# CXJlfISSIOllER OF INdate them; (2) that the shares that were acquired by the -t asses see were only right shares issued by the company to its existing shareholders; (3) that the assessee had to meet huge personal expenses and tax liability in the relevant accounting periods; (4) that the assessee had an overdraft account and he wanted to keep the said overdraft account within reasonable limit; (5) that the assessee wanted to nurse his investments in the company; 1'"'1 ( 6) that the assessee had to and was forced and compelled by circumstances to sell some of the \." shares acquired by him. In the premises, the assessee 's contention was that the sales of the said shares were neither effected voluntarily nor with- a view to make any profit nor under a profit making scheme, but were effected under compelling circU11Btances and as no assessee could be a trader by compulsion, the assessee was not a trader in respect of these • ~shares. Two members namely Judicial Member as well as Accountant Memb ## Text _Characters 0–39,983 of 67,472. This is a partial read: ask again with offset=39983 for what follows._ A B c D E F G H 1072 CXJlfISSIOllER OF INdate them; (2) that the shares that were acquired by the -t asses see were only right shares issued by the company to its existing shareholders; (3) that the assessee had to meet huge personal expenses and tax liability in the relevant accounting periods; (4) that the assessee had an overdraft account and he wanted to keep the said overdraft account within reasonable limit; (5) that the assessee wanted to nurse his investments in the company; 1'"'1 ( 6) that the assessee had to and was forced and compelled by circumstances to sell some of the \." shares acquired by him. In the premises, the assessee 's contention was that the sales of the said shares were neither effected voluntarily nor with- a view to make any profit nor under a profit making scheme, but were effected under compelling circU11Btances and as no assessee could be a trader by compulsion, the assessee was not a trader in respect of these • ~shares. Two members namely Judicial Member as well as Accountant Member gave separate but concurrent opinions and came to the conclusion that the assessee was a dealer in \-shares and not an investor. The Tribunal held : (1) The 1 assessee was the Chairman of the Board of Directors of the said company. (2) The said company had ever since its inception expanding its business and llllking good profits. (3) Its capital had increased and, therefore, right shares were offered to the existing shareholders. ( 4) The assessee had a ;,, substantial holding of equity shares in the COll(lBnY• (5) It "- was not obligatory on the assessee to acquire right shares. T (6) In fact, the assessee was indebted to the bank and was having an overdraft account on which he was paying interest. (7) Not only right shares were sold by the assessee, but he A B c D E F G H A 1074 SUPREME COURT REPORTS [1986] 2 S.C.R. had also sold some of the original equity shares held by him.~ On a reference to the High Court, the High court answered in favour of the assessee and held that the assessee was not a • dealer in shares. Renee the appeal by certificate. Dismissing the appeals and the connected special leave B petitions, the Court c D E F G H HELD: 1. The jurisdiction conferred on the High Cour~ under section 66(1) of the Act of 1922 equivalent to section 256 of the Act of 1961 was limited to entertaining references involving questions of law. If the point raised on reference related to the construction of a document of title or to the interpretation of the relevant provisions of the statute, iti is a pure question of law and in dealing with it, though the High Court might have due regard for the view taken by thet Appellate Tribunal, its decision would not be fettered by the Tribunal's view. The High Court was free to adopt such construction of the document or the statute as appeared to it reasonable. Where the point sought to be raised on a reference waa a pure question of fact, the finding of fact recorded by the Tribunal 1111st be regarded as conclusive in proceedings under reference. If however, such a finding of fact was based on an inference drawn from primary evidentiary facts proved in.