Juggilal Kamlapat Vs. Commissioner of Income-tax, Uttar Pradesh - Court Judgment

Excerpt:
direct taxation - profit on sale of shares - appellant firm assessed to tax in respect of profit on sale of shares which was treated as revenue income - assessment confirmed by appellate assistant commissioner, tribunal and high court - appeal made before supreme court - large block of shares purchased at ruling rates with borrowed money and disposed of at profit in small lots - some shares sold to strangers through brokers - interest on borrowed money debited in revenue account and claimed as revenue allowance - shares not purchased for acquiring managing agency of other company - shares not sold on account of financial difficulties - financing allied concerns acted in course of its business by taking over shares not subscribed by public - held, profit was revenue income liable to be taxed. - [s.k. dass, acting c.j.,; k. subba rao,; n. rajagopala ayyangar,; raghuvar dayal, jj.] the appellant was a registered dealer carrying on business in bidis. for the year 1949-50, i.e., for the period from october 22, 1949 to november 9, 1950 he submitted only one return on october 5, 1950 for one quarter and defaulted in respect of the other quarters. he was served a notice on august 13, 1954 under s. 11(1) and (2) of the c.p. and berar sales tax act, 1947, in respect of the turnover for the said period. there after, he filed the returns, but in the assessment proceedings he contended inter alia, that the proceedings before the sales tax commissioner were barred by time. this contention was rejected and his tax liability was determined. then the appellant moved the high court in writ petition. in the other appeal no. 102/1961, the appellant had not filed any return for the year 1950-51 i.e. for the period from november 10, 1950 to october 31, 1951. he was served a notice on october 15, 1954, under s. 11(4) of the act. the said notice was within 3 years from october 16, 1951 which fell within the 4th quarter of the concerned year. the appellant then, filed his returns under protest and contended that the assessment proceedings were barred by limitation under s. 11(a) of the act. this plea was re- jected and his tax liability was determined. the appellant then, filed another writ petition for a similar relief. both the writ petitions were heard together and the learned single judge relying on a decision in firm sheonarayan matadin v. sales tax officer, raipur, quashed the said assessments. the respondent then, filed letters patent appeals before the division bench and by a common judgment the orders of the learned single judge were set aside. in this court, the appellant contended : (1) the expression "escaped assessment" in s. 11-a of the act would apply also to a case where there was no assessment at all ; (2) even if the first assessment proceedings were pending before the appropriate authority, it could only make the assessment within three years from the date of the commencement of the said proceedings, which would start only after the appropriate authority issued a notice under s. 10(1) or s. 11(2) or s. 11(5) of the act; (3) in the present case no proceedings in respect -of the said assessment were pending and (4) as only a part of the fourth quarter in the second appeal falls within three years, the proceedings in respect of the said entire quarter would be barred under s. 11-a of the act and, in any view only the turnover escaped in respect of the period between november 10, 1950 to october 31, 1951 could be assessed. the respondent mainly contended that whatever may be said in the case of an unregistered dealer, in the case of a registered dealer the proceedings commence from the date fixed in the registration certificate within which the said dealer has a statutory obligation to furnish his return. held : (raghubar dayal, j. dissenting) : the expression "escaped assessment" in s. 11-a of the act includes that of a turnover which has not been assessed at all, because for one reason or other no assessment proceedings were initiated and therefore, no assessment was made in respect thereof. commissioner of income-tax, bombay v. pirojbai' n. contrac- tor, (1937) 5 i.t.r. 338, maharaj' kumar kamal singh v. com- missioner of income-tax, bihar and orissa, [1959] supp. - s.c.r. 10 maharajadhiraj sir kameshwar singh v. state of bihar, [1960] 1 s.c.r. 332, commissioner of income-tax, bombay v. narsee nagsee & co. [1960] 3 s.c.r. 988 and state of madras v. balu chettiar, (1956) 7 s.t.c. 519,relied on. the assessment proceedings under the sales tax must be held to be pending from the time the said proceedings were initiated until they were terminated by a final order of assessment. before the final order of assessment, it could not be said that the entire turnover or a part thereof of a dealer had escaped assessment, for, the assessment was not completed and, if completed, it might be that the entire turnover would be caught in the net. in re lachhiram basantlal, (1930) i.l.r. 58 cal. 909 and rajendra nath mukherjee v. income-tax commissioner, (1938) l.r. 61 i.a. 10, referred to. under sub-section (1) of s. 10, the commissioner need not issue a notice to a registered dealer for furnishing