Patna High Court
Raja Bahadur Vishweshwara Singh Of ... vs The Commissioner Of Income-Tax And Ors. on 26 April, 1956
Equivalent citations: AIR1956PAT501, [1956]30ITR202(PATNA)
JUDGMENT Das, C.J.
1. These are five miscellaneous judicial cases in which this Court required the Appellate Tribunal to state a case on the following two questions of law:
(1) Whether in the circumstances of the case there is material to support the finding of the Appellate Tribunal that the assessee was a dealer in shares and securities with respect to each of the accounts and, therefore, liable to be taxed.
(2) Whether, having regard to the findings of the Appellate Tribunal in respect of 1941-42 assessment, it was open to the Appellate Tribunal in the present cases to hold that the profits and the transactions of sale and purchase of shares and securities amounted to profits of business and so liable to be taxed.
2. The relevant facts are these. The assessee is a zamindar, being the brother of the present Maharajadhiraj of Darbhanga. He owns and possesses a big zamindari property, known as the Rajnagar estate, under a maintenance grant. The assessee had been purchasing shares and securities from the Fasli year 1336 onwards (corresponding to the assessment year 1930-31). In their statement of the case, the Appellate Tribunal has divided the assessment for the years 1930-31 to 1948-49 into three period, the periods being (1) 1930-31 assessment year to 1940-41 assessment year; (2) 1341-42 assessment, year to 1943-44 assessment year and (3) 1944-45 assessment year to 1948-43 assessment year.
During the first period there were purchases of shares year after year, but there were no sales except in the fasli year 1344 (corresponding to 1938-39 assessment year). The profits arising on the sales in the Fasli year 1344 amounted to Rs. 83,807/- That amount was, included in the assessee's total income for the year 1938-39 by the Income-tax Officer. The Commissioner of Income-tax confirmed this inclusion by an order under Section 33, as it then stood but by a revised order dated 22-5-1941, the Commissioner of Income-tax excluded this sum of Rs. 83,807/- from the assessee's total income for 1938-39 on the ground that the amount was capital accretion and not "business profits."
On 16-7-1940, the petitioner arranged with the Mercantile Bank Ltd., Calcutta, to allow him to overdraw his account by Rs. 10,00,000/- on the guarantee of his brother, the Maharajadhiraj of Darbhanga, and against deposit of shares to be bought by the assessee. This overdraft arrangement was made for the purpose of buying shares and securities, and under this arrangement certain shares of the value of Rs. 10,000/- were bought on 22-7-1940, and the value was debited to the assessee's account in the Mercantile Bank of India Ltd.
Within five days of the aforesaid purchase, however, that is, on 27-7-1940, the assessee obtained in cash a sum of Rs. 10,00,000/- from his brother, without Interest, and paid the amount into his account with the Mercantile Bank of India Ltd., thereby wiping out the overdraft of Rs. 10,000/-. The overdraft arrangement with the Mercantile Bank came to an end and out of the sum of Rs. 10,00,000/- provided by the assessee's brother the assessee purchased and sold shares and securities tor large amounts.
A separate set of account books was opened on 22-7-1940, which were styled "No. 2. Investment Account" and the purchase and sale of shares made out of the sum of Rs. 10,00,000/- were recorded in those books. There was another set of books called No. 1 Investment Account. In these books were entered the purchases and sales of shares which the assessee had been making since the 1930-31 assessment year.
3. In the second period, namely, the period from 1941-42 to 1943-44, there were purchases of shares in all the three years, but sales only in two years, and the excess receipts in 1347 and 1348 Pasli were Rs. 79,418/- and Rs. 39,326/- respectively. These sums were the subject-matter of assessment for the assessment years 1941-42 and 1942-43.
The Income-tax Officer held that they were business profits and, therefore, assessable to income-tax. After an unsuccessful appeal to the Appellate Assistant Commissioner against the assessment for 1941-42 the assessee appealed to the Income-tax Appellate Tribunal. The Tribunal allowed the appeal of the petitioner and held that the sum in question was not business profits, but capital accretion of a prudent investor. The order of the Appellate Tribunal dated 25-10-1943, is marked Ex. A in the paper-book, and will be found at pages 13 to 18.
