STAR COMPANY LIMITED versus COMMISSIONER OF INCOME TAX (CENTRAL) CALCUTTA

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STAR COMPANY LIMITED v. COMMISSIONER OF INCOME TAX (CENTRAL) CALCUTTA August 7, 1969 [J.C. SHAH, ACT!SG C.J., V. RAMASWAMI ASD A. N. GROVER, JJ.]

Income-Tax-Loss arising in the ordinary course of business-Assessee carrying on business of buying and selling shares-Buying certain shares of a company at well above market price as nominee of associate who acq11ired management of company-Selling shares later to a.rsociate al 111arkrt price-Loss on transaclion if in normal course of business.

The K company, \\'ho \\'ere the managing agents of the F Company, entereU into an agreement on f\.fay 21, 1952, with the M Company, where by the entire share-holding of the K Company consisting of certain prefer ence and ordinary shares were to be sold to the ~1 Company or their non1inees. The appellant was a public limlted company carrying on the businc!>s of dealing in shares and securities. Some of the preference shares v.·crc pu'rchascd, amongst others by the appellant at Rs. 185 per share and f0r this ourposc the appellant had to overdraw on its bank account. The m:nket price of the preference shares at the time was about Rs. 119. After the agreement \Vas implemented, the M <:on1pany became the man;iging 11g~nts or the F Company.

On December 23, 1953, the appellant snld the preference 5hares to the ~f Company thereby incurring a loss or Rs. 1,11,816. In its assessment to inc0mc-tax the appellant claimed this loss as arising in the ordinary course or its business. The Income-tax Officer and Appclla1e Assistant Cornmis sioncr rejected the ;:1ppellant's claim on the ground that the shares v.·cre purchased as a conlrihulion to the scheme of acquisition 0f the n1~naging ogcncy of the F Company by the M .company. The Appellate Tribunal found however that there was no evidence that the appellant h;id been n1ade a pa"'·n in the scheme of acquisition of the managing agency; but in \'ie\\' oJ the treatment of the loss by lhe appellant as a Joss in in\'Cstment and not a loss on its stock in trade in its own profit anJ loss account, the tribun;1I held that the shares were not acquired in the course of the appel lant's share dealing business and therefore rejected itc; cl:tim. The High Court, upon a reference, also held against the appeli<int, hut expressed the opinion that the tribunal had not properly considered the prim:iry facts found hy the Income-tax Officer and the Appellate Assistant Commissioner \\'hich clearly sho\\o'ed that the appellant, an a!>sociale of the :-..-1 Company, h;td en1ered into the transaction relating to preference shares at the bid ding: of the ;\f Company and for the purpose o'( hclpin!? them.

In appeal to this Court it \\·as contended (i) 1h:it the High Court "'·as not entitled to reverse the findings of fact of the tribunal \Vhich v.•ere in f:t\'Ollr of the appellant since the' depanment h:id nor challenged these by means of appropriate proceedings; and (ii) that \\'here a qucs1ion is one of n1ixcd 'facls and la''" the f;icts aS found hy the tribun11l must he accept ed :is correct~ the lrihunal had negatived the fin~ting 1hat the preference sh:Hl'S \\'Cre :lcquired by the appellant as a p:nvn in the schen1e of transfer of th~ managing a~ency of the F Con1pany and it 'vas not open to the High Court to come to rhe same concluo;ion by not trca1ing the findings 0f the Tribunal as final.

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STAR COMPANY v. C.I.T. (Grover, !.)

773

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I HELD : Dismissing the appeal :

(i} The question Which was referred to the High Court was couched in general terms and was not limited to or circumscribed by the reasons which had been given by the Tribunal against the appellant. The question of law on which refe'rence can be made must arise out of the order of the Tribunal. Although certain reasons which had appealed to the Income tax Officer and the Appellate Assistant Commissioner were not accepted by the Tribunal, it had come to the conclusion which was material for the disposal of the -appeal, r.amely~ that the loss in question was not a loss that arose in the course of the appellant's business in share dealing. The question which was referred to the High Court was framed in the light of this final conclusion and it was not necessary for the department to apply for and obtain a reference on a question arising from the reasons given by the Tribunal in suppo·rt of its conclusion in favour of the department. [777 D-G]

(ii) Even if the conclusion of the High Court on the facts relating to the appellant's role in the scheme for transfer of the managing agency to the M Company wa·s not taken into consideration, the question which was referred to it had to be answered against the appellant. This was clear on admitted and proved facts which had some extraordinary features and led to the itresistible conclusion that whatever the motives which entered into tee appellant's acquisition of the shares, they were not bought and sold in the ordinary course of the business of the appellant as a dealer in shares. [778 FJ

Commissioner of Income-tax, Bombay City I v. Greaves Cotton & Co. Ltd., 68 I.T.R. 200; and Oriental Investment Co. P. Ltd. v. Commissioner of Income-tax, 72 .I.T .}l, 408; referred to.

