K. L. ROY J. - The assessee is a company. Its main activity consists in acting as the managing agents of a large number of companies. The assessee held also substantial shares and securities which in its balance-sheet for the year ending March 31, 1955, were shown at cost at over Rs. 1,20,00,000. In the course of its assessment for the year 1955-56 for which the corresponding previous year ending March 31, 1955, the Income-tax Officer found that during the preceding 15 or 16 years the assessee had substantial transactions in the purchase and sale of shares. In this year the assessee had claimed a loss of Rs. 91,963 in its business of dealing in shares. According to the Income-tax Officer, the loss claimed was on account of losses alleged to have been suffered in the sale of the following shares viz., 139 debentures in Malwa Sugar Mills Company Limited (loss Rs. 646); 200 preference shares in the United Collieries (loss Rs. 4,000) and 2,500 ordinary shares in Karamchand Thapar and Sons Limited (loss Rs. 1,04,592). The Income-tax Officer was of the opinion that the assessee was not a dealer in shares and the sales of the shares in which the losses were alleged to have been incurred were not genuine for, inter alia, the following reasons :
(i) The shares sold during the year were mostly shares of companies managed by the assessee and as the managing agents it was incumbent on the assessee to hold the required number of shares in these companies. The sales were to associated or managed companies and even when sold to regular brokers, the shares ultimately were taken over by these latter companies.
(ii) The shares had been shown under the head 'investment' in the assessees balance-sheet and the resultant loss has been shown as loss on sale of assets in its profit and loss account.
(iii) The long period between the purchases and sales of the shares and debentures indicated that these were not acquired for the purpose of the assessees business as a dealer in shares.
(iv) The bulk of the shares held by the assessee were not quoted in the stock exchange and a dealer in shares would not normally deal in such shares.
(v) The assessee had not taken advantage of the favorable prices for these shares and had mostly shown losses in the past on the sale of such shares. This indicated that the sales were not genuine, but were arranged with a motive to create an artificial loss for setting such loss against other income of the assessee.
(vi) The assessee carried forward huge stocks of unsold shares year after year and the sales in each year were very low in comparison. That was not the normal activity of a trader in shares. The Income-tax Officer further found that the 139 debentures in Malwa Sugar Mills Limited were purchased by the assessee in small lots during the month of December 1954, and the whole lot was sold on the 30th December, 1954, to an associated concern at a loss of Rs. 646.
The 200 preference shares in United Collieries Limited were purchased on the 10th October, 1953, and were sold on the 29th July, 1954, at a loss of Rs. 4,000. So far as the 2,500 shares in Karamchand Thapar and Sons Limited were concerned, 110 such shares were acquired on May 20, 1941. and 1,300 on September 17, 1941 in the year the said company was incorporated, while a further 100 shares were acquired on the 31st March, 1950. These shares were sold on the 4th March, 1955, at a loss of Rs. 1,04,592. These sales were made to Messrs. Mugneeram Bangur and Company, a well-known firm of stock brokers, but were acquired two years later by another associated concern. The Income-tax Officer found that Messrs. Karamchand Thapar and Sons Limited had been earning substantial profits and declaring good dividends in the preceding 10 or 11 year and the break up value of these shares on the basis of the balance-sheet of this company as at 30th June, came to Rs. 175 per share. These shares were not quoted in the market. The Income-tax Officer held that these shares had been sold much below the market rate. In view of his findings and conclusion, the Income-tax Officer disallowed the losses on the sale of the shares of the above three companies. The assessee appealed to the Appellate Assistant Commissioner against the aforesaid order of assessment claiming, inter alia, that the Income-tax Officer was not justified in disallowing the losses claimed on the sale of the shares of the above named three companies and that such losses should have been allowed in full. The Appellate Assistant Commissioner disagreed with the Income-tax Officers finding that the assessee was not a dealer in shares and following his own decision in the assessees appeals for the assessment years 1952-53 and 1953-54, he held that the assessee was dealer in shares. He also disagreed shares are not genuine sales. He then proceeded to consider whether the aforesaid shares were sold by the assessee as its stock-in-trade or whether any of these shares formed part of its capital investment in order to determine whether the losses were to be allowed as revenue loss or disallowed as capital loss.
So far as the losses claimed in respect of the sales of the debentures in Malwa Sugar Mills Limited and of the preference shares in United Collieries Limited, the Appellate Assistant Commissioner was of the view that there was no reason for disallowing the claim in respect of those sales. The sales were made shortly after the purchase, the purchasers were separate and distinct entities and there was nothing to show that the sales were at concessional rates. The Appellate Assistant Commissioner, therefore, allowed the claim for losses on the sale of these shares.
