Case Note & Summary
This appeal by special leave arose from a reference under section 66(2) of the Indian Income Tax Act, 1922 for the assessment year 1947-48. The assessee, Rameshwar Prasad Bagla, was a partner in Agarwal & Co. He acquired shares of India United Mills Ltd. as part of an arrangement to obtain the managing agency and control of the company. The dispute concerned whether the profit from the sale of those shares was business income taxable under section 10 or capital gain taxable under section 12B. In 1943 negotiations led to an agreement dated January 26, 1945, under which E.D. Sassoon & Co. Ltd. agreed to assign the managing agency of India United Mills Ltd. to Agarwal & Co. for a consideration of Rs. 57,80,000. Agarwal & Co. also agreed to purchase large blocks of shares. The assessee became entitled to 62,500 ordinary shares after his brother relinquished his rights. He sold 43,700 shares between April 3, 1946 and July 19, 1946 in seven lots, realizing a profit of Rs. 1,80,220. In a letter dated March 30, 1949, the assessee conceded that an appreciation of Rs. 1,51,927/1/11 should have been disclosed as capital gain, stating that he was not dealing in shares as business. The Income Tax Officer rejected this plea and held the shares to be stock-in-trade, bringing the profit to tax under section 10. The Appellate Assistant Commissioner substantially upheld this. On further appeal, the Income Tax Appellate Tribunal remanded the case and ultimately, by order dated September 26, 1956, held that the shares were purchased not as stock-in-trade but for securing the managing agency and control of the company, and therefore the surplus was not taxable as business income. The revenue then sought a reference, which the Tribunal rejected, but the High Court directed a reference under section 66(2). The High Court answered both questions against the assessee, holding that there was no material for the Tribunal's finding and that the shares constituted stock-in-trade, and therefore the profit was not capital gain under section 12B. Before the Supreme Court, the assessee argued that the Tribunal's finding was based on evidence and the High Court had exceeded its advisory jurisdiction by reappreciating evidence. The revenue supported the High Court's view. The Supreme Court emphasized that in a reference under section 66, the High Court and the Supreme Court are not constituted as courts of appeal; they exercise only advisory jurisdiction. It is for the Tribunal to decide questions of fact, and the High Court cannot go behind the Tribunal's findings of fact unless they are based on no relevant evidence or on conjectures. The Court found that the High Court had erroneously proceeded as if it had to independently arrive at a finding. On the merits, the Court held that there was enough material before the Tribunal to support its finding that the shares were acquired for managing agency and control and not as stock-in-trade. Consequently, the profit on sale constituted capital gain chargeable under section 12B, relying on Ramnarain Sons (Pvt.) Ltd. v. Commissioner of Income-tax. The Supreme Court allowed the appeal, set aside the High Court's judgment, and restored the Tribunal's order, answering both questions in favour of the assessee.
Headnote
A) Income Tax Law - Reference Jurisdiction - Advisory Not Appellate - Indian Income Tax Act, 1922, Section 66(2) - In a reference under section 66(2), the High Court and Supreme Court exercise advisory jurisdiction and are not courts of appeal; findings of fact by the Income Tax Appellate Tribunal are binding unless based on no relevant evidence or on conjectures. The High Court erred by independently reappreciating evidence and substituting its own finding instead of examining whether there was material before the Tribunal. Held that the High Court was not justified in setting aside the Tribunal's finding of fact (Paras 453-457C). B) Income Tax Law - Capital vs Revenue - Stock-in-Trade vs Capital Assets - Indian Income Tax Act, 1922, Section 10 - Where shares are acquired with a view to obtain managing agency and control of a company, they are capital assets and not stock-in-trade, even if sold at a profit later. The Tribunal on remand had sufficient material to hold that the shares in question were purchased for managing agency and control, and not as stock-in-trade. Held that the High Court's answer that there was no material was erroneous; the Tribunal's finding was supported by evidence (Paras 455-457). C) Income Tax Law - Capital Gains - Chargeability Under Section 12B - Indian Income Tax Act, 1922, Section 12B - Profit arising from sale of shares held as capital assets constitutes capital gain chargeable to income tax under section 12B, not business profits under section 10. Since the shares were not stock-in-trade, the surplus on sale was capital gain. Held that the profit made by sale of shares constituted capital gain chargeable to income tax under section 12B (Paras 456-457C).
Issue of Consideration
Whether there was material for the finding that the shares in question were purchased by the assessee with a view to acquire the managing agency and control of the company or the shares constituted his stock-in-trade; and if the shares did not constitute stock-in-trade, whether the profit made on their sale constituted capital gain chargeable to income tax under section 12B of the Indian Income Tax Act, 1922
Final Decision
The Supreme Court allowed the appeal, set aside the judgment of the Allahabad High Court, and restored the order of the Income Tax Appellate Tribunal. It held that there was enough material before the Tribunal to support its finding that the shares were purchased by the assessee with a view to acquire the managing agency and control of the company and did not constitute stock-in-trade. It further held that the profit made on the sale of shares constituted capital gain chargeable to income tax under section 12B of the Indian Income Tax Act, 1922.
Law Points
- In a reference under section 66 of the Indian Income Tax Act
- 1922
- the High Court and Supreme Court exercise advisory jurisdiction
- not appellate jurisdiction
- findings of fact by the Income Tax Appellate Tribunal are binding unless based on no relevant evidence or on conjectures
- purchase of shares to acquire managing agency and control makes them capital assets and not stock-in-trade
- profit on sale of such shares is capital gain chargeable to tax under section 12B
- not business profits under section 10
- the High Court cannot reappreciate evidence or substitute its own finding of fact