The findings of the Appellate Tribunal with regard to the assessment of 1941-42 have been summarised in the statement of the case, and will be found at page 4 of the paper-book. It is worthy of note, however, that the Appellate Tribunal considered the effect of the arrangement with the Mercantile Bank of India Ltd., which the assessee entered into in 1940 and also the advance of Rs. 10,00,000/- which the brother of the assessee made to him. On a consideration of all the facts and circumstances, the Appellate Tribunal came to the conclusion that the assessee was merely an investor and he converted some of the shares in the accounting year in question for the purpose of a better return and as such he did not do any business.
4. In regard to the assessment year 1942-43, the Appellate Assistant Commissioner excluded the sum of Rs. 39,326/- from the total income for that year, relying upon the past history of the case. No profit was derived by the assessee from the sals of shares in the assessment year 1943-44, as there were no sales in that year.
5. I now come to the third period, which is the period in question in these five cases. In their statement of the case, the Appellate Tribunal has given tabular statements of the purchases and sales in both the accounts, Account No. 1 and Account No. 2, for the assessment years 1944-45, 1945-46, 1946-47, 1947-48 and 1948-49. The net profits made from the purchase and sale of shares for the aforesaid years were as follows-
1944-45 .
Rs. 2,62,000/-
and odd 1945-46 .
Rs. 3,95,000/-
and odd 1946-47 .
Rs. 1,57,000/-
and odd 1947-48 .
Rs. 1,33,000/-
and odd.
1948-49 .
Rs. 76,000/-
and odd
6. The Income-tax officer found the aforesaid amounts to be business profits and, therefore, liable to income-tax. The findings which the Income-tax officer gave have been, summarises in the statement of the case and will be found at p. 6 of the paper-book. The assessee preferred appeals to the Appellate Assistant Commissioner against the assessments for all those years. The Appellate Assistant Commissioner, who heard the appeals against the assessments for 1944-45 and 1946-46, decided in favour of the assessee and excluded the profits from the assessments, relying principally on the Appellate Tribunal's finding with regard to the 1941-42 assessment.
The Appellate Assistant Commissioner, who heard the appeals against the assessments for 1946-47, 1947-48 and 1948-49, however, confirmed the assessments. The Income-tax officer appealed to the Tribunal against the orders passed by the Appellate Assistant Commissioner in respect of the assessments for 1944-45 and 1945-46, and the assessee appealed to the Tribunal against the orders passed by the Appellate Assistant Commissioner in respect of the assessments for 1946-47, 1947-48 and 1948-49. All these appeals were heard together by the Appellate Tribunal and a common order was passed on 11-5-1951. The Appellate Tribunal held as follows:
"We hold on the evidence before us that the assessee is to be regarded as a dealer in shares and securities, and the profit or loss from such share dealing is assessable to income-tax as profits from business."
Thereafter, the assessee moved the Tribunal under Section 66(1), Indian Income-tax Act for referring certain questions of law to this Court. The Tribunal by its order dated 22-2-1952, refused to refer the particular questions of law which the assessee wished to be referred to the High Court.
The assessee then moved this Court, and this Court by an order dated 21-1-1853, directed the Appellate Tribunal to state a case on the two questions of law which I have quoted at the beginning of this judgment. A statement of the case was then made by the Appellate Tribunal with regard to the two questions of law already indicated by me.
7. We have heard learned counsel for the assessee and learned counsel for the Income-tax Department. It is well to emphasise at this stage the limited scope of the first question of law which we have to answer. It is now well settled that we do not sit in appeal, over the decision of the Appellate Tribunal, and it is not for us to determine afresh with regard to the evidence given in the case whether the assessee was merely a prudent investor or was carrying on a business in shares and securities.
If there was evidence or material in support of the finding of the appellate Tribunal, there would be an end of the matter and we must then answer the first question against the assessee. This point, as I have said, is well settled and I need only refer to -- 'Rellim Ltd. v. Vise', 1952-22 I. T. R. (Sup) 51 (A); -- 'Lalit Ram Mangilal v. Commissioner of Income Tax, U. P.', 1950-18 ITR 286: (AIR 1950 All 390) (B); -- 'The American Thread Company v. Joyce', (1913) 6 Tax Cas 163 (C); -- 'W. L. Knopp v. Commissioner of Income-tax, Madras, 1948-16 ITR 398: (AIR 1949 Mad 393) (D) ; -- 'Messrs. Behari Lal Jhandu Mal, In re', 1944-12 ITR 209- (AIR 1944 Lah 287) (E) and.-- 'K.H. Mody, In re', 1948-8 ITR 179 (P)..
