Income Tax Appellate Tribunal - Kolkata
Hind Marketing Corpn. (P.) Ltd. vs Income-Tax Officer on 27 December, 1991
Equivalent citations: [1992]40ITD476(KOL)
ORDER
D.S. Meenakshisundaram, Vice President
1. The appellant objects to the order of the CIT (Appeals) sustaining the rejection of its claim for deduction of a sum of Rs. 3 lakhs as business loss by the Assessing Authority.
2. This appeal arises out of the Income-tax assessment of M/s. Hind Marketing Corporation (P.) Ltd., appellant herein. The assessment year is 1973-74 for which the previous year ended on 31-12-1972. The assessee carried on business in money lending and agency business. In its return of income for this year, the assessee had claimed a sum of Rs. 3 lakhs as loss on the sale of shares held by it in M/s. Madras Vanaspati Ltd. and claimed this loss as business loss.
3. The Income-tax Officer disallowed this claim on the ground that the assessee failed to furnish the details regarding the sale of investment and for want of evidence. The assessee took up the matter in appeal but without success. It, therefore, preferred a further appeal to the Tribunal which was disposed of by the Appellate Tribunal "A-Bench", Calcutta in I.T. A. No. 1663 (Cal.) of 1975-76 by their order dated 23-9-76. The Tribunal set aside the order of the AAC and restored the matter to his file for fresh disposal for the following reasons set out in paragraph 2 of the said order dated 23-9-76 which is quoted below :--
After hearing both sides on this appeal, we are of the opinion that, the Appellate Assistant Commissioner's order appealed against deserves to be set aside and he must dispose of the appeal afresh in accordance with law. From the aforesaid order it is not clear whether anybody appeared before him on behalf of the assessee. The case was heard on 25-1-1975 and was understand from the Departmental Representative that the notice was dated 18-1-1975. This is also evident from the Appellate Assistant Commissioner's records. The order sheet entry in the Appellate Assistant Commissioner's record was dated 25-1-1975. The entry in the order sheet is illegible to all of us. The learned counsel for the assessee could not specifically state as to whether anybody appeared before the Appellate Assistant Commissioner on behalf of the assessee. Be it as it may that the appellate order appealed against reflects that none appeared before him on behalf of the assessee. However, we find from the order of the Appellate Tribunal dated 14-1-1974 in I.T.A. No. 5120 (Cal.) of 72-73 relating to assessment year 1969-70 of the assessee that the assessee was carrying on business of money-lending and agency and that an agreement dated 30-4-1969 the assessee which had no shares of Messrs. Madras Vanaspati Ltd. prior to 30-3-1969 agreed as a measure of financial help to the said company to subscribe for the available balance of the issued but not yet subscribed capital namely 169488 equity shares of Rs. 3 each by paying to it the entire sum of Rs. 5,08,464 for the same. The assessee also agreed not to charge interest on its loan to the said company for the year 1-5-1967 to 30-4-1968. Again from the extract from report of the Board of Directors of Madras Vanaspati Ltd., Madras to its members for the year ended 30th April 1968 (filled by the learned counsel for the assessee) we also find that the assessee-company took on 31st August 1968 a block of 209612 shares and paid to the company Rs. 6,28,836 at Rs. 3 per share. Learned counsel also showed us from the copy of the account of the said Madras company appearing in the assessee's books of account that the consideration money for the shares was adjusted against the business loan advanced by the assessee to the said company. According to the learned counsel the loss arising out of the sale of shares xonarirutws a revenue loss because the shares sold from a part of the trading stock of the assessee company, in view of the fact that the shares sold were acquired by way of realisation of business loan. However, the case requires investigation. Considering all these facts we are of the opinion that the Appellate Assistant Commissioner should not have disposed of the appeal in the manner in which he chose to do so. We therefore, set aside his order and restore the appeal to his file for fresh decision in accordance with law and also keeping in view our observations above. In this connection, we must also mention that the Appellate Assistant Commissioner should dispose of the other two issues likewise.
