The New Jahangir Vakil Millsco., Ltd. vs The Commissioner Of Income-Tax, Bombay

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 445 of 1962

Decision Date: 10 April 1963

Coram: S. K. Das, A. K. Sarkar, M. Hidayatullah

In this matter, the Supreme Court of India delivered its judgment on 10 April 1963. The case was titled The New Jahangir Vakil Millsco., Ltd. versus The Commissioner of Income‑Tax, Bombay. The bench consisted of Justices S. K. Das, A. K. Sarkar and M. Hidayatullah, and the opinion was authored by Justice S. K. Das.

The petitioner, The New Jahangir Vakil Millsco., Ltd., a company engaged in manufacturing and selling textile piece‑goods, faced a tax assessment for the year 1945‑46. The Income‑Tax Officer initially added Rs 1,86,931 to the petitioner’s taxable income, later reducing that amount to Rs 1,23,840 and classifying it as a revenue receipt. The reduction represented the excess of the sale price over the original cost of certain shares and securities that the petitioner had purchased and subsequently sold during the assessment year.

The petitioner contended that it was not a dealer in shares and securities for the relevant year or for any prior year, asserting that the shares and securities were held as investments and that any surplus derived from their sale constituted a capital receipt. Even assuming that the petitioner was a dealer in shares and securities for the year in question, it argued that the Income‑Tax Officer erred in computing profits because the officer failed to regard the market value of the shares on the opening day of the year as the cost basis for the calculation.

The Appellate Assistant Commissioner rejected the petitioner’s arguments, observing that the volume of transactions was sufficiently large to demonstrate that the petitioner was engaged in the business of dealing in shares. The Appellate Tribunal also dismissed the petitioner’s contentions, and the matter was subsequently appealed before the Bombay High Court, which likewise ruled against the petitioner.

The Supreme Court upheld the findings of the lower authorities. It held that the petitioner was indeed a dealer in shares and securities and that the income earned from the sale of those shares constituted a revenue receipt, not a capital receipt. Accordingly, the profits were to be measured as the difference between the original purchase price of the shares and the price realized on their sale. The Court further observed that the principle of res judicata did not apply to the taxation issue, allowing the taxing authorities to examine the petitioner’s position in the year 1943 in order to determine the proper computation of gains realized in 1944, even though the assessment proceedings concerned the profits of 1944.

It was held that the fact that the assessee had been treated as an investor in an earlier assessment covering the year 1943 did not prevent the assessing authorities from examining, for the purpose of computing the profits for the year 1944, when the assessee’s trading activity in shares had actually begun. The authorities determined that the trading activity started in 1943, and on the basis of that finding they correctly computed the profits for 1944. The judgment referred to several authorities to support this approach, namely Commissioner of Income‑tax v. Bai Shirinbai K. Kooka, [1962] Supp. 3 S.C.R. 391; Broken Hill Property Company v. Broken Hill Municipal Council, [1926] A.C. 94; Boystead v. Commissioner of Taxation, [1926] A.C. 155; Society of Medical Officer of Health v. Hope, [1960] A.C. 551; Caffoor v. Income‑tax Commissioner, [1961] A.C. 584; and Installment Supply (P) Ltd. v. Union of India, [1962] 2 S.C.R. 644. The discussion set out the legal principle that a previous classification of the assessee as an investor does not estop the tax authorities from revisiting the tax position when new facts about the commencement of trading activity are established, thereby allowing a proper computation of income for the later assessment year.

The appeal before the Court concerned Civil Appeal No. 445 of 1962, arising from a judgment and order dated 1 April and 12 April 1960 of the Bombay High Court in Income‑tax Reference No. 52 of 1959. The matter was heard on 10 April 1963, and the judgment was delivered by Justice S. K. Das. The appellant, identified as The New Jehangir Vakil Mills Co., Ltd., Bhavnagar, was described as the assessee and engaged in manufacturing and selling textile piece‑goods in the former Bhavnagar State. The dispute related to the assessment year 1945‑46, whose account year corresponded to the calendar year 1944. In that year the Income‑Tax officer had added to the assessee’s taxable income an amount of Rs 1,86,931, later reduced to Rs 1,23,840, characterising it as a revenue receipt arising from the excess of the sale price over the original cost of certain shares and securities that the appellant had bought and sold. The officer held that the assessee had acted as a dealer in shares and securities both in the year of sale and in preceding years. The assessee challenged this addition on two grounds. First, it argued that it was not a dealer in shares or securities during the relevant account year or earlier years, asserting that the shares were held for investment purposes and that any surplus represented a capital receipt. Second, even assuming it was a dealer, the assessee contended that the officer erred by not using the market value of the shares on the opening day of the year as the cost for computing profit. These two questions, together with a third which did not survive, were referred to the High Court under section 66‑A (2) of the Indian Income‑tax Act.

