9911796707
TMI Blog2004 (6) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... , has referred the following two questions for the decision of this court at the instance of the assessee: "1. Whether, on the facts and in the circumstances of the case and in view of the objects of the assessee contained in its memorandum of association was the Appellate Tribunal right in holding that the investments made in the capital of the co-operative societies cannot be considered as its objects and the loss arising therefrom cannot be treated as a revenue/ business loss allowable under the Income-tax Act? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in disallowing deduction of an amount of Rs. 80,20,588 being the amount written off by the assessee in the profit and loss account, from out of its advance in the form of shares in the cooperative societies which had either become defunct or had gone under liquidation?" The brief facts relevant for answering the above two questions may be stated. The applicant-assessee is a public sector undertaking, the shares of which are held by the Government of Kerala. It is an assessee to income-tax under the Income-tax Act, 1961 (for short "the Act"). The assessment year concerned is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to carry on the promotional activities by investments in shares in the industrial co-operative societies in order to further its objects to promote the small-scale industries. It is further contended that the very business of the assessee consisted in investing in the co-operative societies and such being the nature of the assessee's business, if the value of the shares held in the co-operative societies had depleted because of their losses or because of their liabilities having exceeded their assets, like any prudent businessman, the assessee had recognised such losses in the value of its trading investment and, therefore, it should be allowed as a trading loss. Counsel also contended that even if it is to be held as a capital loss under the scheme of the Act, the same should be allowed to be set off against the other income of the assessee. On behalf of the Revenue, Shri P.K.R. Menon, senior counsel, submitted that this is not a case where the assessee was a dealer in shares and as such suffered any loss. Senior counsel further submits that the alleged loss on revaluation of shares in the industrial co-operative societies should neither be considered as a business loss nor as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for successful implementation of industrial projects." The objects incidental or ancillary to the attainment of the above main objects are also provided in sub-clauses 1 to 54 of clause IIIB of the memorandum of association. The other objects for which the company is established are also stated in the said memorandum of association. Among the objects incidental or ancillary to the attainment of the main objects, sub-clauses 10,11,15,35 and 36 reads as follows: "10. To promote other companies, firms, establishments, concerns, cooperative societies or undertakings on industrial townships for any purpose calculated to benefit the industrial development of Kerala. 11. To promote and establish companies, associations, advisory boards and other suitable bodies and co-operative societies for the prosecution or execution of industrial undertakings, works, projects and enterprises of any description, whether of a private or public character, which in the opinion of the company would contribute to the industrial development of Kerala, and to acquire and dispose of shares and interests in such companies or associations or in any other companies or associations or in the undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares in the co-operative societies since the position of the co-operative societies was either defunct or under liquidation. In the reassessment order (annexure A) the Assessing Officer has dealt with the issue in paragraph 1. It was observed that the assessee-company is not a dealer in shares, that these shares are held by the company as its investments and in writing off about 90 per cent, of the value of investments (in 36 co-operative societies) the company has revalued its investments and the loss on revaluation is debited to the profit and loss account as expenditure. Out of the shares in 36 co-operative societies the value of shares in 24 co-operative societies are revalued at Re. 1 per share even though in many cases the paid-up value of one share is Rs. 1,000. The Assessing Officer was of the view that even where the above loss is incurred by the assessee during the sale of these shares, it can only be considered as a capital loss as the assessee-company is not a dealer in shares and that the shares are held even prior to 1978-79 which is a long-term capital loss which cannot be set off against income from business. The Assessing Officer has also noted that in the sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial sectors. It was, therefore, observed that the investment made by the appellant-company in the capital of the co-operative societies can be viewed only as its capital stock and cannot be viewed as part of its trading capital or circulating capital and, therefore, if at all there was any loss on the shares representing the investments, it cannot be viewed as part of its trading capital or circulating capital. It was observed that if at all there was any loss in the shares representing the investments, it cannot be viewed as a trading loss or a revenue loss. The Tribunal held that the Assessing Officer was right when he contends that the assessee is not a dealer in shares in the absence of any provision in the memorandum of association for disinvestment in the shares held by the appellant. The alternate contention of the assessee was that the loss on the revaluation of the shares held by the assessee in the capital of the defunct co-operative societies should at least be viewed as a capital loss. The Tribunal observed that the assessee would be right if such loss was really incurred by it either by transfer, sale, exchange, relinquishment or extinguishment of such shares