Commissioner of Income Tax (Central) vs Bikaner Trading Co. Ltd.

Mitter, J.—These two references are consolidated. They arise out of the same set of facts. Reference No. 7 of 1960 is u/s 66(1) while Reference No. 48 of 1960 is u/s 66(2) of the income tax Act. The questions referred to us are as follows:

(1)(a) Was the Assessee''s loss of Rs. 7,61,000 sustained in any business of his within the meaning of "business" under the income tax Act ?

(b) Is such a finding by the Tribunal supported by any evidence or material on record ?

(2) If the answer to question (1) be in the negative then whether the Tribunal was right in holding that the above loss was allowable in computing the total income of the Assessee ?

(3) Whether on the facts and in the circumstances of the case, the loss resulting from the aforesaid solitary money lending transaction was allowable under the provisions of the income tax Act as a business loss ?

It is to be noted that questions (1) and (2) arise out of reference No. 48 of 1960 while the last question arises out of Reference No. 7 of 1960.

The case relates to the assessment year 1953-54, corresponding to the accounting year ending on June 30, 1952. As the Tribunal adopted the facts of the case as recorded in the order of the Appellate Assistant Commissioner, it will be convenient to note the facts as therein stated, One Bhimsen Gupta was the managing director of Hind Machines Ltd., a private limited company. He held 1,60,000 ordinary shares out of total of 2,00,000 ordinary shares issued by the company. Being in need of Rs. 8,00,000 he entered into a contract with the Assessee on October 31, 1946 whereby the Assessee agreed to purchase 80,000 shares of Hind Machines Limited at Rs. 10 per share, i.e. at par value. There was a further agreement between the parties whereby the Assessee undertook to deliver back the said 80,000 shares at the agreed price of Rs. 11/4 per share on or before October 31, 1947. As security for the due performance of this contract Gupta deposited a second lot of 80,000 ordinary shares with the relevant transfer deeds duly signed by way of pledge. As the second lot of shares was only partly paid, a part of Rs. 8,00,000 was utilised for making them fully paid. The contract further provided that in the event of Gupta''s failing to take back 80,000 shares at Rs. 11/4 per share, as already stated, the Assessee would be at liberty to sell the second lot of shares given by way of security to make up for any loss by reason of such failure. Gupta was unable to take back the shares by October 31, 1947, and by mutual consent the time for performance of the contract was extended till January 23, 1948. Negotiations went on even after that date but the parties did not come to any terms. In the meantime, two directors of the Assessee attended the meetings of Hind Machines Limited. At one such meeting there was a proposal to wind up the company on the ground of financial difficulties. On December 18, 1948, Gupta demanded return of 80,000 shares held as security on the ground that the market price of the shares as on January 23. 1948, was higher than Rs. 11/4 per share so that on the date of the breach of contract there was no loss to the Appellant. It is to be noted that during 1948 these shares were transferred and registered in the name of the Assessee by mutual consent. The Assessee did not return the shares and Gupta filed a suit in this Court against the Assessee on December 20, 1948. The Court found that the market price of the shares was much below Rs. 11/4 per share on January 23, 1948: the suit was dismissed on January 20, 1950. A cheque for Rs. 1,00,000 given by Gupta to the Assessee sometime in the year 1948, was dishonoured. The Court held that by reason of Gupta''s breach of contract the Assessee had suffered a loss and was, therefore, entitled to retain the shares held as security and to dispose of the same to make good the loss. Thereafter, the Assessee tried to sell both lots of shares. Eventually, the two lots were sold for the total sum of Rs. 45,000 on May 10, 1951 and August 20, 1951. These dates are taken from the statement of facts which formed an annexure to the petition of the Commissioner of income tax u/s 66(1) of the income tax Act. The Appellate Assistant Commissioner, however, recorded that the shares were sold in 1952. Adding the transfer fees and stamps i.e. Rs. 6,000 for getting 80,000 shares mutated in the name of the Assessee to the amount of loan advanced i.e. Rs. 8,00,000 and deducting therefrom the sale proceeds of 1,60,000 shares amounting to Rs. 45,000 we get the figure Rs. 7,61,000 which was claimed by the Assessee as revenue loss.

