Indian Commerce and Industries Co. (P.) Ltd. vs Commissioner of Income Tax

Gulab C. Gupta, J.—This is a reference u/s 256(2) of the income tax Act, 1961 (''the Act'') in accordance with the direction of this Court referring following three questions for the opinion of this Court: 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in its conclusion that a sum of Rs. 39,000 cannot be allowed as a business loss?

Whether, the Tribunal having come to the conclusion that the investment in the shares in question for the purpose of acquiring more business is justified in rejecting the claim that the amount in question cannot be allowed as a deduction in business loss?

Whether, the conclusion of the Tribunal that the sum of Rs. 39,000 is not a business loss, is a fair and reasonable view to take in the matter?

The assessee is a company carrying on business in structural engineering and was, at the relevant time, having business relations with Kothari Sugars & Chemicals Ltd. In the year 1961, the assessee acquired 6,000 shares of Rs. 10 each in the said company. These shares were subsequently sold by the assessee during the previous year ending on 30-9-1976 relevant to assessment year 1977-78 for Rs. 21,000. Thus, the assessee incurred a loss of Rs. 9,000 in this deal. The assessee had also acquired another lot of 10,000 shares at Rs. 10 each in the same company on 13-7-1972 valuing a sum of Rs. 1 lakh. These shares were also sold by the assessee during the previous year under reference for Rs. 35,000. The assessee, therefore, incurred a loss of Rs. 65,000. The earlier shares were held for more than 5 years and the second lot of 10,000 shares for less than 5 years. The assessee claimed that the above loss should be deducted in computing income of the assessee from business on the ground that the loss arose in the course of business. The assessee supported the claim by producing correspondence between it and Kothari Sugars & Chemicals Ltd. to show that the shares were purchased only on being pressurized from the said company and with the intention of obtaining more business from them. They also submitted that because of these purchases, there was a phenomenal increase in the business of the assessee-company with Kothari Sugars & Chemicals Ltd. The ITO disallowed the claim holding that the establishment of business with Kothari Group was itself a capital asset and the shares had not been converted into stock-in-trade. He was, therefore, of the opinion that the investment in capital could only be treated as capital investment. Reliance was placed on the decision of the Supreme Court in Ramnarain Sons (Pr.) Ltd. Vs. Commissioner of Income Tax, Bombay, On appeal, the AAC found as a fact that the shares had been purchased in order to have good business with Kothari Sugars & Chemicals Ltd. In spite of it, it was held that since the assessee did not treat those shares as a stock-in-trade, he was not entitled to treat the loss as business loss. The assessment was, therefore, upheld. On further appeal, the Tribunal held that the assessee was not a dealer in shares and stocks and there was no compulsion for him to purchase or sell those shares. The Tribunal further found that the improvement in the assessee''s business with Kothari Group may be for more than one reason. It was, therefore, held that the loss could not be treated as a business loss and the appeal was dismissed. Thereafter, the assessee requested for a reference which has been made.

A perusal of the order of the AAC clearly indicated that the said Commissioner had accepted the submission of the assessee that the shares were purchased with a view to improve business with Kothari Sugars & Chemicals Ltd. The business returns of subsequent years were held to justify the said expectation. The learned Commissioner had also found that the shares were not purchased by the assessee because of the insistence from Kothari Sugars & Chemicals Ltd. In spite of it, the said Authority did not grant benefit as, according to him, the assessee himself allowed the same to remain as capital asset. These findings, in our opinion, are based on documents on record and have not been set aside by the Tribunal. In fact, the Tribunal has itself noticed that the shares were purchased by the assessee-company on the insistence of Kothari Sugars & Chemicals Ltd. The AAC has observed in paragraph 10 of his order that the material available shows that the appellant would not have had this much of turnover but for their cooperation with Kothari Group in making the investments as expected of them. Similarly in paragraph 11 also, he has recorded that the shares were purchased because of coercion from Kothari Group and also with a view to increase the appellant''s business with Kothari Group. In spite of these findings, the Tribunal did not give the benefit to the assessee because those shares were not converted into stock-in-trade. In view of those findings, it is apparent that there is a nexus between the business of the company and the purchase of the shares. The business of the company would not have been increased as it did actually but for these shares. The question requiring consideration is whether loss suffered by selling these shares could be treated as business loss or not. The question came up for consideration of a Division Bench of this Court in Additional Commissioner of Income Tax Vs. B.M.S. (P.) Ltd., . It was a case where the assessee, who was in road transport business, succumbed to the pressure of regional transport authorities and purchased Government Bonds carrying 4.2 per cent interest. He later on suffered loss by selling those Bonds and claimed the same as business loss. This Court relying on its earlier decision in Commissioner of Income Tax Vs. Gobald Motor Service (P.) Ltd., held that the loss was a business loss as it was incurred in order to procure better business for the assessee-firm. This decision has received approval of the Supreme Court in Patnaik and Co. Ltd. Vs. Commissioner of Income Tax, Orissa, . It was a case where the assessee, who was a dealer in automobile spare parts, had invested some amount in purchasing Orissa Government Floated Loan 1972 because of the insistence of the transport authorities. Since he suffered loss in this deal, he claimed the said loss as a revenue loss. It was not allowed and eventually the matter was taken to the Supreme Court. The Supreme Court approved the decision of this Court in B.M.S. (P.) Ltd.''s case (supra) and held that the assessee had subscribed to the Government loan only with a view to obtain a preferential treatment in his business with the Government and for that reason treated the loss as business loss. Not only the decision of this Court but the decision of the Orissa High Court in Commissioner of Income Tax Vs. Industry and Commerce Enterprisers (P.) Ltd., and Commissioner of Income Tax, Tamil Nadu-V Vs. Dhandayuthapani Foundry (Private) Ltd., were also approved. No subsequent decision of the Supreme Court has been brought to our notice taking a contrary view of the matter. The learned counsel for the revenue, however, submitted that as long as the shares were not treated to be stock-in-trade by the assessee, the loss could not have been treated to be a business loss. He had relied upon the decision in Ramnarain Sons (PR) Ltd. ''s case (supra). In the aforesaid case, the assessee was a dealer in shares and securities and also carried on his business as managing agent of other firms. He had, in order to acquire the managing agency of a textile mill, purchased shares of another company. The subsequent sale of those shares caused loss to him and the loss was claimed as trade loss. The Supreme Court found as a matter of fact that the shares were purchased far in excess of their market price to facilitate acquisition of managing agency and for that reason, treated the same as a capital asset. The decision depended on the intention of the assessee in purchasing the shares as capital asset. The aforesaid judgment would not in any way go contrary to the subsequent judgment in Patnaik & Co. Ltd. ''s case (supra). Since this Court is bound by the aforesaid judgment, there is no reason why the loss suffered by the assessee in this case should not be treated as a business loss. Accordingly, we are of the opinion that the Tribunal is not correct in holding that the loss suffered by the assessee is liable to be taxed under the capital gains. In view of the discussion aforesaid, our answer to the question No. 1 is in the negative against the department and in favour of the assessee and that sum of Rs. 39,000 has to be allowed as business loss. Our answer to the second question is in the negative and in favour of the assessee. As a necessary consequence, our answer to question No. 3 is in the negative and against the department. No order as to costs. Counsel fee Rs. 1,000.