T.P. Mukerjee, J. - (1.) THIS is a reference by the Appellate Tribunal under Section 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as "the Act". The reference has been made at the instance of the Commissioner of Income-tax, U.P., Lucknow, on the question of law set out hereinbelow.
(2.) THE respondent. Raja Jagdish Pratap Sahi, hereinafter referred to as "the assessee", was a big zamindar. Consequent on the abolition of zamindari in the year 1951, the assessee received compensation in the shape of zamindari abolition compensation (Z. A. C.) bonds and thereafter he started investing his money in shares and securities. During the previous years relevant to the assessment years 1957-58, 1958-59 and 1960-61, to which the present reference relates, the assessee sold some of the shares and purchased certain other shares. In some of these transactions the assessee earned a surplus over the cost price, while in other transactions the shares were sold for less than the cost price. THE resultant effect of these transactions was that there was a total surplus of Rs. 3,100, Rs. 15,098 and Rs. 1,666 for the three relevant years. THEse amounts were included in the total income of the assessee on the basis that they were profits resulting from an adventure in the nature of trade. THE contention of the assessee was that the shares were sold not with a view to make a profit but for purchase of ordinary shares of Tata Iron and Steel Co. Ltd., for better investment. THE contention was not accepted by the Income-tax Officer. Appeals to the Appellate Assistant Commissioner proved unsuccessful, and, thereupon, the assessee took the matter to the Appellate Tribunal in second appeal. The assessee's case before the Tribunal was that, on the abolition of zamindari, the assessee started investing his funds in Government securities, debentures and preference shares of limited companies. Subsequently, the assessee was advised that for the purpose of investment Tata ordinary shares were the best, and acting upon such advice the assessee gradually liquidated his holdings of Government securities, debentures and preference shares of other companies with a view to invest the amounts in Tata ordinary shares. Thus, by the assessment year 1960-61, the assessee held Tata ordinary shares of the value of Rs. 8,68,000 out of a total holding of Rs. 10,22,000 and by the next succeeding assessment year 1961-62, the assessee's holding in Tata ordinary shares amounted to Rs. 9,49,000 out of a total holding of Rs. 10,41,000. The assessee contended that he had all along been an investor and never a dealer in shares and that the surpluses which he had received in the course of realisation of investments represented accretion to capital and was not taxable as profit in an adventure in the nature of trade. The Tribunal gave effect to the contention of the assessee and held that the amounts in question were received by the assessee in the process of his conversion of the investments and, as such, the same could not be taxed under Section 10 of the Act as profits of a business. The Tribunal, therefore, directed that the amounts in question be deleted from the total income of the assessee for the three relevant assessment years. The questions referred by the Tribunal for the opinion of this court are : "1. Whether there were any materials on record to support the finding of the Tribunal that the assessee was not a dealer in shares and securities and preference shares and debentures during the three assessment years in question ? 2. Whether the profits and losses arising from the sale of shares and securities, preference shares and debentures of the assessee can be taxed as business profits ? "
(3.) FROM the order of the Tribunal, which is annexure "C" to the statement of the case, it would appear that the assessee had started the process of conversion from the assessment year 1954-55. During the period relevant to the assessment years 1954-55 and 1955-56, the assessee had purchased mostly Government securities and debentures of Standard Vacuum Refineries Co. Ltd. and of Burmah Shell Refineries Ltd. The assessee had also preference shares of Tata Iron and Steel Company and Titagurh Paper Mills Ltd. In the next following year, relevant to the assessment for 1956-57, the assessee sold most of the Government securities and preference shares and invested the sate proceeds in Tata ordinary shares. The assessee also purchased shares of Indian Cable Company Ltd., Dunlop Rubber Company Ltd. and I. C. I. Co. Ltd., but in the same year it sold away the shares of Dunlop Rubber Company Ltd. at a loss. As already stated, the assessment years relevant to the present case are the years 1957-58, 1958-59 and 1960-61. The transactions of purchase and sale made by the assessee during these three years are recorded in the tabular statement given below : JUDGEMENT_235_ITR79_1971Html1.htm ;