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Petitioner: COMMISSIONER OF INCOME-TAX; BOMBAY VS Respondent: H. HULCK LARSEN
1988 P T D 819
1988 P T D 819
[Supreme Court (India)]
Present: R.S. Pathak and Sabyasachi JJ
COMMISSIONER OF INCOME-TAX; BOMBAY
Versus
H. HULCK LARSEN
Civil Appeals Nos. 1954 and 1955 of 1974, decided on 8th May, 1986.
(On appeal from the judgment and order, dated 10-8-1971, of the Bombay High Court in Income-tax Reference No. 124 of 1963).
(a) Income-tax Act (XI of 1922)--
-S. 66(1)--Reference to High Court--Scope o enquiry and extent of jurisdiction of High Court--Question of fact or law or mixed question of fact and law--Findings of Income-tax Appellate Tribunal--Effect on High Court decision.
Though the High Court might have due regard for the view taken by the Appellate Tribunal, its decision would not be fettered by the Tribunal's view. It was free to adopt such construction of the document or the statute appeared to it to be reasonable. Where the point sought to be raised on a reference was a 'pure question of fact, the finding of fact recorded by the Tribunal must be regarded as conclusive in proceedings under reference. If, however, such a finding of fact was based on an inference drawn from primary evidentiary facts proved in the case, its correctness or validity were open to challenge in reference proceedings within narrow limits. Where the assessee or the Revenue contended that the inference had been drawn on considering inadmissible evidence or 'after excluding admissible and relevant evidence and if the High Court was satisfied that the inference was 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 party to challenge a conclusion to act drawn by the Tribunal on the ground that it was not-supported by any legal evidence; or that the impugned conclusion drawn from the relevant facts was not rationally possible and if such a plea was established, the Court might consider whether the inclusion was not perverse and should not, therefore, be set aside. It was within those narrow limits that the conclusions of fact recorded by the Tribunal could be challenged in a reference to the nigh Court. Such conclusions could never be challenged on the ground that these were based on misappreciation of evidence. A conclusion reached by the Tribunal on the ground 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 or 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 of 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 rind 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.
(b) Income-tax Act (XI of 1922)--
---S. 66(1)--Question of fact or law--Dealing in shares--Finding as to how far dealing in share was a question of fact or question of law--How to be determined.
What were 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 share or an investor was itself a question of law. The mere fact that a company had within its objects the dealing in investment in shares, did rot give to the company the characteristics of a dealer in shares, but if other circumstances were proved, it might be relevant for the purpose of determining the nature of the activities of the company. Inference from facts would be a question of fact or a question of law according as the point for determination is one of pure fact or a mixed question of law and fact. A finding of fact without evidence to support it or based on relevant and irrelevant matters is not unassailable. It was difficult to draw a line and draw a distinction as to what was a question of law and what was a question of fact.
What are the characteristics of the business of 6eaLing 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 :in investor was a question of law 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. There are mixed questions of law and fact.
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 trace in respect of his investments, but per se it led to no conclusion whatever.
In considering whether a transaction was or was not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee having regard to the legal requirements which were associated with the concept of trade or business The inference on this question raised by the Tribunal on the facts fund was of mixed law and fact and as open to challenge before the High Court on a reference. The question whether the assessee's transactions amounted to dealing in shares and properties or to investment, was a mixed question of law and 'fact, and the legal effect of the facts found by the Tribunal on which the assessee could be treated as a dealer or an investor, was a question of law.
(c) Income-tax--
---Income or capital--Question whether in respect of certain transactions the assessee was a dealer or an investor and consequently whether income arising from sale of shares by assessee was to be taxed on-revenue account or on capital account--Factors to be kept in view while deciding such question...
Question involved in the case is whether in respect of certain transactions the assessee was a dealer or an investor and consequently whether the income arising from the sale of shares by the assessee is to, be taxed on revenue account or capital account.
