# 1is COMMISSIONER OF INCOME TAX, NAGPUR v. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD

- **Citation:** [1976] 1 S.C.R. 126
- **Court:** Supreme Court of India
- **Decided:** 1975-07-25
- **Bench:** A. N. Ray C. J, K. K. Mathew, V. R. Krishna Iyer, S. M. Fazal Ali
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1is-commissioner-of-income-tax-nagpur-v-sutlej-cotton-mills-supply-agency-ltd-6472
- **Pages:** 9

## Headnote

lncome~tax-Jurisdiction of a High Court on reference-Scope of-.4 3ingle
adventure-Tests for determining whether in the nature of business.
The asses.see acquired shares in a newly floated sister concern
and
later
sold a part of its stock at a profit. The Income-tax Officer assessed the profit
to tax on the basis that i~ was profit accruing to the assessee from an adventure
in the nature of business, and the order was confirmed by the Appellate
AMistant Commissioner.
On appeal the Appellate Tribunal
held
that
tho
U'an!action was in the nature of business adventure; that the assessee by itl
Memorandum of Assoc:ation was authorised to buy anct sell shares; that there
was a specific resolution to buy and sell shares; that the assessee included the
profit on the sale of shares in _its profit and loss account without showina
it in any reserve account, that the shares were purchased from borrowed fund!
and not with ready cash; that the sales were not on account of any pressiq
necessity; that it kept the profit in cash in a bank and that the assessee had
in the past dealt with shares as a business transaction.
On reference, the High Court held that there was no provision in the
Memorandum of Association which authorised the carrying on of the businesa
of purchasing and selling shares; that the inclusion of the profit in the profit
-and loss account. was not conclusive of the question whether it was capital asiCt
or revenue receipt; that the nature and character of the money !hould bo
determined by its inherent character; that there was no evidence that the sharct
were purchased out of borrowed funds; that a solitary transaction could not
A
B
c
D
be taken as conclusive of the fact that the sale of shares was an adventure in
E
the nature of trade and that in any case the dominant intention of the asseSiCO
in acquiring the shares was to boost the shares of a sister concern and when
•nee that was achieved the assessee started seiling the investments.
On appeal to this Courl' it was contended by the respondent that the profit
can be taxed only if the dominant int.ention of the assessee was to carry on an
-adTenture in the nature of business and not otherwise.
Allowing the appeal,
HELD : The Tribunal found, after taking into account all
the relevant
circumstances, that the dominant intention of the assessee was to make profit
by resale of the shares and not to make an investment. [134F]
(1) (a) The finding that Joss or profit is a trading loss or profit is primarily
a finding of fact though in reaching that finding the Tribunal h&s to apply
tho correct test laid down by law.
When the Tribunal bas considered the
evidence on record and applied the
correct test, there
is no scope for any
interference with the finding of the Tribunal. [134Gl
C.I.T. v. Aslwka MarketinR Co. [1972] 83 I.T.R. 439. referred to.
(b) The whole conclusion of the High Court was based on an unw3rranted
aunmption of facts.
The danger of falling to recognise that the jurisdictioa
of the High Court in these matters is only advisory and that conclu~ion of
fa.eta are conclusions on which the High C.ourt is to exercise the adviiorY
juriadiction is illustrated by this case. At no time had the assessee a ca~ that
t~ shares were purchased with a view to help a sister concern. Nowhere
ia- the statement of the case or the supplementary statement of case nreoared
by tho Tribunal and filed in the High· Court waa there a finding on tho questfon.
[134E; DJ
F
H
+
•
..
,
I
I
)'
•
'
C.I.T. v. SUTLEJ COTTON MILLS LTD. (Mathew, J.)
127
A
(2) The tests for the purpose of ascertaining whether profits made upon a
sale or an article are taxable profits are :
B
c
D
E
F
G
(i) if a transaction (is in the as.sessee's ordinary line of bwineM it is in the
nature of. trade. [131Jl......C]
(ii) it is not necessary, to constitute trade, that there should be a !eriea of
transactions, both of purchase and sale.