the relevant returns, but a statutory obligation is imposed on the said dealer to do so by such dates and to such authority as may be prescribed. in the case of a registered dealer there are four variations in the matter of assessment of his 'turnover : (1) he submits a return by the date prescribed and pays the tax due in terms of the said return; the commissioner accepts the correctness of the return and appropriates the amount paid towards the tax due for the period covered by the return. (2) the commissioner is not satisfied with the correctness of the return ; he issues a notice to him under s. 11(2), and makes an enquiry as provided under the act, but does not finalize the assessment. (3) the registered dealer does not submit a return; the commissioner issues a notice under s. 10(3) and s. 11(4) of the act. (4) the registered dealer does not submit any return for any period and the commissioner issues notice to him beyond three years. in the case of a registered dealer the proceedings before the commissioner starts factually when a return is made or when a notice is issued to him either under s. 10(3) or under s. 11(2) of the act. the acceptance of the contention that the statutory obligation to file a return initiates the proceedings is to invoke a fiction not sanctioned by the act. bisesar house v. state of bombay (1958) 9 s.t.c. 654 and ramakrishna ramnath v. sales tax officer, nagpur, (1960) 11 s.t.c. 811, distinguished. a statutory obligation to make a return within a prescribed time does not proprio vigore initiate the assessment proceedings before the commissioner; but the proceedings would commence after the return was submitted and would continue till a final order of assessment was made in regard to the said return. in the first case, therefore, the tribunal had no jurisdiction to issue a notice under s. 11-a with respect to the quarters other than that covered by return made by the appellant. in the second case, the commissioner had jurisdiction to assess the turnover in respect of the entire fourth quarter, but as it was done without showing separately the assessment of tax payable in respect of each quarter, this court cannot confine the relief to be given to the appellant in these appeals to the period barred under s. 1 1-a of the act. the appeals, therefore must be allowed. per raghubar dayal, j.--the turnover for the years 1949-50 and 1950-51 could not be said to be turnover which escaped assessment, within the meaning of that expression in s. 11-a of the act and therefore, the notices issued by the assistant commissioner of sales tax in 1954 under s. 11(2) cannot be said to be notices issued under s. 11-a beyond the period within which they could have been issued. the proceedings for the assessment commence against the registered dealer from the prescribed date for his submitting the return which he is required to submit by sub- section (1) of s. 10. no notice is necessary to be issued to him for the submitting of the return for the purpose of assessment. the statute, by the provisions of sub-section, (1) of s. 10, gives him the required notice to the effect that he is to submit the necessary returns by the dates prescribed by the rules. the registration certificate issued to him mentions the period of the dealer's year, the prescribed return period and the dates by which the dealer had to furnish the returns. the registered dealer is, in this way, in no worse position than an ordinary dealer who receives a notice for -submitting the returns by a certain date. in the case of the unregistered dealer, the proceedings commence by the issue of a notice under subsection (1) of s. 10. there is no time limit fixed for the sales tax officer to take action against the registered dealer under sub-sections (2) and (4) of s. 11. he does not contravene art. 14, if he takes action against a registered dealer under sub-section (2) or sub- section 4 of s. 11 even after the expiry of three years from the period whose turnover is to be assessed. - in the view of the income-tax officer the profit arose from 'a well planned business activity in which the assessee had fully utilised its resources'.the appellate assistant commissioner affirmed the decision of the income-tax officer. the tribunal was, in our judgment, right in inferring that the 'purchase and sale of shares was a business activity which was continuous',and since the firm 'had entered upon a well-planned scheme for earning profit and that in furtherance and execution of that profit making scheme they sold the shares at the opportune time' and that 'the sale of the shares was not merely on account of pecuniary embarrassment' as claimed, the profit realised by the firm by the sales of shares could not be characterised as a casual receipt, nor could it be treated as accretion to a capital asset. 