# 4 52 RAMESHW AR PRASAD BAGLA v. COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW

- **Citation:** [1973] 2 S.C.R. 452
- **Court:** Supreme Court of India
- **Decided:** 1972-09-27
- **Bench:** K. S. Hegde, P. Jaganmohan Reddy, I. D. Dua, H. R. Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/4-52-rameshw-ar-prasad-bagla-v-commissioner-of-income-tax-u-p-lucknow-5864
- **Pages:** 8

## Headnote

Indian Jncon1e Tax Act, 1922, Sec. 66(2)-Powt•rs of High Court
and Supren1e Court nut appellate hut 011/y advisory.
Sec. 10, Sec. 12, (b) ll'hctlu•r surplus realised on the sale of shares
originally hou;.:ht for the contrul of the Co111pany and obtaining nianaging·
axency, is lit1hle to tax ar _apital Rains or as profit ott sale of shares.
The appcllant-a<Sessec is a partner in A. & Co. Managing Agency
oi one textile Mill was assigned by the
Managing Agents
(S. & C9.) to
A. & Co. for consiJcration of huying large nun1bcr of shares and cash.
·rhc appellant bought 31,250 shares.
An equal nurnhcr of shares \\'as
iransfcrrcd in his favour by h.s hrothcr.
In 1946, the appellant sold
43,700 shares resulting in the profit of Rs. 1,51.927. Before the income
Tax Officer the appellant's content:on was that the surplus Y.'as in the
natur~ of capital gains.
The J.T.O. hoY.·cver, held that the amount y.·as
liable to taxation u/s 10 of the Act as profits on the sale 0f share~. The
tribunal remanded the case to the l.T.O.
The appeal along with
the
remand report v.·as plt.11.:cd he'iorc the
Tribunal
for hca ing.
After
carefully considering al! the evidence the ·rrihunal heh.! th:.i.t the shares
\\'CfC purchased not 'as stuck-in·tra<le hut for securing the
managing
agency and co:itrol of the company. The Tribunal further held that the
surplus on sale of 5harcs is not incon1e y.·hich is liabh: to income tax under
sec. IO.
Thereafter, the Tribunal, on the High Court's direction dre\v
up a statement of case u/s 62 (2).
The High Court reversed the findings of the Tribunal and hclJ against the appellant.
HELD :
There \\'as enough m.itcrial a:id evidence referred to by
the Tribunal \\'hilc recon.ling its finding that the shares in question had
been purchased by the asscssce with a view to acquire the manz.ging
agency and control of the textile mill anJ
that the
shares did
not
constitute stock-in·tradc of the assessce.
It is for the Tribunal to decide
the question of fact and the High Court in a reference u/s 66 of the
Act cannot go beh\nd the Tr;bunal's finding of fact.
The High Court
can only lay down the law applicable to the facts of the ca<;e found by the
Tribunal. The High Court and the Supreme Court. in an appeal ag~;nst
the Judgment of the High Court, in a reference u/s 66 of the Act are
Flot COI'Mitituted courts o'f appeal.
These courts only exercise advisory
jurisd:ction in such references.
Only in case Y.'here the finding is not
based on any relevant evidence or is based on conjectures or suspicion,
a qucs~·ion of Jaw is raised and interference with the finding of facts is
permissible.
The High Court was not justified in
setting . aside
the
finding of fact in the instant case. (457 CJ
On facts we arc of the opinion that the profit made by the sale of
shares constituted capital gain chacgeable to income tax u/s 12 (b).
Indeed it was the prayer of the assessee himself in his letter dated March
30, 1949.
Ra1nnarain Sons (P\'t.) Ltd. v. Con1111issioner of !nC0111e-tax, [1961)41
l.T.R. 534 relied on. ·
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
R: P. BAGLA \', C.I.T, (Khanna, J.)
453
CIVIL APP ELLA TE JURISDiCTION : Civil Appeal No. 1718 of
1969.
Appeal by special leave from the judgment and order dated
February 20, 1967 of the Allahabad High Court in Misc. Case
No. 561 of 1963.
