1970 (3) TMI 50 - HC - Income Tax

Assessee is a private limited company. It carries on business as a money-lender, and also of an art silk mill - money advaced by assessee to company and acquired the shares of company for amount of loan - company went into liquidation - claim for deduction of the amount of loan against business income

Summary

Issues:
1. Deduction of Rs. 6,15,000 against business income under section 10(1) and/or section 10(2)(xi) of the Indian Income-tax Act.

Analysis:

The case involved a private limited company engaged in money-lending and operating an art silk mill during the assessment year 1956-57. The primary issue was whether the company could claim a deduction of Rs. 6,15,000 against its business income under section 10(1) and/or section 10(2)(xi) of the Indian Income-tax Act. The company had entered into an agreement to advance a loan to another entity for distributing cinema films. Subsequently, the company converted a portion of the loan into shares of the entity. The Income-tax Appellate Tribunal denied the deduction, stating that the company had converted the loan into a capital investment, not a trade investment. The Tribunal held that the shares were held as a capital investment, not as a trade investment, as the company did not engage in share trading at the time of writing off the debt.

Regarding the deduction under section 10(2)(xi), the company's counsel did not press the claim, acknowledging that no debt remained after acquiring the shares, making the provision inapplicable. The crucial point remaining was whether the shares constituted a capital asset or a trading asset. The company argued that the shares were acquired in the course of its money-lending business. However, the court found that the shares were not acquired as security for the loan, and there was no compulsion to acquire them for debt recovery purposes. The court noted that the shares were acquired outright, indicating an intention to close the loan transaction and participate in the management of the entity. The court rejected the argument that the shares were acquired in the course of money-lending business, emphasizing that the company used funds already engaged in the loan, not spare funds typically used for investments.

The court distinguished a previous case cited by the company's counsel, emphasizing that the conduct of the company post-acquisition did not support the shares being treated as a trading asset. The court concluded that the shares were acquired as a capital investment, not in the course of business or trade. Consequently, the court ruled against the company's claim for deduction, requiring the company to pay the department's costs for the reference.

In summary, the judgment addressed the company's claim for deduction under the Indian Income-tax Act, analyzing whether the shares acquired from a loan conversion constituted a capital or trading asset. The court determined that the shares were held as a capital investment, not in the course of business activities, leading to the denial of the deduction claimed by the company.