CXJlfISSIOllER OF IN<Xl4 v. H. HOLCK LARSF.11

the background of instant case, to prevent depreciation In in the the value of 1'was - relevant

#3. Consideration of all involves appreciation of all the facts in their proper perspective. If that is not done it cannot be said that there has been consideration of all relevant factors. The Tribunal did not consider the relevant factors in their proper perspective and in particular, namely, (i) that the assessee was the Chairman ~of the company and in fact that if he did not participate in buying right shares there might have been adverse effect on the market so far as the shares of the company were concerned; (ii) that he had an overdraft with the Bank; (iii) and that he had to remit money to Denmark for the purchase of his house • • ~And as such the attitude of a person entitled to right shares judging whether he was a dealer and investor was not viewed in proper dimension but merely noted by the Tribunal \resulting in the non-consideration of a vital factor leading 'to an erroneous inference. The Tribunal in this case has undoubtedly noted the assessee' s contention of nursing the investment. The Tribunal, however, has not considered in its investment was necessary. Tribunal thus erred. In that view of the matter the High Court was justified in interfering with ~the conclusion reached by the Tribunal. There is no reason to interfere with the order of High Court. [1099 D-H; 1100 A-B] the actual position as to how then nursing of ,..l CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1954-55 (NT) of 1974 etc. B c [) G 11 • .)ool ·~ - 1078 SUPREME COURT REPORTS [1986] 2 S.C.R, From the Judgment and Order dated 10th August, 1971 of the Bombay High Court in Income Tax Reference No. 124 of 1963. ~ V. Gauri Shankar and Ms. A. Subhashini Appellant. B S.T. Desai, H. Salve, Ravinder and Ms. A.K. Verma for the Respondent. The Judgment of the Court was delivered by SABYASAC!ll HUKHARJI, J. These appeals by certificate the High Cr>urt of arise f rr>m Bombay date·! 10th August, 1971 in Income Tax Reference No. 124 -1. l of 1963. judgment and dee ls lr>n of The question involved in these appeals is famil tar int direct tax laws. The points in controversy are short. But the adjudication is pending for long. Assessment years involved l 9Sh58 and 1958-59. The High Court disposed of references on 10th August, 1971 and in 1986 i.e. nearly after 28 years of the years of assessment we are posed with the question whether in respect of certain transactions in those consequentially whether the shares by the a·1sc·:;see capital acc0nnt. t0 be tax:ed on rc\l'en:1·~ acc.~1~111t or. the assessee was a dealer or income arising from the sale of 't investor i'i The ~·1~sti.on that th~ High Court ha<l t0 ans\>ler was as follows: t • ''Whether, on the facts and in the circumstances of the case, the assessee was a dealer in sharec; the accountinS?; periods relevant to the assessment years 1959-bO and 1960-61 ?" in- -f The said question was referred by High Court at the instance of the asseessee. the Tribunal to the The asses see, H. Holck Larsen, was a partner in the firm of M/s Larsen & fo,1bo (hereinafter referre·l to as the 'sald t company') upto 1946. On 8th fobruary, l 946/7th February, 1946, that partnership was cr>nverted into a private limited company c D F G H C.I.T. v. H. HOLCK IARSEN [SABYASACHI MUKHARJI, J.] 1079 the same name. , of In consideration of hts interest in the f firm, the assessee was allotted shares of the company. Against the assessee got 1875 equity shares and payment of cash, against his interest in the partnership firm, he got 53, 486 - equity shares. During the next few accounting years upto the financial year 1953-54, the assessee acquired 2, 994 shares of the said company and sold 1, 550 shares. According statement of the case, the purchases and sales of shares of -# the said company were few and far between upto the financial year 1953-54, but these became larger in number and at close intervals in the next few succeeding years. The chart would indicate the position in this respect. ~ (1) Financial ending (2) No of shares acquired (3) Value (Rs.) (4) No. of Shares 31-3-1955 31-3-1956 31-3-1957 31-3-1958 31-3-1959 • 31-3-1960 ---- 6, 111 6,102 1,256 5,500 11,000 ----- 61,110 61,020 12,560 55,000 1, 11,000 4,600 13,955 7,661 5,050 5,200 10,400 (5) Sale Price (Rs.) 51,173 1,88,433 1,24,406 63,721 87,810 2,45,732 ·1 shares acquired 29, 969 shares of During the years mentioned in the chart, the assessee had the said company and sold 37,366 thereby making a profit of Rs. 1,65,581. Besides purchasing and selling equity shares of the said company, the the said assessee had also dealt in preference shares of 1-:company. The assesree had sold shares of Andhra Cement Co. in the financial year 1954-55, made purchases of shares of S.C.C. and I.C.C. in the years 1955-56, 1956-57 and 1958-59 and also of shares of India Cement Co. and National Carbon in 1955-56 and also sold shares of Guest Keen Wi 11 iams and Indian Cement in 1958-59. During all these years the purchases and sales of equity shares of the said company were more marked than the ~ purchase and sale of other shares. Besides the sale of equity the said company and shares of other companies f shares of stated above, the assessee had also sold some of his original shares of the said company held by him. ,; A B c D E F G H 1080 SUPREME COURT REPORTS [1986] 2 s.c.R. On these facts the assessee contended before the Income Tax Officer that the assessee was only an investor and not a~ dealer in shares but this contention was rejected by the Income Tax Officer and the A.ppellate A.ssistant Corrnnissioner. (3) Aggrieved by the said decision of the Appellate A.ssistant the assessee filed second appeal before the Commissioner, Tribunal. Before the Tribunal it was contended on behalf of the asses see (1) that the assessee never purchased equity shares of the said company from any outsider or any stranger~ except in a few cases from close friends or from members of the staff just to accommodate them; (2) that the shares that were acquired by the assessee were only right shares issued by the company its existing shareholders; assessee had to meet huge personal expenses and tax liability in the relevant accounting periods; (4) that the assessee had an overdraft account and he wanted to keep the said overdraft account within reasonable limit; (5) that the assessee wanted to nurse his investments in the company and (6) that the assessee had to and was forced and compelled by circumstances In the premises, to sell some of the shares acquired by him. the said