Raja Bahadur Visheshwara Singhand vs Commissioner Of Income-Tax, Bihar and Orissa

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 137 to 141 of 1958

Decision Date: 15 December 1960

Coram: J.L. Kapur, M. Hidayatullah, J.C. Shah

In the case titled Raja Bahadur Visheshwara Singhand … versus Commissioner of Income‑Tax, Bihar and Orissa, the judgment was delivered on 15 December 1960 by the Supreme Court of India. The opinion was authored by Justice J. L. Kapur, who was joined by Justices M. Hidayatullah and J. C. Shah. The parties are identified as the petitioner, Raja Bahadur Visheshwara Singhand and others, and the respondent, the Commissioner of Income‑Tax for the provinces of Bihar and Orissa. The decision is reported in the 1961 volume of the All India Reporter at page 1062 and also appears in the 1961 third volume of the Supreme Court Reports on page 287. The matter concerns the provisions of the Indian Income‑Tax Act of 1922, specifically section 66(2), and deals with whether the purchase and sale of shares and securities funded by surplus cash constitute a business activity liable to tax or merely an investment that results in capital appreciation.

The factual background set out that the appellant habitually invested his excess cash in shares and securities and kept a dedicated ledger referred to as Book No. 1 to record these transactions. Between the years 1930 and the accounting year 1941‑42, he acquired a substantial portfolio of shares and securities whose aggregate value reached Rs 1,491 lacs by the close of the 1941‑42 year. During that period he also disposed of certain securities representing several lacs of value and earned a profit on those disposals. In 1940, the appellant obtained a sizeable loan from his brother, the Maharaja of Darbhanga, and consequently opened a second ledger, designated as Account No. 2, in which all entries relating to purchases and sales financed by the borrowed amount were recorded. The assessments for the fiscal years 1944‑45 through 1948‑49 showed that profits derived from the trading of shares and securities amounted to several lacs, and the Income‑Tax Officer determined that these profits were taxable as business income. The Appellate Assistant Commissioner affirmed the assessments for the later years but excluded the profits for the year 1944‑45. Both parties appealed, and the Appellate Tribunal, after considering the evidence, concluded that the appellant should be regarded as a dealer in shares and securities, thereby rendering the profits subject to income tax.

The High Court subsequently framed two specific questions under section 66(2) of the Income‑Tax Act and answered both affirmatively. The first question asked whether the material on record supported the Tribunal’s finding that the assessee acted as a dealer in shares and securities with respect to each of the two accounts, and consequently was liable to tax. The second question considered whether, in light of the Tribunal’s earlier finding concerning the 1941‑42 assessment, it was permissible for the Tribunal to hold that the profits arising from the purchases and sales of shares and securities constituted business profits and were therefore taxable. On a further appeal by special leave, the appellant contended, among other points, that his status as a Zamindar meant that buying and selling shares was not his ordinary occupation, that he did not carry on a business of trading shares, and that his transactions were merely investments of surplus funds, implying that the excess amounts received on sale should be treated as capital receipts rather than assessable profits.

The Court held that the amounts received from the sales could not be characterized as capital receipts that were merely surplus and not profits. It found that, based on the evidence presented and the facts established at trial, the appellant had been correctly assessed. The Court explained the principle that applies to such transactions: when a person who holds an ordinary investment decides to liquidate it and obtains a price higher than the purchase price, the excess amount is generally regarded as a capital gain and is not taxable as profit under the income‑tax law. However, the Court observed that the present case was different because the appellant’s activities did not consist of a simple realization or change in investment. Instead, the appellant engaged in conduct that amounted to the genuine carrying on of a business of dealing in shares and securities. Consequently, the appreciation realised on those transactions was to be treated as profit of business and was therefore assessable to income tax. The Court referred to the judgments in G. Venkataswami Naidu & Co. v. The Commissioner of Income‑tax [1959] Supp. 1 S.C.R. 464, Oriental Investment Company Ltd. v. The Commissioner of Income‑tax [1958] S.C.R. 49, and Raja Bahadur Kamakshya Narain Singh v. Commissioner of Income‑tax (Bihar and Orissa) (1943) L.R. 70 I.A. 180, which discuss the distinction between capital gains and business profits. The Court emphasized that the substantial nature of the transactions, the method of maintaining the books, the large volume of shares bought and sold, and the ratio of purchases to sales, together with the holding pattern, justified the Tribunal’s conclusion that the appellant was dealing in shares as a business. The High Court was therefore unable to disturb those findings and correctly answered the questions posed under section 66(2) of the Income‑tax Act in the affirmative. The Court also noted that the doctrine of res judicata does not apply in income‑tax matters, and consequently the Appellate Tribunal was fully within its jurisdiction to reach the findings it had made.

