Holding

The Supreme Court held that the characterisation of the share transactions is a mixed question of law and fact, and the High Court was justified in overturning the Tribunal’s finding, confirming that the assessee was an investor, not a dealer.

Summary

The assessee, a former partner of Larsen & Toubro and later Chairman of the company, was allotted a large number of right shares under Section 81 of the Companies Act, 1956. Over several years he bought and sold both right and ordinary shares, making a profit of Rs.1,65,581. The Income Tax Officer and the Appellate Assistant Commissioner treated him as a dealer in shares from 1954‑55 onward, while the Tribunal upheld that view. The assessee contended that the shares were acquired to prevent dilution of his capital and to meet personal overdraft needs, not for profit‑making, and thus he was an investor. The High Court held he was an investor and set aside the Tribunal’s finding. The Supreme Court affirmed that the determination of dealer versus investor is a mixed question of law and fact, that the High Court was entitled to review the Tribunal’s inference, and dismissed the appeals, upholding the High Court’s decision.

Issues considered

The correct characterisation of the assessee's share transactions – dealer/trader or investor – for income‑tax purposes.
Whether the question of dealer versus investor is a pure question of law, fact, or a mixed question of law and fact.
The scope of the High Court's jurisdiction under Section 66(1) of the 1922 Act (now Section 256 of the 1961 Act) to review Tribunal findings.
The relevance of Section 81 of the Companies Act, 1956 concerning right shares to the tax characterisation.

Legislation cited

Companies Act, 1956s. 81
Income Tax Act (1922) / Income Tax Act (1961)s. 256, s. 66(1)

Subjects

Income TaxDealer vs InvestorRight SharesSection 81 Companies ActMixed Question of Law and FactHigh Court JurisdictionTribunal FindingsCapital Gains

Judgment

1072

A CXJlfISSIOllER OF IN<Xl4E TAX, BOIBAY
v.
H. HOLCK LARSF.11

M.\Y 8, 1986

[R.S. PATHAK AND SABYASACHI MUKHARJI, JJ,]
B
Income, exlglbllity to tax - Purchase and sale of Right
shares acquired under section 81 of the Companies Act, 1956 -
Whether the asses see ls a "dealer" /"trader" or "invegtor" - _._
Question of law, fact or both explained - Whether trade or
investment ls a question of law - Whether the intention of the
c assessee relevant Assessee's intention ls to nurse
investments by acquiring and selling shares - Whether could be_L
treated as "plunging in the waters of trade". r
The Respondent-assessee was a partner in the firm of t
Larsen and Toubro, upto 1946. On 7th/8th February 1946 that
D firm was converted into a private limited under the same name.
In consideration of his interest in the firm, the assessee was
allotted 53,486 Right shares of the company, as per section 81 "'""
of the Companies Act, 1956. During the next few accounting
years upto the financial year 1953-54 during which the company
became a public Ltd. company, the assessee acquired 2, 994
E shares of the said company and sold 1550 shares. The purchases ~
and sales of shares of the said company were few and far
between upto the financial year 1953-54 but these became
larger in number and at close intervals in the next few -
succeeding financial years ending between 31.3.55 and 31.3.60.
During the aforesaid period, the assessee had acquired 29,969
shares of the said company and sold 37366 shares thereby
r·
F
making a profit of Rs. 1,65,581. Besides purchasing and
selling equity shares of the said company, the assessee had )
also dealt in preference shares of the said company. The r
assessee had sold shares of Andhra Cement Co. in the financial
year 1954-55, made purchases of shares of s.c.c. and I.c.c. in
G
the years 1955-56, 1956-·57 and 1958-59 and also of shares of
India Cement Co. and National Carbon in 1955-56 and also sold
shares of Guest Keen Williams and Indian Cement Co. in i.._
1958-59. During all these years the purchases and sales of 1--
equity shares of the said company were more marked than the
purchase and sale of other shares. Besides the sale of equity
H
shares of the said company and shares of other companies, the
C.I.T. v. H. HOLCK IARSEN 1073

A
fassessee had also sold some of his original shares of the said
company held by him. For all the accounting years upto the
'-» year ending March 31st, 1958 he was assessed as an investor.
The Income Tax Officer on a reconsideration of the findings in
earlier years took the view that the assessee was an investor
only till March 31st, 1954 but that from the financial year B
1954-55 the assessee was a dealer in shares and therefore,
profits made by him during such years are Hable to tax. The
+.first Appeal before the Appellate Commissioner was rejected.
The assessee therefore, filed a second appeal. In such an
appeal before the Tribunal, the assessee contended that (l)
the assessee never purchased equity shares of the said company
from any outsider or any stranger except in a few cases from c
l-Close friends or from members of the staff just to accom-
! D'.>date them; (2) that the shares that were acquired by the
-t asses see were only right shares issued by the company to its
existing shareholders; (3) that the assessee had to meet huge
personal expenses and tax liability in the relevant accounting
periods; (4) that the assessee had an overdraft account and he D
wanted to keep the said overdraft account within reasonable
limit; (5) that the assessee wanted to nurse his investments
in the company; 1'"'1 ( 6) that the assessee had to and was
forced and compelled by circumstances to sell some of the
\." shares acquired by him. In the premises, the assessee 's con-
tention was that the sales of the said shares were neither E

-
effected voluntarily nor with- a view to make any profit nor
under a profit making scheme, but were effected under compell-
ing circU11Btances and as no assessee could be a trader by
compulsion, the assessee was not a trader in respect of these
• ~shares. Two members namely Judicial Member as well as
Accountant Member gave separate but concurrent opinions and F
came to the conclusion that the assessee was a dealer in
\-shares and not an investor. The Tribunal held : (1) The
1assessee was the Chairman of the Board of Directors of the
said company. (2) The said company had ever since its incep-
tion expanding its business and llllking good profits. (3) Its
capital had increased and, therefore, right shares were G
offered to the existing shareholders. ( 4) The assessee had a
;,, substantial holding of equity shares in the COll(lBnY• (5) It
"- was not obligatory on the assessee to acquire right shares.
T (6) In fact, the assessee was indebted to the bank and was
having an overdraft account on which he was paying interest.
(7) Not only right shares were sold by the assessee, but he H
1074 SUPREME COURT REPORTS [1986] 2 S.C.R.

A
had also sold some of the original equity shares held by him.~
On a reference to the High Court, the High court answered in
favour of the assessee and held that the assessee was not a •
dealer in shares. Renee the appeal by certificate.