Regarding the loss of Rs. 1,04,592 claimed on the sale of shares of Messrs. Karamchand Thapar and Sons Limited, the Appellate Assistant Commissioner noted the finding of the Income-tax Officer that substantial profits had been earned by this company in the preceding years and also that the break up value of these shares on the basis of the balance-sheet of the company as on the 30th June, 1954, came to Rs. 173 per shares. He also noted that these shares were not quoted in the stock exchange. A letter from Messrs. Stewart & Co., Stock and Share Brokers, dated the 26th November, 1951, was produced by the assessee before the Appellate Assistant Commissioner in which the share brokers had appraised the estimated market value of the shares of Karamchand Thapar & Sons Ltd. at Rs. 50 per fully paid ordinary shares on the basis of the balance-sheet of that company for the year 1950. The Appellate Assistant Commissioner remarked that the assessee had purchased 100 shares on the 31st of March, 1950, at Rs. 75 per share when, according to the assessee, the market value of these shares was Rs. 50 per share. Considering that the position of the company was very sound and that there was a possibility of earning large dividends on these shares and also considering that no sales had been made of these shares for a period of 14 years, the Appellate Assistant Commissioner came to the conclusion that these shares were held by the assessee as investment and not as stock-in trade in its business as a trader in shares. The Appellate Assistant Commissioner also found that the assessee was the managing agents of that company and remained so till 1956 and was of the opinion that the 2,400 shares, which were acquired at an initial stage, must have been acquired in connection with the acquisition or retention of the managing agency of that company. The Appellate Assistant Commissioner, therefore, held that these shares had not been acquired as stock-in-trade but as capital investment in connection with the acquisition of the managing agency of Messrs. Karamchand Thapar & Sons Ltd. or for earning dividends. He, therefore, upheld that decision of the Income-tax Officer in disallowing the claim of loss of Rs. 1,04,592 on the sale of these shares.
On further appeal by the assessee to the Tribunal against the disallowance by the Appellate Assistant Commissioner of its claims for loss on the sale of the shares of Messrs. Karamchand Thapar & Sons Ltd., the Tribunal observed as follows :
'We will take it for granted, since the Appellate Assistant Commissioner has so observed, that the assessee is a dealer in shares. We will also take it for granted that so far as the sales of shares in question are concerned, they are genuine sales. The question, however, remains as to whether it was the sale of stock-in-trade or merely a change of investments and hence the loss which accrued was a capital loss.
In order to judge the nature of the dealings as to whether it was a trading deal or an investment deal, one has primarily to see the way in which the assessee has himself treated his stocks, namely, whether as investment or as stock-in-trade. In this particular case, we find that the shares have been shown under the head investment in the balance-sheet and in fact the loss accruing to the assessee on the sale of these shares has been shown in the profit and loss account as a loss on the sale of assets. Then there are further indications in the conduct of the assessee himself which amply go to show that these shares were held purely as investment and sold as such.
We have already indicated above that in the balance-sheet the assessee had shown these shares as being held as investments. The further fact that it held the shares for all these fourteen years, from the year 1941, is mostly computable with persons who seek to keep shares as investments. Moreover it does not stand to reason it, as the assessees counsel states, it was held as stock-in-trade, that they should not have been sold out when there was good and favorable market for those shares, Now this is not the conduct of a person who claims to be a dealer in shares.
Having considered the reasons given by the authorities below, which in our opinion validly point to the conclusion that this deal was a deal regarding the investment and not of the stock-in-trade, and also having considered the arguments placed on behalf of the assessee, which does not dislodge us from that opinion, we hold that the loss was a loss on the sale of investments and a capital loss and the learned Appellant Assistant Commissioner was justified in disallowing the assessees claim'.
At the instance of the assessee the following question of law has been referred to this court by the Tribunal under section 66(1) of the Indian Income-tax Act, 1922 :
'Whether, on the facts and in the circumstances of the case, the loss of Rs. 1,04,592, on the sale of the shares of M/s. Karamchand Thapar & Sons Ltd. had been rightly disallowed as a capital loss ?'
Mr. R. C. Deb, learned counsel appearing on behalf of the assessee, submitted that the assessees entire stock of share was done as 'investment at a cost' on the asset side of its balance-sheet. Similarly, the profit on the sale of the shares was shown as profit on assets sold on the credit side of the profit and loss account while the loss on such sale was shown as loss on assets sold on the debit side. Mr. R. Deb submitted that the assessee had treated all its shares in the same manner and the Appellant Assistant Commissioner and the Tribunal were not justified in making a distinction between some shares being held as stock while others being held as investment. Mr. Deb wanted to contend that as the Income-tax Officer himself had found that the assessee had acquired the shares also for a very long time and as he had allowed the loss claimed on the sale of these shares, he was not justified in disallowing the claim for loss on the sale of the shares in Karamchand Thapar & Sons Ltd. As neither the Appellant Assistant Commissioner nor the Tribunal had any occasion to consider the case of the shares of Yuvraj Sugar Mills and as they have decided the question on the grounds different from those of the Income-tax Officer, it is not necessary to notice this argument of Mr. Deb, any further.
