Pari Mangaldas Girdhardas v. Commissioner Of Income Tax, Gujarat High Court, Judgment, Law, casemine.com

Precedent	Rule or Principle Cited For	Application by the Court
British Selmson Aero Engines Ltd. vs. Commissioners of Inland Revenue	Illustrates the difficulty in distinguishing capital gains from business profits and the need for principled reasoning.	Used to emphasize that judicial conclusions must be reasoned and not left to chance.
California Copper Syndicate vs. Harris	Defines the distinction between capital gains and business income from sale of shares.	Adopted to frame the central legal question on whether the gain was a mere enhancement of value or a gain in carrying out a business.
C.I.T. vs. Sultej Cotton Mills Supply Agency Ltd.	Approves the principle distinguishing capital gains from business profits.	Referenced to support the principle stated in California Copper Syndicate case.
Oriental Investment Co. Ltd. vs. C.I.T.	Characterizes the mixed question of fact and law in determining whether an assessee is a dealer or investor in shares.	Applied to affirm that the Tribunal's finding is a mixed question to be evaluated on all relevant circumstances.
Commissioner of Income-tax vs. Wallace and Company	Definition of "business" as continuous exercise of an activity.	Used to interpret the statutory meaning of "business" in the context of share dealings.
Narain Swadeshi Weaving Mills vs. Commissioner of Excess Profits Tax	Definition of "business" as substantial, systematic, and organised activity with a set purpose.	Invoked to clarify the nature of business for tax purposes, including isolated transactions as possible adventure in trade.
State of Gujarat vs. Raipur Manufacturing Co. Ltd.	Explains "business" in taxing statutes as occupation with profit motive involving continuity and regularity.	Relied upon to expand the understanding of business activity and profit motive in tax law.
Loka Shikshana Trust vs. C.I.T.	Confirms the application of the "business" concept as per sales-tax law to income-tax law.	Referenced for consistency in the interpretation of "business" across tax statutes.
Ramnarain Sons (P) Ltd. vs. C.I.T.	Emphasizes the mixed question of fact and law in characterizing share dealings.	Used to affirm the approach to assessing whether profits are business income.
Rowlatt, Thew vs. South West Africa Co. Ltd.	Test for intention at the time of acquisition as relevant to the nature of transaction.	Applied to assess whether shares were acquired for trade or investment.
Griffiths vs. J.P. Harrison (Watford) Ltd.	Importance of object, intention and expectation in judging the nature of a transaction.	Considered relevant to determine the commercial character of share dealings.
Juggilal Kamlapat vs. C.I.T.	Purchase with intention of resale as a guide-line but not decisive.	Noted that intention is relevant but not conclusive in characterizing transactions.
Raja Bahadur Kamakhya Narain Singh vs. C.I.T.	Test for commercial instinct and purpose of sales in determining business nature.	Applied to examine the motives behind sales of shares.
The Dunn Trust Ltd. vs. Williams	Relevance of commercial instinct and motivation in sales of stock-in-trade.	Used to emphasize the importance of motive in characterizing transactions.
Investment Ltd. vs. C.I.T.	Value of how the assessee treated the shares in books and balance-sheet as evidence.	Considered as relevant but not conclusive in determining nature of income.
Karan Chand Thapar and Bros. P. Ltd. vs. C.I.T.	Shares shown as stock-in-trade is a relevant test for business character.	Applied as a subsidiary test in the instant case.
C.I.T. vs. Durgaprasad More	Principle that estoppel and res judicata do not apply in income-tax proceedings.	Relied upon to reject estoppel argument against assessee changing stance on nature of income.
Punjab Co-operative Bank Ltd. vs. C.I.T.	Profit from sale of shares as business income when shares are part of business assets.	Referenced to support principles on business income from share dealings.
Sardar Indra Singh and Sons Ltd. vs. C.I.T.	Similar principles on business income from shares.	Used in conjunction with Punjab Co-operative Bank case.
A. H. Wadia vs. C.I.T.	Ownership of property and its relation to business assets.	Applied to distinguish investment from business assets in money-lending context.
C.I.T. vs. Bhavnagar Trust Corporation (P) Ltd.	Assets received in satisfaction of dues may constitute stock-in-trade.	Referenced in relation to acquisition of shares from partner in settlement of debt.
C.I.T. vs. V.M.P. Firm	Doctrine of approbate and reprobate and estoppel in tax law.	Applied to reject estoppel against assessee changing its position on income nature.
Raja Bahadur Visheshwara Singh vs. C.I.T.	Non-applicability of res judicata in income-tax matters.	Used to emphasize independent consideration of each assessment year.
Dalhousie Investment Trust Co. Ltd. vs. C.I.T.	Earlier acceptance of investment character not binding in subsequent assessments.	Applied to support non-conclusiveness of past treatment of shares.
Nagubai Ammal vs. Sham Rao	Value of admissions under section 21 of the Indian Evidence Act.	Referenced to explain that admission is evidence but not conclusive proof.
C.I.T. vs. Sayaji Mills Ltd.	Tribunal's power to consider new grounds or aspects in appeal.	Applied in context of admissibility of additional evidence before the Tribunal.
Parsottim vs. Lal Mohar	Principles governing admission of additional evidence under Order 41, Rule 27 CPC.	Used to explain limitations on admitting additional evidence.
Arjan Singh vs. Kartar Singh	Judicial discretion in admitting additional evidence.	Referenced for the judicial nature of discretion in admitting evidence.
K. Venkataramiah vs. A Seetharama Reddy	Judicial discretion for admitting additional evidence "for any other substantial cause".	Applied to assess whether Tribunal should have admitted additional evidence.
Purushathama Reddiar vs. Perumal	Effect of parties' assent or objection to admission of additional evidence.	Used to note that absence of objection precludes later challenge.
C.I.T. vs. Indian Molasses Co. P. Ltd.	Procedure when Tribunal is directed to submit supplementary statement of case.	Followed to decline answering the question and to remit for further consideration.

1. The assessee, a registered partnership firm, carried on business as money-lenders. In course of time, however, it came to acquire shares of public limited Companies and derived dividend income from the said source. In S.Y. 2025, corresponding assessment year being A.Y. 1970-71, it sold shares of sizable value and made profits. In the course of proceedings for assessment to income-tax in the relevant assessment year, the question arose as to whether the profits were liable to be taxed as profits and gains of business or as capital gains and it is that vexed question which has reached upto this Court in this Reference.

2. In order to determine the controversy, it would be necessary to apprehend the relevant facts. The activity of the assessee in the field of purchase and sale of shares has been traced back by the Income-tax Appellate Tribunal to a period of 22 years from the relevant account year and let us glean at the facts found by the Tribunal.

3. In S.Y. 2003 and S.Y. 2004 (corresponding assessment years A.Ys. 1948-49 and 1949-50) the assessee acquired 77 and 81 ordinary shares respectively of a Mill Co. In S.Y. 2006, corresponding assessment year being A.Y. 1951-52, it acquired 79 preference shares of the said Mill Company as bonus shares. So far a sales of share during the aforesaid period are concerned, the Tribunal has characterised them as "very nominal" since the assessee sold in S.Y. 2006 only 1 1/2 preference shares out of its holding. This was the extent of the activity of the assessee upto S.Y. 2006.

4. Then comes S.Y. 2007, corresponding assessment year being A.Y. 1952-53. One Mathurdas Mangaldas Parekh was a partner of the assessee at the material time. It appears that the had a running account with the assessee whereunder he was indebted to the assessee in the sum of Rupees 6,02,075/- at the commencement of the said year. The assessee purchased from the said Mathurdas at market price shares worth Rs. 5,86,500/- during the course of the said year and in that manner and to that extent the debt due by the said Mathurdas to the assessee firm was satisfied. The said Mathurdas retired the firm in the course of the same year. Amongst the shares purchased from the said Mathurdas by the assessee were the following shares :-

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5. Coming now the acquisition and sale of shares from S.Y. 2008 to S.Y. 2024, corresponding assessment years being A.Y. 1953-54 to A.Y. 1969-70, the Tribunal has found that the assessee continued to have further of shares in the following manner : (1) bonus shares; (2) right shares; and (3) "occasional purchase" of new shares. So far as purchase are concerned, the Tribunal has found that in S.Ys. 2009, 2010, and 2019 to 2022 there were no purchases. However, with regard to the remaining years, the position of purchases of shares was under :-

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Be it noted that so far as the aforesaid purchases are concerned, the Tribunal has given are confined only to the names of the company and number and class of shares purchased. It has, however, not found as to what was the face value of those shares or what was the cost of their acquisition to the assessee. No particulars whatever of the bonus and right shares acquired have also been given in the order of the Tribunal. One more thing may also be mentioned, namely, that though with regard to the purchase of shares in S.Y. 2015 no particulars can be gathered from the order of the Tribunal, which has merely described them as "numerous", it is not disputed in view of the evidence on record that in the said year the assessee purchased 29 ordinary and 11 preference shares.