or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court did not agree with the view of the High Court that no loss was suffered by the assessee on the remittance of the two amounts. The Supreme Court then considered the question whether the loss suffered by the assessee was a trading loss. The court observed that this loss is not an allowable deduction under any express provision of section 10(2) but if it was a trading loss, it would be liable to be deducted in computing the taxable profit of the assessee under section 10(1). The Supreme Court observed as follows: "The argument which found favour with the High Court was that the loss was caused on account of devaluation of the Pakistani rupee which was an act of the sovereign power and it could not, therefore, be regarded as a loss arising in the course of the business of the assessee or incidental to such business. This argument is plainly erroneous and cannot stand scrutiny even for a moment. It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it as pointed out by Venkatarama Aiyar, J., speaking on behalf of this court in Badridas Daga v. CIT [1958] 34 ITR 10 (SC), but it would not be correct to say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions describes 'fixed capital' as what the owner turns to profit by keeping it in his own possession and 'circulating capital' as what he makes profit of by parting with it and letting it change masters. 'Circulating capital' means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursement, while 'fixed capital' means capital not so employed in the business, though it may be used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business. Vide Golden Horse Shoe (New) Ltd. v. Thurgood [1933] 18 TC 280 (CA). If there is any loss resulting from depreciation of the foreign currency which is embarked or adventured in the business and is part of the circulating capital, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s report of the directors of the assessee-company was the basis for reopening the assessment already completed. The question as to whether the investment made by the assessee-company (in the instant case by the predecessor) pursuant to the objects of the company in the co-operative societies can be treated as stock-in-trade or a trading asset will necessarily have to be decided with reference to the memorandum and articles of associations of the assessee-company, of course, subject to the provisions of the Kerala Co-operative Societies Act. As already noted, one of the main objects of the company was to aid, counsel, finance, project and promote the interest of small-scale industries in the State, inter alia, co-operative societies. The assessee-company had invested money in the co-operative societies in the form of shares of the said societies. Whether these investments can be treated as stock-in-trade or trading asset is the question to be decided. The memorandum and articles of association of the company does not provide either for withdrawing the shares or for transferring such shares in the cooperative societies under any circumstances. Clause 36 deals with lending of monies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the said amount is made only under section 37 of the Act. Under section 37 of the Act any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Thus, in order to be eligible for the deduction of the expenditure incurred by an assessee, the expenditure should not be of the nature prescribed in sections 30 to 36 of the Act. It should not be of the nature of capital expenditure. It must be laid out or expended wholly and exclusively for the purpose of the business. The claim for deduction made by the assessee admittedly will not fall under sections 30 to 36. We have already taken the view that the expenditure of the nature claimed is a capital loss. Can it be said that the expenditure is for the purpose of the business of the assessee? The word "business" is defined in section 2(13) of the Act which includes any trade, commerce or manufacture or any adventure or conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , who delivered the judgment observed at page 15 of the report thus: "The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act." In this case the investment in the shares in the industrial co-operative societies cannot be treated as a trading activity, for, there is no purchase and sale involved in such transaction. In fact, the Tribunal, after referring to the clauses in the memorandum and articles of association of the assessee has observed that the investment made in the capital of the co-operative societies cannot by itself be considered as an object, though it is described as an object but can be viewed only as an exercise of power to enable the appellant-company to promote industrialisation in the small sectors in Kerala State. The Tribunal further observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the shares are still existing with rights intact. The Tribunal has accordingly held that the reduction in the value of the shares effected through book entries cannot be construed as a loss arising out of transactions of trading in capital assets, much less revenue assets. Admittedly, there is no transfer of shares in the industrial co-operative societies resulting in any capital loss. The shares of the co-operative societies are kept intact despite the fact that the co-operative societies are either defunct or under liquidation. The assessee had only revalued the shares. For example, the value of the share was reduced from Rs. 100 to Re. 1 by means of book entries even though there was no transfer of such shares. Such revaluation though permissible in respect of stock-in-trade/trading assets and deduction can be allowed under section 37 of the Act in respect of the loss on such revaluation vide judgment dated March 1, 1999, in I.T.R. Nos. 52 and 53 of 1995 (CIT v. South Indian Bank Ltd. [2000] 241 ITR 374), the same cannot be allowed as a deduction in respect of the loss on account of revaluation of a capital asset. As already noted, there is no transfer of the shares held by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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