2004 (8) TMI 84 - HC - Income Tax

Computing the taxable income Expenditure - 1. Whether, Tribunal was justified in rejecting the assessee s claim that Rs. 23,158 be allowed while computing the assessees total income as the said expenses had been incurred by it in running the company? 2. Whether Tribunal was justified in holding that the assessee-company had earned capital gain of Rs. 23,072 on the acquisition of the shares of National Insurance Company Ltd., of the face value of Rs. 5,82,742 by the General Insurance Corporation of India Ltd., for Rs. 6,05,815 on the nationalisation of the general insurance business? - We answer both the questions of law referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee.

Summary

Issues:
1. Rejection of business expenses claim by the Tribunal.
2. Determination of capital gains on acquisition of shares of National Insurance Company Ltd.

Rejection of Business Expenses Claim:
The case involved the assessment year 1975-76 where the applicant company claimed business expenses totaling Rs. 23,157.84. The Income-tax Officer did not allow these expenses, stating that the applicant was not carrying on any business during that period and the expenses were not incurred for earning dividend income. The Appellate Assistant Commissioner and the Tribunal upheld this decision. The applicant argued that the expenses were for business purposes as they were trying to restart the business. However, the Revenue contended that only specific expenses listed in section 57 of the Income-tax Act can be deducted from income under "Income from other sources". As the applicant was not conducting any business during the assessment year, the expenses were rightly disallowed. The court agreed with the Revenue, stating that the applicant's inability to start a new business for about nine years could not be considered a temporary lull, and thus, the expenses claimed were not allowable deductions under section 37 of the Act.

Determination of Capital Gains:
Regarding the capital gains issue, the applicant received compensation of Rs. 6,05,814 from the Government of India for the acquisition of 4,500 ordinary shares of National Insurance Company Ltd. The book value of these shares was Rs. 5,82,742. The Income-tax Officer treated the surplus of Rs. 23,072 as capital gains chargeable under section 45 of the Act. The applicant argued that they actually suffered a loss of Rs. 1,27,761 due to receiving shares of M.P. Industries Limited instead of cash. However, the court held that the surplus amount was indeed liable to be treated as capital gains, as determined by the Tribunal. The court emphasized that until the shares of M.P. Industries were sold or transferred, the question of any loss to the applicant did not arise. Therefore, the Tribunal's decision to tax the surplus as long-term capital gains was upheld.

In conclusion, the High Court answered both questions of law in favor of the Revenue and against the assessee, stating that the business expenses claimed were not allowable deductions and the surplus amount from the acquisition of shares constituted capital gains subject to taxation.