The judgment was issued under the civil appellate jurisdiction in Civil Appeals Nos. 137 to 141 of 1958. These appeals were filed by special leave against the judgment and order dated 26 April 1956 of the Patna High Court in Miscellaneous Judicial Cases Nos. 362 to 366 of 1955. Counsel representing the appellants numbered 2 to 4 was instructed, while counsel for the respondent appeared in all the appeals. The judgment was pronounced on 15 December 1960 by Justice Kapur. The appellant, who is the son of the late Maharajadhiraja of Darbhanga and brother of the current Maharaja, had brought the five appeals challenging the High Court’s decision that had answered the two questions under section 66(2) of the Indian Income‑tax Act against him and in favour of the Commissioner of Income‑tax. After the death of his father in 1929, the appellant received the Estate of Rajnagar as maintenance and was granted an annual allowance that was initially Rs. 30,000 and later increased to Rs. 48,000. Beginning in 1929, the appellant invested his surplus cash in shares and securities, recording these transactions in an account referred to as Account Book No. 1. From 1930 through the financial year 1941‑42, he purchased a substantial quantity of shares and securities, which were reflected in the accounting records as detailed in the subsequent portions of the case file.

The Court noted that during the year 1941‑42 the appellant’s holdings in shares and securities were recorded at a value of fourteen lakh ninety‑one thousand rupees. In the earlier accounting years the appellant had sold shares and securities valued at one lakh forty‑eight thousand rupees in 1936‑37 and at one lakh sixty‑nine thousand rupees in 1939‑40. Although the appellant earned certain profits on those sales, the Commissioner of Income‑Tax, in the first instance, and the Income‑Tax Tribunal, in the second, ordered that the amounts not be assessed to income‑tax.

For the accounting years 1942‑43 through 1946‑47 the appellant both purchased and sold additional shares and securities. The entries recorded in Investment Account No. 1 for those years were as follows. In 1942‑43 the opening balance of shares and securities stood at one thousand three hundred fifty‑four thousand rupees, the cost of purchases during the year was fourteen lakh sixty‑six thousand rupees, there were no securities sold, and the cost of shares purchased during the year amounted to four lakh sixty‑eight thousand rupees. In 1943‑44 the opening balance was nine lakh ninety‑eight thousand rupees, purchases cost two lakh thirty‑seven thousand rupees, securities sold cost four lakh sixteen thousand rupees and shares purchased during the year cost three lakh five thousand rupees. In 1944‑45 the opening balance was eight lakh twenty thousand rupees, purchases cost two lakh sixty‑nine thousand rupees, securities sold cost one lakh three thousand rupees and shares purchased during the year were recorded as other call money. In 1945‑46 the opening balance was ten lakh fifty‑two thousand rupees, there were no purchases, securities sold cost one lakh three thousand rupees and shares purchased during the year were again recorded as other call money. Finally, in 1946‑47 the opening balance was nine lakh fifty thousand rupees, purchases cost fifteen lakh eighty‑three thousand rupees, securities sold cost three lakh thirty‑nine thousand rupees and shares purchased during the year were recorded as other call money. Across these years the appellant realised profits that ranged from two lakh fifty‑six thousand nine hundred fifty‑nine rupees in 1942‑43 to thirty‑three thousand one hundred seventy‑four rupees in 1946‑47.

