1990 (12) TMI 148 - AT - Income Tax

Summary

Issues Involved:
1. Whether the loss of Rs. 2,00,287 on the sale of shares should be treated as a business loss or a capital loss.

Detailed Analysis:

1. Treatment of Loss on Sale of Shares:

The first ground is against the direction of the CIT(Appeals) directing the assessing officer to allow loss of Rs. 2,00,287 on sale of shares as revenue loss.

During the year relevant to assessment year 1980-81 the assessee claimed loss on account of sale of shares of M/s. Gangeshwar Ltd. and M/s. Mahalaxmi Sugar Co. Ltd. amounting to Rs. 2,00,287. The assessing officer did not allow the loss, inter alia, on the following grounds:

(i) The assessee had claimed a similar loss for assessment year 1979-80 which was treated as a short-term capital loss and not allowed as a business loss ;

(ii) The assessee failed to furnish complete details of its share-dealings, details of payments made for purchase of shares, details of consideration of sale of shares, purchaser's identity etc. ; and

(iii) The assessee HUF purchased the shares with full knowledge that it would be incurring losses on these shares and consequently the claim of loss was not genuine. The claim of the assessee was accordingly rejected by the assessing officer as per the directions of the Inspecting Assistant Commissioner.

Commissioner of Income-tax (Appeals) found that the assessee vide its letter dated 21-10-1982 had given details of the opening balance of shares, their purchase, sale etc. The names of the companies, number of shares and the value of shares had also been disclosed in the statement. Commissioner of Income-tax (Appeals) further noted that in its letter dated 13-10-1982 the assessee had given the history of its share business. He, therefore, did not find any substance in the finding of the assessing officer that the details were not furnished by the assessee before him. CIT (Appeals) further found that the rates quoted by the company showed that the assessee's sale price was not less than the prevailing market price. He, therefore, held that the loss of Rs. 2,00,287 suffered by the assessee on the sale of shares was a genuine loss.

As regards the question whether the loss should be allowed as a business loss or a capital loss the observation of the learned Commissioner of Income-tax (Appeals) was that the assessee had purchased and sold shares of only three companies, namely, M/s. Gangeshwar Ltd., M/s. Mahalaxmi Sugar Mills Co. Ltd. and M/s. RBL Tirath Ram Shah (India) Ltd. which appear to belong to the same group. He also noticed that the assessee had trading relations with them and had earned commission on the sale of sugar from the first two companies. He found that at no stage had the assessee purchased shares of any other companies. According to the learned Commissioner of Income-tax (Appeals), therefore the shares were not held as the stock-in-trade. It was also mentioned by the CIT (Appeals) that for assessment year 1979-80 loss in shares transactions was held by Appellate Assistant Commissioner/Tribunal as business loss, but the Department's appeal on this point was dismissed by the Tribunal on technical grounds and not on merits and thus, the Tribunal's decisions would not serve as a guide for arriving at a proper decision for assessment year 1980-81. It was, however, pleaded by the assessee before the CIT (Appeals) that the shares of the aforesaid three companies had been purchased by way of business expediency and the assessee had earned substantial income from these companies. Relying on the decision of the Supreme Court in the case of Patnaik & Co. Ltd. v. CIT [1986] 161 ITR 365/27 Taxman 287 the learned CIT(Appeals) directed the Income-tax Officer to allow the loss of Rs. 2,00,287 incurred by the assessee on share transactions as a revenue loss.

Smt. Sheba Bhattacharya, the learned Departmental Representative, strongly submitted that the assessee was not carrying on any business in share dealings and, as such, the loss on sale of shares could not be treated as a business loss. It was also emphasised that for assessment year 1979-80 the Revenue's appeal did not succeed on technical grounds and the Tribunal's order for that year did not deal with the merits of the case. It was submitted that if the whole idea in purchasing the shares of the aforesaid three companies was to come closer to the managements of the companies and thereby to promote the business then there was no question of sale of these shares. In this connection it was pointed out that the assessee had purchased 52,854 shares of M/s. Gangeshwar Ltd. which were sold within three weeks of their purchase on 11-4-1978 thereby resulting in a loss of Rs. 55,497 to the assessee. Similarly, it was submitted that the assessee purchased 45,000 shares of Mahalaxmi Sugar Mills Co. Ltd. on 23-3-1978 out of which 25,000 shares were sold on 24-5-1979 resulting in a loss of Rs. 34,987. Thus, the submission was that it was argued that the assessee purchased 43,500 shares of M/s. Gangeshwar Ltd. on 7-12-1978 and all the shares were sold on 10-3-1980 resulting in a loss of Rs. 1,65,300. It was also pointed out that out of the 45,000 shares purchased of M/s. Mahalaxmi Sugar Mills Co. Ltd. on 23-3-1978 the balance 20,000 shares were sold on 24-5-1979 resulting in a loss of Rs. 34,987. Thus the submission was that the loss incurred for assessment year 1979-80 amounting to Rs. 1,12,309 and the loss of Rs. 2,00,287 for assessment year 1980-81 could not be said to be business loss as these did not arise out of any commercial expediency. It was vehemently argued that if the purpose of the assessee was to promote business or to facilitate its operations with the sugar mills then there was no point in disposing of the shares in a few days or in a few months of their purchase. It was vehemently argued that the CIT (Appeals) should not have directed the Income-tax Officer to allow a sum of Rs. 2,00,287 as business loss.

