# M/s. RAMNARAIN SONS (Pr.) LTD v. COMMISSIONER OF INCOME TAX, BOMBAY

- **Citation:** [1961] 2 S.C.R. 904
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Bench:** J. L. Kafur, M. lI:IDAYATULLAH, J. c. SHAH
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-ramnarain-sons-pr-ltd-v-commissioner-of-income-tax-bombay-2106
- **Pages:** 7

## Headnote

lncom. Tax-Assessment-Purchase of shares for acquiring
managing agency rights-Loss incurred in sale of such shares-If of
a capital nature.
The appellants, a private limited company, carrying on
business as brokers, managing agents and dealers in shares and
securities and having as one of their objects the acquisition of
managing agencies, purchased shares of the Dawn Mills at a
rate much higher than the market rate for obtaining the controlling voting right and thereby acquired the managing agency
of the Mills. Later on, they sold some of those shares and
suffered a loss of Rs. 1,78,438. The Income-tax Officer in assessing the taxable income disallowed the loss and the Appellate
' ..
•r
2 S.C.R. SUPREME COURT REPORTS
905
Assistant Commissioner on appeal confirmed that order. The
Income-tax Appellate Tribunal held that the shares did not
become stock-in-trade of the appellants, but since the loss incurred was incidental to their business of acquiring managing
agency, it was allowable as a revenue loss. On reference, the
High Court held that the shares acquired by the appellants
were a capital asset and the loss suffered by the sale was of a
capital nature.
Held, that the High Court had taken the correct view of
the matter and the appeal must fail.
The question whether a transaction is or is not an adventure of the nature of trade has to be decided in the light of the
intention of the assessee judged by the legal requirements associated with the concept o'f trade or business.
Since the shares in question were purchased by the appellants with the intention of acquiring the managing agency and
not in the course of their business as dealers in shares with the
intention of trading in those shares and what was acquired by
such purchase was a capital. asset in the shape of a managing
agency, it could not be said merely because the managing
agency could be utilised for earning profits. that those shares
were stock-in-trade of their share business.
G. Venkataswami Naidu and Co. v. The Commissioner of
Income-tax, [1959] Supp. I S.C.R. 464 and The Oriental Investment Co., Ltd. v. The Commissioner of Income-tax, Bombay, [1958]
S.C.R. 49, referred to.
'
CIVIL APPELL.A.TE JURISDICTION: Civil Appeal No.
698of1957.
Appeal by special leave from the judgment and
order dated August 2, 1956, of the Bombay High
Court in Income-tax Reference No. 1 of 1956.
A. V. Viswanatha Sastri, B. A. Pallcliiwala and
G. Gopalakrishnan, for the appellant.
Hardyal Hardy and D. Gupta, for the respondent.
1960. December 5. The Judgment of the Court
was delivered by
SHAH, J.-The High Court of Judicature at Bombay answered the following two questions referred by
the Income Tax Appellate Tribunal, Bench "B",
Bombay, under s. 66(1) of the Indian Income Tax
Act, 1922:
(1) Whether the acquisition of the managing agency
M /s. Ramnarain
Sons (Pr.) Ltd.
v.
Commissio11er of
Income-tax,
Bombay
Shah ].
1960
906
SUPREME COURT REPORTS
[1961]
of the Dawn Mills Co.,. Ltd., was in the nature of a
"business" carried on by the assessee company?
P.1 /s. Ra»1narain
Sons (I».) Ud.
(2) If the answer to the first question is in the
v.
affirmative, whether the loss suffered by the assessee
Commissioner cf company of Rs. 1, 78,438 on purchase and sale of 400
In&ome-tax,
shares of the Dawn Mills Co., Ltd., being incidental to
Bombay
its business of acquiring the managing agency, was a
Shall].
loss of a revenue nature?,
as follows:
(1) Acquisition of the managing agency was an
acquisition of a capital asset;
(2) The loss in respect of the 400 shares was of a
capital nature.
Against the order of the High Court, this appeal is
preferred with special leave.
The appellants are a private limited company
registered under the Indian Companies Act, 1913, and
carry on business as brokers, managing agents and
dealers in shares and securities. One of the objects for
which the appellants were incorporated was to acquire
managing agencies. The appellants also carried on
business in shares of different comp

## Text

904
SUPREME COURT REPORTS
[1961]
1960
the result that there will not be any evidence ta.ken
Sh .
-.;: Oth
by the committing Magistrate which could be used as
mam v.
