1963 (10) TMI 1 - HC - Income Tax

Summary

Issues Involved:
1. Permissibility of the loss of Rs. 7,74,080 as a revenue loss.
2. The genuineness of the transaction involving the purchase and sale of shares.
3. The intention behind the transaction and its classification as a capital or revenue loss.

Detailed Analysis:

1. Permissibility of the Loss of Rs. 7,74,080 as a Revenue Loss:
The primary issue was whether the loss of Rs. 7,74,080 claimed by the assessee-company was a permissible deduction as a revenue loss for the assessment year 1949-50. The Income-tax Officer disallowed the loss, stating that the transaction was not a genuine revenue loss but a maneuver to pass on shares at an inflated rate to Mr. Jain at a lower price. The Appellate Assistant Commissioner upheld this decision, but the Income-tax Appellate Tribunal allowed the loss, considering it a genuine revenue loss. The High Court needed to determine if there was material evidence to support the Tribunal's finding and whether the Tribunal misdirected itself in law.

2. The Genuineness of the Transaction Involving the Purchase and Sale of Shares:
The Tribunal's finding that the loss was genuine was challenged based on several points:
- The assessee-company purchased shares at Rs. 680 per share from D.C.P.M. Ltd. when the market rate was Rs. 523, which was against commercial expediency.
- The transaction was deemed unreal and a mere paper entry to facilitate Mr. Jain's acquisition of control over the jute company.
- The assessee-company acted as an intermediary to share the loss in this transaction.
The Tribunal reversed the decision of the Income-tax Officer and the Appellate Assistant Commissioner, but the High Court found that the Tribunal had misdirected itself in law and lacked valid material to support its conclusion.

3. The Intention Behind the Transaction and Its Classification as a Capital or Revenue Loss:
The High Court examined whether the transaction was entered into with the intention of trading in shares or with the ulterior motive of helping the chairman of the board of directors. The court referred to Supreme Court decisions in Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. National Finance Ltd., which held that acquiring shares to gain control over management is a capital investment, and the resulting loss is a capital loss, not a revenue loss. The High Court concluded that the transaction was not a genuine trading transaction but a maneuver to share the loss of the sister concern, D.C.P.M. Ltd., and thus, the loss was not permissible as a revenue loss.

Conclusion:
The High Court answered the question of law in favor of the Commissioner of Income-tax and against the assessee-company, ruling that the loss of Rs. 7,74,080 was not incurred in the course of trade or as an adventure in the nature of trade, and thus, it was not deductible as a revenue loss. The assessee-company was liable to pay the costs of the reference.