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Karam Chand Thapar and Bros. Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(1986)18ITD236(Kol.)
AppellantKaram Chand Thapar and Bros. Ltd.
Respondentincome-tax Officer
Excerpt:
commissioner was justified in invoking revisional powers where assessing officer did not consider the provision of section 46(2) and assess the loss on sale of shares as business loss, where shares were held as investment.certain shares were acquired by the assessee at the time of incorporation of a company. same were also shown as trade investment in the balance sheet and the profit and loss account and not as stock-in-trade. though the book value of the shares was rs. 1 lac, it received rs. 10,000 as final dividend from the liquidator. having held that the assessee was dealer in shares in the earlier years, the income tax officer allowed rs. 90,000 as business loss. the commissioner invoked section 263 by holding that the investment in shares was made by the assessee as an investor and.....
Judgment:
Commissioner was justified in invoking revisional powers where assessing officer did not consider the provision of section 46(2) and assess the loss on sale of shares as business loss, where shares were held as investment.

Certain shares were acquired by the assessee at the time of incorporation of a company. Same were also shown as trade investment in the balance sheet and the profit and loss account and not as stock-in-trade. Though the book value of the shares was Rs. 1 Lac, it received Rs. 10,000 as final dividend from the liquidator. Having held that the assessee was dealer in shares in the earlier years, the Income Tax Officer allowed Rs. 90,000 as business loss. The Commissioner invoked section 263 by holding that the investment in shares was made by the assessee as an investor and not for selling the shares at profit and, therefore, the Income Tax Officer erred in not taking into account the provision of section 46(2).

As the Income Tax Officer has not at all taken into account for consideration the amount received by the assessee from the liquidator keeping in view the provision of section 46(2), the Commissioner was justified in invoking his jurisdiction under section 263.

1. The appeal by the assessee is directed against the order of the Commissioner as passed Under Section 263 of the Income-tax Act, 1961 ('the Act'). The appeal by the assessee is that the Commissioner erred in holding that the assessment order made by the ITO Under Section 143(3) of the Act for the assessment year 1979-80 was erroneous and prejudicial to the interests of the revenue and that the Commissioner erred in not treating the loss at Rs. 90,000 as business loss arising from the writing off of the value of the shares of a company which went into liquidation after three years of its incorporation. It is also the appeal by the assessee that the Commissioner erred in holding that the shares of the said company, i.e., Thapar Steinmuller Boiler Co. Ltd., being not stock-in-trade, but on investment basis. It is also submitted that the Commissioner erred in holding that 16 per cent holding would make the assessee an investor in anticipation of high dividend inspite of the fact that the company went into liquidation within three years of its incorporation. The contention of the assessee is also that in treating the said loss, as capital loss, the Commissioner brought in extraneous and irrelevant facts on the basis of presumption and surmises.

2. The Commissioner in his order Under Section 263 for the assessment year 1979-80 noted that he examined the records of the case of the assessee and he found that assessment order was prima facie erroneous insofar as it is prejudicial to the interests of the revenue. In the circumstances, he initiated proceedings Under Section 263 to which the assessee objected and filed written statement. The Commissioner also heard the assessee's authorised representative. The Commissioner pointed out that the assessee is a company and it carries on several businesses which included standing guarantee for loans, providing specialised services in diverse areas of business activities in addition to business in mining iron and manganese ores, selling agency, etc. He pointed out that the main source of income, however, was from dividend of shares and interest on other securities. Rs. 90,000 was claimed by the assessee as business loss in respect of the shares of the above company purchased by the assessee in 1963 at Rs. 1 lakh at the rate of Rs. 10 per share for 1,000 shares. He pointed out that the said company went into liquidation and in the assessment year 1979-80, the assessee received final dividend of Rs. 10,000 from the liquidator.

The assessee wrote off the balance of Rs. 90,000, i.e., Rs. 1 lakh minus Rs. 10,000. The ITO allowed the above amount as business loss on the ground that the assessee is a dealer in shares. The Commissioner pointed out that the ITO failed to examine the real issue, i.e., whether the shares of the above company were its investment or its stock-in-trade. He noted that the fact that the assessee had been held in some of the earlier assessment years to be dealer in shares, would not ipso facto prove that all the investments in shares were its stock-in-trade. He pointed out that the shares of this particular company were acquired as investment. He pointed out that 1,000 shares were acquired out of 6,071 shares when the company was incorporated, i.e., holding was to the extent of 16 per cent of a total shares issued by the company. He also noted that the shares were acquired almost as soon as the company was incorporated. He, therefore, inferred that the assessee invested in the shares of Thapar Steinmuller Boiler Co. Ltd. not with a view to selling them at a profit later, but as an investor with a view to earning highest rate of dividend. He observed that the shares of that company were, therefore, in the investment portfolio and the loss should have been dealt with as provided Under Section 46(2) of the Act and, therefore, the ITO erred in allowing Rs. 90,000 as business loss, Hence, this appeal by the assessee.

