# Soh"1n Pathak and Sons v. Commissioner of Income-tax, U.P. Patanjali

- **Citation:** [1954] 1 S.C.R. 167
- **Court:** Supreme Court of India
- **Decided:** 1954
- **Case number:** Civil Appeal No. 40 of 1952
- **Bench:** Patanjali Sastri C.J, S. R. DAs, VrvrAN Bos:m, Ghulam Hasan, Bhagwati
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/soh-1n-pathak-and-sons-v-commissioner-of-income-tax-u-p-patanjali-240
- **Pages:** 5

## Headnote

Incomdax Act (XI of 1922), s. IO-Income-Sale of shares
and sec1irities-Company carrying on business as financiers and
promoters of cornpanies-1 ncorne frorn sale of securities-Whether
assessable-Tests.
·
The question whether surplus arising from the sale of shares
and securities is assessable as profits or gains or is only an appreciation of capital arising from a change of investment depends on
whether the sales which produced the surplus were so connected
with the carrying on of the assssses's business that it could be
fairly said that the surplus is the profits and gains of the business .
1953
Soh"1n Pathak
and Sons
v.
Commissioner of
Income-tax,
U.P.
Patanjali
Sastri G. J.
19$8
Sep. 23.
168
SUPREME COURT REPORTS
[1954]
1953
It is not necessary that the surplus should have resulted from
such a course of dealing in securities as by itself would amount
Sardar Indra
to the carrying on of a business of buying and selling securities.
Singh and Sona It would be enough if such sales were effected in the usual course
Ltd.
of carrying on the business, or, in other words1 if the realisation
v.
of securities is a normal step in carrying on the assesseejs
Commissioner of business:.
·
Income-tax,
,
C
.
k L l
I
.
West Bengal.
P1li1~Jab a-operative Ban
tc. v. ncome-tax Ooniniissioner,
Lahore (67 I.A. 464) followed.
Where one of the objects of a cotnpany was to carry on the
business of financiers and to purchase, acquire, and sell stock,
shares, business concerns and other undertakings and the company
held a large number of shares in other companies and was realising its holdings and acquiring new shares, and it was engaged in
financing and promoting the business of other companies :
Held, that the sale of investments and the making of fresh
investments was directly connected with the carrying on of the
company's business and
profi~s made by the co1npany by sale of
shares and securities were assessable to income-tax.
CIVIL
APPELLATE
JURISDICTION : Civil Appeal
No. 40 of 1952.
Appeal from the Judgment and Order dated the
the 15th May, 1950, of the High Court of Judicature at
Calcutta (Harries C. J. and Sinha J.) in its Special
Jurisdiction (Income-tax) in Income-tax Reference
No. 7 of 1949.
N. 0. Chatterjee (R. P. Khosla, with him) for the
appellant.
C. K. Daphtary, Solicitor-General for India ( G. N.
Joshi, with him) for the Commissioner of Income-tax.
1953. September 23.
The Judgment of the Court
was delivered by
PATANJALI SASTRI C.J.-This is an appeal from a
judgment of the High Court of Judicature at Calcutta
answering a question referred to it by the Income-tax
Appellate Tribunal under section 66 of the Indian
Income-tax Act, 1922.
The appellant is .a private limited company incorporated in the year 1935 under the Indian Companies
..
•
•
S.C.R.
SUPREME COURT REPORTS
i69
Act with the following objects, among others, set out
1963
in the memorandum of association :
sardar Indra
To carry on and undertake any business, transaction, Singh and Sons
operation or work commonly carried on or undertaken
Ltd.
by bankers, capitalists, promoters, financiers, conces-
.v ..
.
.
h t
. •
Commissioner of
s10na1res, contractors, mere an s, managers, managmg
.J
t
ncome- ax:,
agents, secretaries and treasurers.
west Bengal.
To purchase or otherwise acquire, ;ind to sell. ....... .
stock, share ......... business concerns and undertakings.
Patanjali
Sastri a. J.
To invest and deal with the moneys of the company
not immediately required for the company's business
upon such securities and in such manner as may from
time to time be determined.
The company held a large num her of shares in other
incorporated companies and was realising some of its
holdings and acquiring large blocks of shares in other
companies. In the return for the assessment year
1938-39 the company showed a loss of Rs. 3,22,221 as
a result of the sales of shares and securities during the
previous year and this was allowed as a business loss
in the computation of its profits. In the assessme

