1941-42. But the department was again unsuccessful as the Tribunal once again held, on the strength of the correspondence which had passed between the assessee, his bankers au:ld his brokers in Calcutta, that the only possible conclusion emerging from that correspondence was that the assessee's intention was not to deal in shares and debentures, a.nd that the said transactions were a mer~ change in investment carried out of a single scheme of earning a better yield from investments. The Tribunal's orders in respect of these assessments for the assessment years 1939-40 to 1941-42 were made part of the Statement of Case filed by the Tribunal before the High Court in the present References.

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Between June 28, 1940 and November 9, 1940 the assessee purchased 68,109 tolas of gold for Rs. 28,47,380/- from out of the sale proceeds of the said shares. The gold so purchased was kept in his family vaults at Padma, the seat of his estate, for nearly 4 years. Between October 9, 1944 and October 20, 1944, he disposed of the bulk of the goltl, i.e. 55,494 tolas, for Rs. 36,80,174/-, the sale resulting in a surplus of Rs. 13,43,469/-, which is the subject-matter of the first appeal. The remaining quantity of gold was sold 011 October 19; 1945, and that sale brought him an excess of Rs. 33,481/-, which is part of the subject-matter of the second appeal.

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In respect of these two surplus amounts, the assessee contended that they were the result of a change in investment and could not be said to be transactions in the l!lature of trade or business. His ca~e was that neither the Government securities, nor the shares and debentures purchased out of their sale proceeds, nor the gold were sold and purchased by way of dealing in them, that. at no .time they became his stock-in-trade for any business or adventures in the nature of trade or business therein, that the transactions were mere conversions from one investment to another, depend\ng upon the circumstances which prevailed during the respective periods and that the sale of gold in 1944 and 1945 was occasioned partly due to the tide . in the second world war turning in favour -0{ the allies and partly due (a) to his having to pay Rs. 7 lacs by way of income-tax, (b) expenses for the marriage of his younger brother, ( c) for payment of Rs. 6 lacs debt to one Gupta and ( d) for purchase of Victory Bonds worth Rs. 14 lacs and odd at the instance of the Government authorities as contribution of his estate to the war effort.

A

B

c

D

E

F

G

H

The Tribunal rejected the case that gold had been sold for the reo.sons given by the assessee or as a change in· investment and

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KAMAKHYA NARAIN v. C.I.T. (She/at, !.)

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16 7

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A held that : (l) conversion of shares into gold was not due to any panic resulting from the war, (2) that there was no pressing necessity for the sale of gold as alleged by him, (3) that Victory Bonds were not by way of any war effort since the assessee sold them away within a short time after their purchase, and ( 4) that the sale proceeds of gold were utilised in purchasing shares for which he borrowed an additional amount of Rs. 5.10 lacs i.n

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B 1945-46 against· gold. In ihis view the Tribunal confinned the l.T.0.'s decision that the two excess amounts were liable to income tax in the two assessment years.

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The sale proceeds o.f gold sold as aforesaid were utilised by the assessee in purchasing 7025 shares of Karanpura Developc ment Co. Ltd. for Rs. 2,37,267/. during the period from December 8, 1944 to April 20, 1945 and shares of Bokaro Ramgur Co. for Rs. 39,81,663/- purchased in 1945-46. Part of the sale proceeds were also utilised in purchasing the said Victory Bonds. Between November 8, 1945 and February 21, 1946, he sold 6950• of the Karanpura shares realising a net surplus of ~. 88,522/-, which the Income Tax Officer treated as business profit and D brought to tax for the assessment year 1946-4 7.

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As the Statement of Case by the Tribooal shows, the Tribunal examined the assessee' s dealings since the time he took over the· said estate. The Tribunal noted that the said shares were purchased from the said Rs. 48 lacs in the Bank reserved for that purpose and t:rat they were sold and purchased at very short E intervals. From these tacts it held that he mustl be considered to have launched a scheme in dealing in shares, which conclusion, it thought, was strengthened by the fact of the assessee having borrowed Rs. 5 .10 lacs for the said purpose. The Tribunal further held that the complete picture of the said transactions over a length of time had not been before the preceding Tnounal when F it passed the earlier orders for the assessment years 1939-40 to 1941-42, and therefore, its conclusions were not applicable to the transactions in question. It consequently held the assessee to be a dealer in shares. As regards the gold ·also, the Tribunal confinned the orders oi the 1.T.O. rejecting the assessee's case that the gold was purchased by him owing to the war crisis and sold G by him on account of the pressing necessities alleged by him and the change in the war situation then.