3. Apart from the above issue, the Commissioner also noted that the largest part of the company's income was from dividend and deduction Under Section 80M of the Act would be allowable. He pointed out that after the introduction of Section 80AA deduction would be considered from the net dividend income and not from the gross dividend income. He noted that the ITO was aware of this provision, but in working out the net dividend, he deducted expense of Rs. 5,142 only from the gross dividend which amounted to Rs. 78,08,487 during the year. The gross receipts from all sources were at Rs. 1,91,68,935 which included the above dividend income. The expenses were to the extent of Rs. 1,26,10,329 out of which the ITO considered Rs. 5,142 only to be relat-able to dividend income and the rest as relatable business of the assessee. He also pointed out that the expenses included interest of Rs. 22,79,402. He also noted that no portion of this interest or any other expenditure was held by the ITO to be relatable to dividend income. The result was that on the ITO's finding, deduction Under Section 80M has been computed almost on the gross dividend, which according to the Commissioner, was contrary to the express provision of the Act. Hence, the Commissioner considered the ITO's order to be erroneous.

4. The appeal by the assessee is that the Commissioner having himself failed to correlate any part of the interest paid and expenses incurred by the assessee to the cost of shares and expenses for any dividend, made a futile attempt by setting aside the assessment order and directing the ITO to allocate the portion of the said interest to the dividend income.

5. As mentioned earlier, the assessee's authorised representative appeared before the Commissioner and made various submissions. It was contended before him that the assessee is a dealer in shares as has been held in several orders of assessments and appellate orders of the earlier years. It was stressed that there were actual sales and purchases of shares in the earlier years and, therefore, the shares were held by the assessee as stock-in-trade and that the loss was rightly allowed by the ITO. It was argued that there was no error in the order of the ITO. It was argued also that since the assessee is a dealer in shares and having other business activities, the expenses entirely related to the business and no part of the expenditure could be allocated to dividend income relying on the decision in the case of CIT v. New India Investment Corpn. Ltd. [1978] 113 ITR 778 (Cal.) and CIT v. Tata Engg. and Locomotive Co. Ltd. [1981] 131 ITR 19 (Bom.). It was urged, therefore, that the gross dividend should be considered for computing the deduction Under Section 80M.6. It was alternatively argued that even if the shares were held not to be stock-in-trade, no part of the expenditure should be allocated to dividend income, particularly when the dividend income was derived from the three companies only and there was no scope for incurring substantial expenditure in collecting dividends. In respect of interest payment, it was contended that there was no evidence to show that the shares were purchased out of borrowed funds and increase in shareholding of three companies over the years has been mainly from issue of bonus shares and, therefore, the interest debited to the profit and loss account was not chargeable against the dividend income.

7. The Commissioner considered the various aspects of the matter and the facts available. He declined to accept the contention made before him. He declined to accept as a general proposition that all shares of a dealer in shares would be a stock-in-trade, as a dealer in share may also have certain shares in the investment portfolio He observed that if shares were purchased to acquire controlling interest, then such shares cannot form stock-in-trade, which issue came up before the Hon'ble Supreme Court in the case of the assessee for the assessment year 1955-56. The Commissioner also referred to the facts of that year in Karam Chanel Thapar & Bros. (P.) Ltd. v. CIT [1971] 82 ITR 899 (SC).

He noted that if the nature of the source is examined in the light of those principles laid down by the Hon'ble Supreme Court, it would have to be held that the shares of Thapar Steinmuller & Boiler Co. Ltd. were the investment of the assessee. He mentioned that the assessee's holding was substantial and that how in the name of the company, the name of Thapars appeared. He mentioned that apparently the shares were purchased soon after the incorporation and possibly out of first issue of shares and it was some sort of a joint venture between the assessee and the German company. The Commissioner inferred that these shares could not have been acquired with a view to dealing with them.

8. The Commissioner went on saying that the shares of other companies from which bulk dividend has been earned, had not appeared to be stock-in-trade of the assessee. He found that out of Rs. 78,08,487, being the dividend, Rs. 77,65,471 was the dividend income received from three companies only, namely, Ballarpur Industries Ltd., Greaves Cotton Ltd. and Jagajit Cotton Textiles Ltd. which was launched and controlled by the Thapar group. He, therefore, inferred that the assessee has a controlling interest in them and the shares of these companies were rarely sold even if the shares have been quoted at the very high price in the market. He also noted that the shares were held for a long period. He felt that sale of shares, if any, was not to outsiders but to the people of the same group or their associates and, therefore, the shares were not sold by a. dealer in shares. The Commissioner declined to consider the shares of these companies as stock-in-trade of the assessee as in his view, the circumstances indicated that they were investments of the assessee.

9. In the circumstances, he inferred that since the assessee was not a dealer in share, the decision of the Hon'ble Calcutta and Gujarat High Courts would not apply to the facts of the case. He noted that a portion of the expenses, particularly interests, should be allocated to dividend income with result that the amount deductible Under Section 80M will be substantially reduced.

10. The Commissioner also considered the alternative argument that even if the shares were held to be the investments of the assessee, the expenses should not be allocated to the dividend income as almost the entire dividend has been received from three companies only for which much expenditure was incurred in collecting dividends. It was stated that the collection charges were very nominal and the ITO had already deducted the same from the gross dividend income and no administrative expenses were incurred for that purpose. It was also submitted that the shares have not been purchased out of borrowings as the capital and resources were sufficient to account for the shareholdings. It was also stressed that increase in the number of shares was mainly on account of bonus issues which did not cost anything to the assessee. It was, therefore, urged that the interest was payable on borrowings which have been utilised only for the business purpose and there was no question of charging interest to dividend account.