the asses see' s contention was shares were neither effected voluntarily nor with a view to make any profit nor under a profit making scheme, but were effected under compelling circumstances and as no assessee~ could be a trader by compulsion, the assessee was not a trader in respect of these shares. The Tribunal rejected the said contentions. The Tribunal held: (1) The assessee was a Chairman of the Board of Directors of the said company. (2) The said company had ever since its inception expanding itst< business and making good profits. increased and, existing shareholders. (4) The assessee had a substantial.J holding of equity shares in the company. (5) It was not obli-1 gatory on the assessee to acquire right shares. (6) In fact, the assessee was indebted to the bank and was having an over- draft account on which he was paying interest. (7) Not only right shares were sold by the assessee, but he had also sold some of the original equity shares held by him. Its capital had therefore, right shares were offered to the that the sales of (3) ~ The Tribunal was of the view that as the Chairman of thef Board of Directors of the said company, the assessee knew the financial position of the company and also knew A. B c o E F G 1-1 C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J.] 1081 \ company's business was expanding and flourishing, and yet he ~ sold away the shares of such a company held by him. The sale, according to the Tribunal, must have been to earn profits. The frequency of the acquisition of right shares and the sales in large numbers in quick succession, according to the Tribunal, established that all the dealings in shares were part and parcel of a profit making scheme. to make profit and the motive ·t The Tribunal the correctness of t The Tribunal further noted the Appellate Assistant Commissioner had found that in some years, the income of the assessee was much more than the expenses he had to meet and notwithstanding that fact, the assessee had sold some shares. the Tribunal nor . finding was neither challenged before . anything established -tTribunal, therefore, if the assessee was under no obligation to acquire right shares, there was no necessity for him to apply for and obtain right shares except to make prof its on their sales. According to the Tribun!l, it is far from the conduct of a prudent and reasonable man like the assessee to to sell away his capital assets expect him recurring personal expenditure. The frequent acquisition of right shares at par coupled with the fact that even some of 1' the original holdings were sold, were against the assessee's the contrary. According investments according to meet intention of nursing his Tribunal. that according The Tribunal noted , :.\'Assistant Commissioner, such an activity was purpose by self-cancelling activity'. The Tribunal was agreement with the Appellate 'self-destructive the Appellate Assistant \Commissioner and came to the conclusion that it was the idea of huge profits that the assessee was making by sale of shares of the said company that compelled him to acquire right shares frequently and in large numbers notwithstanding the fact that he was indebted to the bank and he was having an overdraft account with it. The facts that the assessee did not sell all the company was the right shares or that the founder of interested in acquiring right shares or that he did not take ~ all the right shares offered to him because of his financial liability, according to the Tribunal, would not affect issue. The Tribunal, therefore, came to the conclusion that > - A B c D • E F G H 1082 SUPREME COURT REPORTS [19861 2 s.c.R. the assessee was doing business in the assessment years under consideration. 1 ~ Two members namely Judicial Member as well as Accountant Member gave separate but concurrent opinions for coming to the conclusion that the asses see was a dealer in shares. In his the Accountant Member had observed that in separate or<ier, the assessment years 1956-57 to 1960-61, both inclusive, the acquisition of the shares was large and so also the sale of shares and in the first three accounting years, the share#· than the shares acquired by right. The sold were much more right shares acquired in those three years were 6, 111, 6102 and 1,256 whereas the assessee had sold from ti100 to ti100 right shares which were 13, 955, 7661 and 5,050 respectivelyo_l_ The maximum number of shares held by the assessee was little T over 56,600 and this number went down progressively from thet assess100nt year 1953-54 to assessment year 1958-59 by about 15,000. The Accountant Member, therefore, was of the view that it was not possible to accept the submission of the assessee that the shares were sold only to reduce the overdraft taken from the bank. It may be 100ntioned, while on this aspect, that during the first few years apart from the years in question i.e. 1959-60 and 1960-61, i.e. from the assessioont years 1955-56,'! 1956-57, 1957-58 and 1958-59, the assessee had been treated by the revenue as an investor in shares and was not taxed on the dealings of these shares. This is an aspect which requires to be taken into consideration in conjunction with other factors - in answering the question. The second point on this aspect i~. that for subsequent years for which Special Leave Nos. 8292-8293 of 1979 are pending are for the assessment years 1968-69 and 1969-70 and in those two years the Tribunal ha# investor anti accepted the position that the assessee was an not a dealer in shares. This position, however, according the revenue, had to be accepted in view of the judgment of the Bombay High Court in tr instant case which is under appeal before this Court. Therefore, it was not, according to the counsel for the revenue, on any divergence of finding or any ~ different inference being drawn from the said findings but. because of decision of the Bombay High Court and out oft treated as an deference investor. The findings of the Tribunal for those two years are to it, the assessee had to be A B c D E F G H C.I.T. v. H. HOLCK LARSEN [SABYASACHI MUK!IARJI, J.] 1083 also the subject matter of Special Leave Petition 8292 and 8293. These will have to be disposed of along with these appeals. The Hlgh Court in the question in favour of the assessee and held that the assessee was not a dealer in shares. judgment answered impugned -t I In this case the facts have been enumerated and tabulated in the statement of the case. The Tribunal on those facts came to the conclusion that the assessee was for the relevant two years a dealer in shares. The High Court, however, in answer the contrary and held the