The Assessee''s argument before the Appellate Assistant Commissioner was that the loss had arisen on a transaction of purchase and resale of shares as had been held by this Court in the suit filed by Bhimsen Gupta and there was no justification in the finding by the income tax Officer in his assessment order that the transaction was entered into for the purpose of acquiring control over Hind Machines Limited.

The Appellate Assistant Commissioner came to the finding that the transaction of October, 1946 "was clearly one of loan and the transfer of 80,000 shares as well as security of further 80,000 shares were all a part of security against the loan. The Assessee had never any right of disposal of 80,000 shares transferred to its name upto January 23, 1948 (the date to which the contract was extended). He was a sort of trustee for these shares and was holding those shares as a pledge" The reasoning of the Appellate Assistant Commissioner in coming to this finding was as follows:

A transaction for the purchase of share is normally independent of any subsequent transaction of sale... In the present case, however, I find that the alleged sale price has already been limited to a "definite amount of Rs. 11/4 so that the question of taking advantage of a rising market was never there nor was there any question of earning dividend. In fact, the margin of Rs. 1/4 per share was merely by way of compensation for the advance of Rs. 8,00,000/- for the period from October 31, 1946 to October 31, 1947, and this margin was never by way of dividend nor by way of appreciation in the value of shares by reason of variation in the market. The margin was independent of any such factor and, on this view alone, it is not possible to hold the transaction as one of purchase and sale of shares. Even though these 80,000 shares were transferred to the name of the Appellant as a registered shareholder, they were subject to a subsisting contract for a re-transfer so that they were as pledged against the loan advanced and compensation thereon. The further lot of 80,000 shares were additional collateral security... In fact, the amount of Rs. 8,00,000 advanced on October 31, 1946, had nothing to do with the prevailing price of those shares on October 31, 1946, as the company was still then making very good profits and the market price would have been higher than the par value. Similarly, the amount of Rs. 9,00,000 receivable on January 23, 1948, had nothing to do with the prevailing market on that date as the company had by then began to make loss and the price would have been less. Thus I find that neither the amount alleged to be the cost price of the shares nor the amount alleged to be the sale price of shares nor the excess of Rs. 1,00,000 receivable had anything to do with the prevailing market rates of the shares or with the profit in a transaction of sale and purchase of the shares.

The Appellate Assistant Commissioner went on to record that

The transaction was an isolated loan where the compensation for the loan was not the usual commercial rate specified as such but as amount determined on an ad hoc basis, from a persual of the records and the activities of the company hitherto, I find that the money lending has not been a business of the company and the loan cannot be described as a part of the money lending transaction. For the past several years, the income of the Appellant consists of interest and dividend, and also profit in sale of investments for one year i.e. 1952-53. There is no suggestion of any activities analogous to money lending operation. The loss, therefore, would be loss in capital and not a revenue loss.

To fortify this finding the Appellate Commissioner recorded the following further facts:

(1) The holdings of 1,60,000 fully paid shares out of a total share capital of the company consisting of 170080 fully paid shares and 30000 partly paid shares gave the holder an overriding control over that company.

(2) The Assessee nominated two of its Directors to the Board of Directors of Hind Machines Limited and they regularly attended whatever meetings were held by the last mentioned company.

(3) The Hind Machines Limited were making good profits at least on October 31, 1946. The Assessee was, therefore, advancing the amount for a controlling interest in what he then knew to be a prosperous concern.

(4) The activities of the Assessee were also by way of holding shares as investments and except for 1952-53 there had been no transaction in sales of shares. The general background of the appellate, therefore, was an investor in shares.

(5) The Appellant''s balance sheet as on June 30, 1952 showed investments amounting to Rs. 27,58,684 in five companies which were all associate concerns of Messrs. Soorajmall Nagarmull group.