~ the caae, its correctness and validity were open to challenge in reference proceedings withiil however narrow limits. The aasessee or the revenue could contend that the inference had been drawn on considering inadmissible evidence or after excluding admissible and relevant evidence and if the High Court was satisfied that the inference was the result oft' improper admission or exclusion of evidence it would be justified in examining the correctness of the conclusion. It_f lllllY also be open to the party to challenge a conclusion of fact drawn by the Tribunal on the ground that it was not supported by any legal evidence or that the impugned conclusion drawn froa the relevant facts was not rationally possible and if such a plea was established, the Court might consider whether the conclusion was not perverse and should not, therefore be set aside. However, it was within those narrow limits that the conclusions of fact recorded by the r Tribunal could be challenged in a reference to the High Court. Such conclusions could never be challenged on the ground that these were based on misappreciation of evidence. A conclusion - C.I.T. v. H. HOLCK LARSEN 1075 reached by the Tribunal on the ground that it is a conclusion /on a question of mixed law and fact, is no doubt based upon the primary evidentiary facts but its ultimate form is A ~, determined by the application of relevant legal principles. The need to apply the relevant legal principles tends to confer upon the final conclusion its character of a legal B conclusion. In dealing with findings on questions of mixed law and fact the High Court, however, has to accept the findings of the Tribunal on the primary questions of facts; but it is 1£>pen to the High Court to examine whether the Tribunal had applied the relevant legal principles correctly or not; and in ~ that sense, the scope of inquiry and the context of the juris- --" diction of the High Court in dealing with such points was the C same as in dealing with pure points of law, and not beyond tthat. (1085 B-11; 1086 A-<:) - t 1. 2 What are the characteristics of the business of dealing in shares or that of an investor was a mixed question of fact and law. What is the legal effect of the facts found by the Tribunal and whether as a result the assessee could be termed a dealer in shares or an investor was a question of law. In between the domains occupied respectively by question of fact and law, there is a larger area, in which both these questions run into each other, forming, so to say conclaves •within each other. These are mixed question of law and fact. The instant case is one of question of law and fact. (1088 F-G; 1089 I>-E) D E 1.3 Where a person in selling his investment realised an enhanced price, the excess over his purchase price was not - 1'profit assessable to tax as incOlm!, but it would be so if what F was done was not a mere realisation of the invest11ent but an +act done for uking profit. The distinction between the two 1types of transactions is not always easy to make. Whether the transaction is of one kind or the other depends on the question whether the excess is an enhance11ent of the 'ialue by realising a security or a gain in an operation of prof it-makG ing. The assessee llight invest his capital in share~ wilh the ) intention to resell these if in future their sale bring in a higher price. Such an investment though mtivated by a i possibility of enhanced value, did not necessarily render the investment a transaction in the nature of trade. In the pNJlises the totality of all the facts will have to be borne H in mind and the correct legal principles applf.ed to these. If A B c D E F G H 1076 SUPREME COURT REPORTS [1986] 2 s.c.R. all the relevant factors have been taken into consideration and there has been no misapplication of the· principles of law~ then the conclusion arrived at by the Tribunal cannot be interfered with because the inference is a question of law, if such an inference was a possible one, subject, however, that all the relevant factors have been duly weighed and considered by the Tribunal the inference reached by the Tribunal should not be interfered with. [1093 D-H] J.P. Harrison (Watford) Ltd. v. Griffiths (H.M • .