1. M/s, Sir Shadilal Sugar and General Mills Ltd , Mansur-pur, Muzaffarnagar (hereinafter referred to as ' assessee-company '), in its assessment to income-tax for the assessment year 1964-65, the previous year ended on September 30, 1963, claimed deduction of a sum of Rs. 29,347 as loss incurred in transactions in Govt. securities. The ITO, on the view that the assessee-company does not deal in Govt. securities, held that the securities had been purchased by way of investment and the loss so incurred was of a capital nature. Hence, he disallowed the claim for deduction. On appeal, the same view was taken by ,the AAC and, on further appeal, by the Income-tax Appellate Tribunal, Hence, at the instance of the assessee, the following question has been referred under Section 256(2) of the Act, 1961, for the opinion of this court:
' Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was not entitled to the deduction of Rs. 29,347 claimed by the assessee as a trading loss for the assessment year 1964-65 ?.'
2. The facts in this behalf are not disputed. It was in pursuance of a letter dated August 12, 1962, which was received by the assessee from the District Magistrate, Muzaffarnagar, that the assessee subscribed to the U.P. State Development Loan, 1974, to the extent of Rs. 6,50,000. On receipt of the aforesaid letter, the assessee directed its bankers, the Punjab National Bank, on September 20, 1962, to debit its account by the aforesaid amount and arrange to keep the loan in its cash credit account against Govt. securities. The assessee sold those securities in the relevant previous year resulting in a loss of Rs. 29,347.
3. It has been submitted before us on behalf of the assessee-company by Sri Bharatji Agrawal that it was not necessary for the assessee-company to have been dealing in securities with a view to claim the aforesaid loss. It was claimed that it was a business expenditure and since the assessee in order to carry on its business had to keep the district authorities on the right side, it had to make this investment. Reliance has been placed on a decision of the Madras High Court in Addl. CIT v. B. M. S. (P.) Ltd. : 119ITR321(Mad) .
4. We find that that case is distinguishable on facts. There, the assessee-company dealing in bus transport business, subscribed to certain Govt. bonds carrying 41/2% interest at the instance of the road transport authorities and for that purpose it borrowed moneys at 10% interest. Investment was made to keep the road transport authorities in proper humour under the belief that it was necessary to carry on its business. Subsequently, the assessee sold the bonds at a loss of Rs. 3,127 andclaimed this amount as a business loss. The ITO and the AAC disallowed the claim but the Appellate Tribunal accepted it. On further reference, the High Court held that subscribing to Govt. bonds was not opposed to public policy and hence the Tribunal was right in holding that the assessee was obliged to sell the bonds before they became ripe for payment in order to stop incurring further loss as the money with'which the subscription to the bonds were made had been borrowed at 10% interest while the bonds carried interest only at 41/2%.
5. Thus, there was found a compelling necessity in that case on account of which the assessee-company had to sell the bonds before they became ripe for payment. The bonds carried interest only at 41/2% while the assessee-company had raised loan to subscribe to those bonds at 10%. No such compelling reason has been disclosed by the assessee-company in the present case. The Govt. bonds certainly carried interest at 41/2% and the amount was subscribed by the assessee from its cash credit account. There is nothing on the record to show as to at what rate the assessee was paying interest on the loans taken against the cash credit account. Thus, there was no compelling necessity whatsoever for selling the Govt. securities before they became ripe for payment. There was no nexus established by the assessee-company between the loss suffered and the business carried on by it. Its claim, therefore, has been rightly disallowed.
6. We, therefore, answer the question in the affirmative, against the assessee and in favour of the department. The department is entitled to costs which are assessed at Rs. 200.