question held the controversy t assessee was an investor in shares. In the background of these facts, two questions arise, i where courts have to deal with these types of transactions. The first question is, whether the findings of the Tribunal or the fact finding body is based on evidence from which the conclusions arrived at by the said fact finding body can be said to be either reasonable or possible. Therefore, in the context of instant case, it is necessary to examine that what were the facts Tribunal and whether all the facts have been fully considered Y by the tribunal for the conclusions drawn. If the conclusions drawn by the Tribunal are pure inferences of facts, then no question of the conclusion arrived at by the interference. lf, however, reasonable man could finding body ,.;, possibly have arrived at, then conclusion arrived at by the Tribunal would be without evidence and perverse in law. If there is material to support the conclusion, the fact that ~ - another body or the court might have arrived at a different ' law arises and no occasion conclusion is not relevant. ls ca<Bed found by ls such that no r - A B c D E The second question is what are the legal principles applicable to the facts of these types of cases to determine whether the conduct was that of a dealer in shares or an investor in the shares. G The two questions have been dealt in many together though no case can provide decisions which may be noted, guidance for all situations. 1084 SUPREME CO!JRT REPORTS [1986] 2 S.C,R. How in case of sale of share the object or the purpose of selling the shares, in order to determine whether one was a ~ dealer in shares or an investor in shares, should be viewed may be looked at from the anJlle of Lord Reid in J.P. Harisson (Watford), Ltd. v. Griffiths (R.H. Inspector of Taxes) 40 Tax cases 281 at 295-296 when he observed: "The question has been asked in a number of cases: ·mat was it?" With all "If this was not tracling, deference to those who have used that argument, I t I and business affairs - frequent occurrence, and to find appropriate names Innominate contracts and ·t clo not think that it ls very useful in most cases. are of Human affairs - infinite variety. They do not fit neatly categories or classes. transactions are of would not expect denote new kinds of operations devised for the sole t purpose of gaining tax advantages. In the present case the question is not what the transaction of buying and selling the shares lacks to be trading, but whether the later stages of the whole operation show that the first step - the purchase of the shares - was not taken as, or in the course of, a trading transaction." I , ..,.. later stages of trading, but whether The real question as Lord Reid said was not whether- the transaction of buying and selling the shares lacks the element the whole operation show that the first step - the purchase of the shares - was not transaction. It was, further, reiterated in that decision that where a question of inference from certain facts found by the Tribunal arises, unless the court comes to the conclusion that·._J the inference drawn by the Tribunal could not be reasonably ( drawn at all, then it is not proper to interfere with, that finding of facts. taken as or in the course of, a trading',~ How a question of this nature should be viewed has been indicated by this Court as early as 1958 in G. Venltatas-1. Naidu & Co. v. c.-issioner of lncoe-taI, 35 I. T. R. 594 S. C •• The question there was whether sale of a land to a company t could be treated in the facts and circumstances of the case as an adventure in the nature of trade. There, on the facts this .\ c D E F G H C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKllARJI, J.] 1085 I - 4 the view taken by taken by the view "t regard findings of the Appellate Tribunal provisions of the statute, it is a pure question of in dealing with it, though t document of title or to the interpretation of , Court upheld .f affirming that the assessee knew that it would be able to sell the managed company whenever it thought it profitable to do so; that the assessee had purchased the four plots of land with the sole intention of selling them to the mills at a profit which intention raised a strong presumption the Tribunal. This Court in favour of reiterated that the jurisdiction conferred on the High Court under section 66(1) of the Act of 1922 (hereinafter called the t 'old Act') i.e. section 256 of the Act of 1961, (hereinafter 'new Act') was 1 imi ted to entertaining references cal led the involving questions of law. It was emphasised that if the point raised on reference re lated to the construction of a the relevant law; and the High Court might have due the Appellate Tribunal, decision would not be fettered by the Tribunal's view. lt was free to adopt such construction of the document or the statute as appeared to it reasonable. Where the point sought to be raised on finding .of fact recorded by the Tribunal must be regarded as conclusive in proceedings under reference. lf, however, such a finding of. fact was based on an inference drawn from primary in the case, its correctness and validity were open in reference proceedings, within, however, narrow limits. The assessee or the revenue could contend that the inference had been drawn on considering inadmissible. evidence or after excluding admissible and relevant evidence; and if the High Court was satisfied that improper admission or result of exclusion of evidence, it would be justified in examining the party t.1 ch:1l lt~nge B conclusion of fact dra"1n by th1~ Trtbt1nal on the ground that it •as n0t supported by any legal evidence; or that the impugned conclusion drawn from the relevant facts was not rationally possible; and if such a plea was establish ed, the court might consider whether the conclusion was not preverse and should not, therefore, be set aside. It was to be that it was within those narrow limits that the conclusions of fact recorded by the Tribunal could be challenged in a reference to the High Court. Such conclusions could never be challenged on the ground that these were based )' correctness of the concl•1sion. It may als0 be open a reference was a pure question of fact, 't remembered, however, i' evidentiary facts proved inference was to challenge A B c D E F G H 1086 SUPREME COURT REPORTS [1986] 2 s.c.R. on misappreciation of evidence. A conclusion reached by the ' Tribunal on the ground that it is a conclusion on a question of mixed law and fact, is no doubt based upon the primary evidentiary facts, but its ultimate form is determined by the application of relevant legal