+ Inspector of Taxes), 40 Tax Cases 281 at 295-296; Leeming v. Jones [1930] 15 T.C. 333 at 357; Stanley (Surveyor of Taxes) v. The Gramphooe and Typewriter, Ltd., 5 Tax Cases 358; Californian Copper Syndicate (Limited and Reduced) v. Harris J, (Surveyor of Taxes), 5 Tax Cases 159 at 166; eo..tssioners of l Inland ReveDle v. Lysaght:, [1928] A.C. 234 = 13 Tax Cases 511 (at page 247 of Appeal Cases); and Edwards (Inspector of+ Taxes) v. Baristow and Another, 3 W.L.R. 410 s 28 I.T.R. 579 quoted with approval. G. Venkatasval. Naidu & Co. v. Comlssioner of Income-Tax, 35 I. T. R. 594 S, C. ; Oriental InvestEnt Co. Ltd. v. eo..lssioner of Income Tax, Bollbay, 32 I.T.R. 664 S.C.; Sree Meenakshi Mills Ltd. v. eo..lssioner of Income Tax Madras, 31 I.T.R, 28 S.C.; Saroj Kumar Mazm.lar Vol ea.l.ssioner of IncOE Tax, Vest Bengal, 37 I.T.R. 242 S.C.; llamnrain Sons (Pvt.) Ltd. v. eo..tssioner of Income-tax, llollbay, 41 I. T.R. 5311 S.C.; Jm&i Ram Bahadur Rall v. eo..tssioner of lncoE-t:u, Calcutta, 57 I. T. R. 21 S. C.; Miss Ilmn D!ldabhoy Kapadia v. eo..tssioner of Income-tax, Bombay, 63 I. T.R. 651 S.C.; Dslhousie Invest11ent Trost Co. Ltd. v. t' ea.l.ssioner of Income Tax (Central), Calcutta, 68 I.T.R. 486 s.c.; P.M. Moh..-d Meerakhan v. eo..tssioner of Tncome-t:u,_J Kerala, 73 I.T.R. 735 s.c.; and Raja Bahadur Kamkhya llarain{ Singh v. eo..tssioner of Income-Tu, Bihar & Orissa, 77 I.T.R., 253 S.C. referred to. 2. Section 81 of the Companies Act, 1956 provides that if a company proposes to increase its subscribed capital by allotment of further shares, such shares should be offered to the existing share-holders of equity shares and the offer t should be deemed to include a right to renounce the shares, The right to receive the new shares is embedded in the old .. - - C.I.T. v. H. HOLCK Ll\RSEN 1077 shares. Therefore the moment, the issue of right shares are f·announced the original share was bound to depreciate because a larger number of people participate in the existing capital. Right shares were not acquired by the assessee as a matter of free choice. The assessee acquired those shares if the assessee did not do so, his capital would erode. Further, as the facts disclose, he had to find so lf:lch more money in ordea to acquire the shares and it was not always prudent to permit the overdraft account to swell. The true object in this case 1'was to prevent depreciation in the value of the shares investment. The assessee also renounced some of his rights to get the right shares and thereby entered into these transactions to nurse his investments. In the background of the lcorrelation of several factors, in the instant case, the 1 action of the assessee was like a prudent investor and not of ia plunger in the waters of trade. [1096 E-G; 1097 B; 1098 F; . · 1099 F] 3. Consideration of all relevant facts involves appreciation of all the facts in their proper perspective. If that is not done it cannot be said that there has been consideration of all relevant factors. The Tribunal did not consider the relevant factors in their proper perspective and in particular, namely, (i) that the assessee was the Chairman ~of the company and in fact that if he did not participate in buying right shares there might have been adverse effect on the market so far as the shares of the company were concerned; (ii) that he had an overdraft with the Bank; (iii) and that he had to remit money to Denmark for the purchase of his house • • ~And as such the attitude of a person entitled to right shares for judging whether he was a dealer and investor was not viewed in proper dimension but merely noted by the Tribunal \resulting in the non-consideration of a vital factor leading 'to an erroneous inference. The Tribunal in this case has undoubtedly noted the assessee' s contention of nursing the investment. The Tribunal, however, has not considered in its order the actual position as to how then nursing of the investment was necessary. Tribunal thus erred. In that view of ,..l the matter the High Court was justified in interfering with ~the conclusion reached by the Tribunal. There is no reason to interfere with the order of High Court. [1099 D-H; 1100 A-B] CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1954-55 (NT) of 1974 etc. B c [) G 11 1078 SUPREME COURT REPORTS [1986] 2 S.C.R, From the Judgment and Order dated 10th August, 1971 of the Bombay High Court in Income Tax Reference No. 124 of 1963. ~ V. Gauri Shankar and Ms. A. Subhashini for the Appellant. • B S.T. Desai, H. Salve, Ravinder and Ms. A.K. Verma for c D F the Respondent. The Judgment of the Court was delivered by SABYASAC!ll HUKHARJI, J. These appeals by certificate .)ool arise f rr>m the judgment and dee ls lr>n of the High Cr>urt of Bombay date·! 