4. The matter was again heard by the CIT (Appeals) who by his order dated 5-8-1987 cancelled the disallowance of the loss rejecting the assessee's contentions that this loss of Rs. 3 lakhs should be allowed as a revenue loss incidental to its business. The Commissioner held that the assessee was not carrying on any business of dealing in shares, that the shares of Madras Vanaspati Ltd. acquired by the appellant were treated by it as its investment and not as its stock-in-trade and that the assessee's claim that the purchase of these shares was done for reducing the extent of the debt due to it by Madras Vanaspati Ltd. was of no relevance in respect of its claim of a trading loss. According to the Commissioner this was due to the fact that the adjustment of the purchase consideration for the shares against the loan account represented only the mode of payment of the cost of acquisition of the shares, that instead of making an out-right payment in cash for the purchase of shares, the assessee had made the direct payment of the sale consideration by getting it adjusted against the loan amount outstanding and due to it and that such an action would not convert the shares which were acquired as investment into its stock-in-trade. In support of this conclusion the CIT (Appeals) relied on the decision of the Madras High Court reported in VR. KR. S. Firm v. CIT [1966] 61 ITR 661 and distinguished the decision of the Supreme Court in Pandit Narain Dutt Chhimwal v. CIT [1972] 83 ITR 413 which was relied on by the assessee. Hence, he rejected the assessee's claim of business loss ofRs.3 lakhs and upheld the order of the ITO disallowing this loss as justified. Aggrieved by this order of the CIT (Appeals), the assessee has come up in appeal to the Tribunal for the second time.
5. Shri S. Shrikrishna Ayyer, the learned Chartered Accountant of the assessee challenged the findings of the CIT (Appeals) and contended that the facts of the case established that the shares of M/s. Madras Vanaspati Ltd. were acquired in the course of money lending business carried on by the assessee that it represented assets taken over in lieu of a money lending debt due to the assessee from Madras Vanaspati Ltd. and that, therefore, the shares in question constituted the stock-in-trade of the money lending business of the assessee-company. The learned Chartered Accountant urged that even though the assessee is not a dealer in shares, the nature of the shares as its stock-in-trade of its money lending business could not be denied as it was a case of change of the loan due from a Sundry Debtor into shares i.e., shares taken over in lieu of money lending debt and, therefore, it became part of assets of the money lending business. Shri Ayyer argued the mere fact that the shares in question were shown under the head "Investment" in the Balance Sheet of the appellant as required by the provisions of the Companies Act, could not in any way affect or alter the true nature of character of the shares as stock-in-trade of the assessee's money lending business and would not make them investments as held by the CIT (Appeals). In this connection, the learned Chartered Accountant relied on the orders of the Appellate Tribunal for the assessee's own case for earlier assessment year 1969-70 dated 14-1-74 in I.T.A. No. 5120 (Cal.) of 1972-73 decided by the Appellate Tribunal "C-Bench", Calcutta and pointed out that the Appellate Tribunal while dismissing the departmental appeal for the assessment year 1969-70 held that the entire transaction of acquisition of shares in Madras Vanaspati Ltd. was part of money lending business of the assessee. He further pointed out that this decision of the Appellate Tribunal was taken up in Reference to the High Court by the Commissioner of Income-tax and that the said Reference has also been decided in favour of the assessee as could be seen from the Solicitor's letter dated 2-2-89 at page 16 of the Paper Book. The learned Chartered Accountant also relied on the assessee's written submissions at page 17 of the Paper Book which was filed before the CIT (Appeals) and contended that the CIT (Appeals) ought to have followed the decision of the Supreme Court in the case of Pandit Narain Dutt Chhimwal (supra) and held that the loss in question was allowable as business loss. He further submitted that the decision of the Madras High Court in the case of VR. KR. S. Firm (supra) relied on by the CIT (Appeals) were entirely different from the facts of the present case. He submitted that the purchase of shares of Madras Vanaspati Ltd. was not an investment but as apart of the assessee's money lending business to realise its money to the tune of Rs. 33 lakhs advanced to the said Madras Vanaspati Ltd. and that, therefore, the loss in question was allowable as business loss arising in the course of the assessee's money lending business.