The Court further explained that on 16 July 1940 the appellant arranged an overdraft of ten thousand rupees with the Mercantile Bank of India, which he subsequently used to purchase shares. His brother, the Maharaja, then advanced ten lakh rupees to him without interest, enabling the appellant to settle the overdraft. A second ledger, termed Investment Account No. 2, was opened to record all transactions involving shares bought with the money borrowed from the Maharaja. In the first assessment period the Court held that the income from these transactions was not taxable, concluding that the appellant was not carrying on any trade. In the second period, covering the assessment years 1944‑45 to 1948‑49, the profits derived from the purchase and sale of shares were recorded as follows: approximately two lakh sixty‑two thousand rupees in 1944‑45, about three lakh ninety‑five thousand rupees in 1945‑46, roughly one lakh fifty‑seven thousand rupees in 1946‑47, about one lakh thirty‑three thousand rupees in 1947‑48, and around seventy‑six thousand rupees in 1948‑49. The Income‑Tax Officer deemed these amounts to be business profits liable to tax. Upon appeal, the Appellate Assistant Commissioner excluded the profits for the years 1944‑45 and 1945‑46 but upheld the assessments for 1946‑47 through 1948‑49. Both parties then appealed to the Appellate Tribunal, which, after examining the evidence, held that the appellant should be regarded as a dealer in shares and securities and consequently that the profits were assessable to income‑tax. The appellant subsequently applied for a case to be stated under section 66(1) of the Income‑Tax Act; that application was dismissed, but the High Court issued an order under section 66(2) directing that a case be stated on two questions of law.

The High Court was requested to frame a case on two legal questions. The first question asked whether, considering all the facts of the case, there existed material sufficient to support the Appellate Tribunal’s conclusion that the assessee acted as a dealer in shares and securities with respect to each of his accounts, and consequently ought to be liable to tax. The second question inquired whether, in view of the Appellate Tribunal’s findings concerning the assessment for the year 1941‑42, the Tribunal was authorized in the present proceedings to determine that the gains arising from the purchase and sale of shares and securities represented business profits and were therefore taxable. The High Court examined the facts and circumstances that the Tribunal had relied upon in reaching its finding. It held that those facts constituted the material before the Tribunal and were sufficient to sustain the Tribunal’s conclusion. Accordingly, the Court answered the first question in the affirmative, meaning that the appellant stood against the finding of the Tribunal. Regarding the second question, the High Court also answered affirmatively, holding that the appellant again was opposed to the Tribunal’s conclusion. The appellant subsequently sought special leave to approach this Court.

In his submissions before this Court, the appellant contended that he was not engaged in a trade of buying and selling shares. He asserted that his transactions were undertaken as investments of surplus monies rather than as commercial operations, and that the proceeds from the sales were capital receipts representing surplus, not profits. The appellant further explained that, being a zamindar, the trade of shares was not his usual activity. He possessed a substantial regular income, and it was this surplus that he chose to invest in shares. He maintained that whenever the investments yielded a profit, he would convert the holdings into securities, and that from the year 1931‑32 onward he had been acquiring shares without selling them for many years. He argued that the nature of investment required periodic alteration so that the invested monies could be employed to the investor’s greatest advantage, and that the sales were undertaken merely to redeploy the invested funds in a more advantageous manner. Counsel for the appellant relied upon several precedents to support the contention that the first question should be interpreted more broadly than the High Court had done and that its true scope corresponded to the questions considered in earlier decisions of this Court. The counsel cited G. Venkataswami Naidu & Co. v. The Commissioner of Income‑tax (1) and Oriental Investment Co., Ltd. v. The Commissioner of Income‑tax, Bombay (2). In the Venkataswami case, the assessee had purchased four parcels of land adjoining mills for which he acted as Managing Agent, and after about five years sold the parcels to the mills, realizing a gain of approximately Rs. 43,000 over the purchase price. The tax authorities had treated that transaction as a purchase with a view to resale at a profit.