According to the Appellate Commissioner:

With the background of the share holding of the Assessee it is not inconceivable that the acquisition of 1,60,000 shares of Hind Machines Limited was also a, part of the general activities of this company in acquiring control of various associate concerns of Soorajmall Nagarmull group. The Assessee itself is also an associate concern of that group. The transaction thus conformed to the usual pattern of the activities of the Assessee which appears to have embarked on this acquisition in view of the possibility of being able to acquire a control over the company. Bhimsen Gupta was parting with his control over what then was a prosperous company and his need of a huge amount of Rs. 8,00,000 would certainly put the Appellant wise to the fact that B.S. Gupta was in a bad way and that he would not be able to repay the amount borrowed. On this view of the matter also the transaction of advancing Rs. 8,00,000 against the contract for shares can be viewed in its context of acquiring a control over the company and the loss would again, therefore, be a capital loss.

The Tribunal recapitulated the essential facts very concisely and recorded that the Appellate Assistant Commissioner while holding that the transaction was in the nature of money lending, had yet held that the transaction could not be said to be a money lending business in view of the fact that it stood all by itself. According to the Tribunal:

The facts of the case indicate that all along the Assessee had a motive of making a profit out of the deal... the amount of Rs. 8,00,000 was paid as a purchase price to B.S. Gupta to accommodate him as a loan and the expectation was by the end of the year the said B.S. Gupta would repay the whole amount and the Assessee would get a profit of Rs. 1,00,000. Referring to the cases of Gayaprosad and Chotay Lal (1) and Mohammed Faruq 1938 ITR 1 the Tribunal was of the view that "even a single transaction in money lending would be business transaction giving rise to a loss on the revenue account.

It was contended before us on behalf of the Revenue that the Tribunal had erred in failing to consider the aspect of the question with regard to the Assessee''s going in for the transaction with a view to acquire a controlling interest in Hind Machines Ltd. Further, it was argued that the Assessee could not be said to be indulging in money lending or in any adventure or concern in the nature of trade because of the following reasons:

(1) Even though the transaction might, at the outset, have savored of a loan, it really did not have that character because a money lender does not agree to an extension of time for payment of a large sum of money like Rs. 8,00,000 from October 31, 1947, till January 23, 1948 without any consideration or stipulation for payment of interest.

(2) The fact that the Assessee did not demand any further interest from January, 1948 to December, 1948, when Gupta filed his suit, went to show that getting interest on the loan was not the object of the Assessee.

(3) Even after the dismissal of Gupta''s suit in January, 1950 the Assessee did not take any steps immediately to cut down its loss by selling the shares but waited till well past the middle of the year 1951 to put the shares up to sale.

(4) The Assessee ultimately sold the shares because the company was in a bad way and holding on to the shares would have proved useless.

It was argued that the above considerations, along with the finding that the Assessee had never before or since entered into any other money lending transaction, but had invested as much as Rs. 27,00,000 in acquiring large blocks of shares in five named companies, without selling any, excepting once in the year 1952-53, clearly established that the dominant motive of the Assessee was the capture of Hind Machines Ltd. and only when it found that the company was in a very bad way, that it changed its purpose and put the shares to sale. Thus, the object of the company, throughout, was to make an investment in the shares of Hind Machines Ltd. and not money lending.

In our opinion the primary facts found do not necessarily lead to the conclusion that the advance of Rs. 8,00,000 was with a view to capture the company. The crux of the matter is that on October 31, 1946 when the sum of Rs. 8,00,000 was parted with Hind Machines Ltd. was in a prosperous condition although Bhimsen Gupta himself was in financial difficulties. What he did with the money we do not know. A part of it, at least, went to make the second lot of 80000 shares fully paid, and to that extent it was Hind Machines Ltd. which benefited, at least partially, by the loan. If the dominant motive of the Assessee was the capture of the company, it would hardly be expected to take part in any proposal to wind up the company in 1948. Joining in such a proposal can only lead to the inference that the Assessee thought that the company was not likely to prosper and was, therefore, considering minimising its'' losses by getting whatever could be had by putting the company into liquidation and a resultant sale of its assets. So long as Bhimsen Gupta''s suit was not disposed of, i.e., from December, 1948 to January, 1950, no steps could be be taken by the Assessee. While it is true that the Assessee does not appear to have taken any steps immediately after the dismissal of Gupta''s suit to put the shares to sale, it must not be forgotten that the sale of the bulk of shares in a manufacturing or processing company cannot be held overnight. The sale has got to be advertised widely so that prospective purchasers may have sufficient time to acquaint themselves with the affairs of the company before going in for the transaction. The Assessee was not obliged to sell the entire 1,60,000 shares. The first lot of 80,000 shares became its property on the failure of Bhimsen Gupta to repurchase them. There is no finding recorded as to who bought the shares. Getting a return of Rs. 45,000 only where Rs. 8,06,000 had been invested, hardly fits in with the theory of investment of money in shares. The whole conduct of the Assessee is more consistent with the inference drawn by the Appellate Tribunal that it had a motive of making a profit out of the deal which did not come off than with the Appellate Assistant Commissioner''s conclusion that it was meant to be a coup to get a controlling interest in the company, In my opinion the original intention of the Assessee is more important in such matters than the course of its subsequent conduct which is shaped by later and unforeseen events.