10th August, 1971 in Income Tax Reference No. 124 -1. of 1963. l The question involved in these appeals is famil tar int direct tax laws. The points in controversy are short. But the adjudication is pending for long. Assessment years involved are l 9Sh58 and 1958-59. The High Court disposed of these references on 10th August, 1971 and in 1986 i.e. nearly after ·~ 28 years of the years of assessment we are posed with the question whether in respect of certain transactions in those years the assessee was a dealer or an investor and consequentially whether the income arising from the sale of 't shares by the a·1sc·:;see i'i t0 be tax:ed on rc\l'en:1·~ acc.~1~111t or. capital acc0nnt. The ~·1~sti.on that th~ High Court haler was as follows: t • ''Whether, on the facts and in the circumstances of the case, the assessee was a dealer in sharec; in- -f the accountinS?; periods relevant to the assessment years 1959-bO and 1960-61 ?" - G The said question was referred by the Tribunal to the H High Court at the instance of the asseessee. The asses see, H. Holck Larsen, was a partner in the firm of M/s Larsen & fo,1bo (hereinafter referre·l to as the 'sald t company') upto 1946. On 8th fobruary, l 946/7th February, 1946, that partnership was cr>nverted into a private limited company C.I.T. v. H. HOLCK IARSEN [SABYASACHI MUKHARJI, J.] 1079 , of the same name. In consideration of hts interest in the f firm, the assessee was allotted shares of the company. Against payment of cash, the assessee got 1875 equity shares and against his interest in the partnership firm, he got 53, 486 - equity shares. During the next few accounting years upto the financial year 1953-54, the assessee acquired 2, 994 shares of the said company and sold 1, 550 shares. According to the statement of the case, the purchases and sales of shares of -# the said company were few and far between upto the financial year 1953-54, but these became larger in number and at close ~ intervals in the next few succeeding years. The chart would indicate the position in this respect. (1) (2) (3) (4) (5) Financial No of Value No. of Sale year shares (Rs.) Shares Price ending acquired sold (Rs.) 31-3-1955 ---- ----- 4,600 51,173 31-3-1956 6, 111 61,110 13,955 1,88,433 31-3-1957 6,102 61,020 7,661 1,24,406 31-3-1958 1,256 12,560 5,050 63,721 31-3-1959 5,500 55,000 5,200 87,810 • 31-3-1960 11,000 1, 11,000 10,400 2,45,732 During the years mentioned in the chart, the assessee had acquired 29, 969 shares of the said company and sold 37,366 ·1 shares thereby making a profit of Rs. 1,65,581. Besides purchasing and selling equity shares of the said company, the assessee had also dealt in preference shares of the said 1-:company. The assesree had sold shares of Andhra Cement Co. in the financial year 1954-55, made purchases of shares of S.C.C. and I.C.C. in the years 1955-56, 1956-57 and 1958-59 and also of shares of India Cement Co. and National Carbon in 1955-56 and also sold shares of Guest Keen Wi 11 iams and Indian Cement in 1958-59. During all these years the purchases and sales of ,; equity shares of the said company were more marked than the ~ purchase and sale of other shares. Besides the sale of equity f shares of the said company and shares of other companies stated above, the assessee had also sold some of his original shares of the said company held by him. A B c D E F G H A. 1080 SUPREME COURT REPORTS [1986] 2 s.c.R. On these facts the assessee contended before the Income Tax Officer that the assessee was only an investor and not a~ dealer in shares but this contention was rejected by the Income Tax Officer and the A.ppellate A.ssistant Corrnnissioner. Aggrieved by the said decision of the Appellate A.ssistant B Commissioner, the assessee filed second appeal before the Tribunal. Before the Tribunal it was contended on behalf of the asses see (1) that the assessee never purchased equity shares of the said company from any outsider or any stranger~ except in a few cases from close friends or from members of the staff just to accommodate them; (2) that the shares that c were acquired by the assessee were only right shares issued by the company to its existing shareholders; (3) that the assessee had to meet huge personal expenses and tax liability