11. The Commissioner found some force in the submission relating to administrative expenses. He, however, did not accept the point that no expenditure other than collection charges, were deductible to the dividend income, particularly when the shareholding of the assessee was substantial in a number of companies. According to him, it cannot be argued that the assessee could manage the shareholding without incurring any expenditure and, as such, some portion of the administrative and office expenses would have to be charged to the dividend account. In respect of interest payment, the Commissioner found that it was not possible to identify the individual borrowings and the purpose and that it was not possible to locate in what lots and when the shares were purchased. He pointed out that a study on the balance sheet for a number of years would give an indication of the increase in the shareholding was accompanied by an increase in borrowings, which point required examination.

12. He, therefore, concluded that the ITO did not apply his mind to the real issues in the assessment and the ITO was carried away by the fact that the assessee had been held to be the dealer in shares for certain transactions and that the conclusion and decision of the ITO were based on assumption which correctness was open to serious doubt. The Commissioner noted that the case required much more detailed examination on the above issues which the ITO had failed to do and the result was that the assessment was erroneous and was prejudicial to the interests of the revenue. He, therefore, set aside the assessment order and directed the ITO to examine the case thoroughly for fresh disposal.

14. It is vehemently urged by the assessee's learned counsel that there was absolutely justification for the Commissioner to take action Under Section 263. The learned counsel at the first instance points out that the Commissioner by his first notice dated 7-3-1983 asked the assessee to show cause why action should not be taken Under Section 263. It is stated that for that reasons, the Commissioner referred one point only, i.e., regarding allowance of Rs. 90,000 as business loss which according to the Commissioner, was erroneous. It is seen from a copy of the notice that the Commissioner noted that the above loss claimed by the assessee was on the sale of shares of Thapar Steinmuller & Boiler Co. Ltd. (in liquidation). After disposing the assets of the company, the liquidator paid Rs. 10,000 to the assessee per pro-value of the shares held by the assessee. In the circumstances, he was of the view that the ITO was wrong in treating the above loss as business loss, which was a capital loss in view of Section 46(2). It is submitted by the assessee's learned counsel that that was the first and primary ground of the Commissioner for taking action. It is submitted that later on the Commissioner by a separate notice dated 25-4-1983 has stated in addition that the shares in question did form the capital asset of the assessee and not stock-in-trade, while referring to the provisions of Section 46(2). According to the assessee's learned counsel, the assessee has been a dealer in shares all throughout in the past and the shares were held as stock-in-trade. It is pointed out that in respect of the shares of the above company were purchased in 1963, but unfortunately that company went into liquidation in 1966. It is argued on behalf of the assessee that the Commissioner went wrong in assuming that the shares of that company was an investment and the result of the transaction was a capital loss. It is also pointed out that the Commissioner has taken the point regarding deduction of expenses from dividend income for allowing relief Under Section 80M, read with Section 80AA as amended by the Finance Act, 1980. According to him, the ITO did consider this issue as could be apparent from the order of assessment itself and in fact, the ITO did allow relief Under Section 80AA and that it was only the net dividend income had been worked out by the ITO in the assessment order itself and, therefore, there was no question of saying that the ITO had failed to apply his mind as in fact, it was the Commissioner who had failed to apply his mind to the facts of this case. According to the assessee's learned counsel the Commissioner wrongly assumed that the ITO did not consider this aspect of the matter, while forming the opinion that the order of assessment was erroneous. It was not the case of the Commissioner that the expenses have not been allocated properly and that in fact, pro rata allocation of expenses cannot be made. In this connection the assessee's learned counsel refers to the decision of the Hon'ble Calcutta High Court in the case of New India Investment Corpn. Ltd. (supra) in which on the facts of the case, it was held that where an assessee was holding shares and securities as its stock-in-trade and the dividend was received therefrom and none of the holdings were held by way of investment only and the assessee incurred expenditure to earn such income, then the dividend though assessable under a particular head, was really the business income of the assessee and the expenditure should be allowed, under the head 'Profits and gains of business or profession' and cannot be apportioned against the income arising under different heads, i.e., business and the dividend. It is submitted, therefore, that the Commissioner cannot on facts or in law allocated such expenses as relatable to dividend income only. On behalf of the assessee further reliance is placed on the decision of the Hon'ble Gujarat High Court in the case CIT v. Cotton Fabrics Ltd. [1981] 131 ITR 99, in which it was found that the assessee was a dealer in shares and, therefore, the dividend income of the assessee was the business income and interest on borrowings would be deductible and no apportionment can be made.

15. The assessee's learned counsel goes on to submit that the contention of the assessee was accepted in later years and in fact, the assessee has been treated as a dealer in shares. Reference is made to the assessee's letter dated 19-3-1982 addressed to the ITO which is at page 13 of the paper book as well as to the instruction of the concerned IAC Under Section 144B of the Act to the ITO for the assessment year 1978-79. It is submitted also that for the earlier year, i.e., 1977-78 the same question was there as per the IAC's instruction which appears at page 14 of the paper book.

16. It is, therefore, submitted that on the facts of the case, the Commissioner wrongly assumed jurisdiction Under Section 144B particularly when the dividend income was mainly from the three companies for which no possible expenditure could have been incurred beyond what had been claimed by the assessee and allowed by the ITO in the assessment order itself.

