Judgement

MATHEW, J. - This is an appeal from the judgment of the High Court of Madhya Pradesh in a reference made at the instance of the assessee M/s. Sutlej Cotton Mills Supply Agency Ltd. (hereinafter referred to as the assessee ) by the Income Tax Appellate Tribunal (here- inafter referred to as the "Tribunal ) under Section 66 (1) of the Indian Income Tax Act. The question referred was:

"Whether the inference of the Tribunal that the profit of Rupees 2,13,150/- arising from the sale of 1,58,200 shares of the Gwalior Rayon Silk .Manufacturing (Weaving) Co. Ltd., is assessable as business profit is correct?"

2. When the reference came up for hearing before the High Court, the High Court found that although the Tribunal was of the view that the question referred was a mixed question of law and fact it had not stated all the facts and circumstances on which it based its conclusion that the profit of Rs. 2,13,150/- was a business profit and so the Court called for a supplementary statement of the case and a supplementary statement of the case was submitted to the Court by the Tribunal.

3. The material facts in the statement of the case were as follows. The assessee is a public limited company and it is controlled by the Birlas. The assessee applied for certain shares of the Gwalior Rayon Silk Manufacturing (Weaving) Company Limited (hereinatfer referred to as the "Rayon Company"), also a company controlled by the Birlas This company was floated on 25-8-1947 with a paid up capital of Rupees 5 lakhs made up of 50,000 ordinary shares of Rs.10/- each. In the year ending 31-12-1951, the Rayon Company issued certain new shares for paid up capital of Rs. 1,17,25,000/made up as follows:

Rs.

7,60,000 Ordinary shares of Rs. 10- each fully paid up 76,00,000

1,50,000 Ordinary shares of Rs.10 each with paid up at Rs. 2/8- each 3,75,000

1,50,000 6 per cent preference shares of Rs. 100/-each paid up at Rs. 25 each (re-deemable at par at the company option after a specified date by giving one year s notice) 37,50,000

4. The assessee which was interested in the Rayon Company and which had already purchased 1,000 ordinary shares, subscribed for 3,49,000 shares of the new issue and paid Rs. 8,72,500/- as application money on the 25th and 27th February, 1951, and paid Rs. 26,17,500/- as final, call money on 10-8-1951. These purchases were authorised by a resolution of the assessee dated 7-2-1951. The assessee sold a part of its stock viz.,1,58,200 shares at a profit of Rs. 2,13,150/-.

5. For the assessment year 1956-57 (accounting year ending on 31-3-1956), the Income Tax Officer sought to assess the amount on the basis that it was profit accruing to the assessee from an adventure in the nature of business. The assessee contended that the amount represented capital gain as the shares were purchased by way of investment and that the same cannot be taxed as revenue receipt. The Income Tax Officer rejected the contention. The assessee filed an appeal before the Appellate Assistant Commissioner. He confirmed the order. The assessee then went up in appeal before the Appellate Tribunal.

6. The Tribunal came to the conclusion, after considering all the circumstances, that the transaction was in the nature of a business adventure and that profits were liable to be taxed. The reasons which induced the Tribunal to come to this conclusion were: The assessee was authorised by clauses 12, 13, 28 and 29 of paragraph 3 of its Memorandum of Association to buy and sell shares; there were specific resolutions of the Company authorising a director of the assessee purchase and sell these shares; the assessee had included the profit of Rs. 2,13, 150/- in the profit and loss account without taking it to any reserve account or specifically set it apart for any other purpose; the assessee had purchased the shares from borrowed funds and not with money readily available to it; the assessee did not make the sales on account of any pressing necessity to meet existing liabiliti