6. strong reliance was, however, placed on a somewhat obscure statement in the order of the appellate assistant commissioner :in the case of raymond woollen mills shares it is clear beyond doubt that the purchase of the shares was a first rate business deal and that it was motivated by the desire and intention to acquire the managing agency of the mills. trust shares were purchased on february 14, 1945 and were sold on august 22, 1945. aluminium shares as well as j.j.c. shah, ag. c.j.1. in proceedings for assessment to income-tax for the year 1946-47, the appellant firm was assessed to tax in respect of an amount of rs. 3,99,587 received by it as profit on sale of shares. the plea of the firm that the amount was 'capital gain' and was on that account not taxable was rejected. in the view of the income-tax officer the profit arose from 'a well planned business activity in which the assessee had fully utilised its resources'. the appellate assistant commissioner affirmed the decision of the income-tax officer. the income-tax appellate tribunal dismissed the appeal filed by the firm.2. the tribunal, amongst others, referred the following question to the high court of allahabad for opinion :whether the surplus realised by the sale of the shares of aluminium corporation of india ltd., j.k. investment trust and raymond woollen mills amounting in aggregate to rs. 3,99,587 or any part thereof was the revenue income of the assessee liable to tax under the income tax act, 1922 ?the high court answered the question in the affirmative. the firm has appealed to this court with special leave.3. in 1944 the firm purchased 50,000 ordinary shares of raymond woollen mills ltd. (hereinafter called 'raymond') for rs. 69,75,255. the firm paid rs. 7,00,000 on november 4, 1944 and the balance on december 6, 1944. the transaction was financed with the aid of a loan of rs. 70 lakhs borrowed from the hindustan commercial bank ltd. the firm sold those shares through brokers between november 23, 1944 and april 2, 1946 and realised rs. 72,42,200, the transaction resulting in a net profit of rs. 2,66,945. between january 26, 1945 and april 5, 1946 the firm also purchased 67 debentures, 5,582 preference shares and 18,576 ordinary shares of the aluminium corporation ltd.-(hereinafter called 'aluminium') for rs. 8,57,480. except 2118 preference shares, the entire lot of shares with the debentures was sold for rs. 7,05,957 between february 1, 1945 and august 13, 1945. adjusting the cost of shares left on hand the firm realised a net profit of rs. 60,278 in that transaction. the firm also purchased 290 'a' class shares of j.k. investment trust ltd.-(hereinafter called 'j.k. trust') on february 4, 1945 for rs. 1,45,000 and sold the same on august 22, 1945 for rs. 2,17,264, the transaction resulting in a net profit of rs. 72,364.4. before the departmental authorities the firm claimed that it had taken over the entire share capital issued by raymond with a view to secure its managing agency and had thereafter distributed the shares of raymond to the various associates of the firm, and the transaction being one to facilitate acquisition of a capital asset being a capital investment, the profit realised by sale of the shares was not liable to be assessed to income-tax. the firm also claimed that when a part of the new issue of capital of aluminium was not taken over by the public, the firm as financiers of the j.k. group of industries took over the shares and the debentures pot subscribed within the time allowed. this transaction, it was contended, was also of the nature of capital investment. it was explained that the shares were sold on account of 'financial embarrassment' and not with the object of earning income, and the profit realised by the sale did not attract tax. similar contentions were also raised in respect of the shares of j.k. trust. the departmental authorities rejected the contentions. the tribunal agreed with them.5. from the facts found by the tribunal it is clear that for purchasing the raymond shares, the firm paid rs. 7,00,000 on november 4, 1944, and the balance on december 6, 1944, and commenced selling the shares on november 23, 1944. the contention that the shares were only distributed to the 'allied concerns' is contrary to the findings of the tribunal. some of the shares were sold through brokers to outsiders. it is a significant circumstance that the firm parted with all the raymond shares by april 2, 1946 and did not retain a single share after that date. it is true that some of the shares were held by j.k. industries ltd. and other j.k. concerns. but the transfer even to the j.k. concerns was in all cases for a profit. within a few days after purchasing the raymond shares, the 'firm started unloading them', and the shares were never sold without making profit. the interest paid for the loan borrowed from the hindustan commercial bank ltd. for financing the purchase of raymond shares was debited in the accounts as a revenue expenditure, and it was claimed as a permissible allowance. the firm used to promote companies. one of its activities was to finance 'sister concerns' known as j.k. industries. the case of the firm that the shares had to be sold on account of 'financial embarrassment' was plainly untrue. the tribunal was, in our judgment, right in inferring that the 'purchase and sale of shares was a business activity which was continuous', and since the firm 'had entered upon a well-planned scheme for earning profit and that in furtherance and execution of that profit making scheme they sold the shares at the opportune time' and that 'the sale of the shares was not merely on