Dr. S. Narayanan, the learned authorised representative of the assessee, on the other hand, submitted that the assessee was not a dealer in shares. According to him the assessee was a commission agent and dealer in sugar. Giving the history of the case it was submitted that for assessment years 1975-76, 1976-77 and 1977-78 the assessee had only share income from a partnership firm which came to Rs. 3,034, Rs. 72 and Rs. 21,882 respectively. It was pointed out that the assessee started its own sugar business in the year relevant to assessment year 1978-79 and thereafter the share income from the partnership firm remained very little, but the business income from sugar dealings increased considerably in the subsequent years. It was pointed out that though for assessment year 1979-80 the business income was a loss of Rs. 1,22,947, it was a profit of Rs. 78,087 for assessment year 1980-81 and for subsequent three assessment years the assessee had shown profits of more than Rs. 3.5 lakhs in each year. It was also pointed out that the assessee had purchased shares of the three companies mentioned above and these three companies belonged to the same group. It was submitted that the assessee had to borrow money for the purchase of big blocks of shares of these companies and the idea behind purchasing the shares was that the assessee would get more business from these companies. The underlying purpose for purchasing these shares, according to the learned counsel was, that the assessee should be able to augment its business and to indirectly facilitate it further. It was emphasised again and again that the assessee had voluntarily purchased these shares with a view to coming closer to the managements of these companies. Our attention was drawn to pages 474, 626 and 628 of the Law & Practice of Income-tax by N.A. Palkhiwala and B.A. Palkhiwala (8th Edition, Volume I). Similarly our attention was drawn to pages 1493 and 1494 of Sampath Iyengar's book Law of Income Tax (Vol. 2 - 8th Edition). Reliance was placed on the Supreme Court decision in Patnaik & Co. Ltd.'s case and Allahabad High Court decision in CIT v. Dhampur Sugar Mills Ltd. [1988] 171 ITR 675. The sum and substance of the submissions was that the assessee had incurred loss on sale of shares out of commercial expediency and that it should be allowed as a business loss.

We have carefully considered the rival submissions as also the facts on record. Each case has to be decided on its own facts. We have, therefore, to decide this case also on the basis of its own facts.