The profit motive in entering into a transaction was not decisive, for an accretion to capital did not become taxable income merely because an asset was acquired in the expectation that it might be sold at a profit. Ii a transaction was related to the business which, was normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade might readily be inferred.
It was not possible to evolve any single legal test or formula which could be applied in determining whether a transaction was an adventure in the nature of trade or not. The, answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and- circumstances proved therein and which determine the character of the transaction.
Since the expression "adventure in the, nature of trade implied the existence of certain element in the transactions which in law would invest these with the character of trade of business and the question on that account became a mixed question of law and fact the Court could review the Tribunal's findings if it had misdirected itself in law. It was fairly clear that where a person in selling his investment ?realised an enhanced price, the excess over his purchase price was not profit assessable to, tax as income, but it would be so, if what was done was not a mere realisation of the investment but an act done for making profit. The, distinction between the two types of transactions is not always easy to make. Whether the transaction is of one kind or the other depends on the question whether the excess is an enhancement of the value by realising a security or a gain in an operation of profit making. The assessee might invest his capital in shares with the intention to resell these if in future their sale bring in a higher price. Such an investment, though motivated by a possibility of enhanced value, did not necessarily render the investment of a transaction in the nature of trade. On this premises, the totality of all the facts will have to be borne in mind and the correct legal principles applied to these. If all the relevant factors have been taken into consideration and there has been no misapplication of the principles of law, then the conclusion arrived at by the Tribunal cannot be interfered with because the inference is a question of law, if such an inference was a possible one, subject, however, that all the relevant factors have been duly weighed and considered by the Tribunal, the inference reached by the Tribunal should not be interfered with. In order to determine the question certain features will have to be borne in mind.
The course of dealings in the case showed that the dominant motive of the assessee in acquiring and selling the new shares and in renouncing some of the right shares was to prevent the inevitable erosion of his capital. If the assessee, had not acted in the manner he did, his original investments would have depreciated in value and, therefore, in a sense, .he entered into these transactions to nurse his investments. It was important to bear in mind, and that could be appreciated if one had regard to what has been noted before that the right shares were not acquired by the assessee as a matter of free choice. The assessee acquired,, those shares because if the assessee did not do ,so, his capital would erode. But as is apparent from the fats 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 the true object in this case was to prevent depreciation in the value of his investment. The assessee also in this case renounced some of his rights to get the right shares.
Whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was not a question of law. This is a mixed question of law and fact.
J.P. Harrison (Watford) Ltd, v. Griffiths (H.M. Inspector of Taxes) [1962] 40 T C 281 (HL); G. Venkataswami Naidu & Co. v. C.I.T. [1959] 35 1 T R 594; Royal Commission on Taxation of Profits and Income of England; Leeming v. Jones [1930] 15 T C 333, 335 (HL); Oriental Investment Co. Ltd. v. C.I.T. [1957] _32 I 'P R 664; Shree Meenakshi Mills Ltd. v. C.I.T. [1957] 31 I T R 28 (SC) ?Stanley (Surveyor of Taxes) v. Gramophone and Typewriter Ltd. [190131 5 T C 358; Californian Copper Syndicate v. Haris (Surveyor of Taxes) [1904] 5 TC 159 at 166- (C. of Exch); IRC v. Lysaght [1928] A C 234; 13 T C 511 (HL); Edwards (Inspector of Taxes v. Bairstow [1955] 3 W L R 410; 28 I T R 579 (HL); J.P. Harrison (Watford) Ltd: v. Griffiths .(H.M. Inspector of Taxes)[1962] 40 T .C 281 (HL) Saroj K umar Mazumdar v . C.I.T. [1959] 37 1 T R .242; Ramnarain Sons (P) Ltd. v. C.I.T. [1964] 41 I T R 534 (SC); Janki .Ram Bahadur Ram v. C.I.T. [1965] 57 I T R 21 (S C); Dhun uadabhoy Kapadia v. C.I. T. [1967] 63 I T R 651 (SC); Dalhousie Investment Trust Co. Ltd. v. C.I.T. [19681 68 1 T R 486; P.M. Muhammad Meerakhan v. C.I.T. [1969] 73 1 T R 735 (SC); Raja Bahadur Kamakhya Narain Sing v. C.I.T. [1970] 77 I T R 253 (SC); H. Holck Larsen v. C. I. T. [19721 85 I T k 285 (Bom); Investments--An Introduction to analysis and Management fifth Edn.; Business Finance--F.W. Paish and R.J. Briston, Six Edn. p. 115; Balgownie Land Trust Ltd. v. I.R.C. [1929] 14 T C 684 (C. Sess.) ref.