Dismissing the appeals and the connected special leave
B petitions, the Court

HELD: 1. The jurisdiction conferred on the High Cour~
under section 66(1) of the Act of 1922 equivalent to section
256 of the Act of 1961 was limited to entertaining references
involving questions of law. If the point raised on reference
c related to the construction of a document of title or to the
interpretation of the relevant provisions of the statute, iti
is a pure question of law and in dealing with it, though the
High Court might have due regard for the view taken by thet
Appellate Tribunal, its decision would not be fettered by the
Tribunal's view. The High Court was free to adopt such
D construction of the document or the statute as appeared to it
reasonable. Where the point sought to be raised on a reference
waa a pure question of fact, the finding of fact recorded by
the Tribunal 1111st be regarded as conclusive in proceedings
under reference. If however, such a finding of fact was based
on an inference drawn from primary evidentiary facts proved in.~
E the caae, its correctness and validity were open to challenge
in reference proceedings withiil however narrow limits. The
aasessee or the revenue could contend that the inference had
been drawn on considering inadmissible evidence or after
excluding admissible and relevant evidence and if the High
Court was satisfied that the inference was the result oft'
-
F improper admission or exclusion of evidence it would be
justified in examining the correctness of the conclusion. It_f
lllllY also be open to the party to challenge a conclusion of
fact drawn by the Tribunal on the ground that it was not
supported by any legal evidence or that the impugned
conclusion drawn froa the relevant facts was not rationally
G
possible and if such a plea was established, the Court might
consider whether the conclusion was not perverse and should
not, therefore be set aside. However, it was within those
narrow limits that the conclusions of fact recorded by the r
Tribunal could be challenged in a reference to the High Court.
Such conclusions could never be challenged on the ground that
H
these were based on misappreciation of evidence. A conclusion
C.I.T. v. H. HOLCK LARSEN 1075

A
reached by the Tribunal on the ground that it is a conclusion
/on a question of mixed law and fact, is no doubt based upon
the primary evidentiary facts but its ultimate form is
~, determined by the application of relevant legal principles.
The need to apply the relevant legal principles tends to
confer upon the final conclusion its character of a legal B
conclusion. In dealing with findings on questions of mixed law
and fact the High Court, however, has to accept the findings
of the Tribunal on the primary questions of facts; but it is
1£>pen to the High Court to examine whether the Tribunal had
applied the relevant legal principles correctly or not; and in
~ that sense, the scope of inquiry and the context of the juris-
--" diction of the High Court in dealing with such points was the C
same as in dealing with pure points of law, and not beyond
tthat. (1085 B-11; 1086 A-<:)

t 1. 2 What are the characteristics of the business of
dealing in shares or that of an investor was a mixed question
of fact and law. What is the legal effect of the facts found D
by the Tribunal and whether as a result the assessee could be
termed a dealer in shares or an investor was a question of
law. In between the domains occupied respectively by question
of fact and law, there is a larger area, in which both these
questions run into each other, forming, so to say conclaves
•within each other. These are mixed question of law and fact. E
The instant case is one of question of law and fact.

- (1088 F-G; 1089 I>-E)

1.3 Where a person in selling his investment realised an
enhanced price, the excess over his purchase price was not
- 1'profit assessable to tax as incOlm!, but it would be so if what F
was done was not a mere realisation of the invest11ent but an
+act done for uking profit. The distinction between the two
1types of transactions is not always easy to make. Whether the
transaction is of one kind or the other depends on the ques-
tion whether the excess is an enhance11ent of the 'ialue by
realising a security or a gain in an operation of prof it-mak- G
ing. The assessee llight invest his capital in share~ wilh the
) intention to resell these if in future their sale bring in a
higher price. Such an investment though mtivated by a
i possibility of enhanced value, did not necessarily render the
investment a transaction in the nature of trade. In the
pNJlises the totality of all the facts will have to be borne H
in mind and the correct legal principles applf.ed to these. If
1076 SUPREME COURT REPORTS [1986] 2 s.c.R.

A
all the relevant factors have been taken into consideration
and there has been no misapplication of the· principles of law~
then the conclusion arrived at by the Tribunal cannot be
interfered with because the inference is a question of law, if
such an inference was a possible one, subject, however, that
all the relevant factors have been duly weighed and considered
B
by the Tribunal the inference reached by the Tribunal should
not be interfered with. [1093 D-H]

J.P. Harrison (Watford) Ltd. v. Griffiths (H.M•.+
Inspector of Taxes), 40 Tax Cases 281 at 295-296; Leeming v.
Jones [1930] 15 T.C. 333 at 357; Stanley (Surveyor of Taxes)
..
c v. The Gramphooe and Typewriter, Ltd., 5 Tax Cases 358;
Californian Copper Syndicate (Limited and Reduced) v. HarrisJ,
(Surveyor of Taxes), 5 Tax Cases 159 at 166; eo..tssioners of l
Inland ReveDle v. Lysaght:, [1928] A.C. 234 = 13 Tax Cases 511
(at page 247 of Appeal Cases); and Edwards (Inspector of+
Taxes) v. Baristow and Another, 3 W.L.R. 410 s 28 I.T.R. 579
D
quoted with approval.

G. Venkatasval. Naidu & Co. v. Comlssioner of
Income-Tax, 35 I. T. R. 594 S, C. ; Oriental InvestEnt Co. Ltd.
v. eo..lssioner of Income Tax, Bollbay, 32 I.T.R. 664 S.C.;
Sree Meenakshi Mills Ltd. v. eo..lssioner of Income Tax
Madras, 31 I.T.R, 28 S.C.; Saroj Kumar Mazm.lar Vol
E
ea.l.ssioner of IncOE Tax, Vest Bengal, 37 I.T.R. 242 S.C.;
llamnrain Sons (Pvt.) Ltd. v. eo..tssioner of Income-tax,
llollbay, 41 I. T.R. 5311 S.C.; Jm&i Ram Bahadur Rall v.
eo..tssioner of lncoE-t:u, Calcutta, 57 I. T. R. 21 S. C.; Miss
Ilmn D!ldabhoy Kapadia v. eo..tssioner of Income-tax, Bombay,
63 I. T.R. 651 S.C.; Dslhousie Invest11ent Trost Co. Ltd. v. t'
-
F
ea.l.ssioner of Income Tax (Central), Calcutta, 68 I.T.R. 486
s.c.; P.M. Moh..-d Meerakhan v. eo..tssioner of Tncome-t:u,_J
Kerala, 73 I.T.R. 735 s.c.; and Raja Bahadur Kamkhya llarain{
Singh v. eo..tssioner of Income-Tu, Bihar & Orissa, 77
I.T.R., 253 S.C. referred to.
G
2. Section 81 of the Companies Act, 1956 provides that
if a company proposes to increase its subscribed capital by
allotment of further shares, such shares should be offered to
the existing share-holders of equity shares and the offer t
should be deemed to include a right to renounce the shares,
H
The right to receive the new shares is embedded in the old
C.I.T. v. H. HOLCK Ll\RSEN 1077

shares. Therefore the moment, the issue of right shares are
f·announced the original share was bound to depreciate because a
larger number of people participate in the existing capital.
Right shares were not acquired by the assessee as a matter of
free choice. The assessee acquired those shares if the
assessee did not do so, his capital would erode. Further, as B
the facts disclose, he had to find so lf:lch more money in ordea
to acquire the shares and it was not always prudent to permit
the overdraft account to swell. The true object in this case
1'was to prevent depreciation in the value of the shares
investment. The assessee also renounced some of his rights to
get the right shares and thereby entered into these transac-
tions to nurse his investments. In the background of the c
lcorrelation of several factors, in the instant case, the
1 action of the assessee was like a prudent investor and not of
ia plunger in the waters of trade. [1096 E-G; 1097 B; 1098 F;
. · 1099 F]

3. Consideration of all relevant facts involves [)

appreciation of all the facts in their proper perspective. If
that is not done it cannot be said that there has been
consideration of all relevant factors. The Tribunal did not
consider the relevant factors in their proper perspective and
in particular, namely, (i) that the assessee was the Chairman
~of the company and in fact that if he did not participate in

-
buying right shares there might have been adverse effect on
the market so far as the shares of the company were concerned;
(ii) that he had an overdraft with the Bank; (iii) and that he
had to remit money to Denmark for the purchase of his house •
• ~And as such the attitude of a person entitled to right shares
for judging whether he was a dealer and investor was not
viewed in proper dimension but merely noted by the Tribunal
\resulting in the non-consideration of a vital factor leading
'to an erroneous inference. The Tribunal in this case has
undoubtedly noted the assessee' s contention of nursing the
investment. The Tribunal, however, has not considered in its
order the actual position as to how then nursing of the G
investment was necessary. Tribunal thus erred. In that view of
,..l the matter the High Court was justified in interfering with
~the conclusion reached by the Tribunal. There is no reason to
interfere with the order of High Court. [1099 D-H; 1100 A-B]

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1954-55 11
(NT) of 1974 etc.
1078 SUPREME COURT REPORTS [1986] 2 S.C.R,

From the Judgment and Order dated 10th August, 1971 of
•
the Bombay High Court in Income Tax Reference No. 124 of 1963. ~

V. Gauri Shankar and Ms. A. Subhashini for the
Appellant.

B S.T. Desai, H. Salve, Ravinder and Ms. A.K. Verma for
the Respondent.

