1. At the instance of the assessee, the Income tax Appellate Tribunal, Delhi has, acting under Section 66 (1) of the Income-tax Act, 1922, stated the case and referred to this Court for its opinion the following question of law:
Whether on the facts, and in the circumstances proved in this case, the inference that the securities in question were held by the assessee as an investment and not as a stock-in-trade and that the loss incurred thereon was a capital loss is, in law, justified?
2. The material facts as disclosed in the statement of the case are these. The assessment year is 1953-54, the relevant account being 1952-58 ending on 31 March 1953. The assessee is a company incorporated in the year 1948 with several objects set out in the Memorandum of Association, including those mentioned in Clause 16 thereof, which reads:
'To invest and deal with the moneys of the Company, and in particular to subscribe for or otherwise acquire and to hold and deal with the perpetual or redeemable debentures or debenture-stock or obligation or the shares, fully or partly paid, or stock of any company in India or elsewhere.'
During the relevant account year, Government securities of the face value of Rs. 91,50,000/-, which had been purchased on 28 July 1948, were sold at a loss of Rs. 13,40,569/- and this large amount, which was so debited in the profits and loss account, was claimed as a loss. The balance sheet of the assessee company as on 31 March 1953 showed that it held investments of Rs. 1,93,30,958/- in Government Securities and of Rs. 64,54,529/- in shares in joint stock companies. In the balance sheet, the securities held by the Company were shown as 'investments' and valued at cost unlike stock-in-trade which are valued at the market rates The securities were sold for the first time only in the relevant account year 1952-53. In that year, the assessee purchased on 19th September 1952 securities worth Rupees 1,00,00,000/- in three different lots and fully sold the securities of the value of Rupees 69,00,00/- purchased in two of those lots, at a profit oi Rs. 21,024/- but this amount was not accounted for at all in the books of the Company. Even so, the Income-tax Offieer had allowed certain losses in other years as follows:
Loss incurred in redemption ofcertain securities which had become due
Loss on shares.
3. The Income-tax Officer disallowed the loss of Rs. 13,40,569, which was claimed by the assessee, on the ground that it was not authorised to deal in securities and that the transaction in question, not being a normal business venture but being one 'of a casual and capital nature' resulted in loss of capital. The Appellate Assistant Commissioner too disallowed the claim, holding that the assessee company was not a dealer in securities, on the following among other grounds:
(i) The Company had, from the time it commenced business seven years ago in 1948. effected sales of securities only in the account year 1952-63.
(ii) In other years, securities were only redeemed and not sold, showing that the Company was an investor and not a dealer in securities.
(iii) In the balance sheets, the securities were shown as investments. They were not valued at the market rates, which were less.
(iv) Transactions of sale of securities were not frequent and it could not be said that there was any scheme of profit-making. In the further appeal, the Appellate Tribunal substantially agreed with the Appellate Assistant Commissioner.
4. Having heard the counsel, we have formed the opinion that, on the facts found in this case, the Government securities were investment of an enduring character and the loss resulting from sale of some of those securities was a capital loss and not a revenue loss. Shri Chitale, learned counsel for the assessee company, argued that it was authorised by the Memorandum of Association to carry on business as investors and financiers and relied in support of that contention on Clause 6 of the Memorandum which reads :
'To carry on in India or elsewhere business as investors, brokers, merchants, agents, financiers, factors, bankers, manufacturers, etc., and also business as buyers, sellers, dealers, exporters and importers of all kinds of produce, raw material, manufactured goods and merchandise whatsoever. '
In our opinion, the mere fact that one of the objects of the Company is to carry on business as investors or financiers is not conclusive of the matter though it may be relevant for determining the nature and scope of its activities : Lakshminarayan Ram Gopal v. Government of Hyderabad : 25ITR449(SC) and Oriental Investment Co. Ltd. v. Commissioner of Income-tax Bombay : 32ITR664(SC)
5. The four grounds mentioned by the Appellate Assistant Commissioner, which were accepted by the Tribunal also, contra-indicale that the transaction in this case was an adventure in the nature of trade. It is, however, argued that merely because the assessee had valued the securities at cost and not at the lower market rates, it could not be concluded that they were investments and not the assessee's stock-in-trade. In a matter like this, so it was contended, all that can be insisted upon is adherence to a regular basis of valuation and the assessee is free to adopt his own method of accounting. This is undoubtedly correct and yet in considering whether the securities were stock-in-trade or an adventure in the nature of trade, it cannot be ignored that the generally accepted and established rule of commerical practice and accountancy is that anticipated loss is taken into account by valuing the closing stock at cost or market price whichever is lower : Chainrup Sampatram v. Commissioner of Income-tax West Bengal : 24ITR481(SC) .