6. As regards the sales of shares effected during the aforesaid period, the finding of the Tribunal is that no sales were effected in S.Ys. 2010, 2011, 2012, 2013, 2014, 2016, 2019, 2021, 2022, and 2023. In S.Ys. 2015, 2017, 2020 and 2024 there were sales only of 8, 3, 5 and 4 coupons respectively. There were no other sales. That leaves only S.Ys., 2008, 2009 and 2018, for consideration. The Tribunal has observed that out of these years, there were "substantial" sales or disposals during S.Y. 2008 and S.Y. 2018. The particulars with regard to the sales or disposals in the course of S.Ys. 2308 and 2009, as per the finding of the Tribunal, are as follows :-

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As regards S.Y. 2018, according to the findings of the Tribunal, there were two kinds of disposals of shares by the assessee. In the first place, nearly one-third of the total share-holding of the assessee-firm in the relevant year was transferred to or parted with in favour of the heirs of one of the partners of the assessee-firm who had expired. This transaction can by no stretch of imagination be called a sale. In the next place, there was regular sale of shares and coupons. The Tribunal has not given full particulars with regard to such sales in the course of its order. However, the evidence on record on which the Tribunal has relied for the purpose of giving particulars with regard to sale of shares shows that the assessee sold during the course of the said year 2 coupons, 10 preference shares and 13 ordinary shares of various Companies. As in the case of purchases so in the case of sales, the Tribunal has not found as to what was the book value of shares or as to what was the sale price realised by the assessee. All that the Tribunal has said in the course of its order was that except for S. Yrs. 2008 and 2018, the transactions were not substantial.

7. We now reach S.Y. 2025 which is the relevant year for the purpose of this case. During this year, no shares were purchased by the assessee. However, the assessee sold the following shares out of its holding :-

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8. The assessee filed its return of income for the assessment year in question on June 27, 1970. In the return it inter alia showed a net profit of Rs. 15,724/- as a result of the aforesaid transactions and this income was returned as business income. A revised return of income was thereafter filed on September 23, 1970. However, so far as the question under consideration is concerned, there was no change or variation in the revised return. Yet another revised return was filed on November 12, 1970 and in the said revised return the profit earned by the assessee no the sale of shares was returned as capital gains and not as business income. According to the assessee, the aforesaid transmission of sale of shares resulted in capital gains (long term) to the tune of Rs. 36,481/- and its liability, if any, to income-tax arose only in respect of such capital gains. Copies of profit & loss account and balance-sheet were filed along with the return.

9. The Income-tax Officer found : (1) that past records disclosed that the assessee earned for the last several years "positive income" from dividend only; (2) that the entire business of money-lending, which was also inclusive of investments in shares, was considered as the business of the assessee; (3) that all the investments in shape of shares formed stock-in-trade of the assessee (4) that all the expenses incurred by the assessee were allowed in the computation of income for the past years; & (5) that the assessee itself had in its original two returns declared the profit on the sale of shares as business income. In view of these facts and circumstances, according to the Income-tax officer, the profit on the sale of shares could not be treated as capital gains. The Income-tax Officer observed that the mere fact that the shares which were sold during the relevant previous year were held by the assessee-firm for a long time was not sufficient to convert the share-holding into an investment. In view of these findings, the Income-tax Officer treated the profit yielded by the sale of shares as business income and worked out the net profit on sale of shares at Rs. 84,052/- and assessment to income-tax was made on the said basis.

10. The assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner found : (1) that having a bird's eye view of the transactions in shares from S.Ys. 2007 to 2025, it appeared that there were only purchases of shares and receipt of bonus shares through those years and that the sales were very rare; (2) that sales of shares to outsiders were undertaken sometimes in peculiar circumstances, namely, in order to settle accounts; (3) that there were other disposals of shares but they were not in favour of outsiders but in favour of co-parceners at the time of partition and in favour of ex-partners at the time of retirement from the firm; and (d) that the mere circumstance that the assessee had shown the share-holding as its business assets in the past was not sufficient to draw an inference against the assessee that it was not held as an investment in as much as proceeding for assessment to income-tax estoppel were inapplicable. In view of the aforesaid finding, the Appellate Assistant Commissioner held that the share-holding was held by the assessee as an investment and not as stock-in-trade and a conformity with the said finding, the directed the Income-tax Officer to compute the profit realised on sale of shares, namely, Rs. 36,481/- as capital gains in place and stead of business profits of Rs. 84,052/- computed by the Income-tax Officer.

11. The Income-tax Officer preferred an appeal against the said decision to the Income-tax Appellate Tribunal. The Tribunal observed that the sale transaction of Jubilee Mills' ordinary shares was the main transaction in which the assessee earned the profit. The Tribunal then referred to the purchases and sales of shares during the entire period of 22 years commencing from S.Y. 2003 and ending with S.Y. 2025 and it found that there was "substantial" acquisition of shares in S.Y. 2007 from the ex-partner and, therefore, there was acquisition of bonus shares and right shares and there were also "occasional" purchases. It further found that so far as sales are concerned, except for two years, namely, S.Y. 2008 and S.Y. 2018, the transactions were not substantial. The Tribunal then considered the contention of the assessee that since it was also holding preference shares, it could not be said that it was dealing in shares. The Tribunal found that the entire share-holding of the assessee was treated as stock-in-trade in the past and it was not shown that any portion thereof was coverted into investment. Besides, a composite share-holding could not be divided into two water-tight compartments, one consiting of shares held as stock-in-trade and the other consisting of shares held as investment. The Tribunal next dealt with the contention of the assessee that it had committed a mistake in treating itself as a dealer and not on investor in shares because the amount of profits earned in the earlier years was small and the assessee had no occasion to consider the matter carefully from all angles. The Tribunal held that the assess had not only filed returns showing itself as a dealer in shares and submitted to orders assessing the income derived from shares as business income, but in some of the years when the assessee was treated by the taxing authority as an investor and certain losses were not allowed, it had also carried the matter in appeals and in one case it had gone right upto the Tribunal to obtain the decision that it was a dealer in shares. Besides, over a period of number of years the assessee was treated as a dealer in shares. Expenses were allowed to be deducted and losses were allowed to be set off against dividend income. The Taxing Authority had thus changed its position to its prejudice by reason of the representation that the assessee was a dealer in shares. When the assessee earned in the year under consideration good profit on sale of shares it cannot be allowed to change the stand and say that it was not a dealer in shares and that all the past assessments were wrong. Two other contentions of the assessee before the Tribunal were (i) that the Jubilee Mills' shares were not held by it for business purpose and (ii) that their sale was not in ordinary course of business but it was undertaken as a part and parcel of the transaction of transfer of the Jubilee management of the Mills. The assessee, in support of the second submission, produced before the Tribunal an agreement relating to such arrangement. The Tribunal found that the first contention was not raised at any prior stage and no attempt was made before any of the lower authorities to distinguish between the shares of the Jubilee Mills and the shares of the other Companies and that there was no material on record to come to the conclusion that such different treatment was given to the shares of the Jubilee Mills. In the opinion of the Tribunal, susch new contention could not be allowed to be raised at such late stage. The Tribunal also refused to take into account the second contention on the same ground and it was not inclined to look into the agreement on the ground that it did not from part of the record and no attempt was made to produce it before the lower authorities and no reason was given for such failure. In the light of the findings aforesaid, the Tribunal held that the assessee was a dealer in shares and that the income realised by it on sale of shares in the year of account was business income. It accordingly set aside the decision of the Appellate Assistant Commissioner and directed the Income-tax officer to tax an amount of Rs. 83,582/- as business income in the hands of the assessee.

12. At the instance of the assessee, the Tribunal has referred the following question of law to this Court for its opinion;

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the profit of Rs. 83,852/- realised by the assessee on the sale of shares was assessable to tax as business profits ?"

13. The question posed above is not altogether easy to answer. Many a battle has been fought between the taxpayer and tax Collector on this point in varying circumstance, as is evident from the reports of the decided cases which are a legion. Many of such cases were pressed into service at the hearing of this Reference by both the sides, the choice of citation dictated by a seeming similarity of facts and circumstances. We are not sure how far this studious journey through the pages of law Reports has shed light on the solution of the problem posed before us herein, for, each case was decided on its own facts and one peculiar circumstance here or there turned the scales. In many of such cases, another view could possibly have been taken, as plausible and logical as the other. To borrow the words of Greene M.R. in British Selmson Aero Engines Ltd. vs. Commissioners of Inland Revenue,

" .... indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons."

