9911796707
TMI Blog1986 (5) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee an investor in anticipation of high dividend inspite of the fact that the company went into liquidation within three years of its incorporation. The contention of the assessee is also that in treating the said loss, as capital loss, the Commissioner brought in extraneous and irrelevant facts on the basis of presumption and surmises. 2. The Commissioner in his order under section 263 for the assessment year 1979-80 noted that he examined the records of the case of the assessee and he found that assessment order was prima facie erroneous insofar as it is prejudicial to the interests of the revenue. In the circumstances, he initiated proceedings under section 263 to which the assessee objected and filed written statement. The Commissioner also heard the assessee's authorised representative. The Commissioner pointed out that the assessee is a company and it carries on several business which included standing guarantee for loans, providing specialised services in diverse areas of business activities in addition to business in mining iron and manganese ores, selling agency, etc. He pointed out that the main source of income, however, was from dividend of shares and interest on o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere at Rs. 1,91,68,935 which included the above dividend income. The expenses were to the extent of Rs. 1,26,10,329 out of which the ITO considered Rs. 5,142 only to be relatable to dividend income and the rest as relatable business of the assessee. He also pointed out that the expenses included interest of Rs. 22,79,402. He also pointed out that the expenses included interest or any other expenditure was held by the ITO to be relatable to dividend income. The result was that on the ITO's finding, deduction under section 80M has been computed almost on the gross dividend, which according to the Commissioner, was contrary to the express provision of the Act. Hence, the Commissioner considered the ITO's order to be erroneous. 4. The appeal by the assessee is that the Commissioner having himself failed to correlated any part of the interest paid and expenses incurred by the assessee to the cost of shares and expenses for any dividend, made a futile attempt by setting aside the assessment order and directing the ITO to allocate the portion of the said interest to the dividend income. 5. As mentioned earlier, the assessee's authorised representative appeared before the Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amined in the light of those principles laid down by the Hon'ble Supreme Court, it would have to be held that the shares of Thapar Steinmuller Boiler Co. Ltd. were the investment of the assessee. He mentioned that the assessee's holding was substantial and that how in the name of the company, the name of Thapars appeared. He mentioned that apparently the shares were purchased soon after the incorporation and possibly out of first issue of shares and it was some sort of a joint venture between the assessee and the German company. The Commissioner inferred that these shares could not have been acquired with a view to dealing with them. 8. The Commissioner went on saying that the shares of other companies from which bulk dividend has been earned, had not appeared to be stock-in-trade of the assessee. He found that out of Rs. 78,08,487, being the dividend, Rs. 77,65,471 was the dividend income received from three companies only, namely, Ballarpur Industries Ltd., Greaves Cotton Ltd. and Jagajit Cotton Textiles Ltd. which was launched and controlled by the Thapar group. He, therefore, inferred that the assessee has a controlling interest in them and the shares of these companies wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istrative and office expenses would have to be charged to the dividend account. In respect of interest payment, the Commissioner found that it was not possible to identify the individual borrowings and the purpose and that it was not possible to locate in what lots and when the shares were purchased. He pointed out that a study on the balance sheet for a number of years would give an indication of the increase in the shareholding was accompanied by an increase in borrowings, which point required examination. 12. He, therefore, concluded that the ITO did not apply his mind to the real issues in the assessment and the ITO was carried away by the fact that the assessee had been to be the dealer in shares for certain transactions and that conclusion and decision of the ITO were based on assumption which correctness was open to serious doubt. The Commissioner noted that the case required much more detailed examination on the above issues which the ITO had failed to do and the result was that the assessment was erroneous and was prejudicial to the interests of the revenue. He, therefore, set aside the assessment order and directed the ITO to examine the case thoroughly for fresh dispos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worked out by the ITO in the assessment order itself and, therefore, there was no question of saying that the ITO had failed to apply his mind as in fact, it was the Commissioner who had failed to apply his mind to the facts of this case. According to the assessee's learned counsel the Commissioner wrongly assumed that the ITO did not consider this aspect of the matter, while forming the opinion that the order of assessment was erroneous. It was not the case of the Commissioner that the expenses have not been allocated properly and that in fact, pro rata allocation of expenses cannot be made. In this connection the assessee's learned counsel refers to the decision of the Hon'ble Calcutta High Court in the case of New India Investment Corpn. Ltd. in which on the facts of the case, it was held that where an assessee was holding shares and securities as its stock-in-trade and the dividend was received therefrom and none of the holdings were held by way of investment only and the assessee incurred expenditure to earn such income, then the dividend though assessable under a particular head, was really the business income of the assessee and the expenditure should be allowed under the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho was a businessman was also a dealer in share and, therefore, the loss was an admissible deduction arising out of business of the assessee in share dealing, on the findings of the Tribunal. It is stressed on behalf of the assessee that the buying and selling of shares by the assessee were at the prevailing prices and not at a concessional rate and, therefore, there was no question of treating the assessee as not a dealer in shares. It is also urged that that was also one of the objects of the company dealing in shares. 