1990 (9) TMI 21 - HC - Income Tax

Summary

Issues:
- Disallowance of short-term capital loss on sale of shares
- Conversion of loan into shares and subsequent sale of shares
- Determination of cost of shares obtained through loan conversion
- Allowability of loss in computing income

Analysis:
The judgment pertains to an application under section 256(2) of the Income-tax Act, 1961, where the assessee sought to raise multiple questions of law regarding the disallowance of a short-term capital loss on the sale of shares in a company. The Tribunal had initially rejected the reference application, stating that the questions involved findings of fact based on cogent material. However, after hearing both counsels, the court found that a question of law did arise from the Tribunal's order, specifically related to the disallowed capital loss. The court directed the Tribunal to refer this question as a question of law, emphasizing that it covers all relevant aspects of the case. The Tribunal was instructed to prepare the statement of the case and refer the question to the court within six months.

Regarding the specific issues raised by the assessee, the court addressed each in detail. The court questioned whether the Tribunal erred in disallowing the capital loss and whether the Tribunal's views on the nature of the share transaction and the recoverability of the loan were based on conjectures and contrary to the material on record. The court also examined whether the Tribunal overlooked the conversion of the loan into shares and subsequent sales, and whether the determination of the cost of shares obtained through the loan conversion was accurate. Additionally, the court considered whether the loss, if any, was on account of the loan realization at the time of conversion into shares and whether it should be allowable in computing the assessee's income. The judgment highlighted the need for a comprehensive review of these issues to determine the correctness of the disallowance of the capital loss and related aspects of the transaction.

In conclusion, the court found merit in the assessee's application and directed the Tribunal to refer the question of disallowance of the capital loss as a question of law. The judgment emphasized the importance of thoroughly examining the legal implications of the disallowed claim and ensuring that all relevant aspects of the case are considered in the reference to the court. The ruling made the rule absolute without any order as to costs, indicating the seriousness of the legal issues raised by the assessee in challenging the disallowance of the capital loss on the sale of shares.