CASE NO.: Appeal (civil) 246 of 1953 PETITIONER: DHIRAJLAL GIRDHARILAL RESPONDENT: C.I.T. BOMBAY DATE OF JUDGMENT: 25/10/1954 BENCH: M.C. MAHAJAN (CJ) & S.R. DAS & G. HASAN & N. H. BHAGWATI & T.L.V. AIYYAR JUDGMENT:
JUDGMENT
AIR 1955 SC 271
The Judgment was delivered by MEHR CHAND MAHAJAN, C.J.
MEHR CHAND MAHAJAN, C.J.
This appeal by special leave is directed against an order of the High Court
of Judicature at Bombay, whereby the High Court summarily dismissed an
application made under Section 66(2) of the Indian Income tax Act, 1922,
requiring the Income-tax Appellate Tribunal to state a case and refer to it
the questions of law said by the appellant to arise out of the order of the
Tribunal The appellant is a Hindu undivided family, comprised of Dhirajlal
and his two brothers Hiralal and Kirtilal, Dhirajlal being the karta of the
family. Girdharlal Trikamlal who was the father of Dhirajlal, Hiralal and
Kirtilal, was the head of the joint Hindu family before his death on 26th
July, 1945. During his lifetime he and one of his sons Dhirajlal were also
carrying on business separately in their firm name Girdharlal Trikamlal &
Co., as dealers in stocks and shares. This firm was dissolved on the death
of Girdharlal and a new firm comprised of Dhirajlal and his younger brother
Hiralal was formed with the object of taking over the business formerly
carried on by Messrs. Girdharlal Trikamlal & Co. Girdharlal had an account
with the firm of Girdharlal Trikamlal & Co. and on the date of his death
this account had a credit balance of Rs. 25, 31, 999. The firm Girdharlal
Trikamlal & Co. at that moment had shares of the value of Rs. 23, 60, 000
approximately as part of their total assets. On the death of Girdharlal,
his three sons and his widow clearly became entitled to the amount that
stood to his credit in the firm Girdharlal Trikamlal & Co. and by an
arrangement made after his death the Hindu undivided family got in July,
1942, shares of the value of Rs. 18, 34, 586 from the firm towards payment
of its liability to the Hindu undivided family as part of the inheritance
of Girdharlal and for the balance the Hindu undivided family was shown as
creditor of the new firm. The shares that were handed over were valued at
the market price. The Hindu undivided family thus in its status as such
became the owner of those shares. It is common ground that the family in
that status antecedent to that date was not doing any business in stocks or
sharesThe Hindu undivided family having obtained the shares, it sold some
of the shares in the financial year 1943-44 and made a profit of Rs. 1, 42,
025 in the assessment year 1944-45. The Income-tax Officer during that year
included the profit made by sale of shares in the assessment of the Hindu
undivided family by arriving at the following finding :–
“The undivided Hindu family continued to do the share business and
purchased shares worth Rs. 3, 00, 460 during the account years 1942-43
and 1943-44. What the assessee got from their father Mr. Girdharlal
Trikamlal was converted by them into trading capital or, in other word
they had converted their inheritance into the stock-in-trade. The fact
that they had been purchasing other shares appears to point to this
conclusion only. In these circumstances I include the profit of Rs. 1,
42, 025 in the assessment.”
The appellant combated this position before the Appellate Assistant
Commissioner and contended that the family was not doing any business in
stocks and shares. On the other hand. it was only unloading the shares
which had come to it on the death of Girdharlal Trikamlal and was trying to
convert them into cash, and whatever shares were purchased were purchased
by way of investment. The Appellate Assistant Commissioner accepted this
contention and gave a reduction of Rs. 1, 42, 025 in the income as
assessed. He said as follows :–
“Thus on facts before me I hold that the transactions in shares are by
way of change in investment and not business dealings. Hence the profit
is capital accretion and not business profit. Thus the same is not
liable to assessment.”
The Commissioner of Income-tax preferred an appeal against this order and
with success. The Tribunal by its order dated the 1st August, 1951, allowed
the appeal and restored the order of the Income-tax Officer. It held that
the transfer of shares of the value of Rs. 18, 34, 586 by the new firm to
the Hindu undivided family was a device to evade income-tax. After
examining the purchases and sales of shares by the Hindu undivided family
during the years 1942, 1943, 1944 and 1945, the Tribunal came to the
conclusion that the moving spirit in the new firm being Dhirajlal who was
also the karta of the Hindu undivided family, knowing the conditions
obtaining in the market effected the said transactions of the transfer of
shares to enable the Hindu undivided family to realize the profits. The
Tribunal concluded its decision with the following observations :–
“Shares of the value of Rs. 18 lakhs odd were transferred, one might
say, by a dealer in shares to himself in another capacity. There was
absolutely no reason why the shares should have been transferred to the
Hindu undivided family. It has also not been pointed out why the Hindu
undivided family found it necessary to effect sales of a large number
of shares in the financial years 1943-44 and 1944-45. It has also not
been shown why the Hindu undivided family should have purchased shares
of the value of over Rs. 2 lakhs between 1st August, 1942, and 1st
March, 1943. We have examined the frequencies of the sales in the
financial year 1943-44. Shares were sold in July, August, October,
December, January, February and March. The irresistible inference
appears to be that from the very start the intention of Dhirajlal both
as a transferor and as a transferee was to deal in these shares.”