A single transaction of purchaso and
-sale outside the asscssce's line of business may constit

## Text

1is
COMMISSIONER OF INCOME TAX, NAGPUR
v.
SUTLEJ COTTON MILLS SUPPLY AGENCY LTD.
July 25, 1975
[A. N. RAY C. J., K. K. MATHEW, V. R. KRISHNA IYER AND
S. M. FAZAL ALI, JJ.]
lncome~tax-Jurisdiction of a High Court on reference-Scope of-.4 3ingle
adventure-Tests for determining whether in the nature of business.
The asses.see acquired shares in a newly floated sister concern
and
later
sold a part of its stock at a profit. The Income-tax Officer assessed the profit
to tax on the basis that i~ was profit accruing to the assessee from an adventure
in the nature of business, and the order was confirmed by the Appellate
AMistant Commissioner.
On appeal the Appellate Tribunal
held
that
tho
U'an!action was in the nature of business adventure; that the assessee by itl
Memorandum of Assoc:ation was authorised to buy anct sell shares; that there
was a specific resolution to buy and sell shares; that the assessee included the
profit on the sale of shares in _its profit and loss account without showina
it in any reserve account, that the shares were purchased from borrowed fund!
and not with ready cash; that the sales were not on account of any pressiq
necessity; that it kept the profit in cash in a bank and that the assessee had
in the past dealt with shares as a business transaction.
On reference, the High Court held that there was no provision in the
Memorandum of Association which authorised the carrying on of the businesa
of purchasing and selling shares; that the inclusion of the profit in the profit
-and loss account. was not conclusive of the question whether it was capital asiCt
or revenue receipt; that the nature and character of the money !hould bo
determined by its inherent character; that there was no evidence that the sharct
were purchased out of borrowed funds; that a solitary transaction could not
A
B
c
D
be taken as conclusive of the fact that the sale of shares was an adventure in
E
the nature of trade and that in any case the dominant intention of the asseSiCO
in acquiring the shares was to boost the shares of a sister concern and when
•nee that was achieved the assessee started seiling the investments.
On appeal to this Courl' it was contended by the respondent that the profit
can be taxed only if the dominant int.ention of the assessee was to carry on an
-adTenture in the nature of business and not otherwise.
Allowing the appeal,
HELD : The Tribunal found, after taking into account all
the relevant
circumstances, that the dominant intention of the assessee was to make profit
by resale of the shares and not to make an investment. [134F]
(1) (a) The finding that Joss or profit is a trading loss or profit is primarily
a finding of fact though in reaching that finding the Tribunal h&s to apply
tho correct test laid down by law.
When the Tribunal bas considered the
evidence on record and applied the
correct test, there
is no scope for any
interference with the finding of the Tribunal. [134Gl
C.I.T. v. Aslwka MarketinR Co. [1972] 83 I.T.R. 439. referred to.
(b) The whole conclusion of the High Court was based on an unw3rranted
aunmption of facts.
The danger of falling to recognise that the jurisdictioa
of the High Court in these matters is only advisory and that conclu~ion of
fa.eta are conclusions on which the High C.ourt is to exercise the adviiorY
juriadiction is illustrated by this case. At no time had the assessee a ca~ that
t~ shares were purchased with a view to help a sister concern. Nowhere
ia- the statement of the case or the supplementary statement of case nreoared
by tho Tribunal and filed in the High· Court waa there a finding on tho questfon.
[134E; DJ
F
H
+
•
..
,
I
I
)'
•
'
C.I.T. v. SUTLEJ COTTON MILLS LTD. (Mathew, J.)
127
A
(2) The tests for the purpose of ascertaining whether profits made upon a
sale or an article are taxable profits are :
B
c
D
E
F
G
(i) if a transaction (is in the as.sessee's ordinary line of bwineM it is in the
nature of. trade. [131Jl......C]
(ii) it is not necessary, to constitute trade, that there should be a !eriea of
transactions, both of purchase and sale.
