Ramaswami, J. - (1.) The appellant is a private Limited Company controlled by Mulraj Kersondas and his nominees. It is a dealer in shares, both in forward and ready market. In the year 1942 Mulraj Kersondas obtained control of the Elphinstone Spinning and Weaving Mills (hereinafter referred to as the 'Elphinstone Mills') . He also acquired the managing agency of the Elphinstone Mills for a consideration of Rs. 6 lakhs. In 1943 Mulraj Kersondas assigned the Managing Agency to a Private Company known as Chidambaram Mulraj and Co Ltd .whose shareholders were Mulraj Kersondas, his nominees and the appellant During the years 1942 to 1948 the clearings in shares of the appellant included dealings in shares of Elphinstone Mills also and the profit and loss in the dealings of Elphinstone Mills was taken by the appellant to its revenue account during these years. At the end of the year 1948 the appellant held 5,137 ordinary shares and 1,131 preference shares of the Elphinstone Mills During the years subsequent to the year 1948 the appellant did not effect any sale in the Elphinstone Mills' shares, excepting a solitary transaction of 160 shares in the year 1952. On the other hand, the appellant purchased some more shares and added to its holdings in the shares of the said mills. Therefore, in the year 1953 the appellant held in all 8,693 ordinary shares and 2.117 preference shares of the Elphinstone Mills. It appears that during the years from 1948 onwards there was slump in the price of the shares of the Elphinstone Mills and the prices of the ordinary and preference shares on the material date in 1953 were Rs 37 per ordinary share and Rs. 88 per preference share.
(2.) On September 25, 1953 Mulraj Kersondas wrote a letter to K D Jalan a well-known businessman of Calcutta making an offer of sale of 25,000 ordinary shares and 10,000 preference shares of the Elphinstone, Mills for a total sum of Rs. 45 lakhs. He stated in that letter that the shares offered stood in the names of himself his family members and his allied concerns. The offer for sale was accompanied by a further offer that it the offer for sale was accepted Mulraj Kersondas would obtain the resignation of the present Directors of the Elphinstone Mills and would also get appointed as Directors persons of the choice of K. D. Jalan and that he would obtain the resignation of the present Managing Agents of the Elphinstone Mills, viz., Chidambaram Mulraj and Co. Ltd. It was further stated in the letter that the price to be paid, the transfer of the shares, the resignation of the Directors and the appointment of the new Directors of the choice of the purchaser, and the resignation of the Managing Agents the would all be simultaneous. K. D. Jalan accepted the offer and paid the sum of Rs. 45 lakhs out of which Mulraj Kersondas paid Rs. 10 lakhs to Chidambaram Mulraj and Co. Ltd., which relinquished the Managing Agency at his instance. The balance was distributed at Rs. 80 per ordinary share and Rs. 150 per preference share of the Elphinstone Mills (as against the prevailing market price of Rs. 37 and Rs. 88 respectively) to the respective shareholders whose shares had been sold to K. D. Jalan. In respect of its shares sold to K. D. Jalan the appellant received Rs. 10, 42, 990, though the appellant recorded its total receipts as Rs. 10,37,775 and the discrepancy of Rupees 5,215 has not been explained. The cost price of the shares to the appellant was Rs. 8,03,544 and the profit on the sale was worked out in the appellant's books at Rs. 2,34,231. The appellant, however, did not show the surplus in its Profit and Loss account but took it to the capital reserve account and showed it as a capital reserve in its balance sheet. In the assessment of the appellant for the assessment year 1954-55, the Income Tax Officer treated the amount of Rs. 2,34,231 as the income of the appellant from the sale of the shares and brought the said amount to tax. The appellant took the matter in appeal to the Appellate Assistant Commissioner who accepted its contention that the said amount represented a capital gain and did not form part of the income from the business of the appellant and accordingly allowed its appeal. Against the decision of the Appellate Assistant Commissioner the Department appealed to the Income-tax Appellate Tribunal which allowed the appeal, set aside the order of the Appellate Assistant Commissioner and restored that of the Income Tax Officer. Thereafter, at the instance of the appellant the Income-tax Appellate Tribunal stated a case to the High Court under Section 66 (1) of the Indian Income-tax Act (1922) on the following question of law: "Whether on the facts and in the circumstances of the case the sum of Rupees 2,34,230 was the income of the assessee - On the directions of the High Court, the Tribunal submitted a supplementary statement of the case and referred the following additional questions of law: "(2) Whether on the facts and in the circumstances of the case, the amount of Rs 10,42,990 received by the assessee, as allotted by Mulraj Kersondas out of the sum of Rs. 45 lakhs received by him from Shri K. D. Jalan represents exclusively the price of the shares or includes therein any consideration for the procuring of the resignation of the present Directors for obtaining the appointment of the Directors of the choice of Shri K. D. Jalan and for the resignation of the present managing agents of the Mills. (3) If so, what in view thereof should be taken as the sale price of each of the ordinary shares and each of the preference shares sold by the assessee in calculating its income arising therefrom - By its judgment dated April 21, 1964 the High Court answered the first two questions against the appellant and held that in view of the answer to the second question the third question did not survive and therefore need not be answered. The present appeal is brought to this Court on a certificate granted by the High Court under S. 66 (A) of the Income Tax Act, 1922.
(3.) The distinction between investment and stock-in-trade, between fixed capital and circulating capital is well-known. In Californian Copper Syndicate (Ltd. and Reduced) vs. Harris, (1905) 5 Tax Cas 159, 165-166 Lord Justice Clerk observed: "It is quite a well settled principle in dealing with questions of assessment of Income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that where they make a gain by a realisation the gain they make is liable to be assessed for Income-tax. What is the line which separates the two classes of cases may be difficult to define, and each ease must be considered according to its facts; the question to be determined being-Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operations of business in carrying out a scheme for profit-making - The principle stated in this case was approved in Commr. of Taxes vs. Melbourne Trust Ltd., 1914 AC 1001 in Rees Roturbo Development Syndicate Ltd. vs. Ducker, (1928) 13 Tax Cas 366 and in Venkataswami Naidu and Co. vs. Commr. of Income-tax, (1959) 35 ITR 594 .;