The Judgment of the Court was delivered by

SABYASAC!ll HUKHARJI, J. These appeals by certificate .)ool

c arise f rr>m the judgment and dee ls lr>n of the High Cr>urt of
Bombay date·! 10th August, 1971 in Income Tax Reference No. 124 -1.
of 1963. l

The question involved in these appeals is famil tar int
direct tax laws. The points in controversy are short. But the
D adjudication is pending for long. Assessment years involved
are l 9Sh58 and 1958-59. The High Court disposed of these
references on 10th August, 1971 and in 1986 i.e. nearly after ·~
28 years of the years of assessment we are posed with the
question whether in respect of certain transactions in those
years the assessee was a dealer or an investor and
consequentially whether the income arising from the sale of 't

-
shares by the a·1sc·:;see i'i t0 be tax:ed on rc\l'en:1·~ acc.~1~111t or.
capital acc0nnt.

The ~·1~sti.on that th~ High Court ha<l t0 ans\>ler was as
follows: t•
F
''Whether, on the facts and in the circumstances of
the case, the assessee was a dealer in sharec; in- -f
the accountinS?; periods relevant to the assessment
years 1959-bO and 1960-61 ?"

G The said question was referred by the Tribunal to the
High Court at the instance of the asseessee.

The asses see, H. Holck Larsen, was a partner in the firm
of M/s Larsen & fo,1bo (hereinafter referre·l to as the 'sald t
company') upto 1946. On 8th fobruary, l 946/7th February, 1946,
that partnership was cr>nverted into a private limited company
H
C.I.T. v. H. HOLCK IARSEN [SABYASACHI MUKHARJI, J.] 1079
A
, of the same name. In consideration of hts interest in the
f firm, the assessee was allotted shares of the company. Against
payment of cash, the assessee got 1875 equity shares and
against his interest in the partnership firm, he got 53, 486 -
equity shares. During the next few accounting years upto the B
financial year 1953-54, the assessee acquired 2, 994 shares of
the said company and sold 1, 550 shares. According to the
statement of the case, the purchases and sales of shares of
-# the said company were few and far between upto the financial
year 1953-54, but these became larger in number and at close
~ intervals in the next few succeeding years. The chart would
indicate the position in this respect. c

(1) (2) (3) (4) (5)
Financial No of Value No. of Sale
year shares (Rs.) Shares Price
ending acquired sold (Rs.)
D

31-3-1955 ---- ----- 4,600 51,173
31-3-1956 6, 111 61,110 13,955 1,88,433
31-3-1957 6,102 61,020 7,661 1,24,406
31-3-1958 1,256 12,560 5,050 63,721
31-3-1959 5,500 55,000 5,200 87,810 E
• 31-3-1960 11,000 1, 11,000 10,400 2,45,732

During the years mentioned in the chart, the assessee had
acquired 29, 969 shares of the said company and sold 37,366
·1 shares thereby making a profit of Rs. 1,65,581. Besides F
purchasing and selling equity shares of the said company, the
assessee had also dealt in preference shares of the said
1-:company. The assesree had sold shares of Andhra Cement Co. in
the financial year 1954-55, made purchases of shares of S.C.C.
and I.C.C. in the years 1955-56, 1956-57 and 1958-59 and also
of shares of India Cement Co. and National Carbon in 1955-56
G
and also sold shares of Guest Keen Wi 11 iams and Indian Cement
in 1958-59. During all these years the purchases and sales of
,; equity shares of the said company were more marked than the
~ purchase and sale of other shares. Besides the sale of equity
f shares of the said company and shares of other companies
stated above, the assessee had also sold some of his original
H
shares of the said company held by him.
1080 SUPREME COURT REPORTS [1986] 2 s.c.R.

A.
On these facts the assessee contended before the Income
Tax Officer that the assessee was only an investor and not a~
dealer in shares but this contention was rejected by the
Income Tax Officer and the A.ppellate A.ssistant Corrnnissioner.

Aggrieved by the said decision of the Appellate A.ssistant
B Commissioner, the assessee filed second appeal before the
Tribunal. Before the Tribunal it was contended on behalf of
the asses see (1) that the assessee never purchased equity
shares of the said company from any outsider or any stranger~
except in a few cases from close friends or from members of
the staff just to accommodate them; (2) that the shares that
c were acquired by the assessee were only right shares issued by
the company to its existing shareholders; (3) that the
assessee had to meet huge personal expenses and tax liability
in the relevant accounting periods; (4) that the assessee had
an overdraft account and he wanted to keep the said overdraft
account within reasonable limit; (5) that the assessee wanted
o to nurse his investments in the company and (6) that the
assessee had to and was forced and compelled by circumstances
to sell some of the shares acquired by him. In the premises,
the asses see' s contention was that the sales of the said
shares were neither effected voluntarily nor with a view to
make any profit nor under a profit making scheme, but were
E effected under compelling circumstances and as no assessee~
could be a trader by compulsion, the assessee was not a trader
in respect of these shares. The Tribunal rejected the said
contentions. The Tribunal held: (1) The assessee was a
Chairman of the Board of Directors of the said company. (2)
The said company had ever since its inception expanding itst<
F business and making good profits. (3) Its capital had
increased and, therefore, right shares were offered to the
existing shareholders. (4) The assessee had a substantial.J
holding of equity shares in the company. (5) It was not obli-1
gatory on the assessee to acquire right shares. (6) In fact,
the assessee was indebted to the bank and was having an over-
G draft account on which he was paying interest. (7) Not only
right shares were sold by the assessee, but he had also sold
some of the original equity shares held by him. ~

The Tribunal was of the view that as the Chairman of thef
Board of Directors of the said company, the assessee knew the
1-1 financial position of the company and also knew that the
C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J.] 1081

\ company's business was expanding and flourishing, and yet he A
~ sold away the shares of such a company held by him. The sale,
according to the Tribunal, must have been to earn profits. The
frequency of the acquisition of right shares and the sales in
large numbers in quick succession, according to the Tribunal,
established the motive to make profit and that all the
dealings in shares were part and parcel of a profit making B
scheme.

·t The Tribunal noted that the Appellate Assistant
Commissioner had found that in some years, the income of the
assessee was much more than the expenses he had to meet and
notwithstanding that fact, the assessee had sold some shares.
The Tribunal further noted that the correctness of this c
t
. finding was neither challenged before the Tribunal nor
. anything established to the contrary. According to the
-tTribunal, therefore, if the assessee was under no obligation
to acquire right shares, there was no necessity for him to
apply for and obtain right shares except to make prof its on
their sales. According to the Tribun!l, it is far from the D
conduct of a prudent and reasonable man like the assessee to •
expect him to sell away his capital assets to meet the
recurring personal expenditure. The frequent acquisition of
right shares at par coupled with the fact that even some of
1' the original holdings were sold, were against the assessee's
E

-
intention of nursing his investments according to the
Tribunal.

