1. This reference relates to assessment year 1958-59, the previous year for which is the year ending September 30, 1957. Seth R. Dalmia (hereinafter referred to as 'the assessed') filed a return of his income for the assessment year 1958-59, disclosing an income of Rs. 99,496. In computing this income, he claimed, inter alia, that the loss incurred by him in the earlier years amounting to Rs. 2,52,121 from his business in shares should be set off against the dividend income of Rs. 3,12,734 which he had received during the accounting year. This dividend income represented the dividend received by the assessed from the shareholding in Jaipur Udyog Ltd. The assessed had also claimed allowance of interest amounting to Rs. 1,95,870 which was payable to M/s. Asia Udyog Pvt. Ltd. on the amount borrowed by the assessed for the purchase of the shares of Jaipur Udyog Ltd. The Income-tax Officer disallowed the assessed's claim for set-off on the ground that the dividend income did not constitute income from business under Section 10 of the Indian Income-tax Act, 1922 (hereinafter referred as 'the Act') but constituted income from other sources under Section 12(1A) of the Act. He also disallowed the assessed's claim for interest on the ground that the borrowings from M/s. Asia Udyog Pvt. Ltd. were not for the sake of earning any income.
2. Against this order of the Income-tax Officer, the assessed preferred an appeal to the Appellate Assistant Commissioner and the latter, while allowing the assessed's claim of interest to the extent of Rs. 1,08,000, however, disallowed the assessed's claim for the set-off of the loss of earlier years against the dividend income received from the shareholding in Jaipur Udyog Ltd.
3. The assessed preferred a second appeal before the Income-tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') and pressed his claim for the set-off of the loss of the earlier years against the dividend income from the shares of Jaipur Udyog Ltd. For the reasons which will be referred to at a later stage, the Tribunal allowed the assessed's claim. At the instance of the Commissioner of Income-tax, however, the Tribunal has referred the following question to this court under Section 66(1) of the Act;
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessed was entitled to carry forward and set off losses of the earlier years against dividend income of the assessed in the assessment year 1958-59 ?'
It would appear from the assessment order for the year 1958-59, which is made a part of the statement of the case, that the assessed derived income from various sources, such as, income from interest on securities, income from property, income from business and income from dividends. The income from business was from the business of a dealer in shares. It is not disputed that the loss claimed by the assessed amounting to Rs. 2,52,121 represented the loss incurred by the assessed in the earlier years from this business in shares. Under Section 24(2) of the Act, the assessed would be entitled to set off this loss of earlier years against his business income in shares and not against his income from any other source. thereforee, the assessed would be entitled to set off the earlier years' loss against the dividend income received by him from his shares in Jaipur Udyog Ltd. only if these shares constituted his stock-in-trade of his business in shares and that he would not be entitled to such a set-off if the said shares of Jaipur Udyog Ltd. were not his stock-in-trade but were only in the nature of an investment. thereforee, the question for determination is whether in the account year relevant to the assessment year under reference, the assessed held these shares of Jaipur Udyog Ltd. as his stock-in-trade or as investment.
4. The three main factors on the basis of which the Tribunal came to the conclusion that the shares in Jaipur Udyog Ltd. were the stock-in-trade of the assessed during the account year were-
(i) that while the shares had been originally acquired to obtain a controlling interest in the Jaipur Udyog Ltd., the assessed was not interested in retaining those shares in the year of account with a view to retain his controlling interest in Jaipur Udyog Ltd. in view of the fact that the controlling interest of the said company had already passed from the hands of the assessed to those of the Jain group;
(ii) that the Appellate Assistant Commissioner had allowed the assessed's claim for interest paid on the loans raised by him for purchasing these shares; and
(iii) that in the assessment years 1959-60 and 1960-61 the assessed had offered the income from the sale of these shares for assessment as income from business and the Income-tax Officer had assessed the said income as income from business.
It would appear from the assessment order as well as the order of the Appellate Assistant Commissioner that the assessed had purchased the shares in question on April 30, 1955, which fell within the assessment year 1955-56. The exact date when the controlling interest in Jaipur Udyog Ltd. passed from the hands of the assessed to the Jain group is not available on the record and the Tribunal in its order merely stated that-
'the controlling interest in the Jaipur Udyog Ltd. had already passed from the hands of the assessed to Jain group'.
This would mean that some time between the assessment year 1955-56 and the assessment year under reference, namely, 1958-59, the controlling interest had passed from the hands of the assessed to the Jain group. This would again mean that some time between the assessment year 1955-56 and the assessment year 1958-59, the assessed no longer held the shares in question with the object of having a controlling interest in the Jaipur Udyog Ltd. It is no doubt true that it would still be open to the assessed to keep these shares by way of investment but it is at the same time open to him to convert his investment into his stock-in-trade. As observed by the Supreme Court in Commissioner of Income-tax v. Associated Industrial Development Co. (P.) Ltd., : 82ITR586(SC) :
'Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessed who holds the shares and he should, in 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.'
Again, as observed by the Madras High Court in V. S. R. M. Firm v. Commissioner of Income-tax : 47ITR720(Mad) :
'What is originally a capital investment may be converted into a trading stock by the conduct of the assessed in dealing with it. But, evidence of such conduct must be cogent, clear and unequivocal, and the taxing authorities are not justified in inferring that capital as acquired the character of stock-in-trade merely from the fact that the assessed had dealt with another capital stock as a trading commodity.'