Dr. V. Gauri Shankar, Senior Advocate with Miss A. Subhashini for Appellant.
S.T. Desai, Senior Advocate with Harish Salve, Mrs. Anjali K Verma and Joel Peres for Respondent.
JUDGMENT
SABYASACHI MUKHARJI, J.--These appeals by certificate arise from the judgment and decision of 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 A investor and consequently 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 dealer in shares in the accounting periods relevant to the assessment years 1959-60 and 1960-61?"
The said question was referred by the Tribunal to the High Court at the instance of the assessee:
The assessee, H. Holck Larsen, was a partner in the firm of A/s Larsen & Tourbo (hereinafter referred to as the 'said company') up to 1946. on February 8, 1946/February 7, 1946, that partnership was converted into a private limited company of the same name. In consideration of his interest in the firm, the assessee was allotted shares of the company. Against payment of cash, the assessee got 1,875 equity shares and against his interest in the partnership firm, he got 53,486 equity shares. During the next few accounting years up to the financial year 1953-54, the assessee acquired 2,994 shares of the said company and sold 1,550 shares According to the statement of the case, the purchases and sales of shares of the said company were few and far between up to the financial year 1953-54. but these became larger in number and at close intervals in the next few succeeding years. The chart would indicate the position in this respect.
?????? (1) Financial Year ending
???????? (2) No. of? shares acquired
????? (3) ?Value
??????? (4) No. of? shares sold?????
????? (5) ?? Sale price Rs.
31-3-1955
4,600
51,173
31-3-1956
6,111
61,110
13,955
1,88,433
31-3-1957
6,102
61,020
7,661
1,24,406
31-3-1958
1,256
12,560
5,050
63,721
31-3-1959
5,500
55,000
5,200
87,810
31-3-1960
11,000
1,11,000
10,400
2,45,732
During the years mentioned, in the chart, the assessee had acquired 29,969 shares of the said company and sold 37,366 shares thereby making a profit of RS.1,65,581. Besides purchasing and selling equity shares of the said company, the assessee had also dealt in preference shares of the said company. The assessee had sold shares of Andhra Cement Co. in the financial year 1954-55, made purchases of shires of S.C.C. and I.C.C. in the years 1955-56, 1956-57 and 1958-59 and also shares of India Cements Ltd. and National Carbon in 1955-56 and also sold shares of Guest 'Keen Williams and India Cement in 1958-59. During all these years, the purchases and sales of equity share 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 huge personal expenses and tax liability in the relevant accounting periods; (4) that the assessee had an overdraft account arid he wanted to keep the said overdraft account within reasonable limits; (5) that the assessee wanted to nurse his investments in the company; and (6) that the assessee had to and was forced and compelled by circumstances to sell some of `he shares acquired by him. In the premises, the assessee's contention was that the sales of the said shares were effected neither voluntarily nor with a view to make any profit not under a profit-making scheme, but were effected under compelling circumstances and as no assessee could be trader by compulsion, the assessee was not a trader in respect ref these shares. The Tribunal rejected the said contentions. The Tribunal held: (1) The assessee was the chairman of the board of directors of the said company. (2) The said company had ever since its inception expanding its business and making good profits. (3) Its capital had increased and, therefore, right shares were offered to the existing shareholders. (4) The assessee had a substantial holding of equity shares in the company. (51 It was not obligatory on the assessee to acquire right shares. (6) In fact, the assessee was indebted to-the bank and was having an overdraft account on which he was paying interest. (7) Not only right shares were sold by the assessee, but he had also sold some of the original equity shares held by him.
