PANDEY, J. - 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, justifie ?'
The material facts as disclosed in the statement of the case are these :
The assessment year is 1953-54, the relevant accounting year being 1952-53 ending on March 31, 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 July 28, 1948, were sold at a loss of Rs. 13,40,569 and this large amount, which was so debited in the profit and loss acconut, was claimed as a loss. The balance-sheet of the assessee-company as on March 31, 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 sold for the first time only in the relevant account year 1952-53. In that year the assessee purchased on September 19, 1952, securities worth Rs. 1,00,00,000 in three different lots and fully sold the securities of the value of Rs. 69,00,000, purchased in two of those lots, at a profit of Rs. 21,024, but this amount was not accounted for at all in the books of the company. Even so, the Income-tax Officer had allowed certain losses in other years as follows :
Loss incurred in redemption of certain securities which had become due.
Loss in shares.
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 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 1952-53.
(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 Commissioner.
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 Chitaley, learned consul for the assessee-company, argued that it was authorised by the memorandum of association to carry on business as investors and financiers which reads :
I 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 : Lakshmnaraya Ram Gopal & Son Ltd. v. Government of Hyderabad and Oriental Investment Co. Ltyd. v. Commissioner of Income-tax.
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 & Son Ltd. v. Government of Hyderabad and Oriental Investment Co. Ltd. v. Commissioner of Income-tax.
The four grounds mentioned by the Appellate Assistant Commissioner, which were accepted by the Tribunal also, contra-indicate 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 assessees 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 of an adventure in the nature of trade, it cannot be ignored that the generally accepted and established rule of commercial 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 .
It is next urged that the securities were sold at a loss only for the purpose of utilising 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 Sardar Indra Singh & Sons Ltd. v. Commissioner of Income-tax . 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 source of its business and they became its stock-in-trade. The profit 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 on 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 companys 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 assessees 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 usually course of carrying on the business or, in the words used by the Privy Council in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax if the realisation of securities is a normal step in carrying on the assessees 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 companys business, there can be no doubt that the present case falls on the Revenues 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, Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, there was, in the course of the 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, 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 abovementioned Supreme Court and the Privy Council cases. We must, therefore, reject this contention.
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 as 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 the costs of this reference. Hearing fee Rs. 200.