1993 (4) TMI 87 - AT - Income Tax

Business Expenditure Business Loss Capital Loss Equity Shares Income From Other Sources Industrial Undertaking Set Off Against Capital Gains

Summary

Issues:
1. Nature of income from investment
2. Disallowance of Computation Charges

Analysis:

Issue 1: Nature of income from investment
The appeal concerned the assessment year 1978-79, where the assessee disputed the characterization of income from investment as not being in the nature of business. The CIT (Appeals) had categorized the income from investment as attributable to "other sources," while the assessee contended that it should be considered as business income. However, during the hearing, the assessee did not press this ground, leading to its rejection by the Tribunal.

Issue 2: Disallowance of Computation Charges
The second ground of appeal related to the disallowance of Computation Charges amounting to Rs. 12,01,782. The case involved a subsidiary company of KPPL, where a debt was assigned to the assessee-company in exchange for a sum related to the shares' call money. The assessee claimed the commutation charges as business expenses or losses under various sections of the Act, including section 37, section 28, and section 57(iii). The ITO, however, disallowed these claims, a decision upheld by the CIT (Appeals).

Upon review, the Tribunal found that the loss arising from the commutation of the debt was on a capital account, not a business loss eligible under section 28 or section 37. The transaction was deemed not a business transaction but a capital-related one, intertwined with the issue of share capital by the company. The Tribunal highlighted that the loss was closely linked to the issue of share capital and thus characterized as a loss on a capital account, not a revenue account.

The Tribunal further dismissed the claim for deduction under section 57(iii), stating that the loss was not a revenue loss but a capital account loss. It distinguished the case from precedents cited by the assessee's counsel, emphasizing that the commutation charges were akin to a loss incurred by accepting a debt due in the future against the call money due presently. Consequently, the deduction under section 57(iii) was deemed inapplicable.

Regarding the claim that the amount represented a capital loss under section 45, the Tribunal found it unsustainable. It noted that the loss had actually arisen when the assessee accepted the debt payable in the future against the call money due at a lower value, originating from the transaction of issuing share capital. The Tribunal, therefore, rejected the grounds against the disallowance made by the ITO and upheld by the CIT (Appeals).

In conclusion, the Tribunal dismissed the appeal, affirming the decision on the disallowance of Computation Charges.