account of pecuniary embarrassment' as claimed, the profit realised by the firm by the sales of shares could not be characterised as a casual receipt, nor could it be treated as accretion to a capital asset.6. strong reliance was, however, placed on a somewhat obscure statement in the order of the appellate assistant commissioner :in the case of raymond woollen mills shares it is clear beyond doubt that the purchase of the shares was a first rate business deal and that it was motivated by the desire and intention to acquire the managing agency of the mills. if this is not an operation in the scheme of profit-making; it is not known what will constitute such a transaction.apparently there is a typographical error in the second clause of the first sentence, and the word 'not' has by inadvertence been omitted; otherwise in the context in which it occurs the clause has no meaning whatever. in any event as rightly pointed out by the high court the reasons given by the tribunal and the conclusion recorded by it are inconsistent with the finding that the shares were purchased with the sole object of acquiring the managing agency of the raymond woollen mills and not with a view to make profits.7. counsel for the firm invited our attention to the decision of this court in ramanarain sons (p) ltd. v. commissioner of income-tax, bombay : [1961]41itr534(sc) in support of his contention that a transaction for purchasing shares with the object of acquiring the managing agency of a company will be regarded as capital investment and not a business in share. in ramnarain sons' case : [1961]41itr534(sc) : [1961]41itr534(sc) the appellant company was a dealer in shares and securities and also carried on business as managing agents of other companies. with a view to acquire the managing agency of a company, the appellant company purchased from the managing agents a large block of shares at a rate approximately 50% above the ruling market rate. two months later the appellant company sold a small lot out of those shares at a loss and claimed the loss as a trading loss. it was found in that case by the tribunal that the intention of purchasing the shares was not to acquire them as part of the stock-in-trade of tax-payer's business in shares, but to facilitate the acquisition of the managing agency of the company which was in fact acquired, and on that account loss incurred by the sale of a small lot could be regarded only as a loss of capital nature. the court observed in that case that the circumstance that the tax-payer had borrowed loans at interest to purchase the shares or that it was a dealer in shares and was authorised by its memorandum of association to deal in shares was of no effect. on a review of the evidence the tribunal held that the shares were purchased with the object of acquiring the managing agency and with that view the high court agreed.8. whether a transaction is or is not an adventure in the nature of trade is question of mixed law and fact : in each case the legal effect of the facts found by the tribunal on which the tax-payer could be treated as a dealer or an investor in shares, has to be determined. in the present case the transaction since the inception appears to be impressed with the character of a commercial transaction entered with a view to earn profit. large block of shares was purchased at the ruling rates with borrowed money, and soon thereafter the shares were disposed of at a profit in small lots. some of the shares were sold through brokers to strangers the story of the firm that some or all the shares were merely 'distributed' to its associates is not proved. the interest which the firm had to pay for the amount borrowed for purchasing the shares was acted in the revenue account and was claimed as a revenue allowance.9. it was not the case of the firm that aluminium and j.k. trust shares were purchased for acquiring the managing agency. it was claimed that the shares were taken over because the public did not accept those shares. it was one of the objects of the firm to finance its allied concerns and in taking over shares which the public did not subscribe the firm was acting in the course of its business. the firm commenced selling the shares soon after they were purchased. aluminium shares were purchased between january 26, 1945 and april 5, 1946 (except a few which were retained) and sold at profit. whereas the first lot was purchased on january 26, 1945, the first sale was made on february 1, 1945. it could not be said that this was an investment in shares independent of the trading activity of the firm. the story that the shares had to be sold on account of financial difficulties is plainly belied by the circumstance that the firm went on purchasing and selling the aluminium shares. j.k. trust shares were purchased on february 14, 1945 and were sold on august 22, 1945. aluminium shares as well as j.k. trust shares were sold at a profit and through brokers. these transactions were also stamped with the character of commercial transactions entered into with a profit motive and were not transactions in the nature of capital investments. the answer recorded by the high court is therefore correct.10. the appeal fails and is dismissed with costs.