At the stage, it is pointed out by the learned counsel that for the assessment year 1979-80 which is presently before us, there was no instruction by the concerned IAC Under Section 144B. In course of his arguments, the learned counsel also refers to the decision of the Hon'ble Calcutta High Court in the case of CIT v. Produce Exchange Corpn. Ltd. [1963] 50 ITR 308 in which the finding of the Tribunal that the loss in the purchase and sale of shares was a business loss and was a finding of fact as that the assessee was found to have dealt in shares and the transactions were made at the prevailing rate and one of the objects of the company also was to carry on business in dealing in shares. He also refers to the decision of the Hon'ble Patna High Court in CIT v. Shanti Prasad Jain [1967] 66 ITR 289 in which it was found that the assessee who was a businessman was also a dealer in share and, therefore, the loss was an admissible deduction arising out of business of the assessee in share dealing, on the findings of the Tribunal. It is stressed on behalf of the assessee that the buying and selling of shares by the assessee were at the prevailing prices and not at a concessional rate and, therefore, there was no question of treating the assessee as not a dealer in shares. It is also urged that that was also one of the objects of the company dealing in shares.

17. The assessee's learned counsel refer also to page 23 of the paper book in which the detailed statement of the sale of stocks and shares from the assessment years 1961-62 to 1976-77 during which the profit had been taxed as trading profit and the resulted loss was allowed as business loss in all those years and that in fact, for all those earlier years, the assessee was held to be a dealer in stock and shares.

18. Alternatively, it is also argued on behalf of the assessee that the ITO has correctly appreciated the facts of the case after considering the fact that acquisition of shares was not out of borrowings as addition of shares were out of issue of bonus shares from the companies concerned and, therefore, there is no question of utilisation of borrowed money for acquisition of new shares as alleged by the Commissioner. It is also argued that even assuming that there was an investment in shares, the ITO's order allowing interest payment was not at all erroneous.

19. It is further submitted on behalf of the assessee that the loss incurred by the assessee to the extent of Rs. 90,000 as mentioned earlier, was correctly considered and treated by the ITO as business loss. The shares of that concerned company were purchased in 1963 to the extent which worked out to about 16 per cent of the total shareholding and that by no stretch of imagination, it can be said that a person having 16 per cent shareholding would have a controlled interest in that particular company. It is further urged that in fact, the said company went into liquidation only within a short period, i.e., in 1966. At this stage, the assessee's learned counsel refers to the decision of the Hon'ble Supreme Court in the case of Karam Chand Thapar & Bros. (P.) Ltd. (supra) being the case of the assessee itself.

It is stated that for that much earlier year, the assessee incurred a loss in the sale of a block of shares in 1955 and those shares were held by the assessee for about 14 years. It is elaborately submitted by the assessee's learned counsel that the decision for that earlier year was rendered on the facts available for that year and, therefore, the ratio would not be applicable to the facts of the present case. He also refers to another decision of the Hon'ble Supreme Court in the case of CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586, in order to stress that the assessee had placed all full facts and materials to show that those shares of the liquidated company were held by the assessee as stock-in-trade and not by way of investment, in order to refute the stand taken by the Commissioner in the instant case. It is urged that the future of the above company, i.e., Thapar Steinmuller & Boiler Co. Ltd. was bleak and that in fact, it went into liquidation within three years of the acquisition of the shares and, therefore, the loss was entirely the business loss. According to the assessee's learned counsel that on the facts of the case, the Commissioner has wrongly assumed jurisdiction Under Section 263 on the facts of the case and has wrongly complained that the ITO did not apply his mind to the real issues in the assessment. It is also urged that the ITO did not assume any particular fact but had based his decision on the materials available for that year as well as on the decisions for the earlier years. It is submitted, therefore, that the order of the Commissioner Under Section 263 may be quashed.

20. On the other hand, the submissions of the learned departmental representative are that the Commissioner had assumed proper jurisdiction in this case in view of the facts narrated and discussed in the order of the Commissioner (Appeals) itself. According to him, by the first notice, the Commissioner has given the basic ground why action Under Section 263 was taken and in the second notice the additional materials were pointed out to the assessee by the Commissioner to enable the assessee to meet and show cause in respect of this point. It is submitted that the additional materials were supporting matters although they may not constitute the basic ground on which the order of the Commissioner was passed. It is urged that even otherwise, the assessee would not in any way be prejudiced as the assessee would get ample opportunity before the ITO to state the full facts relying on the decision of the Hon'ble Supreme Court in the case of Rampyari Devi Saraogiv. CIT [1968] 67 ITR 84. He also placed reliance on another decision that the Hon'ble Supreme Court in the case of Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 in which on the facts of the case, it was held that where an income has not been earned or not assessable, yet the assessee filed voluntary return, to assist someone else who would have been assessed at a higher figure and assessment so made on such return would be erroneous and prejudicial to the interests of the revenue. It is submitted before us that in a similar situation, the order Under Section 263 was sustained. In our opinion, this decision has no bearing on the facts of the case as the same are distinguishable. The learned departmental representative also refers to another decision of the Hon'ble Supreme Court in the case of CAIT v. Lucy Kochuvareed [1976] 103 ITR 799 which related to the revisional order of the Commissioner under the Kerala Agricultural Income-tax Act, 1950, related to excessive allowance allowed by the assessing officer in respect of expenses incurred by the assessee. The Commissioner set aside that assessment order for fresh disposal by the assessing officer after examining each item of the expenditure individually. The action of the Commissioner was sustained. Further reference is made to the decision of the Hon'ble Madras High Court in the case of Indian Textiles v. CIT[1986] 157 ITR 112 in which under similar situation the revisional order of the Commis-sioner under the income-tax relating to relief allowed without verification by the assessing officer was held to be an order prejudicial to the interests of the revenue. It was also held in that case that if at least in respect of one item, the order of the assessing officer was found to be prejudicial to the revenue, the initiation of proceedings Under Section 263 could not be questioned. On behalf of the revenue, further reliance is placed on a decision of the Hon'ble Supreme Court in the case of Karam Chand Thapar & Bros. (P.) Ltd. (supra) being the case of the assessee itself. It is submitted by the learned departmental representative that in that decision clear guidelines have been enunciated on the facts of the case for that year, although it has not been said in so many words. It is submitted that the facts prevailing during the year under consideration, were similar to those of the year dealt in by the Hon'ble Supreme Court. It is highlighted that the shares in the present case, had not been sold within three years and the assessee bought those shares apparently right from the inception and the extent of such holding was about 16 percent of the total share which gave the assessee a controlling power over the affairs of the company. It is urged that the ITO had not applied his mind to such vital aspects of this matter, before allowing the loss as stated above.