A single transaction of purchaso and
-sale outside the asscssce's line of business may constitute an adventure in the
nature of trade; [!31C-D]
Venkataswami Naidu & Co. v. C.l.T. [1959] 35 I.T.R. 594, followed.
I. R. v. Reinhold 34 T. C. 389, 392. referred to ..
(iii) whore the purchase of any artide or of any capital investment is made
without the intention to resell at a profit ihe resale under changed circumstan.c.et
would only be a realisation of capital and would not stamp a transaction with
a buoiness character. [!31G]
C.I.T. v. P. K. N. Co. Ltd. [1966] 60 I.T.R. 65 (S.C. l referred to.
(iv) a transaction is not necessarily in the nature of trade because the purchau was made with the intention of resale. [131H]
JenkinMJn v. Freeland 39 T.C. 636 (C.A.); Radha Debi Jalan v. C.l.T. [1951]
20 I.T.R. 176; India Nut Co. Ltd. v. C.l.T. [1960] 39 I. T. R. 234; Sooniram
Poddar v. C.I.T. [1939] !.T.R. 470. 478-9; Ajax Products Ltd. v. C.I.T. I.T.R.
297, 310; Giistad Irani v. C.I.T. [1957) 31 I.T.R. 92 and Mrs. Alexanden v.
C.I.T. 119521 22 I.T.R. 379. 402. referred to.
(v) a capital investment and resaJe do not lose their capital nature merely
because the resale was foreseen and contemplated when the investment was
made and the possibility of enhanc;ed value motivated the investment [132BJ
Leeming v. Jon.., 15 T. C. 333; Saroj Kumar Mawmdar v. C./.T. [1959.1
37 I.T.R. 2-42, 250-1; I. R. v. Fraser 24 T. C. 498, 502; JanJdram Bhadur Rmn
v. C.l.T. [1965] 57 I.T.R. 21, re!trred to.
(vi) the accretion to capital does not become income merely because the
original capital was invc,,ted in the hope and expectation that it would riso in
value. (132.D-E]
Leeming v. Jones 15 T.C. 333, referred to.
(vii) The intention to resell would, in conjunction with the conduct of the
Msenee and other circumstances, point to the business character
of
the
tl'lln>llction. [132F-G]
H
In the instant cue, the ·BBsessee had been dealin& in shares. (i) In a.a
earlier assessment year the assessce had shown in its profit and loss account
and the balance sheet a loss in dealing of shares which showed that the .-
had been baying and !elling !hare! even though as an isolated adventure in tile
nature of bwineu. The debit on account of devaluation of sha.rc1 shown ia
the profit and loss account wa! permissible only on the footing that the sh.area
cOll!titnted the Btock-in~trade of the asse~e, (ii) in view of the resolution of
th.e ~essee authorising the director to purchase and sell shares the view of the
Hilb Court that the memorandum of association did not authorise tho company
to acqn.ire and sell shares had no· relevance: <iii) the findin2 that the sharoo
were purchased with borrowed funds on which the a•e•tce was paying intere1t..
wu a finding 111uoported by eviden:.e. The Tribunal wa1 correct in holdin1: that
tho .... ...., had not invested its funds with a view to earn dividend: (iv) the
TribUJl&l found that the sh.,.. were not sold to liquidate the debts of the aiseiiOe
as the bll.lance sheet showed that the proceeds were kept as cub in bank.
[133A-HJ
J
128
SUPREME COURT REPORTS
[1976] 1 S.C.R.
CIVIL APPELLAOE JURISDICTION : Civil Appeal No. 1877 of 1970.
From the judgment and order dated the 10th January, 196& of the
Madhya Pradesh High Court at Jabalpur in Misc. Civil Case No. 221
of 1962.
V. S. Desai, B. B. Ahuja and S. P. Nayar, for .the appellant.
M. C. Chag/a, B. Sen, A. K. Chita/e, A. K. Verma, Ravinder Narain.
J.B. Dadachanji and 0. C. Mathur, for respondent.