"'substantive evidence under s. 288 of the Code. Even
The state of if the prosecution takes that risk, the Magistrate shall
Bombay
exercise a sound judicial discretion under the second
part of sub-s. (4) of s. 207A in forming the opinion
Suhba Rao J. whether witnesses should be examined or not, and .
any perverse exercise of that discretion can always be
rectified by a superior court. But there may be a. case
where the Magistrate can make up his mind definitely
on the documents referred to in s. 173 without the a.id
of any oral evidence and in that event he would be
within his rights to discharge or commit the accused,
as the case may be. In this view, it is not necessary
to express our opinion whether even if the Magistrate
acted illegally in committing an accused without taking any evidence, the said illegality is cured either by
x960
December 5.
s. 537 of the Code or any other section thereof.
In the result, the appeals fa.ii and a.re dismissed.
Appoola dismisse,d.
M/s. RAMNARAIN SONS (Pr.) LTD.
v.
COMMISSIONER OF INCOME TAX, BOMBAY
(J. L. KAFUR, M. lI:IDAYATULLAH and
J. c. SHAH, JJ.)
lncom. Tax-Assessment-Purchase of shares for acquiring
managing agency rights-Loss incurred in sale of such shares-If of
a capital nature.
The appellants, a private limited company, carrying on
business as brokers, managing agents and dealers in shares and
securities and having as one of their objects the acquisition of
managing agencies, purchased shares of the Dawn Mills at a
rate much higher than the market rate for obtaining the controlling voting right and thereby acquired the managing agency
of the Mills. Later on, they sold some of those shares and
suffered a loss of Rs. 1,78,438. The Income-tax Officer in assessing the taxable income disallowed the loss and the Appellate
' ..
•r
2 S.C.R. SUPREME COURT REPORTS
905
Assistant Commissioner on appeal confirmed that order. The
Income-tax Appellate Tribunal held that the shares did not
become stock-in-trade of the appellants, but since the loss incurred was incidental to their business of acquiring managing
agency, it was allowable as a revenue loss. On reference, the
High Court held that the shares acquired by the appellants
were a capital asset and the loss suffered by the sale was of a
capital nature.
Held, that the High Court had taken the correct view of
the matter and the appeal must fail.
The question whether a transaction is or is not an adventure of the nature of trade has to be decided in the light of the
intention of the assessee judged by the legal requirements associated with the concept o'f trade or business.
Since the shares in question were purchased by the appellants with the intention of acquiring the managing agency and
not in the course of their business as dealers in shares with the
intention of trading in those shares and what was acquired by
such purchase was a capital. asset in the shape of a managing
agency, it could not be said merely because the managing
agency could be utilised for earning profits. that those shares
were stock-in-trade of their share business.
G. Venkataswami Naidu and Co. v. The Commissioner of
Income-tax, [1959] Supp. I S.C.R. 464 and The Oriental Investment Co., Ltd. v. The Commissioner of Income-tax, Bombay, [1958]
S.C.R. 49, referred to.
'
CIVIL APPELL.A.TE JURISDICTION: Civil Appeal No.
698of1957.
Appeal by special leave from the judgment and
order dated August 2, 1956, of the Bombay High
Court in Income-tax Reference No. 1 of 1956.
A. V. Viswanatha Sastri, B. A. Pallcliiwala and
G. Gopalakrishnan, for the appellant.
Hardyal Hardy and D. Gupta, for the respondent.
1960. December 5. The Judgment of the Court
was delivered by
SHAH, J.-The High Court of Judicature at Bombay answered the following two questions referred by
the Income Tax Appellate Tribunal, Bench "B",
Bombay, under s. 66(1) of the Indian Income Tax
Act, 1922:
(1) Whether the acquisition of the managing agency
M /s. Ramnarain
Sons (Pr.) Ltd.
v.
Commissio11er of
Income-tax,
Bombay
Shah ].
1960
906
SUPREME COURT REPORTS
[1961]
of the Dawn Mills Co.,. Ltd., was in the nature of a
"business" carried on by the assessee company?
P.1 /s. Ra»1narain
Sons (I».) Ud.
(2) If the answer to the first question is in the
v.
affirmative, whether the loss suffered by the assessee
Commissioner cf company of Rs. 1, 78,438 on purchase and sale of 400
In&ome-tax,
shares of the Dawn Mills Co., Ltd., being incidental to
Bombay
its business of acquiring the managing agency, was a
Shall].
loss of a revenue nature?,
as follows:
(1) Acquisition of the managing agency was an
acquisition of a capital asset;
(2) The loss in respect of the 400 shares was of a
capital nature.
Against the order of the High Court, this appeal is
preferred with special leave.
