KRISHNA RAO, J. - The assessee is a registered firm consisting of three partners. During the accounting year that ended on September 30, 1958, which is the previous year for the assessment year 1959-60, the assessee firm carried on the business of manufacture and sale of ice and aerated waters and also acted as the managing agents of the Hyderabad Allwyn Metal Works Ltd., hereinafter called the company. Under clause (1) of the managing agency agreement dated February 6, 1942, the assessee-firm had been appointed as the managing agents of the company for a period of thirty years, subject to the condition that it shall continue to hold the companys shares of not less than O. S. Rs. 1,00,000. The assessee-firm purchased 2,000 shares of O. S. Rs. 50 each in February, 1942, and 4,000 more shares of O. S. Rs. 50 each in June, 1946. In 1956, it brought down the value of the 6,000 shares to I. G. Rs. 1,80,000 and wrote off the loss against the reserves of its accumulated profits. In 1958, capital reduction of the company was effected with the permission of the Andhra Pradesh High Court and the paid-up value of each share was reduced from O. S. Rs. 50 (I. G. Rs. 42-13-0) to I. G. Rs. 10. The assessee-firm wrote off Rs. 5 per share, that is, Rs. 30,000 for 6,000 shares and debited the same to the profit and loss account for the accounting year ended September 30, 1958, during which it obtained Rs. 80,735 as the managing agency commission. The claim of revenue loss was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal on the ground that the loss was a loss of capital. At the instance of the assessee-firm, the following question of law has been referred by the Appellate Tribunal to this court under section 66(1) of the Income-tax Act of 1922.
'Whether the loss of Rs. 30,000 claimed by the assessee on revaluation of the shares of Hyderabad Allwyn Metal Works Ltd., is allowable revenue deductio ?'
The Appellate Assistant Commissioner and the Appellate Tribunal based themselves on the decision of the Supreme Court in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax and of the decision of the Bombay High Court in Commissioner of Income-tax v. Ramnarain Sons Ltd. In Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax, the facts were that the assessee-company which was formed in 1917 did not deal in shares. In 1933, it bought shares of a sugar company with the object of obtaining the managing agency of a mill of that sugar company. The mill was not erected and the agreement for acquiring the managing agency fell through. In 1941 and 1943, the assessee-company sold the shares of the sugar company at a profit of about Rs. 2 lakhs. The income-tax authorities, the Tribunal and the High Court treated the profit as revenue receipts. This was reversed by the Supreme Court and their Lordships held that the profit was appreciation of capital. His Lordship Mahajan C.J. observed at page 53 that the assessees object in buying the shares was purely to obtain the managing agency which would have been an asset of an enduring nature, that the purchase of the shares was an investment and not an adventure and that the profit realised by the sale of the shares was, therefore, not in the nature of income from business. The case of Commissioner of Income-tax v. Ramnarain Sons Ltd. was unsuccessfully taken up on appeal to the Supreme Court and the decision of the Supreme Court is Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax. There the assessee-company was a dealer in shares and suffered a loss of Rs. 1,78,438 by the sale of 400 shares of a textile mill, which it had purchased with the object of acquiring the managing agency of that mill. Their Lordships held that the acquisition was not of a stock-in-trade but of a capital asset and that the loss was of a capital nature. It follows from these decisions that the purchase of shares of the value of O. S. Rs. 1,00,000 by the assessee-firm here was an investment and an acquisition of a capital asset.
Shri Y. N. Anjaneyulu, the learned counsel for the assessee-firm, contends that as the assessee-firm had to retain the shares in order to continue as the managing agents, the loss arose out of and was incidental to the carrying on of its managing agency business and deduction of the loss is permissible under section 10(1) of the Income-tax Act of 1922. He relies for this purpose on Badridas Daga v. Commissioner of Income-tax. There are appellant carried on business as a money-lender through an agent who had the authority to operate on bank accounts. The agent withdrew Rs. 2,30,636 from the bank account and misappropriated it. The appellant was unable to recover a sum of Rs. 2,02,442 and deducted it in computing the profits from the business. The Supreme Court, reversing the decision of the High Court of Nagpur, held that this loss as result of the misappropriation was an admissible deduction in computing the appellants profits under section 10(1) of the Income-tax Act because it was incidental to the carrying on of the appellants business. His Lordship Venkatarama Iyer J. observed that profits and gains, which are liable to be taxed under section 10(1), are what are understood to be such according to ordinary commercial principles, that section 10(2) is not exhaustive of items admissible as deductions and said at page 16 :
'At the same time, it should be emphasized that the loss for which a deduction could be made under section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. If, for example, a thief were to break overnight into the premises of a money-lender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not. The loss in such a case may be said to fall on the assessee, not as a person carrying on business, but as owner of funds. This distinction, through fine, is very material as on it will depend whether deduction, could be made under section 10(1) or not.'
Here also the loss owing to the reduction of the value of the shares fell on the assessee-firm not as a person carrying on business but as the owner of the shares. It is difficult to see how the loss had anything to do with the business of carrying on the managing agency, except that holding the shares as an investment or capital asset was a qualification for continuing to be the managing agent. In Badridas Daga v. Commissioner of Income-tax, it was observed at page 21 that the moneys misappropriated were business funds. But here it is conceded that the shares were not the stock-in-trade of the assessee-firm. A similar contention that the loss by the sale of the shares of the textile mill was incidental to the appellants business and was a revenue loss was put forward but was negatived by the Supreme Court in Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax. His Lordship Shah J. said at pages 538 and 539 :
'The managing agency is manifestly the source of profit of the appellants; but the shares purchased and the managing agency acquired were both assets of a capital nature and did not constitute stock-in-trade of a trading venture..... Subsequent disposal of some out of the shares by the appellants could also not convert what was a capital acquisition into an acquisition in the nature of trade.....
If the acquisition of the shares was not acquisition of a stock-in-trade, but of a capital asset, the appellants, by valuing the shares at cost or market price, whichever was lower, could not bring the difference between the purchase price and the valuation made by them into their trading account.'
Our answer to the question referred, therefore, is that the loss of Rs. 30,000 is not allowable as a revenue deduction. No doubt it appears unfair that in order to qualify for earning the managing agency commission of about Rs. 80,000, the assessee had to suffer a capital loss of about Rs. 30,000 without being eligible for any relief under the income-tax law. But in view of the legal position that the loss had to be classed only as a capital loss the assessee-firm cannot set it off against its income. In the circumstances, the parties will bear their own costs.