The Tribunal noted that according to the Appellate
, :.\'Assistant Commissioner, such an activity was 'self-destructive
purpose by self-cancelling activity'. The Tribunal was in
agreement with the view of the Appellate Assistant F
\Commissioner and came to the conclusion that it was the idea
of huge profits that the assessee was making by sale of shares
of the said company that compelled him to acquire right shares
frequently and in large numbers notwithstanding the fact that
he was indebted to the bank and he was having an overdraft
account with it. The facts that the assessee did not sell all G
> the right shares or that the founder of the company was
interested in acquiring right shares or that he did not take
~ all the right shares offered to him because of his financial
liability, according to the Tribunal, would not affect the
issue. The Tribunal, therefore, came to the conclusion that
H
1082 SUPREME COURT REPORTS [19861 2 s.c.R.

A the assessee was doing business in the assessment years under
1
consideration. ~

Two members namely Judicial Member as well as Accountant
Member gave separate but concurrent opinions for coming to the
conclusion that the asses see was a dealer in shares. In his
separate or<ier, the Accountant Member had observed that in
B the assessment years 1956-57 to 1960-61, both inclusive, the
acquisition of the shares was large and so also the sale of
shares and in the first three accounting years, the share#·
sold were much more than the shares acquired by right. The
right shares acquired in those three years were 6, 111, 6102
and 1,256 whereas the assessee had sold from ti100 to ti100
c right shares which were 13, 955, 7661 and 5,050 respectivelyo_l_
The maximum number of shares held by the assessee was little T
over 56,600 and this number went down progressively from thet
assess100nt year 1953-54 to assessment year 1958-59 by about
15,000. The Accountant Member, therefore, was of the view that
it was not possible to accept the submission of the assessee
D that the shares were sold only to reduce the overdraft taken
from the bank.

It may be 100ntioned, while on this aspect, that during
the first few years apart from the years in question i.e.
1959-60 and 1960-61, i.e. from the assessioont years 1955-56,'!
E

-
1956-57, 1957-58 and 1958-59, the assessee had been treated by
the revenue as an investor in shares and was not taxed on the
dealings of these shares. This is an aspect which requires to
be taken into consideration in conjunction with other factors
in answering the question. The second point on this aspect i~.
that for subsequent years for which Special Leave Nos.
F 8292-8293 of 1979 are pending are for the assessment years
1968-69 and 1969-70 and in those two years the Tribunal ha#
accepted the position that the assessee was an investor anti
not a dealer in shares. This position, however, according the
revenue, had to be accepted in view of the judgment of the
Bombay High Court in tr instant case which is under appeal
G before this Court. Therefore, it was not, according to the
counsel for the revenue, on any divergence of finding or any ~
different inference being drawn from the said findings but.
because of decision of the Bombay High Court and out oft
deference to it, the assessee had to be treated as an
investor. The findings of the Tribunal for those two years are
H
C.I.T. v. H. HOLCK LARSEN [SABYASACHI MUK!IARJI, J.] 1083

also the subject matter of Special Leave Petition 8292 and A
8293. These will have to be disposed of along with these
appeals.

The Hlgh Court in the impugned judgment answered the
question in favour of the assessee and held that the assessee
was not a dealer in shares. B

In this case the facts have been enumerated and tabulated
-t in the statement of the case. The Tribunal on those facts came

I to the conclusion that the assessee was for the relevant two
years a dealer in shares. The High Court, however, in answer
to the question held to the contrary and held that the
c
assessee was an investor in shares.
t
In the background of these facts, two questions arise,
i where courts have to deal with these types of transactions.
The first question is, whether the findings of the Tribunal or
the fact finding body is based on evidence from which the
conclusions arrived at by the said fact finding body can be D

r said to be either reasonable or possible. Therefore, in the
context of the controversy in the instant case, it is
necessary to examine that what were the facts found by the
Tribunal and whether all the facts have been fully considered
Y by the tribunal for the conclusions drawn. If the conclusions
drawn by the Tribunal are pure inferences of facts, then no E

- question of law arises and no occasion ls ca<Bed for
interference. lf, however, the conclusion arrived at by the
fact finding body ls such that no reasonable man could
,.;, possibly have arrived at, then conclusion arrived at by the
Tribunal would be without evidence and perverse in law. If
there is material to support the conclusion, the fact that
~ - another body or the court might have arrived at a different
' conclusion is not relevant.

The second question is what are the legal principles
applicable to the facts of these types of cases to determine
whether the conduct was that of a dealer in shares or an G
investor in the shares.

The two questions have been dealt together in many
decisions which may be noted, though no case can provide
guidance for all situations.
1084 SUPREME CO!JRT REPORTS [1986] 2 S.C,R.

How in case of sale of share the object or the purpose of
selling the shares, in order to determine whether one was a ~
dealer in shares or an investor in shares, should be viewed
may be looked at from the anJlle of Lord Reid in J.P. Harisson
(Watford), Ltd. v. Griffiths (R.H. Inspector of Taxes) 40 Tax
cases 281 at 295-296 when he observed:

"The question has been asked in a number of cases:
"If this was not tracling, ·mat was it?" With all
deference to those who have used that argument, I t
clo not think that it ls very useful in most cases.
I
Human affairs - and business affairs - are of
infinite variety. They do not fit neatly into
c categories or classes. Innominate contracts and ·t
transactions are of frequent occurrence, and I
would not expect to find appropriate names to
denote new kinds of operations devised for the sole t
purpose of gaining tax advantages. In the present
case the question is not what the transaction of
D
buying and selling the shares lacks to be trading,
but whether the later stages of the whole operation ,
show that the first step - the purchase of the
shares - was not taken as, or in the course of, a
trading transaction."
E The real question as Lord Reid said was not whether- the
transaction of buying and selling the shares lacks the element
of trading, but whether the later stages of the whole ..,..
operation show that the first step - the purchase of the
shares - was not taken as or in the course of, a trading',~
transaction. It was, further, reiterated in that decision that
F where a question of inference from certain facts found by the
Tribunal arises, unless the court comes to the conclusion that·._J
the inference drawn by the Tribunal could not be reasonably (
drawn at all, then it is not proper to interfere with,that
finding of facts.
G How a question of this nature should be viewed has been
indicated by this Court as early as 1958 in G. Venltatas-1. .\
Naidu & Co. v. c.-issioner of lncoe-taI, 35 I. T. R. 594 S. C••
The question there was whether sale of a land to a company t
could be treated in the facts and circumstances of the case as
an adventure in the nature of trade. There, on the facts this
H
C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKllARJI, J.] 1085

, Court upheld the findings of the Appellate Tribunal in A
.f affirming that the assessee knew that it would be able to sell
the lands to the managed company whenever it thought it
profitable to do so; that the assessee had purchased the four
plots of land with the sole intention of selling them to the
mills at a profit which intention raised a strong presumption
in favour of the view taken by the Tribunal. This Court B
reiterated that the jurisdiction conferred on the High Court
under section 66(1) of the Act of 1922 (hereinafter called the
t 'old Act') i.e. section 256 of the Act of 1961, (hereinafter

I cal led the 'new Act') was 1imi ted to entertaining references
involving questions of law. It was emphasised that if the
point raised on reference re lated to the construction of a
document of title or to the interpretation of the relevant c
t provisions of the statute, it is a pure question of law; and
in dealing with it, though the High Court might have due
"t regard for the view taken by the Appellate Tribunal, its
decision would not be fettered by the Tribunal's view. lt was
free to adopt such construction of the document or the statute
as appeared to it reasonable. Where the point sought to be D
raised on a reference was a pure question of fact, the
finding .of fact recorded by the Tribunal must be regarded as
conclusive in proceedings under reference. lf, however, such a
finding of. fact was based on an inference drawn from primary
i' evidentiary facts proved in the case, its correctness and