The appellants are a private limited company
registered under the Indian Companies Act, 1913, and
carry on business as brokers, managing agents and
dealers in shares and securities. One of the objects for
which the appellants were incorporated was to acquire
managing agencies. The appellants also carried on
business in shares of different companies, and were
assessed to income-tax as dealers in shares and securities.
M/s. Sassoon J. David & Co., Ltd. were the managing agents of the Dawn Mills Ltd.-a public limited
company-and they held 2,507 out of a total issue of
3,200 shares. On September 28, 1946, the appellants
purchased from M/s. Sassoon J. David & Co., Ltd.
1,507 shares of the Dawn Mills at the rate of
Rs. 2,321-8-0 per share and having obtained a controlling voting right, acquired the managing agency
rights of the Mills. The remaining one thousand shares
were acquired from M/s. Sassoon J. David & Co., Ltd.
by the Directors of the appellants at the rate of
Rs. 1,500.
At the material time, the ruling market
price of the shares of the Dawn Mills was Rs. 1,610.
In December, 1946, the appellants sold 400 out of the
shares purchased by them, and thereby suffered a loss
of Rs. 1,78,438. The loss suffered by the appellants
in the yeftr of account January 1, 1946, to December
31, 1946, by sale of shares including 400 shares of the
2 S.C.R. SUPREME COURT REPORTS
907
Dawn Mills was Rs. 1,92,834. Crediting Rs. 1,05,907
earned as profit in certain other share transactions,
h
h
.
.
h
M/s. Ramnarai
the net loss suffered in t e s a.re transactions m t e Sons (Pr.) Ltd.
year of account amounted to Rs. 86,927. The appelv.
!ants valued their shares at the end of the year of Commissioner o
account at cost or market price whichever was lower.
Income-tax,
By this method of valuation, the books of account of
Bombay
the appellants showed a loss of Rs. 7,97,792 which
included a loss of Rs. 7,04,000 on the valuation of the
Dawn Mills shares held by the appellants at the end
of the year of account.
In the income-tax assessment for the year 1947-48,
the appellants claimed Rs. 86,927 as loss on sales in
trade in shares and Rs. 7,97,792 as loss on valuation
of stock-in-trade. The Income Tax Officer, Companies'
Circle IIl(l), Bombay, disallowed the loss suffered
by the appellants in the sale of the Dawn Mills shares,
because in his view those shares were purchased by
way of capital investment and the loss sum~red by
sale thereof could not be allowed as a trading loss. He
also held that the appellants were not entitled to
depart from the method adopted in earlier years and
to value the closing stock of shares in the year of
account at cost or market price whichever was lower
and to claim the difference between the opening and
closing valuation as a trading loss. The Appellate
Assistant Commissioner confirmed that order.
In
appeal, the Income Tax Appellate .Tribunal held that
the managing agency of the Dawn Mills was acquired
by the appellants as a part of their business activity
and the shares of the Mills having been purchased in
the regular course incidental to their business of
acquiring the managing agency, the loss on the sale of
those shares was allowable as a revenue loss; but the
shares of the Dawn Mills were not the stock-in-trade
of the appellants' business and they were not entitled
to treat the difference between the putchase price and
the value at close of the year of those shares, as a
trading loss. Accordingly, the Tribunal allowed Rs.
I, 78,438 as loss on sale of 400 shares of the Dawn
Mills, but did not allow Rs. 7,04,000 as loss arising
out of the valuation of the Dawn Mills shares at the
Shah].
908
SUPREME COURT REPORTS
[1961)
1960
end of the year of account. On the application of the
Mfs. Ramna.ain Commissioner of Income Tax, the Tribunal referred to
sons (1'<.) Ltd. the High Court the questions set out hereinbefore. In
v.
the High Court, the appellants took out a notice of
Commis.<ioner of motion for directing the Tribunal to refer certain
In;om:-••x.
questions which the appellants claimed arose out of
om ay
the order of the Tribunal and which the Tribunal did
Shah J.
not refer.
The High Court.agreed with the opinion of the Tribunal that the shares of the Dawn Mills were not the
stock-in-trade of the appellants and that those shares
were purchased by the appellants with the object of
acquiring the managing agency. The High Court,
however, held that the shares acquired by the appellants formed a capital asset and the loss suffered by
sale of 400 out of those shares in the year of account
being a capital loss, was not in the computation of
income a permissible deduction.
The High Court
dismissed the notice of motion taken out by the appellants.