Such a gamble, however, has no place in judicial process and the conclusion therein must be reached one way or the other on premises supportable by reasons founded on well-settled principles.

14. With these prefatory remarks, let us begin with the citation of the oft quoted passage of Lord Justice Clerk in California Copper Syndicate vs. Harris, (cited with approval in C.I.T. vs. Sultej Cotton Mills Supply Agency Ltd. wherein the line between capital sales and sales producing income has been drawn in the following words :

"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 .... 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 ...

What is the line which separate the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being; Is the sum a gain that has been made a mere enhancement of value by realising a security or is it a gain made in an operation of business in carring out a scheme for profit making ?"

The question which, in substance, therefore, arises for determination in this case is the one which is set out in the last part of the above citation.

15. It is trite saying that as to what are the characteristics of the business of dealing in shares or that of an investor is a mixed question of fact and law and that what is the legal effect of the facts found by the Tribunal and whether as a result the assessee can be termed a dealer in shares or an investor is itself a question of law (See Oriental Investment Co. Ltd. vs. C.I.T.) In the ultimate analysis, therefore, the finding of the Tribunal that the profit made by the assessee in the instant case is a trading profit is a finding on a mixed question of fact and law and we must ascertain whether the conclusion was reached by the Tribunal after taking into account all the relevant circumstances and upon a balanced consideration of the entire evidence on record and on application of the correct legal tests.

16. To be a dealer in shares in one must carry on the business of purchase and sale of shares with a profit motive. In the context of a taxing statute, the word "business" has acquired a well-defined meaning. In the context of S. 2(4) of the Indian Income-tax Act, 1922, which defined the word "business" in the same term in which S. 2(13) of the Income-tax Act, 1961, (hereinafter referred to as "the Act") defines it, the Privy Council observed in Commissioner of Income-tax vs. Wallace and Company, us under :-

"The words used are no doubt wide, but underlying each of them is the funds mental idea of the continuous exercise of an activity."

In Narain Swadeshi Weaving Mills vs. Commissioner of Excess Profits Tax, the Supreme Court observed at page 773 as under :-

"The word "business" connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivable capable of falling with the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is."

The concept underlying the word "business" was further expounded by the Supreme Court in State of Gujarat vs. Raipur Manufacturing Co. Ltd., in the context of the Sales-tax Law. It was there observed at page 5 and 6 as under :-

"The expression "business" though extensively used in taxing statues, is a word of in-definite import. In taxing statues, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive, and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinary be entered into with a profit-motive. By the use of the expression "profit-motive" it is not intended that profit must in fact earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series transactions. It predicated a motive which pervades the whole series of transactions effected by the person in the course of his activity. In actual practice, the profit-motive may be easily discernible in some transactions : in others it would have to be inferred from a review of the circumstances attendant upon the transaction ...... To infer from a course of transactions that it is intended thereby to carry on business ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the transactions must exist. But no test is decisive of the intention to carry on the business; in the light of all the circumstances an inference that a person desires to carry on the business of sell goods may be raised."

These observations made in the context of sales-tax Law were relied upon and referred to in the context of the Income-tax Law in a recent decision of the Supreme Court in Sole Trustee, Loka Shikshana Trust vs. C.I.T.

17. It would thus appear that the word "business" postulates the existance of certain elements in the activity of an assessee which would invest it with the character of business. In each case the question whether or not the assessee carried on business in a particular item of trade must necessarily be approached in the light of the intention of the assessee, having regard to the aforesaid legal requirements which are associated with the concept of business. See Ramnarain Sons (P) Ltd. vs. C.I.T. and C.I.T. vs. National Finance Ltd.

18. In order to ascertain whether the principal elements of business hereinabove set out are satisfied, certain subsidiary tests have been evolved to which we must now refer. The first test which is often applied is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item in question or with a view to finding an investment. The inquiry, in the words of Rowlatt, J. Thew vs. South West Africa Co. Ltd. "Is the article acquired for the purpose of trade ?" The object, intention and expectation, which are the inspiration of the transaction, are relevant in judging the essential nature of a transaction See Griffiths vs. J.P. Harrison (Watford) Ltd. If the transaction, since the inception appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it has been treated as furnishing a valuable guide-line See. Juggilal Kamlapat vs. C.I.T. This circumstances, though relevant, is, however, not decisive and the transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale. See. Raja Bahadur Kamakhya Nrain Singh vs. C.I.T., C.I.T. vs. Sutlaj Cotton Mills supply Agency Ltd.,

19. The second test that is often applied is as to why and towards for what purpose the sale was effected subsequently. If the object and purpose of the sale is quite inconsistent with the motive which should animate those who direct the fortunes of a trading company when they are effecting sales of that company's stock-in-trade, then such conduct might, in certain cases along with other circumstances, show that the whole transaction of purchase and sale was not in the course of a trading enterprise. A trader would ordinarily dispose of his stock-in-trade in the regular course of business, because he thought that it would produce a desirable profit or that it was a trading operation which was financially beneficial to him. The circumstances in which the sale transaction is entered upon, the reason motivating it, the presence or absence of commercial instinct in undertaking it are all factors which are relevant (See : The Dunn Trust Ltd. vs. Williams, and Raja Bahadur Kamakhya Narain Singh vs. C.I.T.

20. The third text which is frequently applied is as to how the tax payer dealt with the subject matter of transaction during the time that it was with him. Has the tax-payer treated it as the stock-in-trade of his business ? or has he in his books of account and balance-sheet shown the item as an investment ? This inquiry, though relevant, is, however, not conclusive See : Ramnarain Sons (Pvt.) Ltd. vs. C.I.T., Investment Ltd. vs. C.I.T. Raja Bahadur Kamakhay Narain Singh vs. C.I.T. Such evidence, though by itself not conclusive, is held to be a relevant circumstance in deciding the question whether a particular loss or gain was capital loss or capital gain See. Karan Chand Thapar and Bros. P. Ltd. vs. C.I.T. The test often applied therefore, is whether the assessee made item in question the stock-in-trade of business.

21. The fourth test which is sometimes pressed into service is as to how the assessee himself has returned the income from such a source or as to how the department has dealt with it in the course of the immediately preceding or succeeding assessments. The evidence on this point, though not conclusive, is held to be good and cogent evidence to judge the nature of the transaction in the assessment year in question and it has been found to be a circumstances which the taxing authorities are entitled to take into consideration in the absence of any satisfactory explanation See. Investment Ltd. vs. C.I.T. and C.I.T. vs. Durgaprasad More.

22. In the case of partnership firms or companies, yet another test is sometimes applied, namely, whether the partnership deed or the Memorandum of Association authorised the concerned firm or company to purchase and or sell the commodity in question. It was held in Oriental Investment Co. Ltd. vs. C.I.T. that merely because the company has within its objects the dealing in investment in shares it does not give to it the characteristics of a dealer in shares. But if other circumstances are proved, it may be a relevant circumstance for the purpose of determining the nature of activities of an assessee. (See also in this connection Kishan Prasad & Co. Ltd, vs. C.I.T.

23. Last but not the least-rather the most important test applied is as to the volume, frequency, continuity and regularity of transactions of purchase and sale in the class of goods concerned. If there is repetition and continuity, if the magnitude of transaction bears any reasonable proportion to the strength of the holding, then an inference can readily be drawn that the activity is in the nature of a business. In Raja Bahadur Visheshwara Singh vs. C.I.T., it was held that if there was evidence inter alia as regards the substantial nature of transactions, the magnitude of the shares purchased and sold and the ratio between the purchases and sales and the holdings, the conclusion can justly be reached that the assessee was dealing in shares as a business. But this test again, like other tests, is not conclusive, for, it has been held that the transactions in securities and shares, if not frequent but of very large amounts, would point in the direction of the activity being in the nature of business, particularly if in the year of account the transactions of sale and purchase of securities were in number substantial and in value considerable. (See Investment Ltd. vs. C.I.T.

24. These are some of the principles which govern the determination of the question which confronts us in this Reference. We wish to make it clear, however, that this is not intended to be an exhaustive list of all the relevant subsidiary tests and we are not to be understood as laying down that each one of them must be independently satisfied in every case and that an overall view of the matter and collective effect of all the circumstances is not to be taken. The question which we must, therefore, examine is whether in reaching the conclusion that the profit realised by the assessee in the instant case on the sale of shares was assessable to tax as business profits, the Tribunal approached the question from the right perspective and arrived at the conclusion taking into account all the relevant circumstances.

25. One more thing before we enter into the facts of the case. It is for the Revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income (See Janki Ram Bahadur Ram vs. C.I.T.). It has, however, been held that the matter does not rest purely on the technical question of onus which undoubtedly is initially on the Revenue to prove that the particular item of receipt is taxable. Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is matter which is within the knowledge of the assessee who holds the shares and he should, in normal circumstances, be in a position to produce evidence from his record on the point (see C.I.T. vs. Associated Industrial Development Co.

