Patna High Court
Commissioner Of Income-Tax, Bihar And ... vs Dalmia Jain And Co. Ltd. And Others. on 13 January, 1966
Equivalent citations: [1967]65ITR432(PATNA)
JUDGMENT
UNTWALIA J. - These five references made under section 66 (1) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, Patna Bench, have, with the consent of the parties and for the sake of convenience, been heard together and are being disposed of by a common judgment. In M. J. Cs. Nos. 665 and 666 of 1962 the assessee is Dalmia Jain and Company Ltd., and the consolidated references have been made in respect of the assessment years 1950-51 and 1952-53 respectively. In M. J. Cs. Nos. 590 and 591 of 1962, the assessee is Ashoka Marketing Ltd., and the consolidated references relate to the assessment years 1952-53 and 1953-54 respectively. M. J. C. No. 104 of 1962 again relates to the case of Dalmia Jain and Company Ltd. for the assessment year 1953-54.
The two question referred to the High Court in M. J. Cs. Nos. 665 and 666 of 1962 are the following :
"(1) Whether, on the fact and circumstances, the Tribunal was justified in holding that the loss of Rs. 29,935 for the assessment year 1951-52 and the loss of Rs. 29,07,991 for the year 1952-53 incurred on the sale of shares in the New Central Lothian and Albion Jute Mills Ltd. were losses of a revenue nature ?
(2) Whether, on the facts and circumstances, the Tribunal was justified in holding that litigation expenses of Rs. 1,29,994 incurred by the assessee for the assessment year 1951-52 constitute expenditure laid out wholly and exclusively for the purpose of the assessees business ?"
In M. J. Cs. Nos. 590 and 591 of 1962 the question referred are as follows :
"(1) Whether, on the facts and circumstances of the case, the loss of Rs. 10,42,243 for the assessment year 1952-53 and the loss of Rs. 19,40,409 for the assessment year 1953-54 arising on the sale of shares were admissible deductions as losses arising in the course of the assessees business of dealing in shares ?"
(2) Whether, on the facts and circumstances of the case, the claim of Rs. 21,93,000 as loss in speculation, was an admissible deduction in the assessment of the assessee ?"
The only question for determination of the High Court in M. J. C. No. 104 of 1962 is :
"Whether, on the facts and circumstances of this case, the Tribunal was justified in holding that the loss of Rs. 20,500 incurred on the sale of shares in S. K. G. Sugar Ltd. and Bharat Collieries Ltd. in the accounting year were losses of a revenue nature ?"
Some of the facts being, inter se, common in respect of some of the question aforesaid, Mr. S. N. Dutta learned standing counsel for the Commissioner of Income-tax, Bihar and Orissa, Patna, at whose instance all these references have been made by the Appellate Tribunal, and so also Mr. D. P. Pal appearing for the assessee, argued these cases not exactly reference-wise but topic-wise. The first question in M. J. Cs. No. 665 and 666 and the first part of the first question in M. J. Cs. Nos. 590 and 591 relate to the loss claimed to have been suffered by the respective assessee in its dealings in jute shares of three companies, namely, (1) New Central Jute Mills Company Ltd., (2) Lothian Jute Mills Ltd. and (3) Albion Jute Mills Company Ltd. Dalmia Jain Co. Ltd. claimed Rs. 29,935 in the assessment year 1951-52 and Rs. 29,07,991 in the assessment year 1952-53 as loss in its dealings in the jute shares aforesaid. Ashoka Marketing Ltd. claimed in the assessment year 1952-53 a loss of Rs. 10,42,423 on that accounting. The losses under this head were argued as one topic. Ashoka Marketing Ltd. in the assessment year 1953-54 claimed Rs. 19,40,409 as loss sustained in its business of dealings in shares of companies other than the jute companies aforesaid. This was argued and will be dealt with the this judgment as the second topic. Along with this topic will be dealt the only question of M. J. C. No. 104/1962 relating to the claim of Dalmia Jain Co. Ltd. in the assessment year 1953-54 loss on account of dealings in other shares amounting to Rs. 20,500. The third topic of discussion would be the amount of Rs. 21,93,000 claimed by Ashoka Marketing Ltd. in the assessment year 1953-54 as loss in speculation. The fourth and the last topic which this judgment will cover is the amount of Rs. 1,29,994 claimed by Dalmia Jain Co. Ltd. on account of the litigation expenses in the assessment year 1951-52.
The facts which are not in dispute are these. Seven limited liability companies belonged to, and were controlled by, what is commonly known as persons of the Dalmia Jain group headed by Shri Ram Krishan Dalmia of the Dalmia group and Shri Shanti Prasad Jain of the Jain group. Shri S. P. Jain and his family members had a controlling voice and interest in all the seven companies which are : (1) Dalmia Cement and Paper Marketing Ltd., hereinafter, for the sake of brevity, called D. C. P.M. Ltd., (2) Shri Krishna Gyanodaya Ltd., hereinafter refereed to as S. K. G. Sugar Ltd., (3) Dalmia Investment Company Ltd., (4) Dalmia Jain Company Ltd., (5) Ashoka Marketing Ltd., (6) Ashoka Agencies Ltd. and (7) Sahu Jain Ltd. Shri S. P. Jain was these chairman of the board of directors of Dalmia Jain Co. Ltd. and Ashoka Marketing Ltd. The latter, more or less, is his family concern. He and his family members have got 80 per cent. shares in Sahu Jain Co. Ltd. and Shri Ashoka Kumar Jain, the eldest son of Shri S. P. Jain, is its managing director.