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By an order dated April 2, 1959, the High Court referred that Statement of Case back to the Tribunal under s. 66 ( 4) directing· it to consider further all the materials before it and file a supplementary Statement of Case as the High Court found the Statement H factually incorrect in certain respects. The Tribunal accordingly sent a supplementary Statement of Case on April 23, 1960.

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After setting out the assessee's transactions of the sa1e of Government securities in 1938-39, the purchase of shares from

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(1970] 2 S.C.R.

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SUPREME COURT REPORTS

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168

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their sale proceeds, their sale in 1930-40 and 1940-41, the. purchase of gold and its sale, the Tribunal once again rejected the assessee's claim that those transactions were conversions of one investment to another made for a better return or that the gold was sold in October 1944 for pressing necessities alleged by the assessee. Regarding the purchase arid sale of shares, the Tribunal stated that the assessee purchased shares of the value of Rs. 37 lacs and odd in 1945-46, that those were shares of two concerns only, Bokaro and Ramgur Co. Ltd. and Karanpura Development Co. Ltd. and that as the latter company's shares were of the value of Rs. 2,37,267/- only, the bulk; of the amount of Rs. 37 lacs and odd went into the purchase of the shares of Bokaro a:nd Ramgur Co. Ltd. The Tribunal noted that the sale of Karanpura shares resulted in a net profit of Rs. 88,522/-, that in respect of the Karanpura shares there was correspondence showing that his brokers had advised him to acquire 51 % of the company's shareholding as he desired to obtain control over its management, tl;ilt for doing so he wanted tQ obtain founders' shares (each of which shares. carried 3 votes per share), that a compromise was proposed in a suit he had filed as the lessor of the mines leased out to the company, that M/ s. Bird & Co., the managing agents of that company, were not willicrlg to sel! him shares representing the i.nissued capital of the company on terms proposed by the assessee and that ultimately he failed to obtain majority of shares which only could have enabled him to obtain control over the company's management. But the Tribunal found that "the assessee was attempting to obtain control of the company not by purchasing of shares in the market, but by issue of shares by the company in order to settle the dispute between the company and the assessee. These negotiations finally failed." It finally held that having perused the correspondence and having regard to the circumstances, the purchase of Karanpura shares was not in pursuance of a scheme to obtain control over the company by acquiring 51 % of the votes therein.

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The High Court, after hearing the References, held that though the Tribunal had in the earlier assessments held that the assessee's transactions in shares, securities and gold did not amount to transactions in the nature of trade or business, and therefore, the assessee could not be treated as a dealer in those ·articles, there was no bar to the revenue coming to a differerit conclusion, though to do so it must have some new materials and faces before it. It further held that the present Tribunal could also arrive at such a conclusion having regard to : (a) th~ frequency of transactions of purchase and sale of shares, (b) the short interval between pn"chase and sale of shares, ( c) the fact of Rs. 48 lacs in the assessee's wife's account having been ear-marked for shares transactions, ( d) his borrowing Rs. 5 .10 lacs against gold for purchase

A

B

c

D

E

F

G

H

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KAMAKHYA NARAIN v. C.I.T. (She/at, !.)

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169'

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A of shares, and lastly, the fact that the Tribunal this time had before it a more complete picture of the assessee's transactions over a length of period which its predecessor had not when it dealt with the assessments for the assessment years 1939-40 to 1941-42. The High Court further held that there was fresh material, namely, that when the gold was sold, its sale proceeds

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B were again invested in shares and the fact that though Victory Bonds were purchased in January 1945 they were sold after an interval of two months only. The High Court, in this view, concluded that "the Appellate Tribunal, therefore ha.ti before it fresh materials for coming 10 a conclusion contrary to the one come to by its predecessors in the previous orders." It rejected the asst:>see's case : (a) that he had converted one investment into an-

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c other, i.e. from shares and securties to gold, because of the worsening oi the war situation after the fall of France ii:t 1940, (b) that when the war situation improved in 1944 and with that the price of gold began to fall he once again converted his investment from gold to shares, i.e., from an unproductive investment into one which could give him an adequate yield, and ( c) that he had