The Judgment of the Court was delivered by
MATHEW, J.-This is an appeal from the judgment of the High
Court of Madhya Pradesh in a reference made at the instance of the
assessee M/s. Sutlej Cotton Mills Supply Agency Ltd. (hereinafter referred to as the 'assessee') by the Income Tax Appellate Tribunal
(hereinaf,er referred to as the 'Tribunal') under s. 66(1) of the Indian
Income Tax Act.
The question referred was :
"Whether the inferencg of the Tribunal that the profit
of Rs. 2,13,150/- arising from the sale of 1,58,200 shares of
the Gwalior Rayon Silk Manufactunng \ Weavmg) Co. Ltd.,
is assessable as business profit is correct ?".
When the reference came up for hearing before the High Court,
the High Court found that although the Tribunal was of the view that
the question referred was a mixed question of Jaw and fact, it had not
stated all the facts and circumstances on which it based its conclusion
that the profit of Rs. 2,13,1501- was a business profit and so the Court
called for a supplementary statement of the case and a supplementary
statement of the case was submitted to the Court by the Tribunal.
The material facts in the statement of the case were as follqws. The
assessee is a public limited company and it JS controlled by the Birlas.
The assessee applied for certain shares of the Gwalior Rayon Silk Manufacturing (Weaving) Company Limited (hereinafter referred to as the
"Rayon Company"), also a company controlled by the Birlas. This
company was floated on 25-8-1947 with a paid up capital of Rs. 5 lakhs
made up of 50,000 ordinary shares of Rs. 10 /- each. In the year
ending 31-12-1951, the Rayon Company issued certain new shares tor
paid up capital of Rs. 1,17,25,000/- made up as follows:
7,60,000 Ordinary shares of Rs. 10/- each fully paid up.
1,50,000 Ordinary shares of Rs.JO/. each with paid up
at Rs. 2/8/- each.
1,50,000 6% preference shares of Rs. 100/-each paid up
at Rs 25/- each (redeemable at par at the con1pany•s option after a specified date by giving
one Year's notice).
Rs.
76,00,000
3,75,000
37,50,000
A
+
I
c
D
E
F
G
•
H
'
'
l
)
C.I.T. v. SUTLEJ COTTON MILLS LTD. (Mathew, J.)
129
A
The assessee which was interested in the Rayon Company and which
B
c
D
E
F
G
H
bad already purchased l,OOQ. ordinary shares, subscnbed for 3,49,000
shares of the new issue and paid Rs. 8,72,500/ as application money
on the 25th and 27th February, 1951, and paid Rs. 26,17,500/- as final
call money on 10-8-1951. These purchases were authorized by a
resolution of the assessee dated 7-2-1951.
The assessee sold a part of
its stock viz., 1,58,200 shares at a profit of Rs. 2,13,150/-.
For the assessment year 1956-57 (accounting year ending on
31-3-1956), the Income Tax Officer sought to assess the amount on
the basis that it was profit accruing to the assessee from an adventure
in the nature of business.
The assessee contended that the amount represented capital gain as the shares were purchased by way of investment and that the same cannot be taxed as revenue receipt.
The
Income Tax Officer rejected the contention.
'fhe assessee· tiled · art
appeal before the Appellate Assistant Commissioner.
He confirmed. the
order.
The assessee then went up in appeal before
the • .Appellate
Trlbunal.
· • ,. -
The Tribunal came to . the conclusion, after considerl~g all 'the
circumstances, that .the transaction was in the nature of a business .l\dventure and that profits were liable to be taxed.
The reasons ;vhich
induced the Tribunal to come to this conclusion were : The assessee
was. authorised by clauses 12, 13, 28 and 29 of paragraph 3 of .its
Memorandum of Association to buy and sell shares; there were specific
resolutions of the Company authorising a director of the assessee to
purchase and sell these shares; th~ assessee had included the profit of
Rs. 2,13,1501- in the profit and loss account without taking it to .any
reserve account or specifically set it apart for any other purpose; the
assessee had purchased the shares from borrowed funds and not with
money readily available to it; the assessee did not make the sales. on
account of any pressing necessity to meet existing liabilities but had .in
fact kept a part of the sale-proceeds as liquid cash in the United Commercial Bank Ltd.; the assessee had, in the' past, dealt in shares as busi,
ness transaction and had claimed for the assessment year
1951-,52
Rs. 1,29,214/- as loss on account of its dealing in shares of M/s.