The Income-tax Officer was of the view that in the year 1945 the Dalmia Jain group wanted to acquire the control of the three jute mills aforesaid situate near Calcutta. With this object shares of these companies were purchased at very high rates through D. C. P.M. Ltd. He was further of the view that Shri S. P. Jain had advanced a sum of Rs. 31 1/2 lakhs to D. C. P.M. Ltd. for the purpose of purchases of the shares of the three jute mills. He also found that these shares were sold showing losses by one concern of Dalmia group to another concern and the circle was ultimately completed by the shares being transferred to Shri S. P. Jain. He, therefore, held that these shares were acquired for the purpose of getting control of the above-named jute companies and the losses incurred were of a capital nature and could not be allowed. On appeal, the Appellate Assistant Commissioner sustained the disallowance on the ground that the transactions creating the above losses were artificial and unreal and that there was no element of business in those transactions. Hence, the losses, in his opinion were not incidental to the business of the assessee. On further appeal by them, the Appellate Tribunal found that the assessee-companies have been consistently dealing in shares, have been held to be so by the income-tax department, the losses suffered by them have been allowed in the past and the profits made by them in the previous years have been assessed to tax. The Tribunal was of the view that the object or motive with which the share were acquired was neither relevant nor sufficient to take out particular dealings in shares outside the ordinary course of business. It held the losses incurred by the two companies suffered as losses in genuine business dealings and fit to be allowed as revenue losses. It, accordingly, directed the allowance of these losses subject to the adjustment of the amounts according to the market rates prevailing on the dates on which the purchases agreed to purchase the shares from the assessee companies.
It will be advantageous to state at the outset, in order to appreciate the departments point of view, some facts in relation to the transaction of the jute shares from the order dated March 1, 1958, of the Appellate Assistant Commissioner in the case of Dalmia Jain Co. Ltd., in respect of the assessment year 1952-53.
In the year 1945, D. C. P.M. Ltd. purchased 4,838 shares of New Central Jute Mills at Rs. 680 per share, 6,065 shares of Lothian Jute Mills at the rate of Rs. 614 and 5,679 shares of Albion Jute Mills at the rate of Rs. 444. Although the prevailing market rate of the said jute shares does not accurately appear from the records of these cases, it is the admitted position, however, that the shares were cornered and purchased by D. C. P.M. Ltd. at the rates higher then the market rates at part of a scheme to acquire controlling interest in the jute mills. In 1947 there was a private division of the spheres of influence between Dalmia and Sri S. P. Jain D. C. P.M. Ltd. went to Dalmia and the jute shares, which had been purchased by D. C. P. M. Ltd. with the capital of Rs. 31 1/2 lakhs advanced by Shri S. P. Jain, had to travel and go to the hands of Shri S. P. Jain and his nominees as they were purchased for gaining control in the jute mills for him. With this aim in view, D. C. P.M. Ltd. transferred the shares of the New Central Jute Mills on or about the 31st of August, 1947, to S. K. G. Sugar Ltd. at the rate of Rs. 680 per share, at which it had purchased in the year 1945, although the market rate in August, 1947, was Rs. 523 per share. S. K. G. Sugar Ltd., about a year later, transferred these shares to Shri S. P. Jain a the rate of Rs. 520 per share through Dalmia Investment Co. Ltd. The market rate of New Central Jute Mills shares in July, 1948, was Rs. 447 per share as would appear book of M. J. Cs. Nos. 665 and 666 of 1962 forming part of the order of the Income-tax Officer dated March 13, 1957. S. K. G. Sugar Ltd. in this transaction, was made to suffer a loss of Rs. 7,74,080 which was disallowed by the income-tax authorities but was allowed by the Allahabad Bench, as at that time the Patna Bench was not functioning as a revenue loss. The said loss suffered by S. K. G. Sugar Ltd. was the subject-matter of consideration in M. J. C. No. 1149 of 1960 decided by a Bench of this court, to which I was a party, on the 17th October, 1963. I shall have occasion to refer to this decision hereinafter as much reliance was placed upon it by Mr. S. N. Dutta on behalf of the Commissioner of Income-tax in whose favour the question in that case was decided by the High Court. Sri S. P. Jain transferred by sale 2,838 shares of New Central Jute Mills to Dalmia Jain Co. Ltd. and 2,000 shares to Ashoka Marketing Ltd. at Rs. 520 per share, the rate at which he had purchased in July, 1948. The market rate was the same, i.e., Rs. 447 per share. These two companies transferred the shares in April, 1951, to Ashoka Agencies Ltd., through brokers at rates varying from