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D sold gold because of pressing necessities. The first contention· was held unsustainable because even after purchasing gold the assessee had retained considerable cash; the second was rejected on the ground that the assessee had sold gold not because of the allied victory in sight but because he found the gold unprofitable by reason of the fall in its price and the third was rejected as the

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E assessee had failed to mak\ _good the pressing necessities alleged by him. The High Court further held that the findings given b) the Appellate Tribunal were all findings of fact and as they could not be said to have been arrived at without any evidence they could not be interfered with in a Reference under s. 66(2). and answered the questions as to the two surplus amounts of Rs. 13 lacs and odd and Rs. 33 thousand and odd as liable to assessment. In

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F regard to the excess of Rs. 88,522/- resulting from the sale of Karanpura shares, the High Court agreed with the Tribllillal thitt that amount also was rightly brought to tax. It held that the finding of the Tribunaf that the purchase of these shares was not in pursuance of a scheme to obtain control in the company and that the assessee' s scheme for that purpose was to acquire shares

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G representing the unissued ca,pital of the compa,no/ was one of fact with which also it had n~iction to interfere.

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Counsel for the appellant disputed the correctness of the High Court's judgment anct contended : ( 1) that it was in error in declining to go into the correctness of the findings of the· H Tribunal by 1,11erely stating that they were findings of fact, (2) that the quesUon whether a particular item was a trading profit or capital accretion depended on the intention on the part of the assessee at the time of the transaction in question and which had· Ll Sup Cl/70-12 ,

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1170

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(1970] 2 S.C.R.

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SUPREME COURT REPORTS

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to be arrived at by an inference from established facts and was, therefore, a mixed question of fact and law, ( 3) that o nthe facts and circumstances, the Tribunal, and following it the High Court, was in error in treating the gold and the Karanpura shares as the stock-in-trade of the assessee for his alleged trading activities, ( 4) that the onus of proving that the activities of the assessee amount·-ed to activities in the nature of trad.~ or business was on the department and particularly so, as the Tribunal in the earlier '1s1essments had come to a contrary conclnsion, and (5) that the !Jets and circumstances as accepted by the Tribunal in its Statement of Case showed that the purchases of goid and share were made without any intention at that time to re-sell them at profit, and that therefore, the subsequent sales thereof would not stamp those transactions with the character of trade or business in them.

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Since these appeals arise out of References under s. 66 (2), we cannot exercise any wider power Of interference than that permitted to the High Court u_nder the Act. That was not disputed by Mr. Desai. But in support of his contention that this was a case where the High Court could and should have interfered with the Tribunal's findings he cited a number of decisions. It is not necessary to go into all these decisions as the principles on whkh such interference can be made and the· scope of power under s. 66 to do so are by now wel! established. That the question, whether an assessee carries on business or whether certain transactions are in the course of business or whether they a!'lount to adventures in the nature of trade or business is a mixed ques·tion of fact and law is well-settled. The decisiclJ in Venkataswami Naldu & Co. v. C. I. T. (') is an instance in point where this ·Court observed that the expression 'adventure in the nature of trade' -appearing in the definition of 'business' implies the existence of certain elements in the adventure which in law would invest it with the character of trade and that renders the question whether a transaction is in the nature of trade a mixed question of law and fact and the High Court in such a case would interfere if the Tribunal had misdirected itself in law. (cf. "also Liquidators of Pursa Ltd. vs. C. I. T.)(² ). But to distinguish a question of fact and a question of law is nQt always easy, for, sometimes there is ·a common area between the two a,1*I though ·a mere question of fac~ can be turned into one of law, care should be taken against a finding of a mixed question of fact and law being given the unassailability which the Act confers on a pure finding of fact. The case of Sree Menakshi Mills Ltd. v. C. I. T.(⁸ ) holds that where an ultimate filllding on an issue is an inference to be drawn from facts found, on application of a principle of law, there is a ·mixed question of law and fact and such an inference in such a (1) (1959) 35 l.T.R. 594 at 603 to 604. (2) (1954) 25 l.T.R. 265. (3) (1957) 31 l.T.R. 28.

A

B

c

E

F

G

H

KAMAKHYA NARAIN v. C.I.T. (She/at, J.)

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I 71

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case is a question of law open to review by the court. On the other hand, when the final determination of the issue does not involve any application of a principle of law, ·an inference is a pure inference of fact drawn from the other basic facts. ~uch an inference can be attacked only if the,re is no evidence to support it, or, if it is perverse. Siµce the expression 'adventure in the

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8 nature of trade' implies the existence of certain elements in the transactions which in law would invest them with the character of trade or business and the question on that account becomes a mixed question of law and fact, the Court ca,n review the Tribunal's tinding if it has misdirected itself in law.