26. The Tribunal has written an elaborate order in this case. We cannot, however, help observing that it has not considered with circumspection very fact for and against the assessee to which its attention was drawn, that it has not given its finding in a manner which would clearly indicated that evidence pro and contra in regard to each test was considered and the ultimate decision was reached on a balanced consideration of all relevant matters. The Tribunal had first to find all the basic facts. It had then to draw, if necessary, certain informances of facts from those basic facts. On the basis of the totality of facts so found and upon the application of correct legal principles, it had to reach the ultimate conclusion. We are constrained to say, however, that in the instant case certain essential facts have not been found by the Tribunal and, consequently, it has failed to apply certain relevant test. Besides, as we shall immediately point out, it has misdirected itself in law by taking into account an irrelevant consideration and by allowing itself to be persuaded to take the view that it did by misguiding the effect of one circumstance which, though relevant and important, was not decesive.

27. Let us first deal with the aforesaid circumstance which really appears to have weighed with the Tribunal in arriving at the conclusion that it did and which, in sub-stance, seems it is only on account of the fact that this circumstance loomed large on the face of the record and that it was treated as more or less decisive, that the Tribunal failed to find all essential facts and to apply many of the other relevant subsidiary tests in proper perspective and to arrive at a correct decision on a balanced consideration of all the facts and circumstances of the case including this very circumstance. The circumstance aforesaid on which the Tribunal very heavily relied was that the assessee itself had treated its entire share-holding as the stock-in-trade of its business and that it had returned the income from such source as business income and in the course of assessment to income-tax in the previous assessment years, the Department had on that basis taxed such income and allowed deductions and losses against such income.

28. Before the Tribunal the assessee sought to explain its conduct in the past years on the ground of all the while labouring under a misconception that it was a dealer in shares and that it did not fully appreciate the implications and it did not go deep into the matter as the amounts involved were very small. It was only in the year of account, and that too after the original return and the first revised return were filed, that the assessee, on being properly advised, realised the mistake and found that the profits made by it on the sale of shares in the said year were realisations of investment and not income from the business of dealing in shares. According to the assessee, it is under such circumstances that it filed a second revised return and merely because it had committed some mistake in the past year, it could not be prevented from taking the plea that the income was not a business income. The assessee, in substance, urged before the Tribunal that merely because in the past it treated the shares as its stock-in-trade and returned the income from that source as business income, the real nature and character of the said asset was not changed and that if his activities were consistent with that of an investor and not with that of a dealer in shares, its mere conduct could not render the transactions in question as trading transactions if they were otherwise not and the income from such transactions could not be treated as business income.

29. The Tribunal found; (1) that the assessee treated and the Department accepted that all the shares were the assessee's stock-in-trade; (2) that such conduct on the part of the assessee and the Department ran through the assessment of the assessee over a number of years; (3) that even in the assessment year in question the original return and the first revised return were filed on the footing that the shares were the stock-in-trade of the assessee's business and that it was only later on that a revised return was filed claiming that they were its investments; (4) that when in some of the years the Department attempted to treat the assessee as an investor, the assessee fought the matter in appeal and in one case went upto the Tribunal to obtain a decision that the assessee was a dealer in shares and that all the shares were its stock-in-trade; (5) that expenses were claimed and allowed against dividend income and so were losses, and profits were taxed as business income; (6) that there was nothing to justify the decision that though the assessee was a dealer in shares in the past, it ceased to be a dealer before the year of account; and (7) that the Department had changed its position to its prejudice by reason of the representation of the assessee that it was dealer in shares and by allowing losses and expenses against income from those shares and that when the assessee has earned good profit out of sale of shares in the account year, it could not be allowed to change the stand and say that it was not a dealer in shares and all past assessments were wrong. It is in the light of these findings that the Tribunal decided against the assessee, so far as this aspect of the case is concerned, and it is that decision, as earlier stated by us, which appears to have really influenced the mind of the Tribunal in reaching its ultimate conclusion.

30. Now, it appears to us that so far as this aspect of the case is concerned, the Tribunal has misdirected itself in law in four respects and such misdirection has not only affected its finding its on this issue but also its ultimate decision.

31. The Tribunal, in the first place, erred in law invoking the principle of approbate and reprobate and in placing a bar of estoppel against the assessee. In C.I.T. vs. V.M.P. Firm 23, it was contended that the assessee in that case having opted to accept a scheme whereunder its losses suffered during subsequent assessment years were allowed to be set off against profits for the preceding years on the condition that any subsequent that may subsequent recoveries relatable to such losses would be taxable income and the assessee having derived benefit thereunder, it was precluded, on the principle of "approbate and reporbate", from pleading that the income it derived subsequently by realisation of the revived debts, was taxable income. The Supreme Court repelled this contention in the following words :-

"The doctrine of 'approbrate and reprobate' is only a species of estoppel; it applies only to the conduct of parties. As in the case of estoppel, it cannot operate against the provisions of a statute. If a particular income is not taxable, under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law a particular income is either exigible to tax under the taxing statute or it is not. If it is not, the Income-tax Officer has no power to impose tax on the said income."

To the similar effect are the observations in C.I.T. vs. Durga Prasad More, wherein it was observed as under :-

"It is true that neither the principle of res judicata nor the rule of estoppel is applicable to assessment proceedings."

It is that clear that the Tribunal erred in law in holding that having regard to the conduct of the assessee as a result of which the Department had changed its position to its prejudice, the assessee could not be allowed to change the stand. On a close reading the of decision of the Tribunal on this aspect of the case which is contained in para of its order, it appears to us clear that it is this approach which played a decisive role in its ultimate conclusion on this point and to that extent, its decision is vitiated.

32. The Tribunal, in the second place, failed to appreciate that the fact the assessee had treated its shareholding as stock-in-trade in the past and the Department had assessed the income from such shareholding as business income in preceding years was not conclusive in the subsequent assessment years. The principle of res judicata is not applicable to assessment proceedings, as observed in Durga Prasad Mores's case (supra). similar observations are also to be found in Raja Bahadur Visheshara Singh vs. C.I.T. In that case, one of the contentions was that having regard to the contrary finding of the Appellate Tribunal in respect of an earlier assessment, it was not open to the Appellate Tribunal in respect of sub-sequent assessment to hold that the profits and the transactions of sale and purchase of shares and securities to profit of business and, therefore, liable to be taxed. The Supreme Court, while repelling the said contention, held that it was "wholly unsubstantial" and proceeded to observer, -

"There is no such thing as res judicata in income-tax matters. The Appellate Tribunal has placed in a tabulated form the activities of the appellant showing the buying and selling and the magnitude of holdings and it cannot be said, therefore, that it was not open to the Appellate Tribunal to give the finding that it did."

In Dalhousie Investment Trust Co. Ltd. vs. C.I.T. it was observed as under :

"In the years prior to the assessment year, the case put forward by the assessee that the various acquisitions and sale of shares were in the nature of investments was accepted by the department, but such a decision given in the earlier years is not binding in the proceedings for assessment during subsequent years."

It would thus appear, on the well-settled legal position, that merely because the assessee contended and the Department accepted in the course of the assessment to income-tax for the preceding years that the assessee was a dealer in shares and that its income from sale of shares was liable to be taxed as business income, neither the assessee nor the Department was precluded from changing its respective position in the proceedings for assessment during the current assessment year. If there was material before the Tribunal which threw light on the true nature of the activities of the assessee over a number of years, it was its duty to consider such material and arrive at a proper finding in respect of the nature and character of the income from sale of shares in the assessment year in question without in any manner being over-weighed by the consideration as to what happened in the past years. This is not to say that the conduct of the assessee in the past years was not relevant, for as observed in Investment Ltd. vs. C.I.T., though an order made in assessing the income of one year regarding the nature of a transaction or the income received thereform is not conclusive in another year, the finding recorded by the Department in the immediately preceding and succeeding assessment years that the shares and securities were the stock-in-trade of the assessee was "good and cogent" evidence of the nature transactions in shares and securities in the relevant assessment years, and as held in Durgaprasad More's case (supra), the fact that the assessee included the income from a particular source in his return for several years after objecting to its inclusion in one year was a circumstance which the taxing authorities were entitled to take into consideration. All that we are saying is that the Tribunal could not have shut up the plea of the assessee, placed for its consideration in the course of the present assessment proceedings, on the ground that it was not open to the assessee to make a volte face and to take an inconsistent stand.