Rs. 280 to Rs. 284 or, may be, Rs. 274 to Rs. 298, as stated on behalf of the assessee in a chart prepared from the records during the course of hearing of these cases. The market rate also varied in April, 1951, and went up to Rs. 308 per share. Ashoka Agencies Ltd., in its turn, transferred in the year 1963, all the shares of New Central Jute Mills to Shri S. P. Jain and his nominees at the rate of Rs. 210 to Rs. 235. It may be mention here that due to the devaluation of the rupee there was a crash in the jute market some time in the year 1949 and the prices of jute shares had gone down considerable. In August, 1948, D. C. P.M. Ltd. transferred 6,065 shares of Lothian Jute Mills to Shri S. P. Jain at Rs. 565 per share as against the market rate of Rs. 537. In November, 1948, Shri S. P. Jain transferred 4,065 shares of Lothian Jute Mills to Dalmia Jain Co. Ltd. and 2,000 shares to Ashoka Marketing Ltd. at Rs. 565 per share, the rate at which he had purchases from D. C. P.M. Ltd., although the market rate at the time of this transfer also was the same, i.e., Rs. 537 per share. In April, 1951 the two companies aforesaid transferred these shares also to Ashoka Agencies Ltd. through brokers at the rate of Rs. 270 to Rs. 273 or, may be, at Rs. 277 to Rs. 295, as stated on behalf of the assessee during the causes of the argument, as against the market rate of Rs. 305. Ashoka Agencies Ltd. ultimately, in the year 1953, transferred these shares also to Shri S. P. Jain and his nominees at the rate of Rs. 233 to Rs. 290 which was, perhaps, the then prevailing rate. 5,679 shares of Albion Jute Mills were transferred by D. C. P.M. Ltd. to Shri S. P. Jain in August, 1948, at the rate of Rs. 400 to Rs. 410 when the market rate was Rs. 383. Shri S. P. Jain transferred the said shares to Dalmia Jain Co. Ltd. at the rates at which he had purchased from D. C. P.M. Ltd. This transfer also took place on or about the same time, i.e., in August, 1948. Dalmia Jain Co. Ltd. transferred these shares in April, 1951, to Ashoka Agencies Ltd. at the rate of Rs. 277 as against the market rate of Rs. 302. D. C. P. M. Ltd. had purchased 2,035 shares of Albion Jute Mills from brokers in March or April, 1945 and had transferred those shares to Ashoka Agencies Ltd. through brokers in December, 1950, and April, 1951, at sale rates varying from Rs. 244 to Rs. 284 per share. Ashoka Agencies Ltd. finally transferred the entire lot of the shares of Albion Jute Mills in 1953 to Shri S. P. Jain and his nominees at the then market rate which was below Rs. 200. In the transactions aforesaid, a minor part of which took place in the accounting year ending on January 31, 1951, relating to the assessment year 1951-52, Dalmia Jain Co. Ltd. suffered a loss of Rs. 2,92,935 and in the following accounting year corresponding to the assessment year 1952-53 the major portion of the losses amounting to Rs. 29,07,991 was suffered by the said company. Ashoka Marketing Ltd. suffered the loss in the accounting year ending 31st of August, 1951, corresponding to the assessment year 1952-53 to the tune of Rs. 10,42,243 on accounting of the purchase and sale of shares of New Central Jute Mills and Lothian Jute Mills.
The view of the Income-tax Officer that the two assessee-companies could not deal, and be treated as dealers, in shares was not upheld by the Appellate Assistant Commissioner. But tracing the history of the transactions from the year 1945 right up to the year 1953 much before and after the accounting period in question he took the view that the shares were purchased in the beginning for gaining control in the three jute mills and by clever maneuvering and manipulations they were ultimately transferred to Shri S. P. Jain and his nominees by considerably leveling down the prices any by transferring the losses in the accounts of the transactions which took place at rates other than the prevailing market rates were not real and genuine and the entire loss was unreal as a result of the artificial transactions entered into as part of a calculated and predetermined plan. On further appeal by the assessee-companies, the Appellate Tribunal, to put it at one place, has taken the view that, (1) the assessee-companies are dealers in shares and have been held to be so by the department, (ii) that being so, "the object or motive with which the shares were acquired is neither relevant nor sufficient to take out particular dealings in shares outside the ordinary course of business", (iii) the assessee-companies acquired shares in the year 1948 and sold them in 1951 and to "determine whether the dealings of the assessee were in the consider the antecedents of purchase and sale of these shares before they were acquired by the assessee nor as to how those shares were dealt with by the purchasers in their own turn", (iv) the knows as to whether there would, in future, be a rise or fall in the price of those shares in the market, and (v) the transaction of purchase and sale are perfectly genuine dealings and the loss is a genuine revenue loss.