¶104

It is fairly clear that where a person in selling his investment

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realises an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realisation of the investment but an act done for making profits. The distinction between the two types of transactions is not always easy to make. The distinction whether the transcatio11 is of one kind or the other depends on the question whether the

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D excess was an enhancement of the value by realising a security or a gain in an operation of profit making. If the transaction is in the ordinary line of the assessee's business there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realised on the

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E sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue, if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction.

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F For instance, an assessee may invest his capital in shares with the intention to re-seH them if in future their sale may bring in higher price. Such an investment, though motivated by a possibilty of enhanced value, does not render the investment a transaction in the nature of .trade. The test often applied is, has the assessee m'ade his shares and securities the stock-in-trade of a business.

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G

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Though the assessee was at the material time a landholder of a large estate, that fact by itself would not mean that his transactions in shares, securities and bullion cannot be transactions in the nature of trde. They had, therefore, to be examined in the light of all the facts and circumstances to ascertain whether H they had been entred into in pursuit of a trad\rig activity. The first relevant fact is that the assessee's occupation was that of a landholder, having, on attaining majority; a considerable amount of money available for raising income therefrom, The tr~actions

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[1970] 2 s.c.R.

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SUPREME COURT REPORTS

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172

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in question carriedonb regards the that arrived place. So t	were obviously not in the lineofany businessortrade y him. Since the Tribuual came to a conclusionas nature of the assessee's transactions ilifferent from at earlier, it would be useful to tabulate them at one abulated, they areasfollows :	A
(1)	Sale of Government securities in1938-39which realisedRs.44.25lacs;	B
(2)	Opening of an account with this and certain other amounts totallingRs.48lacs in the Imperial Bank;
(3)	Purchase out of these funds, sharesa,nddeben- tures of the value ofRs.34.14lacs in September 1939;	c
(4)	Sale in October1939,_i.e.,_withiu a month, of some of these shares bringing himRs._5._75lacs;
(5)	Sale of the bulk of the shares in1940bringing in Rs.29.58lacs;	D
(6)	Sale of the remaining shares in1941resulting in a small deficit;
(7)	Purchase of68,109tolas of gold in Jme1940 for Rs.28.47lacs;
(8)	Sale of the bulk of the gold, i.e.,_55,495_tolasi!1 October1944resulting in a surplus of Rs.13 lacs and odd;	E
(9)	Sale of the remaining gold in 0Qtober1945 resulting in a surplusofRs.33,481;:;
(10)	Purchase of Karanpura shares between December 1944and April1945of the value of Rs.2,37,267/-;	F
(11)	Purchase of Victory Bonds in January1945of Rs.14lacs, and salethereOfin March1945;
(12) (13)	Borrowing Rs.5.10lacs against gold in1945-46; Purchase of BokaroR:amgurshares in1945-46 for Rs.39.81lacs; and	G
( 14)	Saleof Karanpura shares in1945-46bringing in a surphts ofRs.88,000and odd.
As alrea ofany trade they possess the profits r enquiryon nature of tr	dy stated, though these transactions were not in the line orbusiness carried on by the assessee, nonetheless, if the characteristics of adventures in the nature of trade, esulting therefrom would be liable to tax.Butin an the question whether these transactions wereinthe ade or business,itwould notbealtogether irrelevant	H

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IU.MAKHYA NARAIN v. C.I.T. (She/at, J.)

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17 3

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A -to notice that in 1938-39, when the assessee sold the Government securities, he sold the entire lot and invested the bulk of their sale proceeds in shares and debentures, i.e., as much as Rs. 34 lacs. The same features is present also in his purchase of gold in 1940 and its disposal in 1944 and 1945 usfo.g its sale proceeds in buying shares, which, it must be remembered, were of two companies

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8 only. The transactions thus are not diversified nor are gradual according to the opportunities offered by fluctuating marke.t prices, but are in bulk a.nd almost at a time, which ordinarily are not the characteristics of the dealings of a person carrying on trade or business in them. Thus, in 1938-39 all Government securities were sold and the bulk of their sale proceeds, i.e. Rs. 34 lacs and

¶119

c odd, used in the purchase of shares. The same was the case when gold was bought and sold. Furthermore, when a person trades in shares and debentures, he does not ordinarily buy shares of two companies only, except when a particular script has the possibility of giving an unusual or a certain profit. There was iDOthing on record to show, nor did the Tribunal find, that that was the case with the shares of either of the two companies whose shares the

¶120

D assessee purchased in such large quantity. Prima facie, thes_e transactions would appear in the nature of investments and their conversion into what the assessee believed to be better investments as the circumstances changed from time to time.

