EXECUTORS OF THE ESTATE OF LATE J J KAPADIA Vs. COMMISSIONER OF INCOME TAX BOMBAY CITY

JUDGEMENT

(1.) THE assessee 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 assessment year 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 court 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 daughter. 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 daughter also. Under clause (1) of each of the trusts, the properly transferred under the trusts, 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, arguments, and declarations conditioned 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 life time and after the death of the son, the property, would be held for such person as were specified in the trust deed. It was further provided that during the minority of the sons, the income to which, he was entitled under the trust would be applied towards the maintains, deduction, advancement or benefits of the minor and the balance would be accumulated. In the case of the daughters, the trustees were directed to pay net income of the trusts premises to the daughter during her life and from and after the death of the daughter the property was directed to the held absolutely for such so also in the case of the daughter, 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 the any times to seek 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 premised requiring investing 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 given power to vary or transpose such investment 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 there 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 amongest the trustees and after his death the opinion of the majority of the trustees was to prevail in such matter. The trust deeds gave power to the trustees in exaction of the trusts to decided what money or property represented income and what represented the capital of the trust and on the winding-up of all any part of the trust, they were given the power to allot or apportion any property according, to the respective rights and interest 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 assessment year 1944-45, for which the corresponding account year of the assessee was the Samvat Year 1999, the Income-tax Officer found that the trustees were the selves dealing in shares and the income earned by them would be income includible in the assessment of the settlor, J. J. Kapadia under section 16 (3) (b) of the Indian Income-tax Act. This decision of the Income-tax officer, however, was reversed by the Appellate Assistant Commissioner 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 Appellate Assistant Commissioner. It appears that for the next two years, i. e. for the assessment years 1945-46 and 1946-47, the department followed the view taken by the Appellate Assistant Commissioner in the assessment for the year 1944-45. For the assessment years 1947-48 and 1948-49, however, which correspond to the previous years, viz. , Samvat years 2002 and 2003, respectively, the Income-tax Officer scrutinized the nature of the transactions carried on by the trustees and came to the conclusion that the trustees were dealing in shares for the years. The income earned in the dealing, therefore, was income liable to tax and the total income of J. J. Kapadia in respect of all the trusts in the assessment year 1947-48 and of the 8 out of the 9 trusts excluding the trust, in four of the eldest son. Jagadish during the assessment year 1948-49, because during that the assessment year Jagadish had become a major and the income was, therefore, taken out of the operation of section 16 (3) (iv ). For the assessment year 1948-49, income of the trust in favour of Jagdish was assessed in the assessment of Jagadish. From the assessment orders passed by the Income-tax officer in the assessment of J. J. Kapadia, appeals were preferred to the Appellate Assistant Commissioner. In the said appeals the Appellate Assistant Commissioner once against came to the conclusion that the trustees were not carrying on business in shares, and consequently, the profits 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 Income-tax Officer including the income made by the trustees in the income of J. J. Kapadia. The department appealed against these decisions of the Appellate Assistant Commissioner to the Income-tax Appellate 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 settlors in the settlor's assessment under section 16 (3) of the Act. It, accordingly, allowed the appeals of the department. The assessee application under section 66 (1) of the Income-tax Act for referring certain question of law arising out of the Tribunal order to this court was rejected by it and the assessee applied under section 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 :

(2.) WHETHER, the finding of the Tribunal that the income-tax authorities were right in including under section 16 (3) of the Income-tax Act, income in respect of dealing in shares in the appellant assessment is justified in law ?" 2. The Tribunal accordingly drew up a statement of the case and referred the said question 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, in as much 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 director, the Tribunal has submitted a further statement of the case.

(3.) NOW, the first question relates to the Tribunal 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 dealing 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 were 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 circumstances, 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 accounts 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 facts 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 transaction has been very nearly the same from the commencement of the trust; yet for the assessment year 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 assessment years viz. , 1947-48 and 1948-49 and, consequently, there is no provocation what so ever 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 assessment year 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 mere circumstance that there has been a change in the investment by sale of the shares originally held and the purchase of new shares would not be sufficient to inter that business activity 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 in business activity involved in the transactions of the trustees. It was thus pointed out that the trustees all along had nursed the investment, 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 argumented from year to year. The course of dealing 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, in as much 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 the business.