Learned standing counsel for the department submitted on the authority of the two Supreme Court decisions in Ramnarain Sons (P.) Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. National Finance Ltd., which were followed by me sitting with Chief Justice Ramaswami in the case of Commissioner of Income-tax v. Shri Krishna Gyanodaya Sugar Ltd. (M. J. C. No. 1149 of 1960) decided on the 17th of October, 1963, that the question as to whether a particular loss is genuine or unreal, capital or revenue, is a mixed question of fact and law and is open to challenge if the Tribunal has misdirected itself in law in arriving at the conclusion in regard to these matters. Dr. Pal admitted that the questions aforesaid are largely questions of fact, if not wholly, and if there are materials in support of the findings recorded by the Appellate Tribunal in favour of the assessee, they cannot be assailed in the High Court.
In the two Supreme Court cases, which have been relied on by me in the case of S. K. G. Sugar Ltd., it was pointed out that the real object of a particular venture could be looked into and the question whether the impugned transactions amounted to dealings in shares or to investment is a mixed question of law and fact and that the legal effect of the facts found by the Tribunal on which the assessee could be traced as a dealer or an investor is a question of law. In both the cases it was found that the object of the assessee was to purchase shares at high rates for gaining an enduring advantage or management or the like and, therefore, the loss suffered on sale of such shares was in the nature of capital loss and not a revenue one. The question as to whether a particular transactions is real or unreal did not fall for consideration before the Supreme Court in those cases. Undoubtedly, such a question is largely a question of fact, if not wholly. It is important to remember that in the case of S. K. G. Sugar Ltd. the impugned transaction had taken place at a time prior to, and as a part of the scheme of, the acquisition of the shares of New Central Jute Mills by Shri S. P. Jain. S. K. G. Sugar Ltd., with the object of helping the chairman of its board of directors, was made to purchase the shares at the rate of Rs. 680 as against the market price of Rs. 523 per share and sell them to Shri S. P. Jain, the chairman, at the rate of Rs. 520, almost at the market rate prevailing then. In those circumstances, its was held :
"The whole of the transaction consisting of two events only, namely, the purchase of the shares from D. C. P.M. Ltd. and sale to Sri S. P. Jain through Dalmia Investment Ltd. was not real and the resulting loss, therefore was a fictitious one in so far as it concerned the assessee-company."
It was further observed that :
"... the conclusion of the Income-tax Tribunal that the loss of Rs. 7,74,080 is genuine loss and is in the nature of revenue loss has been arrived at by misdirection in law and in absence of any legal, valid and relevant material."
The ultimate decision in the case was that the loss, on the facts and in the circumstances of that case, was not incurred by the assessee-company or in any event, it was not incurred in the course of its trade or any adventure in the nature of a trade.
But the cases in hand have two distinguishing features. Once the shares of the jute mill passed into the hands of Shri S. P. Jain in July or August, 1948, subsequent transfer by him to the two assessee-companies with which we are concerned now could not be a part of the maneuver to acquire control of the jute mills by Shri S. P. Jain. He had already acquired control by getting the shares transferred in his own name before he transferred them to the assessee-companies. The object of assessee-companies, therefore, could not be to help Shri S. P. Jain in gaining control over, or the management of, the jute mills. The second point of distinction is that the impugned transactions in the instant cases did not take place at such great variance with the market rates as was the case of S. K. G. Sugar Ltd. Purchasing the shares at some higher rates and selling them at some lower rates cannot necessary lead to the inference that the motive was one difference from trading or dealing in shares. It may be emphasised here again that the Tribunal has directed the allowance of the loss at a figure which would be arrived at with reference to the market rates prevailing in 1961, when the assessee-company sold the shares. The Appellate Assistant Commissioner, tracing the history of the transaction of jute shares from 1945 to 1953, held the losses suffered by the assessee-companies by their purchases in 1948, and sales in 1951, as unreal and devoid of any element of business in them. In my opinion, the Appellate Tribunal has rightly pointed out that the assessee-companies held these shares for a period of about three years and to determine whether their dealings were in the ordinary course of business or not it was unnecessary to consider the prior and subsequent history of the purchases and sales. It has not been the departments case nor has any finding been recorded by the income-tax authorities to the effect that fictitious and anti-dated entries of purchase and sales were made in the accounts of the assessee-companies in the year 1953, when ultimately Shri S. P. Jain again acquired the shares in his own name at leveled down prices and thereby a scheme was evolved to distribute by fictitious entries the huge loss in the accounts of the various companies controlled by Shri S. P. Jain In the absence of such a case or findings it is difficult to appreciate as to how the assessee-companies while purchasing the shares in 1948, could visualise the crash in the jute market, which came in August, 1949, after the devaluation of the rupee. As a matter of fact, the assessee-companies waited for about a year and a half even after crash and then sold their holdings of the jute shares at prices which were not very much different from the ruling market prices. Although I do not quite agree with the observation of the Appellate Tribunal that the object or motive with which the shares are acquired by a dealer is neither relevant nor sufficient to take out particular dealings in shares outside the ordinary course of business. I do not find sufficient materials in the order of the Appellate Tribunal or, as a matter of that, in that of the income-tax authorities to enable me to hold, as a question of law, that the object or motive of the assessee-companies in entering into the impugned transactions was not in the nature of trade but some ulterior one, e.g., the gaining of an enduring advantage either for themselves or for Shri S. P. Jain or the like. In the circumstances, I have got to hold that the finding of the Appellate Tribunal that the losses were suffered during the course of business dealings and they are genuine and in the nature of revenue loss, cannot be said to be erroneous.