¶121

In support of his contention that these transactiQDs were not E in the nature . of trade or business, the assessee had relied on the correspondence between him on the one hand and his bankers and brokers on the other, which had satisfied the Tribunal previously with reference to the assessment years 1939-40 to 1941-42. That correspondence lends support to the assessee's case inasmuch a.S he had thereilll clearly instructed his brokers to invest the sale proceeds of the said Government securities in such a way as to F give him an annual yield of net 7 % . There can be no doubt that Government securities were sold accordingly and shares of certain companies were purchased from their sale proceeds in accordance wtih the advice of his brokers and bankers. When it was found that certain shares so ,purchased were not likely to yield the percentage he desired, they were sold within hardly a G month from their purchase. The circumstances in which these tran$actions were brought about, would disclose, as was held by . the previous Tribunal in the case of the earlier assessments, that the ~sessee's intention thein was to change his· investments from Government securities into shares and debentures which, he was advised, would procure ,hiffi a better yield. This cop.clusion is H consistent with his sale of the entire lot of Government securities at 'a time, his going iin for shares with their sale proceeds and the sale in October 1939 of certain shares which were found incapable of giving the rernrn he desired.

¶122

[1970] 2 S.C.R.

¶123

174

¶124

SUPREME COURT REPORTS

¶125

Since the present Tribunal had the advantage of examining the assessee's transactions during the whole of the period, i.e., right from 1938-39 to 1944-45 and thus have a more comprehensive picture of all the tr311lSactions, there would be no b.ar to its coming to a conclusion different from that arrived at in the earlier years, if the acts and conduct of the assessee taken as a whole throughout the period pointed to a different conclusion as both the Tribunal and the High Court have said. But the only new materials poiinted out by the Tribunal from which a different conclusion could be arrived at were (1) the sale of gold in 1944 an~ 1945, (2) the purchase of the said shares from its sale proceeds, and (3) the sale of Karanpura shares. ·

¶126

The question, therefore, the Tribunal had before it was, whether when the assessee purchased the gold he did so with the inttion to deal in it. The Tribunal held, and the High Court concurred with. it, that the assessee's transactions showed that they were in the nature of trading transactions, Two facts, however, throw considerable do11bt on the validity of that conclusion and neither the Tribunal nor the High Court seems to have weighed them with the consideration which they demand. The first fact is that in 1940 he converted his entire share-holding jnto gold,, a fact consistent with his case that he did so because of the nervousness engendered by the breaking out of the SecO!lld World War, the initial German victories and the fall of France. T)le Tribunal did not countenance t!tis case for it thought that if that was so, the assessee would have invested the other cash lying; with him also• in gold, and secndly,because according to it the war panic .started'. in 1942 and not in 19'40. We do not think that this was an accu~ rate approach. The fact that the assessee did not invest all his ·cash cannot mean, as the Tribunal thought, that his case about the purchase of gold was not correct. The war had commenced in 1939 and it is a notorious fact that in 1940 the fortunes of the allies were none too bright. The fact was that the assessee sold his entire share-holding and applied their sde proceeds and also a further amount of Rs. 13 lacs and odd obtained from hi~ lessees, Ml s Anderson Wright & Co., ~nto gold. The second fact, whose significance does not also seem to have been adequately apprehended, was that the assessee, who started with the plan of getting at least net 7% yield, put a very large part of his funds into gold, an altogether sterile security, and retained that gold ¥i his family vaults for nearly 4 years. The Tribunal had before it. the gold prices current during the years 1940 to 1944. These indicate that the gold price remain steady at Rs. 42 per tola all throughout 1940. There was, however, an upward trend noticeable from about the end of 1941 which went up to Rs. 65 uwards the end of 1942. By the middle of 1943 the gold price had risen to Rs."90 and even more. In October 1944, when the assessee sold

e·

E

G

H

KAMAKHYA NARAIN v. C.I.T. (She/at, J.)