principles. The need to apply the relevant legal principles tends to confer upon the final conclusion its character of a legal conclusion. In dealing with findings on questions of mixed law and fact the High Court however, has to accept the findings of the Tribunal on+ the primary questions of facts; but it is open to the High t High Court in dealing with such points was the same as in t Court to examine whether the Tribunal had applied the relevant legal principles correctly or not; and scope of enquiry and the context of the jurisdiction of the in that sense, K:' dealing with pure points of law, and not beyond that. to be T taxable cases the 1920 Commission where Before considering other cases it may be appropriate to refer to the report of Royal Commission on Taxation of Profits and IncOllle of F.ogland, which was presented to the Parliament of United Kingdom in June 1955. There, the Royal Commission considered whether a simple test could be evolved that would from non-taxable one. The Royal separate Commission noted that one was that profit arising from any realisation of property should be declared by taxable income if the property had been acquired with a view to profit-seeking. This seems to have been the kind of test envisaged by they spoke of "any prof.it made on a transaction reccognisable as a business transaction, i.e., a transaction in which the subject matter was acquired with a view to profit-seeking". The difficulty, T' the Royal Commission felt, about applying that test was that, in any normal sense of the words, a "view of profit-seeking" might accnmpany many business trans.action. Since few investors it was noted could expect that their investments would remain exactly stable in probabilities of rise or fall and it is hardly to be expected that they will not choose one for which they hope or expect a rise. The Royal Commission noted that Lord Buckmaster in Leeming v. Jones, [1930] 15 T.C. 333 at 357 had observed that t "an accretion to capital" did not become income merely because the original capital was invested in the hope and expectation that it would rise in value. transactions that would not be cal led 1 in their hands, they are bound to contemplate - A B c D E F G H C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J.] 1087 the Courts, encouraged by 'llie Royal Commission at page 39 of the report observed .) that there should be no single fixed rule i.e. each case must be decided according to its own circumstances. nie general line of enquiry that had been favoured by appeal Commissioners the Royal Commission, was to see whether a transaction that is said to hiwe given rise to a taxable profit bears any of the "badges of trade". The Royal Commission was of the view that seemed to them the right line, and it had the advantage that it based t itself on objective tests of what was a trading adventure instead of concerning itself directly with the unravelling of mtive. At the same time, the Royal Commission was of the view that there was some lack of uni fonnity in the treatment of according t different cases according to the tribunals before which these had been brought. The Royal Co111Dission identify sought i these "badges of trade" as follows: - in, forms of property "(!) 'llie subject matter of the realisation. While almst any form of property can be acquired to be such as conmodities or manufactured articles, which are trading are only very normally exceptionally investment. Again property which does not yield to its owner an income or per~onal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does. the subject of the subject of length of (2) nie the period of ownership. Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But this as a universal rule. there are many exceptions (3) 'llie frequency or number of similar transactions by the same person. If realisation of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date a presump'tion arises that there has been dealing in respect of each. (4) Supplementary work on < r in connection with the property realis~d. If the property is worked up in B c D F G H 1088 SUPREME COURT REPORTS [1986] 2 S.C.R. any way during the ownership so as to bring it into a more marketable condition; or if any special exemptions are made to flnd or attract purchasers, the opening of an office or large-scale such as advertlsing, there is some evtdence of dealtng. For when there is an organised effort to obtain profit there is a source of taxable tncome. But tf nothing at all ts done, the suggestion tends the other way. . 1 'l " (5) The circumstances that were.responstble for the t realisation. There may be some explanation, such as a sudden emergency or oportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase. t (6) Motive. There are cases in which the purpose of the transaction of purchase and sale is clearly t discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realised clearly inferred from surrounding circum.qtances tn the absence of direct evidence of the seller's intentions and even, if necessary, in the face of his own evidence." that it can be In Oriental lnvestmmt Co., Ltd. v. ec-:Lssioner of 't - is the legal effect of lncolle-tax, Bombay, 32 I.T.R. 664 S.C. this Court had occasion to deal with the question of how far the finding in respect of dealing in shares was a question of fact or a question of law or a mixed question of fact and law. This Court observed that what were the characteristics of the business of dealing in ,,.-, shares or that of an investor was a mixed question of fact and law. What Tribunal and whether as a result the assessee could be tei; med-f a dealer in shares or an investor was itself a question of law. The mere fact that a company had within its objects the dealing in investment in shares, did not give to the company the characteristics of a dealer in shares, but if other circumstances were proved it might be purpose of determining the nature of the activities of the '· Company. This Court observed that inference from facts would be a question of fact or a question of law according as the t point for determination is one of pure fact or a mixed question of law and fact. A finding of fact without evidence the facts found by relevant A B c D E F G H C.I.T. v. H. HOLCK LARSEN [S~BYASACHI MUKHARJI, J.] 1089 I that it was difficult to draw a to support it or based on relevant <>nl ) not unassailable. This Court observed at page 669 of l rr,,levant matters ts line and draw a report distinction as to what was a question of law and what was a question of fact. After referring to several authorities, this Court came to the conclusion that