Case Note & Summary
The assessee, Star Company Limited, was a public limited company engaged in the business of dealing in shares and securities. During the assessment year 1954-55, it claimed a loss of Rs. 1,11,816 on the sale of 1,575 preference shares of Fort William Jute Company Ltd. These shares were purchased from Mugneeram Bangur & Co. at Rs. 186 per share on May 22, 1952, and sold back to the same entity at Rs. 115 per share on December 23, 1953. At the time of purchase, the market price of the shares was around Rs. 119-122. The background involved an agreement between Kettlewell Bullen & Co., the then managing agents of Fort William Jute Co., and Mugneeram Bangur & Co. for the sale of the entire shareholding, which facilitated the acquisition of managing agency rights by Mugneeram Bangur & Co. The assessee was an associate of the acquiring concern. The Income Tax Officer and the Appellate Assistant Commissioner disallowed the loss, holding that the shares were purchased as a contribution to the scheme of acquisition of the managing agency and not in the ordinary course of business. The Appellate Tribunal, though observing that there was no direct evidence that the assessee was a pawn in the scheme, upheld the disallowance on the alternative ground that the assessee had itself treated the shares as investment in its profit and loss account, not as stock-in-trade. The Calcutta High Court, on a reference, answered the question against the assessee, criticising the Tribunal for ignoring primary facts that clearly indicated the transaction was at the instance of Mugneeram Bangur & Co. to help them in the scheme. The Supreme Court dismissed the assessee’s appeal. It held that the question referred was a general one and the High Court was entitled to examine all relevant facts, not being bound by the Tribunal’s rejection of certain inferences. Even disregarding the High Court’s finding on the assessee’s role, the admitted facts—such as the purchase price being far above market, the timing immediately after the managing agency agreement, the involvement of a single bulk transaction, and the sale back at a loss—led irresistibly to the conclusion that the shares were not bought and sold in the ordinary course of the share dealing business. The loss was therefore not deductible.
Headnote
A) Income Tax - Business Deduction - Loss from Share Transactions - Income Tax Act, 1922 - The assessee, a dealer in shares, claimed loss on sale of preference shares purchased at above market price in connection with a scheme for transfer of managing agency; held that the transaction, given its extraordinary features and connection to the scheme, was not in the ordinary course of business, so loss not deductible (Paras Not mentioned). B) Income Tax - Reference Jurisdiction - Scope of High Court's Power - Income Tax Act, 1922 - Where a general question of law is referred, the High Court can examine all relevant facts and circumstances, even if the Tribunal had rejected certain findings unfavorable to the assessee; the High Court need not be confined to the reasons given by the Tribunal (Paras Not mentioned). C) Income Tax - Evidence - Inferences from Primary Facts - Income Tax Act, 1922 - When primary facts are found, the Tribunal's inference can be reviewed as a question of law; the High Court was entitled to draw the conclusion that the transaction was not in the ordinary course, contrary to the Tribunal's view that there was no evidence of the assessee being a pawn (Paras Not mentioned).
Issue of Consideration
Whether the loss of Rs. 1,11,816 suffered by the assessee on the sale of shares of Fort William Jute Company Limited was a loss that arose in its share dealing business.
Final Decision
Appeal dismissed. The Supreme Court held that the loss did not arise in the ordinary course of business and the High Court correctly answered the question against the assessee.
Law Points
- Legal points not extracted
- Loss must arise in the ordinary course of business to be deductible
- transactions that are part of a scheme for acquisition of managing agency are not in ordinary course
- High Court can examine entire evidence on a general question referred
- finding of fact by Tribunal on a point in favor of assessee can be reviewed if question is general
