1. Surplus from sale of shares by a company acting as financiers — Dispute whether such amount is taxable business income or non-taxable capital gain. (Para 1 , 2 , 3 )
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1953 Supreme(SC) 77
SUPREME COURT OF INDIA
M. Patanjali Sastri, CJI., S. R. Das, Vivian Bose, Ghulam Hasan, N. H. Bhagwati, JJ.
Sardar Indra Singh and Sons Ltd., Calcutta – Appellant
Versus
The Commissioner of Income-tax, West Bengal – Respondent
Civil Appeal No. 40 of 1952
Decided On : 23-09-1953
Advocates appeared
Shri N. C. Chatterjee, Senior Advocate (Shri R. P. Khosla, Advocate, with him), instructed by Shri S. C. Banerjee, Agent, for Appellant; Shri C. K. Daphtary. Solicitor-General for India (Shri G. N. Joshi, Advocate, with him), instructed by Shri G. H. Rajadhyaksha, Agent, for Respondent.
Shri N. C. Chatterjee, Senior Advocate (Shri R. P. Khosla, Advocate, with him), instructed by Shri S. C. Banerjee, Agent, for Appellant; Shri C. K. Daphtary. Solicitor-General for India (Shri G. N. Joshi, Advocate, with him), instructed by Shri G. H. Rajadhyaksha, Agent, for Respondent.
Surplus from the sale of securities is taxable as business profit if the realization of such securities is a normal step in carrying on the assessee's business, regardless of whether the assessee specifically carries on a business of buying and selling securities.
Headnote:(A) Income-tax Act, 1922 - Section 66 - Taxability of surplus from sale of shares and securities - Whether surplus realized from the sale of shares is a capital receipt or trading profit - The central question is whether the sales producing the surplus were so connected with the carrying on of the business that the surplus constitutes profits and gains of such business - It is not necessary that the surplus results from a course of dealing that by itself amounts to a business of buying and selling securities; it is sufficient if such sales were effected in the usual course of business or if the realization of securities is a normal step in carrying on the business (Para 6).
Facts of the case:
A private limited company, whose objects included acting as financiers and promoters, held shares in various incorporated companies. While a loss from the sale of shares in one assessment year was allowed as a business loss, the company subsequently claimed that surpluses from similar sales in following years were capital gains resulting from a change of investments and thus not taxable. The tax authorities and the Tribunal rejected this, finding that the company had been financing other companies, varying its holdings, and utilizing loans and overdrafts, which indicated that the shares were acquired in the ordinary course of business and constituted stock-in-trade.
Findings of Court:
The court found that there was ample material for the Tribunal to conclude that the realization of profits on investment was directly referable to the carrying on of the company's business as financiers.
Issues: Whether the surplus realized by the company on the sales of shares and securities is a taxable income.
Ratio Decidendi: The determination of whether a surplus arising from the sale of securities is a capital receipt or a trading profit is primarily a question of fact. The applicable test is whether the realization of securities is a normal step in carrying on the assessee's business, thereby making the surplus the profits and gains of that business.
Result: Appeal dismissed.
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Table of Contents
2. Appellant claimed surpluses were capital gains from change of investments — Revenue contended they were profits and gains from the business of dealing in shares. (Para 3 )
3. Realization of profits on investment was directly referable to the company's business as financiers, rendering the shares stock-in-trade. (Para 3 , 6 )
4. Surplus from security sales is taxable as business profit if the realization of such securities is a normal step in carrying on the assessee's business. (Para 6 )
5. Appeal dismissed — Surplus realized on the sales of shares and securities held to be taxable income. (Para 5 , 7 )
6. When is the surplus from the sale of securities considered taxable business income rather than a capital receipt?
It is taxable if the sales are so connected with the carrying on of the business that the surplus is fairly considered profits and gains of that business, or if the realization of securities is a normal step in carrying on the business. (Para 6 )
7. Must an assessee be specifically engaged in the business of buying and selling securities for the surplus to be taxable as business profit?
No, it is not necessary that the surplus result from a course of dealing that by itself amounts to a business of buying and selling securities; it is sufficient if the sales occur in the usual course of the business. (Para 6 )
8. How is the distinction between capital receipts and trading profits determined in the context of security sales?
The determination is primarily a question of fact based on the nature and course of the assessee's business and whether the transactions are linked to the normal operation of that business. (Para 6 )
Judgement
Patanjali Sastri, C.J.I.: 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 S. 66, Income-tax Act, 1922.
2. The appellant is a private limited company incorporated in the year 1935 under the Indian Companies Act with the following objects, among others, set out in the memorandum of association :
To carry on and undertake any business, transaction, operation or work commonly carried on or undertaken by bankers, capitalists, promoters, financiers, concessionaires, contractors, merchants, managers, managing agents, secretaries and treasurers.
To purchase or otherwise acquire, and to sell .... . . . stock, share. . . . . . business concerns and undertakings.
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.
3. The company held a large number 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 of the company s business, the Tribunal came to the following conclusion :
From the foregoing particulars it is clear that the company has been financing and promoting the business of other companies. For this purpose, it had to vary its holdings from time to time ; quite a number of shares held by the company have been of a speculative character. To hold these investments and to finance several companies (managed or otherwise) the appellant company had to resort to obtaining loans and overdrafts. It is, therefore, clear that shares were acquired by the appellant company in the ordinary course of its business and they became its stock-in-trade- The profit on sale of these shares did not essentially arise out of the sale of investment of any surplus funds. It is, therefore, clear that the sale of investments and making of fresh investments are linked up with the business of the company as financiers inasmuch as investing and realising its holdings when finance were needed is part of the normal business of the company. . . . . . . There is ample evidence to show that the company did in fact carry on the business of financiers, which is one of the objects mentioned in cl. 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.
4. 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.
5. 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