Titagarh Paper Mills Ltd.; it also claimed Rs. 6,30,000/- as loss on
·account of devaluation of the shares of M/s. Pilani Investment Corporation though that was not allowed; there had recently grown a business practice of investing large sums of money in shares in new ventures
with an eye on their appreciation for obtaining by sale substantial profits in future.
·
The High Court, in its judgment, said that there was no provision in
clauses 10, 12, 13, 28 and 29 of paragraph 3 of Memorandum
of
Association of the assessee which authorised the carrying on of the business of purchasing and selling shares, although some of these clauses
did authorise the assessee to acquire and sell shares in other similar
companies; that the inclusion of the profit of Rs. 2,13,150/- in the
profit and. loss account without taking it into any reserve specifically
was not conclusive of the question whether it was a capital asset or a
revenue receipt; that the· true nature and character of the moneys received was to be determined not by the manner in which the assessee treated it but by its inherent character, and, that it was wholly immaterial
10-714 Sup. Cl/75
j
1~0
SUPREM~ COURT REPORTS
L1976] 1 S.(.&.
as to how the assessee treated the amount iu question; and that there
was no evidence that the shares were purchased out of borrowed funds
as the assesoee had a fixed deposit of Rs. 31, 75,0001- in the United
Commercial Bank Ltd. and a deposit of Rs. 8,76,008-2-0 in the current
accomll of the Bank. The High Court was of the view that the finding of the Tribunal that the sale of shares in 1955 was made not on
account of any pressing necessity to meet existing liabilities was based
on materials placed before the Tribunal.
The Court, however, said :
"It may be that, at that tim~, the liabilities of the assessee company
existed, but it is quite another matter to say that it was obliged to sell
the shares in order to meet those liabilities." The High Court was also
of the view that the conclusion of the Tribunal that the assessee had
claimed Rs. 1,29,214/- as loss on account of dealing in shares of Mis.
Titagarh Paper Mills Ltd. for the assessment year 1951-52 and that the
claim was allowed by the Income Tax Officer must be accepted as
correct, but said that this Solitary. transaction cannot be taken as conclusiw of the fact that the sale of shares in question here was an adventure in the nature of trade.
The main reason which impelled the
High Court to hold that the transaction was not an adventure in the
nature of trade was that the dominant intention of the assessee in acquiring the shares was to boost the shares of a sister concern viz., the Rayon
Company, and thus render it assistance for setting it up as a going
concern and when that was accomplished, the assessee started selling the
inv~tment w\lich had in the mean time enhanced in value.
The question which the Tribunal had to consider in the appeal and
which was referred to the High Court was a mixed question of law and
fact, namely, whether the profit from sale of the shares in question was a
revenue or a capital receipt.
The distinction between capital accretion
and-income has been explained by Rowlatt, J. in Thew v. South West
Af•ica Co. Ltd.( 1). The learned judge said that for the purpose of ascertaining whether profits made upon a sale of an article are taxable
profits, the question to be asked is : "Is the article acquired for the purpose of trade ?".
If it is, the prgfit arising from its sale must be brought
into revenue account and that the profit is chargeable as capital gains if
the sale is of a capital asset, and as business profit if the sale is in the
course of business or the transaction constitutes an adventure in the
nature of trade.
The line between capital sales and sales producing
income has been drawn by Lord Justice Clerk in Californian Copper
Syndicate v. Harris(") in a passage which has become classical :
"It is quite a well settled principle in dealing with questions of assessment of income tax that where the owner of an
ordinarv investment chooses to realise it, and obtains a greater
price for it than he originally acquired it at, the enhanced
price is not profit .... assessable to income tax.
