V. S. DESAI, J. - (1.) THE assessees are the executors of the estate of the late J. J. Kapadia, a prominent share and stock-broker and the questions which we have to consider on this reference, arise out of the assessment of the said J. J. Kapadia for the asst. yrs. 1947-48 and 1948-49. In the year 1942, J.J. Kapadia, who had four sons and five daughters, executed nine trust deeds for the benefit of his nine children. Under each of the four trust deeds for the benefit of the sons he transferred shares, debentures and securities of the value of Rs. 1,52,000. Under the other trust deeds for the benefit of the five daughters he transferred debentures of the value of Rs. 30,000 under each trust making a total of Rs. 1,50,000 for the five daughters. THEre were five trustees appointed for each trust and all the five persons were the same in respect of all the trusts, J. J. Kapadia being himself one of the trustees. THE terms of the trusts in favour of the sons were identical and so were the terms of the trusts of the daughters also. Under cl. (1) of each of the trusts, the property transferred under the trust, which, as we have already pointed out, was shares, debentures and securities in the case of the sons and debentures in the case of the daughters were to be held by the trustees subject to the powers, provisions, agreements, and declarations contained in the trust deed. In the trusts in favour of the sons it was provided that the trustees shall pay the net income of the trust to the son during his lifetime and after the death of the son, the property would be held for such persons as were specified in the trust deed. It was further provided that during the minority of the son, the income to which he was entitled under the trust would be applied towards the maintenance, education, advancement or benefit of the minor and the balance would be accumulated. In the case of the daughters, the trustees were directed to pay the net income of the trust premises to the daughter during her life and from and after the death of the daughter the property was directed to be held absolutely for such persons as were specified in the trust deed. As in the case of the sons so also in the case of the daughters, during their minority the income was directed to be applied for their maintenance, education, advancement, or benefit and the balance to be accumulated. Under the trust deeds very wide powers were given to the trustees to deal with the property transferred on trust. THEy had the power at any time to sell the trust premises or any part or parts thereof and to invest the net proceeds of such sale or sales or any other moneys for the time being comprised in the said trust premises requiring investment in or upon the mortgage purchase or acquisition of immovable property or invest the same on the construction, development and improvement of buildings or on pledges of shares or debentures or government or other securities or deposits at interest with any companies, firms or in shares or debentures of companies or concerns or Government or other securities or in any other investments as the trustees may think fit. THE trustees were also given power to vary or transpose such investments from time to time and to borrow moneys on the security of the trust premises. THE trustees were even empowered to keep any of the shares, debentures or Government or other securities for the time being comprised in the trust premises in the name of any bank with whom the same may be deposited by the trustees for safe custody instead of in the names of the trustees. Under the trust deed the settlor, who was one of the trustees, had the final voice in the event of difference of opinion arising amongst the trustees and after his death the opinion of the majority of the trustees was to prevail in such matters. THE trust deeds gave power to the trustees in execution of the trusts to decide what money or property represented income and what represented the capital of the trust and on the winding-up of all or any part of the trust, they were given the power to allot or apportion any property according to the respective rights and interests of the persons interested and where properties of the different trusts were blended, fix the value of the respective parts of the said trust premises. All the trust deeds were not revocable for a period of six years and two months from the date of their execution. In the course of the assessment for the asst. yr. 1944-45, for which the corresponding account year of the assessee was the Samvat Year 1999, the ITO found that the trustees were themselves dealing in shares and the income earned by them would be income includible in the assessment of the settlor, J.: J. Kapadia, under s. 16(3)(b) of the Indian IT Act. This decision of the ITO, however, was reversed by the AAC in appeal, who took the view that it was not possible to hold that the trustees were dealing in shares. No appeal was taken to the Tribunal by the Department against the decision of the AAC. It appears that for the next two years, i.e., for the asst. yrs. 1945-46 and 1946-47, the Department followed the view taken by the AAC in the assessment for the year 1944-45. For the asst. yrs. 1947-48 and 1948-49, however, which corresponded to the previous years, viz., Samvat years 2002 and 2003, respectively, the ITO scrutinized the nature of the transactions carried on by the trustees and came to the conclusion that the trustees were dealing in shares for those years. THE income earned in the dealings, therefore, was income liable to tax and in view of the provisions of s. 16(3) was liable to be included in the total income of J. J. Kapadia in respect of all the trusts in the asst. yr. 1947-48 and of the 8 out of the 9 trusts excluding the trust in favour of the eldest son, Jagadish, during the asst. yr. 1948-49, because during that assessment year Jagadish had become a major and the income was, therefore, taken out of the operation of s. 16(3)(iv). For the asst. yr. 1948-49, income of the trust in favour of Jagadish was assessed in the assessment of Jagadish. From the assessment orders passed by the ITO in the assessment of J. J. Kapadia, appeals were preferred to the AAC. In the said appeals the AAC once again came to the conclusion that the trustees were not carrying on business in shares and, consequently, the profit on the sale of shares was not income from business but capital profit. In that view of the matter, he set aside the orders made by the ITO including the income made by the trustees in the income of J. J. Kapadia. THE Department appealed against these decisions of the AAC to the Tribunal. In the said appeals, the Tribunal held that the trustees were dealing in shares and consequently, the profit on the sale of shares earned by them was income liable to tax. THE Tribunal also further held that the said income would be includible as the income of the settlor in the settlor's assessment under s. 16(3) of the Act. It, accordingly, allowed the appeals of the Department. THE assessee's application under s. 66(1) of the Indian IT Act for referring certain questions of law arising out of the Tribunal's order to this Court was rejected by it and the assessee applied under s. 66(2) to this Court and on the said application this Court directed the Tribunal to draw up a statement of the case and refer the following two questions to this Court : "1. Whether there was any evidence and/or material before the Tribunal to conclude that the trustees of the trust created by late Mr. J. J. Kapadia were carrying on business in shares ? 2. Whether the finding of the Tribunal that the IT authorities were right in including under s. 16(3) of the IT Act, income in respect of dealing in shares in the appellants' assessment is justified in law ?"