In considering whether a transaction is or is not an
adventure in the nature of trade, the problem must
be approached in the light of the intention of the
assessee having regard to the "legal requirements
which are associated with the concept of trade or
business". The inference on this question raised by
the Tribunal on the facts found is of mixed law and
fact and is open to challenge before the High Court
on a reference under s. 66 of the Income Tax Act--
G. Venkataswami NaiWu & Co. v. The Commissioner of
Income Tax (1). It was held in The Oriental, Investment Co., Ltd. v. The Commissioner of Income Tax,
Bombay (•), that the question whether the appellants'
transactions amounted to dealing in shares and properties or to investment,. is a mixed question of law
and fact, and that the legal effect of the facts found
by the Tribunal on which the assessee could be treated as a dealer or an investor, is a question of law.
The Tribunal held that the shares of the Dawn Mills
purchased by the appellants did not become their
stock-in-trade. But they held that the transaction
{I) [1959) Supp. I S.C.R. 646.
(2) [1958) S.C.R. 49·
• I
2 S.C.R. SUPREME COURT REPORTS
909
having been effected in the regular course of the busiz96o
ness of the appellants, viz., the acquisition of ma.nag- Mf R
.
·
·
h l
It"
fr
th
I
f h
s.
amnararn
mg agenmes, t e oss resu mg om
e sa e o s ares sons (Pr.) Ltd.
was incidental to that business and was a revenue
v.
loss. It is not easy to appreciate the process by which Commissioner of
this conclusion was reached. The shares were purIncome-lax,
chased for the purpose of acquiring the managing
Bombay
agency of the Dawn Mills; they were not purchased
Shah J.
in the course of the appellants' business as dealers in
shares. By purchasing the shares which facilitated
acquisition of the managing agency, a capital asset
was acquired and merely because the managing agency
could be utilised for earning profit, the acquisition of
the shares which led to the acquisition of the managing agency could not, in the absence of an intention to
trade in those shares, be regarded 'as acquisition of
stock-in-trade of the share business. The appellants
had undoubtedly purchased the shares of the Dawn
Mills with money borrowed at interest, but that circumstance by itself does not evidence an intention to
trade in the shares. Nor is the fa.ct that the appellants are dealers in shares and their Memorandum of
Association authorises them to carry on business in
shares of any importance in the circumstances of this
case. The appellants by entering the shares of the
Dawn Mills in their statement of shares in which
trading transactions were carried on could not alter
the real character of the acquisition. The appellants
were undoubtedly dealers in shares; but the transaction in the Dawn Mills shares was ex facie not a business transaction. The current market rate at the date
of purchase was Rs. 1,610 per share whereas the
appellants acquired the
shares at the rate of
Rs. 2,321-8-0 per share. Even assuming that the
appellants acquired the entire block of 2,507 shares
from M/s. Sassoon J. David & Co., Ltd.-the shares
transferred to the names of the Directors being held
by them merely as nominees of the appellants-the
price per share was considerably in excess of the prevailing market rate. The olny reason for entering
into th~ transaction which could not otherwise be regarded as a prudent business transaction, was the
n5
910
SUPREME COURT REPORTS
[1961)
z96o
acquisition of the managing agency. If the purpose
M/
R
. of the acquisition of a large block of shares at a price
so:~ <~7'.;·~;z which exceeded the current market price by a million
v.
rupees was the acquisition of the managing agency,
Commissioner of the inference is inevitable that intention in purcha.sIncom•·tax,
ing shares was not to acquire them as part of the
Bombay
trade of the appellants in shares. The Tribunal found
Shah J.
that the Dawn Mills' shares were acquired by the
appellants for obtaining the managing agency of the
Mills. The agency was acquired by virtue of the voting power which the appellants obtained having purchased a very large block of shares, and for acquiring
the managing agency, the appellants did not pay any
distinct consideration.
The managing agency is
manifestly the source of profit of the appellants; but
the shares purchased and the managing agency acquired were both assets of a capita.I nature and did not
constitute stock-in-trade of a trading venture. If the
shares were acquired for obtaining control over the
managing agency of the Dawn Mills, the fact that the
acquisition of the shares was integrated with the
acquisition of the managing agency did not affect the
character of the acquisition of the shares. Subsequent
disposal of some out of the shares by the appellants
could also not convert what was a ca.pita.I acquisition
into an acquisition in the nature of trade.
The High Court was therefore right in holding
that the acquisition of the managing agency was an
acquisition of a. capita.I asset and the loss incurred by
sale of the 400 shares was of a. capital nature. The
High Court was also right in dismissing the notice of
motion for an order directing the Tribunal to refer the
questions suggested by the appellants. If the acquisition of the shares was not acquisition of a stock-intra.de, but of a. capital asset, the appellants, by valuing the shares a.t cost or market price whichever was
lower, could not bring the difference between the purchase price and the valuation made by them into
their trading account.
The appeal therefore fails and is dismissed with
costs.