BIRDS INVESTMENTS LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) In this reference under Section 66(1) of the Indian Income-tax Act, 1922, hereinafter described as the " Act", the following questions have been raised for the opinion of this court:

(2.) The facts of the case as appearing from the statement of the case submitted by the Income-tax Appellate Tribunal, as also from other materials appearing in the paper-book, are stated as follows :

(3.) The reference arises out of a supplementary assessment for 1946-47 made under Section 34 of the Act. The original assessment for 1946-47 was made on the 19th April, 1949, without including the profits on purchases and sales of shares. The Income-tax Officer, who made the assessment for 1949-50 received the letter dated 26th October, 1949, from the assessee and it was on the basis of the information contained therein that he initiated the proceedings under Section 34, for making supplementary assessment for 1946-47, out of which the present reference arises. One of the objections taken by the company was that there was no fresh material in possession of the Income-tax Officer, in consequence of which he had reason to believe that profits chargeable to income-tax had escaped assessment. According to the Tribunal, the reason for the assessee saying this is that along with his return of income for the year 1946-47 submitted in October, 1946, the assessee had filed statements headed " Reconciliation of Investments at September, 1945, " and " Reconciliation of Capital Reserve Account",--the latter account showing the profit made on sale of Titagarh Paper and Kurnardhubi Engineering shares, less losses incurred on redemption of certain debentures. According to the Tribunal, although the words " profit " and " loss " are found in this Reconciliation Account, the heading being " Reconciliation of Capital Reserve Account", the Income-tax Officer was not necessarily put on notice that the profit and loss arose on what may be called trading transactions. There was, according to the Tribunal, no indication, however, on the record that the Income-tax Officer who made the original assessment considered this aspect of the matter. After the proceedings under Section 34 of the Act was started, the company in its letter dated 26th October, 1949, addressed to the Income-tax Officer (annexure " B") described itself as purely an investment company. It will appear from the statement of the case that this company is not one of those companies formed for the sole purpose of holding all or most of the shares of the other companies actively carrying on trades such as are referred to in Sub-section (2) of Section 2 of the Indian Companies Act, 1913, and section 132A(i), second proviso, of the same Act, distinguishing between a holding company and an investment company. In other words, the assessee does not fall within the category of purely holding companies. On an examination of the accounts of the assessee-company, the Tribunal came to the conclusion that the company did not carry on an active trade in buying and selling shares, having regard to the volume or magnitude and frequency of the transaction. The sale in each year is only to the tune of Rs. 1,00,000 to Rs. 4,00,000 or Rs. 5,00,000 out of the total holdings in the neighbourhood of RS. 40,00,000. Some of the shares were held by the assessee-company for quite a number of years. Therefore, the Tribunal concluded that the assessee-company was not a dealer in shares in the ordinary sense. The real question that the Tribunal had to decide was whether that being an investment-company, its holdings of stocks and shares partook of the nature of circulating capital with the result that any realisation of excess over cost on sales thereof was its business profit chargeable to tax.