though English decisions began with a broad definition of what were questions of law, ultimately that a "matter of degree" was a question of fact and it had also been decided -t· that a finding by the Commissioners of a fact under a mis the House of Lords decided apprehension of law or want of evidence to support a finding were both questions of law. This Court observed as to what are the characteristics of the business of dealing in shares or . that of an investor was a mixed question of fact and law. What t is the legal effect of the facts found by the Tribunal and ' whether as a result the assessee could be termed a dealer in l shares or an investor was a question of law. As was observed by Venkatarama Ayyar, J. in Sree Keenakshi Mills Limited v. <:oam.ssioner of Incoae-Tax, Madras, 31 I. T.R. 28 s.c. that in between the domains occupied respectively by question of fact and law, there is a large area, in which both these questions run into each other, forming, so to say conclaves within each other. These are mixed question of law and fact. The instant case is one. - In the case of Stanley 'lbe GrllllOphone and Typewriter, Limited, 5 Tax Cases 358 the Court of Appeal in England had dealt with that question. The Court of Appeal in England observed at 374 of the report as follows: (Surveyor of Taxes) v. "It is undoubtedly true that, if the Commissioners find a fact, it is not open to this Court question that finding unless there is no evidence ro support it. If, however, the C~mmissioners state the evidence which was before them and add that upon such evidence they hold that certain results follow, I think it is open, and was intended by the Conmissioners that it should be ope~, to the Court to say whether Conmissioners held." the evidence justified what In Calfornian Copper Syndicate (Liaited and Reduced) v. Barris (Surveyor of Taxes), 5 Tax Cases 159 at 166 Lord A g c D F G H A B c D E F G H 1090 SUPREME COURT REPORTS [19861 2 s.c.R. Justice Clerk observed that the test was whether th.e sum of gain that has been maie was a mere enhancement of value by realising a security, or was it a gain made in an operation of business in carrying out a scheme for prof it-making. ·~ fact and questions of law is difficult to define, but if the I In r.c-tssioners of Inland Revenue v. ~aght, [1928] A.C. 234,, 13 Tax Cases 511 (at page 247 of Appeal Cases Lord Buckmaster observed that the distinction between questions of circumstances found by the Commissloners in the special case + werP. them, incapable of reaching the conclusion reached by then the conclusion could not be protected by saying that it was a conclusion of fact since there were no materials upon relating to certain factors which lead to the conclusion were varying that certainly produce the result then the matter llllSt l be a matter of degree, and the determination of whether or not r the degree extended so far as to make a man in that case resident or ordinarily resident Commissioners and it was not for the Courts to say whether they would have reached the same conclusion. if the incidents t that conclusion could depend. But in England was that whether the conclusion that transaction was not an - The question was again considered in Mwards (Inspector of Taxes v. Baristow and Another, 3 W.L.R. 410 = 28 I.T.R. 579. There the House of Lords held that the facts found led "' transaction was an inevitably adventure in the nature of trade and that the Commissioners' inference the contrary should be set aside. Viscount Simonds observed aclventure in the nature of trade was an inference of fact but ·r· c•iuld be set aside because it appeared that the Commissioner had acted without any evidence or on a view of the facts which could not reasonably be entertained. In making that inference -.J. to have been rightly { to be assumed the Commissioners were directed in law as to the characteristics which distinguish such an adventure, and, so far as the Scottish courts had div2rged the other approach adopted by the English courts was to be preferred. Lord Radcliffe observed that without any misconception of law appearing on the face of the case stated, the facts found may be such that no person acting judicially and properly as to t the relevant law could have come to the determination reached. - to such problems, this approach 4 C.l.T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J.] 1091 We have noted Lord Reid in J.P. Harisson {Watford), Ltd. ) v. Griffiths {H.M. Inspector of Taxes) (supra) saying that intention at the time of the purchase was a relevant and often a conclusive factor whether the resale was in the nature of an adventure in trade or not. But i:t Saroj Kumar Mazt.lar v. Comissioner of lncOE-Tax, West Bengal 37 l.T.R.· 242. (SC), this Court ref erred to the observations of Lord Dunedin in the case of Jones v. 1-ing (supra) where the House of Lords that the fact that a man did not intend to hold an observed to show whether he was carrying ~n a trade or concern in the nature of trade in respect of his investments, but ~ ~ it led to no conclusion whatever. ·t investment might be an item of evidence tending trade, the problem the nature of the intention of In the case of Ralmarain Sons Pvt. Ltd. v. Coimissioner l.T.R. 534 s.c. this Court observed of lncoae Tax, Bombay 41 that in considering whether a transaction was or was not an adventure Ill.1st be the assessee approached in the light of having regard to the legal requirements which were associated with the concept of trade or business. The inference on this question raised by the Tribunal on the facts found was of mixed law and fact and was open to challenge before the High the assessee's Court on a reference. The question whether t<) cleallng in shares and propert tes or to investment, was a mixed question of law and fact, and the legal effect of the facts found by the Tribunal on which the assessee could be treated as a dealer or an investor, was a question of law. "' transactions ainounterl • this Court the profit motive in entering a Income Tax, Calcutta 57 l.T.R. 21 s.c. In the case of Janki Ram Bbadur Ram v. ec-lssioner of observed .\,.