The facts relating to the second topic of the claim of Rs. 19,40,409 as loss sustained by Ashoka Marketing Ltd. in its business of dealings in shares of other companies are these : Out of the total loss of the said amount, the main item of loss is to the tune of Rs. 13,59,894 in respect of 1,05,000 shares of the Punjab National Bank Ltd., of which bank Shri S. P. Jain, the person controlling the assessee-company happened to be the chairman at the time the Appellate Assistant Commissioner was making his order in appeal on January 29, 1959. He had become the chairman of the bank in the year 1954 as was stated at the Bar. A sum of Rs. 4,22,604 was claimed as loss on account of the shares of Rohtas Industries Ltd. A sum of Rs. 1,13,732 was the loss sustained in dealing in the shares of Bharat Collieries Ltd. and the balance of Rs. 44,179 was in respect of dealings in other shares by the assessee-company. According to the findings recorded by the Appellate Assistant Commissioner, the shares of the Punjab National Bank were acquired in January, 1951, at Rs. 30-10-0 per share when the ruling market rate was Rs. 26-12-0, with the intention to acquire control of the bank and not to trade in the shares of the bank. The shares were sold by the assessee-company in the first instance in July, 1952, to certain brokers in Calcutta, who were again financed by the certain other units of Sahu Jain group under the control of Shri S. P. Jain. Ultimately, these shares were passed on by the brokers after some time to Shri S. P. Jain, his wife and daughter-in-law at Rs. 17-8-0 to Rs. 17-12-0 per share and in that process the assessee-company was, made to bear a loss of Rs. 13 1/2 lakhs. The conclusion of the Appellate Assistant Commissioner was that there was no element of trade in the impugned transactions of the shares of Punjab National Bank and reasons other than business or commercial expediency had entered into those transactions and, therefore, the losses did not arise in the course of normal trading in shares. The findings recorded by the Appellate Tribunal are : (i) that Shri S. P. Jain and the members of his family purchased the shares at a subsequent stage and there is no finding recorded by the income-tax authorities that he had already purchased the shares and the assessee-company or its vendee was his mere nominee, (ii) that the assessee-companies admittedly a dealer in shares and there is no material to hold that it had purchased the shares of the Punjab Bank with the object of investment, (iii) that the sales were effected by the assessee at current market prices, and (iv) that the department has failed to establish by any material that the purchase prices paid to the Express Newspapers Ltd. were inflated. It may be mentioned here that Shri S. P. Jain or, as a matter of that, the assessee-company had no connection with the Express News papers Ltd. Further, the argument on behalf of the assessee-company before the Tribunal was that it had to pay a higher price to the Express Newspapers Ltd. as a negotiated price for the reason that the assessee paid only one-third of the total amount in cash and kept the shares with the vendors as security to cover the balance of the price on which no interest was paid. This argument was accepted by the Tribunal which observed.
"Having regard to the bulk lot of shares purchased, the prevailing market price for small lots, and the terms and circumstances of the purchase, we must hold that the department has failed to establish, by material, that the purchase prices paid to Express Newspapers Ltd., were inflated."
On the findings recorded by the Tribunal, I am not prepared to hold that it misdirected itself in law and wrongly allowed the loss incurred by the assessee-company in its dealing in shares of the Punjab National Bank.
The only ground mentioned by the Appellate Assistant Commissioner for disallowing the loss incurred by the assessee-company in its dealings of Rohtas Industries Ltd. and Bharat Collieries Ltd. is that it purchased the shares at rates higher than the market ones and sold them ultimately to sister concerns controlled by the Sahu Jain group of Shri S. P. Jain. On this mere fact alone, the conclusion drawn by him is that most of these shares were purchased with a view to acquire and retain control and were transferred in the course of reshuffling of investments within the group by way of domestic arrangement. Hence, the loss claimed by the assessee was not incurred in the course of ordinary trading in shares and was, in part, unreal. The Appellate Tribunal, in my opinion, has rightly pointed out that there was no bar in the way of the assessee-company in dealing in shares of associate concerns and hence the transactions on that account only could not be held to be unreal or with the object of gaining control. It may be pointed out here that there was no question of gaining any control over, or management of, the associate concerns when the assessee-company purchased their shares. In regard to the different prices, however, the ultimate observation and the direction of the Tribunal is :
"We would, therefore, accept the transactions as genuine but would authorise the Income-tax Officer to make any adjustment in respect of any under-statement in the sale rates so as to place the transactions as at arms length."
