Patna High Court
Commissioner Of Income-Tax vs Shri Krishna Gyanoday Sugar Ltd. on 17 October, 1963
Equivalent citations: [1967]65ITR449(PATNA)
JUDGMENT
UNTWALIA J. - On being required by the High Court under section 66 (2) of the Indian Income-tax Act, 1922, the Income-tax Appellate Tribunal, Patna, Bench, has drawn up a statement of the case and refereed the following question of law :
"Whether, on the facts and circumstances of this case, the loss of Rs. 7,74,080 is a permissible deduction as a revenue loss arising out of the dealing in shares for the assessment year 1949-50 ?"
Shri Krishna Gyanoday Sugar Ltd., the assessee, is a public limited company, raining two sugar manufacturing factories in Bihar - one at Hathwa and the other at Leuriya. The assessment year in question is 1949-50, for which the previous accounting year is the 1st August, 1947, to 31st July, 1948. In the said previous year, Shri Shanti Prasad Jain, the chairman of the board of directors of the assessee-company, owned about 75 per cent. of the ordinary shares and commanded an absolute majority in the meeting of the shareholders. In May, 1945, Shri S. P. Jain advanced a loan of Rs. 31,50,000 to Dalmia Cement and Paper Marketing Ltd. (D. C. P.M. Ltd.) for purchasing shares of New Central Jute Mills Co. Ltd. The said Cement and Paper Marking Company purchased a lot of 2,932 shares of the jute company at the rate of Rs. 675, as against the market quotation of Rs. 603. In all, during the year 1945, the former company purchased 4,838 shares of the jute company, the average price of which was slightly below Rs. 680 per shares. 4,700 shares had been purchased up to the 30th October, 1947, and this enabled Shri S. P. Jain, who was, in control of the Cement and Paper Marketing Co., to be appointed as a director of the jute company on November 2, 1945. On August 31, 1947, the Dalmia Cement and Paper Marketing Ltd. transferred the entire block of 4,838 shares of the jute company to the assessee-company at the rate of Rs. 680 per share, making a nominal profit of Rs. 1,430 only. It is important to note that the market quotation of the shares of the New Central Jute Mills Co. Ltd. on the date of transfer was Rs. 523 per shares (Rs. 530 is mistake in the statement of the case as printed in the paper-book). On June 30, 1948, during the same pervious year, the assessee-company sold the entire block of shares to Dalmia Investment Ltd. at Rs. 520 per shares. The latter, in its turn, transferred the entire block of shares to Shri S. P. Jain in July, 1948, at the same Price, i.e., Rs. 520 per share. Thus, during the previous year of the assessee-company, a lost at the rate of Rs. 160 per share has been shown and claimed in the purchase and sale of 4,838 shares of New Central Jute Mills Co. Ltd., the total amount of loss claimed under this head being Rs. 7,74,080.
The Income-tax Officer disallowed the loss aforesaid for reasons which will be stated hereinafter. The Appellate Assistant Commissioner of Income-tax maintained the disallowance. But, on second appeal by the assessee-company, the Income-tax Appellate Tribunal has held that :
"..... the loss of Rs. 7,74,080, is a genuine loss and is in the nature of a revenue loss which has to be allowed."
In order to answer the question of law mentioned above, it would be necessary to find out as to whether there is any material or evidence in support of the finding of the Tribunal that the loss is a genuine one and is in the nature of a revenue loss, and whether the Tribunal has misdirected itself in law in arriving at the said finding is not a pure finding of fact as was urged by Mr. S. N. Datta, learned counsel for the assessee, but is, as I shall show hereinafter, a mixed question of fact and law.
The findings of the Income-tax Officer, for disallowing the loss in question, to put it in his own words, are the following.
"(i) S. K. G. Ltd. is not a share-dealer nor did holding of investments for a brief period in a jute mill promote or advance its interest as a sugar manufacturing company.
(ii) S. K. G. was purchasing 4,838 shares at the rate of Rs. 680, the market rate being Rs. 523, a purchase against all principle of ordinary commercial expediency, and commercial expediency it had none.