But it is
equally well established that enhanced values obtained from
realisation or conversion of securities may be so assessable
where what is done is not merely a realisation or change of
investment, but an act done in what is truly the carrying on,
or carrying out, of a business .... What is the line which
(1) 9 T. C 141
(2) 5 T. C. 159.
A
•
B
D
E
F
G
I I
·C.l.T. v. SUTLEJ COTTON MILLS LTD. (Mathew, !.)
l 3 I
A
separates the two classes of cases may be difficult to define,
...
.and each case must be considered according to its facts; the
question to be determined being-ls the sum of gain that has
cbeen made a mere enhancement of value by realising a security or is it a gain made in an operation of business in carrying
l
out a scheme for profit-making ?"
B
In the absence of any evidence of trading activity in cases of purchase and resale of sh>ares, it has been held that profit arising from the
resale is an accretion to the capital. If a transaction is ill the assess-ee's
ordinary line of business there can be no difficulty in holding that it is in
the nature of trade. But th(> difficulty arises where the transaction is
outside the assessce's line of business and then, it must depend upon the
facts and circumstances of each case whether the rransaction is in the
A
c
nature of a trade.
It is riot necessary to constitute trade that there should be a series of
transactions, hath of purchase and of sale.
A single transaction of purchase and sale outside the assessee's line of business may constitute an
"
adventure in the naturi> of trade. Neither repetition nor continuity of
I>
similar transactions is necessary to constitute a transaction an adv~nture
in the nature of trade. μ there is repet1tion and continuity, the assesse~
would be ~arrying on a business and the question whether the activity is
an adventure in the nature of trade can hardly arise.
A transaction may
be regarded as isolated _although a similar transaction may have taken
placei a fairly Jong time before [see I. R .. v. Reinhold(')].
The principles umlerlying the distinction between a capital sale and
iE
an adventure in the nature of trade were examined by this Court m
Vcnkataswa111i Naidu & Co. v. C.T.T.('), where thfs Court said that the
,)
character of a transaction cannot be cfetermined solely on the application
of any abstract rule, principle or test but must depend upon aU the facts
and circumstances of the case.
Ultimately, it is a matter" of first impression with Court whether a particular transaction is in the nature of
trade or not. It has been said that a single plunge may be enough
:F
pmvided it is· shows to the satisfaction of the Court that the plunge is
made iii the waters of the trade; but mere purchase/sale of shares-if
that is all that is involved in the plunge-may fall short of anything in
the nature of trade.
Whether it is in the nature of trade will depend on
'
the facrs and circumstantes.
~
Where the purchase of any article or of any capital investment, for
instance, shares, is made without the intention to resell at a profit, a
G
resale under changed cireumstances would only be a realisation of capitaI and w0uld not ~tamp the fnthS11ctioh with a business character [see
j
C.I.T. v. P.K.N. Co., Ltd. (8}].
f
Where a purchase is made with the intention of resale, it depends
)
upon the conduct of the assessee and the circumstances of the case
whether the venture is on capital account or in the nature of trade.
A
H
transaction is not neceS$arily in the nature of trade because the purchase
(I) 34 T. C. 389; 392.
(2) [1959] 35 I. T. R. 594.
(3) [1966] 60 I. T. R. 65 (S. C.).
<-
132
SUPREME COURT REPORTS
[1976} 1 S.C.R.
was made with the intention of resale [see Jenkinson v. Freeland(!);
Radha Debi Jalan v. C./:T.(2); India Nut Co. Ltd. v. C.l.T.( 8 ); M/s.
·Sooniram Poddar v. C.I.T.(4); Ajax Products Ltd. v. C.l.T.('); Gustad
Irani v. C.l.T. (6); and Mrs. Alexander v. C.I.T. (7)].
A
A capital investment and resale do not lose their capital nature
merely because the resale was foreseen and contemplated when the
investment was made and the possibility of enhanced values motivated
B
the investment [see Leeming v. Jones( 8 ) and also the decisions of this
Court in Saroj Kumar Mazumdar v. C.l.T. (9) and Janki Ram Bhadur
Ram v. C.:.l.T. (1°)].
