Whether the purchase or sale of stocks and shares undertaken by the assessee are in the course of business or as investment?

For this attention is invited to the following judgments where this issue has been considered.

  1. CIT v P.K.N. and Co., Ltd (1966) 60 ITR 65 (SC)
  2. Saroj Kumar Mazumdar v CIT (1959) 37 ITR 242 (SC)
  3. CIT v Sutlej Cotton Mills supply Agency (1975) 100 ITR 706 (SC)
  4. G Venkataswamy Naidu(1959) 35 ITR 591 (SC)

 

Let take one of the case from above, CIT v Sutlej Cotton Mills supply Agency (1975) 100 ITR 706 (SC):

The Tribunal came to the conclusion, after considering all the circumstances, that the transaction was in the nature of a business adventure and that profits were liable to be taxed. The reasons which induced the Tribunal to come to this conclusion were : The assessee was authorised by clauses 12, 13, 28 and 29 of paragraph 3 of its memorandum of association to buy and sell shares ; there were specific resolutions of the company authorising a director of the assessee to purchase and sell these shares ; the assessee had included the profit of Rs. 2,13,150 in the profit and loss account without taking it to any reserve account or specifically set it apart for any other purpose ; the assessee had purchased the shares from borrowed funds and not with money readily available to it ; the assessee did not make the sales on account of any pressing necessity to meet existing liabilities but had in fact kept a part of the sale proceeds as liquid cash in the United Commercial Bank Ltd ; the assessee had, in the past, dealt in shares as business transaction and had claimed for the assessment year 1951-52, Rs. 1,29,214 as loss on account of its dealing in shares of M/s. Titaghur Paper Mills Ltd. ; it also claimed Rs. 6,30,000 as loss on account of devaluation of the shares of M/s. Pilani Investment Corporation though that was not allowed ; there had recently grown a business practice of investing large sums of money in shares in new ventures with an eye on their appreciation for obtaining by sale substantial profits in future.

The High Court, in its judgment, said that there was no provision in clauses 10, 12, 13, 28 and 29 of paragraph 3 of the memorandum of association of the assessee which authorised the carrying on of the business of purchasing and selling shares, although some of these clauses did authorise the assessee to acquire and sell shares in other similar companies ; that the inclusion of the profit of Rs. 2,13,150 in the profit and loss account without taking it into any reserve specifically was not conclusive of the question whether it was a capital asset or a revenue receipt ; that the true nature and character of the moneys received was to be determined not by the manner in which the assessee treated it but by its inherent character, and that it was wholly immaterial as to how the assessee treated the amount in question ; and that there was no evidence that the shares were purchased out of borrowed funds as the assessee had a fixed deposit of Rs. 31,75,000 in the United Commercial Bank Ltd., and a deposit of Rs. 8,76,008-2-0 in the current account of the bank. The High Court was of the view that the finding of the Tribunal that the sale of shares in 1955 was made not on account of any pressing necessity to meet existing liabilities was based on materials placed before the Tribunal.

The Supreme Court,  “We do not think that the High Court was right in interfering with the judgment of the Tribunal. In the result we reverse the judgment of the High Court and allow the appeal with costs”.

Conclusion:

The only question to be asked and answered is What was the dominant intention of the assessee when it purchased the shares ? If the dominant intention was to carry on an adventure in the nature of business, the profit can be taxed ; otherwise not. In other words, the question is whether the assessee purchased the shares in a commercial spirit with a view to make profit by trading in them. The Tribunal found, after taking into account all the relevant circumstances, that the dominant intention of the assessee was to make profit by resale of the shares and not to make an investment.

 

 

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Badal Gurung

Mr. Badal Gurung is the student of Chartered Accountant (Final) as well as IGNOU (B.Com).
He is currently working at Himanshu Kumar & Associates in Barakhamba, New Delhi, India.

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