1986 (5) TMI 53 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessment order made by the ITO under section 143(3) for the assessment year 1979-80 was erroneous and prejudicial to the interests of the revenue.
2. Whether the loss of Rs. 90,000 from the writing off of the value of shares should be treated as a business loss or a capital loss.
3. Whether the shares of Thapar Steinmuller Boiler Co. Ltd. were stock-in-trade or investment.
4. Whether the ITO correctly computed the deduction under section 80M of the Act.

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial Assessment Order:
The Commissioner noted that the assessment order was prima facie erroneous and prejudicial to the interests of the revenue. The ITO allowed Rs. 90,000 as a business loss without examining whether the shares were investment or stock-in-trade. The Commissioner inferred that the shares were acquired as an investment and not with the intent to sell them at a profit, thus the loss should have been treated under section 46(2) of the Act.

2. Treatment of Rs. 90,000 Loss:
The assessee claimed the loss as a business loss, arguing that it was a dealer in shares. The Commissioner, however, held that the shares were acquired as an investment and the loss was a capital loss. The shares were purchased in 1963 and the company went into liquidation in 1966. The Commissioner emphasized that the shares were acquired soon after the company's incorporation, indicating an investment intent rather than for trading purposes.

3. Shares of Thapar Steinmuller Boiler Co. Ltd.:
The Commissioner pointed out that the assessee held 16% of the company's shares, indicating an investment for high dividends rather than for trading. The shares were part of the investment portfolio, and the loss should have been treated as a capital loss under section 46(2). The Commissioner also noted that the assessee's main source of income was from dividends and interest on securities, further supporting the investment nature of the shares.

4. Deduction under Section 80M:
The Commissioner criticized the ITO for computing the deduction under section 80M almost on the gross dividend, contrary to the provisions of the Act. The ITO had deducted only Rs. 5,142 from the gross dividend income, which the Commissioner found inadequate. The Commissioner directed that a portion of the expenses, particularly interest, should be allocated to the dividend income, reducing the deductible amount under section 80M.

Arguments by the Assessee:
The assessee argued that it had been treated as a dealer in shares in previous years and the shares were held as stock-in-trade. The assessee contended that no part of the expenditure should be allocated to dividend income, citing decisions from CIT v. New India Investment Corpn. Ltd. and CIT v. Tata Engg. & Loco motive Co. Ltd. The assessee also argued that the ITO had correctly considered the shares as stock-in-trade and the loss as a business loss.

Commissioner's Rebuttal:
The Commissioner declined to accept the assessee's contention, stating that a dealer in shares could also have investments. He referred to the Supreme Court decision in Karam Chand Thapar & Bros. (P.) Ltd. v. CIT, noting that shares purchased for controlling interest cannot be considered stock-in-trade. The Commissioner inferred that the shares were acquired as an investment, not for trading.

Conclusion:
The Tribunal upheld the Commissioner's order, agreeing that the ITO did not apply his mind to the real issues and the assessment was erroneous and prejudicial to the interests of the revenue. The Commissioner had validly assumed jurisdiction under section 263, and the direction to the ITO to re-examine the case thoroughly was sustained. The appeal by the assessee was dismissed.