Dwarkadas Kesardeo Morarka vs Commissioner Of Income-Tax, Central

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 25 January, 1961

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

In this matter the appeal was filed under special leave to appeal pursuant to article 136 of the Constitution, challenging a decision of the High Court of Judicature at Bombay that had refused to direct a reference of the case to the Income‑tax Appellate Tribunal under section 66(2) of the Income‑tax Act. The respondents were the Commissioner of Income‑Tax, Central. The appellants comprised a firm that was duly registered and carried on the business of money‑lending as well as speculation in silver and shares. The partners of the firm also held partnership positions in Messrs Morarka & Co., which functioned as the managing agents of the Sholapur Spinning and Weaving Company Limited, hereinafter referred to as the Sholapur Mills. The firm had commenced its commercial operations in August 1942. During the Samvat year 2000, which corresponds to the period from November 1943 to October 1944, the appellants acquired seventeen ordinary shares of the Sholapur Mills. Subsequently, between November 1944 and October 1948, they purchased an additional eighty‑two ordinary shares, bringing their holding to ninety‑nine ordinary shares by November 1948. At various times the appellants also bought six thousand seven hundred and eighty preference shares of the Sholapur Mills. All of these shareholdings were entered in the appellants’ books of account as stock‑in‑trade and were valued as such at the close of each accounting period. Throughout the period under consideration the appellants never sold any of the ordinary or preference shares.

The appellants prepared a table showing the profit and loss arising from the shareholdings based on their method of valuing stock‑in‑trade. For the accounting year 1945‑46 (assessment year 2000‑01) they reported a loss of Rs 30,802 on the ordinary shares and no loss on the preference shares. For the year 1946‑47 (assessment year 2001‑02) a loss of Rs 35,468‑8‑0 was shown on the ordinary shares, again with no loss on the preference shares. For the year 1947‑48 (assessment year 2002‑03) a profit of Rs 72,545 was recorded on the ordinary shares, with the preference shares still showing nil. In the later period covering the accounting year 1949‑50 (assessment year 2003‑05) the appellants reported a loss of Rs 3,21,831 on the ordinary shares and a loss of Rs 12,020 on the preference shares. The appellants filed their income‑tax returns for the assessment years 1945‑46, 1946‑47 and 1947‑48 on 27 July 1948, 11 November 1948 and 23 May 1949 respectively. In the assessments for 1945‑46 and 1946‑47 the Income‑tax Officer disallowed the losses claimed, holding that the shares constituted capital investment rather than stock‑in‑trade. In the assessment year 1947‑48 the Income‑tax Officer excluded the profit from the returns, but three orders dated 4 May 1951 subsequently held that the shares were to be treated as stock‑in‑trade and that the profits or losses computed according to the appellants’ valuation method were to be taken into account in determining taxable income. Those orders were not contested before the Income‑tax Appellate Tribunal. In the assessment year 1948‑49 the appellants failed to file a return and were therefore assessed under section 23(4) of the Income‑tax Act. For the assessment year 1949‑50 the appellants filed a return claiming a loss of Rs 3,33,851 arising from the shares of the Sholapur Mills.

In the assessment year 1949‑50, the appellants filed a return in which they claimed a loss of Rs 3,33,851 on the shares of the Sholapur Mills. The loss was calculated on the alleged difference between the market value of the shares at the close of the preceding financial year and the market value at the end of the accounting period, with the shares being treated as stock‑in‑trade. The Income‑tax Officer examined the return and concluded that the appellants had inflated the loss by Rs 1,85,000. The Officer further held that the shares constituted a capital investment and not stock‑in‑trade, and therefore the loss could not be allowed as a revenue deduction. The Appellate Assistant Commissioner disagreed with the Officer on the nature of the shares, finding that they were indeed the appellants’ stock‑in‑trade, but concurred with the Officer that the loss had been overstated by Rs 1,85,000. Dissatisfied with that order, the Income‑tax Officer appealed to the Income‑tax Appellate Tribunal. The Tribunal set aside the order of the Appellate Assistant Commissioner and restored the Officer’s order. In doing so, the Tribunal observed that the mere fact that the shares had been treated as stock‑in‑trade in earlier years and that the corresponding profits or losses had been taken into account in the taxable income of the appellants did not prevent the Tribunal from concluding, on the facts before it, that the shares were a capital investment. Consequently, the Tribunal substantially confirmed the view of the Income‑tax Officer. The appellants then made an application for a reference under section 66(1) of the Income‑tax Act, seeking answers to three questions. The Tribunal rejected the application and declined to refer the matters, stating that the questions were: “(1) Whether the Tribunal misdirected itself in law and/or acted without any evidence in finding that the investment of the assessee in the shares of the Sholapur Mills was a capital investment and not its stock‑in‑trade? (2) Whether in any event in view of the assessments made for the years 1945‑46, 1946‑47 and 1947‑48 and the Appellate Assistant Commissioner’s order for these three years, it was open to the department to hold for the assessment year 1949‑50 that the said shares do not represent the assessee’s stock‑in‑trade? (3) Whether the Tribunal misdirected itself in law in omitting to consider certain material facts which were taken into account by the Appellate Assistant Commissioner and expressly maintained in the Appellate Assistant Commissioner’s order, including the fact that the assessee had been holding shares in several other companies as stock‑in‑trade and this position has been accepted by the department although in those shares there have been preferred with special leave.” The Court observed that the High Court was correct in refusing to call for a statement of the case under section 66(2) of the Income‑tax Act. It noted that the Tribunal’s conclusion was drawn from inferences of fact based on the material before the taxing authorities. The conduct of the appellants clearly indicated that, although they dealt in shares of other companies, the shares of the Sholapur Mills were treated by them as a capital investment for the purpose of maintaining their managing agency. The number of shares held by the appellants increased over time and no single share was ever sold, which supported the Tribunal’s finding that the shares were not stock‑in‑trade.

In this case the Tribunal observed that during the period under consideration not a single share of the Sholapur Mills company had ever been sold. The Tribunal further noted that the income‑tax returns for the assessment years 1945‑46, 1946‑47 and 1947‑48 had been filed by the appellants after they were fully aware that the market price of the company’s shares was subject to wide fluctuations. The Tribunal also considered the fact that the appellants were interested in the managing agency of the Sholapur Mills and that every member of the appellants’ family held shares in the company. The Tribunal held that its conclusion was fully supported by the evidence on record. It rejected the proposition that because the shares had been treated as stock‑in‑trade in earlier years they must necessarily be treated in the same manner for the assessment year 1949‑50. The Tribunal explained that each assessment year is a separate proceeding and that a decision rendered for a previous year on the material before the tax authority does not bind the assessment for a later year. The Tribunal was therefore not found to have omitted any material fact. Moreover, the Tribunal’s determination was based on factual findings and no pure question of law arose that would require referral under section 66(2) of the Income‑tax Act. Consequently the appeal was dismissed with costs, and the appeal itself was rejected.