1. This is a reference at the instance of the Commissioner under s. 256(1) of the I.T. Act, 1961, arising from the decision of the Tribunal dated 14th May, 1968, in Income-tax Appeal :No. 15827 of 1966-67 a few facts may be stated :
We are concerned in this reference with the assessment year 1964-65, for which the accounting year is the year ended 31st August, 1963. The assessee is a private limited company which will hereinafter be referred to as 'the assessee-company ' It carries on several types of business and activities, but one of these is share-dealing. On 31st August, 1954, the assessee-company purchased 900 shares of Hind Tobacco & Cigarette Co. Ltd., which company will be hereinafter referred to as 'the tobacco company '. The tobacco company was established in 1951, and of its 10,934 equity shares, Pannalal Bansilal Pittie and his two sons, Badrivishal and Laxmilal, held 1,715 shares each, all the three between them held in all 5,145 shares. Although the tobacco company was a public limited company, its shares were not quoted on the market. The tobacco company went into production in 1954. However, it soon ran into losses and was ultimately taken into liquidation. The resolution of the board of the tobacco company taking the same into voluntary liquidation was passed on 27th April, 1963. On 29th June, 1963, the assessee-company wrote to the liquidator inquiring what amounts he expected to pay to the shareholders (of the tobacco company) as return of the capital. The liquidator by his letter dated 8th July, 1963, informed the assessee-company that the assets of the tobacco company were extremely meagre and they would not suffice even to meet the claims of the creditors fully. Accordingly, in the opinion of the liquidator, he would not be able to pay anything to the shareholders in return for their capital. After receiving this reply, the assessee-company wrote off the value of the shares, viz., Rs. 90,326, The amount was claimed as a revenue loss or as a loss under the head 'Capital gains'. The company had contended that it was a regular dealer in shares and all the shares purchased were held on trading account. Prior to the coming into force of the Companies Act, 1956, the shares had been exhibited in the assessee-company's accounts under the heading 'Shares of joint stock companies'. After 1956, all share investments'. The balance-sheet of the assessee-company for 1958-59 also contained a note that the company was a regular dealer in share. On the basis of these facts it was submitted to the ITO that the loss written off should be allowed as a revenue loss. It was also pointed out to the ITO that in the assessment year 1952-53, the company had made some profit on the sale of certain shares and that this profit had been taxed as its business income. The company further urged that in the assessment year 1953-54, there was a loss on account of shares of another company held by the assessee-company. But this loss was not allowed only because it was not written off in the assessment year under consideration. A similar loss was claimed in the assessment year 1955-56, for which year Rs. 11,200 had been written off by the assessee-company on account of losses on shares of companies which had gone into liquidation. This loss had been allowed by the ITO as a revenue loss. The ITO, however, was not impressed with these arguments. He found from the balance-sheets of the tobacco company that the break-up value of each ordinary share of the tobacco company was Rs. 99.77, Rs. 71.51 and Rs. 29.72 as on 31st March, 1953, 31st March, 1954, and 31st March, 1955, respectively, as against the face value of Rs. 100 each. He further observed that the assessee-company had purchased shares on 31st August, 1954, from M/s. Raja Bahadur Sir Bansilal & sons, Hyderabad. According to the officer, the break-up value at the time of the purchase was about Rs. 50 per share as against the price paid of Rs. 100 per share. The ITO also found that one L. F. Pittie was the common director of the assessee-company as well as of the tobacco company. It was found that other shareholders of the assessee-company were also closely connected with the tobacco company. It was ascertained that M/s. Pittie & Co. were the managing agents of the tobacco company. All this indicated that there was a very close connection between the assessee-company, the tobacco company and the firm from whom the assessee-company had purchased the shares. In the view of the ITO the shares has also been purchased at an inflated price. He did not accept the assessee-company's contention that at the time when the shares were purchased, they appeared to be a sound investment. He concluded that the shares appeared to have been purchased only with a view to accommodate an allied concern of the assessee-company, viz., the firm of M/s. Raja Bahadur Sir Bansilal & Sons of Hyderabad. Accordingly, the ITO refused to treat the loss either as a revenue loss or as a loss under the head 'Capital gains '.
2. The assessee-company appealed to the AAC, but this appeal proved unsuccessful. The AAC reiterated in his order the various facts initially expressed by the ITO and on these facts approved of the conclusion of the ITO. In his view, the shares of the Tobacco company were not acquired by the assessee-company for trading purposes. In his order, the AAC listed the prominent shareholders and the members of the board of directors of the assessee-company; he also noted the composition of the firm of M/s. Pittie & Co., which was established to function as the managing agents, as also the constitution of the firm, viz., M/s. Raja Bahadur Sir Bansilal & Sons of Hyderabad, from whom 900 shares were acquired, by the assessee-company. The set up of the various concerns was mentioned to infer that the purchase of shares was not in the course of any business of share dealing. The AAC also noted that, apart from the original regular allotment of shares of the company, no other sales had taken place except this transaction which took place as stated earlier on 31st August, 1954. In these circumstances, the AAC was of the view that the sale to the assessee-company was only for inter-adjustment of the share-holdings among the four connected concerns, viz., the tobacco company, its managing agents, M/s. Pittie & Co., the firm of M/s. Raja Bahadur Sir Bansilal & Sons and the assessee-company. In the view of the AAC, after this adjustment, the controlling interest remained with Pannalal Bansilal Pittie, Badrivishal Pittie and Laxmilal Pittie or concerns in which they were substantially interested. The AAC also agreed with the ITO's conclusion that the price paid, viz., Rs. 100, which was the face value an inflated price, unjustified by the break-up value of the shares. The AAC also rejected the alternative submission advanced on behalf of the assessee-company that the loss should be allowed as a capital loss.