33. The Tribunal, in the third place, erred in law in not properly appreciating the true effect of the treatment given by the assessee to its share-holding in the past years as the stock-in-trade on the legal aspect which it was called upon the consider, namely, whether the income from such shares and securities was business income in the current assessment year. It was held in Ramnarain Sons (P) Ltd. vs. C.I.T. at page 533 that merely because the assessee in that case had entered the shares of a particular mill in its statement of shares in which trading transactions were carried on could not alter the real character of the acquisition. Even though the assessee in that case was a dealer in shares, it was found, on a totality of circumstances, that the transaction in relation to the shares of the said mill, which found place in a statement maintained by the assessee in respect of its trading transactions, was not a business transaction. In Raja Bahadur Kamakhya Narain Singh vs. C.I.T., it was observed that the name the assessee gave to his account, namely, "Account of Rs. 48 lakhs floating in the share market" could not render the dealings in that account into trading transactions, if otherwise they were not. In Investment Ltd. vs. C.I.T., it was held that the description of stock in the balance-sheet as "investment" was not decisive. In Karam Chand Thaper & Bros. vs. C.I.T., it was held that the circumstance that the assessee showed the shares in question as investment in its books as well as in its balance-sheet was not conclusive and that it was only a relevant circumstance which could have been relied on drawing an inference, provided the explanation furnished was found to be unfounded. It would thus appear that the Tribunal could not have allowed the circumstance that the assessee had treated the shares in question as stock-in-trade to overplay its effect, for though relevant, it was not decisive and it could have been explained.

34. The Tribunal, in the last place, erred in law in failing to properly appreciate and viewing an correct perspective the explanation offered by the assessee with regard to its conduct in the past years. As observed in Durga Prasad More's case (supra), the conduct of the assessee in relation to past years would be relevant if he fails to furnish any satisfactory explanation. At the highest, the fact that the assessee, in the course of earlier assessment proceedings had returned the income from this source as business income may amount to an admission that the shares held by it were stock-in-trade. Apart from the question that such admission would not bind it except in the course of assessment proceedings in respect of the same year, such an admission cannot be treated as conclusive proof of the matter admitted. It would, at the highest, be a piece of evidence and it could be shown to be erroneous or untrue and the weight to be attached to it must depend on the circumstances under which it was made. This is the position with regard to the value of admission even under the general law of the land, namely, S. 21 of the Indian Evidence Act (see Nagubai Ammal vs. Sham Rao). The assessee was therefore, entitled to give an explanation as to its earlier conduct and to urge that it had taken the stand that it did under a mistake or error. This is what the assessee actually did and we have seen the explanation that it offered. On a perusal of the findings is Para 22 of the order of the Tribunal, it would appear that the Tribunal ommitted to apply its mind to the merits or demerits of the said explanation standing by itself and divorced from the consideration of the principal of approbate and reprobate. In any case, without first recording a specific finding on the question whether it accepted or rejected the explanation on its own merits the Tribunal proceeded to consider the question of estoppel and its reasoning is so inextricably interwoven, so far as both these aspects are concerned, that it is difficult, if not impossible, to appreciate : (i) whether it has ultimately rejected the explanation on merits, or (ii) whether even assuming that the explanation was considered and rejected on merits, how far its mind was influenced in the process by the irrelevant consideration of estoppel, or (iii) whether it has altogether refused to consider the explanation on the ground that the assessee cannot be allowed to retrace its steps. The Tribunal, in our opinion, ought to have been more specific having regard to the well-settleed legal position under which if the assessee offered a satisfactory explanation with regard to its conduct such conduct could not have been placed in its way.

35. It would thus appear that the finding of the Tribunal on this relevant aspect is vitiated in as much as the Tribunal misdirected itself in law and fell in error of law while considering and weighing the legal and factual effect of the said aspect. The one ground which weighed very heavily with the Tribunal in deciding against the assessee, therefore, loses all its significance. Be it stated, even at the risk of repetition, that it is aspect which has played a vital part in the approach of the Tribunal even while dealing with the case as a whole. Even when it touched upon certain other aspects of the case, it is factor which loomed in the background in its mind and its entire approach was coloured on that account with the result that it failed to find essential and primary facts and to draw inferences of fact which might possibly have helped in deciding the matter by application of other relevant tests. Let us now proceed to deal with that aspect of the case.

36. The Tribunal, in the first place, failed to find essential facts to consider and record a specific findings as to whether the acquisition of shares, at the point of time when it was made, was with the intention of dealing in those shares or with a view to finding an investment. This aspect was particularly relevant in this case, having regard to its peculiar facts and circumstances and it was required to be investigated into in the face of the subsequent conduct of the assessee which it sought to explain. The finding of the Tribunal shows that the first acquisition of shares was made in S.Ys. 2003 and 2004 when the assessee purchased 77 and 81 ordinary shares respectively of a Mill Company. The assessee was at the material time carrying on business as money lenders. It is not clear from the findings of the Tribunal whether those shares were acquired with the aid of the funds employed by the assessee in its money-lending business or from other sources. The Tribunal has not specifically found, one way or the other, whether such acquisition when made was for the purposes of trade and with the expectation, object or intention of re-selling the share-holding at profit, or whether it was an essential element of the money-lending activity of the assessee, or whether it was a mere investment.

37. In S.Y. 2007 comes the next acquisition of shares which is in considerable bulk. In the said year, the assessee purchased from one of its partners who had a running account with it and who was indebted to it in the sum of Rs. 6,02,075/- at the material time, certain shares at the market value of Rs. 5,86,500/- and in that manner and to that extent it wiped off the debt due by the said partner to the assessee. In view of the peculiar circumstances under which the acquisition was made it was necessary for the Tribunal to find whether the transaction was entered into at that stage with a view to carrying on trading activity in shares or on account of compulsive force of circumstances which left the assessee with no alternative but to settle its account with its partner in the manner that it did. Mere ownership of property, even if it was purchased from a source which was originally employed in business, would not automatically and necessarily make such property a trading asset. There is no warrant for such a presumption, See A. H. Wadia vs. C.I.T. Once such property was purchased, it became invested with the stamp of the absolute ownership of the assessee and without anything more, it may ordinarily be treated as the assessee's capital investment. Be it noted that some of those very shares or the accretions made thereto came to be sold in the year of account nearly 18 years later and that therefore, an inquiry in this direction was extremely pertinent. We derive no assistance, however, from the order of the Tribunal, so far as this aspect is concerned. Be it noted also that no other or further acquisition was made in the said year and that, therefore, there is no other inherent evidence on the strength of which any inference can be raised.

38. Then comes the period from S. Yrs. 2008 to 2025. The Tribunal found that during this period the assessee acquired further shares as any by way of bonus shares, right shares and 2025, however, there were no purchases at all. In the remaining years there were purchases of shares the particulars of which have been set out earlier. The real difficulty, however, arises on account of the fact that the Tribunal was not given the split up of purchases of right shares and other shares. The Tribunal has also not found as to what was the dominating motive of the assessee in acquiring the right shares. It is sell-settled that on the issue of right shares, the value of the old shares depreciates, because the assets of the Company remain stationary, while the number of shares increases. One of the important factors to be taken into account in case of purchase of right shares, therefore is to ascertain whether the purchase of such shares was made with a view to reading or whether it was made in order to protect an investment and to nurse it (See H. Holck Larsen vs. C.I.T. In the absence of the relevant finding on this essential question of fact the mere fact of purchase of right shares by the assessee during this period cannot be pressed into service, to ascertain its original intention. There is no inquiry and finding even on the question of the original object behind the intermittent acquisition of shares other than right shares, so far as this period is concerned.

39. We are conscious of the fact and we have adverted to the same earlier-that this test is not necessarily an independent test which has to be satisfied in all cases and that even the later stage of whole operation might show that the first step-the purchase of shares was taken as or in the course of a trading transaction. Still, however, this was a relevant inquiry to be made in the circumstances aforementioned and the Tribunal could not have omitted to make necessary inquiry and consider what effect those circumstances had in the light of the explanation offered by the assessee with regard to its treatment of the share holding.