It was contended on behalf of the Revenue that since money lending was not one of the lines of business pursued by the Assessee, the transaction could not be an adventure in the nature of trade within the meaning of Section 2(4) of the Act to lead to a revenue loss. Our attention was drawn to the judgment of the Supreme Court in G. Venkataswami Naidu and Co. Vs. The Commissioner of Income Tax, which has a bearing on more than one aspect of the case before us. There it was observed:

When Section 2(4) refers to an adventure; in the nature of trade, it clearly suggests that the transaction cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of the essential, features that make up trade or business but not by all of them ; and so, even an isolated transaction can satisfy the description of an adventure in the nature of trade.

The Court went on to add that it was impossible to evolve any formula which could be applied in determining the character of isolated transactions which came before the Courts in tax proceedings. It said:

In deciding the character of such transactions several factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it ? Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold ? If the commodity purchased is generally the subject matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resalable ?

The Court also laid down another series of tests in determining, the character of the transaction:

Was the purchase made with the intention to resell it at a profit ? It is often said that a transaction of purchase followed by resale can either be an investment or an adventure in the nature of trade. There is no middle course and no half way house. This statement may be broadly true ; and so some judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature of trade from transactions of investment. Even in the application of this test distinction will have to be made between initial intention to resell at a profit which is present but not dominant on sole ; in other words, cases do often arise where the purchasers'' may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the presence of other factors, it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive and it is conceivable that, in considering all the facts and circumstances in the case, the Court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade.

Therefore, according to the Supreme Court not only the initial intention but subsequent conduct of the Assessee must be sifted and a conclusion arrived at in the light of all the facts before the Court as to whether the transaction was by way of an investment or an adventure in the nature of trade.

Mr. Pal for the Revenue contended that as the Tribunal had failed to take into consideration the subsequent conduct of the Assessee, dealt with at length by the Appellate Assistant Commissioner, the inference drawn by the Tribunal was not rationally possible and was, as a matter of fact, perverse. Mr. Pal referred us to the observations of the Supreme Court in Venkataswami Naidu''s (Supra) case in paras. 8 and 9 where the Court had observed that:

The Assessee or the revenue can contend that the inference has been drawn on considering inadmissible evidence or after excluding admissible and relevant evidence ; and, if the High Court is satisfied that the inference is the result of improper admission or exclusion of evidence, it would be justified in examining the correctness of the conclusion. It may also be open to the party to challenge a conclusion of fact drawn by the Tribunal on the ground that it is not supported by any legal evidence; or that the impugned conclusion drawn from the relevant facts is not rationally possible ; and if such a plea is established, the Court may consider whether the conclusion in question is not perverse and should not, therefore, be set aside... There is yet a third class of cases in which the Assessee or the revenue may seek to challenge the correctness of the conclusion reached by the tribunal on the ground that it is a conclusion on a question of mixed law and fact... In dealing with findings on questions of mixed law and fact, the High Court would, no doubt, have to accept the findings of the Tribunal on the primary questions of face ; but it is open to the High Court to examine whether the Tribunal had applied the relevant legal principles correctly or not; and in that sense, the scope of enquiry and the extent of the jurisdiction of the High Court in dealing with such points is the same as in dealing with pure points of law.