21. It is also submitted that proper action and direction were given by the Commissioner in respect of the relief allowable Under Section 80M.It is stressed that the Commissioner has given the basic facts and grounds before coming to his conclusion. It is highlighted that the assessee made huge borrowings and was not possible to identify a particular fund out of which the assessee bought new shares for holding as investment. It is repeatedly stressed that in the case of the assessee itself in Karam Chand Thapar & Bros. (P.) Ltd. (supra) the Hon'ble Supreme Court has dealt with identical facts and circumstances.

It is also urged that on 31-3-1979 a small portion of the shareholding was sold by the assessee, which fact alone would go to show that the assessee was not a dealer in shares as contended by the assessee. It is pointed out that the assessee has a controlling interest in three companies and the assessee bought the shares of Thapar Steinmuller & Boiler Co. Ltd. almost at the inception of that company and this fact will establish that the intention and the purpose of possessing of shares of that company, was for the purpose of investment and for acquiring controlling interest. The learned departmental representative refers to the decision of the Hon'ble Supreme Court in the case of Kishan Prasad & Co. Ltd. v. CIT [1955] 27 ITR 49, in which amongst other things, it was held on the facts of that case that the circumstances whether a transaction was or was not within the company's power has no bearing on the nature of the transaction or on the question whether the profits arising therefrom were capital accretion or revenue income. The assessee in that decided case was formed in 1917 with the object amongst other things of carrying on a general business and trade of commission agents, etc. The managing director of the assessee-company entered into an agreement with sugar syndicate on the condition that the assessee should subscribe for shares and undertook to sell the shares of the syndicate and the assessee would be given managing agency of the mill when such mill was erected. The mill was not erected and the agreement fell through. The shares of the syndicate was sold which was in excess of what they have been paid for. It was held that the purchase of shares was an investment and not an adventure and was not in the nature of income from business and was, therefore, not liable to tax. It is submitted by the learned departmental representative that in the instant case also the shares were purchased by the assessee for the purpose of an investment. Further reference is made to another decision of the Hon'ble Supreme Court in the case of Ramnarain Sons (P.) Ltd. v. CIT [1961] 41 ITR 534. That assessee was found to be a dealer in shares and also carried on business as managing agents of other companies. In order to acquiring managing agency, the assessee purchased certain shares at higher rate which was, subsequently, sold at a lower rate incurring a loss thereof. It was held that purchasing the shares in excess of the market price was to facilitate acquisition of the managing agency which was a capital asset and the intention of purchasing such shares was not acquired part of the stock-in-trade. It was also held in that case that neither the circumstances that the assessee borrowed money at interest to purchase the shares nor the fact that it was a dealer in shares and was authorised by the memorandum of association to deal in shares was of any effect. It was further held that the subsequent disposal of some of such shares by the assessee would not convert what was the capital acquisition into an acquisition in the nature of trade. It was stressed that one has to consider in the light of intention of the assessee having regard to the legal requirements which are associated with the concept of trade or business. The learned departmental representative further refers to another decision of the Hon'ble Supreme Court in the case of CIT. National Finance Ltd. [1962] 44 ITR 788 in which similar view was expressed that the issue has to be decided in the light of the intention of the assessee having regard to the legal requirements which are associated with the concept of trade or business. The assessee in that decided case, claimed loss in dealing in shares. Guiding principles were discussed in that decision. On behalf of the revenue, reliance is also placed on another decision of the Hon'ble Supreme Court in the case of Rameshwar Prasad Bagla v. CIT[1973] 87 ITR 421.

The facts of that case were that shares were purchased which were agreed to be bought as part of negotiation for acquiring managing agency. It was found that the shares were not acquired as stock-in-trade.

22. In respect of the other aspects of the issue, it is submitted on behalf of the revenue that the increase in the borrrowing made by the assessee during the year was reflected in the increase in the shareholding. This aspect of the matter had not been enquired by the ITO, which he should have done. Reference is made to the decision of the case of Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312 (Guj.) in which it was held that for passing order Under Section 263 the Commissioner need not come to any definite conclusion before setting aside the assessment order with the direction for fresh assessment. The learned departmental representative also relies on the decision of the Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl.