(iii) The entire transaction is unreal and mere paper entry to pass on the shares purchases at an inflated rate by Dalmia Cement Paper Marketing (to enable Mr. Jain to acquire control over Central Jute) to Mr. Jain at a lower price; S. K. G. Ltd. is merely a scapegoat in this principle adventure of the managing director.
(iv) The transaction was really between Dalmia Cement and Paper Marketing and Mr. Jain and S. K. G. Ltd. was merely an intermediary made to share a part of the loss in this transaction."
The Appellate Assistant Commissioner, while upholding the decision of the Income-tax Officer in this regard, has said :
"The reason why D. I. Ltd. was inserted as an intermediary between the appellant-company and Shri S. P. Jain was that Shri S. P. Jain was the chairman of the appellant-company and he himself could not have, therefore, directly purchased the share from the appellant-company; that is why the appellant-company after absorbing the loss of Rs. 160 per share passed on the shares to D. I. Ltd., who in turn passed on the same at cost to Shri S. P. Jain who had originally financed the first purchase through D. C. P.M. Ltd."
After examining the subsequent events, he also came to hold that :
".... the management of New Central Jute Mills Co. Ltd. ultimately passed into the hands of Sahu Jain Ltd., the main concern of Shri S. P. Jain group."
He has the concluded :
"It is clear from the chain of events narrated above that Shri S. P. Jain is the central figure of theses transactions, that it was he who wanted to acquire the jute shares and control over the juts company, that it was he who financed the original purchase through D. C. P.M. Ltd., that it was ultimately he who got back all the shares in July, 1948, that it was he who got himself appointed as director of the jute mill and that it was his family company, Sahu Jain Ltd., who ultimately took over the management of the New Central Jute Mills Co. Ltd. The whole machine consisting of several of the companies controlled by Shri S. P. Jain was brought into use for this purpose and all the transaction which took place between the first purchase by D. C. P.M. Ltd., and the last transfer to Shri S. P. Jain were parts of the same calculated, pre-determined, planned strategy of acquiring controlling interest in and management of the jute mill by Shri S. P. Jain and his family at minimum cost to himself. It is obvious that these jute shares were originally acquired through D. C. P.M. Ltd. at more than the prevailing market rates as they had been purchased at any prices with a view to get a foothold into the company and it was obviously unadvantageous for Shri S. P. Jain to take over these shares directly from D. C. P.M. Ltd. at these in flatted prices as there was bound to arise a loss in the transaction. Shri S. P. Jain was evidently unwilling to bear that loss himself and he, therefore, introduced the appellant company under his control as an intermediary who absorbed the first instalment of loss of Rs. 7,74,080. The original inflated purchased price of Rs. 680 was thus leveled down in the first round to Rs. 520 at which rate Shri S. P. Jain took over the shares through the good office of the appellant company and D. T. Ltd. The process of leveling down the price and squeezing out of overburden further continued and in the second round the good offices of Dalmia Jain and Co. Ltd. were utilised for absorbing a loss of Rs. 6,84,000 and Ashoka Marketing Ltd., for absorbing a loss of Rs. 4,74,000 and Ashoka Agencies Ltd. for absorbing a loss of Rs. 2,60,000, all of them being companies in which Shri S. P. Jain had a controlling interest. The shares again travelled back to Shri S. P. Jain and his nominees at the levelled down price of Rs. 210 to Rs. 235 per share as against the original price of Rs. 680 per share; and in this process of squeezing out of the overburden through nominee-companies, the intermediary companies absorbed a loss of Rs. 20 lakhs.
As for as the role of the appellant-company in the whole chain of these transactions in concerned, it became the willing instrument of its chairman, Shri S. P. Jain, in the process of levelling down the artificial price paid for the 4,838 shares of New Central Jute Mills Co. Ltd. for acquiring controlling interest in and management of the jute mill by Shri S. P. Jain and his family at minimum cost to himself. This is evident also from the nature of the entries passed in the books of D. I. Ltd. and Shri S. P. Jain; for example, when D. I. Ltd. received the shares on transfer from the appellant company ultimately, D. C. P.M. Ltd. was credited in its books and not the appellant-company and similarly when the shares passed on to Shri S. P. Jain from D. I. Ltd. it was again D. C. P.M. Ltd. that was credited in this books and not D. I. Ltd. It is clear, therefore, that the ultimate destination of the shares from D. C. P.M. Ltd. to Shri S. P. Jain was per-determined but a circuitous route was adopted for the journey, via the appellant-company and D. I. Ltd. only with the ulterior motive of taking off some burden of the "artificial and inflated price and leaving it off a the door of the appellant company before reaching the door of Shri S. P. Jain well trimmed."