In I. R. v. Fraser( 11 ) Lord Norman said :
"The individual who enters into a purchase of an article or
commodity may have in view the resale of it at a profit, and
yet it may be that this is not the only purpose for which he purchased the article or the commodity, nor the only purpose to
which he might turn it if favourable opportunity for
safo
does not occur.
An amateur may purchase a picture with a
view to its resale at a porfit, and yet he may recognise at _the
time or afterwards that the possession of the picture will give
him aesthetic enjoyment if he is unable ultimately, or at his
chosen time, to realise it at a profit. ... "
An accretion to capital does not become .income merely . because
the original capital was invested in the hope and expectation that it
would rise in value; if it does so rise, its realisation does not make it
income. Lord Dunedin said in Leeming v. Jones(') at p. 360:
"The fact that a man does not mean to hold an investment
may be an item of evidence tending to show whether he is
carrying on a trade or a concern in the nature of trade in respect of his investments, but per se it leads to no conclusion
whatever.~
This Court laid down in Venkataswami Naidu & Co. v. C./.T.(12) that
the dominant or even sole intention to resell is a relevant factor and
raises a strong presumption, but by itself is not conclusive proof, of an
adventure in the nature of trade.
The intention to resell would, in conjunction with the condnc~ of the
assessee and other circumstances, point to the business character of the
transaction.
In the light of the principles above referred to, it is necessary . to
examinP- whether the Tribunal had approached the question from the
right perspective, viz., whether on the basis of its fincfmg on questions
of fact, the inference that the transaction was an adventure in the nature
of trade was justified.
(I) 39 T. C. 636 (C. A.).
(3) [l960J39 I. T. R. 234.
(5) [196lJ 43 I. T. R. 297, 310.
(7) [1952] 22 I. T. R. 379, 402.
(9) [l959J 37 I. T. R. 242, 250-1.
(II) 24 T. C. 498, 501.
(2) [1951) 20 I. T. R. 176.
(4) [1939) I. T. R. 470, 478-9.
(6) [1957) 31 ,I. T. R. 92.
(8) 15 T. C. 333.
(10) [1965) 57 I. T. R. 21.
(12) [l959J35 I. T. R. 594, 610, 622.
c
D
E
F
G
H
I
).
'
~
(
•
c.J.T. v. SUTLEJ COTTON MILLS LTD. (Mathew, J.)
! 33
A
The Tribunal relied on the following circumstances for coming to
the conclusion.
The assessee has been dealing in shares from 1951 to
1953.
For the assessment year 1951-52, the assessee claimed a sum
of Rs. 1,29,214/- which was shown in the profit and loss account and
the balance sheet of the company for the year ending 31-3-1951 as a
loss in the dealing of shares of M/s. Titagarb Paper Mills Ltd.
This
daim was alJowed by the Income Tax Officer.
According to the TriB
bunal, this would show that the assessee bad been buying and selling
shares even though as an isolated atlventure in the nature of business.
The High Court has not upset this finding, but bas only said that this is
an isolated transaction.
That apart, in the same year, a sum of
Rs. 6,30,000/- was debited to the profit and loss account on devaluation of the sb&res of M/s. Pilani Investment Corporation.
Such a
debit was permissible only on the footing that the shares constituted the
C
stock in trade of the assessee. lt is no doubt true that the Department
did not allow this claim.
But that was on the basis that the claim that
the shares have fallen in value was not proved to the satisfaction of the
Income Tax Officer, and not on the basis that the shares were not held
as stock in trade as the High Court wrongly thought.
The Tribunal
also referred to the resolutions passed by the oassessee autb0rising one
of its directors to purchase and sell the shares in the Rayon Company.
D
The finding of the High Court that the clauses of the Memorandum of
Association viz., clauses 10, 12, 13, 28 and 29 do not authorize the
company to acquire and sell shares as business has no relevance in
view of the aforesaid resolution of the assessee and of the fact that it
had been dealing in shares in a commercial spirit as is evident from
its claim for loss in dealings in the shares of M/s. Titagarh Paper Mills
Ltd. and devaluatio',1 of shares of M/s. Pilani Investment Corporation
E
on the basis that they had fallen in value.