-that transaction was not 1 decisive, for an accretion to capital did not become taxable income merely because an asset was acquired in the expectation that it might be sold at a profit. This Court further observed that if a transaction was related to the business which was normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade might readily be inferred • This Court had occasion to consider the question of new shares offered to the holder of old shares in a company with right to renounce in the case of Miss a.in lladabhoy Kapadia v. .. A B c D E F G H 1092 SUPREME COURT REPORTS [1986] 2 s.c.R. C<.ai.ssioner of lnC0111e-Tax, Bombay, 63 ITR 651 s.c. There, the appellant, who was not a dealer in shares, held by way of-\ investment 710 ordinary shares in the Tata Iron and Steel Co. Ltd. The company made an offer to her by which she was entitled to apply for 710 new ordinary shares at a premium the shares or renouncing with an option of either taking there, wholly or partly, in favour of others. The appellant renounced her right to all the 710 shares on 12th June, 1956, and realised Rs. 45,262.50. When this amount was sought to be wholly taxed as a capital gain, the appellant claimed that ant the_ issue of the new shares, the value of her old shares de preciated, since the market quotation of the old shares which was Rs. 2)3 per share on 1st June, 1956 fell to Rs. 198.75 on 4th June, 1956 and that a result of this depreciation she suffered a capital loss in the old shares to the extent of Rs. 37 ,630 which she was entitled to set off against the capital gains of Rs. 45,262. SO. In the alternative she claimed that the right to receive the new shares was a right "1hich was embedded in her old shares and, consequently llhen she realised the sum of Rs. 45,262.50 by selling her right, the capital gain should be computed after deducting from that amount the value of the embedded right which became liquidated. It was held that the appellant was entitled to deduct from the sum of Rs. 45,262.50 the loss suffered by way of depreciation in the old shares. ~ this Court the shares of Moleod and Co. and The question was again considered by Investment Trust Co. Ltd. v. Coumissioner of Dalhousie U.CC--Tax (Central), Calcutta, 68 ITR 486 s.c. There this Court on the facts came to the conclusion that the assesseey. dealt with companies as stock-in-trade, and purchased even the-;/ purpose of sale at a profit and therefore the transactions.I amounted to an adventure in the nature of profit derived by the appellant from the sale of share was therefore revenue rec,,ipt and as much liable to incnme-tax. It Wi'lS held that the 1ecision of department in the earlier years that the transactions 1<ere in the nature of change of invest- ments was not binding in the proceedings for assessment during the subsequent years. the allied in fact these were investments but initially not as trade, and t , B c D E F G In P.M. Moha.-1 Meerakhan v. Colllnissioner of Inco.!-tax, Kerala, 73 ITR 735 S.C. this Court reiterated that it was not C.I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J.] 1093 possible to evolve any single legal test or formula which ~ could be applied in determining whether a transaction was an adventure in the nature of trade or not. The answer to the question llllst necessarily depend in each case on the total impression and effect of all factors and circumstances proved therein and which determine the character of the transaction. relevant review it was reiterated that since -t lncoE-Tax, Bihar & Orissa, 77 ITR 253 s. C. In Raja Babadur Kamkhya Narain Singh v. Coalllissiooer of the question of adventure in the nature of trade was again considered by this Court and the expression "adventure in the nature of trade" implied the existence of certain element in the transactions which in law would invest t these with the character of trade or business and the question ·. on that account became a mixed question of law and fact, the if it had the Tribunal's 1 court could misdirected itself in law. It was fairly clear that where a person in selling his investment realised an enhanced price, the excess over his purchase price was not profit assessable to tax as income, but it would be so, if what was done was not the investment but an act done for a mere realisation of types of making prof it. The distinction between transactions transaction is of one kind or question whether the excesc is an enhancement of the value by in an operation of realising a profit-making. The assessee might invest his capital in shares with the intention to resell these if in future their sale bring in a hi.gher price. Such an investment, though motivated '"( by a possibility of enhanced value, did not necessarily render to make. Whether the other depends on security or a gain is not always easy findings 'f< the investment a transaction in the nat•ffe of trade. In the premises the totality of all the facts will have to be borne ii1 mind and the correct legal principles applied to these. If all the relevant factors have been taken into consideration and principles of Tribunal cannot be interfered with because the inference is a if such an inference was a possi~le one, question of law, i subject, however, that all the relevant factors have been duly weighed and considered by the Tribunal, the inference reached by the Tribunal should not be interfered with. there has been no misapplication of the conclusion arrived at by A B c D E F G H A I c D E F G 1094 SUPREME COURT REPORTS [19861 2 s.c.R. In order to determine the question involved in the instant appeals, certain features will have to be borne in -\ mind. All the right shares were acquired directly as right shares at par from the company. It was further urged that as Chairman assessee was duty-bound to support the issue of new shares by reduce his overdraft, according to the assessee. The gales were also made to purchase a house in Denmark and for which permission had been obtained from Reserve Bank of India to remit Rs. l lakh. This would appear from the assessment order for 1959-60. the company. Sales were made i It was further emphasi~et! that the market prlce "'as lower on the date of sale and there was no profit motive. The Income-tax Officer, however, held intention of the assessee for acquisition of the shares. The i shares acquired after 1st April, 1954 were held as trading stock. This date was chosen by the Income-tax Officer because i from this date, the assessee started selling as well as buying shares on a large scale. Therefore, according to the revenue, this indicated dealings in shares. It may be noted that as such there was -basis for choosing that. that profit was The Tribunal, however, after consideration of all these facts came to the conclusion that the assessee was a dealer in shares. - The judgment of investor. The High Court further Y' the High Court under appeal which incidentally is reported in 85 I. T. R. at page 285 held that the decision in the earlier years that the assessee was an investor was not binding for subsequent years, assessee was always an observed that the frequency of transactions was