-
validity were open to challenge in reference proceedings, E
within, however, narrow limits. The assessee or the revenue
could contend that the inference had been drawn on considering
inadmissible. evidence or after excluding admissible and
4 relevant evidence; and if the High Court was satisfied that
the inference was the result of improper admission or
exclusion of evidence, it would be justified in examining the F
)' correctness of the concl•1sion. It may als0 be open to the
party t.1 ch:1l lt~nge B conclusion of fact dra"1n by th1~ Trtbt1nal
on the ground that it •as n0t supported by any legal evidence;
or that the impugned conclusion drawn from the relevant facts
was not rationally possible; and if such a plea was establish-
ed, the court might consider whether the conclusion was not G
preverse and should not, therefore, be set aside. It was to be
't remembered, however, that it was within those narrow limits
that the conclusions of fact recorded by the Tribunal could be
challenged in a reference to the High Court. Such conclusions
could never be challenged on the ground that these were based
H
1086 SUPREME COURT REPORTS [1986] 2 s.c.R.

A
on misappreciation of evidence. A conclusion reached by the '
Tribunal on the ground that it is a conclusion on a question
of mixed law and fact, is no doubt based upon the primary K:'
evidentiary facts, but its ultimate form is determined by the
application of relevant legal principles. The need to apply
the relevant legal principles tends to confer upon the final
B conclusion its character of a legal conclusion. In dealing
with findings on questions of mixed law and fact the High
Court however, has to accept the findings of the Tribunal on+
the primary questions of facts; but it is open to the High
Court to examine whether the Tribunal had applied the relevant
t
legal principles correctly or not; and in that sense, the
c scope of enquiry and the context of the jurisdiction of the
High Court in dealing with such points was the same as in t
dealing with pure points of law, and not beyond that.

Before considering other cases it may be appropriate to
refer to the report of Royal Commission on Taxation of Profits
D and IncOllle of F.ogland, which was presented to the Parliament
of United Kingdom in June 1955. There, the Royal Commission
considered whether a simple test could be evolved that would
separate taxable cases from non-taxable one. The Royal
Commission noted that one was that profit arising from any
realisation of property should be declared by law to be T
E taxable income if the property had been acquired with a view
to profit-seeking. This seems to have been the kind of test
envisaged by the 1920 Commission where they spoke of "any
prof.it made on a transaction reccognisable as a business
transaction, i.e., a transaction in which the subject matter
was acquired with a view to profit-seeking". The difficulty, T'
-
F the Royal Commission felt, about applying that test was that,
in any normal sense of the words, a "view of profit-seeking"
might accnmpany many transactions that would not be cal led
business trans.action. Since few investors it was noted could
1
expect that their investments would remain exactly stable in
value in their hands, they are bound to contemplate the
G probabilities of rise or fall and it is hardly to be expected
that they will not choose one for which they hope or expect a
rise. The Royal Commission noted that Lord Buckmaster in
Leeming v. Jones, [1930] 15 T.C. 333 at 357 had observed that t
"an accretion to capital" did not become income merely because
the original capital was invested in the hope and expectation
H that it would rise in value.
C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J.] 1087

'llie Royal Commission at page 39 of the report observed
.) that there should be no single fixed rule i.e. each case must
be decided according to its own circumstances. nie general
line of enquiry that had been favoured by appeal Commissioners
and encouraged by the Courts, according to the Royal
Commission, was to see whether a transaction that is said to
hiwe given rise to a taxable profit bears any of the "badges B
of trade". The Royal Commission was of the view that seemed to
them the right line, and it had the advantage that it based
t itself on objective tests of what was a trading adventure
instead of concerning itself directly with the unravelling of
mtive. At the same time, the Royal Commission was of the view
that there was some lack of uni fonnity in the treatment of
different cases according to the tribunals before which these c
t had been brought. The Royal Co111Dission sought to identify
i these "badges of trade" as follows:

"(!) 'llie subject matter of the realisation. While
almst any form of property can be acquired to be
dealt in, those forms of property such as D
conmodities or manufactured articles, which are
normally the subject of trading are only very
exceptionally the subject of investment. Again
property which does not yield to its owner an
income or per~onal enjoyment merely by virtue of

-
its ownership is more likely to have been acquired
with the object of a deal than property that does.

(2) nie length of the period of ownership.
Generally speaking, property meant to be dealt in
is realised within a short time after acquisition.
But there are many exceptions from this as a F
universal rule.

(3) 'llie frequency or number of similar transactions
by the same person. If realisation of the same sort
of property occur in succession over a period of
years or there are several such realisations at G
about the same date a presump'tion arises that there
has been dealing in respect of each.

(4) Supplementary work on <r in connection with the
property realis~d. If the property is worked up in
H
1088 SUPREME COURT REPORTS [1986] 2 S.C.R.

A
any way during the ownership so as to bring it into 1
.
a more marketable condition; or if any special 'l
exemptions are made to flnd or attract purchasers,
such as the opening of an office or large-scale
advertlsing, there is some evtdence of dealtng. For "
when there is an organised effort to obtain profit
B
there is a source of taxable tncome. But tf nothing
at all ts done, the suggestion tends the other way.

(5) The circumstances that were.responstble for the t
realisation. There may be some explanation, such as
a sudden emergency or oportunity calling for ready
money, that negatives the idea that any plan of
c
dealing prompted the original purchase.

(6) Motive. There are cases in which the purpose of
t
the transaction of purchase and sale is clearly t
discernible. Motive is never irrelevant in any of
these cases. What is desirable is that it should be
D
realised clearly that it can be inferred from
surrounding circum.qtances tn the absence of direct
evidence of the seller's intentions and even, if
necessary, in the face of his own evidence."

In Oriental lnvestmmt Co., Ltd. v. ec-:Lssioner of 't
E

-
lncolle-tax, Bombay, 32 I.T.R. 664 S.C. this Court had occasion
to deal with the question of how far the finding in respect of
dealing in shares was a question of fact or a question of law
or a mixed question of fact and law. This Court observed that
what were the characteristics of the business of dealing in ,,.-,
shares or that of an investor was a mixed question of fact and
F
law. What is the legal effect of the facts found by the
Tribunal and whether as a result the assessee could be tei;med-f
a dealer in shares or an investor was itself a question of
law. The mere fact that a company had within its objects the
dealing in investment in shares, did not give to the company
the characteristics of a dealer in shares, but if other
G
circumstances were proved it might be relevant for the
purpose of determining the nature of the activities of the '·
Company. This Court observed that inference from facts would
be a question of fact or a question of law according as the t
point for determination is one of pure fact or a mixed
question of law and fact. A finding of fact without evidence
H
C.I.T. v. H. HOLCK LARSEN [S~BYASACHI MUKHARJI, J.] 1089

to support it or based on relevant <>nl l rr,,levant matters ts A
) not unassailable. This Court observed at page 669 of the
report that it was difficult to draw a line and draw a
distinction as to what was a question of law and what was a
question of fact. After referring to several authorities, this
Court came to the conclusion that though English decisions
began with a broad definition of what were questions of law, g
ultimately the House of Lords decided that a "matter of
degree" was a question of fact and it had also been decided

I -t· that a finding by the Commissioners of a fact under a mis-
apprehension of law or want of evidence to support a finding
were both questions of law. This Court observed as to what are
the characteristics of the business of dealing in shares or
.
that of an investor was a mixed question of fact and law. What c
t is the legal effect of the facts found by the Tribunal and
' whether as a result the assessee could be termed a dealer in
l shares or an investor was a question of law. As was observed
by Venkatarama Ayyar, J. in Sree Keenakshi Mills Limited v.
<:oam.ssioner of Incoae-Tax, Madras, 31 I. T.R. 28 s.c. that in
between the domains occupied respectively by question of fact D
and law, there is a large area, in which both these questions
run into each other, forming, so to say conclaves within each
other. These are mixed question of law and fact. The instant
case is one.