in the relevant accounting periods; (4) that the assessee had an overdraft account and he wanted to keep the said overdraft account within reasonable limit; (5) that the assessee wanted o to nurse his investments in the company and (6) that the assessee had to and was forced and compelled by circumstances to sell some of the shares acquired by him. In the premises, the asses see' s contention was that the sales of the said shares were neither effected voluntarily nor with a view to make any profit nor under a profit making scheme, but were E effected under compelling circumstances and as no assessee~ could be a trader by compulsion, the assessee was not a trader in respect of these shares. The Tribunal rejected the said contentions. The Tribunal held: (1) The assessee was a Chairman of the Board of Directors of the said company. (2) The said company had ever since its inception expanding itst< F business and making good profits. (3) Its capital had increased and, therefore, right shares were offered to the existing shareholders. (4) The assessee had a substantial.J holding of equity shares in the company. (5) It was not obli-1 gatory on the assessee to acquire right shares. (6) In fact, the assessee was indebted to the bank and was having an overG draft account on which he was paying interest. (7) Not only right shares were sold by the assessee, but he had also sold some of the original equity shares held by him. ~ The Tribunal was of the view that as the Chairman of thef Board of Directors of the said company, the assessee knew the 1-1 financial position of the company and also knew that the C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J.] 1081 \ company's business was expanding and flourishing, and yet he ~ sold away the shares of such a company held by him. The sale, according to the Tribunal, must have been to earn profits. The frequency of the acquisition of right shares and the sales in large numbers in quick succession, according to the Tribunal, established the motive to make profit and that all the dealings in shares were part and parcel of a profit making scheme. ·t The Tribunal noted that the Appellate Assistant Commissioner had found that in some years, the income of the assessee was much more than the expenses he had to meet and notwithstanding that fact, the assessee had sold some shares. t The Tribunal further noted that the correctness of this . finding was neither challenged before the Tribunal nor . anything established to the contrary. According to the -tTribunal, therefore, if the assessee was under no obligation to acquire right shares, there was no necessity for him to apply for and obtain right shares except to make prof its on their sales. According to the Tribun!l, it is far from the conduct of a prudent and reasonable man like the assessee to expect him to sell away his capital assets to meet the recurring personal expenditure. The frequent acquisition of right shares at par coupled with the fact that even some of - 1' the original holdings were sold, were against the assessee's intention of nursing his investments according to the Tribunal. The Tribunal noted that according to the Appellate , :.\'Assistant Commissioner, such an activity was 'self-destructive purpose by self-cancelling activity'. The Tribunal was in agreement with the view of the Appellate Assistant \Commissioner and came to the conclusion that it was the idea of huge profits that the assessee was making by sale of shares of the said company that compelled him to acquire right shares frequently and in large numbers notwithstanding the fact that he was indebted to the bank and he was having an overdraft account with it. The facts that the assessee did not sell all > the right shares or that the founder of the company was interested in acquiring right shares or that he did not take ~ all the right shares offered to him because of his financial liability, according to the Tribunal, would not affect the issue. The Tribunal, therefore, came to the conclusion that A B c D • E F G H A B c D E F G H 1082 SUPREME COURT REPORTS [19861 2 s.c.R. the assessee was doing business in the assessment years under 1 consideration. ~ Two members namely Judicial Member as well as Accountant Member gave separate but concurrent opinions for coming to the conclusion that the asses see was a dealer in shares. In his separate or