The Income-tax Appellate Tribunal, by using some intemperate language and passing some structures against the Income-tax Officer and the Appellate Assistant Commissioner, reversed their decision. I am constrained to observe at this stage that use of strong language and the passing of strictures against the officers concerned of the income-tax department were, to say the least, unwarranted and uncalled for; in any event, on the facts and in the circumstance of this case, it was not safe and advisable to make the remarks as made by the Tribunal. Recently, in Pandit Ishwari Prasad Misra v. Mohammad Isa the Supreme Court has observed at page 238 (column 2) :
"The knowledge that another view is possible on the evidence adduced in a case acts as a sobering factor and leads to the use of temperate language in recording Judicial conclusions. Judicial approach in such cases should always be based on the consciousness that one may make a mistake; that is why the use of unduly strong words in expressing conclusions or the adoption of unduly strong, intemperate or extravagant criticism, against the contrary view, which are often founded on a sense of infallibility should always be avoided."
I now proceed to examine the material and reasons given by the Tribunal in support of its decision that the loss in question is genuine and a trading one.
The Tribunal in the beginning of its order says that in the history of the transactions of the shares in question of the New Central Jute Mills Co. Ltd., the persons concerned are "Shri S. P. Jain, the Dalmia Cement and Paper Marketing Company Ltd., S. K. G. Sugar Mills Ltd., (the assessee), Dalmia Investment Ltd., Ashok Marketing Ltd. and Ashok Agencies Ltd." It further says :
"It is common ground that Shri S. P. Jain was all along in a position directly or indirectly to control or influence the decisions (of) the six limited concerns mentioned above."
In regard to the first transaction, namely, the purchase of shares of D. C. P.M. Ltd. in the year 1945 at a price higher then the market quotation, the inference and conclusion of the Income-tax Tribunal may be correct and not open to any serious challenge. The market quotation was in the neighbourhood of Rs. 603 and the shares were purchased at about Rs. 675 per share. It seems clear that Shri S. P. Jain wanted to acquire a controlling interest in the management of New Central Jute Mills Co. Ltd. which he ultimately succeeded in doing and with that aim in view he cornered the shares in the market and purchased in big lost the shares of the said Jute Co. through D. C. P.M. Ltd. The mere fact of paying higher price by the said purchasing company, as rightly observed by the Tribunal, cannot be a ground for disallowing the loss of rupees seven lakhs and odd claimed by the assessee-company.