## Text

•
s.c.:R.
SUPREME COURT REPORTS
167
In the view we have expressed above, it is unnecessary to deal with the alternative contention based on
section 8(1) of the Act.
We allow the appeals, set aside the answer made by the
High Court to question No. 1 and answer it as follows:
In view of the finding of fact that the old joint family
business in Banaras brocade was wound up and was
no longer carried on by the joint family as such during
the relevant chargeable accounting periods, the same
business could not legally be treated as having continued unbroken in respect of such periods for the
purpose of section 10-A of the Excess Profits Tax Act
read with sections 4 and 5 of the same Act. The
judgment of the High Court will stand in other respects. The appellants will have their costs of the
appeals. Advocates' fee one set.
Appeals atlowed.
Agent for the appellants: Naunit Lal.
Agent for the respondent: G. H. Rajadhyaksha.
SARDAR INDRA SINGH AND SONS LTD.
v.
COMMISSIONER OF INCOME-TAX,
WEST BENGAL.
[PATANJALI SASTRI C.J., S. R. DAs, VrvrAN Bos:m,
GHULAM HASAN and BHAGWATI JJ.]
Incomdax Act (XI of 1922), s. IO-Income-Sale of shares
and sec1irities-Company carrying on business as financiers and
promoters of cornpanies-1 ncorne frorn sale of securities-Whether
assessable-Tests.
·
The question whether surplus arising from the sale of shares
and securities is assessable as profits or gains or is only an appreciation of capital arising from a change of investment depends on
whether the sales which produced the surplus were so connected
with the carrying on of the assssses's business that it could be
fairly said that the surplus is the profits and gains of the business .
1953
Soh"1n Pathak
and Sons
v.
Commissioner of
Income-tax,
U.P.
Patanjali
Sastri G. J.
19$8
Sep. 23.
168
SUPREME COURT REPORTS
[1954]
1953
It is not necessary that the surplus should have resulted from
such a course of dealing in securities as by itself would amount
Sardar Indra
to the carrying on of a business of buying and selling securities.
Singh and Sona It would be enough if such sales were effected in the usual course
Ltd.
of carrying on the business, or, in other words1 if the realisation
v.
of securities is a normal step in carrying on the assesseejs
Commissioner of business:.
·
Income-tax,
,
C
.
k L l
I
.
West Bengal.
P1li1~Jab a-operative Ban
tc. v. ncome-tax Ooniniissioner,
Lahore (67 I.A. 464) followed.
Where one of the objects of a cotnpany was to carry on the
business of financiers and to purchase, acquire, and sell stock,
shares, business concerns and other undertakings and the company
held a large number of shares in other companies and was realising its holdings and acquiring new shares, and it was engaged in
financing and promoting the business of other companies :
Held, that the sale of investments and the making of fresh
investments was directly connected with the carrying on of the
company's business and
profi~s made by the co1npany by sale of
shares and securities were assessable to income-tax.
CIVIL
APPELLATE
JURISDICTION : Civil Appeal
No. 40 of 1952.
Appeal from the Judgment and Order dated the
the 15th May, 1950, of the High Court of Judicature at
Calcutta (Harries C. J. and Sinha J.) in its Special
Jurisdiction (Income-tax) in Income-tax Reference
No. 7 of 1949.
N. 0. Chatterjee (R. P. Khosla, with him) for the
appellant.
C. K. Daphtary, Solicitor-General for India ( G. N.
Joshi, with him) for the Commissioner of Income-tax.
1953. September 23.
The Judgment of the Court
was delivered by
PATANJALI SASTRI C.J.-This is an appeal from a
judgment of the High Court of Judicature at Calcutta
answering a question referred to it by the Income-tax
Appellate Tribunal under section 66 of the Indian
Income-tax Act, 1922.
The appellant is .a private limited company incorporated in the year 1935 under the Indian Companies
..
•
•
S.C.R.
SUPREME COURT REPORTS
i69
Act with the following objects, among others, set out
1963
in the memorandum of association :
sardar Indra
To carry on and undertake any business, transaction, Singh and Sons
operation or work commonly carried on or undertaken
Ltd.
by bankers, capitalists, promoters, financiers, conces-
.v ..
.
.
h t
. •
Commissioner of
s10na1res, contractors, mere an s, managers, managmg
.J
t
ncome- ax:,
agents, secretaries and treasurers.
west Bengal.
To purchase or otherwise acquire, ;ind to sell. ....... .
stock, share ......... business concerns and undertakings.
Patanjali
Sastri a. J.
To invest and deal with the moneys of the company
not immediately required for the company's business
upon such securities and in such manner as may from
time to time be determined.
The company held a large num her of shares in other
incorporated companies and was realising some of its
holdings and acquiring large blocks of shares in other
companies. In the return for the assessment year
1938-39 the company showed a loss of Rs. 3,22,221 as
a result of the sales of shares and securities during the
previous year and this was allowed as a business loss
in the computation of its profits. In the assessment
