CHUNILAL KHUSHALDAS PATEL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) FOUR questions of law are submitted by the Tribunal for our opinion, two under S. 66(1) and two under S. 66(2) of the IT Act, 1922. The first question challenges the vires of S. 34(1A) but in view of the decision of the Supreme Court in K. S. Rashid & Son vs. ITO (1964) 52 ITR 355 (SC) this question is not pressed by the assessee and it is conceded that the answer to this question must be against the assessee. Three questions, therefore, survive for consideration. They arise out of an assessment made on the assessee as an individual for the asst. year 1945 46. The relevant accounting year is the calendar year 1944. The assessee was at all material times the chairman of the board of directors of a company called the International Bank of India Ltd. (hereinafter referred to as the bank). One J. C. Thakkar was the managing governor and one Nanji Kalidas Mehta was a director of the bank. On 9th May, 1943, a meeting of the board of directors of the bank was held and at that meeting it was decided that with a view to the strengthening the financial position of the bank, the balance of the authorized share capital of the bank should be issued and the managing governor should take steps to see that it was subscribed for by one or two or more parties in big lots and with a view to attracting such parties to subscribe, brokerage at the rate Rs. 3 per share and the right to the issue of the deferred shares should be offered to the subscribers. Following upon this decision of the board of directors, an agreement was arrived at between the assessee, J. C. Thakkar and Nanji Kalidas Mehta whereby it was agreed that the entire balance of the authorized capital consisting of 24,000 shares should be taken up by these three parties " in three equal parts " and that for the time being, these shares should stand in the name of Nanji Kalidas Mehta or some one residing in a Native State and that all the dealings should be put through the Rajkot branch of the bank. This agreement was disputed by the assessee in the course of the assessment proceedings but it has been found as a fact by the Tribunal (vide paragraph 5 of the Tribunal's order) and the reference must, therefore, be decided on the basis that such an agreement for a joint venture was entered into between the parties. Pursuant to this agreement, the assessee remitted a sum of Rs. 2,40,000 to the credit of the joint account of Nanji Kalidas Mehta and his wife Santokben with the Rajkot branch of the bank on 11th Sept., 1943, as and by way of his contribution to the purchase price of the shares and Nanji Kalidas Mehta contributed a sum of Rs. 6,00,000. No contribution in terms of money was made by the third partner, namely, J. C. Thakkar. Now though the agreement was for taking up 24,000 shares being the balance of the authorized capital, in fact 23, 145 shares were taken up and they were taken in the name of Santokben. J. C. Thakkar soon thereafter as soon as the shares of the bank began to be quoted on the stock exchange started selling these shares on account of the joint venture and on 12th Nov., 1943, he addressed a letter to Nanji Kalidas Mehta, the material portion of which reads as under :

(2.) BY 20th Nov., 1943, a few out of 23,145 shares were sold but from that date J. C. Thakkar expanded the activities of the joint venture and started purchasing further shares of the bank in the market and selling them on account of the joint venture. The number of shares thus purchased and sold, came to 15,677 and they were purchased and sold in different lots from time to time. The last sale took place on 21st June, 1944. The ultimate position as it emerged was that all 15,677 shares purchased in the market were sold, but out of 23,145 shares originally taken up from the bank, 5,100 shares remained unsold. These 5,100 shares were admittedly taken over by the assessee. The second question referred to us raises the controversy whether these 5,100 shares were taken over by the assessee in lieu of his capital and share in the profit of the joint venture or they were withdrawn by him from the stock in trade of the joint venture at cost. We shall presently examine this question but, in the meantime, to continue with the narration of the facts, a statement of account in respect of the aforesaid transactions was drawn up after the shares were sold and this statement of account has been accepted as representing the correct state of affairs both by the IT authorities as also by the Tribunal. The decision of the controversy in regard to 5,100 shares turns largely on the true interpretation of the relevant entries in the statement of account and it would, therefore, be desirable to set it out in extenso. The statement of account, omitting portions immaterial, reads as follows :

(3.) THE Revenue took the view that the assessee, Nanji Kalidas Mehta and J. C. Thakkar being partners in the joint venture with equal shares, the share of each in the profit of the joint venture was Rs. 1,16,543 8 4 (excluding the underwriting commission or brokerage of Rs. 3 per share) and while this share of profit was received by each of the two partners, namely, Nanji Kalidas Mehta and J. C. Thakkar in cash, so far as the assessee was concerned, he received it partly in cash and partly in shares. Rs. 40,043 8 4 was received in cash and the balance of Rs. 76,500 was received embedded in 5,100 shares taken over by the assessee. According to the Revenue, 5,100 shares were received by the assessee in lieu of capital and his share of profit to the extent of Rs. 76,500 and the total profit which accrued or arose to the assessee as a result of the joint venture, therefore, was Rs. 40,043 8 4 plus Rs. 76,500, that is, Rs. 1,16,543 8 4. The Revenue accordingly claimed to tax the assessee on a profit of Rs. 1,16,543 8 4. The assessee resisted this claim saying . Rs. As. Ps. Rs. As. Ps. Cost of 5,100 shares at Rs. 50 . 2,55,000 0 0 Paid by him 2,40,000 0 0 . Share of profit 40,043, 8 0 2,80,043 8 4 . . 2,55,000 0 0 . Due to him final 25,043 8 4 . Rs. As. Ps. Taken by him 1,30,000 0 0 Due to him 1,16,543 8 4 Refund due from Mr. Thakkar 13,456 7 8 " Rs. As. Ps. . 1,16,543 8 4 My shares of profits on 7,715 shares 1,16,543 8 4 Your shares of profit on 7,715 shares 40,043 8 4 Seth Chunilal Khushaldas share of profit on 2,615 shares 2,73,130 9 0 . that his only profit in the joint venture, according to the statement of accounts, was Rs. 40,043 8 4 and that 5,100 shares were received by him not in lieu of capital and his share of profit but as part of the stock in trade withdrawn at cost and receipt of those shares did not, therefore, amount to receipt of any profit. But the claim of the Revenue was upheld by the IT authorities and on appeal by the assessee, the Tribunal also, on an interpretation of the statement of account, took the same view and confirmed the addition of Rs. 76,500 in the assessable income of the assessee. This addition of Rs. 76,500 is challenged by the second question of the present reference.