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TMI Blog1983 (9) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... angalore ------------------ Rs. 1,20,700 ------------------ The ITO noticed that as per clause III(B)(4) of the memorandum of association, one of the objects of the company was to deal in shares. By letter dated 3-7-1979, he proposed to treat the loss as a speculation loss within the meaning of Explanation to section 73 of the Income-tax Act, 1961 (' the Act '). The assessee replied as follows : " (a) The company's business is in manufacture of aluminium rods and this is the first time the company purchased the shares since its inception. (b) The said amount has been shown under the head ' Investment ' in the balance sheet and not under current assets as stock-in-trade. (c) The company has not dealt in shares at any time previously or subsequently. (d) The purchase of shares (made as per the resolutions passed at the board meetings held on 9-4-1975 and 3-4-1976) was an investment. (e) In view of the declining value of the shares the board of directors decided to dispose of the shares. (f) The market value at the time of sale was nil and by selling at Rs. 10 the company was able to salvage at least Rs. 1,20,700. (g) The Explanation to section 73 will be attracted onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... especially when the possession can give no pride to the owner thereof. The Income-tax Officer was right in rejecting the contention on behalf of the assessee that the assessee had to sell the shares because the share value was declining and it was able to salvage the capital at least by accepting 10 per cent of the purchase price as sale consideration. The fact is that share price was nil at both the point of time, viz., at the time of purchase as well as at the time of sale. The loss incurred, therefore, is a speculative one. The Income-tax Officer is further right in his observation that Explanation to section 73 was meant to cover such transaction as one entered into by the assessee. Even if it is not a speculative loss (conceding the arguments of the assessee that it is a capital) it is speculative capital loss amounting to adventure in the nature of trade and would be covered by section 73. Therefore, the disallowance of the loss incurred by the assessee under Explanation to section 73 is approved. Since the transaction according to me smacks of non-genuineness the purchase of loss by the assessee was not bona fide and the same loss would have been disallowed even on the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not took into the balance sheets of P.G. Textile Mills Ltd. There was nothing to indicate that the assessee was investing in shares. The circumstances indicated that the purchase of shares was a speculative venture and not an investment as the assessee was aware of the financial position of P.G. Textile Mills Ltd., right from the beginning. He submitted that the order of the Commissioner (Appeals) should be reversed. 4. Shri Jagadisan, the learned representative of the assessee, drew our attention to the memorandum and articles of association. The main objects of the company enumerated under article III(A) related to manufacture of aluminium rods and allied businesses. Article III(C) enumerated other objects which could be undertaken with the permission of the Company Law Board. Articles III(A) and III(C) did not include dealing in shares. It is only in article III(B) that investment and dealing in shares of other companies is mentioned. Article III(B) refers to objects incidental or ancillary to the attainment of the main objects. Hence, dealing in shares was never the main object of the company and under the circumstances purchase of shares of P. G. Textile Mills Ltd., Baroda, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares." The Explanation was inserted by the Taxation Laws (Amendment) Act, 1975, with effect from 1-4-1977. This was with a view to curb attempts to reduce profits by buying losses or by similar means. The question before us is whether the purchase of shares in P.G. Textile Mills Ltd. amounts to an investment or is a speculative venture. We had the benefit of going through the balance sheets of P.G. Textile Mills Ltd. The accumulated loss on the various dates is as follows : Year ending Loss Rs. 30-6-1972 9,88,910 30-6-1973 9,03,251 30-6-1974 6,99,449 30-6-1975 19,89,304 30-6-1976 52,28,431 30-6-1977 70,92,659 The above figures make it plain that the mills was a heavily losing concern and no prudent investor would purchase the shares of the mills. The assessee all along knew this fact. It is difficult for us to believe that the assessee realised that its investment was bad and, therefore, had to be got ri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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