1978 (3) TMI 98 - HC - Income Tax

Court rules loss on share sale as capital, not revenue. Upholds lower authorities' decisions.

Hirji And Co. Private Limited Versus Commissioner Of Income-Tax, West Bengal II

The High Court held that the loss of Rs. 42,327 incurred by the assessee-company in the sale of shares was a capital loss, not a revenue loss. The court ... Capital Loss, Dealer In Shares, Enduring Nature, Loss On Sale, Revenue Loss Issues Involved:1. Nature of the loss incurred by the assessee-company in the sale of shares.2. Whether the loss is capital or revenue in nature under the Income-tax Act, 1961.Issue-Wise Detailed Analysis:1. Nature of the Loss Incurred by the Assessee-Company in the Sale of Shares:The central issue is whether the loss of Rs. 42,327 incurred by the assessee-company in the sale of shares of M/s. Lajpat Potteries Pvt. Ltd. is capital in nature, as held by the income-tax authorities, or a trading loss, as claimed by the assessee. The assessee is a limited company engaged in the distribution of cutlery and crockery and not a dealer in shares. The shares were acquired to secure a regular supply of goods from M/s. Lajpat Potteries Pvt. Ltd., which was facing financial difficulties.The assessee purchased 1,633 shares for Rs. 52,534 to acquire a controlling interest in M/s. Lajpat Potteries Pvt. Ltd. However, the manufacturing company continued to incur losses and eventually closed down in 1966. The shares were sold in the assessment year 1969-70 for Rs. 10,000, resulting in a loss of Rs. 42,327. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal all held that the loss was capital in nature.2. Whether the Loss is Capital or Revenue in Nature:The principle to determine whether an expenditure is on capital account or revenue account was laid down by the Supreme Court in Commissioner of Income-tax v. Mysore Sugar Co. Ltd. The Supreme Court observed that one must consider the expenditure in relation to the business, and determine whether it was laid out to acquire an asset of enduring nature or as an outgoing in the running of the business.The assessee argued that the shares were purchased in the business interest to ensure a continuous supply of goods and that the loss should be considered a trading loss. The assessee cited several cases, including Commissioner of Income-tax v. Royal Calcutta Turf Club, to support the argument that the expenditure was laid out wholly and exclusively for business purposes. However, the Tribunal found that the assessee's business would not have been seriously affected if the goods were not supplied by M/s. Lajpat Potteries Pvt. Ltd., as the assessee was a distributor for various concerns.The Tribunal, following the principles laid down in Kishan Prasad and Co. Ltd. v. Commissioner of Income-tax and other cases, held that by acquiring a controlling interest, the assessee acquired a benefit of an enduring nature, making the shares a capital asset. The Tribunal's finding that the shares were not stock-in-trade but investments in the nature of capital was upheld.The revenue argued that the loss incurred by the assessee in selling the shares must be regarded as a capital loss. The acquisition of a controlling interest in M/s. Lajpat Potteries Pvt. Ltd. was seen as acquiring a source of supply and a benefit of an enduring nature, thus constituting a capital asset. Various cases, including Pingle Industries Ltd. v. Commissioner of Income-tax and English Crown Speller Co. Ltd. v. Baker, were cited to support this argument.The judgment concluded that the loss incurred by the assessee was a capital loss and not a revenue loss. The answer to the question posed was that the loss of Rs. 42,327 was a capital loss, and the judgment was in favor of the revenue. Each party was ordered to pay and bear its own costs.In conclusion, the High Court held that the loss of Rs. 42,327 incurred by the assessee-company in the sale of shares was a capital loss and not a revenue loss, thereby upholding the decisions of the lower income-tax authorities and the Tribunal.