In the case of Stanley (Surveyor of Taxes) v. 'lbe

- GrllllOphone and Typewriter, Limited, 5 Tax Cases 358 the Court
of Appeal in England had dealt with that question. The Court
of Appeal in England observed at 374 of the report as follows:

"It is undoubtedly true that, if the Commissioners
find a fact, it is not open to this Court to F
question that finding unless there is no evidence
ro support it. If, however, the C~mmissioners state
the evidence which was before them and add that
upon such evidence they hold that certain results
follow, I think it is open, and was intended by the
Conmissioners that it should be ope~, to the Court G
to say whether the evidence justified what the
Conmissioners held."

In Calfornian Copper Syndicate (Liaited and Reduced) v.
Barris (Surveyor of Taxes), 5 Tax Cases 159 at 166 Lord
H
1090 SUPREME COURT REPORTS [19861 2 s.c.R.

A
Justice Clerk observed that the test was whether th.e sum of
gain that has been maie was a mere enhancement of value by ·~
realising a security, or was it a gain made in an operation of
business in carrying out a scheme for prof it-making.

In r.c-tssioners of Inland Revenue v. ~aght, [1928]
B A.C. 234,, 13 Tax Cases 511 (at page 247 of Appeal Cases Lord
Buckmaster observed that the distinction between questions of
fact and questions of law is difficult to define, but if the
circumstances found by the Commissloners in the special case
werP. incapable of reaching the conclusion reached by them,
+
I
then the conclusion could not be protected by saying that it
c was a conclusion of fact since there were no materials upon
which that conclusion could depend. But if the incidents
relating to certain factors which lead to the conclusion were
t
varying that certainly produce the result then the matter llllSt l
be a matter of degree, and the determination of whether or not r
the degree extended so far as to make a man in that case
D resident or ordinarily resident in England was for the
Commissioners and it was not for the Courts to say whether
they would have reached the same conclusion.

The question was again considered in Mwards (Inspector
of Taxes v. Baristow and Another, 3 W.L.R. 410 = 28 I.T.R.
E 579. There the House of Lords held that the facts found led "'
inevitably to the conclusion that the transaction was an

F
adventure in the nature of trade and that the Commissioners'
inference to the contrary should be set aside. Viscount
Simonds observed that whether the transaction was not an
aclventure in the nature of trade was an inference of fact but ·r·
-
c•iuld be set aside because it appeared that the Commissioner
had acted without any evidence or on a view of the facts which
could not reasonably be entertained. In making that inference -.J.
the Commissioners were to be assumed to have been rightly {
directed in law as to the characteristics which distinguish
such an adventure, and, so far as the Scottish courts had
G div2rged from this approach to such problems, the other
approach adopted by the English courts was to be preferred.
Lord Radcliffe observed that without any misconception of law 4
appearing on the face of the case stated, the facts found may
be such that no person acting judicially and properly as to t

H
the relevant law could have come to the determination reached.

-
C.l.T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J.] 1091

A
We have noted Lord Reid in J.P. Harisson {Watford), Ltd.
) v. Griffiths {H.M. Inspector of Taxes) (supra) saying that
intention at the time of the purchase was a relevant and often
a conclusive factor whether the resale was in the nature of an
adventure in trade or not. But i:t Saroj Kumar Mazt.lar v.
Comissioner of lncOE-Tax, West Bengal 37 l.T.R.· 242. (SC),
B
this Court ref erred to the observations of Lord Dunedin in the
case of Jones v. 1-ing (supra) where the House of Lords
observed that the fact that a man did not intend to hold an
·t investment might be an item of evidence tending to show
whether he was carrying ~n a trade or concern in the nature of
trade in respect of his investments, but ~ ~ it led to no
conclusion whatever.
c
In the case of Ralmarain Sons Pvt. Ltd. v. Coimissioner
of lncoae Tax, Bombay 41 l.T.R. 534 s.c. this Court observed
that in considering whether a transaction was or was not an
adventure in the nature of trade, the problem Ill.1st be
approached in the light of the intention of the assessee
D
having regard to the legal requirements which were associated
with the concept of trade or business. The inference on this
question raised by the Tribunal on the facts found was of
mixed law and fact and was open to challenge before the High
Court on a reference. The question whether the assessee's
"' transactions ainounterl t<) cleallng in shares and propert tes or
E
to investment, was a mixed question of law and fact, and the
legal effect of the facts found by the Tribunal on which the
• assessee could be treated as a dealer or an investor, was a
question of law.

In the case of Janki Ram Bbadur Ram v. ec-lssioner of
Income Tax, Calcutta 57 l.T.R. 21 s.c. this Court observed
F
.\,.-that the profit motive in entering a transaction was not
1decisive, for an accretion to capital did not become taxable
income merely because an asset was acquired in the expectation
that it might be sold at a profit. This Court further observed
that if a transaction was related to the business which was
normally carried on by the assessee, though not directly part G
of it, an intention to launch upon an adventure in the nature

. of trade might readily be inferred •

This Court had occasion to consider the question of new
shares offered to the holder of old shares in a company with
right to renounce in the case of Miss a.in lladabhoy Kapadia v. H
1092 SUPREME COURT REPORTS [1986] 2 s.c.R.

C<.ai.ssioner of lnC0111e-Tax, Bombay, 63 ITR 651 s.c. There, the
appellant, who was not a dealer in shares, held by way of-\
investment 710 ordinary shares in the Tata Iron and Steel Co.
Ltd. The company made an offer to her by which she was
entitled to apply for 710 new ordinary shares at a premium
with an option of either taking the shares or renouncing
there, wholly or partly, in favour of others. The appellant
B renounced her right to all the 710 shares on 12th June, 1956,
and realised Rs. 45,262.50. When this amount was sought to be
wholly taxed as a capital gain, the appellant claimed that ant
the_ issue of the new shares, the value of her old shares de-
preciated, since the market quotation of the old shares which
was Rs. 2)3 per share on 1st June, 1956 fell to Rs. 198.75 on
c 4th June, 1956 and that a result of this depreciation she
suffered a capital loss in the old shares to the extent of Rs.
37 ,630 which she was entitled to set off against the capital
gains of Rs. 45,262. SO. In the alternative she claimed that
the right to receive the new shares was a right "1hich was
embedded in her old shares and, consequently llhen she realised
D the sum of Rs. 45,262.50 by selling her right, the capital
gain should be computed after deducting from that amount the
value of the embedded right which became liquidated. It was
held that the appellant was entitled to deduct from the sum of
Rs. 45,262.50 the loss suffered by way of depreciation in the
old shares. ~
E
The question was again considered by this Court in
Dalhousie Investment Trust Co. Ltd. v. Coumissioner of
U.CC--Tax (Central), Calcutta, 68 ITR 486 s.c. There this
Court on the facts came to the conclusion that the assesseey.
dealt with the shares of Moleod and Co. and the allied
F companies as stock-in-trade, and that these were in fact
purchased even initially not as investments but for the-;/
purpose of sale at a profit and therefore the transactions.I
amounted to an adventure in the nature of trade, and the
profit derived by the appellant from the sale of share was
therefore revenue rec,,ipt and as much liable to incnme-tax. It
G Wi'lS held that the 1ecision of department in the earlier years
that the transactions 1<ere in the nature of change of invest- ,
ments was not binding in the proceedings for assessment during
the subsequent years. t
In P.M. Moha.-1 Meerakhan v. Colllnissioner of Inco.!-tax,
fl Kerala, 73 ITR 735 S.C. this Court reiterated that it was not
C.I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J.] 1093

A
possible to evolve any single legal test or formula which
~ could be applied in determining whether a transaction was an
adventure in the nature of trade or not. The answer to the
question llllst necessarily depend in each case on the total
impression and effect of all the relevant factors and
circumstances proved therein and which determine the character
B
of the transaction.

