JAGDISH SAHAI, J. - (1.) IN compliance with the directions of this court under section 66(2) of the INdian INcome-tax Act, 1922 (hereinafter referred to as the Act), the INcome-tax Appellate Tribunal, Bombay Bench (hereinafter referred to as the Tribunal) has submitted the statement of case and referred the following questions of law for the opinion of this court : (i) Whether there was material for the finding that the shares in question were purchased by the assessee with a view to acquire the managing agency and the control of the company or the shares constituted his stock-in-trade ? (ii) Even if the shares in question did not constitute the stock-in-trade of the assessee, whether the profit made on the sale of shares did not constitute capital gain chargeable to income-tax under section 12B of the Act. ?
(2.) THE assessment year with which we are concerned in this reference is 1947-48. THE accounting year is Dessera 2002-2003, corresponding to October 16, 1945, to October 5, 1946. The assessee, Sri Rameshwar Prasad Bagla (hereinafter referred to as the assessee), is a partner of a partnership firm known as Agarwal and Co. The India United Mills Ltd. is a large unit of textiles and was under the managing agency of M/s. E. D. Sassoon and Co. Ltd. of Bombay. The said E. D. Sassoon and Co. Ltd. held share blocks of ordinary and referred shares in India United Mills Ltd. In 1943, negotiations were entered into between M/s. E. D. Sassoon and Co. Ltd. one party, and Agarwal and Co., the other party. The negotiations matured into a deal. The agreement relating to the deal was recorded in a document dated January 26, 1945. E. D. Sassoon and Co. agreed to assign the managing agency of the India United Mills Ltd. to Agarwal and Co. with effect from December 1, 1943, for a consideration of Rs. 57,80,000. In addition, Agarwal and Co. agreed to purchase 16,80,000 ordinary shares of the India United Mills Ltd. of the face value of Rs. 10 each and 20,00,000, deferred share of rupee 1 each. The price payable by Agarwal and Co. for this large lot of shares was Rs. 3,37,20,000 calculated at the rate of Rs. 16-8-0 each ordinary shares and Rs. 3 for each deferred share. The share of the assessee in Agarwal and Co. is 1/16. The partners constituting Agarwal and Co. can conveniently be grouped as : (1) Morarka group, (2) Khetan group, (3) Seksaria group, (4) Poddar group, (5) Bagla group, and (6) Kantilal Nahalchand. The Bagla group consisted of the assessee and his brother. At the time of agreement between E. D. Sassoon and Co. and Agarwal and Co. the latter was not in a position to pay Rs. 80 lakhs and a half for 5 lakhs ordinary shares. Shares worth 3 lakhs were purchased by Ram Kumar Shivchandrai of Poddar group in Agarwal and Co. and worth 2 lakhs by Khetan group in Agarwal and Co. From the statement of case it is clear that the Poddar group and the Khetan group continued to hold these shares up to 1944. In January 1945, these 5 lakhs ordinary shares were taken over by Agarwal and Co. from Poddar and Khetan groups. The shares of the assessee in these 5 lakhs shares would be 31,250 shares. The assessees brother was also entitled to 31,250 shares which he relinquished in favour of the assessee. The result was that the assessee obtained 62,500 shares in the Indian United Mills Ltd. These shares stood in the name of a Bombay Trust Corporation, a company which formed part of the Sassoon group of companies. Soon after the managing agency was taken over by Agarwal and Co. on December 1, 1943, these shares were transferred in the names of various persons purporting to be residing in Jaipur. The transfers in the name of the assessee from the Jaipur parties were effected on January 30, 1948. In order to pay for these shares the assessee borrowed a sum of Rs. 10 lakhs from Agarwal and Co. Out of the 62,500 shares the assessee sold 43,700 shares as follows : 4,000 shares on 3-4-1946. 13,000 shares on 15-4-1946. 9,000 shares on 6-5-1946. 11,000 shares on 29-5-1946. 2,000 shares on 29-5-1946. 2,000 shares on 17-7-1946. 750 shares on 19-7-1946. He made a profit of Rs. 1,80,220. This amount was utilized by him for purchasing shares of the Swadeshi Cotton Mills Ltd., Kanpur. The rest of the shares remained in possession of the assessee during the relevant previous year.
(3.) THE assessee did not disclosed the profit mentioned above in his return. THE Income-tax Officer, however, made an enquiry from the assessee in this respect and the latter sent a letter dated March 30, 1949, to the Income-tax Officer in the course of which he stated : I have already brought to your honours notice in the course of assessment proceedings and would like to confirm that I had certain shares transaction in which there has been appreciation to the tune of Rs. 1,51,927-1-11. Since it is common ground that the assessee is not dealing in shares as business, the said appreciation in capital should have been normally disclosed as capital gain in the return but I regret that the amount could not be shown, so the return already filed may be treated as amended accordingly. Admittedly, the sum of Rs. 1,51,927-1-11 includes surplus realised in the sale of the aforesaid 43,300 shares of the India United Mills limited. The Income-tax Officer repelled the plea of the assessee that the profit made by the sale of 43,700 shares of the India United Mills Ltd. was not profit liable to be taxed as such but was only a capital gain and liable to be taxed accordingly. In the previous year, the year with which we are concerned in this reference, the assessee had not been treated as a dealer in shares. The Income-tax Officer held him (the assessee) a dealer in shares on the ground that the transaction of the shares made by him were on a very large scale. He, therefore, included the sum of Rs. 1,80,220 as profit from the sale of these shares under section 10 of the Act for the purpose of making an assessment on him.;