The profit arising from the sale of shares held as an investment is taxable as a capital gain.

D.K.Sen, J.

1. The material facts on record and the proceedings leading up to the present reference are, inter alia, that Jagarnath Prasad Chhawchharia, the assessee, is a Hindu undivided family which carries on business in money-lending as also in milling wheat and paddy.

2. On May 13, 1967, the assessee acquired 24,000 shares of Swadeshi Cotton Mills Co. Ltd., at Rs. 5 per share. No dividend was declared on the said shares thereafter and on December 20, 1969, the assessee sold the said shares at Rs. 6 per share.

3. In the assessment year 1971-72, the accounting year ending on Deepawali 2027, Samvat year, the assessee was assessed to income-tax. The assessee claimed that the surplus realised on the sale of the said shares was capital in nature and as such not taxable. The Income-tax Officer held that the investment of the assessee in the said shares was not with a view to earn dividend as no dividend had been declared thereon and the assessee had earned no income by way of dividend in the past six years and that the assessee had acquired the said shares with the object of dealing in them. He held that the profit of Rs. 24,000 arising from the sale of the said shares was a profit and gain of the business of the assessee and included the same in the business income of the assessee.

4. Being aggrieved by the said decision of the Income-tax Officer, the assessee preferred an appeal therefrom before the Appellate Assistant Commissioner, where it was reiterated that the assessee was only an investor in the said shares and, therefore, the profit from the sale thereof was of a capital nature and as such the surplus had been shown as a capital gain. The Appellate Assistant Commissioner noted that no dividend had been declared on the said shares even before their purchase by the assessee and, accordingly, held that the assessee did not intend to earn dividend therefrom. He held that the said shares were purchased by the assessee for resale at a profit. He also noted that the appellant was a money-lender and not an investor in shares. He upheld the decision of the Income-tax Officer.

5. Being aggrieved, the assessee went up in further appeal before the Income-tax Appellate Tribunal. It was contended before the Tribunal on behalf of the assessee that the purchase of the said 24,000 shares was the first as also the last investment of the assessee in shares and that the assessee had purchased the said shares by way of investment and had sold them subsequently as no dividend was received therefrom and the money of the assessee stood blocked unnecessarily. It was contended that, in the circumstances, the surplus received by the assessee on sale of the shares was not assessable as income from business as the shares were acquired for investment only.

6. The Tribunal held that the surplus arising out of the sale of the shares was not income of the assessee assessable to income-tax and concluded as follows :

". . . The assessee made investment in the year 1967 and expected yearly dividends but he did not receive any dividend and, therefore, found that the investment had been blocked. He sold the shares to redeem the investment. Therefore, the initial investment in shares and the sale of those shares cannot constitute the assessees business in share dealing, because only for the redemption of the investment, the assessee sold the shares so that he could use the same elsewhere more usefully."

7. The Tribunal accordingly allowed the appeal and deleted the addition of the said surplus holding the same to be a receipt which is not taxable.

8. On an application of the Revenue under Sec.256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question as a question of law arising out of its order for the opinion of this court;

"Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the profit of Rs. 24,000 on the sale of the shares in question is not taxable as income of the assessee ?"