But the Tribunal has misdirected itself and committed a grievous error of law in appreciating the second transaction with which we are concerned in this case. No valid reason has been given by the Tribunal nor could any be given by the learned counsel for the assessee, as to why the assessee-company purchased the entire block of shares from D. C. P.M. Ltd. on 31st October, 1947, at a fabulously high price of Rs. 680 per share as against the market quotation of Rs. 523 per share on that date. The observation of the Tribunal that "after the devaluation of the rupee in 1949, the jute market became duller and duller progressively" is irrelevant for the purposes of justifying the purchase by the assessee-company from a sister concern at a fabulously higher price than the market rate of the entire block of shares of the jute company. Again, the observation of the Tribunal that it "cannot conceive of any advantage that could have been gained by Shri S. P. Jain by reliving D. C. P.M. Ltd. of the burden and passing it on to S. K. G. Ltd." is erroneous in law in view of the Supreme Court decisions in Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. National Finance Ltd. Firstly, it is to be observed, as pointed out by the Income-tax Officer, that Shri S. P. Jain was not only anxious to acquire the management of the new Central Jute Mills Co. Ltd. and purchase the shares of that company alone but also had purchased the shares of Lothian Jute Mills and Albion Jute Mills with the same object, and D. C. P.M. Ltd. had transferred the shares of the latter two companies to Shri S. P. Jain in August, 1948, at a loss of about 5 lakhs. It may, therefore, well be that Shri S. P. Jain did not think it expedient and advisable to throw the entire burden of loss in jute shares on D. C. P.M. Ltd. and made the other companies under his control including the assessee-company to share the burden of loss. And, secondly, on the authority of the two Supreme Court decisions mentioned above, the acquisition of jute shares, by D. C. P.M. Ltd. with the intention of gaining the advantages of management for Shri S. P. Jain in the various jute companies could have been held to be a capital investment and the resulting loss in the transfer of shares as a capital loss and not a revenue one. It is to be remembered that the assessee-company, while purchasing the big block of 4,838 share in a private transaction from a sister concern, was made to sell the entire block at Rs. 520 per share more or less at the market rate to Dalmia Investment Ltd. on the 30th June, 1948, from which company Shri S. P. Jain purchased the entire lot at the same price in July, 1948. It is difficult to appreciate the observation of the Tribunal that it "does not necessarily follow that the value of the large block would depreciate proportionately" was applicable only when the assessee-company purchased the shares in August, 1947 but was not so when it sold them to Dalmia Investment Co. in June, 1948.
In the case of Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax the appellant-company was a dealer in shares and securities and also carried on business as managing agents of other companies. In order to acquired the managing agency of a textile mill, the appellant-company purchased from Season David and Co., who were the managing agents thereof, 1,507 shares of the mill at Rs. 2,321-8-O per share at time when the market price of the shares was Rs. 1,610. The remaining 1,000 shares of the mill held by Season David and Co. were acquired by the directors of the appellant-company. Two months later the appellant-company sold 400 of those shares at a loss of Rs. 1,78,438 and this loss was claimed as trading loss. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the loss because, in their view, the shares were purchased by way of capital investment and the loss suffered by sale therefore, could not be allowed as a trading loss. 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 purchases in the regular course incidental to their business of acquiring the managing agency, the loss of the sale of those shares was allowable as a revenue loss. The High Court, however, held that the shares acquired by the appellants formed a capital asset and the loss suffered by sale of 400 out of those shares in the year of account being a capital loss, was not in the computation of income a permissible deduction. The Supreme Court dismissing the appeal of the assessee-company has said :
"In considering whether a transaction is or is not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee having regard to the legal requirements which are associated with the concept of trade or business. The inference on this question raised by the Tribunal on the facts found is of mixed law and fact and is open to challenge before the High Court on a reference under section 66 of the Income-tax Act, - Venkataswami Naidu & Co. v. Commissioner of Income-tax. It was held in Oriental Investment Co. v. Commissioner of Income-tax that the question whether the appellants transaction amounted to dealing in shares and properties or to investment is a mixed question of law and fact, and that the legal effect of the fact found by the Tribunal on which the assessee could be treated as a dealer or an investor, is a question of law...... If the purposes of the acquisition of a large block of shares at a price which exceeded the current market price by a million rupees was the acquisition of these managing agency, the inference is inevitable that the intention in purchasing the shares was not to acquire them as part of the trade of the appellants in shares............ If the shares were acquired for obtaining control over the managing agency of the Dawn Mills, the fact that the acquisition of the shares was integrated with the acquisition of the managing agency did not affect the character of the acquisition of the shares. Subsequent disposal of some out of the shares by the appellants could also not convent what was a capital acquisition into an acquisition in the nature of trade."
I may observe at this place that clause 8 of the memorandum of association empowers the company :
"To acquire and deal in shares, stock or securities in or of any company or undertaking the acquisition of which may promote or advance the interest of this company."
The Income-tax Officer and the Appellate Assistant Commissioner, with reference to this clause of the memorandum of association, came to the concluding that S. K. G. Ltd. did not acquire these shares on order to perambulate or advance the interest of this company but did so or was apparently made to do so with the ulterior object of helping the chairman of its board of directors and not with the intention of dealing in shares of the jute company.