The mere fact that the assessee paid prices higher than the market ones in purchasing these shares cannot necessarily, in law, justify a conclusion that either the shares were purchased with an ulterior motive or that the transactions were unreal. In any event, I do not feel persuaded to hold that the conclusion of the Appellate Tribunal on the materials before it is erroneous law.
More or less to the same effect is the question referred for determination of the High Court in M. J. C. 104 of 1962 as the one just discussed above. In this case, Dalmia Jain Co. Ltd. sustained losses of Rs. 14,000 on sale of 2,000 ordinary shares of S. K. G. Sugar Ltd. and Rs. 6,500 on sale of 1,000 ordinary shares of the Bharat Collieries Ltd. The Income-tax Officer found that the 2,000 shares of S. K. G. Sugar Ltd. were acquired by the assessee from Shri J. Dalmia on the 31st of July 1943, and were sold on the 27th of March, 1952, and that the 1000 shares of Bharat Collieries Ltd. were acquired in 1944 and sold on the 27th March, 1952. He, therefore, held that as the shares were held by the assessee for a period of about eight years, they did not form part of its stock-in-trade and a part of its business of share-dealing but were really investment in shares. The Appellate Assistant Commissioner took the view that the shares were acquired not to earn profits in sale but to enable the Dalmia Jain group and later on Sahu Jain group to retain control over the S. K. G. Sugar Ltd. and the Bharat Collieries Ltd. He also found that these shares were not sold to outsiders, but were merely transferred to another company of the same group though the transactions passed through the books of common broker and as such the sales were unreal and fictitious. The Appellate Tribunal, in its order dated the 11th of January, 1961, observed that although Shri S. P. Jain might be in a position to directly or indirectly control or influence the decision of the assessee-company, it could not be said that the identity or the legal personality of the assessee-company was the same as that of Shri S. P. Jain. The antecedent history and the ultimate sojourn of the shares, the Tribunal further observed, were not relevant for the determination of the issue as to whether the assessee-company had entered into the transactions in the ordinary course of business. The sole fact that the shares were ultimately sold back to Shri S. P. Jain by the purchasers of the shares from the assessee-company does not establish, in the opinion of the Tribunal, that those purchasers from the assessee-company were mere nominees of Shri S. P. Jain. Subject to the usual direction of adjustment of the amount of loss according to the market rates prevailing on the dates on which the purchasers agreed to purchase the shares from the assessee-company, it was held by the Tribunal that the transactions were real and had been entered into in the ordinary course of business. The learned standing counsel for the department was unable to advance any argument of substance to persuade us to hold that the conclusion of the Tribunal in this case was erroneous in law; rather he almost conceded on the facts and in the circumstances of the case that it could not be so.
Coming to the third topic of discussion in regard to the amount of Rs. 21,93,000 claimed by Ashoka Marketing Ltd. as loss in speculation business incurred in the accounting year corresponding to the assessment year 1953-54, I would like to mention at the outset that learned standing counsel had to concede on the facts recorded in the order of the Appellate Tribunal that the department had not a presentable case in this respect. The fact recorded in the order of the Appellate Tribunal are these. The assessee showed profits in jute speculation amounting to Rs. 34,84,000 and claimed loss amounting to Rs. 21,93,000. The speculation profits arose out of four contracts of sale entered into early in July, 1951, and subsequently closed by contracts of purchase in September, 1951. The losses were suffered out of the contracts of purchase entered into January and February, 1952, with D. C. P.M. Ltd. which were closed by subsequent contracts for sale in March and April, 1952, entailing payment of differences amounting to Rs. 21,93,000, to D. C. P.M. Ltd. The Tribunal did not attach any importance to the fact of non-maintenance of a sauda bahi on the ground that the total number of speculation transactions done by the assessee-company in the relevant accounting year were only eight. The entry in regard to a part of adjustment was delayed and was carried out on August 31, 1952, on the basis of claim received from D. C. P.M. Ltd. sometime in May, 1952. But the most striking fact was that the assessment order of D. C. P.M. Ltd. for 1953-54 which was filed before the Tribunal showed that that company had been assessed on the speculation profits of Rs. 21,93,000 received from the assessee-company. The total income assessed in the hands of D. C. P.M. Ltd. in the said assessment year was about Rs. 35 lakhs. The net result shown by Ashoka Marketing Ltd. the assessee company, with which we are concerned in this case, was a profit of about Rs. 13 lakhs from speculation business. In the circumstances, it was held by the Tribunal and, in my opinion rightly, that the loss was allowable and there was no error, much less any error of law, in its conclusion in this regard.
