1962 (1) TMI 11 - SC - Income Tax

Court allows appeal despite late filing, deems share sale loss as capital not trading. Control by related group pivotal.

The Court deemed the appeal competent despite a delay in filing, finding exceptional circumstances justified special leave. It determined the loss from ... Whether a loss arising from the sale of certain shares by the respondent company was a capital loss? Held that:- The transaction must be regarded as one on the capital side. Shares were never treated as part of the stock-in-trade. They were not sold in the market, but were sold at a loss to another company belonging to the same group, with the obvious intention of setting off the losses against the profits, thus cancelling the profits, and saving them from taxation. Appeal allowed. Issues Involved:1. Competency of the appeal.2. Nature of the loss (capital loss vs. trading loss).3. Interrelation and control of companies.4. Intention behind the acquisition of shares.5. Application of legal principles from previous judgments.Issue-Wise Detailed Analysis:1. Competency of the Appeal:The preliminary objection raised by the respondent was that the appeal is incompetent based on the decision in *Chandi Prasad Chokhani v. State of Bihar*, which held that the Supreme Court would not entertain an appeal directly from an order of the Tribunal bypassing the High Court, except in very exceptional circumstances. The appellant cited *Baldev Singh v. Commissioner of Income-tax* to argue that exceptional circumstances existed in the present case. The Court noted that the Tribunal's order was signed on different dates by its members, and a clerk's illness led to the application being filed a day late. The Court found that the combination of circumstances justified the grant of special leave, as the delay was not due to negligence on the part of the Commissioner of Income-tax. Thus, the appeal was deemed competent.2. Nature of the Loss (Capital Loss vs. Trading Loss):The core issue was whether the loss from the sale of shares by the respondent company was a capital loss or a trading loss. The Tribunal had reversed the Appellate Assistant Commissioner's decision and held it to be a trading loss. The Court examined the facts and the intention behind the acquisition of shares to determine the nature of the loss.3. Interrelation and Control of Companies:The respondent company was part of a group of companies controlled by the 'Yodh Raj Bhalla group.' The Court detailed the shareholdings and interrelations among the companies, showing that the group had significant control over the respondent company and other related entities. This control was crucial in understanding the transactions and the intention behind them.4. Intention Behind the Acquisition of Shares:The Court scrutinized the acquisition of shares of Madhusudan Mills Ltd. by the respondent company. The shares were purchased at a price significantly higher than the market rate, indicating that the primary intention was not to deal in shares but to acquire a controlling interest and lucrative agency rights. The Court referred to previous judgments, including *Commissioner of Income-tax v. Ramnarain Sons Ltd.*, which emphasized the importance of the primary intention behind acquiring shares.5. Application of Legal Principles from Previous Judgments:The Court applied principles from previous judgments, including *Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax* and *Oriental Investment Co. Ltd. v. Commissioner of Income-tax*, which held that the intention behind acquiring shares and the context of the transaction are critical in determining whether a loss is on the capital or revenue side. The Court found that the respondent company's acquisition of shares was aimed at obtaining a capital asset of an enduring nature, not for trading purposes.Conclusion:The Court concluded that the transaction was on the capital side, as the shares were not treated as stock-in-trade and were sold at a loss to another company within the same group to set off losses against profits, thereby avoiding taxation. The appeal was allowed with costs on the respondent.Appeal allowed.