CTT [1975] 99 ITR 375 in which amongst other things it was held that the Commissioner can regard the assessment order as erroneous if the ITO had not made further enquiries before accepting the statement made by the assessee in the return and that the ITO is not only an adjudicator but also an investigator and he cannot remain passive when on the face of the records further enquiry was called for. It is urged that in such a situation as similarly in the present case, the Commissioner has passed valid order Under Section 263. It is submitted by the learned departmental representative that the decision in Cotton Fabrics Ltd.'s case (supra) relied on by the assessee would not be applicable to the facts of the case.

23. It is also stressed that the ITO had not considered properly the requirements and provisions of Section 80A of the Act though this Section was mentioned in the assessment order. It is urged that mere fact that such mentioning of Section in the order would not go to show that the ITO had dealt with the matter properly on the facts of the case. It is urged that on the facts of the case, the Commissioner has assumed proper and valid jurisdiction in initiating action Under Section 263 and his subsequent order and direction to the ITO require to be sustained.

24. In reply, the assessee's learned counsel mentions that the Tribunal in their orders for later years had distinguished the facts as available in Karam Chand Thapar & Bros. (P.) Ltd.'s case (supra) being case of the assessee for the assessment year 1955-56. That order of the Tribunal was for the assessment year 1962-63 and the order was dated 18-2-1974 which is at page 43 of the paper book. It is urged that the Tribunal has discussed similar issue for that year, at length relating to acquisition of shares by the assessee relating to the companies of the same group and that there was nothing to suggest that the acquisition and the purchase of the shares was for anything other than the assessee's normal commercial purpose. It is also noted by the learned counsel that it was also observed by the Tribunal that in the face of the undisputable nature of the assessee's business as dealer in shares, it would be for the department to prove that the dealings were for extra commercial consideration. For that assessment year, i.e., 1962-63, the Tribunal found that the sale of shares of Standard Refinery & Distillery Ltd. and of Malwa Sugar Mills Ltd. were not at prices lower than the market rate. On the facts for that year the Tribunal sustained the allowance of the loss claimed by the assessee to be business loss. The assessee's learned counsel also refers to another decision of the Hon'ble Supreme Court in the case of New Era Agencies (P.) Ltd. v. CIT [1968] 68 ITR 585 in order to stress that even if the assessee had purchased the shares of the company, it could not be said that the assessee had acquired control over that company and that there was no material in the present case to say that the assessee had purchased the shares of Thapar Steinmuller & Boiler Co. Ltd. for the purpose of investment. It is urged, therefore, that the claim of the assessee may be accepted and the order of the Commissioner may be quashed. At the time of his argument, the assessee's learned counsel refers to different decisions of the Tribunal given for the earlier years in the case of the assessee itself in order to support the contention that the assessee was all along in the past a dealer in shares and, therefore, the loss allowed by the ITO was valid and requires to be maintained.

25. We have gone through the orders of the authorities below along with the various papers placed in the paper book for our consideration. The Commissioner was of the view that the ITO had not applied his mind to the facts of this case, on the lines as focussed and highlighted by the Commissioner in the impugned order. He was of the opinion that the ITO was carried away by the fact that the assessee was a dealer in shares in respect of certain transaction whereas the purchase of the shares of Thapar Steinmuller & Boiler Co. Ltd. was patently for the purpose of investment. We have gone through the orders of the Tribunal for the earlier years as placed before us. In those orders discussion was made about the sale of shares of certain specific companies which resulted in a loss and which was claimed to be a business loss. The ITO disallowed the claim of the assessee which was ultimately allowed by the Tribunal for the assessment years 1961-62, 1962-63 and onwards.

Amongst other things, it is seen that before the Tribunal for the assessment years 1966-67 to 1968-69 and 1970-71 in the case of the assessee being IT Appeal Nos. 628 to 631 (Cal.) of 1979 dated 28-5-1980 it was contended on behalf of the revenue that the assessee had sold the debenture and preference shares which had been held as investment as apparent from the balance sheet while the assessee contended that the shares and debentures were shown as investment in the balance sheet as per direction of the auditors whereas the true nature of these debentures and preference shares were that of a trading asset. It was pointed out that similar issue came up before the Tribunal in IT Appeal No. 4803 (Cal.) of 1969-70 and the Tribunal vide order dated 18-2-1974 had held against the department. For the same reasons, the Tribunal for the assessment year 1966-67 onwards also rejected the stand. It is true that what has been recorded in the balance sheet in respect of the shares, would not be conclusive or decisive. But invariably it is one of the points for consideration. In this connection we may refer to the decision of the Hon'ble Supreme Court in the case of Ashoka Viniyoga Ltd v. CIT [1972] 84 ITR 264 in which amongst other things on the facts of that case, it was held that the Tribunal was right in placing reliance on the resolution of the company for the sale as originally recorded in the books of the company since no material was placed to show why the reference to 'investment' was scored out. It was also held that it was true that the name given to the transaction in a document was not conclusive as to its true character. In the absence of a satisfactory explanation it was open to the Tribunal to rely on the admission of the assessee in its own record. In the case before us, the assessee has drawn up a balance sheet on the basis of the auditor's report. The shares of different companies held by the assessee were considered as trade investment including shares of Thapar Steinmuller & Boiler Co. Ltd. In fact, in the profit and loss account for the year under consideration, it is seen that the income from sales as per Schedule VII was on iron and manganese ore, diesel oil, sale of agricultural products, etc., whereas income from investments and interest received has been shown at Schedule VIII which included dividend income, etc. Thus, records of the assessee itself as well as the balance sheet for the year under consideration indicate that the shares of Thapar Steinmuller & Boiler Co. Ltd. were held as investment and in fact, the dividend income from other companies was considered as income from investment at Schedule 'G'. The value of investment was shown either at cost or written down value. That apart, in the balance sheet the stock-in-trade as appearing in Schedule 'E' also comprised of the closing stock of only iron, manganese ore, diesel oil, etc. The shares of Thapar Steinmuller & Boiler Co. Ltd. were not shown or declared as stock-in-trade by the assessee. Similarly, the Schedule 'I' indicated opening stock of iron ore and diesel oil and agricultural farm only. So was the position in respect of the trading purchase.