17. The assessee's learned counsel refer also to page 23 of the paper book in which the detailed statement of the sale of stocks and shares from the assessment years 1961-62 to 1976-77 during which the profit had been taxed as trading profit and the resulted loss was allowed as business loss in all those years and that in fact, for all those earlier years, the assessee was held to be a dealer in stock and shares. 18. Alternatively, it is also argued on behalf of the assessee that the ITO has correctly appreciated the facts of the case after considering the fact that acquisition of shares was not out of borrowings as addition of shares were out of issue of bonus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd has wrongly complained that the ITO did not apply his mind to the real issues in the assessment. It is also urged that the ITO did not assume any particular fact but had based his decision on the materials available for that year as well as on the decisions for the earlier years. It is submitted, therefore, that the order of the Commissioner under section 263 may be quashed. 20. On the other hand, the submissions of the learned departmental representative are that the Commissioner had assumed proper jurisdiction in this case in view of the facts narrated and discussed in the order of the Commissioner (Appeals) itself. According to him, by the first notice, the Commissioner has given the basic ground why action under section 263 was taken and in the second notice the additional materials were pointed out to the assessee by the Commissioner to enable the assessee to meet and show cause in respect of this point. It is submitted that the additional materials were supporting matters although they may not constitute the basic ground on which the order of the Commissioner was passed. It is urged that even otherwise, the assessee would not in any way by prejudiced as the assessee woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words. It is submitted that the facts prevailing during the year under consideration, were similar to those of the year dealt in by the Hon'ble Supreme Court. It is highlighted that the shares in the present case, had not been sold within three years and the assessee bought those shares apparently right from the inception and the extent of such holding was about 16 per cent of the total share which gave the assessee a controlling power over the affairs of the company. It is urged that the ITO had not applied his mind to such vital aspects of this matter, before allowing the loss as stated above. 21. It is also submitted that proper action and direction were given by the Commissioner in respect of the relief allowable under section 80M. It is stressed that the Commissioner has given the basic facts and grounds before coming to his conclusion. it is highlighted that the assessee made huge borrowings and was not possible to identify a particular fund out of which the assessee bought new shares for holding as investment. It is repeatedly stressed that in the case of the assessee itself in Karam Chand Thapar Bros. (P.) Ltd. the Hon'ble Supreme Court has dealt with identical facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a loss thereof. It was held that purchasing the shares in excess of the market price was to facilitate acquisition of the managing agency which was a capital asset and the intention of purchasing such shares was not acquired part of the stock-in-trade. It was also held in that case that neither the circumstances that the assessee borrowed money at interest to purchase the shares nor the fact that it was a dealer in shares and was authorised by the memorandum of association to deal in shares was of any effect. It was further held that the subsequent disposal of some of such shares by the assessee would not convert what was the capital acquisition into an acquisition in the nature of trade. It was stressed that one has to consider in the light of intention of the assessee having regard to the legal requirements which are associated with the concept of trade or business. The learned departmental representative further refers to another decision of the Hon'ble Supreme Court in the case of CIT v. National Finance Ltd. [1962] 44 ITR 788 in which similar view was expressed that the issue has to be decided in the light of the intention of the assessee having regard to the legal requirement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner has assumed proper and valid jurisdiction in initiating action under section 263 and his subsequent order and direction to the ITO require to be sustained. 24. In reply, the assessee's learned counsel mentions that the Tribunal in their orders for later years had.distinguished the facts as available in Karam Chand Thapar Bros. (P.) Ltd's case being case of the assessee for the assessment year 1955-56. That order of the Tribunal was for the assessment year 1962-63 and the order was dated 18-2-1974 which is at page 43 of the paper book. It is urged that the Tribunal has discussed similar issue for that year, at length relating to acquisition of shares by the assessee relating to the companies of the same group and that there was nothing to suggest that the acquisition and the purchase of the shares was for anything other than the assessee's normal commercial purpose. It is also noted by the learned counsel that it was also observed by the Tribunal that in the fact of the undisputable nature of the assessee's business as dealer in shares, it would be for the department to prove that the dealing were for extra commercial consideration. For that assessment year, i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 