1969 (10) TMI 17 - HC - Income Tax

Loss on sale of shares - sales were not made in the normal course of the assessee s business as a dealer in shares, even if it is held that the assessee was at all a regular dealer in shares - it is a capital loss - it cannot be treated as a revenue loss deductible in the computation of its business profits

Summary

Issues:
1. Determination of whether a loss incurred from the sale of shares is a revenue loss or a capital loss.
2. Interpretation of whether shares were held as investments or as stock-in-trade.
3. Assessment of whether the sale of shares was part of the regular business activities of the assessee.

Analysis:
The High Court of Allahabad addressed a reference made by the Appellate Tribunal under the Indian Income-tax Act, 1922 regarding the assessment year 1959-60. The case involved an assessee, a private limited company, that acquired shares of a managed-company in 1945 and later sold them in 1958, incurring a loss of Rs. 7,500. The main issue was whether this loss should be considered a revenue loss or a capital loss for deduction in the computation of total business profits.

The Income-tax Officer initially treated the loss as a capital loss, but the Appellate Assistant Commissioner disagreed, considering the assessee a dealer in shares and allowing the deduction. However, the Appellate Tribunal concluded that the shares were held as investments, not stock-in-trade, and the loss was a capital loss, not deductible from business profits. The Tribunal highlighted that the shares were acquired for obtaining the managing agency of the managed-company and were sold before an amalgamation, indicating a capital nature of the transaction.

The High Court affirmed the Tribunal's decision, emphasizing that the shares were held as investments, not for regular trading purposes. Referring to relevant case law, the Court noted that the mere authorization to deal in shares does not automatically classify a company as a dealer. The Court concluded that the loss on the sale of shares was a capital loss and not eligible for deduction from business profits. The Court's decision favored the Revenue, requiring the assessee to pay costs of the reference.

In summary, the judgment clarified the distinction between revenue and capital losses in the context of share transactions, emphasizing the purpose of acquisition and the nature of holding shares as key factors in determining the deductibility of losses in the computation of business profits.