Profit on the share sold as per Schedule IX was nil during the year and the other incomes were from sources other than share dealings. In another case of Investment Ltd. v. CIT [1970] 77 ITR 533, the Hon'ble Supreme Court on the facts of that case held that though it was true that order made in assessing the income of one year regarding the nature of transaction or the income received therefrom was not conclusive in another year, the finding for the other assessment years that the shares and securities were the stock-in-trade was good or cogent evidence of the nature of the transaction and that no firm conclusion could be drawn for the description by the assessee in the balance sheet by its stock and 'investment' and from the valuation of the securities and shares at cost.

26. The facts of the present case relating to the assessment year 1979-80 were that the assessee did not sell the shares of Thapar Steinmuller & Boiler Co. Ltd. as that company went into liquidation and a liquidator paid Rs. 10,000 as final dividend in lieu of the shares surrendered by the assessee to the liquidator. The book value of those shares is at Rs. 1 lakh at the rate of Rs. 10 per share for 1,000 shares. As stated earlier, the shares were purchased by the assessee some time in 1963 which could have been sold had the same been acquired by the assessee for the purposes of its stock-in-trade. The assessee on the facts of the case had surrendered those shares to the liquidator which cannot be considered as a sale or transfer. It is in this context that we have to consider the provision of Section 46(2) referred to by the Commissioner in the first and second notices to the assessee while initiating the proceedings Under Section 263. In the case of CIT v.R.M. Amin [1977] 106 ITR 368 the Hon'ble Supreme Court on the facts of the case considered that there was no transfer of capital asset within the meaning of Section 2(47) of the Act. When a shareholder received money representing his shares on the distribution of the net assets of the company in liquidation, he received that money in satisfaction of the rights as a shareholder and not by any operation or any transaction which amounted to sale, exchange, relinquishment, etc. The Hon'ble Supreme Court referred to its earlier decision as in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45. But it went on to say that but for Section 46(2), it would not have been possible to charge tax under the head 'Capital gains' on the money received by the shareholder from the company on its liquidation. The Commissioner in his notices has referred to the provisions of this Section on the basis of which amongst other things, he felt that the order of the ITO was erroneous.

It is seen that the ITO has not at all taken into account for consideration the amount received by the assessee from the liquidator keeping in view the provisions of Section 46(2) as discussed above. The Hon'ble Madras High Court also in the case of CIT v. C.T. Oppilal Achi [1977] 109 ITR 126 has held on the facts of that case that Section 46(2) is a charging Section, but it will apply only in relation to the companies as defined in Section 2(17). Similar is the view of the Hon'ble Bombay High Court in the case of Cable & Wireless Ltd. v. V.H.Gangal [1973] 90 ITR 84. Also the case of the same assessee was V.H.Gangal, ITO v. Cables & Wireless Ltd. [1977] 107 ITR 293 (Bom.).

27. As indicated earlier, the assessee's learned counsel has drawn our attention to the grounds adopted by the Commissioner for initiation of proceedings Under Section 263, as narrated in the first and in the second notices issued by him to the assessee in which the Commissioner had also referred to the point that Rs. 90,000 was a capital loss in terms of provisions of Section 46(2) whereas this amount was treated as business loss in the assessment order. In this connection we may refer to the decision in the case of Indian Textiles (supra) as decided by the Hon'ble Madras High Court in which amongst other things, on the facts of that case, it was held that if at least in respect of one item the ITO's order was found to be prejudicial to the interests of the revenue, initiation of proceedings Under Section 263 could not be questioned.

28. In some of the cases cited earlier on behalf of the assessee, it is seen that the facts were distinguishable. In the case of Cotton Fabrics Ltd. (supra), the assessee was found to be a dealer in shares and from that premises, the decision was rendered by the Hon'ble High Court regarding certain claims of expenditure attributable to income from dividends. Similarly, in the case of New India Investment Corpn. Ltd. (supra), the Hon'ble Calcutta High Court had proceeded on the basis that where an assessee was holding shares and securities as stock-in-trade and the dividend received therefrom and none of the holdings of the assessee were held by way of investment only, the expenses incurred to such income would be allowable as business expenditure and the same cannot be apportioned under two different heads, i.e., 'Business' and 'Dividend'. It was also held that even if the income was solely referable to the dividend there cannot be any apportionment as the entire expenditure would then be allowable against the dividend earned. In the present case before us, the dispute of the Commissioner was that the shares held by the assessee in Thapar Steinmuller & Boiler Co. Ltd. were not shares held by a dealer in shares or a stock-in-trade. Similarly, in the case of Santi Prasad Jain (supra) it was found that the assessee was a businessman and also a dealer in shares who claimed loss on the sale of certain shares and the loss was ; accordingly, considered as admissible deduction. In the case of Produce Exchange Corpn. Ltd. (supra), cited at the time of hearing before us, it is seen that the Hon'ble Calcutta High Court has noted that the assessee was carrying on the business in various lines and one of the objects of the company was dealing in shares, etc. It was held amongst other things that the fact that the purchaser acquired secretaryship of the company whose shares were sold was not decisive of the question whether the transaction was an investment or a dealing in shares.