6. It is next urged that the securities were sold at a loss only for the purpose of utilizing the sale proceeds for purchasing shares, that this was really a case of varying the investments and that, for that purpose, the securities should be regarded as having been realised in the normal course of business. To sustain this argument, reliance is placed upon Indra Singh and Sons Ltd. Calcutta v. Commissioner of Income-tax West Bengal : 24ITR415(SC) . In that case, the Tribunal had concluded as follows :
'From the foregoing particulars it is clear that the company has been financing and promoting the business of other companies. For this purpose, it had to vary its holdings from time to time and quite a number of shares held by the company have been of a speculative character. To hold these investments and to finance several companies (managed or otherwise) the appellant company had to resort to obtaining loans and overdrafts. It is, therefore, clear that shares were acquired by the appellant company in the ordinary course of its business and they became its stock-in-trade. The profits on sale of these shares did not essentially arise out of the sale of investment of any surplus funds. It is, therefore, clear that the sale of investments and making of fresh investments are linked up with the business of the company as financiers, inasmuch as investing and realising its holdings when finances were needed is part of the normal business of the company. . . . . There is ample evidence to show that the company did in fact carry oh the business of financiers, which is one of the objects mentioned in Clause 3 (1) of the memorandum of association. The evidence pertaining to the financial transactions of the company, during the relevant accounting years, to which we have referred, clearly establishes that the realisation of profits on investment is directly referable to the carrying on of the company's business as financiers.'
On those conclusions, the Supreme Court observed :
' The principle applicable in all such cases is well settled and the question always is whether the sales which produced the surplus were so connected with the carrying On of the assessee's business that it could fairly be said that the surplus is the profits and gains of such business. It is not necessary that the surplus should have resulted from such a course of dealing in securities as by itself would amount to the carrying on of a business of buying and selling securities. It would be enough if such sales were effected in the usual course of carrying on the business or, in the words used by the Privy Council in Punjab Co-operative Bank Ltd. Amritsar v. Income-tax Commissioner, Lahore , if the realisation of securities is a normal step in carrying on the assessee's business. Though that case arose out of the assessment of a banking business, the test is one of general application in determining whether the surplus arising out of such transactions is a capital receipt or a trading profit. The question is primarily one of fact and there are numerous cases falling on either side of the line but illustrating the same principle. On the facts found in regard to the nature and course of the company's business, there can be no doubt that the present case falls on the Revenue's side of the line. '
The facts of the above mentioned case are distinguishable because there the invested holdings were realised when money was needed for the business of financing which was carried on by the company. In the Privy Council case , there was, in the course of business carried on by a bank, sale of shares and investments to meet the withdrawals by depositors and it was held to be a normal step in carrying on banking business. In the instant case, the securities were sold only in the account year 1952-53 and it was not shown that the sale was justified upon business considerations similar to those existing in the above-mentioned Supreme Court and the Privy Council cases. We must, therefore, reject this contention.
7. In the view we have taken of the facts and circumstances of this case, we are of opinion that, the Government securities were held as an investment and not a stock-in-trade and, therefore, the loss incurred in this case was a capital loss We answer the question referred to us in this manner and direct that the assessee shall pay all costs of this reference Hearing fee Rs. 200.