1971 (7) TMI 136 - HC - Income Tax

Whether the loss on sale of shares of the Jupiter General Insurance Co. Ltd. and East and West Insurance Co. Ltd. was a revenue loss allowable in computing the business income of the petitioners Held yes held that question Whether purchase and sale of shares amounts to dealing in shares or is investment is a mixed question of fact and law

Issues Involved:
1. Whether the loss of Rs. 5,44,580 on the sale of shares was a revenue loss allowable in computing the business income of the petitioners.
2. Whether there is any evidence for concluding that the sole intention in purchasing the shares was to acquire control over the insurance companies.
3. Whether the Tribunal misdirected itself in law and acted without evidence in concluding that the loss was a capital loss rather than a revenue loss.

Detailed Analysis:

Issue 1: Nature of the Loss (Revenue vs. Capital)
The primary issue was whether the loss of Rs. 5,44,580 incurred by the assessee on the sale of shares of Jupiter General Insurance Co. Ltd. and East and West Insurance Co. Ltd. was a revenue loss allowable in computing business income. The assessee argued that the transactions constituted a single adventure aimed at boosting share prices for resale at a profit, thus making the loss a revenue loss. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal, however, held that the shares were purchased to acquire a controlling interest in Jupiter, thus categorizing the loss as a capital loss.

The Tribunal's supplementary statement, requested by the High Court, showed that the assessee controlled significant voting rights in Jupiter, but never more than 50% at any given time. The Tribunal's conclusion that the assessee controlled Jupiter was based on the total shares purchased over three years, not on the actual control at any specific time.

The High Court found that the assessee's intention was to boost share prices for resale at a profit, not to acquire control. This conclusion was supported by the fact that the assessee sold its holdings at a time when it could have captured control, indicating a trading motive rather than an investment motive. Consequently, the court concluded that the loss was a trading or revenue loss, allowable in computing business income.

Issue 2: Intention Behind Purchasing Shares
The second issue questioned whether there was evidence to conclude that the sole intention of purchasing the shares was to acquire control over the insurance companies. The Tribunal had found that the assessee was interested both in trading the shares for profit and in acquiring control. The High Court noted that the Tribunal's finding did not support the assumption that the sole intention was to acquire control.

The High Court, upon reviewing the facts, found no evidence that the sole intention was to acquire control. The assessee's actions, such as selling shares at crucial times, indicated a primary intention to trade for profit. Therefore, the court answered this question in the negative.

Issue 3: Tribunal's Legal Misdirection
The third issue addressed whether the Tribunal misdirected itself in law by concluding that the loss was a capital loss. Consistent with its findings on the first issue, the High Court held that the Tribunal had indeed misdirected itself. The Tribunal's error lay in its failure to consider the actual control over voting rights at specific times and its incorrect inference about the assessee's intention.

The High Court concluded that the loss was a revenue loss, not a capital loss, thus answering the third question in the affirmative.

Conclusion:
The High Court ruled that the loss of Rs. 5,44,580 was a revenue loss allowable in computing the business income of the assessee. There was no evidence to support the conclusion that the sole intention behind purchasing the shares was to acquire control over the insurance companies. The Tribunal had misdirected itself in law by concluding that the loss was a capital loss. The Commissioner was ordered to pay the costs of the reference to the assessee.

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