for the years 1939-40, 1940-41 and 1941-42, however,
the company claimed that the surplus resulting from
similar sales during the corresponding account years
was not taxable income as such surpluses resulted from
a mere change of investments and was, therefore, a
capital gain. The income-tax authorities rejected this
claim and taxed the surplus in each of those years as
the profits and gains of the company's business of
dealing in shares. On appeal, the Income-tax Appellate
Tribunal confirmed the assessment orders but on somewhat different grounds. After an elaborate analysis of
such transactions from the commencement ofthe company's business, the Tribunal came to the following
conclusion:
"From the foregoing particulars it is clear that the
company has been financing and prfrmoting the business
of other companies. For this purpose, it .had to vary
its holdings from time to time, quite a J?.Umber of shares
held by the company have been of a speculative
character. To hold these investments andto finance
i7o
SUPREME COURT REPORTS
[1954)
1953
several companies (managed or otherwise) the appellant
S d
I d
company had to resort to obtaining loans and overar ar n ra
.
Singh and Sons drafts. It IS, therefore, clear that shares were acquired
Ltd.
by the appellant company in the ordinary course of its
v.
business and they became its stock-in-trade. The profit
Commissioner 01 on sale of these shares did not essentially arise out of
W
lncomBe-taxl.
the sale of investment of any surplus funds. It is,
est
enga ·
h
c
J
h
l
l
f"
·
t ere.ore, c ear t at tie sa e o mvestments and makmg
Patanjali
of fresh investme·nts are linked up with the business of
Sastri a. J.
the company as financiers, inasmuch as investing and
realising its holdings when finance were needed is part
of the normal business of th_e company ......... There is
ample evidence to show tha1r1{te company did in fact
carry on the business of financiers, which is one of the
objects mentioned in clause 3 (1) of the memorandum
of association. The evidence pertaining to the financial
transactions of the company, during the relevant
accounting years, to which we have referred, clearly
establishes that the realisation of profits on investment
is directly referable to the carrying on of the company's
business as financiers."
In this view, the Tribunal considered it unnecessary
to decide whether the profits are taxable as profits and
gains of the company from the business of dealing in
shares.
On application by the company the Tribunal referred
the following question to the High Court for its .
decision:
On the facts and circumstances of the case, is the
surplus realised by the company on the sales of shares
and securities a taxable income ?
The court answered the question in the affirmative
but gave leave to the company to appeal to this
court.
The principle applicable in all such cases is well
settled and the question always is whether the sales
which produced the surplus were so connected with the
carrying on of the assessee's business that it could
fairly be said that the surplus is the profits and gains
of such business. It is not necessary that the surplus
•
•
..
-
•
S.C.R.
SUPREME COURT REPORTS
171
should have resulted from such a course of dealing in
1953
securities as by itself would amount to the carrying on
Sardar Indra
of a business o~ buying and selling securities. It would Singh and Sona
be enough if such sales were effected in the usual course
Ltd.
of carrying on the business or, in the words used by the
v.
Privy Council in Punjab Co-operative Bank Ltd. v. Commissioner of
Income-tax Commissioner, Lahore('), if the realisation
Income-tax,
West Bengal.
of securities is a normal step in carrying on the assessee's
business. Though that case arose out of the assessment
Patanjali
of a banking business, the test is one of general appliSastri a. J.
cation in determining whether the surplus arising out
of such transactions is a capital receipt or a trading
profit.
The question is primarily one of fact and there
are numerous cases falling on either side of the line but
illustrating the same principle.
On the facts found in
regard to the nature and course of the company's business, there can be no doubt that the present case falls
on the Revenue's side of the line.
Agreeing with the High Court that there was ample
material upon which the Appellate Tribunal could arrive
at the conclusion which they did, we dismiss the appeal
with costs.
Appeal dismissed.
Agent for the appellant: S. 0. Banerjee.
Agent for the respondent: G. H. Rajadhyaksha.
COMMISSIONER OF INCOME-TAX,
WEST BENGAL
v.
A. W. FIGG}ES & CO., AND OTHERS.
[MEHR CHAND MAHAJAN, S. R. DAs and BHAGWATIJJ.]
Income-tax Act (XI of 1922), s. 25(4)-Firm paying tax i11 1918
-Conversion to limited co1npany in 1947-Right to relief under
s. 25(4)-0hange in personnel of jinn in 1939 and 1947, effect of.
For purposes of assessment to income-tax, a firm is a different
entity distinct from its partners, and a mere change in the constitution of the firm does not bring into existence a new assessable
unit or a distinct assessable entity.
(1) 67 LA. 464, 481,
1943
Sep. 24.