SARDAR INDRA SINGH AND SONS LTD. vs. COMMISSIONER OF INCOME-TAX, WEST BENGAL.

CIVIL APPEAL No. 40/1952Supreme Court[1954] 1 S.C.R. 16723 September 1953Bench: 5 JudgesAuthor: M. PATANJALI SASTRI, SUDHI RANJAN DAS, VIVIAN BOSE, GHULAM HASAN, NATWARLAL HARILAL BHAGWATI5 pages
AI SummaryDismissed

What were the facts?

The assessee, Sardar Indra Singh and Sons Ltd., a private limited company incorporated in 1935, had objects including carrying on business as financiers and promoters, and purchasing, acquiring, and selling stock, shares, business concerns, and undertakings. For the assessment year 1938-39, a loss from the sale of shares and securities was allowed as a business loss. However, for assessment years 1939-40, 1940-41, and 1941-42, the assessee claimed that surpluses from similar sales were capital gains, not taxable income. The income-tax authorities and the Income-tax Appellate Tribunal disagreed, holding these surpluses as profits and gains of the company's business. The High Court affirmed this view, and the company appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the surplus realized by the company on the sales of shares and securities was taxable income. The Court reasoned that the test for determining whether such surplus is taxable as profits and gains of business is whether the sales producing the surplus were so connected with the carrying on of the assessee's business that the surplus could fairly be said to be profits and gains of that business. It is not necessary for the surplus to arise from a course of dealing in securities that by itself constitutes a business of buying and selling securities. It is sufficient if such sales are effected in the usual course of carrying on the business, or if the realization of securities is a normal step in carrying on the assessee's business. The Court found that the company's activities, including financing and promoting other companies, and varying its holdings of shares, indicated that the sale of investments and making of fresh investments were directly connected with its business as financiers. Therefore, the profits made by the company by the sale of shares and securities were assessable to income-tax. The appeal was dismissed.

What were the issues?

1. Whether, on the facts and circumstances of the case, the surplus realized by the company on the sales of shares and securities is taxable income? This question turns on Section 10 of the Indian Income-tax Act, 1922. The assessee contended that the surpluses arose from a mere change of investments and were therefore capital gains, not taxable income. The revenue contended that these surpluses were profits and gains of the company's business of dealing in shares. The Tribunal held that the sale of investments and making of fresh investments were linked to the company's business as financiers, and thus the profits were directly referable to the carrying on of its business. The High Court agreed with the Tribunal.

Which sections of the Income-tax Act were involved?

Section 10,Section 66

AI-generated summary — verify with the full judgment below

• s.c.:R. SUPREME COURT REPORTS 167 In the view we have expressed above, it is unneces- sary to deal with the alternative contention based on section 8(1) of the Act.

We allow the appeals, set aside the answer made by the High Court to question No. 1 and answer it as follows: In view of the finding of fact that the old joint family business in Banaras brocade was wound up and was no longer carried on by the joint family as such during the relevant chargeable accounting periods, the same business could not legally be treated as having con- tinued unbroken in respect of such periods for the purpose of section 10-A of the Excess Profits Tax Act read with sections 4 and 5 of the same Act. The judgment of the High Court will stand in other res- pects. The appellants will have their costs of the appeals. Advocates' fee one set.

Appeals atlowed.

Agent for the appellants: Naunit Lal.

Agent for the respondent: G. H. Rajadhyaksha. SARDAR INDRA SINGH AND SONS LTD. v. COMMISSIONER OF INCOME-TAX, WEST BENGAL. [PATANJALI SASTRI C.J., S. R. DAs, VrvrAN Bos:m, GHULAM HASAN and BHAGWATI JJ.] Incomdax Act (XI of 1922), s. IO-Income-Sale of shares and sec1irities-Company ca

The order continues below.

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