Bhagirath Das, H. K. Puri, S. K. Hirajee and S. K. Dhingra,
for the appellant.
S. Mitra, -B. D. Sharma and R. N. Sachthey, for the respondent.

## Text

4 52
RAMESHW AR PRASAD BAGLA
v.
COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW
September 27, 1972
(K. S. HEGDE, P. JAGANMOHAN REDDY, I. D. DUA AND
H. R. KHANNA, JJ.]
Indian Jncon1e Tax Act, 1922, Sec. 66(2)-Powt•rs of High Court
and Supren1e Court nut appellate hut 011/y advisory.
Sec. 10, Sec. 12, (b) ll'hctlu•r surplus realised on the sale of shares
originally hou;.:ht for the contrul of the Co111pany and obtaining nianaging·
axency, is lit1hle to tax ar _apital Rains or as profit ott sale of shares.
The appcllant-a<Sessec is a partner in A. & Co. Managing Agency
oi one textile Mill was assigned by the
Managing Agents
(S. & C9.) to
A. & Co. for consiJcration of huying large nun1bcr of shares and cash.
·rhc appellant bought 31,250 shares.
An equal nurnhcr of shares \\'as
iransfcrrcd in his favour by h.s hrothcr.
In 1946, the appellant sold
43,700 shares resulting in the profit of Rs. 1,51.927. Before the income
Tax Officer the appellant's content:on was that the surplus Y.'as in the
natur~ of capital gains.
The J.T.O. hoY.·cver, held that the amount y.·as
liable to taxation u/s 10 of the Act as profits on the sale 0f share~. The
tribunal remanded the case to the l.T.O.
The appeal along with
the
remand report v.·as plt.11.:cd he'iorc the
Tribunal
for hca ing.
After
carefully considering al! the evidence the ·rrihunal heh.! th:.i.t the shares
\\'CfC purchased not 'as stuck-in·tra<le hut for securing the
managing
agency and co:itrol of the company. The Tribunal further held that the
surplus on sale of 5harcs is not incon1e y.·hich is liabh: to income tax under
sec. IO.
Thereafter, the Tribunal, on the High Court's direction dre\v
up a statement of case u/s 62 (2).
The High Court reversed the findings of the Tribunal and hclJ against the appellant.
HELD :
There \\'as enough m.itcrial a:id evidence referred to by
the Tribunal \\'hilc recon.ling its finding that the shares in question had
been purchased by the asscssce with a view to acquire the manz.ging
agency and control of the textile mill anJ
that the
shares did
not
constitute stock-in·tradc of the assessce.
It is for the Tribunal to decide
the question of fact and the High Court in a reference u/s 66 of the
Act cannot go beh\nd the Tr;bunal's finding of fact.
The High Court
can only lay down the law applicable to the facts of the ca<;e found by the
Tribunal. The High Court and the Supreme Court. in an appeal ag~;nst
the Judgment of the High Court, in a reference u/s 66 of the Act are
Flot COI'Mitituted courts o'f appeal.
These courts only exercise advisory
jurisd:ction in such references.
Only in case Y.'here the finding is not
based on any relevant evidence or is based on conjectures or suspicion,
a qucs~·ion of Jaw is raised and interference with the finding of facts is
permissible.
The High Court was not justified in
setting . aside
the
finding of fact in the instant case. (457 CJ
On facts we arc of the opinion that the profit made by the sale of
shares constituted capital gain chacgeable to income tax u/s 12 (b).
Indeed it was the prayer of the assessee himself in his letter dated March
30, 1949.
Ra1nnarain Sons (P\'t.) Ltd. v. Con1111issioner of !nC0111e-tax, [1961)41
l.T.R. 534 relied on. ·
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
R: P. BAGLA \', C.I.T, (Khanna, J.)
453
CIVIL APP ELLA TE JURISDiCTION : Civil Appeal No. 1718 of
1969.