29. The contention before us on behalf of the assessee is that the shares were held by the assessee as stock-in-trade which fact was also accepted by the appellate authorities for the earlier years. As stated in the preceding paragraph, the contentions of the assessee are that the facts of the present year were different from those of the earlier year, i.e., 1955-56 as decided by the Hon'ble Supreme Court in Karam Chand Thapar & Bros. (P.) Ltd.'s case (supra). We have indicated earlier that from the balance sheet, profit and loss account, etc., we notice that these items including the shares of Thapar Steinmuller & Boiler Co. Ltd. as per books of account of the assessee were held as trade investment and not as stock-in-trade. The profit and loss account also indicated the same position and the value of the closing stock also reflected only the value of the materials of manganese ore, etc.

From the facts available in the present case before us and as -indicated by the Commissioner, the shares of Thapar Steinmuller & Boiler Co. Ltd. were apparently acquired by the assessee when the company was incorporated. The company acquired 1,000 shares out of 6,071 shares. The assessee did not sell those shares till the same were surrendered to the liquidator for which Rs. 10,000 was received finally from the liquidator, as indicated earlier. Thus, at no point of time before the said surrender of the shares, there was any indication that the assessee intended to sell those shares, as we find no materials to the contrary. Thus, the intention in purchasing those shares was not to acquire them as part of the stock-in-trade of its business in shares.

In the case of Ramnarain Sons (P.) Ltd. (supra) the Hon'ble Supreme Court held that in considering whether the transaction is or is not an adventure in the nature of trade, the problem must be seen in the light of the intention of the assessee having regard to the legal requirements which are associated with the concept of trade or business. In the similar situation in the case of Oriental Investment Co. Ltd. v. CIT [1957] 32 ITR 664, the Hon'ble Supreme Court on the facts of the case, held that the mere fact that the company has within its objects the dealing investment in shares, does not give the assessee the characteristics of a dealer in shares but in other circumstances, if proved, it may be relevant for the purpose of determining the nature or activities of the company.

30. As it was held by the Hon'ble Supreme Court in the case of Associated Industrial Development Co. (P.) Ltd. (supra) whether a particular holding of shares is by way of investment or formed part of stock-in-trade is a matter which is within the knowledge of the assessee and he should in the normal circumstances be in a position to produce evidence from his records as to whether he has maintained any distinction between those shares which are his stock-in-trade and those which are held by way of investment. In the case of the assessee and on the materials available, we do not find any fact on the basis of which we could say that the shares held by the assessee were rather formed part of the stock-in-trade and the assessee has placed no materials for forming any inference as such.

31. As mentioned in the earlier paragraphs, the learned departmental representative places reliance on the decision of the Hon'ble Supreme Court in the case of the assessee itself as in Karam Chand Thapar & Bros. (P.) Ltd.'s case (supra). We have gone through that decision for our consideration also.

32. The assessee's learned counsel before us at the earlier stage of his argument, has also pointed out that it was wrong for the Commissioner to say that the interest borrowing should also be taken into account in working out the expense or relief for the purpose of Section 80M, read with Section 80AA, as according to the assessee, the increase in investment was not necessarily relatable to increase in the borrowing as increase in the shareholding was also due to the fact that the bonus shares were issued by the company and held by the assessee as such. In this connection, it is necessary to refer to another decision of the Hon'ble Supreme Court in the case of CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 in which on the facts of the case, it was held that the bonus shares, by the mere fact that they were received by the assessee in respect of their stock-in-trade and as accretion thereto did not become part of the stock-in-trade and that the bonus shares were received as capital and they could be converted by the assessee into their stock-in-trade or retained as their capital asset.

Accordingly, if any portion of the bonus shares was sold or disposed of, the same would be on the capital account although the bonus shares were received in respect of the shares held by an assessee as stock-in-trade. It was also held that a trader may acquire a commodity as stock-in-trade or an investment and in each case the question is one of evidence to be gathered from the evidence of conduct by the acquirer and his dealings with the commodity. As repeatedly mentioned earlier, the assessee did not sell or dispose of the shares of Thapar Steinmuller & Boiler Co. Ltd. since their purchase till the same was surrendered to the liquidator for which Rs. 10,000 were received which was considered by the Commissioner with reference to Section 46(2) as discussed earlier.

33. Having regard to the entirety of the facts and circumstances of the case and after taking into account the decisions relied on by both the sides and also after taking into account the decisions considered by us above, we are of the opinion that the Commissioner had a valid jurisdiction in initiating proceedings Under Section 263, on the facts of the case. From the brief narration of the facts, we agree with the Commissioner in saying that the ITO did not apply his mind to the issue involved and the case required more detailed examination, which should have been done by the ITO originally. In view of the circumstances and facts of the case, the order of the ITO was erroneous and the Commissioner has validly assumed jurisdiction Under Section 263 and, in our opinion, the direction of the Commissioner to the ITO to examine the case thoroughly and to frame the assessment afresh requires to be substained. In the circumstances, we reject the assessee's appeal on all the points.


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