CIVIL APPELL,\TE JURISDICTION : Civil Appeal No. 1635 of

1968.

Appeal from the judgment and order dated May 7, 1965 of the

Calcutta High Court in Income-tax Reference No. 205 of 1961.

S. Ray, R. K. Choudhury and B. P. Maheshwari, for the appel

lant.

Jagdish Swarup, Solicitor-General, S. C. Manchanda, R. N.

Sachthey and B. D. Sharma, for the respondent,

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The Judgment of the Court was delivered by

Grover, J. This is an appeal by certificate from a judgment following question

of the Calcutta High Court answering the referred to it in the negative and against the assessee :

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"Whether on the facts and in the circumstances of the case, the Joss of Rs. 1,11,816/- suffered by the assessee on the sale of shares of Fort William Jute Company Limited was a Joss that arose in its share dealing business."

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The assessee is ~. public limited company. inter alia, business of dealing in shares and securities. The profits

It carries on,

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the ordinary and losses arising from transactions in shares in course of the assessee's business have always been .reated as profits or losses of the share dealing business. During the assessment year 1954-55, relevant accounting period being the financial year 1953-54 the assessee suffered a Joss of Rs. 1,11,816 on the sale of 1,575 preference shares of Fort William Jute Company Ltd. These shares were purchased on May 22, 1952 at the rate of Rs. 186 per share from Mugneeram Bangur & Co. and were sold on December 23, 1953 at the rate of Rs. 1151- per share to the same company.

The background in which these transactions took place may be noticed. Kettlewell Bullen & Co. were the managing agent~ of Fort William Jute Co. Ltd. On May 21, 1952 an agreement was entered into between Kettlewell Bullen & Co. and Mugneeram Bungur & Co. according to which the entire holdings of Kettlewell Bullen & Co. in the managed company (Fort William Jute Co. Ltd.) consisting of 6,920 tax-free cumulative preference shares and 600 ordinary shares were to be sold to Mugneeram Bangur & Co. or their nominees at the agreed price of Rs. 1851- per preference share and Rs. 400/- per ordinary share. Pur suant to this agreement Kettlewell Bullen & Co. issued a circular letter to all shareholders of Fort William Jute Co. Ltd inform ing them of the terms of the agreement and pointing out that Kettlewell Bullen & Co. would tender resignation from the office It was of the managing agents with effect from July l, 1952. stated in this letter "the purchase price of each ordinary share was Rs. 400/- and of each preference share Rs. 185/-. It was further condition of the agreement that Mis. Mugneeram BanJ!nr & Co. would offer to all shareholders of the company (ordi.uary and preference) to purchase their shares at the same price on the · terms hereinafter referred to". Brothers Ltd. would be appointed managing agents.

It was intended that Ml s. Bangur

At the time of the agreement, namely, May 21, 1952 the market price of the preference shares ranged between Rs. 1191- and Rs. 122 per share but the shares were purchased by the asscssee on May 22, 1952 at the rate of Rs. 186/- per share. A large part of the preference shares of Fort William Jute Co. Ltd. were transferred to three Companies by Mugneeram Bangur & Co. who had to take over 8 ,617 preference shares in terms of the agreement. The Companies to which these shares were transferred were (1) Manwar Textile Agency Ltd; (2) Union Co. Ltd., and (3) Star Co. Ltd.-the assessee. M/s. Bangur Bros., were appointed a~ the managing agents of Fort William Jute Company for a period of ten years with effect from July 1, 1952. The total number of preference shares of Fort William Jute Company Ltd. which were acquired by the assessee from Mugnee-

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STAR COMPANY V. C.I.T. (Grover,].)

775

ram Baneur & Co. was 1,670. One lot of 1,620 shares was purchased on May 22, 1952 at Rs. 186/- per share aind the second lot of 50 shares was purchased at Rs. 184/- on May 27, 1952. For the acquisition of these shares the assessee had to overdraw on its Bank account. On December 23, 1953, 1,575 shares were sold to Mugneeram Bangur & Co. at Rs. 115/- per share result ing in a Joss of Rs. 1,11,816 which was included in the loss of Rs. 1,30,152/- debited to the profit and Joss account under the head "Joss on sale of investment". The assessee claimed this as a loss arising in the ordinary course of its business.