The Court observed that the third question referred to earlier no longer survived, and therefore only two questions remained for determination in this appeal. The first question concerned whether, if the surplus described earlier were held to constitute assessable income, the income should be measured by taking the market value of the shares on the opening day of the year as the cost of acquisition. The second question asked whether any evidence existed on the record that could justify the Tribunal’s finding that the assessee company had been a dealer in shares not only in the year presently under consideration but also in the preceding years.

Regarding the dispute over whether the assessee was a dealer in shares and securities for the calendar year 1944, the position appeared to be that the Income‑Tax Officer had decided against the assessee. The assessee then appealed to the Appellate Assistant Commissioner, who remanded the matter back to the Income‑Tax Officer on the ground that the material presently before the officer was insufficient to resolve the issue. During the remand proceedings, the assessee submitted to the Income‑Tax Officer a series of statements setting out the pattern of transactions in shares and securities dating back to 1939. These statements were labeled as annexure “C” and were incorporated into the statement of the case for the record.

In his remand report dated 1 April 1952, which also formed part of the statement of the case, the Income‑Tax Officer examined the purchases and sales of shares made by the assessee in various years. He concluded that the assessee had been dealing in shares at least from the year 1942, basing this finding on the frequency and multiplicity of the transactions carried out since that year. The officer further noted that in 1943 the assessee had sold certain shares out of a block of shares, and that after deducting the proceeds of the shares realized in 1943, the balance shown in the balance sheet represented the value of the remaining shares in each block. The balance‑sheet values of those remaining shares were not the original cost price to the assessee; in some instances the recorded value was even below cost. Because of this method of valuation in the balance sheet, the profit that would be attributable to the sale of shares during the years 1945‑46 was calculated as Rs 1,23,8401‑. The officer observed, however, that if the difference between the actual sale price and the market value of the shares on the first day of the account year were taken as the basis of computation, the resulting profit figures might be different.

Relying on the foregoing remand report, the Appellate Assistant Commissioner proceeded to examine the transaction records himself. In doing so, he made the following observation, which was entered verbatim in the record: “There are five different transactions of purchase and two transactions of sale in 1942. The tempo of purchases and sales goes up from 1943. There are purchases of fifteen or twenty different dates in 1943. There is a similar number of transactions in 1944. Many of the shares purchased in 1943 have been disposed of in 1944. Several…” The Commissioner’s comment underscored the large number and regularity of the share transactions over the successive years, which the Commissioner believed was sufficient to demonstrate that the assessee was engaged in the business of dealing in shares.

The assistant commissioner observed that several scrips purchased in 1944 had been sold within the same year and that the volume of transactions was, in his view, ample to demonstrate that the assessee acted as a dealer in shares. An appeal was subsequently lodged before the Tribunal. The Tribunal concluded that, with regard to Government securities, the assessee was required to keep its substantial cash holdings invested in such securities; consequently, the proceeds obtained from the sale of those securities were not to be treated as revenue receipts and therefore could not be included in the assessee’s total income. The Tribunal, however, held that the assessee was a dealer in shares for the year 1944 and that the profits derived from the sale of those shares had been correctly calculated as the difference between the original purchase price paid by the assessee and the price realised on sale. Moreover, the Tribunal expressly affirmed that this method of computing profit was appropriate because it found that the assessee had been dealing in shares not only in 1944 but also from 1942 onward. It is noteworthy that, for the years preceding the 1944 account year, the tax department had classified the assessee as an investor rather than a dealer in shares and had accordingly issued assessments for those years; those assessments have now become final. When the matter was referred to the High Court on a case stated by the Tribunal, the High Court identified 1943 as the pivotal year. The Court reasoned that if the assessee had been a dealer in shares since 1943 and had sold some of those shares in the 1944 account year, thereby earning profits, then both questions presented to the High Court should be decided against the assessee. The Court therefore reformulated the second question by replacing the phrase “in the years past” with “in the year 1943.” The High Court further observed that, while exercising its advisory jurisdiction, it did not entertain an appeal against the Tribunal’s finding that the assessee was a dealer in shares in 1943. The Court held that, based on the material on record, the Tribunal was entitled to conclude that the assessee was a dealer in shares in 1943, and that, regarding the computation of profits, the assessee could not contend that the market value of the shares on the opening day of 1944 should be treated as their cost. Consequently, the High Court answered both questions against the assessee. Counsel for the appellant presented extensive submissions on both issues, but the Court observed that, because of the re‑framing of the second question, the two issues effectively merged into a single inquiry: whether the assessee was a dealer in shares in 1943 and continued to be one in 1944, the relevant account year.