Therefore, the principal question before us is whether there was material in the record to support the finding of the Appellate Tribunal that the assessee was a dealer in shares and securities, in other words, the profits which the assessee made in the years in question were profits of business and not merely the profits of a prudent investor. Learned counsel for the assesses has submitted before us that the Appellate Tribunal instead of confining themselves to the facts found by the Income-tax officer have expressed opinion or drawn inferences therefrom, which inferences do net follow from the facts found.
The argument before us is that the facts which have been found excluding the inferences drawn therefrom, would show that the assessee, who held large zamindari property and had considerable sums for purposes of investment, was a mere investor and he did not carry on any trade or business so as to make the profits from his investment liable to income-tax. The statement of the case submitted to us by the Tribunal has been criticized on the ground that instead of merely stating the facts found, it includes opinions and inferences drawn therefrom.
The main argument of learned counsel for the assessee is that if the Appellate Tribunal had confined themselves to the facts found then they could not have come to the conclusion that the assessee was a dealer in shares and securities. Learned counsel has contended that the case should be approached from this point of view, and it should be held that there was no material to support the finding of the Appellate Tribunal.
Learned counsel has submitted that the question whether there is material on record sufficient to sustain a finding of fact which is based on inferences from other proved facts is a question of law, and has relied upon the observations of his Lordship Bose J., in -- 'Seth Suwalal Chhogalal v. Commissioner of Income-tax, U. P. and C. P., 1949-17 ITR 2(59: (AIR 1949 Nag 249) (G), I may quote hero the observations of his Lordship in ex-tenso. His Lordship Said:
"Now it may be difficult in given cases to draw a dividing line between what is purely a question of fact and what is a question of law in so far as the question is whether there is present in the case the necessary scintilla of evidence on which a given fact can be based or a fact can be said to be disproved, I use the expression 'necessary scintilla of evidence' because, in my opinion, that embodies what is meant in Section 3(1), Evidence Act.
The question, in this case is whether, assuming the burden of proof is on the Income-tax authorities to prove that no genuine partnership exists, there is evidence which can be left to a Jury to determine that fact. Now though it may be difficult, in given cases to draw the line, nevertheless the law directs that a line must be drawn and their Lordships of the Privy Council have stated on several occasions that suspicion cannot take the place of proof. Accordingly, we have to see whether there are facts here from which an inference that this was not a genuine transaction but a sham one can be drawn."
It is well to remember, however, that every inference from facts proved is not necessarily a question of law. An inference that a man is suffering from cold because he is sneezing is not ax inference of law but is really an inference of fact. If I may say so with great respect, the matter was put very succinctly by Malik C. J. in '1950-18 ITR 286 at p. 294 : (AIR 1950 All 390 at p. 392) (B).
"After the primary facts have been found the question arises of inferences from them. Any legal effect from such findings must necessarily be a question of law. Where it is an inference of fact if the inference could not be derived from the proved facts, even in that case it is possible to hold that this Court can go into the Question on the same ground on which this Court does not consider itself bound by findings of fact which, are not based on any evidence.
Where the inference drawn is not a pure inference of fact but is a mixed inference, partly of fact and partly of law, so tar as the inference is an inference of law this Court cannot be bound, but a pure inference of fact from primary facts proved if it is not possible to hold that such inferences cannot follow from such findings, cannot be reopened before us. The question therefore, narrows down to this, whether the Tribunal had any material on which it could come to the conclusion that the purchase of gold bars was in the nature of a trade with a dominant object of making profit."
If the appellate Tribunal has applied the right principles in determining the question at issue before them and has considered the facts proved, it is really not for us to say that a different inference should have been drawn. It is true, as was observed in -- 'Dhirajlal Girdharilal v. Commissioner of Income-tax, Bombay', 1954-26 ITR 736: ( (S) AIR, 1955 SC 271) (H), that where a Court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the Court was affected by the irrelevant material used by it in arriving at its finding; and such a finding is vitiated because of the use of inadmissible material and thereby an Issue of law arises. That, however, is not the question before us.
The question before us is whether the Appellate Tribunal applied the right principles and had material or facts before them on which they could hold that the assessee was engaged in trading transactions in the matter of shares and securities. As was observed by Vaigey J. in -- 'Dunn Trust Ltd. v. Williams', (1950) 31 Tax Cas 477 at p. 484 (1), a decision on which learned counsel for the assessee has relied, this Court must be careful not to depart from the conclusions arrived at by the Income-tax authorities, if these conclusions were justified by the evidence. In '1952-22 ITR (Sup) 51 (A), Wynn-Parry J. said:
"The 'principles of law which govern this case are perfectly clear; and as the matter strikes me it is one which upon examination will be found to raise no more than a very short question --short, but not thereby easy to answer -- namely, whether or not the Commissioners had evidence before them upon which they could properly make the finding which they did".