Appeal by special leave from the judgment and order dated
February 20, 1967 of the Allahabad High Court in Misc. Case
No. 561 of 1963.
Bhagirath Das, H. K. Puri, S. K. Hirajee and S. K. Dhingra,
for the appellant.
S. Mitra, -B. D. Sharma and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
KHANNA, J. This appeal by special leave is directed against
the judgment of Allahabad High
Court whereby
that court
answered the following two ques:ions in a reference made to it
under section 66(2) of the Indian Income Tax Act, 1922 (hereinafter referred to as the Act) :
. ·• ( i) Whether there was material for
the finding
that the shares in question were
purchased by
the
assessee with a view to acquire the managing
agency
and the control of the company or the shares constituted
his stock-in-trade '?
(ii) Even if the shares in question did not constitute
the stock-in-trnde of the assessee, whether the p10fit
made on the sale of shares did not constitute capital
gain chargeable to income tax under section 12-B
of
the Act?"
On the first question, the answer of the High Court was that there
was no material for the finding that the shares in question were
purchased by the assessee with a view to acquire the managing
agency and co.1Lol of the company.
It was further held that the
shares constituted the stock-in-trade of the assessee. In view of
the abeve, the High Court held in answer to question No.
(ii)
that the profits made by the sale of shares could not constitute
capital gain chnrgeable to income tax under section 12-B of the
Act.
The matter relates to assessment year 1947-48, the relevant
previous year for which was the Dassera year 2002-2003 corresponding to the period from October 16, 1945 to October 5.
1946.
Rameshwar Prasad Bagla, the assessee-appellant, is a partner
of firm Agarwal & Co. having one-sixteenth share in the firm.
Agarwal & Co.
consisted of six groups of partners,
viz.,
(1)
Morarka Group, (2) Khetan Group, (3; Seksaria Group,. (4)
J
454
SUPREME COURT REPORTS
Poddar Group, (5) Bagla Group, and (6) Kantilal Nahalchand.
The Bagla Group consisted of the assessee and his brother.
M/s E. D. Sassoon & Co. Ltd. were the managing agents of
the India United Mills Ltd.
The latter is a public lilhited company and was engaged in the manufacture of textiles in .Bom~ay.
Large blocks of ordinary and deferred shares m the India Umted
Mills Ltd. were held by M/s E. D. Sas>oon & Co. Ltd. and its
associates.
In 1943 there were negotiations between M/s. E. D.
Sassoon & Co. Ltd. and one of the partners of Agarwal & Co.
Those negotiations resulted in an agreement dated January 26,
1945 under which Mis E. D. Sassoon & Co. Ltd. agreed to assign
the managing agency of the India United Mills Ltd. to Agarwal
& Co. with effect from December !, 1943.
The consideration for
the sale of managing agency was Rs. 57,80,000/-.
Agarwal &
Co. also agreed to purchase 16,80,000 ordinary shares of the face
value of Rs. 10/- each and twenty lac deferred shares of rupee
one each of the India United Mills Ltd.
The total issued shares
of the India United Mills Ltd. were twenty lac ordinary shares of
Rs. 10/- each and fifty lac defe~red shares of rupee one each. The
price for this big lot of shares wcs fixed at Rs. 3,37,20,000 calculated at the rate of Rs. 16/8/- for an ordinary shares
and
Rs. 3 /- for a deferred share.
At the time when the above mentioned large block of shares
of the India United Mills Ltd. was agreed to be acquired, Agarwal
& Co. was not in a position to pay for five lac ordinary shares
involving an outlay of Rs. 82,50,000.
Those five lac shares were
purchased by Ramkumar Shivchandrai of Poddar Group of partners in Agarwal & Co. to the extent of three lac shares.
The
remaining two lac shares were purchased by Khetan Group of
· partners.
The two Groups, viz., Poddar and Khetan Groups,
held the five lac sha;·es on behulf of Agarwal & Co. till 1944. The
understanding with Poddar and Khetan Groups was
that those
shares would be taken up by the partners of Agarwal & Co. at the
same price.