The Income-tax Officer and the Appellate Assistant Com missioner rejected the assessee's, claim on the ground that the shares were purchased as a contribution to the scheme of acqui sition of the managing agency of the Fort William Jute Co. Ltd. by Mugneeram Bangur & Co. or its nominee. The loss, there fore, did not arise in the course of the assessee's normal business of dealing in shares. The Appellate Tribunal found that there was no evidence that the assessee had been made a pawn in the scheme of acquisition of the managing agency of Fort William Jute Co, Ltd. by Mugneeram, Bangur & Co. or that the shares were acquired by the assessee to relieve the latter of the load of their shares in pur,suance of that scheme. The Tribunal was further of the view that even if Mugneeram Bangur & Co. had a controlling interest .in the assessee firm by having a majority of the shares in it no such inference could necessarily by raised that the assessee did not purchase the shares of Fort William Jute Co. Ltd. as a weasure of its own activity as a deafer in shares. The Tribunru, however, held that the shares were not acquired in the course of the assessee's share deruing business for the reason that in the profit and loss account for the year ending March 31, 1954 the assessee had made a distinction between its transactions as a deruer and as an investor in shares. The Tribunal found that while the profit on sale of shares out of its stock in trade had been shown and described as such in the profit and loss account, the Joss on srue of investment had been shown in the profit and Joss account as a loss in investment. From the treatment of the Joss given by the assessee in its own profit and loss account the Tribunal came to the conclusion that the shares of Fort William Jute Co. Ltd., were acquired by the assessee as a measure of investment a.id not as stock in trade of the assessee's share dealing business.

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The High Court, while deilling with the question which had been referred at the instance of the assessee, was of the opinion that the Tribunal had not proper Jy considered the primary facts which had been found by the Income-taic Officer and the Appellate

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S~PREME COURT REPORTS

[ 1970] l S.C.R.

Assistant Commissioner. proved and admitted facts which were :

It proceeded to refer to some of the

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(!) The profits and loss account relating to the sale of shares showed that the transactions in Fort William Jute Co. shares stood apart from the other transactions. While the other tr~actions were of a few thousand rupees only rising to nearly 30,000 in one case the transaction in Fort William Jute Co. shares involved tile payment of nearly Rs. 3,00,000.

( 2) These shares were acquired in one Jot from Mugneeram Bangur & Co. and sold back to the same concern in one lot which was altogether unusual.

( 3) The shares in question were purchased by the assessee one day after the agreement was entered into between, Kettlewell Bullen & Co. and Mugnceram Ban gur & Co.

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( 4) The preference shares of the

face value of Rs. 100/- were purchased at Rs. 186/. per share on May 22, 1952 when on the previous day the quotation in the market was Rs. ll 9/- per share only. Taking the overall picture the High Court felt that there could be only one iiWcrencc that the assessee--an associate of Mugneeram Ba,ngur & Co.-had cnttred the transaction relating to preference shares at the bidding lt of the Bangurs, for the purpose of helping them. was observed that the Tribunal was wrong in nolding that there was no evidence that these associates had been made pawns in the transaction. The conclusion of the High Court was "on the facts and circumstances of the case it is impossible to hold that the assessee bought shares in the ordinary course of business or would have bought them but to help Mugneeram Ban gur & Co. in <heir scheme of acquisition of the manag It appears that the High Court was ing agency rights". not impressed with the view <>f the Trib4rial that on the basis of entries in the profit and loss account it could be held that the share transactions in question related to the capital account, the shares having been acquired as a measure of investment.

The first contention raised on behalf of the asscssee, which is 1he appellant before us, is that the High Court was not entitled 10 reverse the findings of fact of the Appellate Tribunal since

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STAR COMPANY v. C.l.T. (Grover, J.)

777

that

It is submitted

to that scheme.

the department had not challenged the same by means of appro priate proceedings for reference of a question challenging those It is pointed that the Tribunal had come to the con findings. clusion that there was no evidence to show the assessee had been made,a pawn in the scheme of acquisition of the mana ging agency of Fort William Jute Co. by Mugneeram Bangur the & Co. or that the preference shares had been acquired by assessee pursuant the that Tribunal had thus reversed the view which had commended itself to the )ncoine-tax Officer and the Appellate Assistant Com in missioner and tQ that extent the Tribunai's decision was fovbur of the aseessee and could not be reversed or set aside by the High Court in the absence of any reference at the instance of the department. It is \llOteworthy that the question which was referred is couched in general terms and was not limited to or circumscribed by th~ reasons which had been given by the Tribu nal against the assessee The question of Jaw on which reference can be made must arise out of the order of the Tribunal. The order which was made in the present case was in favour of the depart It is true that certain reasons ment and against the assessee. which had appealed to the Income tax Officer a,nd the Appellate Assistant Commissioner were not accepted by the Appellate Tri bunal but it had come to the following conclusion which was mate rial for the disposal of the appeal : -

the "We accordingly uphold the view taken by authorities below that the loss of Rs. 1, 11,818/- in curred on the sale of 1,575 preference shares of Fort in William Jute Co. Ltd. was not a that arose course of the appellant's business in share dealing though for different reasons".

loss

The question which was referred was framed in the light of the final conclusion and in our judgment it was not necessary for the department to apply for and obtain a reference on a question arising from the reasons given by the Tribunal in support of its conclusion in favour of the department.