40. The Tribunal, in the second place, failed to find basic facts and consider and record a finding on the question as to why and how and for what purpose the sales of shares were effected during the period with which is concerned itself and from time to time even during the earlier years. The latter peculiar facts and circumstances of this case and it would have thrown light on the nature and character of the activity of the assessee. It may be noted, in this connection, firstly, that the Tribunal has found that no sales were effected in S. Ys. 2010 to 2014 2016, 2019, and 2021 to 2023. In S. Ys. 2015 2017, 2020 and 2024 there were sales only of 8, 3, 5 and 4 respectively. In the remaining years, there were "substantial" sales or disposal only during S.Ys. 2008 and 2018, leaving aside the sales in the assessment year. In S.Y. 2008, 1097 preference shares only appear to have been sold at a loss to on one party, namely, Zenith Assurance Co. Ltd. In S.Y 2018, one third of the total share-holding was transferred to the heirs of one of the deceased partners. This transaction, as observed partners. This transaction, as observed earlier, can by no stretch of imagination be called a sale. However, when an argument to that effect was advanced before the Tribunal by the assessee, it observed : "...... if that was so, there was no reason why were treated as business transaction". We are unable to comprehend the import of this observation. If, however, what is meant is that such transaction assumed the colour of sales, then the Tribunal clearly in law. Regular sale of shares and coupons in the same year consisted only of 2 coupons, 10 preference and 13 ordinary shares. It would thus appear that what has been described as an instance of "substantial sale" consists of a disposal which cannot be termed as a sale and the sale of a few ordinary and preference shares. In the next place, from the arguments advanced before the Tribunal, it appears that the sale in S.Y. 2018 resulted into a profit only of Rs. 1378/- and that from S.Y. 2018 till the assessment year in question only a sum of Rs. 1405/- was taxed by way of profit. In some of the years under reference, the assessee appears to have sold shares at a loss and particularly, on the sale of shares in S.Y. 2009 which consisted of sale of 100 ordinary shares and 380 preference shares, the assessee appears to have claimed loss of Rs. 54,495/- which in the allowed by the Income-tax Officer in the course of the assessment to income-tax for the relevant assessment year as per the arguments advanced before the Tribunal. It was necessary for the Tribunal to find whether such, in fact was the position and, if so, whether the activity of the assessee aforesaid was such as would animate those who direct the fortunes of a trading firm when they are selling the firm's stock-in-trade. In the last place, the order of the Appellate Assistant Commissioner, when the Tribunal reversed, shows that some of the sales were made for the purpose of settling account and in order to arrive at division of properties amongst three co-parceners at the time of the partition of the Hindu Undivided Family when the Tribunal was reversing the decision of the Appellate Assistant Commissioner, it was necessary for it to find whether such conclusion drawn by the Appellate Assistant Commissioner was justified on record and, if so, whether such sales could be said to be commercial sales. It is difficult to appreciate as to how, in the absence of any finding on these essential questions of fact, the Tribunal could have reached the conclusion that it arrived at.

41. So far as the sales effected during the year under consideration are concerned, the Tribunal has found as a matter of fact that the main shares on which the assessee earned profit were the ordinary shares of Jubilee Mills. It may be recalled that the assessee originally acquired 6000 ordinary shares of the said Mills from its partner in S.Y. 2007 and that the said share-holding was substantially augmented by acquisition of bonus shares is one of the subsequent years. The mills during the year of account.

42. Now, with regard to the sale of these shares, it was inter alis submitted by the assessee before the Tribunal that such sale was not effected in the ordinary course of business but it was undertaken as a part and parcel of the transaction of transfer of the management of the Jubilee Mills. The submission, which was reinforced by the assessee by production of an agreement entered into between the assessee and the transferee; was rejected by the Tribunal on the grounds that (1) no distinction was even made between the holding of the Jubilee Mills' shares and the holding of other shares, and (2) the agreement could not be taken into account, because it did not form part of the record it before the lower authorities and no reason was shown as to why it was not so produced.

43. In its application for reference under S. 256(1) of the Act, the assessee specifically sought to bring the aforesaid controversy before this Court by raising two questions, namely, (1) whether the Tribunal erred in law in not taking cognizance of the agreement in question on the ground that it was not on record and was not produced before any of the lower authorities, and (2) whether on that account its ultimate finding was vitiated. The Tribunal, in the statement of case submitted to this Court, stated in para 7 that though the assessee required it to refer a number of questions, the question referred by it "fully covered all the aspects" which were considered by the Tribunal. It would thus appear that the question with regard to the sale of 3000 Jubilee Mills' shares and circumstances in which it was effected and the question as to the exercise of discretion by the Tribunal in the matter of taking into consideration additional evidence in the shape of agreement was intended to be specifically brought before this Court and that the question as framed takes in that aspect in the circumstances abovementioned.

44. Now, even proceeding on the footing that the assessee had at no point of time made a distinction between the holding of the Jubilee Mills shares and the other share-holding, it would nonetheless be a relevant circumstances which will require consideration. If the assessee succeeds in establishing that the Jubilee Mills' share were sold not in the course of its business, if any, as a dealer but as an integral part of an independent transaction in consequence of which the management of the Jubilee Mills came to be transferred. The agreement produced before the Tribunal by the assessee, therefore, had a bearing on the question with which the Tribunal was concerned. The question which then arises is whether the Tribunal was right in law in taking the aforesaid view on the admissibility of additional evidence.

45. Now, in this connection, it is well-settled that s. 254(1) confers the upon the Tribunal wide powers in dealing with the appeals preferred to it. The jurisdiction of the Tribunal is undoubtedly restricted to the subject matter of the appeal. But once it is shown that a particular claim of contention was the subject matter of the appeal before the Tribunal, the law authorises the Tribunal to pass such orders in relation to such claim or connection as it thinks fit. All questions, whether of law or of fact, which relate to the assessment of the assessee may ordinarily be allowed to be raised by him in appeal, even though they may not have been raised before the Income-tax Officer, if grant of relief to him would be available on the determination of such questions (See C.I.T. vs. Sayaji Mills Ltd. In the present case, the question whether the profits realised by the assessee on the sale of various shares including the Jubilee Mills' shares were taxable as business income undoubtedly formed the subject matter of the appeal before the Tribunal. The assessee had succeeded before the Appellate Assistant Commissioner and it was a respondent before the Tribunal. It was entitled to support the order passed by the Appellate Assistant Commissioner which was in its favour by pressing into service any of the grounds decided against it (vide Rule 27). In view of the principle underlying the decision in Sayaji Mills case, it could also have maintained the order on a new aspect or angle with the permission of the Tribunal. In order, however, that such angle or aspect could be presented for consideration, it was necessary for the assessee to rely upon a piece of documentary evidence which had not been brought on record. The assessee tendered such document before the Tribunal and apparently invoked the provisions of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, which deals with the production of additional evidence before the Tribunal. The said Rule reads as under :-

"The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or if the Income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points-specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced."

The provisions of the said Rule make it clear that the parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal. However, in these classes of cases it permit production of additional evidence : (1) when the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders; (2) when the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed for any other substantial cause; or (3) when the Income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them. The said Rule provides that in any of those three cases, for reason to be recorded, the Tribunal may allow the production of additional evidence. We are not concerned in the present case with a case falling in the third category and we need to say no more about it. Since the provisions of the said Rule are in pari materia with the provisions of order 41, Rule 27 of the Code of Civil Procedure, we way refer to some of the decided cases relating to Order 41, Rule 27(1)(b) C.P.C. in order to appreciate the nature of the power conferred under Rule 29 upon the Tribunal, in so far as the first two categories of cases are concerned.

46. In Parsottim vs. Lal Mohar the Privy Council, while discussing whether additional evidence can be admitted under Order 41, R. 27 (1)(f) observed :-

"It may be required to enable the Court to pronounce judgment or for any other substantial cause, but in either case it must be the Court that requires it. This is the plain grammatical reading of the sub-clause. The legitimate occasion for the exercise of this direction is not whenever before the appeal is heard a party applies to adduce fresh evidence, but when on examining the evidence as it stands some inherent lands or defect becomes apparent ....... ........

It may well be that the defect may be pointed out by a party or that a party may move the Court to supply the defect, but the requirement must be the requirement of the Court upon its appreciation of the evidence as it stands."

In Arjan Singh vs. Kartar Singh, the aforesaid view of the Privy Council was reaffirmed and it was observed :-

"The true test, therefore, is whether the appellate Court is able to pronounce judgment into consideration the additional evidence sought to be adduced."

The Supreme Court also observed in that case as follows :

"The discretion to receive and admit additional evidence is not an arbitrary one, but is a judicial one circumscribed by the limitations specified in O. 41, R. 27, Civil P.C. If the additional evidence was allowed to be adduced contrary to the principles governing the reception of such evidence, it would be a case of improper exercise of discretion, and the additional evidence so brought on the record will have to be ignored and the case decided as if it was non-existent."

47. In K. Venkataramiah vs. A Seetharama Reddy, it was held :

"...it is well to remember that the appellate Court has the power to allow additional evidence not only if it requires such evidence, 'to enable it to pronounce judgment' but also for 'any other substantial cause.' There may well be cases where even though the court finds that it is able pronounce judgment on the state of the record as it is, and so, it cannot strictly say that it requires additional evidence 'to enable it to pronounce judgment', it still considers that in the interest of justice something which remains obscure should be filled up so that it can pronounce its judgment in a more satisfactory manner. Such a case will be one for allowing additional evidence 'for any other substantial cause' under R. 27(1)(b) of the Code.

