1967 (3) TMI 30 - HC - Income Tax

Whether the Tribunal misdirect itself in law in coming to the finding that the loss arising from the sale of shares was not deductible from the profits of the company - Held, no

Summary

Issues Involved:
1. Whether the loss of Rs. 4,80,988 arising from the sale of shares was deductible from the profits of the company.
2. Whether the transaction of purchasing and selling shares was a trading transaction or a capital transaction.

Issue-wise Detailed Analysis:

1. Deductibility of Loss from Profits:
The primary issue was whether the loss of Rs. 4,80,988 incurred by the assessee-company from the sale of shares was deductible from its business income. The company argued that the loss was a revenue loss and should be deductible. However, the Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal all rejected this claim, holding that the loss was a capital loss and not deductible from revenue income. The Tribunal specifically noted that the shares were held as investments and not as stock-in-trade, and thus the loss was capital in nature.

2. Nature of the Transaction:
The Tribunal and the lower authorities examined whether the transaction of purchasing and selling shares was a trading transaction or a capital transaction. The Tribunal concluded that the transaction was not in the nature of trade but was an investment. Several factors supported this conclusion:
- The purchase of shares was not in line with a scheme of profit-making but was intended for enjoying a steady dividend income.
- The transaction was a solitary instance in the company's history.
- The shares purchased were non-participating preference shares, typically bought for safe investment rather than for speculative gain.
- The shares were purchased and sold within the Dalmia-Jain group of companies, indicating an investment rather than a business transaction.

Arguments and Counterarguments:
- The company argued that the buying and selling of shares was part of its business activities and thus the loss should be considered a trading loss. The company relied on the Privy Council decision in Griffiths v. J. P. Harrison (Watford) Limited, which suggested that the intention to make a fiscal advantage does not negate trading.
- The department countered that the transaction was not an ordinary business activity but an isolated investment transaction. The Tribunal's findings were supported by evidence and no error of law was committed.

Judicial Precedents and Principles:
The judgment referred to various judicial precedents and principles to determine whether a transaction is in the nature of trade or investment:
- The distinction between trading and investment was discussed with reference to Konstam's Treatise on Income Tax.
- The Supreme Court's observations in Kishan Prasad and Co. Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Kasturi Estates Private Ltd. emphasized that the nature of the transaction, rather than the company's capacity, determines whether it is a trade.
- The Tribunal considered the company's memorandum of association, which allowed both trading and investment in shares, but concluded that the transaction in question was an investment.

Conclusion:
The High Court agreed with the Tribunal's conclusion that the transaction was an investment and not a trading activity. Consequently, the loss was a capital loss and not deductible from the company's business income. The question referred to the court was answered in the negative, meaning the Tribunal did not misdirect itself in law in its finding. The parties were ordered to bear their own costs.