In Raja Babadur Kamkhya Narain Singh v. Coalllissiooer of
-t lncoE-Tax, Bihar & Orissa, 77 ITR 253 s. C. the question of
adventure in the nature of trade was again considered by this
Court and it was reiterated that since the expression
"adventure in the nature of trade" implied the existence of
certain element in the transactions which in law would invest
c
t these with the character of trade or business and the question
·. on that account became a mixed question of law and fact, the
1 court could review the Tribunal's findings if it had
misdirected itself in law. It was fairly clear that where a
person in selling his investment realised an enhanced price, D
the excess over his purchase price was not profit assessable
to tax as income, but it would be so, if what was done was not
a mere realisation of the investment but an act done for
making prof it. The distinction between the two types of
transactions is not always easy to make. Whether the
'f< transaction is of one kind or the other depends on the
E
question whether the excesc is an enhancement of the value by
realising a security or a gain in an operation of
profit-making. The assessee might invest his capital in shares
with the intention to resell these if in future their sale
bring in a hi.gher price. Such an investment, though motivated
'"(
by a possibility of enhanced value, did not necessarily render F
the investment a transaction in the nat•ffe of trade.

In the premises the totality of all the facts will have
to be borne ii1 mind and the correct legal principles applied
to these. If all the relevant factors have been taken into
consideration and there has been no misapplication of the G
principles of law then the conclusion arrived at by the
Tribunal cannot be interfered with because the inference is a
question of law, if such an inference was a possi~le one,
i subject, however, that all the relevant factors have been duly
weighed and considered by the Tribunal, the inference reached
by the Tribunal should not be interfered with. H
1094 SUPREME COURT REPORTS [19861 2 s.c.R.

A
In order to determine the question involved in the
instant appeals, certain features will have to be borne in -\
mind. All the right shares were acquired directly as right
shares at par from the company. It was further urged that as
Chairman assessee was duty-bound to support the issue of new
shares by the company. Sales were made to reduce his
I overdraft, according to the assessee. The gales were also made
to purchase a house in Denmark and for which permission had
been obtained from Reserve Bank of India to remit Rs. l lakh.
This would appear from the assessment order for 1959-60. i

It was further emphasi~et! that the market prlce "'as
c lower on the date of sale and there was no profit motive. The
Income-tax Officer, however, held that profit was the
intention of the assessee for acquisition of the shares. The i
shares acquired after 1st April, 1954 were held as trading
stock. This date was chosen by the Income-tax Officer because i
from this date, the assessee started selling as well as buying
D shares on a large scale. Therefore, according to the revenue,
this indicated dealings in shares. It may be noted that as
such there was -basis for choosing that.

The Tribunal, however, after consideration of all these
facts came to the conclusion that the assessee was a dealer in
E shares.

The judgment of the High Court under appeal which
incidentally is reported in 85 I. T. R. at page 285 held that -
the decision in the earlier years that the assessee was an
investor was not binding for subsequent years, that the
F assessee was always an investor. The High Court further Y'
observed that the frequency of transactions was not decisive.
According to the High Court, it was necessary to appreciate --ll
the implications of the issuance of right shares and purchase f
thereof by the assessee. Right shares were issued by virtue of
the provisions of section 81 of the Companies Act. It is rot
G necessary to set out the provisions dealing with the issue of
right shares. The issuance of the right shares depreciates the
value of the original shares initially.

In the impugned judgment, it was held that whether the t
transactions of sale and purchase of shares were trading
H transactions or in the nature of investment was a question of
C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J,] 1095

A
} law and JDJSt be viewed in the light of the intention of the
asses see.

On the question of how the right shares affect the
original shares, our attention was drawn to Investments - An
Introduction to Analysis and Management Fifth &:lition, wherein B
it was emphasised at page 35 of the book that the world
economies offered a wide variety of securities or assets to
-.satisfy the investor's desire for return and risk. Most
investors are risk-averse, and attempt to maximize their
• wealth. As a principle, investors maximize wealth by
....._ maximizing return and minimizing risk. Investment may be
defined as the purchase by an individual or institution it was c
~observed of an asset that produces a return proportional to
r risk over some future period. The investments, it was further
+observed, available for purchase were typically financial
assets, but real or tangible assets might be included among
the alternative investments.
D
Another principle guiding investment, tt was emphasised
ac page 604 of the book, was the main reason for
diversification - reduction of a risk of loss of capital and
income. Investors face an unknown and uncertain future and try
_,to diversify the investments. As a general rule lt was
emphasised at page 603 of the book, growth of capital was a E

- desirable objective of portfolio management. Thi' .1;.: ., .:· 1~J;lJ.
that every investor llllSt invest in growth stocks; this wouli
be lnconsi.stent with many investors' needs. A fund can be
built up from reinvested income as well as through the
·-fpurchase of growth shares. A large fund does provide more
income for the investor than a small fund. Many investors have F
increased the capital value of their funds through reinvested
'ividends and interest income. Some wanted income, some
capital gains, and some a combination of both. In spite of
these variations, several objectives should be considered as
basic to a well-executed investment programme. The guiding
principles establish the indifference curve of risk versus G
return for the investor.
,,..
t To various other authorities our attention was drawn to
highlight this aspect.

In Busi111!88 Flmnce · - l W Paish and R J Briston, Sixth H
1096 SUPREME COURT REPORTS [1986] 2 S.C.R.

A Edition at page 115, it was observed how issue of right shares ,
depreciates the value of the original shares. It was thus ~
observed :

"Since the price to be paid for the new shares is
substantially below the current market price of the
existing ones, the price per share of the enlarged
B issue will normally be below the price of the old
shares before the issue, and the price of the old
share will therefore tend to fall; but shareholders -t
will recover this loss either by taking up the new
shares themselves or by selling their rights. If
they neglect to do either they will suffer a loss
c of value on their existing shares without
compensation, unless the company, as is now nor-
t
mally the case, sells their rights on their behalf i
and pays over the proceeds to them. Whatever
happens, either the shareholders will take up the
shares themselves or they or the company will sell
D their rights to someone else who will do so. The
success of the issue can therefore be assured,
provided that it is not too large in relation to
the capital already issued."

As noted above, section 81 of the Companies Act, 1956 so ~
E

-
far as relevant for the present purpose provides that if a
company proposes to increase its subscribed capital by
allotment of further shares, such shares should be offered to
the existing share-holders of Equity Shares and the offer
should be deemed to include a right to renounce the shares. y-.
The right to receive the new shares is embedded in the old
F shares. Therefore the moment, it was emphasised by the High
Court, the issue of right shares are announced, the original~
share was bound to depreciate because a larger number of
people participate in the existing capital.