Mr. Deb next contended that having accepted the assessee as a dealer in a shares and the genuineness of the sales of the shares by the assessee, neither the Appellant Assistant Commissioner nor the Tribunal was justified in finding that the shares in Karamchand Thapar & Sons Ltd. were held as investment and as its stock-in-trade. In coming to his conclusion that the aforesaid shares were held as investment, the Appellant Assistant Commissioner had relied on the following findings :
(i) That the assessee had purchased 100 such shares on the 31st March, 1950, at Rs. 75 per shares while the market price of the share was Rs. 50 per share.
(ii) That the 2,400 shares were acquired in 1941, and kept intact for 14 years and as the assessee became the managing agents of this company and had continued as such managing agents till 1956, the shares must have been acquired in connection with the acquisition or retention of the managing agency.
Mr. Deb submitted that these shares were not quoted in the stock exchanged there was no open market for them. The Appellant Assistants Commissioner was, therefore, not justified in holding that the assessee had purchased these shares as a price in excess of the market price. According to Mr. Deb, the Appellant Assistant Commissioner had failed completely to appreciate the report of Messrs. Stewart & Co., who had given only their appraisal of the estimated market value of these shares as on the 26th November, 1951, which was long after the purchase of these shares by the assessee. We agree with Mr. Deb, that the Appellate Assistant Commissioner was in error in taking the market value of these shares at Rs. 50, as on the 31st March, 1950. Mr. Deb further connected that the Appellant Assistant Commissioners inference that these shares were acquired in connection with the acquisition or retention of the managing agency of that company was a pure surmise and was not based on any material whatsoever. We are, however, unable to accept this contention. The Appellate Assistant Commissioner found as a fact that 2,400 shares were acquired in 1941 when Messrs. Karamchand Thapar & Sons Ltd. was established, that the assessee became the managing agents of that company and retained such managing agency till 1956 and that all the shares in this company were sold in March 1955. From these facts the conclusion grown, namely, that the shares were acquired in connection with the acquisition or retention of the managing agency could not be said to be based on no material or perverse. In G. Venkataswami Naidu & Co. v. Commissioner of Income-tax the Supreme Court observed as follows :
'In some cases, the point sought to be resigned on reference may turn out to be a pure question of fact; and if that be so, the finding of fact recorded by the Tribunal must be regarded as conclusive in proceedings under section 66(1). If, however, such a finding of fact is based on an inference drawn from primary evidentiary facts proved in the case, its correctness or validity is open to challenge in reference proceedings within narrow limits. The assessee or the revenue can contend that the inference has been drawn on considering inadmissible evidence or after excluding admissible and relevant evidence; and if the High Court is satisfied that the inference is the result of improper admission or exclusion of evidence, it would be justified in examining the correctness of the conclusion. It may also be open to the parties to challenge a conclusion of fact drawn by the Tribunal on the ground that it is not supported by any legal evidence; or that the impugned conclusion drawn from the relevant facts is not rationally possible; and if such a plea is established the court may consider whether the conclusion in question is not perverse and should not, therefore, be set aside. It is within these narrow limits that the conclusion of fact recorded by the Tribunal can be challenged under section 66(1). Such conclusion can never be challenged on the ground that they are based on misappreciation.'
In this case the above conclusion drawn by the Appellant Assistant Commissioner had been accepted and adopted by the Tribunal. In order to test the correctness or validity of the conclusion drawn by the Appellant Assistant Commissioner we have to apply the above test laid down by the Supreme Court. The inference drawn by the Appellant Assistant Commissioner is undoubtedly based on some material and it could not be said that such a conclusion was not rationally possible. It is not uncommon for managing agents to hold substantial shares in the managed company to have a greater control in the affairs of that company. This Court might have arrived at a conclusion different from that of the Appellant Assistant Commissioner on the facts and material as found by him; but it is well-settled that in a reference under section 66 of the Indian Income-tax Act, 1922, this court could not substitute its own opinion for that of the income-tax appellant authorities.
Apart from the reasons given by the Appellant Assistant Commissioner. the Tribunal has also given three additional reasons of its own for holding that the said shares were held by the assessee as its investment, namely :
(i) That these shares had been shown under the head 'investment' in the balance sheet and the loss on the sale of such shares had been shown in the profit and loss account as loss on sale of assets.
(ii) That the shares had been held by the assessee for a long period of 14 of years.
(iii) That the shares were not sold when there was a good and favorable market for those shares.