The only topic which remains to be considered now is in regard to the amount of Rs. 1,29,994 claimed by Dalmia Jain Company Ltd. as litigation expenses in the accounting year ending on January 31, 1951, corresponding to the assessment year 1951-52. The facts which are mentioned in the order dated March 1, 1958, of the Appellate Assistant Commissioner, which have been adopted as the basis of the order of the Tribunal also, are these. The litigation expenses in question relate to the protracted litigation in respect of the Murli Hills between Kutchwar Lime Company, Subodh Gopal Bose and Kalyanpur Lime Company on the one hand and the State of Bihar on the other, in which the assessee-company was also involved. On the 1st of April, 1928, the state Government, as owner of the Murli Hills, gave a lease to the Kutchwar Lime Company for 20 years for the purpose of quarrying limestone therein. There was a clause in the lease deed preventing the Kutchwar Lime Company from assigning its lease to any third party without the consent and concurrence of the lessor. In January, 1933, Kutchwar Lime Company went into voluntary liquidation and the liquidators assigned the leasehold to Subodh Gopal Bose in September, 1933, without the permission of the Government. The assignee took possession of the property on March 9, 1933, but was stopped by the Government from working the quarry. The Government of Bihar forfeited the lease of Kutchwar Lime Company by an order dated 23rd of March, 1934 and re-entered into possession. The Government granted a fresh lease to Kalyanpur Lime Co. for a period of 20 years with effect from April 1, 1934. On September 24, 1934, the Kutchwar Lime Co. sued the Government for a declaration that the lease granted to in 1928 had not been validly forfeited and for injunction restraining the Government from granting lease to any one else. There was a claim for damages also. The suit was decreed by the High Court on February 7, 1936 and the decree was affirmed by the Privy Council on November 19, 1937. Kalyanpur Lime Co. vacated the quarry in April, 1936, after the starting of the contempt proceeding by Kutchwar Lime Co.; the latter company got back possession of the Murli Hills and remained in possession until the lease expired on March 31, 1948. The Government then re-entered into possession. Kalyanpur Lime Company repeatedly asked the Government to execute the lease as agreed to by them in 1934. The Government refused to do so and informed the Lime Co. on June 2, 1949, that the Government had decided to lease the Murli Hills to Dalmia Jain Co. Ltd. Kalyanpur Lime Co. thereupon sued the Government for specific performance of contract and also for possession and compensation. The Government resisted the suit, inter alia, on the ground that there was no concluded contract between them and Kalyanpur Lime Co. The assessee-company was made a party-defendant in the suit of Kalyanpur Lime Co. It would also appear from the facts stated in the order of the Income-tax Officer that near about that time Subodh Gopal Bose also filed a suit against the State of Bihar impleading the assessee-company to as a dependent. The relief claimed by S. G. Bose was for injunction to restrain the Government of Bihar and Dalmia Jain Co. Ltd. from entering into possession. Finally, in the suit filed by Kalyanpur Lime Co. it was held by the Supreme Court in December, 1953, that there was a valid contract between the said company and the Government of Bihar, and Kalyanpur Lime Company was entitled to a decree for specific performance. As the period of 20 years from 1934 was to expire in 1954, the Supreme Courts did not grant a decree for specific performance but only allowed damages. In respect of the claim of the assessee-company the Supreme Court held that this company was a lessee for one year from September 22, 1949, to September 22, 1950, with notice of Kalyanpur Lime Companys prior contract and it had no locus stand to contest the suit for specific performance filed by the latter. One more fact may be stated here that on expiry of the lease for one year in favour of the assessee-company the Government of Bihar did not renew the lease as there were disputes regarding the rights of the various parties but, as per their letter dated November 4, 1950, the assessee-company was appointed as Government agent to work the quarry for a year. Subsequently, after the conclusion of the litigations, one by the decision of the Supreme Court in the suit filed by Kalyanpur Lime Co., and the other by compromise in the suit filed by S. G. Bose, the assessee company succeeded in getting a lease from the Government of Bihar in the year 1955. In such a situation, it was held by the income-tax authorities that the legal expenditure, a part of which was incurred in the contempt proceeding started by S. G. Bose, was made in the attempt to acquire a new asset of an enduring character and not to defend the legal title as the assessee-company had none. On further appeal by the assessee, the Tribunal has taken the view that, (1) the Dalmia Jain Co. Ltd. was in possession of the quarry in the capacity of an agent of the Government of Bihar and was working it as such, (ii) the Government of Bihar was drawn into the legislation and the assessee was also impleaded as a party defendant, (iii) the assessees right, title and interest depended upon the right title and interest of the Government of Bihar under which it held the quarry land, (iv) the finding of the department that the litigation was to acquire the income giving quarry is wrong and the litigation was to save the existing possession of the assessee and the assessee was certainly interested to defend its own possession by supporting its principal, the Government of Bihar, and (v) in the opinion if the Tribunal, the expenses clearly are therefore for maintaining and saving the existing possession and revenue ones, the Tribunal the expense correct are therefor firm maintaining bad saving the existing possession and revenue onces the Tribunal directed the Income-tax Officer to examine the expense band allow so such of the expense which are proved and verified.
The Principle of law which can be applied to the allowance of litigation expenses as revenue ones in the circumstances similar to those of the case in hand is well settled. In Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd. it was said by Lawrence J., as he then was, at page 602 :
"On the other question as to whether this is a payment properly attributable to capital or to revenue, in my opinion the principle which is to be deduced from the cases is that whether a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital. But that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in sustains a matter of maintenance, of the capital structure or the capital assets of the company."