It is easy to see that such requirement of the Court to enable it to pronounce judgment or for any other substantial cause is not likely to arise ordinarily unless some inherent lacuna or defect becomes apparent on an examination of the evidence."

48. The principles, which emerge from the decided cases are, as earlier stated, applicable even in relation to the exercise of power under the first part of Rule 29 and accordingly, in the context of exercise of such power, the following principles should be borne in mind : (1) The discretion given to the Tribunal to receive and admit additional evidence is not an arbitrary one but is a judicial one circumscribed by the limitations specified in Rule 29; (2) The Tribunal has the power to allow additional evidence if it requires such evidence to enable it to pass orders, that is to say, when it finds that there is any lacuna or defect which needs to be filled up so that it could pronounce an order; (3) The Tribunal has the power to allow additional evidence also if it requires such evidence for any other substantial cause, that is to say, even in cases where the Tribunal finds that it is able to pronounce judgment on the state of the record as it is, may still allow additional evidence to be brought on record if it consider that in the interest of justice something which remains obscure should be filled up so that it can pronounce its order in a more satisfactory manner (4) Such requirement in either case must be of the Tribunal and it will not arise ordinarily unless some inherent lacuna or defect becomes apparent on an examination of the evidence and, therefore, the legitimate occasion for the exercise of discretion under Rule 29 is not before the appeal is heard but when on an examination of evidence as it stands, some inherent locuna or defect becomes apparent; (5) such defect may be pointed out by a party or a party may move the Tribunal to supply the defect or the Tribunal itself may act suo motu in the matter; (6) if the additional evidence is allowed to be adduced contrary to the principles governing the reception of evidence, it would be a case of improper exercise of discretion and the additional evidence so brought on record will have to be ignored; and (7) a fortiori, if the decision not to allow additional evidence is arrived at unreasonably or capriciously or by ignoring relevant facts and adopting an unjudicial approach, then the exercise of discretion would, in law, be wrongful and improper.

49. While we are dealing with this question, it may be pertinent to point out that though Rule 39 requires the Tribunal to record reasons for admitting additional evidence, the said provision is not mandatory and omission to record reasons though a serious defect, will not necessarily vitiate the admission of the additional evidence. It is very much to be desired that the Tribunal should not overlook this requirement. In cases, however, where reasons are not recorded but it could be definitely ascertained from the record as to why the Tribunal allowed additional evidence and it is clear that the power was properly exercised within the limitation imposed by the Rule, the admission of additional evidence may not be improper in law (See K. Venkataramiah's case (supra). Another thing which may be borne in mind is that any objection as to the admission of additional evidence must be taken before the Tribunal itself and that if additional evidence is allowed to be let in without any objection, it would not be open to the party aggrieved to raise any objection as to its admissibility at a subsequent stage. When additional evidence is taken with the assent of both the sides or without any objection at the time when it was taken, it would not be open to a party to complain in regard to it later on that it was admitted in breach of the provisions of law (see Purushathama Reddiar vs. Perumal, and Venkataramiah's case (supra).

50. In the light of the aforesaid legal position, let us examine whether in the instant case the discretion in the matter of rejection of additional evidence was exercised in a judicial manner and bearing in mind the aforesaid statutory guide-line. On behalf of the assessee, it was urged that the additional evidence produced by it ought to have been admitted if the Tribunal was satisfied about its genuineness and proof and after giving an adequate opportunity to the other side to rebut such evidence, on the ground that it was required in the interest of justice, so that the appeal before the Tribunal could have been decided in a more satisfactory manner. The assessee's submission was that there was a lacuna in the evidence and such omission was required to be filled up in the interest of justice so that the Tribunal could adequately deal with the contention of the assessee in respect of a different treatment being meted out to the sale proceeds of the Jubilee Mills' shares. The attempt in other words, was to invoke that part of Rule 29 which authorises the Tribunal to admit additional evidence "for any other substantial cause". The assessee urged that the Tribunal, instead of considering the matter in the right perspective, refused to receive additional evidence on the ground that no attempt was made to produce it before the lower authorities and no reasons were given for such omission.

This ground, according to the assessee, though it may be relevant, was not decisive and in so far as the Tribunal failed to consider whether in the interest of justice the lacuna in the evidence was still required to be filled up in order to pronounce its order in a more satisfactory manner, the exercise of the discretion under Rule 29 was vitiated.

51. We find that there is force in the submission made on behalf of the assessee. There is no manner of doubt that the assessee had not produced the agreement in question before the lower authorities and there was, therefore, a lacuna in the record. It is only on account of such defect that the question of allowing additional evidence arose and the assessee moved the Tribunal to supply the defect. The omission by itself and without more cannot be decisive because it is only on account of the defect arising out of such omission that the question of receiving and admitting additional evidence arises. The Tribunal was, therefore, required to consider whether in the interest of justice something which remained obscure was required to be filled up so that it could pronounce its order in a more satisfactory manner. The Tribunal, however, failed to apply the said test. It appears to us, therefore, that the Tribunal has failed to exercise its discretion in the matter of reception and admission of additional evidence in the light of the relevant perspective. It is difficult to predicate as to what view the Tribunal might have taken had it approached the question from the correct legal angle. It is equally difficult to predicate as to what effect such evidence, if admitted, might have had on the ultimate decision of the Tribunal.

52. The foregoing discussion would reveal that the Tribunal has failed to apply its mind to one more relevant subsidiary test, namely, as to under what circumstances and for what purposes the sales of shares were effected and it has also failed to find primary facts bearing on that aspect of the case. As earlier stated, this subsidiary test is not necessarily an independent test. Still, however, in the peculiar circumstances of this case, an inquiry in this direction was relevant and the Tribunal could not have omitted to apply its mind to this material aspect.

53. The Tribunal, in the third place, failed to consider a very important question in the true legal perspective, namely, the volume, frequency, continuity and regularity of transactions purchases and sales of shares and to record essential findings of fact having a bearing on the said aspect. This question was also specifically placed for consideration before the Tribunal on behalf of the parties and still the Tribunal failed to find basic facts and to record a specific finding whether, having regard to the volume, frequency, continuity and regularity, the assessee could be said to be carrying on business as a dealer in shares. We have, while narrating facts, given particulars with regard to the nature and extent of the activity of the assessee over a period of 22 years in the field of purchase and sale of shares. We have there pointed out the findings of the Tribunal on this aspect of the case are confined only to number and class of shares purchased and sold and the names of the respective companies. The Tribunal failed to record any finding on the magnitude of the shares purchased and sold and the ratio between the purchases and sales and the holdings It is significant to note that though the Tribunal set out in its order the rival contentions of parties on this point which contained certain factual data and that though it made a summary of the transactions of sale purchase of shares in the whole period of 22 years, it did not record a finding on the magnitude of the shares purchased and sold and the ratio between the purchases and the sales and the holdings and the net gain or loss made by the assessee on such transactions and the commercial nature or otherwise of such activities. The Tribunal, as earlier stated, also failed to consider whether the purchase of right shares was a part of the business activity, if any, of the assessee and, if not, what its effect on this aspect of the case was. Though the Tribunal observed that except for the acquisition of shares from its partner in S.Y. 2007, the rest of the purchases made by the assessee were only "occasional" and that in a number of years there were no purchases at all, failed to specifically consider the effect of this circumstance on the question of regulating and continuity of operations. Similarly, though the Tribunal found that there were "substantial" shares or disposals only during two years (one of such disposal being in favour of the heirs of the deceased partner which cannot be termed as a sale), the Tribunal failed to consider the effect of such circumstance in judging the nature of activities of the assessee. The Tribunal also failed to consider whether the other intermittent transactions of purchase and sale of securities were in number substantial and in value considerable so that in the absence of the element of frequency it could still be said that the assessee was carrying on activity in the nature of business. Likewise, the Tribunal failed to consider whether, except in the account year, there was any single transaction of sale of shares involving large stakes so that a similar inference could be drawn even on the basis of such transaction. In the absence of any factual data and application of mind by the Tribunal to this relevant aspect of the matter, we are left with nothing more than a bare history covering a period of 22 years, which shows some activity on the part of the assessee in the field of purchase and sale of shares from which it is difficult to arrive at any conclusion whether the test of volume, frequency, continuity and regularity is satisfied. The circumstances, namely, (i) that a large chunk of shares was acquired from an ex-partner in liquidation of his debt, (ii) that a substantial portion of the shareholding was parted with in favour of the heirs of a deceased partner nearly 11 years later, (iii) that there were only "occasional" purchases and not "substantial" sales in the remaining years, (iv) that amongest the shares purchased were included also the right shares which might have been acquired either to trade or to protect investment, (v) that a large part of the investment was allowed to be locked up for a number of years (18 years) before it was liquidated in the year of account and (vi) that sale of shares appears to have resulted, except in the last year, not in substantial profits but many times in losses, might appear prima facie and without more to militate against the conclusion being drawn that the activity of the assessee satisfied the test of business. It hardly needs to be re-emphasized that the line which separates a case in which an investor gains a sum as and by way of enhancement of value of security by realising it and a case where a gain is made in an operation of business in carrying out a scheme for profit-making is very thin. It appears to us, therefore, that in failing to find essential facts bearing on this aspect of the case and in omitting to apply this very important test in the light of the relevant facts, the Tribunal failed to make an inquiry in a direction which was very material in the peculiar facts and circumstances of the case.