In the case under consideration, the issue that was referred to the Court was whether there was sufficient material to assess the amount in question as income arising from an adventure in the nature of trade, as cited in the authorities (1) [1959] Supp. 1 S.C.R. 646 and (2) [1958] S.C.R. 49. The High Court had held that the transaction possessed the character of an adventure in the nature of trade. On appeal, this Court observed that before a tax tribunal could conclude that a transaction was indeed an adventure in the nature of trade, it was necessary for the tribunal to consider the legal requirements that define the concept of trade or business, and that the determination involved a mixed question of law and fact. The Court further explained that when a person invests money in land with the intention of retaining it and subsequently sells the land at a profit, the resulting gain is treated as a capital accretion rather than profit derived from an adventure in the nature of trade. Conversely, if a purchase is made solely and exclusively with the intention of reselling it at a profit, and the purchaser never intended to retain the property for personal use, a strong presumption arises that the transaction is of a trading nature; however, this presumption is rebuttable. In the absence of any evidence to the contrary, the purchase was held to fall within the latter category, namely an adventure in the nature of trade. In the Oriental Investment case (1), the assessee was an investment company that bought certain shares and later sold them, asserting that it should be treated as an investor rather than a dealer on the ground that it did not carry on a business of purchasing and selling shares. The assessee’s applications for reference to the High Court were rejected because no question of law arose from the tribunal’s order. The Court held that the question of whether the assessee’s activities amounted to dealing in shares and properties, or were merely an investment, was a mixed question of law and fact, and that the legal effect of the factual findings constituted a question of law. Accordingly, this Court ordered that the case be stated on two questions. One question mirrored the principal issue in the present case, while the second question was broader, asking whether profits and losses arising from the sale of shares and similar assets could be taxed as business profits. The High Court in the present case was required to answer a narrow question, and based on the material before it, the Court correctly answered in the affirmative. Even if the question were construed more broadly, the evidence and facts established that the appellant had been properly assessed. Counsel for the appellant contended that the amounts received during the relevant accounting years represented capital accretions and therefore should not be assessable as income. In support of that position, counsel for the appellant relied on the foregoing authorities.

In support of his position, the appellant cited several authorities. He referred first to Raja Bahadur Kamakshya Narain Singh v. The Commissioner of Income‑Tax, Bihar & Orissa (1), where Lord Wright explained that profits obtained from the sale of shares may be treated as capital gains when the seller is an ordinary investor who merely changes his securities, but the same profits may be regarded as income where the seller is an investment company or an insurance company. He also relied on the cases Californian Copper Syndicate Limited v. Harris (2), Cooper v. Stubbs (3), Leeming v. Jones (4) and Edwards v. Bairstow & Harrison (5). The appellant argued that a detailed discussion of those cases was unnecessary because the governing principle was well settled: when a holder of an ordinary investment sells that investment at a higher price than the purchase price, the excess is not assessable as income tax, whereas in the present circumstance the transactions did not constitute a mere realization or a change of investment but represented the ordinary course of a business, and therefore the appreciation obtained must be assessable. The appellant further explained that in July 1948 he had borrowed, without interest, approximately ten lakh rupees, apparently from his brother, and had opened a new account designated as No 2 Investment Account. For the assessment years in issue, the appellant bought and sold shares in very large amounts, ranging in the first account from Rs 4.68 lacs down to Rs 69 thousand, and in the second account from Rs 9.64 lacs down to Rs 3.60 lacs, or, if Port Trust Debentures are excluded (1) [1943] L.R.70 I.A. 180,194. (2) [1904] 5 T.C. 259. (3) [1925] 10 T.C. 29, 57. (4) [1930] 15 T.C. 333 (5)..[1955] 36 T.C. 207. The scale, frequency and the ratio of sales to purchases and to total holdings provided evidence from which the Income‑Tax Appellate Tribunal could determine the true nature of the appellant’s activities. The Tribunal considered the substantial size of the transactions, the way the books were kept, the large volume of shares bought and sold and the relative proportions of purchases, sales and holdings. On the basis of that material, the Tribunal concluded that there was sufficient basis to find that the appellant dealt in shares as a business, a conclusion that the High Court could not disturb. In the Court’s view this affirmed the judgment against the appellant. The second question raised was regarded as wholly unsubstantial; the doctrine of res judicata does not apply in income‑tax matters. The Tribunal had tabulated the appellant’s buying and selling activities and the magnitude of his holdings, and it could not be said that it was otherwise.

The Court observed that the Appellate Tribunal was not authorised to make the conclusion it had reached; in other words, the Tribunal could not lawfully arrive at the finding it had recorded. In the Court’s view, the High Court had correctly ruled against the appellant and there was no error in that judgment. Consequently, the Court decided that the appeals filed by the appellant should be thrown out. The dismissal of the appeals was accompanied by an order that the appellant bear the costs of the proceedings. In addition, the Court ordered the appellant to pay a single hearing fee that was due in this Court. Accordingly, both appeals were dismissed and the appellant was liable for the costs and the one hearing fee.