# [1970] 2 S.C.R. 163

- **Citation:** [1970] 2 S.C.R. 163
- **Court:** Supreme Court of India
- **Decided:** 1969-09-01
- **Case number:** Civil Appeals Nos. 481 and 482 of 1966
- **Bench:** J. Ni. Shelat, C. A. VAIDJALINGAl>I
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1970-2-s-c-r-163-4766
- **Pages:** 14

## Headnote

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.
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
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.
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
fact and not arrived at without evidence so that no interference
\Vas
warranted in reference proceedings.
The. assessee appealed.
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
(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
(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]
164
SUPREME COURT REPORTS
(1970] 2 S.C.R.
(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
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

## Text

_Characters 0–39,980 of 41,430. This is a partial read: ask again with offset=39980 for what follows._

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v.
COMMISSIONER OF INCOME.TAX, BIHAR AND ORISSA
September 1, 1969
(J. NI. SHELAT AND C. A. VAIDJALINGAl>I, JJ.]
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.
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
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.
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
fact and not arrived at without evidence so that no interference
\Vas
warranted in reference proceedings.
The. assessee appealed.
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
(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
(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]
164
SUPREME COURT REPORTS
(1970] 2 S.C.R.
(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
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
(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 securities and not mix up his other capital and the income arising
from his
estate. [175 D-EJ
( 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
(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
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.
( e) The expression 'advent~re 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
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.
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos.
481
and 482 of 1966.
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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KAMAKHYA NARAIN v. C.I.T. (She/at, J.)
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S. T. Desai and D. N. Mukherjee, for the appellant (in both
the appeals) .
Jagadish
Swarup,
Solicitor-General, S. K. Aiyar,
R. N.
Sachthey and B. D. Sharma, for the respondent
(in both the
appeals)
'Ille Judgme.nt of the Court was delivered by
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 determination 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
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.
The assessee was at all material times a landholder deriving
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
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
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
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
166
SUPREME COURT REPORTS
[l 97U] 2 S.C.R.
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.
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.
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.
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, !.)
16 7
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
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.
The sale proceeds o.f gold sold as aforesaid were utilised by
the assessee in purchasing 7025 shares of Karanpura Development 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
brought to tax for the assessment year 1946-4 7.
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
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
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
by him on account of the pressing necessities alleged by him and
the change in the war situation then.
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
factually incorrect in certain respects.
The Tribunal accordingly
sent a supplementary Statement of Case on April 23, 1960.
After setting out the assessee's transactions of the sa1e of
Government securities in 1938-39, the purchase of shares from
168
SUPREME COURT REPORTS
(1970] 2 S.C.R.
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.
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
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KAMAKHYA NARAIN v. C.I.T. (She/at, !.)
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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
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
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asst:>see's case : (a) that he had converted one investment into another, 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
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one which could give him an adequate yield, and ( c) that he had
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
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
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
representing the unissued ca,pital of the compa,no/ was one of fact
with which also it had n~iction to interfere.
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
,
1170
SUPREME COURT REPORTS
(1970] 2 S.C.R.
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.
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.
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KAMAKHYA NARAIN v. C.I.T. (She/at, J.)
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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
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.
It is fairly clear that where a person in selling his investment
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
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
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.
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.
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 tr~de. They had, therefore,
to be examined
in the light of all the facts and circumstances to ascertain whether
they had been ent~red 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
172
SUPREME COURT REPORTS
[1970] 2 s.c.R.
in question were obviously not in the line of any business or trade
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carried on by him.
Since the Tribuual came to a conclusion as
regards the nature of the assessee's transactions ilifferent from
that arrived at earlier, it would be useful to tabulate them at one
place. So tabulated, they are as follows :
(1) Sale of Government securities in 1938-39 which
realised Rs. 44.25 lacs;
( 2) Opening of an account with this and certain other
amounts totalling Rs. 48 lacs in the Imperial
Bank;
( 3) Purchase out of these funds, shares a,nd debentures of the value of Rs. 34.14 lacs in September
1939;
( 4) Sale in October 1939, i.e., withiu a month, of
some of these shares bringing him Rs. 5. 75 lacs;
(5) Sale of the bulk of the shares in 1940 bringing
in Rs. 29.58 lacs;
( 6) Sale of the remaining shares in 1941 resulting in
a small deficit;
(7) Purchase of 68,109 tolas of gold in J me 1940
for Rs. 28.47 lacs;
(8) Sale of the bulk of the gold, i.e., 55,495 tolas i!1
October 1944 resulting in a surplus of Rs. 13
lacs and odd;
( 9) Sale of the remaining gold in 0Qtober 1945
resulting in a surplus of Rs. 33,481;:;
(10) Purchase of Karanpura shares between December
1944 and April 1945 of the value of
Rs. 2,37,267/-;
(11) Purchase of Victory Bonds in January 1945 of
Rs. 14 lacs, and sale thereOf in March 1945;
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(12) Borrowing Rs. 5.10 lacs against gold in 1945-46;
(13) Purchase of Bokaro R:amgur shares in 1945-46
for Rs. 39.81 lacs; and
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( 14) Sale of Karanpura shares in 1945-46 bringing in
a surphts of Rs. 88,000 and odd.
As already stated, though these transactions were not in the line
of any trade or business carried on by the assessee, nonetheless, if
they possess the characteristics of adventures in the nature of trade,
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the profits resulting therefrom would be liable to tax. But in an
enquiry on the question whether these transactions were in the
nature of trade or business, it would not be altogether irrelevant
IU.MAKHYA NARAIN v. C.I.T. (She/at, J.)
17 3
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
only. The transactions thus are not diversified nor are gradual
according to the opportunities offered by fluctuating marke.t prices,
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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
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
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.
In support of his contention that these transactiQDs were not
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
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
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
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.
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SUPREME COURT REPORTS
[1970] 2 S.C.R.
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.
·
The question, therefore, the Tribunal had before it
was,
whether when the assessee purchased the gold he did so with the
int~tion 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 sec~ndly,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
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KAMAKHYA NARAIN v. C.I.T. (She/at, J.)
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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 waited 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
about the end of 1942 is inconsistent with the hypothesis that the
object with which th,, gold was purchased was to trade in it.
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
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
to this account cannot for that reason only render his dealing with
that account into trading transactions if o!herwise, they were not.
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
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
trade or business in Victory Bonds.
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
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
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SUPREME COURT REPORTS
[1970] 2 S.C.R.
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.