KUNJILAL GUPTA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE business of the assessee consisted of buying and selling shares but it does not follow that every buying, and every selling, of shares by them was done in the course of their business. Every profit made by sale of the stock -in -trade of a business is profits and gains of the business but no profit made by sale of any capital assets of the business is profits and gains of the business. There is a distinction recognized by law between stock -in -trade and capital assets and it depends not on the nature of the goods but on the purpose behind their acquisition and the use made of them. Hence, some out of the goods of the same nature owned by a businessman can be his stock - in - trade and others, capital assets. He is entitled to have stock -in -trade and also capital assets and is not forbidden to have capital assets of the same nature as his stock -in -trade. It follows that everything possessed by a businessman is not necessarily his stock -in -trade simply because it is of the same nature as his stock -in -trade. There can be, and there is, no presumption that whenever a dealer in a particular commodity acquires it, he acquires it as his stock -in -trade and not as capital goods. It is obvious that if the law permits him to have capital goods of the same nature as his stock -in -trade it cannot make every acquisition of goods of that nature his stock -in -trade regardless of all circumstances. It is consistent with the law that distinguishes between stock -in - trade and capital goods owned by a dealer that he can acquire as capital assets goods of the same nature as his stock -in -trade.

(2.) IF a dealer can have goods of the same nature partly as stock -in -trade and partly as capital assets and there can be no presumption of law that goods of that nature acquired by him become his stock -in -trade or become his capital assets, the question whether he acquires them as stock -in -trade or as capital assets at once becomes a question of fact. Intention with which a dealer acquires goods of the same nature as the goods of his stock -in -trade is the first and obvious fact to be taken into account in deciding whether the acquisition is stock -in - trade or is capital assets. If he acquires them as stock -in -trade, i.e., with the intention of dealing in them in the course of his business they become his stock -in -trade; otherwise, or if he acquires them as his capital assets, i.e., not with the intention of dealing in them in the course of his business, they become his capital assets. Intention, which may be inferred from the object behind the acquisition of shares by a dealer in shares, is the deciding factor. The fact that the assessee is a dealer in shares may be immaterial if the circumstances show that the acquisition was with the intention of acquiring a capital asset. If an investor can acquire shares as a capital asset there is no reason why a dealer in shares cannot. Acquisition of shares may be voluntary, i.e., intentional, or involuntary, i.e., unintentional. Intention exists only when the acquisition is voluntary and there cannot arise any question of intention when it is involuntary. Acquisition of bonus shares allotted by a company in lieu of distribution of profits is involuntary acquisition; the assessee is bound to accept the shares unless he wishes to renounce them. He has no option of taking something in lieu of them. He must accept them or nothing. In such a case in which he acquires bonus shares without any intention on his part, how he deals with them subsequent to the acquisition would be the deciding factor. If he decides to include them in his stock -in -trade they would become his stock -in -trade, but it is open to him to treat them as his capital asset. Once the intention was established that they were acquired as stock -in -trade or as capital assets the nature of the acquisition cannot be altered by the subsequent dealing with them; but if there was no question of intention because the acquisition was involuntary and, therefore, it was not established that they were acquired as stock -in -trade or as capital assets the subsequent treatment becomes of great importance. In an involuntary acquisition there is no intention at the time of the acquisition but immediately after the acquisition an intention to treat them as stock -in -trade or as capital assets can be formed and if it is formed how they are dealt with by the assessee is the best evidence from which it can be inferred. If after the involuntary acquisition the assessee intends to deal with them as stock -in -trade they become his stock -in -trade but they cannot be imposed upon him as his stock - in -trade without regard to his intention to be inferred from the subsequent treatment. In the instant case there is no evidence of how the assessee dealt with the shares after the allotment; in other words there is nothing to show that it treated them as its stock -in -trade. The assessing authority had no data from which to infer that it intended to include them in its stock -in -trade and had no power to assume them to be its stock -in -trade. A dealer in shares, who acquires shares as a capital asset, can subsequently convert them into his stock -in -trade but he can do so by doing certain overt act and the conversion can be proved only by proof of the overt act.

(3.) THERE can be no dispute that every profit made by sale of the stock -in -trade of a business is profits and gains of the business. It is, however, equally clear that no profit made by sale of any capital assets of the business can be treated to be profits and gains of the business. The right to receive bonus shares is based upon the entry of the name of that person in the register of the company and is not dependent upon the factual position whether or not he holds shares in that company. It is true that when the bonus shares are issued to a person whose name is recorded in the company's registers it is on the assumption that he holds the shares but still the basis is the entry of the name in the registers of the company and not the right to hold the share.