In this case, the Court examined whether the assessee was a dealer in shares for the year 1944, which was the relevant account year, and considered two distinct aspects of the question. The first aspect concerned whether any evidence existed that could support the Tribunal’s finding that the assessee had been a dealer in shares in 1943. The second aspect concerned the method by which profits arising from the sale of shares in 1944 should be computed for the assessment year 1945‑46. The Court observed that if the assessee had indeed been a dealer in 1943, then the principle articulated by this Court in Commissioner of Income‑tax v. Bai Shirinbai K. Kooka (1) would not be applicable, because that earlier decision was based on the premise that the assessee in that case had converted investment shares into stock‑in‑trade and had commenced a trading activity from 1 April 1946, making the financial year 1946‑47 the relevant account year. By contrast, if the present assessee was already a dealer in 1943, nothing material occurred on the opening day of the relevant account year, 1 January 1944, and consequently there was no justification for taking the market value of the shares on that date as the cost in computing the profits. Counsel for the assessee advanced an argument that can now be set out. He clarified that he was not contesting the authority of the assessing officers to consider whether the assessee was a dealer in shares in 1944, the relevant account year. Rather, he contended that the taxing authorities could not lawfully consider and conclude that the assessee was a dealer in shares in 1943, because for all years prior to 1944 the department had already assessed the assessee on the basis that he was an investor in shares and not a dealer, and those assessments had become final. Only a reopening of those earlier assessments under section 34 or section 35 of the Income‑Tax Act would be permissible. Accordingly, the argument asserted that while assessing the assessee for the account year 1944 the department could treat him as a dealer for that year, it could not do so for any earlier year that was not the subject of the present assessment proceedings. Counsel further submitted that if his first contention were accepted, the profits derived from the sale of shares in 1944 would have to be computed in the manner laid down in Commissioner of Income‑tax v. Bai Shirinbai K. Kooka (1) [1962] Supp. 3 S.C.R. 391, because the assessee would be deemed a dealer for the first time in the relevant account year 1944. The Court noted that this line of reasoning appeared plausible at first glance and recognized that the question of profit computation in such a situation was not completely free from difficulty. However, after a careful examination of the argument, the Court concluded that it could not be accepted. Regarding the first aspect of the question, the Court found no difficulty.

The Assistant Commissioner together with the Tribunal examined a series of transactions involving shares that were recorded in the books of the assessee. From their examination they inferred that the assessee had been carrying on the business of a dealer in shares during the year 1943. The High Court also set out a summary of the various share transactions in which the assessee had participated in the same year. Considering the frequency with which those transactions occurred and the character of each transaction, the taxing authorities were justified in reaching the conclusion that the assessee was, in fact, a dealer in shares in 1943. The Court declined to apply the rule of “no evidence” to the present facts and therefore held that the High Court had correctly answered the issue relating to that particular aspect of the case.

Turning to the question of how the profits should be computed, the Court observed that although the immediate question presented to the assessing authorities was whether the assessee was a dealer in the year 1944, the status of the assessee in 1943 also became relevant when the authorities tried to determine the method of computing the profit earned in 1944. Consequently, the Court said it was not accurate to say that the position of the assessee in 1943 lay entirely outside the scope of the assessment proceedings for the year 1945‑46. In order to calculate the profit arising from the sale of shares in 1944, the assessing authorities were required to decide whether the assessee’s trading activity in shares had commenced on 1 January 1944 or whether it had begun at an earlier date. The Court explained that if the assessee was already a dealer at the time the shares that were later sold in 1944 had been purchased, then the rule laid down in Commissioner of Income‑Tax v. Bai Shirin Bai K. Kooka would not apply, and the profit would simply be the excess of the sale price over the original cost price.

