Bombay High Court
Mathuradas vs Commissioner Of Income Tax, Central ... on 27 February, 1951
Equivalent citations: AIR 1952 NAGPUR 97
ORDER
1. This is an application under Section 66 (2) of the Indian Income-tax Act requesting this Court to require the Income-tax Appellate Tribunal, Bombay, to state the case and refer it to this Court. The Appellate Tribunal declined to refer the case on a petition of the Applicant under Section 66 (1) of the Indian Income-tax Act.
2. The short facts of the case are that the applicant (assessee) suffered a loss of Rs. 25,059 from the sale of two blocks of securities on the account year relevant to the assessment year 1941-42 and sought to deduct this loss from his income. The Income-tax Officer declined to deduct this loss which in his opinion was capital loss. The Appellate Assistant Commissioner took the view that the securities were stock-on-trade. The Appellate Tribunal reversed the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer.
3. According to the Appellate Tribunal the question whether the securities were investment or stock-in-trade was a question of fact and hence they declined to refer the questions framed by the assessee for the opinion of this Court. These questions are:
(1) Whether the securities and other holding of the applicant did not constitute his stock-in-trade ?
(2) Whether the loss of Rs. 25,059 arising on the sale of securities in the account year was not a trading loss?
4. The case of the applicant is that the investment in securities must be accepted to be an investment in business in his case because as clearly as assessment year 1938-39 he had made a declaration before the Assistant Commissioner of Income-tax that all the shares and securities held by him were for business and their total value was Rs. 3,67,000 then, and this declaration was accepted and a loss of Rs. 849 being the loss incurred on the sale of certain securities worth Rs. 35,000 was admitted as a business loss.
5. The relevant portion of the order of the Assistant Commissioner of Income-tax, Nagpur, dated 24th July, 1939, reads as follows:--
The second ground asks for a deduction of Es. 849 being loss incurred on sale of certain shares held by the petitioner as stock-in-trade. This has been disallowed on the ground that the shares are held not for business but as a capital asset. The petitioner has filed a declaration before me that all the shares and securities held by him are for business. Their total value amounts to Es. 3,67,000. He started purchasing them in Samvat 1991-92 and the first transfers took place daring the year Samvat 1993-94, so that the business is a new one. The above loss relates to securities worth Rs. 35,000 only. In view of she formal declaration made by the petitioner I would admit the loss as a business loss.
6. It would appear from this that the reality of the business was assumed in that year and the business was held to be new. The alleged business commenced in 1934-35. The first sale took place in 1937-38 and the second in 1940-41.
7. The reasoning of the Appellate Assistant Commissioner of Income-tax, Nagpur, was as follows:--
Ground No. 4 contests the disallowance of Rs. 5,500 and Rs. 19,559 representing loss from sale of securities; The Income-tax Officer disallowed the item in dispute by holding it as a loss of capital. It is urged on behalf of the petitioner that the investment in securities should be presumed as an investment in business in his case in view of the declaration made by him before the Assistant Commissioner years ago when he least expected that the sale of securities would yield him a loss and as no facts have been pointed out to the contrary by the Department. On behalf of the Department it is urged that the statement relied upon by the petitioner is not binding on the Department as it is the conduct of the assessee that governs the allowance or disallowance of a particular item, that loss in this case is admissible if it is established that business was carried on and that there was a continuity of transactions as contemplated in the case of Shaw Wallace & Co. (1) (1932) 59 I.A. 200. Since there is said to be no continuity of transactions in this case, the disallowance is in proper order and be maintained and that the finding given by the Assistant Commissioner in the past on the petitioner's declaration should not be taken as binding if the facts are found to be otherwise.
I have considered the arguments advanced in this behalf and have also looked into the connected records and find that the shares and securities sold by the petitioner were held by him as a business proposition and that the losses resulting from the sale thereof have already been admitted in the past. I see no reason why the same should not be done over again in the absence of any convincing evidence to the contrary. I do not think the petitioner least expected that he will suffer heavy losses when he made the declaration as far back as 1938. In the circumstances, I shall admit the objection at Rs. 25,059.