F
G
H
Secondly, the Tribunal said that from 1947 to 1956, no dividend
had been declared by the Rayon Company and that the money which
went into the purchase of these shares was borrowed by the assessee.
In other words, the view of the Tribunal was, it was with borrowed
funds that the assessee purchased the shares. It is no doubt true that
there was no evidence to show that the money was specifically borrowed
for the purpose of buying shares.
But there was evidence before the
Tribunal for its finding that the liabilities of the assessce exceeded its
assets.
The finding, therefore, that the shares were purchased with
borrowed funds on which the assessee woas paying interest, was a finding supported by evidence.
The reasoning of the Tribunal that it is
most improbable that the assessee would be investing borrowed money
on which interest would have to be paid in shares which yielded no
dividend, was correct.
We cannot say that this was not a relevant
circumstance for the Tribunal to toake into consideration for coming to
the conclusion that the transaction was an adve'ature in the nature of
business.
Looking into all the circumstances, the Tribunal negatived
the case of the assessee that it had invested its funds with a view to earn
dividend.
The c•ase of the assessee throughout was that the purchase of the
shares was by way of investment and the sale was forced by necessity
because the creditors were pressing for repayment of the loan.
The
/
134
SUPREME COURT REPORTS
(1976] 1 S.C.R.
Tribunal found that the shares were not sold to liquidate the debts of
the assessee as the balance sheet as on 21-3-1956 showed that the
proceeds were kept -as liquid cash in the United Commercial Bank Ltd.
As already stated, the main reason why the High Court came to a
different conclusion, is stated as follows in the judgment :
" .... Undoubtedly, there are some elements which are
contra-indicative of i11vestment but there are other considerations which detract from their value as elements indicating an
adventure in the nature of trade, the main being, that . the
assessee company, which is controlled by the Birlas, purchased
the shares with a view to assisting a sister company controlled
by the same persons; and not to embark upon a venture in
the nature of trade."
At no time had the assessee a case that the shares were purchased
with a view to help a sister company· controlled by the Birlas.
No
such case was set up by the assessee either before the Income Tax Officer or the Appellate Assisvant Commissioner; nor was it urged before
the Appellate Tribunal.
Nowhere in the statement of case or the supplementary statement of case prepared by the Tribunal ano filed in the
High Court was there a'.1y finding on the question.
The whole conclusion of the High Court is based on unwarranted assumption of facts
which must have been· taken from the argument of the assessee before
the High Court.
The danger of failing to recognize that the jurisdiction of the High Court in these matters is only advisory and
that
conclusion of facts are conclusioias on which the High Court is
to
exercise the advisory jurisdiction is illustrated by this case.
Mr. Chagla for the respondent contended that the only question to
be asked and answered is : What was the dominant intention of the
assessee when it pnrd1ased the shares ? If the domiaat>t intention was
to carry on an adventure in the nature of business, the profit
can
be taxed; otherwise not.
In other words, the question is whether the
assessee purchased the shares in a commercial spirit with ·a view
to
make profit by trading in them.
The Tribunal found, after taking into accom1t all the relevant circumstances that the dominant intention of the assessee was to make profit by resale of the shares and not to
make an investment.
The finding that loss or profit is a trading loss or profit is primarily
a finding of fact, though in reaching that finding the Tribunal has to
B
c
D
E
F
apply the correct test laid down by law When we see that the Tribunal
G
has considernd the evidence on record and applied the
correct test,
there is no seep" for interference with the finding of the Tribunal (see
C. I. T. v. Ashoka Marketing Co.(').
We do not think! that the High Court was right in interfering with
the judgm~at of the Tribunal.
In the result we reverse the judgment
of the High Court and allow the appeal with costs.
P.B.R.
Appeal 1•ilowed.
(1) [t972] 83 I. T. R. 439.
H
•