It has next been contended on behalf of the appellant that where a question is one of mixed facts and Jaw the facts as found by the Tribunal must be accepted as correct. The Tribu nal had negatived the finding of the Income-tax Officer and the Appellate Assistant Commissioner that the preference shares had been acquired by the assessee as a pawn in the scheme of trans fer of the managing agency of Fort William Jute Co. Ltd. It was, therefore, not open to the High Court to come to the same conclusion by not treating the finding of the Appellate Tribunal

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SUPREME COURT REPORTS

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as final. Our attention ha~ been invited to the observations in Commissioner of Income-tax, Bombay City I v. Greaves Cotton & Co. Ltd.(') that it is not open to the High Court in a reference under s. 66 (I) of the Income-tax Act, 1922 to embark upon a re-appraisal of the evidence and to arrive at findings of fact con trary to those of the Tribunal. 1l1e finding of fact will be defective in law if there is no vidence to support it or if the finding is unreasonable or perverse, but it is not open to a party to challenge such a finding unless reference has been made of a Jn Oriental Investment specific question concerning that finding. Co. P. Ltd. v. Commissioner of Income-tax(') it has been re· iterated that in dealing with findings on questions of mixed law and fact, the High Court must accept the findings of the Tribunal on the primary question of fact as final although it is open to the the High Court to examine whether the Tribunal had applied It is argurd that the High relevant legal principles correctly. Court has not characterised the aforesaid finding of the Appellate Tribunal as perverse or arbitrary and once that finding is accept ed there would be no justification for holding that the assessec had been made a pawn in the matter of the scheme of transfer of the managing agency of Fort William Jute Co. Ltd. by Mug neeram Bangur & Co. or Bangur Brothers Ltd. In any case there were several facts which showed that the assessee was not privy or -party to the aforesaid scheme. It did not acquire any interest in the managing agency nor was it a subsidiary or asso ciate of Mugnccram Bangur group of concerns. The assessee was connected with the Bangurs only to the extent that out of its four Directors two of the Directors were Bangurs.

In our opinion even if the conclusion of the High Court on the point mentioned above is not taken into con.~ideration the question which was referred had to be answered the assessee. On admitted and proved facts there can be no manner of doubt that the assessee did not acquire the preference shares in the ordinary course of business. These facts may be restated as follows : -

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(I) The market rate of the preference shares remain ed constant at the figure of Rs. 119 /- between April 16, 1952 and May 21, 1952.

(2) On May 21, 1952

the agreement between Mugneeram Bangur & Co. and Kettlewell Bullen & Co. was entered into for purchas ing the entire holding of the managing agency company in the managed company.

(t) 68 1.T.R. 200.

(2) 72 1.T.R. 408.

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STAR COMPANY v. C.I.T. (Grover, !.)

779

(3) On May 22, 1952, 1,620 shares were acquired from Mugneeram Bangur & by the assessee Co. at the rate of Rs. 186/- per share. 50 more shares were acquired on May 27, 1952 at Rs. 184/- per share. The shares were obvious ly acquired at a price which was very much higher than the market price which prevailed only a day before they were purchased by the assessee.

(4) Out of 1,670 shares taken over by the assessee from Mugneeram Bangur & Co. 1,575 were sold back to the same company at the rate of Rs. 115/- per share.

(5) The profit and loss account for the assessment year 1954-55 showed that the dealings in other shares of comparatively much lesser value than the shares in question. The profits and losses which had been made and incurr~d on account of the other shares were also comparatively of minimal nature.

(6) The shares of Fort William Jute Co. Ltd., were purchased by the assessee by obtaining an over draft from a Bank.

All the above facts and circumstances which have

some extraordinary features lead to the irresistible conclusion that the whatever the motives which entered into the acquisition of shares, they were certainly not bou.~ht and sold in the ordinary course of business of the assessee as a dealer in shares. The ans wer to the question must, therefore, be in the negative and against the assessee and it was rightly so returned by the High Court.

The appeal fails and it is dismissed with costs.

R.K.P.S.

Appeal dismissed.