2017 (7) TMI 1048 - HC - Income Tax

Shares treated as stock in trade of the assessee company - Held that - Underwriting or subscription in shares, debentures or other securities of industrial concerns and the rendition of financial assistance by various modes including loans, guarantees and under writing subscription. The assessee was thus incorporated solely for the purpose of ensuring and facilitating growth and development of industries in the state of Tamilnadu. Investment by way of subscription to shares is solely on account of the under writing operations. Such being the position, the investments are of the nature of stock-in-trade and cannot be held to be otherwise. In fact, this aspect of the matter was decided by the Income Tax Appellate Tribunal in the assessee s own case in respect of assessment year 1970-71 wherein, by a well reasoned order dated 14.3.1975, the stand of the assessee that investment in companies would constitute represent stock in trade, was accepted. Question No.2 is thus answered in favour of the assessee and against the revenue. Loans to companies in liquidation had become bad debts and ought to be written off - whether he Tribunal was right in allowing the re-valuation of only loss making shares at market value? - Held that - A detailed analysis has been undertaken therein with respect to various items identified and sought to be written off in view of the doubtful character of recovery of loans and investments. Investments in the shares of six industrial companies were undertaken by way of underwriting of issue of shares. Upon finding that the net worth was negative, it was proposed to write off 100% of such investment in five cases. In the matter relating to one defaulter, M/s. Southern Brick Works Limited, the recommendation for write-off was only 50% of the investment, in view of a proposal for take over of the entity by M/sVinichem Private Limtied. The note also proposes the write-off of an amount of ₹ 33.82 lakhs being 90% of the advances made to two companies, M/s.Upper India Bearings Limited and M/s. Nedumbalam Samiappa Annapoorani Mills Limited, where creditors had approached the High Court seeking their winding-up and receivers had been appointed. The need for and criteria adopted for the valuation of the shares as well as the efforts taken and measures adopted by the assessee company for recovery of the advances have been duly noted by the tribunal. The erosion of capital leading to a fall in value of shares has been established. We are thus of the view that the conclusion of the tribunal in this regard are well founded and are not vitiated by perversity. - Decided in favour of the assessee.

Summary

Issues:
1. Whether the Tribunal had enough material to hold and was right in holding that the loans to companies in liquidation had become bad debts and ought to be written off?
2. Whether the shares are the stock in trade of the assessee company?
3. Whether the Tribunal was right in allowing the re-valuation of only loss making shares at market value?

Issue 1:
The case involved an appeal by a State Government undertaking regarding the write-off of investments in shares of industrial companies and loans to companies in liquidation. The assessing officer initially rejected these claims as premature. However, the Income Tax Appellate Tribunal allowed both claims, which were contested in the High Court. The Court considered the nature of the investments and loans in question, along with the reasoning provided by the Tribunal.

Issue 2:
The Court analyzed the nature of the State Government undertaking, highlighting its main objectives of promoting industrial development in Tamilnadu. It was established that the investments in shares were part of the underwriting operations, making them stock-in-trade. The Court referred to a previous Tribunal decision supporting this classification for the assessment year 1970-71. Consequently, the Court ruled in favor of the assessee regarding the shares being considered stock-in-trade.

Issue 3:
The Tribunal's decision to re-value loss-making shares at market value was challenged in this issue. The Court reviewed a note prepared for the Board, which detailed the reasons for writing off investments in certain companies and loans to others. The Court noted the efforts made by the assessee company to recover the advances and the criteria used for valuing shares. Ultimately, the Court found the Tribunal's conclusions regarding the valuation of shares and recovery efforts to be well-founded and not based on perversity. As a result, the Court ruled against the Department and in favor of the assessee on this issue.

In conclusion, the High Court upheld the Tribunal's decision, dismissing the departmental appeal and ruling in favor of the assessee on all substantial questions of law. No costs were awarded in this matter.