Dalhousie Holdings Ltd. vs Commissioner of Income Tax

Ajit K. Sengupta, J.—In this reference u/s 256(1) of the income tax Act, 1961 (''the Act'') for the assessment year 1972-73, the following question of law has been referred to this Court:

Whether, on the facts and in the circumstances of the case, and after having found that the assessee had acquired shares in various companies with the object of getting directorship in companies, the Tribunal erred in law in disallowing the loss on sale of shares as a business loss?

Shortly stated, the facts are that the assessee is a limited company and derives income from share of profit, dividend, interest, etc. The assessee incurred a loss of Rs. 1,46,136 in shares. It claimed the loss as business loss. The ITO in the original assessment noted that there was a profit to the assessee in the assessment year 1970-71 and the assessee itself claimed this gain as capital gain. The ITO found that the assessee was an investor and hence, the loss incurred by it was capital loss. The assessee''s appeal against the order of the ITO was heard by the AAC who set aside the order of the ITO vide his order dated 25-6-1976. Thereafter, the ITO passed a fresh assessment order dated 31-8-1977. In this order, the ITO re-examined the issue in the light of the directions of the AAC and came to the conclusion that the assessee was only an investor. The ITO also observed that the assessee did not have any share transactions in the five earlier years. He also found that the assessee did not treat the shares as stock-in-trade and the profit earned by the assessee during the assessment years 1969-70 and 1970-71 had been taken as capital gains. The ITO readjusted the loss claimed by the assessee at Rs. 1,44,894 and treated the same as long-term capital loss and allowed the same to be carried forward to be set off against future profit. This order of the ITO was set aside by the Commissioner (Appeals) by an order dated 9-11-1982. A fresh assessment order dated 10-12-1984 was, thereafter, passed by the ITO.

Against the aforesaid order of the ITO, the assessee went in appeal before the Commissioner (Appeals) who in his final order dated 4-7-1986 came to the conclusion that the assessee was not a dealer in shares and found that the assessee was a partner in Orr. Dignam & Co. and was enjoying the firm''s income. The partners were holding directorship in various companies and, accordingly, the shares were held in the company. It also found that the director''s fees and commission received by the firm were assessed as income from other sources. Accordingly, he was of the opinion that the loss incurred by the assessee was a capital loss.

The assessee through its cross-objection contended before the Tribunal that the loss incurred by the assessee was a trading loss and relied on several decisions in support of the case. On the other hand, the department supported the order of the Commissioner (Appeals) and urged that the loss was a capital loss.

The Tribunal came to the finding that the assessee held several shares in different companies by which the partners of the parent firm became directors in those companies and, accordingly, enjoyed director''s fees, remuneration and/or commission. Therefore, the shares were held by the company not in its trading operation. The shares were compulsorily held by the assessee as qualification shares in order to get the directorship. It is also the finding of the Tribunal that the ultimate aim of the company was to hold shares in the company so that the partners of the firm could get directorship in the company. If the shares are held in the said situation to get directorship by virtue of the qualification shares, it could not be said that the shares were held by the assessee-company in its normal trading operation. The facts establish that the shares were held by the assessee as an investor in order to get directorship. This fact is further strengthened by the acts of the assessee when the assessee earned the profit for the assessment years 1969-70 and 1970-71 and the assessee itself claimed the said profit as capital gain. Further, in last five years there was no transaction at all. Further, if the shares are sold when the assessee ceases to be a director of the company, the assessee-company only liquidates its investments which was not truthful because the assessee used to be a director of the company. Under the circumstances, after considering the facts and the case law relied upon by the assessee, it is correct that the assessee was only an investor and, therefore, the loss incurred by the assessee was a capital loss.

In our view on the facts found by the Tribunal the conclusion is inescapable that the loss was a capital loss. The true nature of loss could only be determined with intention with which the shares were acquired by the assessee and the conduct of the assessee in the past. The intention of the assessee is known. The assessee has treated this as investment because the assessee itself claimed the profit in the assessment years 1969-70 and 1970-71 as capital gain. Further, there was no transaction in last 5 years. Under the aforesaid circumstances, the Tribunal was justified in holding that loss earned by the assessee was a capital loss.

Mr. Dutt, the learned counsel for the assessee, referred to a decision of the Supreme Court in the case of Patnaik & Co. Ltd. v. CIT [ 19861 161 ITR 365. In that case, the assessee which dealt in automobiles and spare parts, had subscribed to certain Government loans. It sustained a loss of Rs. 53,650 while selling them and claimed that the loss was a revenue loss. The Tribunal found that, having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders for motor vehicles, the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business and that the investment was made byway of commercial expediency for the purpose of carrying on the business and, therefore, the loss suffered by the assessee on the sale of the investment was a revenue loss. On a reference, the High Court re-examined the facts on record and held that the investment was not connected with the orders placed by the Government with the assessee and held that the loss was a capital loss. The Supreme Court held reversing the decision of the High Court that, since the question referred to the High Court was framed on the assumption that it had to be decided in the factual matrix delineated by the Tribunal, the High Court was wrong in re-appreciating the evidence; its finding had to the vacated.

We fail to appreciate how the case helps the assessee. The assessee in this case raised a question on the perversity of the finding of the Tribunal. That question was not allowed by the Tribunal. Thereafter the assessee did not come before this Court u/s 256(2). We cannot, therefore, disturb the finding of the Tribunal as incorporated in the statement of case. It is now well-settled that the Tribunal is a fact-finding authority and this Court in its advisory jurisdiction cannot reappreciate the evidence. The Court can only go into the question of perversity of finding, if such a question has been raised on the facts found by the Tribunal. On the facts found by the Tribunal, the conclusion is irresistible that the assessee acquired the shares in various companies for obtaining the directorship or ultimate control of the companies. Accordingly, the acquisition of shares was in the investment portfolio. Therefore, the loss, if any, on sale of such shares must be capital loss and the Tribunal was right on facts in coming to the conclusion as it did.

For the reasons aforesaid, we answer the question in this reference in the negative and in favour of the revenue. There will, however, be no order as to costs.

Banerjee, J.

I agree.