It has been admitted by the learned counsel for the assessee that the assessee was not dealing in shares. We would, therefore, not go into the question whether the assessee was a dealer in shares and whether the shares were being held as stock-in-trade. The Revenue has not questioned the genuineness of the transactions and the CIT (Appeals) has also found that the assessee had furnished full details regarding purchase, sale etc. of shares. The only question to be decided by us is whether the CIT(A) was justified in directing the Income-tax Officer to allow the loss of Rs. 2,00,287 as revenue loss. We find that the assessee had purchased shares only of the three above-mentioned companies. Only 92 shares of M/s. RBL Tirath Ram Shah (India) had been purchased and these were not sold up to 31-3-1980 relevant to assessment year 1980-81. The main shares were, however, of M/s. Gangeshwar Ltd. and M/s. Mahalaxmi Sugar Mills Co. Ltd. As per the details furnished before us and as submitted by the learned Departmental Representative we find that for assessment year 1979-80 the assessee had purchased 52,854 shares of M/s. Gangeshwar Ltd. which were sold on 11-4-1978 i.e, within three weeks of their purchase. Similarly, out of 45,000 shares of M/s. Mahalaxmi Sugar Mills Co. Ltd. purchased on 23-3-1978, 25,000 shares were sold on 11-4-1978 and the balance 20,000 shares on 24-5-1979. The assessee purchased another block of 43,500 shares of M/s. Gangeshwar Ltd. On 7-12-1978 and the entire lot was sold in 15 months period on 10-3-1980. If the assessee's arguments were to be accepted that the shares were purchased with a view to facilitating its business or promoting its business then it is not understood as to why these shares were sold so soon after the purchase. If the idea was to come closer to the managements of the three companies then that purpose was not being achieved by the disposal of the shares, but by their retention. The learned counsel for the assessee has submitted that as a result of the sale of shares the assessee's profits had gone up phenomenally in the subsequent years particularly in assessment years 1981-82, 1982-83 and 1983-84. According to him there was a live link and a direct nexus between the purchase of shares and the increase in the business of the assessee. In this regard we find that there is no direct nexus or live link between the purchase of shares and the increase in business. No direct nexus has been established in this regard. From the details available at page 56 of the assessee's compilation, we find that for assessment year 1978-79 which was the first year of assessee's business with the three companies aforesaid as a dealer, the gross commission earned amounted to Rs. 1,23,975. This was for a period of about 6 months because the assessee became a dealer in sugar only with effect from September 1977. On this basis the gross commission for a whole year would have amounted to Rs. 2.5 lakhs. For assessment years 1979-80 and 1980-81 the figures of gross commission mentioned are Rs. 3,99,460 and Rs. 3,22,517. It is worth noting that the first purchase of shares by the assessee of M/s. Gangeshwar Ltd. and M/s. Mahalaxmi Sugar Mills Co. Ltd. was on 23-3-1978 which was almost towards the close of the accounting year relevant to assessment year 1978-79. Thus, in the absence of purchase of any shares the assessee had earned gross commission of Rs. 1,23,975 for a period of about 6 months. If the commission increased to more than Rs. 3,00,000 in the subsequent years it was a normal feature and there was nothing unusual, extraordinary or spectacular about the increase in the commission income as a result of the purchase of shares.

The case of Patnaik & Co. Ltd. was decided on its own facts which are distinguishable. In that case the assessee was told that if it subscribed for the Government loan, preferential treatment would be granted to it in the placing of orders for motor-vehicles required by the various Government departments and to the further benefit of an advance from the Government up to 50 per cent of the value of the orders placed. Pursuant to that understanding, an advance to the extent of Rs. 18,37,062 was received by the assessee and a circular was also issued by the State Government to various departments to make purchases of the vehicles required by them from the assessee. It was also noticed that the sales shot up substantially. On September 4, 1961 the assessee made a deposit of Rs. 5,00,000 consequent upon a resolution of Board of Directors passed about 6 weeks before, after a statement made by the Chairman during the Board Meeting that the Government had approached him to subscribe to the Government loan and the company should do so as good number of orders would be expected. The purchase of the loan was approved by the Board of Directors and was ratified in the Annual General Meeting of the shareholders held on 31-12-1961. This was the sequence of events, looking to this and the close proximity of the investment with the receipt of the Government orders the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and the Supreme Court found that the Tribunal was right in coming to the above conclusion.

If we compare the facts of the above case with those of the instant case it immediately becomes clear that the facts are absolutely distinguishable. Here the assessee has failed to prove any sequence of events. The learned counsel's emphasis on the voluntary nature of purchase assumes added significance because there was no suggestion or understanding from the side of the sugar companies for the assessee to purchase their shares. The assessee has also not proved any direct nexus between the purchase of shares and the earning of profits. The increase in profits appears to be a normal feature of the assessee's business.

In the case of Dhampur Sugar Mills Ltd. also the facts were somewhat similar to the facts in the case of Patnaik & Co. Ltd. In that case the assessee had purchased U.P. State Development Bonds for Rs. 3,23,190. Those bonds had been purchased at the behest of the Distt. authorities and it was found that it was necessary for the mill to maintain the goodwill of and good relations with the Distt. authorities for otherwise the business of the sugar mill would have suffered. The Tribunal in that case recorded a finding that the purchase of the bonds was connected with the business of the assessee and the Hon'ble High Court applying the principles laid down in Patnaik & Co. Ltd.'s case held that the loss incurred on the sale of such bonds was a revenue loss. The facts of this case are also distinguishable from those of the instant case.

Having regard to the entire facts and circumstances of the case, we hold that there was no business expediency in purchasing the shares of the aforesaid company and, as such, the loss incurred on the sale of shares cannot be held as a business loss. It will be treated as a capital loss.