8. When the matter was taken to the Appellate Tribunal by the Department the Tribunal observed as follows:
This brings us to the cross-appeal by the Department, R.A.A. No. -150, which arises from the assessee's assessment for 1941-42. In this assessment the assessee claimed allowance for a total loss of, Rs. 25,059 on sales of two blocks of securities, viz., Government Paper 1945-55 and similar Paper 1963-65. The Income-tax Officer disallowed the loss holding that these securities were the assessee's investments, and that, consequently, the loss was a capital loss. It was, however, urged that the securities in question were stock-in-trade or a business asset of the assessee which argument commended itself to the Appellate Assistant Commissioner. He held that the assessee "hold the securities as a business proposition relying solely on a declaration made by the assessee in 1938-39 that these securities were his stock-in-trade. It is contended on behalf of the Department that except the solitary and interested statement of the assessee, there was no evidence to hold the view that they were the assessee's stock-in-trade. It cannot be denied that the assessee's uncorroborated statement in the past cannot be accepted without some corroboration, and there is none in this case. On the contrary, the admitted circumstances go to show that these securities as well as several other holdings were the assessee's investments. Speaking of the securities in particular, the first block was bought by him in 1934 and 1935 and the Second in the year 1939. The assessee is a mill-owner, besides having several other sources of income. But he does not carry on any business in securities or shares. The sale of the securities in question was the first transaction of its kind, there being no sales of any of his holdings between 1934-35 and the assessment year 1941-42. The rest of the holdings have remained intact with the assessee till this day. The only circumstance that has been pointed out on his behalf that he used to lodge these securities with his bank against his overdrafts. But that fact does not at all help to establish that he was holding them as his stock-in-trade. It might equally give rise to an inference the other way. The sale in question was a solitary transaction and it is now well ascertained that such a transaction will amount to business apart from special circumstances. No such special circumstances are present in this case and we therefore think that the loss that the assessee sustained was his capital loss.
9. The law with regard to investments and turning them to account is well settled. As their Lordships of the Privy Council stated in Punjab Co-operative Bank, Ltd., Amritsar v. Commissioner of Income-tax, Lahore :
The principle to be applied in such a case is now well settled It was admirably stated in a Scottish Case, Californian Copper Syndicate v. Harris (1904) 6 F. 894 : 5 Tax Cas. 159, and the statement has been more than once approved both in the House of Lords and in the Judicial Committee: see for example Commissioner of Taxes v. Melbourne Trust, Limited [1914] A.C. 1001 at 1010. Some dicta which appear to support the view that it is necessary prove that the taxpayer has carried on a separate or severable business of buying and selling investments with a view to profit in order to establish that profits made on the sale of investments are taxable, for example, the dicta in the case of Commissioners of Inland Revenue v. Scottish Automobile and General Insurance Co. (1931) 16 Tax Cas. 381 at pp. 388, 389, cannot now be relied ' It is well established' to cite the exact words used in Californian Copper Syndicate v. Harris (1904) 6 F. 894 : 5 Tax Cas. 159' 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 on, or carrying out, of a business.
In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in but it may be very undesirable to use this second line of defence. If as in the present case some of the securities of the bank are realised order to meet withdrawals by depositors, it seems to their Lordships to be quite clear that this is a normal step in carrying on the banking business, or, in other words, that it is an act done in ' what is truly the carrying on ' of the banking business. This, it appears to their Lordships, is the more appropriate and satisfactory ground for dealing with the question arising in the present case. It accords exactly with one of the findings in the statement of the Commissioner agreeing with the views both of the Income-tax Officer who first dealt with the case and' of the Assistant Commissioner. He observed:
that the purchase and sale of shares and securities are so much linked with the deposits and withdrawals of clients that with the existing articles of association the purchase and sale of shares and securities are as much part of the assessee's business as receiving deposits from clients and paying them off are, and, therefore, the profits which arise from the former transactions are as much business profits as the profits arising from the latter transactions are.
10. The same view is adumbrated in South Behar Railway v. Inland Revenue Commissioners [1925] A.C. 476 and the distinction has been brought out in Scottish Investment Trust Co. v. Forbes (1893) 3 Tax Cas. 231, Assets Co. Ltd. v. Forbes (1897) 3 Tax Cas. 542 and in Tehran (Johore) Bubber Syndicate, Ltd. v. Farmer (1910) 5 Tax Cas. 658. See also Inland Revenue Commissioners v. Korean Syndicate Ltd. [1921] 3 K.B. 258, Commissioners of Inland Revenue v. Dale Steamship Co. Ltd. (1928) 12 Tax Cas. 712 and Rees Roturbo Development Syndicate, Ltd. v. Duclcer (1929) 13 Tax Cas. 366. Prom all these cases it follows that the investments and turning them to account must not be merely incidental but an essential feature of the business.
