Dhirajlal Girdharilal vs C.I.T. Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Appeal (civil) 246 of 1953

Decision Date: 25 October 1954

Coram: G. Hasan, N. H. Bhagwati, Mehr Chand Mahajan

In this case the Supreme Court recorded that the appeal by special leave was filed against an order of the High Court of Judicature at Bombay. The High Court had summarily dismissed an application filed under section sixty-six of the Indian Income-tax Act, 1922. That application had sought a direction for the Income-tax Appellate Tribunal to state a case and to refer to it the questions of law that the appellant claimed to arise from the Tribunal’s order. The appellant was a Hindu undivided family consisting of Dhirajlal, who acted as karta, and his two brothers Hiralal and Kirtilal. Their father, Girdharlal Trikamlal, had been the head of the joint Hindu family until his death on twenty-sixth July, 1945.

During his lifetime Girdharlal Trikamlal and his son Dhirajlal had carried on a separate business under the firm name Girdharlal Trikamlal and Co., dealing in stocks and shares. On the death of Girdharlal that firm was dissolved and a new partnership was formed between Dhirajlal and his younger brother Hiralal, whose purpose was to take over the business previously conducted by Girdharlal Trikamlal and Co. At the date of Girdharlal’s death an account he held with his own firm showed a credit balance of twenty-five lakh thirty-one thousand nine hundred ninety-nine rupees. The firm at that moment also possessed shares whose market value was approximately twenty-three lakh sixty-thousand rupees, forming part of its total assets.

When Girdharlal died his three sons together with his widow became entitled to the amount standing to his credit in the firm. By a post-death arrangement the Hindu undivided family was allotted, in July 1942, shares valued at eighteen lakh thirty-four thousand five hundred eighty-six rupees from the firm. These shares were transferred as part of the settlement of the family’s liability to the undivided family and represented a portion of Girdharlal’s inheritance. For the remaining balance the Hindu undivided family was recorded as a creditor of the newly created firm. The shares transferred were valued at market price, and consequently the undivided family, in its capacity as such, became the owner of those shares. It was unanimously accepted that, before that date, the family in its undivided status was not engaged in any business of buying or selling stocks or shares. After receiving the shares, the Hindu undivided family sold a portion of them in the financial year 1943-44, realizing a profit of one lakh forty-two thousand rupees.

In the assessment year 1944-45 the Income-tax Officer included the profit of Rs. 1,42,025 that the Hindu undivided family earned from the sale of shares in the assessment of that family, reasoning that the family continued to engage in the share business and had purchased shares worth Rs. 3,00,460 during the account years 1942-43 and 1943-44, and that the amount received from the late Mr. Girdharlal Trikamlal had been converted by the family into trading capital, effectively turning the inheritance into stock-in-trade, a conclusion supported by the subsequent purchase of additional shares; consequently the officer stated that the profit of Rs. 1,42,025 was to be included in the assessment. The appellant challenged this finding before the Appellate Assistant Commissioner, asserting that the family was not carrying on any business in shares but was merely liquidating the shares inherited on the death of Girdharlal Trikamlal in order to obtain cash, and that any shares subsequently purchased were acquired as investments rather than for trading purposes. The Appellate Assistant Commissioner accepted the appellant’s argument and granted a reduction of Rs. 1,42,025 in the assessed income, holding that, based on the facts before him, the transactions in shares represented a change in investment and not business dealings, and that the profit therefore constituted capital accretion rather than business profit and was not liable to assessment. Dissatisfied with this order, the Commissioner of Income-tax appealed, and the appeal was allowed. The Tribunal, by its order dated 1 August 1951, restored the Income-tax Officer’s assessment, finding that the transfer of shares valued at Rs. 18,34,586 from the new firm to the Hindu undivided family was a device intended to evade income-tax. After examining the family’s purchase and sale of shares during the years 1942, 1943, 1944 and 1945, the Tribunal concluded that the driving force behind the transactions was Dhirajlal, who acted both as the proprietor of the new firm and as the karta of the Hindu undivided family, and who, aware of market conditions, effected the transfer of shares so that the family could realize the profits. The Tribunal further observed that shares worth roughly Rs. 18 lakhs had been transferred, essentially by a dealer in shares to himself in another capacity, and that there was no justification for the transfer to the family; it also noted that no explanation had been provided for the family’s need to sell a large number of shares in the financial years 1943-44 and 1944-45, nor for its purchase of shares exceeding Rs. 2 lakhs between 1 August 1942 and 1 March 1943.

In the year 1943 the Tribunal examined the pattern of share sales that occurred during the financial year 1943-44. It observed that sales were made in the months of July, August, October, December, January, February and March. From this pattern the Tribunal drew the inevitable inference that, from the very beginning, Dhirajlal, acting both as the transferor of the shares and as the transferee, intended to deal in those shares.