The Court further noted that the effect of a decision given by an income‑tax officer for one assessment year on a decision for another year had been examined by the courts on several occasions. Generally, the doctrine of res judicata or estoppel by record does not bind such decisions; nevertheless, an officer may revisit a previously decided question if fresh facts emerge or if the earlier decision was made without considering material evidence. Regarding the argument that sections 34 and 35 of the Act should prevent the computation, the Court pointed out that the assessment for the year 1943 was not being reopened and therefore remained valid. What was being undertaken was the computation of the profit for the year 1944, which required the assessing authorities to determine the commencement date of the trading activity in shares. The Court concluded that the profit arising in 1944 could not have been the subject of any assessment proceeding for 1943, because such profit only materialised when the shares were sold in 1944.

In the year 1944 the Court examined the decision rendered in Broken Hill Proprietary Company v. Broken Hill Municipal Council (2). In that earlier Australian case the dispute concerned the capital value of a mine for rating purposes, and the High Court of Australia had previously determined the question of valuation between the parties. When the later case was considered, the Court observed that the earlier decision could not be treated as res judicata because it dealt with a valuation and a tax liability that applied to a different assessment year. The Court quoted the reasoning of the Australian judges, stating that “the decision of the High Court related to a valuation and a liability to a tax in a previous year, and no doubt as regards that year the decision could not be disputed. The present case relates to a new question—namely, the valuation for a different year and the liability for that year. It is not eadem questio and therefore the principle of res judicata cannot apply.” The Court then turned to another authority reported in the same volume, Hoystead v. Commissioner of Taxation (1). That case involved the question of whether certain beneficiaries under a will were joint owners. Although no explicit decision on joint ownership had been rendered in earlier litigation, the earlier courts had assumed and admitted that the beneficiaries were joint owners, and that admission had been so fundamental to the judgment that it estopped the Commissioner from later taking a contrary view. The Court noted that the decision in Hoystead was later distinguished by the judgment in Society of Medical Officers of Health v. Hope (2). Both of these authorities were subsequently examined by the Judicial Committee in Caffoor v. Income Tax Commissioner (3). The Judicial Committee approved the Broken Hill decision and affirmed the principle that, in matters involving recurring annual taxes, an appellate decision concerning the assessment for one year does not address the same issue, or eadem questio, that arises in respect of the assessment for another year; consequently, no estoppel arises. Regarding Hoystead’s case, the Committee observed that “Their Lordships are of opinion that it is impossible for them to treat Hoystead’s case as constituting a legal authority on the question of estoppels in respect of successive years of tax assessment. So to treat it would bring it into direct conflict with the contemporaneous decision in the Broken Hill case; and to follow it would involve preferring a decision, in which the particular point was either assumed without argument or not noticed to a decision, in itself consistent with much other authority, in which the point was explicitly raised and explicitly determined.” The Court further referred to Installment Supply (P) Ltd. v. Union of India (1), wherein this Court reiterated that, in tax matters, the doctrine of res judicata does not ordinarily apply. Applying the principle articulated above, the Court concluded that the taxing authorities were free to examine the position of the assessee in 1943 for the purpose of determining the appropriate tax treatment for that year, even though the assessment proceeding concerned the computation of profits for 1944.

In this case the Court explained that the revenue authorities were permitted to examine the taxpayer’s circumstances in the year 1943 when they were determining how the gains earned in 1944 should be calculated, even though the assessment proceeding itself was limited to the computation of the profits for the year 1944. The Court observed that the fact that, in an earlier assessment covering the year 1943, the taxpayer had been treated as an investor did not, in its view, bar the assessing authorities from considering, for the purpose of computing the 1944 profits, the exact time at which the taxpayer’s trading activity in shares actually commenced. The assessing authorities investigated the matter and concluded that the trading activity began in 1943. Relying on that finding, the authorities correctly arrived at the amount of profit for 1944, and the answer rendered by the High Court to the question of profit computation was therefore affirmed as correct. On the basis of these conclusions the Court held that the appeal could not succeed, dismissed it, and ordered that the appellant pay the costs. The judgment referred to the authority reported in [1962] 2 S.C.R. 644.