¶132

175

¶133

A a large bulk of his gold holding !he price was at Rs. 68 per tola. If !he idea of the assessee, in purchasing the gold was to trade in it, he- would not have waite-d for 4 years without disposing of a. particle of it. The price was on the upward trend in 1941 and reached !he climax in 1943 when he could have sold the gold and made considerable gain. The fact that he did not do so and waitB ed until October 1944 the war fortunes were turning in favour of !he allies, that confidence had gradually been regained by trading circles and that that was why he thought that it was no longer necessary for him to retain the gold any further and could safely invest his money in income-bearing securties. The furth~r fact that he sold practically the whole of his stock of gold in October 1944 instead of selling it bit by bit when the price was rising since c about the end of 1942 is inconsistent with the hypothesis that the object with which th,, gold was purchased was to trade in it.

¶134

Regarding share transactions, we think that the Tribunal placed undue emphasis on the fact that when he opened the bank account in March 1939 with the sale proceeds of Government D securities, he did so, firstly, in the !llatne of his wife ·and, secondly, called that account as one of "Rs. 48 lacs floating in the share market". The first had no particular significance and the second properly viewed only meant that he wanted to set apart this fund for transactions in shares and securities and not mix up his other capital and the income arising from his estate. The .natne he gave E to this account cannot for that reason only render his dealing with that account into trading transactions if o!herwise, they were not.

¶135

Similarly, the Tribunal was unduly impressed by the fact that he sold away the Victory Bonds within about two months from their purchase. The correspondence produced by the ·assessee clearly shows that he had bought !hose Bonds at the pressure of F the then Commissioner. The Bonds were not likely to fetch him the yield he desired. His purchase of !hem had thus served the purpose, viz., his showing to the authorities that his estate had made a war cOllltribution. The sale by him of those Bonds would not affect the Government or its war effort. The fact that he sold them soon after the purchase would not invest it with the stamp o,f G trade or business in Victory Bonds.

¶136

As regards the Karanpura shares, the correspondence betweell' him and the company and the advice he had from his brokers referred tv im !he Statement of Case show !hat the assessee did at one time entertain the idea of obtaining control over the company's H management by procuring 51 % of its total shares. He could do so by purchasing shares in the open market and also by other means. He purchased 7 ,025 shares in the market but that was clearly oot enough. There was at that time litigation going oa

¶137

[1970] 2 S.C.R.

¶138

U6

¶139

SUPREME COURT REPORTS

¶140

between him and the company and he seems to have hit upon the idea that he would compromise his suit 'if the managing agents of the company were to sell him shares representing its unissued capital at prices offered by him. The object of his offer was that he would not have to pay the market price of the shares which was 3 times more than the one offered by him. The company did not agree and his move for compromise failed. According to him, there was, therefore, no useful purpose for retaining those shares and he sold 6,950 shares leaving only 75 shares with him. On these facts the Tribunal was not right in concludiin:g that the shares which the assessee purchased from the market were not for the purpose of acquiring the major share-holding in the company and that the control over the company was to be obtained only by purchasing shares represent\ng the unissued capital. Both the purchase of shares and the move to obtain shares representing the unissued capital were part of the same design and if the latter failed,-his purchase of 7,025 shares would obviously not bring him nearer his object. Furthermore, the bulk of the sale proceeds of gold went into the purch<.se of Bokaro Ramgur shares which remained with him till the assessment years \n question. The profits made on the sale of shares, acquired with the intentbn of obtaining control over the compa'.ly's management and not for dealing in them, would be 0)1 the capital and not revenue account. (see Kishan Prasad & Co. Ltd. v. C.l.T. (1) and C.l.T. v. National Finance Ltd. (² ). The Statement of Case itself set out facts which were consistent with the assessee's case.

¶141

In our view the Tribunal misdirected itself in applying the iaw to the facts found by it both in the matter of gold and shares, aind the High Court would have been entitled to interfere with its findings instead of holding that it could not do so as the findings were findings of fact. The questions involved being mixed questions of fact and law, the hypo<hesis on which the High Court acted that the findings were purely findings of fact and therefore were unass'ailable was in our view not correct.

¶142

The appeals, therefore, will have to be allowed and the answers givein by the High Court set aside. We hold that the two questions referred to the High Court should have beell answered in assessee's favour and we do so accordingly. The respondent will pay to the appellant costs of these appeals but only one hearing fee.

Appeal allowed.

G.C.

A

B

c

D