(2.) THE Tribunal accordingly drew up a statement of the case and referred the said questions to this Court. THE reference first came before us on the 3rd of March, 1967, when it was found that a further statement will have to be called for from the Tribunal for the proper disposal of the reference, inasmuch as neither the order of the Tribunal nor the statement of the case drawn up by it supplied the material on which the conclusions of the Tribunal were arrived at. This Court accordingly directed the Tribunal to submit a further supplemental statement of the case and, in pursuance of the said direction, the Tribunal has submitted a further statement of the case. Now, the first question relates to the Tribunal's finding that the trustees of the trusts created by the late Mr. J. J. Kapadia were carrying on business in shares. The material relating to the said question consists of the transactions in shares carried on by the trustees during the years in question. A statement of the said dealings has been furnished by the assessee for the years commencing from Samvat year 1999 to Samvat year 2009. On a scrutiny and examination of the said statement, the Tribunal is of the opinion that the number of transactions and the volume of shares purchased and sold indicates that the business in shares was being done by the trustees until at any rate the end of Samvat year 2004, inasmuch as, during the said years, nearly about 2/3rds of the capital has been turned over. This circumstance, taken along with the further fact that no explanation has been submitted by the assessee as to why several of the scrips were sold in the relevant account years, indicates, according to the Tribunal, that the business in shares was indulged in by the trustees and the said inference in their opinion is further supported by the fact that the settlor, who was a prominent and experienced dealer in shares, was himself one of the trustees having a dominating voice in the administration of the trust. Now, it is contended on behalf of the assessee that the facts and circumstances pointed out by the Tribunal do not constitute satisfactory or sufficient material to support the conclusion. It is pointed out that the volume of the transactions has been very nearly the same from the commencement of the trust ; yet for the asst. yrs. 1944-45 and the subsequent two years the activities of the trustees were held not to be business activities. There is no difference in the activities in the earlier years and the relevant asst. yrs., viz., 1947-48 and 1948-49 and, consequently, there is no provocation whatsoever for coming to a different conclusion so far as these years are concerned. It is also further pointed out that for one of these two years, viz., for the asst. yr. 1948-49, in the assessment of the son, who had become major, viz., Jagadish Kapadia, the Tribunal's conclusion on the same material was that the trustees were not carrying on any business activity. It is contended that the mere circumstance that there has been a change in the investment by sale of the shares originally held and purchase of new shares would not be sufficient to infer that business activity is involved in the transactions. It was urged that the Tribunal, in arriving at its conclusion that the trustees were carrying on a business activity, had not properly scrutinised the material on record and had omitted to consider several important and material circumstances which indicated that there was no business activity involved in the transactions of the trustees. It was thus pointed out that the trustees all along had nursed the investments, which had been transferred to them on trust : disposing of some of them and going in for others in the best interest of the trust. The sale proceeds realised by the sale of the shares were reinvested in purchase of other shares and the holding was augmented from year to year. The course of dealings would also show that a consistent attitude was maintained in all the trusts under their management which indicated that what was being done by the trustees was not with a view to doing business but with a view to safeguarding the interests of the trusts. The course of the transactions also indicated, it was urged, that the shares and securities were not being dealt with as stock-in-trade in the manner in which a person dealing in them would do, inasmuch as there was no fluctuation either way in the holding but the holding has only steadily increased during the course of the years. It was, therefore, argued on behalf of the assessee that, having regard to the overall picture presented by the transactions carried on by the trustees, it could not be said they were engaged in any activity in the nature of business. It was because of these arguments that this Court, when the reference was heard by us for the first time, called for a more detailed statement with regard to the transactions carried on by the trustees, in respect of the several trusts. In the order, which was made on the said occasion calling for a further statement, this Court had directed that the Tribunal should supply further information with regard to the transactions and their nature and extent, which would have a bearing on the determination of the question as to whether the transactions indicated a course of dealing in the nature of business or a dealing merely in investments. In the further statement furnished by the Tribunal, it is pointed out that the dealings in the material years comprised of partial unloading in the case of certain shares and complete unloading in the case of others. It is pointed out that in several cases shares purchased anew have been disposed of within a short time and although explanation has been given with regard to some of such purchases and sales, there are other instances in respect of which there is no explanation. Along with the supplementary statement, the Tribunal has also forwarded as part of it, details with regard to the purchases and sales in the Samvat years 2002 and 2003 and also a statement showing the purchase and sale of certain shares.
