2004 (6) TMI 35 - HC - Income Tax

1. Whether, in view of the objects of the assessee contained in its memorandum of association was the Appellate Tribunal right in holding that the investments made in the capital of the co-operative societies cannot be considered as its objects and the loss arising therefrom cannot be treated as a revenue/ business loss allowable under the Income-tax Act? 2. Whether, Tribunal was right in disallowing deduction of an amount of Rs. 80,20,588 being the amount written off by the assessee in the profit and loss account, from out of its advance in the form of shares in the cooperative societies which had either become defunct or had gone under liquidation? Both questions are answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

Summary

Issues Involved:
1. Whether the investments made in the capital of the co-operative societies can be considered as the assessee's objects and if the loss arising therefrom can be treated as a revenue/business loss allowable under the Income-tax Act.
2. Whether the deduction of Rs. 80,20,588 written off by the assessee in the profit and loss account from its advance in the form of shares in the cooperative societies, which had either become defunct or had gone under liquidation, was rightfully disallowed by the Appellate Tribunal.

Issue-wise Detailed Analysis:

1. Consideration of Investments in Co-operative Societies as Objects and Treatment of Resulting Loss:
The assessee, a public sector undertaking, argued that its investments in co-operative societies were part of its stock-in-trade and should be treated as current assets. The assessee contended that the memorandum of association allowed it to invest in industrial co-operative societies to promote small-scale industries, making such investments a part of its business activities. The assessee claimed that the loss from the devaluation of these shares should be considered a trading loss or, at the very least, a capital loss that could be set off against other income.

The Revenue countered that the assessee was not a dealer in shares and that the loss on revaluation of shares in co-operative societies should not be considered a business or capital loss. The Tribunal held that the investments in co-operative societies were not part of the assessee's trading capital or circulating capital but were capital investments. The Tribunal concluded that the loss on these shares could not be considered a trading or revenue loss. The Tribunal's decision was based on the absence of any provision in the memorandum of association for disinvestment in the shares held by the assessee.

2. Disallowance of Deduction for Written-off Amount:
The assessee wrote off Rs. 80,20,588 in its profit and loss account, representing investments in defunct or liquidated co-operative societies. The Assessing Officer disallowed this deduction, viewing the shares as investments rather than stock-in-trade. The first appellate authority and the Tribunal upheld this disallowance, relying on the Supreme Court's decision in Vijaya Bank Ltd. v. Addl CIT, which characterized such investments as capital outlay.

The Tribunal observed that the memorandum of association did not provide for the transfer or withdrawal of shares in co-operative societies, indicating that these investments were capital in nature. The Tribunal also noted that the revaluation of shares through book entries did not constitute an actual loss arising from trading activities. The Tribunal concluded that the reduction in the value of shares through revaluation could not be considered a loss arising from trading in capital or revenue assets. The Tribunal's findings were consistent with the principles established by the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT, which distinguished between trading and capital losses based on the nature of the asset.

The court agreed with the Tribunal's reasoning and conclusions, holding that the investments in co-operative societies were capital investments and not trading assets. Consequently, the loss on revaluation of these shares could not be allowed as a deduction under section 37 of the Income-tax Act. The court affirmed the Tribunal's decision, answering both questions in favor of the Revenue and against the assessee.