not decisive. According to the High Court, it was necessary to appreciate --ll the implications of the issuance of right shares and purchase f thereof by the assessee. Right shares were issued by virtue of the provisions of section 81 of the Companies Act. It is rot necessary to set out the provisions dealing with the issue of right shares. The issuance of the right shares depreciates the value of the original shares initially. In the impugned judgment, it was held that whether the t transactions of sale and purchase of shares were trading transactions or in the nature of investment was a question of H C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J,] 1095 } law and JDJSt be viewed in the light of the intention of the asses see. • wealth. As On -.satisfy the question of how the right shares affect the original shares, our attention was drawn to Investments - An Introduction to Analysis and Management Fifth &:lition, wherein the book that the world it was emphasised at page 35 of economies offered a wide variety of securities or assets to risk. Most investor's desire for return and investors are risk-averse, and attempt investors maximize wealth by a principle, maximizing return and minimizing risk. Investment may be defined as the purchase by an individual or institution it was ~observed of an asset that produces a return proportional to r risk over some future period. The investments, it was further typically financial +observed, available for purchase were assets, but real or tangible assets might be included among the alternative investments. to maximize reason 604 of the main _,to diversify the book, was investments. As a general Another principle guiding investment, tt was emphasised reduction of a risk of loss of capital and diversification - income. Investors face an unknown and uncertain future and try rule lt was emphasised at page 603 of the book, growth of capital was a desirable objective of portfolio management. Thi' .1;.: ., .:· 1~J;lJ. that every investor llllSt invest in growth stocks; this wouli lnconsi.stent with many investors' needs. A fund can be built up ·-fpurchase of growth shares. A large fund does provide more income for the investor than a small fund. Many investors have increased the capital value of their funds through reinvested 'ividends and capital gains, and some a combination of both. In spite of these variations, several objectives should be considered as basic to a well-executed investment programme. The guiding principles establish the indifference curve of risk versus return for the investor. income. Some wanted income as well as from reinvested interest through income, ,,.. t highlight this aspect. To various other authorities our attention was drawn to In Busi111!88 Flmnce · - l W Paish and R J Briston, Sixth H A B c D E F G ....._ - 1096 SUPREME COURT REPORTS [1986] 2 S.C.R. Edition at page 115, it was observed how issue of right shares , depreciates the value of the original shares. It was thus ~ observed : "Since the price to be paid for the new shares is substantially below the current market price of the existing ones, the price per share of the enlarged issue will normally be below the price of the old shares before the issue, and the price of the old share will therefore tend to fall; but shareholders -t will recover this loss either by taking up the new shares themselves or by selling their rights. If they neglect to do either they will suffer a loss shares without t their existing compensation, unless the company, as mally the case, sells their rights on their behalf i and pays over them. Whatever happens, either the shareholders will take up the shares themselves or they or the company will sell their rights to someone else who will do so. The success of issue can therefore be assured, provided that it is not too large in relation to the capital already issued." the proceeds is now nor As noted above, section 81 of the Companies Act, 1956 so ~ increase far as relevant for the present purpose provides that if a company proposes its subscribed capital by allotment of further shares, such shares should be offered to the existing share-holders of Equity Shares and the offer should be deemed to include a right to renounce the shares. y-. The right to receive the new shares is embedded in the old shares. Therefore the moment, it was emphasised by the High Court, the issue of right shares are announced, the original~ to depreciate because a share was bound people participate in the existing capital. larger number of - the right shares and sold The High Court emphasised that in this case the assessee them and he also had acquired renounced some of those rights. The question which the High Court was confronted with was whether by indulging in those L transactions, the assessee was trading in shares or whether he T entered into those transactions in the old capacity of an investor. The High Court was of the view that the course of -" A B c D E F G H C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J,] 1097 to prevent the right shares was -t noted before that the Right shares, according dealings in the instant case showed that the dominant motive } of the assessee in acquiring and selling the new shares and in renouncing some of inevitable erosion of his capital. If the assessee, according to the High Court, had not acted in the manner he did, his original investments would have depreciated in value, and therefore, in a sense he entered into these transactions to nurse his investments. It was important to bear in mind, and that could be appreciated if one had regard to what has been the High Court, were not acquired by the assessee as a matter of free choice. The assessee acquired, according to the High Court, those shares because if the assessee did not do so, his capital would erode. But as is apparent from the facts noted t-before, he had to find so much more money in order to acquire +overdraft account to swell. Having regard to all the facts as noted by relevant decision, the High Court was of the view that true object in this case was to prevent depreciation in the value of his investment. The assessee also in this case, as we have noted before, renounced some of his rights tn get the right shares. the shares and it was not always prudent the High Court and to permit referring • j 'I' nursing The High Court was of the view that investment has not been Tribunal. Therefore, in the light of the justified one inference was circumstances of this case. a the true intention of appreciated by facts, the Tribunal's ·"i At the outset it must be stated that the Tribunal in its order has noted that according to the assessee, the contention of the assessee was that with a view to keep the bankdraft 'within reasonable iimit and with the price object of nursing · his investments in the company, the asses see had to and was to sell some of the forced and compelled by clrc11J11Stances shares and the Trlh,1nal has also noted that the assegsee woLtH not be a trader by c0mpulsion. The Tribunal hai ~·»t·:l·l••rd these arg11ment<. The Tribunal also noted that the asge·;see was the Chairman of the Board of Di rectors. The Tribunal a l~o __. ~oted that ever since its inception, the company was expanding r 1ts business and making good profits. Its capital had increased and, therefore, right shares were offered to the existing shareholders. The assessee had a substantial •.ulding . , A B c Tl E F G H 1098 SUPREME COURT REPORTS [1986] 2 s.c.R. IDlCh more of F.quity Shares in the company. It was therefore, according to the Tribunal, not obligatory on the assessee to acquire \ right shares. 