The High Court emphasised that in this case the assessee
G had acquired the right shares and sold them and he also
renounced some of those rights. The question which the High -"
Court was confronted with was whether by indulging in those L
transactions, the assessee was trading in shares or whether he T
entered into those transactions in the old capacity of an
investor. The High Court was of the view that the course of
H
C. I. T. v. H. HOLCK LARSEN [SABYASACHI MUKHARJI, J,] 1097

A
dealings in the instant case showed that the dominant motive
} of the assessee in acquiring and selling the new shares and in
renouncing some of the right shares was to prevent the
inevitable erosion of his capital. If the assessee, according
to the High Court, had not acted in the manner he did, his
original investments would have depreciated in value, and
B
therefore, in a sense he entered into these transactions to
nurse his investments. It was important to bear in mind, and
that could be appreciated if one had regard to what has been
-t noted before that the Right shares, according to the High
Court, were not acquired by the assessee as a matter of free
• choice. The assessee acquired, according to the High Court,
those shares because if the assessee did not do so, his
capital would erode. But as is apparent from the facts noted
c
t-before, he had to find so much more money in order to acquire
the shares and it was not always prudent to permit the
+overdraft account to swell. Having regard to all the facts as
noted by the High Court and referring to the relevant
decision, the High Court was of the view that true object in
Tl
this case was to prevent depreciation in the value of his
j investment. The assessee also in this case, as we have noted
before, renounced some of his rights tn get the right shares.

The High Court was of the view that the true intention of
'I' nursing the investment has not been appreciated by the
Tribunal. Therefore, in the light of the facts, the Tribunal's E
inference was not a justified one in the facts and
circumstances of this case.

·"i At the outset it must be stated that the Tribunal in its
order has noted that according to the assessee, the contention
of the assessee was that with a view to keep the bankdraft F
'within reasonable iimit and with the price object of nursing
· his investments in the company, the asses see had to and was
forced and compelled by clrc11J11Stances to sell some of the
shares and the Trlh,1nal has also noted that the assegsee woLtH
not be a trader by c0mpulsion. The Tribunal hai ~·»t·:l·l••rd
these arg11ment<. The Tribunal also noted that the asge·;see was G
., the Chairman of the Board of Di rectors. The Tribunal a l~o
__. ~oted that ever since its inception, the company was expanding
r 1ts business and making good profits. Its capital had
increased and, therefore, right shares were offered to the
existing shareholders. The assessee had a substantial •.ulding
H
1098 SUPREME COURT REPORTS [1986] 2 s.c.R.

A
of F.quity Shares in the company. It was therefore, according
to the Tribunal, not obligatory on the assessee to acquire \
right shares. 'Ille Tribunal considered the acquisition of right
shares in the background of the indebtedness of the assessee
to the bank and he was having an over~raft account on which he
was paying interest. 'Ille Tribunal noted the frequency of the
B
acquisition of the right shares and the sales in large numbers
in quick succession, and according to the Tribunal, the motive
was to make profit and that all the dealings in shares were
part and parcel of a profit making scheme. 'Ille Tribunal ~
further noted that the Appellate Assistant Conunissioner, in
fact, had found that in some years the income of the assessee •
was IDlCh more than the expenses he had to meet and
c notwithstanding that fact, the assessee had sold some shares. -t
According to the Tribunal, the correctness of this finding had
neither been challenged before the Tribunal nor anything
established to the contrary. 'Ille Tribunal was of the view that +
the assessee was under no obligation to acquire right shares.
D
There was no necessity for him to apply for right shares
except to make profits. It was far from the conduct of a
prudent and reasonable man like the assessee to expect him to
sell away his capital assets to meet the recurring personal
expenditure, according to the Tribunal. The frequent acquisi-
tion of right shares at par coupled with the fact that even
E some of the original holdings were sold, was against the sub- 'lf
mission that the sale was to nurse the investment.

According to the Tribunal if the fact of the overdraft by
the assessee was borne in mind and if the fact of overdraft is
..
kept in view then it could not be said that the assessee had
F
purchased the right shares with a view to what can be ascribed )"-
as nursing the investments.

'Illerefore bearing the principles of the different cases f
which we have set out hereinbefore and considering the motive
in the light of the transactions and the intention with which
the shares were acquired, nature of the shares, the question
G
has to be judged whether there has been trading in shares or
in the words of Lord President Clyde, whether there was plunge
in the waters of trade, in buying shares or acquisition of
shares, (see The Balgoomie Land Trust Ltd. v. The c.-lsaioner t
of Inland llenenue, 14 Tax Cases 684 at 691).
H
C, I, T, v, H. HOLCK I.ARSEN ( SABYASACHI MUKHARJI, J. ] l 099

A
The High Court, in our opinion, made a mistake in
J observing whether transactions of sale and purchase of shares
were trading transactions or whether these were in the nature
of investment was a question of law. This is a mixed question
of law and fact. The entirety of the said facts have been
dealt with both by the Tribunal as well as the High Court. The
High Court observed that there was nothing on record to show B
as to what extent and what measure, the overdraft account was
utilised for acquiring right shares nor indeed was anything to
t show the gain which was likely to result which in fact
resulted to the assessee by paying interest on the borrowed
fund. But the relevant facts 1111st be considered in its proper
perspective. It appears that the facts, that the assessee was
the Chairman of the Company - effect of the issue of right c
t shares vis-a-vis original shares had not been fully kept in
proper perspective by the Tribunal in its evaluation. It
·t further appears that the fact that the assessee was the Chair-
man of the company and in fact that if he did not participate
in buying right shares, that would have adverse effect on the
value of the shares of the company, was also not kept in view D
by the Tribunal. Consideration of all relevant facts involves
appreciation of all the facts in their proper perspective. If
that is not done it cannot be said that there has been consi-
deration of all relevant factors. Tribunal, it appears, fell
~ into error in not taking into consideration properly and
fully- though it noted, the fact that if the right shares were E

- not subscribed by the assessee, his original shares ·would
depreciate in value, but the assessee was also in need of
money - he had an overdraft with Bank and he had to remit
money to Denmark for the purchase of a house - and further
'"i when right shares were issued had he not subscribed to these,
there might have been adverse effect on the market so far as F
-", the shares of the company were concerned. In the background of
the correlation of these factors the action of the assessee
was like a prudent investor and not of a plunger in the
waters of trade. The dealings in the right shares by the
assessee keeping in the background these were right shares and
effect of non-subscription the value of the original shares G
were not fully appreciated by the Tribunal. And as such the
attitude of a person entitled to right shares for judging
1 whether he was a dealer and investor was not viewed in proper
dimension but merely noted by the Tribunal resulting in the
non consideration of a vital factor leading tp an erroneous
H
1100 SUPREME COURT REPORTS [1986] 2 S.C.R.

A inference. The Ttibunal in this case has undoubtely noted the
assessee's contention of nursing the investment. The Tribunal, \
however, has not considered in its order the actual position
as to how the nursing of the investment was necessary.
Tribunal thus erred. In that view of the matter the High Court
was justified in interfering with the conclusion reached by
the Tribunal. There is no reason to interfere with the order
B of High Court.

In the premises these appeals lllllst fail and are dismissed T
with costs.
•
In. the view we have taken the Special Leave Petition Nos.
c 8292-8293 of 1979 are accordingly dismissed. In the facts and~
circumstances, however, of these cases, there will be no order )
as to costs of these applications.

S.R. Appeals and Petitf.ons dismissed.

-
r