2008 (2) TMI 579 - HC - Income Tax

Business loss- The assessee with an intention to promote M/s. MIC Auto Ancillaries Limited had purchased shares of the said company for a sum of Rs. 45, 52, 870. After holding such shares for a period of eight years it thought it fit to sell the same. Ultimately the said shares held by the assessee of M/s. MIC Auto Ancillaries Limited were sold for a price of Rs.15, 96, 000 thereby it was put to a net loss of Rs. 29, 56, 870. the Assessing Officer has disallowed share loss on the ground of that it is capital loss. The Commissioner (Appeals) and Tribunal held that holding of shares by the assessee in pursuance of its object should be treated as for the purpose of business and accordingly held any loss on sale of such share should be treated as business loss and not capital loss. Held that- the sale is made on a huge loss thus it is business loss.

Summary

Issues:
1. Interpretation of profit/loss from the sale of equity shares as capital loss or business loss.

Analysis:
The case involved an appeal by the Revenue against the order of the Income-tax Appellate Tribunal regarding the treatment of profit/loss derived from the sale of equity shares by the assessee. The key issue was whether the profit/loss should be considered a capital loss as held by the Assessing Officer or a business loss of the assessee. The assessee had purchased shares of a company with the intention to promote it, but later sold them at a loss. The Revenue contended that the loss should be treated as a capital loss, while the assessee argued that it should be considered a business loss.

The Tribunal and the Commissioner of Income-tax (Appeals) both ruled in favor of the assessee, holding that the investment in shares should be treated as part of the business activities of the assessee and not as a capital investment. They emphasized that the main object of the company was to carry on the business of investment and finance, including buying, holding, and selling shares. The Tribunal relied on a judgment of the Supreme Court in the case of Sutlej Cotton Mills Ltd. to support their decision. The Tribunal concluded that any loss on the sale of such shares should be treated as a business loss rather than a capital loss.

The court, after considering the arguments and the precedent set by the Supreme Court judgment, agreed with the Tribunal's decision. It was noted that the assessee had indeed incurred a significant loss upon selling the shares, which supported the classification of the loss as a business loss. Therefore, the court ruled in favor of the assessee, holding that the profit/loss derived from the sale of equity shares should be treated as a business loss and not a capital loss. The appeal by the Revenue was dismissed, and the judgment was delivered in favor of the assessee.