In January 1945 the aforesaid five
lac ordinary
shares were taken over by Agarwal & Co. from Poddar and Khetan Groups.
The assessee appellant was entitled with reference
to his holding in Agarwal & Co. to 31,250 shares, i.e.
one-sixteenth out of the five lac shares.
The assessee's brother was likewise entitled to an equal number of shares out of those five lac
shares.
The assessee's brother relinquished his rights in the said
31,250 shares in favour of the assessee, as a result of which the
assessee obtained 62,500 shares in the India United Mills Ltd.
The shares were paid for at the rate of Rs. 16/8/- per ~hare in
1945.
These shares had earlier stood in the name of Bombay
Trust Corporation which was a company formed by Sasoon Group
of companies.
After the managing agency of the India Un.ited
A
B
c
D
E
G
H
' •
R. P. BAGLA V, C.I.T. (Khanna, J.)
455
A~ Mills Ltd. had been taken over by Agarwal & Co. on December
I, 1943, those shares were transferred between March and August
1944 in the name of various persons residing in Jaipur.
Those
persons transferred the said shares in favour of the asscssee on
fonuary 30, 1945.
The assessec borrowed rupees ten lacs from
B
c
D
E
F
G
H
Agarwal & Co. in order to pay for the price of those shares.
Out of 62,500 shares acquired by
the assessee,
he sold
43,700 shares during the period from April 3, 1946 to July 19,
1946 in seven lots.
The rest of the shares remained in the possession of the assessee during the relevant ye~r. The sale
of
43,700 shares resulted in a profit of Rs. 1,80,220 to the asses~ee.
The sale proceeds were thereafter utilised by the assessee for purr.hasing shares of Swadesh Mills Ltd., Kanpur.
The assessee did not disclose the profit of Rs. 1,80,220 in the
turn.
In response to a notice issued by the income tax officer,
the assessee wrote Jetter dated March 30, 1949 in the course of
which he stated :
"I have already brought to your honour's notice
ir. the course of assessment proceedings and would
like to confirm that I had certain share transaction in which there has been appreciation to the
tune of Rs. 1,51,927/1/11. Since it is common ground
that the assessee is not dealing in shares as business the said appreciation in capital should have been
normally disclosed as capital gain in the return but I
regret that the amount could not be shown, so the return
already filed may be treated as amended accordingly."
The amount of Rs. 1,51,927/1/11 ref11rred to in the assessee's
letter included the surplus realised as a result of the sale of 43,700
shares of the India Unitd Mills Ltd.
The income tax officer rejected the plea of the assessee that
the profit made by the sale of 43, 700 shares of the India United
Mills Ltd. was not profit liable to be taxed as such, but was only
capital gain.
In the previous year with which we are not concerned, the assessec had not been treated as a dealer in shares.
The income tax officer held the assessee to b~ a dealer in shares
during the relevant year on the ground that the assessee had·
entered into share transactions on a very exh:nsive "·ale.
The
income tax officer accordingly brought to
tax
the
sum
of
Rs. 1,80.220 under section IO of the Act as profits on the sale of
shares.
On appeal the Appellate Assistant Commissioner held
that 62.500 shares were stock-in-trade.
The finding of the income
tax officer was substantially upheld.
Some relief was granted by
reducing the taxable income.
On further appeal by the assessec·
J
4 56
SUPREME COURT REPORTS
(1973) 2 S.C.R.
to the Income Tax Appellate Tribunal, the matter was remanded
to the inc0me tax officer on May 1,
1954.
The income tax
officer thereafter submitted a repo1t on June 12, 1956. The appeal
along with the remand report of the income tax officer was put up
before the Tribunal for hearing.
The Tribunal, as
per order
dated September 26, 1956, held that the excess realised from the
sale of shares was not income which was liable to income
tax.
Jn coming to this conclusion the Tribunal observed :
"A large number of shares had to be purchased by
Agarwal & Co. as a result of an agreement with the
Sassoons.
Agarwal & Co. was interested in the managing agency of some mills also which came to them as a
result of the same agreement.
