1990 (3) TMI 111 - AT - Income Tax

Summary

Issues Involved:

1. Claim of Rs. 6,24,890 as business loss.
2. Disallowance of Rs. 4,467 under Section 40A(5).
3. Addition of Rs. 65,535 deleted by the Commissioner (A).
4. Deletion of notional interest of Rs. 63,449.

Issue-wise Detailed Analysis:

1. Claim of Rs. 6,24,890 as Business Loss:

The assessee, a private limited company, claimed a business loss of Rs. 6,24,890 arising from the sale of shares in three companies: Dayal Sharma Pictures Pvt. Ltd., Mathur Papers and Foils Ltd., and Mathur Alloy Steels Pvt. Ltd. The assessee argued that these shares represented stock-in-trade, as they were part of their business activities involving the investigation of projects and promotion of new industrial undertakings. The assessee's case was that the loss incurred from selling these shares at rates lower than their cost should be treated as a business loss.

The Income Tax Officer (ITO) rejected this claim, considering the shares as investments rather than stock-in-trade, as they were shown as investments in the balance sheet and held for more than three years. The Commissioner (A) upheld the ITO's finding on the same grounds.

On further appeal, the assessee referred to the objects clauses in their Memorandum of Association, which included dealing in stocks and shares and promoting companies. They argued that their activities of investigating projects and floating companies constituted a business. However, the Tribunal had previously ruled in the assessee's case for the assessment year 1978-79 that promotion of projects was not part of the assessee's business.

The Tribunal concluded that the evidence was insufficient to prove that the shares were business assets. The materials presented did not conclusively show that the assessee was conducting a business with these shares, and the Tribunal's prior finding supported the view that the shares were held as investments. Therefore, the loss on the sale of shares was deemed a capital loss.

2. Disallowance of Rs. 4,467 under Section 40A(5):

The issue involved the disallowance of Rs. 4,467 under Section 40A(5). The ITO had treated the cash payments to directors for house rent and fees as perquisites. However, the Tribunal found that these payments could not be treated as perquisites based on a Delhi High Court decision. Consequently, this addition was deleted, and the assessee's appeal was partly allowed.

3. Addition of Rs. 65,535 Deleted by the Commissioner (A):

The Department appealed against the deletion of an addition of Rs. 65,535, which was credited to the profit and loss account after writing off balances in various sundry creditors' accounts. These amounts were deposits received from customers for the sale of tractors, which had remained in the books as liabilities. The Commissioner (A) accepted the assessee's submission that there was no cessation of liability by this unilateral write-off.

The Tribunal agreed with the Commissioner (A), noting that the deposits, even if considered trading receipts, could not be taxed in the current accounting year. The Tribunal referenced the Bombay High Court decision in CIT vs. Botliboi and Co. Pvt. Ltd., but found that the question of the correct year for taxation was not addressed therein. Therefore, the addition was not upheld.

4. Deletion of Notional Interest of Rs. 63,449:

The Department also contested the deletion of notional interest of Rs. 63,449. This issue had been previously decided by the Tribunal in favor of the assessee for prior assessment years. Following those decisions, the Tribunal upheld the order of the Commissioner (A) in deleting the notional interest.

Conclusion:

The assessee's appeal was partly allowed regarding the disallowance under Section 40A(5), while the Department's appeal was dismissed in its entirety. The Tribunal upheld the findings that the loss on the sale of shares was a capital loss, the addition of Rs. 65,535 did not represent a cessation of liability, and the deletion of notional interest of Rs. 63,449 was appropriate.