If I may say so with great respect, in the case before us also the short question is whether or not the Appellate Tribunal had materials before them upon which they could properly make the finding which they did.
8. As the statement of the case sent to us by the Appellate Tribunal has been criticised as being mostly inferential, I would go at once to the order of the Appellate Tribunal dated 11-5-1951, by which the Appellate Tribunal held that the assessee was to be regarded as a dealer in shares and securities. The Appellate Tribunal considered the following facts and circumstances in arriving at their finding. In para. 6 of their order the Appellate Tribunal said:
"It appears to us that though, as is claimed, the assessee may be a big Zamindar by himself with a likelihood of heavy balances awaiting investments, in this particular case, he was able to indulge himself in the present set of activities only as a result of the substantial borrowing from his together to the extent of Rs. 10,00,000/-".
The Appellate Tribunal then said:
"It is in evidence that the assessee's brother is having a well established office with expert personnel at his command to deal with investments in the share market and the assessee presumably wanted to avail himself of this expert knowledge of his brother's establishment. The fact that he entered into an agreement with the bank for a large loan to finance him in this scheme of his seems to support this view."
The Appellate Tribunal then dealt with the arrangement with the Mercantile Bank of India Ltd., & the two accounts which were maintained on behalf of the assessee. The Appellate Tribunal then observed;
"In both cases, the purchases have been exclusively out of borrowings. It is not therefore clearly the case of an investor, as it has been argued, who has ample funds in his hands and who looks out for investments picking such as would give him the largest returns consistent with safety."
The Appellate Tribunal found that the transactions in question were substantial, and the manner in which the books had been maintained confirmed the view that the assessee had been engaging himself in an operation of business in a regular scheme of profit making. The Appellate Tribunal found that the sales of the shares were for the purpose of cashing in on the improved markets which undoubtedly prevailed during the years 1350 to 1353, during which period, significantly, there were no substantial purchases; but in 1354 Fasli there were substantial purchases when market conditions reached rock-bottom levels.
All these are facts and circumstances which the Appellate Tribunal could take into account in arriving at their finding, and I am unable to agree with learned counsel for the assessee that there were no materials before the Appellate Tribunal to support their finding. It is not disputed that the law upon this matter is free from doubt, and as was observed by Vaisey J. in '(1950) 31 Tax Cas 477 at p. 485 (1)', the 'locus classicus' upon this point is the opinion of Clerk L.J., in the case of -- 'Californian Copper Syndicate v. Harris', which is reported in '5 Tax Cas 159 at p. 165 (J), where Clerk L. J. says: , "It is quite a well settled principle in dealing; with questions of assessment of Income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D, Income-tax Act of 1842 assessable to Income-tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits."
The question is if the aforesaid principles were kept in mind by the Appellate Tribunal. The order of the Appellate Tribunal dated 11-5-1951, shows clearly that they applied the right principles which were referred to by the Judicial Member of the Appellate Tribunal in his order dated 11-5-1951, he observed:
"The original overdraft account that was arranged closed in July, 1940, as the assessee's brother advanced moneys. There was no change of interest, nor were the advances from the assessee's brother repaid even at a time when the account towards the end 1350 and 1351 showed cash balances of about 4,1/2 lakhs and 7,1/2 lakhs respectively. Sales started in 1347 and continued repetitive operations resulted in profits assessed between the years under purview. The assessee's accounts were maintained by the investment department of his brother and the transactions were done through that organization and the purchases and sales effected through brokers. The clear indication in this case is admittedly that the purchases and sales were originated with an overdraft arrangement and substituted subsequently through the help of the assessee's brother. A person who deals with such amounts could not, in our view, intend to invest and the intention at the time of purchases must be with a motive of earning profits."
There is no cut and dried formula by which trading or business transactions can be distinguished from the operations of a prudent investor. Business is defined in Section 2 (4), Indian Income-tax Act as "including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture". The number of transactions is not the sole determining criterion of test, though a systematic and habitual dealing in shares may be an important element which has to be taken into consideration for determining whether the transactions were business transactions within the meaning of the Income-tax Act.