Finally his Lordship held at page 605 :
"It appears tome that the legal expenses which were incurred by the respondent-company did not create any new asset at all but were expenses which were incurred in the ordinary course of maintaining the assets of the company, and the fact that it was maintaining the title and not the value of the companys business does not, in my opinion, make it any different."
In Morgan (H. M. Inspector of Taxes) v. Tate & Lyle Ltd. Lord Morton of Henryton, in his speech which concurs in the majority decision of the House of Lords, has referred with approval at page 411 to the passage in the judgment of Lawrence J., which I have extracted above in my second quotation, and has further said :
"This decision was approved by the Court of Appeal in Associated Portland Cement Manufacturers Ltd. v. Kerr and was applied by Croom-Johnson J. in Cooke v. Quick Shoe Repair Service."
In Transport Co. (Private) Ltd. v. Commissioner of Income-tax it was pointed out by the Madras High Court that where the purpose of litigation is to maintain an existing title to the assets of the assessees business, expenditure therefore would be of a revenue nature, but, if the purpose was to acquire or cure a defect in the assessees title to the assets, it would be of a capital nature, that it is immaterial whether the assess figures as a plaintiff or a defendant in the action and that it is also immaterial whether the result of the suite was in favour of or against the assessee. The same view has been expressed by the Calcutta High Court in Liberty Cinema v. Commissioner of Income-tax, where, on a review of authorities, it has been said at page 167 :
"The position on the authorities, therefore, is that if the legal expenses are incurred in creating, curing or completing title to the capital then it is capital expenditure."
On the facts of the case before the Calcutta High Court, it was held that expenses incurred in connection with an application made to set arise the sale under the Public Demands Recovery Act, at which the assessee had purchased the property before the sale was confirmed and before it became absolute, could not be allowed as business expenditure.
Applying the legal principles governing such cases, it should be noticed that Dalmia Jain Co. Ltd. had acquired no legal title to the land, namely, in Murli Hills. It was upon it either by sufferance or as an agent of the Government of Bihar. In either view of the matter the assessee-company was not incurring the litigation expenses in protection or maintenance of its title or the capital assets of the company. The expenses, so to say, were being met in order to protect the title and the right of the Government of Bihar to grant a fresh lease which they had promised to do in favour of the assessee-company. In my opinion, therefore, the assessee was meeting the litigation expenses and laying out the money for acquisition of a fixed capital asset in future which it did acquire in the year 1955. The expenses were not incurred in the ordinary course of maintaining the assets of the company as the property which was the subject-matter of litigation was not the property of the company and it had no title to it. The possession of the company was either that of a temporary leases, during the pendency of the litigation, or of an agent of the Government of Bihar and such possession could not be characterised as an asset of the company, the maintenance of which would justify the huge expenditure of more than a lakh of rupees in one year over the litigation which the assessee-company, to all intents and proposes, was fighting not in it own right but on behalf of the Government of Bihar with the ultimate object of getting a lease from them. I, therefore, hold that the Tribunal erred in law holding that the litigation was to save the existing possession of the assessee and the expenses incurred in defending the assessees possession by supporting its principle, the Government of Bihar, were revenue expenses.
To sum up the result of the discussion aforesaid, I would answer the first question referred for the opinion of the High Court in M. J. Cs. Nos. 665 and 666 of 1962 in favour of the assessee and against the department and hold that, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the loss of Rs. 29,935 in the assessment year 1951-52 and the loss of Rs. 29,07,991 in the assessment year 1952-53 incurred on the sale of shares of three cases, which, strictly seeking, pertains, to M. J. C. No. 665 only, must be answered in favour of the department and against the assessee. In accordingly hold that the Tribunal was not justified in holding that the litigation expenses of Rs. 1,29,994 incurred by the assessee in the assessment year 1951-52 constitute expenditure laid out wholly and exclusively for the purposes of the assessees business. I would make no order as to cost, in these two cases. In M. J. Cs. Nos. 590 and 591 of 1962. I hold that, on the facts and in the circumstances of the case, the loss or Rs. 10,42,243 in the assessment year 1952-53 and the loss of Rs. 19,40,409 in the assessment year 1953-54 arising on the sale of the shares were admissible for deduction as losses arising in the course of the assessees business in dealing in shares and that the claim or Rs. 21,93,000 was admissible deduction in the assessment as being loss in speculation. Both the question, therefore, are answered in favour of the assessee and against the Commissioner of Income-tax who must pay the cost of these two references; there will be only one hearing fee or Rs. 250. The only question in M. J. C. No. 104 of 1962 is also answered in favour of the assessee and against the department and it is held that the Tribunal was justified in holding that the loss of Rs. 20,500 incurred on the sale of shares was loss of a revenue nature. The Commissioner of Income-tax must pay to the assessee the costs of this reference also but hearing fee will be Rs. 100 only.
G. N. Prasad J. - I agree.