Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1960 Supreme(SC) 322

SUPREME COURT OF INDIA
5th December, 1960.
J.L. KAPUR, M. HIDAYATULLAH AND J.C. SHAH, JJ.
M/s. Ramnarain Sons (Pr.) Ltd., Appellant
Versus
Commissioner of Income-tax, Bombay, Respondent.
Civil Appeal No. 698 of 1957.
Advocates appeared
Mr. A. V. Viswanatha Sastri, Senior, Advocate; Mr. B. A. Palkhiwala, Advocate and Mr. G. Gopalakrishnan, Advocate of M/s. Gagrat and Co., Advocates with him, for Appellant; M/s. Hardyal Hardy and D. Gupta, Advocates, for Respondent.

Advocates:
A.V.VISHWANATHA SASTRI, B.A.PALKHIWALA, D.GUTPA, G.GOPALAKRISHNAN, GAGRAT JANEDRA LAL, HARDYAL HARDY

The acquisition of a managing agency and the subsequent loss incurred on the sale of shares purchased to obtain the managing agency are capital in nature and not deductible as revenue losses from income.

Headnote:
{'KEYWORD': 'Income Tax', 'SUBJECT': 'Acquisition of Managing Agency and Loss on Sale of Shares', 'ACT SECTION LIST': ['Indian Income-tax Act, 1922, S. 66(1)'], 'SUMMARY': 'The acquisition of the managing agency of a company and the subsequent loss incurred on the sale of shares purchased to obtain the managing agency were held to be capital in nature, and not revenue losses deductible from income.'}
Fact of the Case:

The assessee company, a dealer in shares and securities, purchased a controlling interest in the Dawn Mills Co., Ltd. to acquire its managing agency. The company suffered a loss on the sale of some of the shares acquired. The Income-tax Officer disallowed the loss as a trading loss, holding that the shares were purchased as a capital investment. The Appellate Assistant Commissioner confirmed the order. The Income-tax Appellate Tribunal allowed the loss on the sale of shares as a revenue loss, but disallowed the loss arising from the valuation of the shares at the end of the year of account.
Finding of the Court:

The High Court held that the acquisition of the managing agency was an acquisition of a capital asset and the loss incurred by sale of the 400 shares was of a capital nature. The High Court also dismissed the notice of motion for an order directing the Tribunal to refer the questions suggested by the appellants.
Issues: 1. Whether the acquisition of the managing agency of the Dawn Mills Co., Ltd., was in the nature of a "business" carried on by the assessee company? 2. If the answer to the first question is in the affirmative, whether the loss suffered by the assessee company of Rs. 1,78,438/- on purchase and sale of 400 shares of the Dawn Mill Co., Ltd., being incidental to its business of acquiring the managing agency, was a loss of a revenue nature?
Ratio Decidendi: The intention of the assessee in acquiring the shares is crucial in determining whether the transaction is an adventure in the nature of trade. The shares were purchased for the purpose of acquiring the managing agency of the Dawn Mills, not in the course of the appellants' business as dealers in shares. The acquisition of the shares was a capital acquisition, and the subsequent disposal of some of the shares did not convert it into an acquisition in the nature of trade.
Final Decision: The appeal was dismissed with costs.

Judgment

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 of the Dawn Mills Co., Ltd., was in the nature of a "business" carried on by the assessee company ?

2. If the answer to the first question is in the affirmative, whether the loss suffered by the assessee company of Rs. 1,78,438/- on purchase and sale of 400 shares of the Dawn Mill Co., Ltd., being incidental to its business of acquiring the managing agency, was a 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.

2. 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.

3. M/s. Sassoon, J. David and 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 form M/s. Sassoon, J. David and 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 appellant s in the year of account January 1, 1946, to December 31, 1946, by sale of shares including 400 shares of the Dawn Mills was Rs. 1,92,834/-. Crediting Rs. 1,05,907/- earned as profit in certain other share transactions, the net loss suffered in the share transactions in the year of account amounted to Rs. 86,927/-. The appellants valued their shares at the end of the year of account at cost or market price whichever was lower. By this method of valuation, the books of account of 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.

4. In the income-tax assessment for the year 1947-48, the appellants claimed Rs. 86,927/- as loss on sales in trade in shares & Rs. 7,97,792/- as loss on valuation of stock-in-trade. The Income-tax Officer, Companies Circle III(I), 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 suffered 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 w

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1960 Supreme(SC) 322

The acquisition of a managing agency and the subsequent loss incurred on the sale of shares purchased to obtain the managing agency are capital in nature and not deductible as revenue losses from income.

Cases Referred (3)