The Tribunal was of the view that as the chairman of the board of directors of the said company. The assessee knew the financial position of the company and also knew that the company's business was expanding and flourishing, and yet he sold away the shares of such a company held by him. The sale, according to the Tribunal, must have been to earn profits. The frequency of the acquisition of right shares and the sales in large number in quick succession, according to the Tribunal, established the motive to make profit and that all the dealings in shares were part and parcel of a profit-making scheme.
The Tribunal noted that Appellate Assistant Commissioner had found that in some years, the income of the assessee was much more than the expenses he had to meet and notwithstanding that fact, the assessee had sold some shares. The Tribunal further noted that the correctness of this finding was neither challenged before 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 overdraft account with it. The facts that the assessee did not sell all the shares or that the founder of the company was interested in acquiring right shares or that he did not take all the right shares offered to him because of his financial liability, according to the Tribunal, would not affect the issue. The Tribunal, therefore, came to the conclusion that the assessee was doing business in shares in the assessment years under consideration.
Two members, namely, the Judicial" Members as well as the Accountant Member, gave separate but concurrent opinions for coming to the conclusions that the assessee was a dealer in shares. In his separate order, the Accountant Member had observed that in the assessment years 1956-57 to 1960-61 both inclusive, the acquisition of the shares was large and so also the sale of shares and in the first three accounting years, the shares sold were much more than the shares acquired by right. The right shares acquired in those three years were 6,11,16,102 and 1,256 whereas the assessee had sold from, time to time right shares which were 13,955-7,661 and 5,050, respectively. The maximum number of shares held by the assessee was little over 56,600 and this number went down progressively from the assessment year 1953-54 to the assessment year 1958--59 by about 15,000. The Accountant Member, therefore, was of the view that it was not possible to accept the submission of the assessee that the shares were sold only to reduce the overdraft taken from the bank.
It may be mentioned, while on this aspect, that during the first few years, apart from the years in question, i.e. 1959-60 and 1960-61, i.e. for the assessment years 1955-66, 19517-57, 1957-58 and 1958-59, the assessee had been treated by the Revenue as an investor in shares and was not taxed on the dealings in these shares. This is an aspect, which requires to be taken into consideration in conjunction with other factors in answering the question. The second point on this aspect is that for subsequent years for which Special Leave Petitions Nos. 8292-8293 of 1979 are pending are for the assessment years 1968-69 and 1969-70 and, in those two years, the Tribunal had accepted the position that the assessee was an investor and not a dealer in shares. This position, however, according to the Revenue, had to be accepted in view of the judgment of the Bombay high Court in the instant 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 fact-finding body is based on evidence from which the conclusions arrived at by the said fact-finding body can be said to be either reasonable or possible. Therefore, in the context of the controversy in the instant case, it is necessary to examine what were the facts found by the Tribunal and whether all the facts have been fully considered by the Tribunal for the conclusions drawn. If the conclusions drawn by the Tribunal are pure inferences of facts, then no question of law arises and no occasion is caused for interference. If, however, the conclusion arrived at by the fact--finding body such that no reasonable man could possibly have arrived at, the conclusion arrived at by the Tribunal would be without evident and perverse in law. If there is material to support the conclusion, the fact that another body or the Court might have arrived at different conclusion is not relevant.
The second question is what are the legal principles applicable to the facts of these types of cases to determine whether the conduct was that of a dealer in shares or of an investor in shares.
The two questions have been dealt with together in many decisions, which may be noted, though no case can provide guidance for all situations.
How in the case of sale of shares, the object or the purpose of selling the shares, in order to determine whether one was a dealer in shares or an investor in shares, should be viewed may be looked at from the angle of Lord Reid in J. P Harrison (Watford) Ltd. v. Griffiths (H.M. Inspector of Taxes) (1962) 40 TC…
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