6. Shri A. Ghosh, the learned Departmental Representative relied on the findings of the CIT (Appeals) and contended that the decision in the case of Pandit Narain Dutt, Chhimwal (supra) was distinguishable on facts from the assessee's case and that, therefore, the order of the CIT (Appeals) should be upheld.
7. We have carefully considered the contentions set out above in the light of the matters placed before us and the authorities relied on in support of the same.
8. The order of the Appellate Tribunal "C-Bench" Calcutta, in ITA No. 5120 (Cal.) of 1972-73 for the assessment year 1969-70 dated 14-1-74 reference is above is very relevant to appreciate correctly and properly the true nature and character of the shares acquired by the assessee in the year 1968. As this order of the Tribunal has been affirmed by the High Court in I.T. Reference No. 437 of 1975 dated 2-2-89, we consider it useful and proper to quote the relevant findings of the Tribunal from the said order in para 6, which reads as under :--
There is no dispute about the fact that the assessee had advanced to the Madras company as much as Rs. 32,66,342/92 by 30-4-1968. Till that date the assessee was only an unsecured creditor as regards huge amount. The debtor in spite of all the promises that it had given initially, had not yet gone into production in spite of aids given to it given by the Government of Madras. The balance sheet of the debtor company as at 30-4-1968 shows that it had suffered a loss of about Rs. 43,00,000 during the year and that it had more than Rs. 52,00,000 by way of loan liabilities secured and unsecured. It is also seen that, presumably on account of its strained circumstances even the Madras Government has conditionally waived a sum of Rs. 1,63,727 in favour of that company during the year. It was in such predictment that the assessee entered into the correspondence with its creditor company in an effort either to get back the amount or at least to get the advance secured to its advantage. The final result was the agreement dated 30-4-1968 when as a matter of fact the amount due to the company was the principal amount aforesaid and the interest thereon amounting to Rs. 8,38,870.03 p. As the agreement itself would indicate, even the Company Law Board had then advised the Madras Company to take early steps to improve its financial position within one year to avoid action under Section 433(o) read with Section 439 of the Companies Act, 1956. The agreement also makes it clear that prior to 30-3-1968 the assessee had no shares in the debtor company and that it was only on that day, as a measure to be of help to the Madras Company, it agreed to subscribe for the available balance of the issue but not yet subscribed capital, viz. 1,69,488 equity shares of Rs. 3 each by paying to it the entire sum of Rs. 5,08,464 for the same. It was as part of that agreement that the assessee agreed as a measure of further help to the debtor company not to charge interest on its loan for the year from 1-5-1967 to 30-4-1968. It was not as if the assessee did not get substantial advance as a result of this concession granted by it. For, by means of the same agreement, the assessee obtained from the debtor company an agreement to create a second charge on the assets for the entire amount due to it. Needless to say that if such a charge had not been obtained, the assessee would have had to continue as an unsecured creditor of the Madras Company which was by no means in a happy financial position then. By the agreement the assessee had agreed not to claim the interest that had already been credited in its accounts for the period from 1-5-1967 to31-12-1967. It also agreed not to charge any interest for the subsequent period till 30-4-68. We are not able to find any substance in the contention urged by the learned Departmental Representative that on 30-4-1968 no portion of the interest of that accounting year had not yet accrued due to the assessee for any write off. Interest accrued from day to day and there was nothing that prevented the assessee from calculating interest for the period from 1-1-1968 to 30-4-1968 for writing it off along with the interest of the period from 1-5-1967 to 31-12-1967 which had already been brought into its accounts. We do not in the circumstances referred to above, see anything to suspect that there had been any collusion in this matter between the assessee and the debtor company. On the other hand we find in everything connected with the agreement dated 30-4-1968 and the terms contained therein prudent and shrewd business man ship. We have hence no hesitation to recognise what has been done as a measure of unassailable, commercial expediency actuated well by the assessee's best business interests. We therefore, see nothing in this case to warrant interference with the order of the AAC. The order of the AAC is hence confirmed and the appeal is dismissed.