In Commissioner of Income-tax v. National Finance Ltd. the facts were similar to the ones in the instant case. The National Finance Ltd. belonged to a group of companies controlled by one Lala Yodh Raj Bhalla and certain persons associated with him, conveniently described in the judgment of the Supreme Court as "Yodh Raj Bhalla group." These companies were (1) Jaswant Sugar Mills Ltd., (2) Jaswant Straw Board Ltd., (3) National Finance Ltd., (4) National Construction and Development Corporation Ltd., (5) Ganesh Finance Corporation Ltd., and (6) Raghunath Investment Trust Ltd. The interelation of these companies was very intimate, and they were practically owned by the Yodh Raj Bhalla group. In July, 1948, Yodh Raj Bhalla, who was in a position by reasons of his holdings in these six companies to influence decisions of the board of directors, arranged to purchase 26,547 shares of the Madhusudan Mills from Messrs. Bhadani Brothers Ltd., who were the managing agents of the mills. The purchase was made at Rs. 400 per share, when the price in the market was about Rs. 250 per share. These shares were purchased on behalf of Yodh Raj Bhalla by Jaswant Sugar Mills Ltd. On October 9, 1948, the assessee company purchased 15,547 shares at Rs. 400 per share from Jaswant Sugar Mills Ltd. which company sold the remaining 11,000 shares to National Construction and development Corporation Ltd., another sister concern belonging to Yodh Raj Bhalla group at Rs. 400 per share. On this date the ruling price in the market was Rs. 217-8-0 per share. The assessee-company made enormous profit from the acquisition of these shares by way of dividend and commission as the purchasing and selling agent. In April, 1949, 4,500 shares were sold by the assessee-company to the National Investment Trust Ltd. at Rs. 181 per share resulting in a loss of Rs. 8,80,000 and in June, 1949, another block of 3,000 shares was sold to the National Investment Trust Ltd. at Rs. 180 per share, resulting in a loss of Rs. 5,86,312. The Supreme Court was concerned with the second amount of loss, which was sought to be set off by the assessee-company against the profit made in that connection. Hidayatullah J., delivering the judgment of the Supreme Court, has said at page 796 :
"Whether a particular loss is a trading loss or a loss on the capital side undoubtedly depends upon the facts of each case. But it has been held, over and over again, that the question is not one of pure fact, and that a mixed question of fact and law is always involved."
After referring with approval to the observations of Chief Justice Chagla in the case of Commissioner of Income-tax v. Ram Narain Sons Ltd., which decision was unheld by the Supreme Court in Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax, the learned judge has said :
"In Oriental Investment Co. Ltd. v. Commissioner of Income-tax that principle was reiterated and it was held that the object for which a company was formed did not invest the deal with the characteristics of a trade in shares, but that other circumstance along with that fact must be considered to find out the real object of a particular venture" (the underlining is mine).
The question before the Supreme Court was :
"Whether the assessee-company in purchasing the shares merely wished to deal in those shares as stock-in-trade, or was acquiring a capital asset of an enduring nature."
And, it was observed :
"This question is not one of fact, pure and simple, but one of an inference in law from the proved circumstances of the case."
After discussing the facts of the case, the ultimate concluding drawn was :
"All this shows that the affairs of these companies were centrally arranged, and the intention was to benefit the assessee-company by the acquisition of a large block of shares at a very much larger price than obtaining in the market, to acquire certain agencies of a profitable character."
Although the finding of the Income-tax Officer that :
"S. K. G. Ltd. is not a share-dealer nor holding of investment for a brief period in jute mill ?) promote or advance its interest as a sugar manufacturing company."