'Ille Tribunal considered the acquisition of right shares in the background of the indebtedness of the assessee to the bank and he was having an over~raft account on which he was paying interest. 'Ille Tribunal noted the frequency of the acquisition of the right shares and the sales in large numbers in quick succession, and according to the Tribunal, the motive was to make profit and that all the dealings in shares were part and parcel of a profit making scheme. further noted that the Appellate Assistant Conunissioner, in fact, had found that in some years the income of the assessee to meet and notwithstanding that fact, the assessee had sold some shares. -t According to the Tribunal, the correctness of this finding had neither been challenged before the Tribunal nor anything established to the contrary. 'Ille Tribunal was of the view that + the assessee was under no obligation to acquire right shares. There was no necessity for him to apply for right shares except to make profits. It was far from the conduct of a prudent and reasonable man like the assessee to expect him to sell away his capital assets to meet the recurring personal expenditure, according to the Tribunal. The frequent acquisi tion of right shares at par coupled with the fact that even some of the original holdings were sold, was against the sub- mission that the sale was to nurse the investment. the expenses he had 'lf 'Ille Tribunal ~ According to the Tribunal if the fact of the overdraft by the assessee was borne in mind and if the fact of overdraft is kept in view then it could not be said that the assessee had purchased the right shares with a view to what can be ascribed )" as nursing the investments. 'Illerefore bearing the principles of the different cases f which we have set out hereinbefore and considering the motive in the light of the transactions and the intention with which the shares were acquired, nature of the shares, the question has to be judged whether there has been trading in shares or in the words of Lord President Clyde, whether there was plunge in the waters of trade, in buying shares or acquisition of shares, (see The Balgoomie Land Trust Ltd. v. The c.-lsaioner t of Inland llenenue, 14 Tax Cases 684 at 691). • .. A B c D E F G H C, I, T, v, H. HOLCK I.ARSEN ( SABYASACHI MUKHARJI, J. ] l 099 t show The High Court, the gain which was proper perspective by likely to result which in our opinion, made a mistake J observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This is a mixed question of law and fact. The entirety of the said facts have been dealt with both by the Tribunal as well as the High Court. The High Court observed that there was nothing on record to show as to what extent and what measure, the overdraft account was utilised for acquiring right shares nor indeed was anything to in fact resulted to the assessee by paying interest on the borrowed fund. But the relevant facts 1111st be considered in its proper perspective. It appears that the facts, that the assessee was the Chairman of the Company - effect of the issue of right t shares vis-a-vis original shares had not been fully kept in in its evaluation. It the Tribunal ·t further appears that the fact that the assessee was the Chair man of the company and in fact that if he did not participate in buying right shares, that would have adverse effect on the value of the shares of the company, was also not kept in view by the Tribunal. Consideration of all relevant facts involves appreciation of all the facts in their proper perspective. If that is not done it cannot be said that there has been consi factors. Tribunal, it appears, fell deration of all relevant into consideration properly and fully- though it noted, the fact that if the right shares were the assessee, his original shares ·would not subscribed by depreciate in value, but the assessee was also in need of money - he had an overdraft with Bank and he had to remit money to Denmark for the purchase of a house - and further '"i when right shares were issued had he not subscribed to these, there might have been adverse effect on the market so far as -", the shares of the company were concerned. In the background of the correlation of these factors the action of the assessee investor and not of a plunger in the waters of assessee keeping in the background these were right shares and effect of non-subscription the value of the original shares were not fully appreciated by the Tribunal. And as such the attitude of a person entitled to right shares for judging 1 whether he was a dealer and investor was not viewed in proper dimension but merely noted by the Tribunal resulting in the non consideration of a vital factor leading tp an erroneous trade. The dealings in the right shares by ~ into error in not like a prudent taking A B c D E F G H - A B c 1100 SUPREME COURT REPORTS [1986] 2 S.C.R. to how inference. The Ttibunal in this case has undoubtely noted the assessee's contention of nursing the investment. The Tribunal, however, has not considered in its order the actual position investment was necessary. Tribunal thus erred. In that view of the matter the High Court was justified in interfering with the conclusion reached by the Tribunal. There is no reason to interfere with the order of High Court. the nursing of \ In the premises these appeals lllllst fail and are dismissed T with costs. • In. the view we have taken the Special Leave Petition Nos. 8292-8293 of 1979 are accordingly dismissed. In the facts and~ circumstances, however, of these cases, there will be no order ) as to costs of these applications. S.R. Appeals and Petitf.ons dismissed. - r