In Calcutta Discount Co. Ltd. v. Income-tax Officer, : 41ITR191(SC) the Supreme Court, while considering the scope of Section 34 of the Act, observed as follows ;
'That the question whether sales of shares were by way of changing the investments or by way of trading in shares had to be decided on a consideration of different circumstances, including the frequency of the sales, the nature of the shares sold, the price received as compared with the cost price, and several other relevant facts......but whether the assessedhad the intention to make a business profit as distinguished from the intention to change the form of the investments was really an inference to be drawn by the assessing authority from the material facts taken in conjunction with the surrounding circumstances.'
In the present case, the assessed had acquired the shares on April 30, 1955. In the assessment year 1959-60, the assessed was offered the right to purchase 83,333 shares of Jaipur Udyog Ltd. out of the newly issued shares on his original holding of 2,50,000 shares. The assessed sold his right to purchase the new shares to R. K. Relon & Company at a rate of Rs. 2 per right to purchase one share. The assessed credited the profit of Rs. 1,68,709 so realised by him to the profit and loss account. He had contended before the Income-tax Officer that, though he was an investor in some shares and a dealer in some shares, after the control of the management of the affairs of Jaipur Udyog Ltd. passed out of his hands to Sahu Jain group, he had ceased to be an investor in these shares and he had held the same as stock-in-trade of his share business and the profit of Rs. 1,68,709 received by him on the sale of rights shares was, thereforee, assessable as his income under the head business. The Income-tax Officer accepted the stand of the assessed and included the profit of Rs. 1,68,709 as his income from business. Similarly, in the assessment year 1960-61, the assessed earned profit of Rs. 2,52,548 from the sale of shares of Jaipur Udyog Ltd. which he offered for assessment as his income from business and the same was treated and assessed as his income from business. It would thus appear that, as soon as the control of management of Jaipur Udyog Ltd. had passed from the hands of the assessed to Sahu Jain group, he had started selling these shares. The sale of the shares in the assessment years 1959-60 and 1960-61, i.e., within the period of 4 years, is more consistent with the holding of the shares by the assessed as the stock-in-trade than with the holding of the shares by the assessed by way of investment. In any case, there is no positive evidence in support of the stand taken by the revenue that even after the controlling interest in Jaipur Udyog Ltd. had passed from the hands of the assessed, he continued to hold the shares by way of investment.
5. Although the Income-tax Officer had disallowed the assessed's claim of interest on the amount borrowed for the purchase of these shares, the Appellate Assistant Commissioner had allowed the assessed's claim and this amount of interest was allowed to be deducted out of the businessincome of the assessed. This would mean that the Appellate Assistant Commissioner treated the amount borrowed for the purchase of shares as an amount borrowed for the purpose of the business of the assessed.
6. The above facts in our view justify the conclusion drawn by the Tribunal that in the account year under reference the assessed held these shares as his stock-in-trade and not by way of investment. Shri B. N. Kirpal, learned counsel for the revenue, contends that the above facts are not sufficient to justify the conclusion drawn by the Tribunal. On the other hand, Shri G.C. Sharma, learned counsel for the assessed, contends that the finding of the Tribunal that the shares in question constituted a stock-in-trade of the assessed during the account year under reference is essentially a question of fact and in view of the question which has been referred by the Tribunal to this court, it is not open to this court to consider whether there was sufficient material before the Tribunal to justify its conclusion. It is not necessary for the purpose of this case to go into the scope of a reference under Section 66(1) of the Act. Even assuming that the question as framed by the Tribunal and referred to this court would necessarily imply that this court could consider whether there was sufficient material before the Tribunal to justify its conclusion, we are of the view that the circumstances which were relied upon by the Tribunal for drawing its conclusion and which have been referred by us in the foregoing paragraphs, do justify the conclusion drawn by the Tribunal that the shares in question-were held by the assessed during the accounting year as stock-in-trade. Although the Income-tax Officer appears to have disallowed the assessed's claim for set-off of the losses of earlier years against the dividend income of the present year on the ground that the business losses cannot be set off against dividend income under Section 12(1A) of the Act, this ground is not pressed by the learned counsel for the revenue, as it is now settled that if the dividend income which is sought to be assessed under Section 12(1A) of the Act is derived from the stock-in-trade of the assessed, such dividend income still retains the character of business income and is available for being set off against the business losses carried forward from the earlier years. The Tribunal has referred to the decision of the Madhya Pradesh High Court in Commissioner of Income-tax v. Shrikrishan Chandmal : 60ITR303(MP) . That decision as well as the decision of the Gujarat High Court in Commissioner of Income-tax v. Bhavnagar Trust Corporation P. Ltd. : 69ITR278(Guj) support this view, namely, that if the dividend income is derived from the stock-in-trade of the assessed then it is available for set off of losses under Section 24(2) of the Act notwithstanding the fact that such dividend income is treated as income under Section 12(1A) of the Act.
7. In the result, we answer the question referred to us in the affirmative i.e., in favor of the assessed and against the revenue. The assessed is alsoentitled to the costs of this reference. Counsel's fee is fixed at Rs. 250.