631 (Cal.) of 1979 dated 28-5-1980 it was contended on behalf of the revenue that the assessee had sold the debenture and preference shares which had been held as investment as apparent from the balance sheet while the assessee contended that the shares and debentures were shown as investment in the balance sheet as per direction of the auditors whereas the true nature of these debentures and preference shares were that of a trading asset. It was pointed out that similar issue came up before the Tribunal in IT Appeal Nos. 4803 (Cal.) of 1969-70 and the Tribunal vide order dated 18-2-1974 had held against the department. For the same reasons, the Tribunal for the assessment year 1966-67 onwards also rejected the stand. It is true that what has been recorded in the balance sheet in respect of the shares, would not be conclusive or decisive. But invariably it is one of the points for consideration. In this connection we may refer to the decision of the Hon'ble Supreme Court in the case of Ashoka Viniyoga Ltd. v. CIT [1972] 84 ITR 264 in which amongst other things on the facts of that case, it was held that the Tribunal was right in placing reliance on the resolution of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that no firm conclusion could be drawn for the description by the assessee in the balance sheet by its stock and 'investment' and from the valuation of the securities and shares at cost. 26. The facts of the present case relating to the assessment year 1979-80 were that the assessee did not sell the shares of Thapar Steinmuller Boiler Co. Ltd. as that company went into liquidation and a liquidator paid Rs. 10,000 as final dividend in lieu of the shares surrendered by the assessee to the liquidator. The book value of those shares is at Rs. 1 lakh at the rate of Rs. 10 per share for 1,000 shares. As stated earlier, the shares were purchased by the assessee some time in 1963 which could have been sold had the same been acquired by the assessee for the purposes of its stock-in-trade. The assessee on the facts of the case had surrendered those shares to the liquidator which cannot be considered as a sale or transfer. It is in this context that we have to consider the provision of section 46(2) referred to by the Commissioner in the first and second notices to the assessee while initiating the proceedings under section 263. In the case of CIT v. R. M. Amin [1977] 106 ITR 368 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of proceedings under section 263 could not be questioned. 28. In some of the cases cited earlier on behalf of the assessee, it is been that the facts were distinguishable. In the case of Cotton Fabrics Ltd., the assessee was found to be a dealer in shares and from that premises, the decision was rendered by the Hon'ble High Court regarding certain claims of expenditure attributable to income from dividends. Similarly, in the case of New India Investment Corpn. Ltd., the Hon'ble Calcutta High Court had proceeded on the basis that where an assessee was holding shares and securities as stock-in-trade and the dividend received therefrom and none of the holdings of the assessee were held by way of investment only, the expenses incurred to such income would be allowable as business expenditure and the same cannot be apportioned under two different heads, i.e., 'Business' and 'Dividend'. It was also held that even if the income was solely referable to the dividend there cannot be any apportionment as the entire expenditure would then be allowable against the dividend earned. In the present case before us, the dispute of the Commissioner was that the shares held by the assessee in T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business in shares. In the case of Ramnarain Sons (P.) Ltd. the Hon'ble Supreme Court held that in considering whether the transaction is or is not an adventure in the nature of trade, the problem must be seen in the light of the intention of the assessee having regard to the legal requirements which are associated with the concept of trade or business. In the similar situation in the case of Oriental Investment Co. Ltd. v. CIT [1957] 32 ITR 664, the Hon'ble Supreme Court on the facts of the case, held that the mere fact that the company has within its objects the dealing investment in shares, does not give the assessee the characteristics of a dealer in shares but in other circumstances, if proved, it may be relevant for the purpose of determining the nature or activities of the company. 30. As it was held by the Hon'ble Supreme Court in the case of Associated Industrial Development Co. (P.) Ltd. whether a particular holding of shares is by way of investment or formed part of stock-in-trade is a matter which is within the knowledge of the assessee and he should in the normal circumstances be in a position to produce evidence from his record as to whether he has maintained a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s surrendered to the liquidator for which Rs. 10,000 were received which was considered by the Commissioner with reference to section 46(2) as discussed earlier. 33. Having regard to the entirety of the facts and circumstances of the case and after taking into account the decisions relied on by both the sides and also after taking into account the decision considered by us above, we are of the opinion that the Commissioner had a valid jurisdiction in initiating proceedings under section 263, on the facts of the case. From the brief narration of the facts, we agree with the Commissioner in saying that the ITO did not apply his mind to the issue involved and the case required more detailed examination, which should have been done by the ITO originally. In view of the circumstances and facts of the case, the order of the ITO was erroneous and the Commissioner has validly assumed jurisdiction under section 263 and, in our opinion, the direction of the Commissioner to the ITO to examine the case thoroughly and to frame the assessment afresh requires to be substained. In the circumstances, we reject the assessee's appeal on all the points. 34. In the result, the appeal is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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