Mr. Deb challenged each one of the above grounds on which the Tribunal based its decision. He contended that the word 'investment' was not a term of art. The mere fact that the assessee had described the shares as investment was wholly immaterial in considering the true nature of its holding. He pointed out that in the assessees profit and loss account, the profit from the sale of shares had been credited while the loss from such sales had been debited. The revenue, therefore, was in effect taxing the profit while disallowing the losses. We must accept the contention of Mr. Deb that the fact the assessee had described the holding of its shares as investment in its balance-sheet or that the loss had been shown as loss on sale of assets were wholly immaterial for the purpose of determining the question in issue.
As observed by the Supreme Court in Ramnarain Sons (P.) Ltd. v. Commissioner of Income-tax the fact that the assessee had purchased the shares with borrowed money or that the assessee was a dealer in shares or that the shares were entered in the assessees stock account, were not of any importance in the circumstances of the case and could not alter the real character of the transaction. As we accept this contention of Mr. Deb, it is not necessary for us to consider his alternative submission that under the provisions of the Indian Companies Act, 1913, the assessee had properly shown his stock of shares as 'investment of cost' in its balance-sheet.
As regards the second ground of the Tribunals decision, Mr. Deb contended that the mere fact that these shares had been held for a long period without sale would not convert them into investments. He pointed out that the Yuvraj Sugar Mill shares had also been held for a long period but the Income-tax Officer had allowed the loss on these shares. Mr. Deb object to the finding of the Tribunal that these shares had not been sold when there was a good and favorable market for them, which finding constituted the third ground of its decision. He argued that as the shares were the shares of a private limited company which were never quoted in the stock exchange, the Tribunal and no materials to come to the above finding. The Tribunal probably relied on the figures of profit earned by the company in previous years given by the Income-tax Officer and concluded that the company must have declared good dividends and as such the shares could have been sold for a favorable price in those years. We also accept this contention of Mr. Deb that there was no material for the Tribunals finding that the shares had not been sold when there was a good and favorable market.
Mr. Deb finally argued that any losses arising from even a change of investment would be allowable as a trading loss where the change of investment was necessary for the purpose of the assessees ordinary trading activities. For this proposition he relied on decision of this court in Indra Singh & Ltd. v. Commissioner of Income-tax which had subsequently been upheld by the Supreme Court on appeal In the absence of any finding that the sale of these shares was necessitated for the purpose of the assessees business undertaking, the ratio of the above decision is not applicable to this case and it could not be held that even if the shares constituted the assessees investment, the loss resulting from the sale of such shares would be the assessees trading loss.
In dealing with a similar question, the Supreme Court in Commissioner of Income-tax v. National Finance Ltd. observed at page 799 :
'The question, therefore, would be whether the assessee-company in purchasing the shares merely wished to deal in those shares as stock-in-trade, or was acquiring a capital asset of an enduring nature. This question is not one of fact, pure and simple, but one of an inference in law from the proved circumstances of the case.'
Both in the above case and in Ramnarain Sons case the Supreme Court had held that if the purpose of the acquisition of a large block of shares was a the acquisition of the managing agency, the inference is invitable that the intention in purchasing the shares was not to acquire them as part of the trade of the assessee in shares. Keeping in mind the aforesaid principles we have to examine the facts found by the Appellate Assistant Commissioner and the Tribunal, the inference that could justifiably be drawn from such facts and decide whether the Tribunals conclusion that the loss on the sale of the aforesaid shares was a loss on the sale of investment and a capital loss was correct. The undisputed fact found are that 2,400 of these shares were acquired by the assessee in 1941, the year in which Karamchand Thapar & Sons Ltd. was incorported; that the assessee became the managing agents of that company and continued as such till the year 1956; that a further 100 shares were purchased in 1950, and that the whole lot of 2,500 whereas were sold in March, 1965. We have accepted Mr. Debs contention that the other conclusion arrived at either by the Appellate Assistant Commissioner or the Tribunal could not be sustained. From the admitted fact the Appellate Assistant Commissioner has drawn the conclusion that these shares were acquired in connection with the acquisition or retention of the managing agency of Messrs. Karamchand Thapar & Sons Ltd. We have already rejected Mr. Debs argument that such in inference was based on no material or was perverse. If the purpose of the acquisition of the shares was to facilitate the acquisition or retention of managing agency and if these shares had been held by the assessee for a long period of 14 years without sale, then the conclusion that the shares did not constitute the assessees stock-in-trade in its share dealing business could not be held to be unreasonable or perverse. In our opinion, the Tribunals decision was correct and the question referred must be answered in the affirmative and against the assessee.
The Commissioner of Income-tax is entitled to the costs of this reference.
BANERJEE J. - I agree.
Question answered in the affirmative.