In 1944-12 ITR 209 at p. 225: (AIR 1944 Lah 287 at p. 293) (E), it was rightly observed that the essential test in such cases is whether the sales and purchases were made not with the intention to invest one's capital but with the object of selling the shares in future in order to make a profit. The Appellate Tribunal kept that test in view and considered the materials before them in the light of that test.
9. Learned counsel for the assessee has drawn our attention to two circumstances. It has been pointed out that from the statements supplied by the assessee the total purchases for the years in question came to Rs. 44,00,000/- in the two accounts. There was no sale of shares in the Fasli years 1350, 1351 and 1352 in either of the two accounts; in Fasli year 1353 there were sales to the extent of Rs. 61,075/- only. In 1354 Fasli there were sales of shares and securities worth Rs. 3,39,174/-, which included Rs. 2,00,000/- worth of Government of India securities, namely, Victory Loans.
It was also pointed out that one of the sales in Account No. 2 related to 3 per cent. Calcutta Board Trust Debentures which were purchased at a cost of Rs. 9,65,000/- in 1353 Fasli and were sold in 1354. Then again, it was pointed out that In the Fasli years 1356, 1357 and 1358 there were no sales in Account No. 1 or Account No. 2, and in Fasli year 1357 there was some loss in Account No. 2, due to the liquidation of some Companies, amounting to Rs. 11,424/-.
Learned Counsel for the assessee has taken us through some of these transactions of the years in question, and has very strenuously argued that if the statements of purchases and sales which were submitted by the assessee in respect of the two accounts were scrutinised, it would be found that the transactions were all for the purpose of prudent investment and were not trading transactions. It is true that if profits are made as a result of investment, such profits are not business profits; they are merely accretions to capital. :
But, as I have said, it is not for us to determine afresh on the evidence in the record whether the assessee was carrying on a trade or business or was a mere prudent investor. If the Appellate Tribunal had materials before them, to come to the conclusion that the assessee was carrying on a trade or business, even though the transactions were isolated or few in number, there is an end of the matter and we cannot interfere with the findings of the Appellate Tribunal.
10. In my view the proper answer to the first question is that there was material to support the finding of the Appellate Tribunal and the question must, therefore, be answered against the assessee.
11. With regard to the second question, the position seems to me to be equally clear. It is well settled that the rule of res judicata does not apply in such cases (see -- 'The Commissioners of Inland Revenue v. Sneath', (1932) 17 Tax Gas 149 (K). Though the Income-tax Officer is not bound by the rule of res judicata or estoppel by record, yet he can reopen the matter of assessment only if fresh facts came to light, which, on investigation, would entitle the officer to come to a conclusion different from that of his predecessor; see -- 'Kaniram Ganpat Rai v. Commr. of Income-tax, Bihar and Orissa, 1941-9 ITR 332: (AIR 1941 Pat 527 (1).
Therefore, with regard to the second question the point to be considered is whether there were fresh materials on the second occasion on which it could be held that the assessee was carrying on a business of shares and securities, a finding which is contrary to the finding arrived at by the Appellate Tribunal for the assessment year 1941-42. In their statement of the case, the Appellate Tribunal have placed side by side the facts found by the Tribunal in respect of the assessment year 1941-42, and the facts found by the Tribunal in respect of the assessment years 1944-45 to 1948-49: this will be found at page 9 of the paper-book.
It is obvious from what the Appellate Tribunal has stated that there were fresh materials before the Appellate Tribunal on which they were entitled to come to a conclusion different from that of their predecessor, and it cannot be said as I a matter of law that it was not open to the Appellate Tribunal to come to findings different from those arrived at by the Appellate Tribunal in respect of the 1841-42 assessment.
The second question must also be answered against the assessee. Lastly, learned counsel for the assessee has submitted that in very similar circumstances in the case of the Maharajadhraj of Darbhanga, it was held that he was an investor and the profits made, were not business profits. The tax-payer has my sympathy in this case, because different conclusions were arrived at by the Appellate Tribunal for the different assessment years; and if in the case of his brother another conclusion has been arrived at, there is perhaps a case of hardship. Hard cases should not, however, make bad law.
The question before us is the short question whether for the five years under consideration there were materials before the Appellate Tribunal from Which they could come to the finding at which they came. Once that question is answered against the assessee, we have no power to interfere with the findings of the Appellate Tribunal
12. In the result, I would answer both the questions against the assessee. The Income-tax Department are entitled to their costs and we assess the hearing fee at Rs. 250/- only. There will be one consolidated hearing fee for all the five cases.
Kanhaiya Singh, J.
13. I agree.