(3.) NOW, an examination of these statements would show that there have been several purchases of new shares during these years. Thus, taking the case of one trust only in favour of the eldest son, Jagadish Kapadia, the purchases are in 25 different kinds of shares of a total price of Rs. 87,151. The sales effected are almost to the same extent being for the total value of Rs. 86,259. The circumstance that the purchases and the sales approximate the same value may, it may be said, indicate that there has been only a change in the investment but a closer scrutiny will show that it is not the truth of the matter. In the first place, there is no reason why the shares already held have been sold. It will be seen from the statement that most of the shares that were sold in this year were not from the original holding but from the later purchases, which would mean that the shares sold were those which had been freshly purchased by the trustees after the execution of the trust. This conduct is hardly consistent with the conduct of an investor in shares, and, on the other hand, is quite consistent with the conduct of a dealer. It would be seen from the statement submitted that shares of the Belapur Sugar, which were purchased in the Samvat year 2002 have been sold out at a loss in the Samvat year 2003. If the said shares were purchased in Samvat year 2002 by way of investment, there is hardly any reason why they should have been sold out in Samvat year 2003 at a loss. In view of the short interval between the purchase and the sale, it would appear that the transaction is not consistent with its being a transaction of investment. In the case of the trusts in favour of the daughters, the assets settled were debentures of 3 scrips. It appears from the statements furnished that in the first year, i.e., Samvat year 1999, a few new scrips were purchased by the trustees and the total holding augmented from Rs. 1,50,000 to Rs. 1,57,681. In the Samvat year 2000, there was no activity whatsoever in these trusts, but in the Samvat year 2001, there was considerable sale and purchase activity and it appears that the sales effected were at a loss. The total sales, which comprised of the sale of the 3 original scrips and one of a newly purchased scrip a few months before the sale, came to Rs. 1,84,756 and the total purchases came to Rs. 1,53,947. The result of these transactions was that at the end of the year the total holding in these trusts fell down from Rs. 1,57,681 to Rs. 1,26,872. Having regard to this material on record, it would seem that the dealings of the trustees in the several trusts could not be characterised with any definiteness as the dealings of an investor nursing the investments, and would appear to be rather in the nature of dealings in business. At any rate, these features, which we have pointed out, would constitute material relevant to the finding of the Tribunal that the trustees were indulging in an activity in the nature of business and, consequently, it would not be possible to hold that the finding of the Tribunal that the trustees of the trust were carrying on business in shares, is not supported by any evidence or material on record. Since the first question which we have to answer is whether there was any evidence and/or material before the Tribunal for its conclusion, the said question, in our opinion, must be answered in the affirmative and against the assessee. The second question is whether the income in respect of the dealings in shares in the several trusts could be included under s. 16(3)(b) of the IT Act in the income of the settlor. The contention of the assessee was two-fold. It was urged that the trustees not having carried on any business there was no income which was taxable ; the excess realised on the sales being only an accretion of capital. Consequently, there was no income to be included in the settlor's assessment under s. 16(3). The alternative argument was that, even assuming that the activity of the trustees was business activity and the income was the income of the business carried on by the trustees, it was still not the income of the assets transferred on trust and, consequently, not includible in the income of the settlor under s. 16(3)(b). In order to appreciate this contention, it would be necessary to consider the provisions of s. 16(3) of the Indian IT Act. That section provides as follows : "In computing the total income of any individual for the purpose of assessment, there shall be included : (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly-- . . . . (iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart ; or (iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration ; and (b) so much of the income of any person or AOP as arises from assets transferred otherwise than for adequate consideration to the person or association by such individual for the benefit of his wife or a minor child or both." ;