has not been upset either by the Appellate Assistant Commissioner - rather he has approved it - or by the Income-tax Appellate Tribunal, I shall assume that the assessee-company was a dealer in shares, but the question is - did it enter into the transaction in question in the course of business with the object of trading in jute shares or was it made to enter in this transaction with some ulterior, motive of helping the chairman of its board of directors. In my opinion, on the facts and in the circumstances of this case, as elaborately found by the Income-tax Officer and the Appellate Assistant Commissioner, none of which primary facts has been upset by the Appellate Tribunal, its abundantly clear that the intention, motive or object of the assessee-company in entering into the transaction of purchase and sale of the jute mill shares was not to trade in the jute mill shares nor was it to acquire any capital advantage of acquisition of the management of the jute mill by the assessee-company but was an ulterior one of helping the chairman of its board of directors. In the course of the accounting year, purchasing the shares at the rate of Rs. 680 as against the market price of Rs. 523 and selling them at the market price of Rs. 520 per share were nothing but a maneuver in the accounts of the assessee-company at the instance of the chairman of its board of directors for the purposes of sharing with others his loss or the loss of the sister concern, namely, D. C. P.M. Ltd. The whole of the transaction consisting of two events only, namely, the purchase of the shares from D. C. P.M. Ltd. and sale to Shri S. P. Jain through Dalmia Investment Ltd. was not real and the resulting loss, therefore, was a fictitious one in so far as it concerned the assessee-company. The mere fact the assessee-company disclosed in its accounts receipt of Rs. 1,75,378 by way of dividend from the jute company in question, cannot clothe the transaction of sale and purchase of the shares of the said jute company with reality and guanines. Having shown and claimed the loss of rupees seven lakhs and odd, the assessee-company was obliged to show in its return the dividend income from the jute company and possibly, while disallowing the loss in question, the Income-tax Officer could not exclude the dividend income from the assessment of the total income of the assessee-company when it has, of its own volition, chosen to include that amount in its profits. I have no doubt in my mind that the conclusion of the Income-tax Tribunal that the loss of Rs. 7,74,080 is a genuine loss and is in the nature of revenue loss has been arrived at by a misdirection in law and in the absence of any legal, valid and relevant material.
Learned counsel for the assessee-company submitted on the authority of Raja Bahadur Vishweshwara Singh v. Commissioner of Income-tax, Raja Bahadur Vishweshwara Singh v. Commissioner of Income-tax, Ashoka Marketing Ltd. v. Commissioner of Income-tax and Rajputana Textiles (Agencies) Ltd. v. Commissioner of Income-tax, that the finding is a finding of fact and no question of law arises therefrom. In Raja Bahadur Vishweshwara Singhs case, Das C.J. posed the question in the following terms :
"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 transaction in the matter of shares and securities."
It is well established, as was observed in that case also, that if, an inference or conclusion is drawn by the Tribunal without any material, it becomes a question of law. In the same case the same view as approved by the Supreme Court in Raja Bahadur Vishweshwara Singh v. Commissioner of Income-tax. In the case of Ashok Marketing Ltd., my Lord the Chief Justice, delivering the judgment on behalf of the Bench, while observing that the finding arrived at by the Appellate Tribunal was a finding of fact, has further observed :
"... and in a case of this description its well established that the finding should not be disturbed by the High Court unless it is apparent that the Appellate Tribunal has misdirected itself in law or that it has applied a wrong legal principle or that there is no evidence which would justify a reasonable man in drawing the inference which the Appellate Tribunal has drawn."
In my opinion, the case in hand is clearly covered by the principle of law thus stated. The decision of the Supreme Court in Rajputana Textiles case has been distinguished in the later decision of the Supreme Court in Oriental Investment Co. Ltd. v. Commissioner of Income-tax, in these words :
"...... on the facts and circumstances of the case, it was held that a particular deal in shares was a commercial venture and had all the attributes of an adventure in the nature of trade."
In my opinion, the later decision of the Supreme Court governs the present case and the facts of Rajputana Textiles case are different in material particulars.
Keeping in view the well established principles of law in relation to the question before us, I have unhesitatingly come to the conclusion that, on the facts and in the circumstances of this case, the loss of Rs. 7,74,080 was not incurred by the assessee-company; in any event it was not incurred in the course of its trade or in an adventure in the nature of trade. It was, therefore, not permissible to deduct such loss as a revenue loss. The question of law referred to be the Appellate Tribunal must be answered in favour of the Commissioner of Income-tax and against the assessee-company, which will be liable to pay the costs of this reference to the former (Commissioner of Income-tax); hearing fee Rs. 250.
RAMASWAMI C.J. - I agree.
Question answered against the assessee.