The appellant subsequently filed an application before the Tribunal requesting a statement of the case and a reference of the legal questions that arose from the Tribunal’s order to the High Court. By an order dated 23 November 1951 the Tribunal rejected the application, holding that the issue of whether the Hindu undivided family had carried on a business in respect of the shares transferred to it and the shares it had purchased was purely a question of fact, that no question of law arose from the Tribunal’s findings, and that the intention of Dhirajlal from the outset was to deal in the shares.

Unsatisfied with the Tribunal’s order, the appellant approached the High Court under Section 66(2) seeking a direction that the Tribunal state a case and refer to it two questions of law: (1) whether, on the facts and circumstances of the case, the assessee was carrying on business in shares during the account year; and (2) whether any material existed on the record that could support a finding that the assessee was indeed carrying on such a business. The High Court dismissed the application summarily, apparently on the ground that, in its view, no question of law arose from the Tribunal’s order.

The appellant then filed an application before the Supreme Court under Article 136 of the Constitution, seeking leave to appeal against the High Court’s dismissal. Leave to appeal was granted. The matter raised the issue of whether a question that is essentially factual can become a question of law when the fact-finder decides on that fact by considering material that is irrelevant, partially relevant, or based on conjecture, surmise or suspicion, rather than on admissible evidence. The Tribunal’s own judgment demonstrated that its approach was tainted by suspicion and reliance on conjectural circumstances for which there was no evidence in the record. As the Tribunal stated in its finding: “It appears to us that this transfer was effected with the object of evading income-tax, if it could be done so.”

In its findings, the Tribunal stated that if the shares had stayed with the newly formed firm and sales had been carried out, the resulting profits would have been subject to income-tax. It concluded that the very act of transferring the shares, together with the fact that a substantial portion of the firm’s holdings was transferred, demonstrated conclusively that the purpose of the transfer was to evade tax wherever possible. The Tribunal observed that the Hindu undivided family did not receive the shares as a return of its capital. It further noted that the family was aware, at the time of transfer, of the purpose underlying the transaction. The Tribunal added that had the shares remained with the Hindu undivided family for a considerable duration, it might be reasonable to accept that the family regarded the shares as a return of capital; however, the family did not retain the shares for a long period. The Tribunal pointed out that no shares were sold between 1 August 1942 and 31 March 1943, and that between 22 July 1942 and 31 March 1944 shares of sixteen companies were sold for a total of Rs. 3,67,420, some of which were drawn from the shares purchased during the earlier period. The Tribunal described the principal actor in the new firm as Dhirajlal, the elder brother, and said that the same individual also acted as the driving force in the Hindu undivided family. It asserted that Dhirajlal, in his dual roles as transferor and transferee, possessed full knowledge of the prevailing conditions in the share market, where prices were rising and were expected to continue rising because of the war. The learned Attorney-General openly admitted that the Tribunal had, to some extent, relied on its own imagination and on several surmises and conjectures in reaching its conclusion. He argued, however, that if the irrelevant material employed by the Tribunal were removed, there remained sufficient evidence to support the factual finding. The Court found this contention unpersuasive. It reiterated that when a fact-finding body bases its decision on material that is partly relevant and partly irrelevant, it is impossible to determine how much the irrelevant portion influenced the court’s mind. Consequently, such a finding is vitiated by the use of inadmissible material, giving rise to a question of law. For these reasons, the Court held that both the Tribunal and the High Court were mistaken in concluding that no issue of law arose, and that the Tribunal could not be directed to state a case and refer any question of law to the High Court. The two questions framed by the appellant, which he sought the High Court to ask the Tribunal to refer, were deemed comprehensive enough to encompass the legal issue that, in the Court’s view, arose from the Tribunal’s order.

The Court first noted the order that had been issued by the Tribunal. It then observed that the position would become clearer if the two questions previously raised were restated in a single, precise form. Accordingly, the Court proposed that the question be framed as follows: “Whether the finding of the Tribunal is not vitiated by reason of its having relied upon suspicions and surmises not supported by any evidence on the record or upon partly inadmissible material?” Having considered the merits of the appeal, the Court allowed the appeal. It set aside the decision of the High Court that had dismissed the appellant’s application under Section 66(2) of the Indian Income-Tax Act, 1922. The matter was then remanded to the High Court with a specific direction. The High Court was instructed to ask the Tribunal to state a case and to refer to it the same question of law framed above, namely whether the Tribunal’s finding is tainted by reliance on unsupported suspicions, surmises, or partially inadmissible material. The Court ordered that the costs of the proceedings shall follow the result. The appeal was therefore allowed.