We think that on the
facts produced the purchase of
the
shares
by
the
asses,see was not with a view to deal in those shares but
with a view to obtain the managing agency and control
of the company.
It may also be noted here rhat if the
price ruling at tl~e time of the transfer was to be taken
into account, perhaps, t)lere is no profit.
The profit
has been shown as the iransfer is made at the price at
which the shares were originally sold by the Sassoons.
We think that on the facts before the Income-tax auth'orities the assessee's holding of shares in the India United
Mills Ltd. was not the purchase of a stock in trade as
held by the Department.
We accept
the
assessee's
appeal and direct that the excess realised on the sale of
these shares is not income which is liable to
incometax."
An application was thereafter filed on behalf of the
respondent
for s·tating a case to the High Court, but that application was
rejected.
The respondent then approached the High Court under
section 66(2) of the Act.
The High Court thereupon directed
the Tribunal to draw up a statement of case and refer the questions reproduced earlier to the High Court.
After the questions
were referred, the High Court gave answers to the questions, as
mentioned at the commencement of this judgment.
We have heard Mr. Bhagirath Das on behalf of the appellant
and Mr. Sukumar Mitra on behalf of the respondent and are of
the opinion that the judgment of the High Court cannot be sustained.
The question with which the High Court was concerned
was whether there was material before the Tribunal for arrivin n
at the finding that the shares in question had been purchased by
the assessee with a view to acquire the managing agency
and
control of the India United Mills Ltd. Perusal of the judgment of
the High Court shows that the High Court did not discuss
this
A
B
c
n
E
F
G
H
B
c
D
E
G
H
R. P. BAGLA v. C.I.T, (Khanna, I.)
H7
aspect of the matter.
On the contrary, the High Court proceeded
straightaway to deal with the matter as if it had itself to arrive at
an independent finding on the point as to whether the shares in
question had been purchased by the assessee with
a view to
acquire the managing agency and control of the company.
This
upproach of the High Court was wholly erroneous and not warranted by law.
It is for the Tribunal to decide questions of fact,
and the High Court in ·a reference under section 66 of the Act
cannot go behind the Tribunal's findings of
fact.
The
High
Court can only lay down the law applicable to the facts found by
the Tribunal.
TI1e ·High Court and the Supreme Court, in
an
<lppepl against the judgment of the High Court given in a reference under section 66 of the Act, arc not constitut~d courts or
appeal against the order of the Tribunal.
These
courts only
exercise advisory jurisdiction in such references.
The High Court
in a reference under section 66 of the Act can, however, go into
the question as to whether the conclusion of the Tribunal on a
question of fact is based upon relevant evidence. If the High
Court finds that there is no such evidence to support the finding
of fact o: the Tribunal, this circumstance would give rise to a
question of law and can be agitated in a reference.
It is
also
well established that when a Tribunal acts on material which
is
irrelevant to the enquiry or considers material which
is
partly
relevant and partly irrelevant or bases its decision partly on conjectures, surmises and suspicions and partly on evidence, then in
such a situation an issue of law arises and the finding of the Tribunal can be interfered with.
The finding may also be interfered
with if it be found to be so unreasonable that no person acting
judicially and properly instructed as to the relevant law could have
arrived at it.
None of the circumstances justifying interference
with the finding of fact of the Tribunal has been shown to exist in
this case.
In the absence of any such circumstance, the
High
Court in our view was not justified in interfering with the finding
of fact of the Tribunal.
The fact that the High Court on appreciation of evidence would have arrived at a conclusion of fact
different from that of the Tribunal did not warrant interference
with the finding of the Tribunal.
·
The Tribun!J.l in arriving at the conclusion that the purchase
of the shares in question by the assessee was with a view to obtain
the managing agency and control of the India United Mills Ltd.
and that those shares were not purchased as stock-in-trade referred to a number of circumstances.
It was found by the Tribunal
that the shares in question were out of the lot sold by Sassoons to
~garwal & Co.
