DALHOUSIE INVESTMENT TRUST COMPANY LTD. vs. COMMISSIONER OF INCOME-TAX (CENTRAL), CALCUTTA

CIVIL APPEAL No. 581/1966Supreme Court[1968] 2 S.C.R. 35322 November 1967Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, VISHISHTHA BHARGAVA7 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that the income derived by the assessee from the sale of shares was a revenue receipt and taxable. The Court reasoned that the facts and circumstances led to the conclusion that the shares were purchased and sold with the motive of earning profit, not for investment. While the assessee's principal business was investment, its Memorandum of Association also permitted dealing in shares. The Tribunal's finding that the purchases and sales were in pursuit of this dealing clause was accepted. The assessee failed to prove that the sale was due to the control of McLeod & Co. Ltd. passing from the Kanoria group to the Bajoria group, as the Kanoria group still held a majority of shares at the time of sale. The subsequent purchase of shares in a rising market further strengthened the inference that the transactions were an adventure in the nature of trade. The Court distinguished the case from Ram Narain Sons (P) Ltd. by finding that the initial purchase of shares was not for investment but for re-sale at a profit. Therefore, the High Court was correct in its conclusion.

What were the facts?

The assessee, Dalhousie Investment Trust Company Ltd., primarily engaged in the investment of its capital in shares and stocks, deriving income from dividends and interest. The assessee purchased shares of McLeod & Co. Ltd. during a period of falling prices, taking loans at interest. The assessee claimed these shares were held as investments and sold because control of the company passed out of the hands of its directors. The Income-tax Officer and the Tribunal did not accept this explanation. The Supreme Court had previously remanded the case for a further statement of facts from the Tribunal regarding the object of purchasing shares and whether control had indeed passed. The supplementary statement confirmed the Tribunal's finding that the purchases and sales were in pursuit of Clause (2) of the Memorandum of Association, which allowed dealing in shares. The Tribunal found no evidence for the assessee's stated object for acquiring McLeod & Co. shares, nor why activities were confined to McLeod & Co. and its managed companies. The sale of 6,900 shares occurred when the controlling director had resigned but before the resignation was officially accepted.

What were the issues?

1. Whether, on the facts and circumstances of the case, the surplus derived by the assessee from the sale of its shares and securities in the relevant previous years was a revenue receipt and as such taxable under the Income Tax Act? Assessee's Contentions: - The shares were held as investments and sold because control of McLeod & Co. Ltd. passed out of the hands of the assessee's directors. - The Tribunal had not recorded a finding that the shares were converted into stock-in-trade or that the variation of investments amounted to dealings in investments. - Reliance was placed on the principle that the purpose of purchase is the principal consideration, and if the purpose was investment, profit from variation does not make it revenue income, citing Ram Narain Sons (P) Ltd. v. Commissioner of Income-tax, Bombay. - Reliance was also placed on Bengal and Assam Investors Ltd. v. Commissioner of Income-tax, West Bengal, and Commissioner of Income-tax v. Bai Shrinbai K. Kooka, arguing that shares must be dealt in as stock-in-trade to be taxed as revenue. Revenue's Contentions: - The Tribunal's finding that the purchases and sales were in pursuit of Clause (2) of the Memorandum of Association, which allowed dealing in shares, was accepted. - The assessee failed to prove the object of the sale, justifying the inference that shares were sold with the sole object of earning profit. - The conduct of the assessee in subsequent years, including purchasing shares in a rising market when control had passed, further supported the inference that transactions were an adventure in the nature of trade.

Which sections of the Income-tax Act were involved?

Section 2(4)

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B c D E F G DALHOUSIE INVESTMENT TRUST COMPANY LTD. v. COMMISSIONER OF INCOME·TAX (CENTRAL), CALCUTTA November 22, 1967 [J. C. SHAH, V. RAMASWAMI AND V. BHAGRAVA, JJ.] Indian Income"'ax A.ct, 1922 (11 of 1922), s. 2(4) Purchase and sale of share when. amounts to adventure in the nature of Trade-Previous findillgs of Tribunal whether blndillg in subsequent assessment years. The principal activity of the assessee was investment of its capitals in shares and stocks. It changed its investments by sale of its shares and stocks from time to time. The assessee's income was primarily derived from dividends on shares and interest derived by it on the Investments. The assessee purchased the shares of a company V>hen their prices were falling by taking loan at lnterest and the return on investment was not at all substanti"

1.

The assessee's explanation that the shares were, in fact, being held as investment and \\'-ere sold simply because the. co111:rol of the company went out of the hands of the Directors of the ass-esscc, was not accepted by the Tribunal. HELD : The incJme derived by the 1 asscssce from tlie sale of these -shares was revenue n~ceipt and as such tax

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