[Emphasis supplied]
9. In the light of the above findings of the Tribunal, it would be clear that the shares in question were acquired by the assessee-company in lieu of its money lending debt due from Madras Vanaspati Ltd. and not as an investment. It is a case of the realisation of money lending debt by the assessee due from Madras Vanaspati Ltd. to whom it had advanced nearly Rs. 33 lakhs. It is, therefore, clearly established that the shares in question formed part of the stock-in-trade of the money lending business of the assessee-company. We are unable to agree with the reasoning and conclusion of the CIT (Appeals) that this mode of acquisition of the shares is an irrelevant factor as this contention of the CIT (Appeals) runs counter to decide the cases. The mere fact that the assessee company had shown the shares under the head "investment" in its Balance Sheet could not affect or alter its original character and nature as stock-in-trade of the money lending business of the company at the time of their acquisition in 1968. As rightly contended by the assessee's learned Chartered Accountant the assessee had to show the shares under the head "investment" in the form of Balance Sheet prescribed under the Companies Act, but it is not decisive nor conclusive of the issue regarding its true nature and character.
10. In Pandit Narain Dutt Chhimwal's case (supra) the assessee had acquired certain lands in the course of its money lending business. Subsequently, these lands were sold in plots by the assessee. The assessee's claim was that the profit arising on the sale of these plots of lands was not taxable as income but this was negatived by the Tribunal who held that the lands in question which were acquired in lieu of money lending debt continued to retain its character of business asset until it was sold and that, therefore, the profit constituted profit of the assessee's money lending business. This decision of the Tribunal was affirmed by the High Court and on further appeal to the Supreme Court, Their Lordships of the Supreme Court confirmed the decision of the High Court holding that there was no infirmity in the reasoning and conclusion of the Tribunal on the facts.
11. In our view, this decision of the Supreme Court is directly applicable to the facts of the present case. In the case before the Supreme Court, it was a case of acquisition of an immovable property in lieu of money lending debt whereas, in the case before us, the assessee has acquired shares of the debtor company in lieu of the money lending debt or in part realisation of the money lending debt due from the debtor company. Therefore, the shares acquired by the assessee company in Madras Vanaspati Ltd. retained their character of a business asset of the money lending business of the assessee-company until they were sold. The error committed by the CIT (Appeals) is that the assessee should be a dealer in shares in order to hold that the shares in question are stock-in-trade. This conclusion of the CIT (Appeals) is clearly untenable in view of the decision of the Supreme Court referred to above.
12. The decision of the Madras High Court in the case of VR. KR. S. Firm (supra), the facts were entirely different. It was not a case of shares taken over in lieu of money lending debt. It was on this fact the Madras High Court held that in the absence of any evidence to show that the assessee had treated the shares as its stock-in-trade, the loss could not be allowed as business loss. On the contrary, in the present case, it is clearly established on facts that the shares of Madras Vanaspati Ltd. represented the stock-in-trade of the money lending business of the assessee-company as they were acquired in the course of money lending business and in lieu of money lending debt due from the said Madras Vanaspati Ltd. We, therefore, respectfully follow the decision of the hon'ble Supreme Court in the case of Pandit Narain Dutt Chhimwal (supra) and hold that the loss of Rs. 3 lakhs arising on the sale of shares (about the quantum of which there is no dispute before us) is a revenue loss which arose to the assessee in the course of its money lending business on the realisation of the money lending assets and, therefore, it is allowable in the computation of its business income. Accordingly, we accept the contention of the assessee's learned Chartered Accountant and allow the assessee's appeal.
13. In the result, the appeal is allowed.