The appellant made an application to the Tribunal for statement of the case
and for a reference of questions of law arising out of the order of the
Tribunal to the High Court. By its order dated the 23rd November, 1951, the
Tribunal disallowed the application on the ground that the question whether
or not the Hindu undivided family carried on business in respect of the
shares transferred to it by the firm and in the shares purchased by it, is
a question of fact and that no question of law arose out of the findings of
the Tribunal and that from the very start the intention of Dhirajlal both
as a transferor and transferee was to deal in these shares. Dissatisfied
with the order of the Tribunal, the appellant made an application to the
High Court under Section 66(2) for a direction to the Tribunal to state a
case and to refer to it the following questions of law :–
1. Whether on the facts and circumstances of the case the assessee was
doing business in shares in the account year ; or
2. Whether there is any material on record on the basis of which it could
be held that the assessee was doing the business in shares in the account
year
As already pointed out, the High Court summarily dismissed the application,
presumably on the ground that in its opinion no question of law arose out
of the order of the Tribunal. On an application being made to this Court
under the provisions of Article 136 of the Constitution, leave to appeal
against this order was granted
The question whether or not the Hindu undivided family was doing business
in shares transferred to it by the firm is undoubtedly a question of fact
but if the court of fact, whose decision on a question of fact is final,
arrives at this decision by considering material which is irrelevant to the
enquiry, or by considering material which is partly relevant and partly
irrelevant, or bases its decision partly on conjectures, surmises and
suspicions, and partly on evidence, then in such a situation clearly an
issue of law arises. It is apparent from the following quotation from the
judgment of the Tribunal that not only was its approach to the question
raised before it tainted with suspicion, but it took into consideration a
number of circumstances based purely on conjectures and surmises and for
which there was not a scintilla of evidence on the record. This is what was
said by it :–
“It appears to us that this transfer was effected with the object of
evading income-tax, if it could be done so legally. If the shares had
remained with the new firm, and if sales had been effected, the profits
would have been liable to tax. The very fact that shares were
transferred, and that also a substantial holding of the firm, indicates
conclusively that the object of the transfer was to evade income-tax,
if possible. The Hindu undivided family, it strikes us did not take the
shares as the return of its capital. The Hindu undivided family knew,
when the shares were transferred, what the object underlying the
transfer was. If these shares had remained with the Hindu undivided
family for a considerable time, one might very well accept the
proposition that the Hindu undivided family took the shares as the
return of its capital. The Hindu undivided family, however, did not
keep the shares for a very long period. We have already indicated that
no shares were sold between 1st August, 1942, and 31st March, 1943.
Between 22nd July, 1942, and 31st March, 1944, shares of 16 companies
were sold for Rs. 3, 67, 420. Some of the shares sold were out of the
shares purchased between 1st August, 1942, and 31st March, 1943,
……. It goes without saving that the moving spirit in the new firm
was Dhirajlal, being the elder brother, and the moving spirit in the
Hindu undivided family would also be Dhirajlal. He in his capacity as
the transferor and in his capacity as the transferee was fully aware of
the conditions obtaining in the share market. Prices were rising and
were likely to rise on account of war.”
The learned Attorney-General frankly conceded that it could not be denied
that to a certain extent the Tribunal had drawn upon its own imagination
and had made use of a number of surmises and conjectures in reaching its
result. He, however, contended that eliminating the irrelevant material
employed by the Tribunal in arriving at its conclusion, there was
sufficient material on which the finding of fact could be supported. In our
opinion, this contention is not well founded. It is well established that
when a court of fact acts on material, partly relevant and partly
irrelevant, it is impossible to say to what extent the mind of the court
was affected by the irrelevant material used by it in arriving at its
finding. Such a finding is vitiated because of the use of inadmissible
material and thereby an issue of law arises
For the reasons given above we are of the opinion that both the Tribunal
and the High Court were in error in the view that no issue of law arose in
the case and that the Tribunal could not be called upon to state a case and
to refer to the High Court any issue of law. The two questions framed by
the appellant and which he wanted the High Court to ask the Tribunal to
refer to it are comprehensive enough to embrace the issue of law that, in
our opinion, arises out of the order of the Tribunal. But we think that it
would clarify the position if these two questions were re-stated in the
following form :–
“Whether the finding of the Tribunal is not vitiated by reason of its
having relied upon suspicions and surmises not supported by any
evidence on the record or upon partly inadmissible material ?”
In the result we allow this appeal, set aside the order of the High Court
dismissing the application of the appellant under Section 66(2) of the
Indian Income-Tax Act, 1922 , and remand the case to the High Court with
the direction that it should ask the Tribunal to state a case and to refer
to it the following question of law :–
“Whether the finding of the Tribunal is not vitiated by reason of its
having relied upon suspicions and surmises not supported by any
evidence on the record or upon partly inadmissible material ?”
The costs will abide the result.
Appeal allowed.