11. In India the prevailing view has also been the same. See for example In the matter of Amritsar Produce Exchange, Ltd. , Punjab National Bank v. Emperor (1926) 7 Lah. 227, Dalmia Cement Ltd. v. Income-tax Commissioner , Income-tax Commissioner, Bihar and Orissa v. Kameshwar Singh Hira Nand v. Income-tax Commissioner, Rawalpindi . The entire relevant case law on the point was reviewed by Harries, C.J., and Sinha, J., in Lndra Singh & Sons Ltd. v. Commissioner of Income-tax . The distinction has been brought out admirably in Ganga Sagar In re . There the sale was made by the assessee to enable him to advance a loan of rupees one lac to one B. Udai Singh Jain of Aligarh. The assessee was found to have been investing his capital in Government securities for a considerable number of years and except for one more sale had made only the sale resulting in the loss claimed by him. An application by the assessee requesting the High Court to require the Commissioner of Income-tax to state a case was rejected by Niaruatullah and Bennet, JJ. Their Lordships considered the tests to be applied in such cases and observed as follows:
In Section 2(4) of the Income-tax Act 'business' is defined follows:
'Business' includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. This definition is no doubt wide so far as the activities are mentioned which may be included under the term 'business.' A distinction is however drawn between 'business' as so defined and receipts which are of a casual and non-recurring nature mentioned in Section 4 (3) (vii). This sub-section says that the Act does not apply to any receipts not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature. The question therefore is whether the profits or loss from sales of securities or shares would be of a casual and non-recurring nature, or whether they would be of the nature of business. The distinction is further shown by the fact that the Act itself is styled an Income-tax Act, thaw is, an Act which is to tax income, and not an Act which is to tax the gains of capital other than the interest or profits which accrue on the capital. In the Income-tax Manual in the comment on Section 4(3)(vii), it is stated that where A makes a practice of speculating in the purchase and sale of shares, his profits are liable to income-tax; that is, where there is a purchase with the intention of speculating. It is the intention with which the purchase is made which makes the difference. A man may either buy shares or securities with the object and intention of making a gain from the sale when these shares or securities have risen to a higher price, or he may purchase the share or securities with the intention of keeping his capital safe and receiving meanwhile a certain amount of dividend or interest. The intention must be deduced from the facts and from the circumstances of the cases Where a man makes a business of speculating this will be deduced be the Court from the fact that be makes numerous purchases and sales, the sales being within a short time of the purchase. On the other hand, where a man makes few sales, although he may make a number of purchases, and where the sales are made at long intervals after the purchases, the conclusion to be drawn is that he is not indulging in the business of speculating in these stocks and shares, but that he is investing his capital in these stocks and shares. In this view of the law it appears to us that the Assistant Commissioner has not made any error in drawing his conclusions from the facts which he found. Accordingly we do not see that we can with any advantage call upon the Commissioner of Income-tax to state a case.
12. The application was dismissed as there was no error of law in reaching the conclusion on facts, the learned Judges observing:
This is an application by an assessee in income-tax for this Court require the Commissioner of Income-tax to state a case under Section 66 (3), Income-tax Act, XI of 1922. In stating the case the Income-tax Commissioner states the facts and on these facts this Court comes to a finding on a point of law. It is not open to this Court to find facts for itself. At the most under Sub-section (4), Section 66, if this Court is not satisfied with the statement in a case the Court may ask for an additional statement or alterations.
13. There can be no doubt that the question whether a particular investment is a business undertaking or in other words " an act done in what is truly the carrying on, or carrying out, of a 'business" is really one of fact, and a finding given on such a question cannot be the subject of a reference, as was held in the Allahabad case last mentioned. The finding can only be the subject of a reference if it involves a legal fact or in reaching the conclusion the Tribunal has committed an error of law. We do not apprehend the rulings relied upon by the applicant, viz., Dhanrajmal v. Commissioner of Income-tax [1942] 10 I.T.R. 384 : A.I.R. 1942 Sind 74, Central Talkies, Circuit v. Commissioner of Income-tax , and Jagannathram v. Income-tax Commissioner , as laying down any different law. We have seen only the headnote of the latter case as the entire report of the judgment is not available. In the present case the Tribunal was required only to decide whether the investments and turning them to account was part of any business. That was essentially a question of fact, the law on the subject being correctly apprehended by the Tribunal. If we had found that the Tribunal had misdirected itself on the law before proceeding to decide the question of fact we might have required the Tribunal to state the case. But that is not the case here. There being no mistake in understanding the real test, the finding must be treated as one of fact: see Tarak Nath v. Commissioner of Income-tax, Bengal and Kirpaldas Motandas v. Commissioner of Income-tax [1942] 10 I.T.R. 505. The answers to questions involved were also self-evident. The learned Counsel for the applicant relies upon Deoniti Prasad Income-tax Commissioner ', to support his contention that once the Income-tax Officer accepted his declaration the question whether these investments were part of his business must be held to have been finally determined. In the cited case the Department treated the promissory notes and mortgage bonds as part of the business of money-lending and had assessed the assessee on profits. The department was therefore not allowed to "blow hot and cold."
14. It is significant that in the present case the amount of loss was small in the earlier year, and there was only a declaration in proof of this business. Evidence for and against business is not likely to remain static, and if after considering the entire circumstances the Tribunal found that there was really no business and the investments formed part of his capital, the assessee could not be heard to say that the finding is wrong in law.
15. It was argued on the authority of Sutoalal Chhogalal v. Commissioner of Income-tax, C.P. & Berar , that there is no evidence to put against the declaration and the fact that these securities were lodged with the bank against overdrafts. The applicant might have mortgaged his house, but that would not make a loss on the sale of the house a business loss. Many persons lodge securities with the bank to secure overdrafts and suffer losses when the securities are cashed. But that would not make the loss a business loss unless there was a business of buying and selling stocks and securities or the sale forms "an essential feature" of the business of the assessee whatever it be.
16. In our opinion the two questions are essentially questions of fact and no law is involved. The application fails and is dismissed with costs. Counsel's fee Rs. 75.