54. The Tribunal, in the last place, also failed to apply the subsidiary test which is sometimes invoked, namely, whether the partnership-deed, if any, authorised the assessee to purchase and/or sell shares. Having regard to the circumstances under which a substantial portion of the share was originally acquired and in view of the nature and character of the transactions of sale, an inquiry in this direction might have thrown some light on the question under consideration. There is no dispute that the assessee's original business was money lending and that it started dealing in shares, if at all, with the first acquisition of shares which was comparatively insignificant in S.Y. 2003. If the entire activity of the assessee reviewed earlier could be viewed in the light of what it was authorised to do under the partnership-deed, if any, it might have aided in reaching the ultimate conclusion. But the Tribunal found no facts bearing on this aspect and the test was never applied.

55. The fore-going discussion would show that at this stage we do not have all the relevant material before us on the basis of which we could answer the question referred to us one way or the other. In the absence of essential finding on questions of fact and for want of proper inferences of fact drawn from those basic facts, we are unable to reach the conclusion whether the assessee was a dealer in shares and whether the income realised by him was assessable to income-tax as business income in the assessment year in question.

56. The Revenue, when confronted with this position urged upon us to approach the case from a slightly different angle. It was submitted that the assessee in the present case was carrying on money-lending business and activity of purchase and sale of shares was so intimately connected with the carrying on of the assessee's said business that it could fairly be said that the surplus was the profits and gains from such business. It was in this connection particularly emphasised that the largest single acquisition of shares was made by the assessee in course of its money-lending business by wiping out nearly wholly, if not wholly, the debt of one of its partners to whom the monies were lent by it and that a large chunk of the share-holding of the assessee was parted with in favour of the heirs of one of its deceased partners, with a view to settle their claim. The purchases and sales, in the circumstances of the case, clearly indicated that they were effected in the usual course of the carrying on of the business of money-lending and they were in the nature of normal steps in the course of carrying on of such business. In such cases, proceeded the argument an inference should readily be drawn that the income realised from the sale of the shares was business income and was liable to be taxed accordingly.

57. As against this stand adopted on behalf of the Revenue, the contention on behalf of the assessee was that this was a wholly new case and that it was not open to the Revenue to make out such case for the first time in this Reference. In the alternative, it was contended that it was in any case a wholly new aspect of the case which depended for its determination upon investigation into questions of facts and that since such an aspect was not presented on behalf of the Revenue before the final fact-finding authority, the assessee had no opportunity to meet it or to rebut it and that, therefore, the Revenue should not be permitted to raise it. In this connection, it was particularly emphasised that the purchase of shares from the ex-partner in S.Y. 2007 could not be said to be in the course of money-lending business in as much as what was settled by the said transaction was not the debt of a person to whom monies were lent in regular course of business but the over-drawn account of a partner. It was urged that if the aspect which the Revenue now wanted to present was raised before the lower authorities, the assessee could have led proper evidence to rebut the same, particularly by bringing on record circumstances with regard to the acquisition of shares from its ex-partner.

58. Now, leaving aside for the time-being the controversy as to whether the alternative submission made on behalf of the Revenue amounts to making out a wholly new case or tantamounts to presenting only a new aspect of the case and even proceeding on the assumption that it is not the former but the latter, the question which still arises for consideration is whether, in the facts and circumstances of the case, it would be in the interest of justice to permit the Revenue to raise such a point at this stage. It appears from the order of the Income-tax Officer that his view was that the entire business of money-lending, which was also inclusive of investment in shares, was considered as a business of the assessee and that, therefore, the profits earned on the sale of shares, which constituted the stock-in-trade of the assessee, were liable to be taxed as business-income. This approach, which was initially taken by the Department, however, does not appear to have been pursued at the higher stages and a bare reading of the order of the Tribunal shows that it was contended before it by the Department and it upheld the said contention that the assessee was a dealer in shares, meaning thereby that the assessee's course of dealings in shares by itself amounted to carrying on of business of buying and selling shares. It is under these circumstances and in the light of the grievance made on behalf of the assessee that the question posed above falls for consideration.

59. Now, it is well-settled that : (1) it is not necessary, in order to constitute profits from the sale of shares as business income, to establish that the surplus resulted from such a course of dealing in securities which by itself amounted to the carrying on of a business of buying and selling securities; (2) it would be enough if such sales were effected in the usual course of carrying on the business or, if the realisation of securities was a normal step in carrying on the assessee's money-lending business; (3) mere ownership of properties, even if purchased from a source which was originally employed in the money-lending business, does not automatically make such properties part of such business; (4) once the properties were purchased by the money-lender, they became of his absolute ownership and any subsequent loss arising on resale of these properties was loss on capital invested in purchase of property and not invested in the money-lending business; (5) the question in each case is, therefore, primarily a question of fact and it is for the Revenue to establish that the properties after they were purchased, or their income, were still part of the assets used by the money-lender in his business or in operations connected with such business; (6) no presumption could be made that the properties were still part of the assets of the money-lending business and no onus rested on the assessee to prove that he had some unequivocal act by which he withdrew those properties from his money-lending business and constituted them as an independent investment; and (7) if the money-lender had no choice but to accept some other assets in full or part satisfaction of the dues of his business, the assets so received may constitute the stock-in-trade of the money-lending business. Propositions (1) and (2) are established by the decisions in Punjab Co-operative Bank Ltd. vs. C.I.T., and Sardar Indra Singh and Sons Ltd. vs. C.I.T., Propositions (4) to (6) emerge from the decision in A.H. Wadia vs. C.I.T., and proposition (7) is the outcome of the decision C.I.T. vs. Bhavnagar Trust Corporation (P) Ltd.

60. Against this legal back ground, let us consider whether the Revenue could be allowed to raise at this stage the alternative contention in the facts and circumstances of the present case. The circumstances to be borne in mind in this conext may be recounted. First, at the stage of the Tribunal, the case of the Department, which was accepted by the Tribunal, was that the assessee was a dealer in shares, that is to say, it carried on independently the business of dealing in shares. Secondly, there is, under the circumstances, no finding of the Tribunal that the sales were effected and the purchases were made in the usual course of carrying on of the money-lending business or as a normal step in such business. Thirdly, since the question was never raised before the Tribunal, there was no opportunity to prove whether the acquisition of shares by the assessee from its ex-partner was a transaction in the money-lending business or whether it was on account of settlement of dues by a partner of his account with the firm which was overdrawn. Fourthly, there is nothing to show that even the sale in the year of account with which we are concerned which resulted in such gains was a sale in the usual course of or as a normal step in the carrying on of the assessee's money-lending business. Fifthly, if the matter is approached from this angle, even the question of burden mights arise since the onus may shift at some stage, from one party to another. It would thus appear that none of the essential facts on the basis of which this fresh approach could be made are found by the Tribunal and that having regard to the fact that the assessee had no opportunity to meet such a case, to permit the Department to take up such a stand at this stage, might result in injustice. In our opinion, therefore, it would not be possible and, at any rate, just and proper to answer the question referred to us on this alternative basis.

61. In such circumstances, two courses are now open to us : (1) to call for a supplementary statement of the case from the Tribunal, or (2) to decline to answer the question raised by the Tribunal and to leave the Tribunal to take appropriate steps to adjust its decision under S. 260(1)in the light of the answer of this Court. As observed by the Supreme Court in C.I.T. vs. Indian Molasses Co. P. Ltd., if the Tribunal is directed to submit a supplementary statement of the case, it will be restricted to the evidence on the record and it may not be entitled to take additional evidence and the same may result in injustice. Following, therefore, the course adopted in the said decision, we decline to answer the question and leave it to the Tribunal to adjust its decision under section 260(1) in the light of the observations made in this judgment. We wish to make it clear, however, that we should not be taken to have expressed any opinion on the main controversy between the parties and that it would be for the Tribunal to adjust its decision on the point bearing in mind the views expressed by us on the question of law.

62. In the circumstances of the case, there will be no order as to the cost of this Reference.

Pari Mangaldas Girdhardas v. Commissioner Of Income Tax

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Pari Mangaldas Girdhardas v. Commissioner Of Income Tax

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