1967 (6) TMI 18 - HC - Income Tax

Court validates reassessment under Section 34(1)(b) of Income-tax Act, upholds loss on sale of shares.

The court validated the proceedings under Section 34(1)(b) of the Indian Income-tax Act, 1922, allowing for the inclusion of any income that had escaped ... Proceedings u/s 34(1)(b) - assessment made pursuant to the proceedings - validity - loss on sale of shares - held that it arise from a share dealing business but was a loss on realisation of investment Issues Involved:1. Validity of proceedings under Section 34(1)(b) of the Indian Income-tax Act, 1922.2. Classification of the loss on the sale of shares as trading loss or loss on realization of investment.Detailed Analysis:1. Validity of Proceedings under Section 34(1)(b):Contention of the Assessee:- The assessee argued that the Income-tax Officer (ITO) could not include any other item of escaped income except the deemed dividend income for which the Section 34 notice was issued. The assessee contended that if other items of income had escaped assessment, separate proceedings under Section 34 should have been initiated.Contention of the Revenue:- The Revenue, relying on the Punjab High Court decision in *Commissioner of Income-tax v. Jagan Nath Maheshwary*, argued that once an assessment is reopened, any other item of income that had escaped could be brought to tax. The Madras High Court also supported this view in *Modern Theatres Ltd. v. Commissioner of Income-tax*.Court's Findings:- The court agreed with the Punjab High Court's interpretation that the word 'such' in Section 34(1)(b) refers to any income that had escaped assessment and not just the specific income mentioned in the notice.- The court found that additional information came into the possession of the ITO during the assessment for the subsequent year, which led him to believe that excessive loss had been allowed in the original assessment.- The court held that the reassessment proceedings were validly initiated under Section 34(1)(b) and the assessment made pursuant to these proceedings was legal and valid.Conclusion:- The first question was answered in the affirmative, validating the proceedings under Section 34(1)(b).2. Classification of the Loss on Sale of Shares:Contention of the Assessee:- The assessee argued that the frequency of transactions, the financing of transactions through borrowing, and the articles of association permitting dealing in shares indicated that the transactions were trading activities.- The assessee also contended that the earlier resolutions describing the shares as investments were rectified by the resolution of August 27, 1952, which correctly showed the shares as stock-in-trade.Contention of the Revenue:- The Revenue argued that the shares were purchased as investments, as evidenced by the resolutions of the board of directors, the treatment of the shares in earlier balance sheets, and the sale vouchers.- The Tribunal found that the resolution of August 27, 1952, was passed to convert a capital loss into a trading loss and that the shares were originally acquired as capital investments.Court's Findings:- The court noted that the Tribunal had considered various factors, including the resolutions of the board of directors, the treatment of shares in earlier balance sheets, and the sale vouchers, to conclude that the shares were acquired as investments.- The court held that the Tribunal's conclusion was supported by legal evidence and was rationally possible. The Tribunal was justified in holding that the loss on the sale of shares was a loss on realization of investments and not a trading loss.Conclusion:- The second question was answered in the affirmative, upholding that the loss on the sale of shares was a loss on realization of investments.Final Judgment:- Both questions referred were answered in the affirmative.- The assessee was ordered to pay the costs of the reference to the Commissioner.