It was also found that the shares had been
transferred to the assessee at the original price at which these
shares ha~ .been sold ~y the Sasoons and not at the price which
was prevallmg at the time of transfer.
The Tribunal further
.J
458
SUPREME COURT REPORTS
(1973) 2 S.C.R,
found that 62,500 shares represented the portion of the assessee
in the total number of shares originally purchased by Agarwal &
Co.
In the light of those findings, the Tribunal recorded its conclusion in the paragraph which has been reproduced earlier. The
above conclusion of the Tribunal, in our opinion, was based upon
relevant material and could not be interfered with in a reference
under section 66 of the Act.
The High Court in arriving at the conclusion that the shares
in question had been purchased not with a view to obtain the
managing agency but as a stock-in-trade has referred to the fact
that the asscssee took loan for the purchase of those shares and
subsequently transferred 43,700 shares out of 62,500 shares. This
circumstance as observed by this Court in the case of Ramnarain
Sons (Pr.) Ltd. v. Commissioner of Income Tax(') would not by
itself go to show that the purchase of shares was not to facilitate
the acquisition of the managing agency.
In that case the appellant company was a dealer in shares and securities and carried on
business as managing agents for some companies.
In order to
acquire the managing agency of a textile-mill, the appellant company purchased from Sassoon David and Co.,
who
were
the
managing agents thereof, 1,507 shares of the mill at Rs. 2,321-8-0
per share at a time when the market p~ice of the shares was
Rs. 1,610.
The remaining 1,000 shares of the
mill
held
by
Sassoon David and Co. were acquired by the directors
of
the
appellant company.
Two months later the appellant
company
sold 400 of those shares at a loss of Rs. 1.78,438.
The said loss
was claimed as a trading loss.
Question arose in this
context
whether the purchase of shares could be regarded as acquisition
of stock-in-trade. Dealing the above question, this Court observed :
"By purchasing the shares which facilitated acquisition of the managing agency, a capital asset was acquir·
cd and merely because the managing agency cculd be
utilised for earning profit, the acquisition of the shares
which led to the acquisitio~ of the managing
agency
could not, tn the al,scncc of an intention to trade in
th"sc shares, be regarded as acquisition
of
stock-intrade of the share business.
The appellants had
undoubtedly purchased the shares of t~c Dawn Mills with
money borrowed at interest, but that circumstance by
itself docs not evidence an intention to trade
in
the
shares.
Nor is the fact that the appellants are dealers
in shares and their nwmorandum of association authorises them to carry on busine'5 in shares of any importance in the circumstances of the case."
(I) [1961] 41 l.T.R. 51~.
A
n
c
D
E
F
G
......
II
A
B
c
D
E
R. P. BAGLA V. C.I. r. (Khanna, I.)
It was further observed :
"Subsequent disposal of some out of the shares by
appellants could 1lso not convert what was a capital
acquisition into an acquisition in the nature of trade."
~59
We are, therefore, of the view that the answer given by the
High Court to question No. ( l) was not correct.
In our opinion,
there was material for the finding that the shares in question had
been purchased by the assessee with a view to acquire the managing agency and control of the India United Mills Ltd. and that
the shares did not constitute the stock-in-trade of the assessee.
So far as the second question is concerned, we find that it is
the common case of the partb that if the shares in question are
held to be m1t stock-in-trade of the assessee, in that case the profits made on the sale of those shares would constitute capital gain
chargeable to income 1;1.~ under section 12-B ot the Act.
Indeed,
this is what was prayed for by the assessee in his letter dated
\1arch 30. 1949.
Lookin~ to the facts also. we
arc of the
opinion that the pwfit made on the sale of those shares constituted
capital gain charge1bk to income tax under section 12-B of the
f\ct.
We would answer question No. (ii) accordingly.
We, therefore, accept the appeal. set aside the judgment of
the High Court and discharge the answers given by it to the questions referred and substitute the answers indicated above.
The
appellant sbll be entitled to his costs of this Court as well as those
in the High Court.
S.B.W.
12 -lA'JSSnpCI/73
/