3. The assessee-company carried the matter in second appeal before the Tribunal. No arguments were addressed to the Tribunal on the question of the loss being allowed as a loss on the transfer of a capital asset within the meaning of s. 45 of the Act. The only ground argued was that the loss was allowable as a revenue loss. Counsel appearing on behalf of the assessee-company referred to the treatment of the company as a dealer in shares in past assessments; he also referred to the exhibition of the shares under 'current assets' in the balance-sheets which were prepared after the Companies Act, 1956, came into force. In the balance sheets the shares purchased were shown at cost. It was contended that when it was realised that nothing would be recovered from the liquidator, the company was justified in writing off the full value of the investment. Regarding the price paid for acquiring the shares it was submitted for consideration that the latest available balance-sheet at the time of the purchase was the one showing the statement of assets and liabilities as on 31st March, 1953. On this date admittedly the break-up value of the shares came to Rs. 99.77, which was substantially the same as the price paid up by the assessee-company. It was urged that the tobacco company was a newly established company and there was a lucrative one. In 1954, when the shares were purchased, there was no apprehension that the tobacco company would fail and it was urged that the purchase was at a normal price by a dealer in shares. On behalf of the department, the departmental representative repeated the arguments which had found favour with the ITO and the AAC.
4. After hearing the respective submission, the Tribunal held that none of the objection raised by the department for allowing the loss was of substance or could be sustained. In its view the fact that the shareholders of the assessee-company were otherwise also interested in the tobacco company could not be ground for saying that the shares were not acquired for trading. In the opinion of the Tribunal, there was no rule or principle according to which a trader in shares must only deal with shares of a public limited company in which he has no other interest. The Tribunal also considered that the price of Rs. 100 per share paid was a bona fide price and not a dictated price or an arranged price. In its view at the time of the purchase, there were good prospects for the tobacco company and there was no reason to be pessimistic about its working in future. The fact that the break-up value of the shares progressively deteriorated in the following years cannot retrospectively make the price paid in 1954 an artificially inflated price. The Tribunal found that after the shares of the tobacco company were acquired by the assessee-company, they were held like the other shares which have been accepted by the department as being held on trading account. This was conclusively proved by the entry in the balance-sheet. The Tribunal found no substance in the objection raised on behalf of the department that there could not be a write-off when the shares were not yet disposed of. In its view, the action of the assessee-company in writing off the value of the investments when it became certain that nothing would be recovered was in accord with the proper accounting procedure. Taking all these facts into consideration the Tribunal was of opinion that the assessee-company was entitled to the loss of Rs. 90,326 being treated as a revenue loss in the accounting year. Accordingly, it directed the ITO to allow the loss as a revenue loss.
5. Mr. Joshi took us through the close connection between the assessee-company and the tobacco company as also between the firm which had sold the shares to the assessee-company and the managing agents of the tobacco company and submitted that these facts conclusively establish that the transaction was not a normal purchase of shares but one to control the tobacco company or to keep the management and control of the tobacco company in the hands of M/s. Pittie & Co., with which the assessee-company and its shareholders were closely connected. If this argument were to be accepted, it would mean that in almost every case of purchase of shares of a private limited company or a closely-held company it would have to be held that the purchase was not on trading account but for different considerations. This may be one of the factors which were required to be considered but cannot by itself be a decisive factor as contended for by Mr. Joshi. Further, it would appear to us that the conclusion reached by the Tribunal that the price paid was not an inflated or a dictated one or an arranged one is correct, particularly when it is realised that the latest available balance-sheet was the one as on 31st March, 1953, which gave the break-up value of the shares of the tobacco company at Rs. 99.77. In retrospect, after the lapse of many years, it may be possible to say that the break-up value was only Rs. 50 or Rs. 60 at the time of the purchase of the shares. This, however, will not be a fair method of ascertaining the price to be paid at the time of purchase.
6. Merely because the assessee-company and its vendor firm are sister concerns or are having common directors and partners, it would not necessarily make the purchase an arrangement or a device to palm off the shares of the tobacco company at an inflated price. The Tribunal has in its well-considered order dealt with the various aspects which influenced the ITO and the AAC and has dealt with the same in para. 5 of its appellate order. We are in substantial agreement with the approach of the Tribunal. Having stated this, it would follow that we see no reason to interfere with the conclusion arrived at by the Tribunal from the facts found; and if that be our view, then the question referred to us is required to be answered in the affirmative and in favour of the assessee. The question is accordingly so answered.
7. The Commissioner will pay to the assessee the costs of this reference.