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[ In the High Court of Madras, No . ] 20/12/1967
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  "1968 (69) ITR 894"  ==   "1968 (70) ITR 838"  

        VEERASWAMI J.Loyal Textile Mills Limited an incorporated limited liability company had a subscribed capital consisting of 15 000 preference shares 63 142 ordinary shares and 40 000 deferred shares. Each share was of the face value of Rs. 5. The deferred shares would be entitled to dividend only after payment of the prescribed rate of dividend to preference shares. On April 9 1946 the assessee which was also a company incorporated in February 1946 became the managing agents of Loyal Textile Mills under an agreement for the purpose entered into on April 17 1946. During the year ended April 30 1947 the assessee acquired 320 ordinary shares and 250 preference shares of Loyal Textile Mills. On October 10 1947 the assessee made a further acquisition of 39 000 deferred shares for a total consideration of Rs. 39 000. In 1954 the assessee agreed to make over its managing agency to Karamutha Thiagaraja Chettiar in terms of a letter dated September 16 1954 addressed by A. V. Thomas a director of the assessee-company. The terms included that Thiagaraja Chettiar should take over the deferred shares at Rs. 5 per share and also pay the assessee a further sum of Rs. one lakh as compensation for loss of future remuneration to the assessee as managing agent. The assessee sold during the assessment year 1956-57 with which this reference is concerned the ordinary and preference shares which resulted in a loss. After adjusting this loss on the extra amount received on the sale of deferred shares there was a net profit of Rs. 1 21 464. The assessee did not return this amount as its income for the year on the ground that it was a capital receipt. The revenue disagreed and brought the amount to tax treating it as income. The Tribunal concurred with that view. It also declined to a make a reference and the case comes up before us pursuant to the direction under section 66(2) The question for consideration is Whether on the facts and in the circumstances of the case the sum of Rs. 1 21 464 the excess realised on the sale of the deferred shares was income assessable to tax? * The assessees contention throughout which is reiterated in this court is that it bought the deferred shares not with a view to selling them at a profit but with a view to reinforce the voting power in the Loyal Textile Mills and thus gain controlling power in the administration. It was stated that the purchase of the deferred shares did not constitute a business in dealing in shares. The revenue as well as the Tribunal have found that the assessee has made sales of shares in 1947 1948 1950 1953 1954 and 1955. They have also found that no dividends were at any time declared on the deferred shares. They are all of the view that in view of these facts the assessee took the opportunity of making a profit when there was the offer to purchase the managing agency as well as the deferred shares and that it had not been proved by the assessee that its sole object in acquiring these shares was to augment the voting strength of the managing agency companyBefore us the argument for the assessee is that the Tribunal in recording its finding to that effect had misdirected itself mixed up the facts and failed to judge the nature of the transaction of purchase and sales separately in the light of their own merits. Possibly there is some force in the contention but all the same we are of the view that the eventual conclusion of the Tribunal that the assessee has failed to prove that its sole object in acquiring the deferred shares was to gain controlling power in Loyal Textile Mills cannot be said to be erroneous. There is no difficulty about the proposition of law urged for the assessee and as a proposition it is supported by Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax. Where a managing agency company acquires shares in the managed company with the proved intention of gaining controlling power and not with a view to make a profit out of the transaction the asset acquired and sold will partake of the character of capital. But in the above case the facts proved clearly established such an intention. The entire shares held by the controlled company were 3 200 in number out of which the assessee there who was also the managing agent of the controlled company held 2 507 shares. The assessee there purchased 1 507 shares out of the 2 507 shares at a price far higher than the market price ruling at the time of purchase. Later the assessee in that case sold 400 of those shares at a loss which it claimed to be a trading loss. The Supreme Court held that by purchasing those shares far in excess of their market price to facilitate the acquisition of the managing agency a capital asset was acquired and the intention in purchasing these shares was not to purchase them as stock-in-trade of the business in shares. But in the case before us the facts do not show that the assessee in acquiring the deferred shares had a similar intention of winning controlling power. As we noticed at the outset the total number of shares which the assessee had acquired by October 10 1947 were only 39 570 while the number of shares issued by Loyal Textile Mills amounted to 1 18 412. Nor does it appear that when the assessee purchased the deferred shares they did so at a higher price than the then market rate. It is also significant that if the intention in purchasing the shares was as stated by the assessee it made no effort to acquire more shares with a view to give effect to that intention subsequent to October 10 1947. It purchased no further shares at all until it sold its entire shareholding in 1954. In such circumstances the Tribunal was entitled to come to the conclusion that the assessee had failed to prove that it had purchased the deferred shares only with the intention of acquiring a controlling power in Loyal Textile MillsThe circumstances of the case do justify the view of the Tribunal that once the assessee failed to prove its intention as stated by it in the light of the other facts the assessee acquired the deferred shares with a view to make a profit out of them as it actually turned out in the accounting year an adventure in the nature of tradeWe accordingly answer the question referred to this court against the assessee with costs counsels fee Rs. 250Question answered against the assessee.