According to Mr. Pal the cumulative effect of failure to examine the conduct of the Assessee in the light of the facts found by the Appellate Assistant Commissioner, viz., that the Assessee itself was an associate of Surajmall Nagarmull group of concerns, that it held large blocks of shares in similar associate concerns and that, as already argued by Mr. Pal, there were factors which went to show that the transaction was not one of money lending, was that the Tribunal had reached its conclusion by excluding relevant evidence, and its inference was perverse on a conspectus of all the facts of the case. The finding of the Tribunal being on questions of mixed law and fact, this Court should examine the conclusion of the Tribunal and pronounce the same to be unjustified. Reference was also made to the judgment of the Supreme Court in BAI VELBAI Vs. COMMISSIONER OF Income Tax, BOMBAY CITY., , where it was said, following the judgment in SREE MEENAKSHI MILLS LIMITED Vs. COMMISSIONER OF Income Tax, MADRAS., referred to at length in Venkataswami Naidu''s (Supra) case, that a finding on a question of fact was open to attack u/s 66 as erroneous in law when there is no evidence to support it or if it was perverse or had been reached without consideration of the several matters relevant for such a determination.

We were also referred to the English case of Bean Doncaster Amalgamated Collieries Ltd. (1946) 27 Tax Cases 296 and, in particular, to certain observations of Du Parco L.J. at pages 306 and 307 of the report where the learned Lord Justice said:

Unless the Commissioners having found the relevant facts and put to themselves the proper question, have proceeded to give the right answer, they may be said, on this view, to have erred in point of law. If an inference from facts does not logically accord with and follow from them, then one must say that there is no evidence to support it. To come to a conclusion which there is no evidence to support is to make an error of law.

On the authority of these cases, Mr. Pal argued that the inference drawn by the tribunal that the transaction was one of money lending does not accord with all the facts which the Appellate Assistant Commissioner considered and which it was the duty of the Tribunal to examine. Mr. Pal argued that in so doing the Tribunal fell into an error of law and the Court should come to its own conclusion on all the facts found and take a view different from that of the Tribunal as the question is one of mixed law and fact.

According to Dr. Pal for the Assessee the Tribunal''s conclusion was the correct one in the light of all the facts considered by the Appellate Commissioner. Dr. Pal laid great stress on the intention of Assessee at the inception of the transaction. He argued that as Hind Machines Limited was in a flourishing condition in October, 1946, there was no reason to believe that the Assessee''s intention was other than one of making a profit of Rs. 1,00,000 on an investment of Rs. 8,00,000 at the end of a year which meant a return of 12 1/2 per cent per annum on the outlay. According to Dr. Pal, this kind of transaction could hardly be expected to be entered into if the intention of the Assessee was to acquire the shares for then Bhimsen Gupta might easily have been able to repay the amount due to the Assessee at the end of the year because the shares must in October, 1946 have stood at a value over par. He further contended that the subsequent conduct of the Assessee was not inconsistent with the transaction being an adventure in the nature of trade. According to him the negotiations between the parties from January, 1948 went to show that the Assessee was trying to get out of an uncomfortable situation and had even considered the proposal of putting the company into liquidation. From December, 1948 to January, 1950 the Assessee was powerless because of the pendency of the suit filed by Bhimsen Gupta in this Court. Thereafter, although there might have been some delay in the matter of the shares being put to sale, this circumstance would hardly justify the inference that the Assessee was out to acquire a controlling interest in the company. Merely because the Assessee was holding large blocks of shares in five named companies, the Tribunal could not Judge the Assessee in that light and come to the conclusion that the transaction in this case was also with the dominant object of acquiring a controlling interest in Hind Machines Ltd.

As I have already pointed out, the view to take of the conduct of the Assessee in the light of all the facts on record is that it had a profit-making motive which did not materialise. It set its hand to a transaction which, although expected to yield a substantial profit, only resulted in dead loss.

The judgment of the Supreme Court in Venkataswami Naidu''s (Supra) case and the cases therein referred to show that a single transaction can very well amount to an adventure in the nature of trade and, in my opinion, the Tribunal''s conclusion is not unjustified. There was a loan of Rs. 8,00,000 given with an idea of reaping a very substantial profit which did not come off.

In the light of the above, the answers to question (1)(a) and (b) are in the affirmative. Question (2) does not arise. The answer to question No. (3) will be in the affirmative. The Assessee will have the costs of the references.

Masud, J.

I agree.