TaxTMI 
TaxTMI 
2004 (6) TMI 35
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.... advance in the form of shares in the cooperative societies which had either become defunct or had gone under liquidation?" The brief facts relevant for answering the above two questions may be stated. The applicant-assessee is a public sector undertaking, the shares of which are held by the Government of Kerala. It is an assessee to income-tax under the Income-tax Act, 1961 (for short "the Act"). The assessment year concerned is 1983-84 and the relevant accounting period ended on March 31, 1983. The assessment of the applicant was originally completed on March 14, 1986, and the same was revised on May 19, 1986, on a net income of Rs. 3,33,82,490. This was on the basis of the provisional accounts (unaudited accounts submitted by the assessee). On April 19, 1988, the assessee submitted the audited accounts. On the basis of the information contained in the audited accounts, the assessment for the year 1983-84 was reopened under section 147 of the Act. Paragraph 1 of the directors report to the annual accounts for the assessment year 1982-83 contained the following observations: "The investment in shares in the co-operative societies to the extent of Rs. 80,20,588 has been written o....
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....the Act, the same should be allowed to be set off against the other income of the assessee. On behalf of the Revenue, Shri P.K.R. Menon, senior counsel, submitted that this is not a case where the assessee was a dealer in shares and as such suffered any loss. Senior counsel further submits that the alleged loss on revaluation of shares in the industrial co-operative societies should neither be considered as a business loss nor as a capital loss. The applicant, Kerala Small Industries Development Corporation Ltd., is a company incorporated under the Companies Act, 1956. Earlier, the name of the company was Kerala State Small Industries and it was later changed to Kerala Small Industries Development Corporation Ltd. with effect from November 14, 1986. As per the memorandum of association, the main objects to be pursued by the company on its incorporation are: "1. To take over by transfer the whole or any part of the undertakings' property or liabilities of Kerala State Small Industries Corporation Ltd., and Kerala Employment Promotion Corporation Ltd., in accordance with the Companies Act, 1956. 2. To aid, counsel, finance, protect and promote the interests of small industries in....
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....table bodies and co-operative societies for the prosecution or execution of industrial undertakings, works, projects and enterprises of any description, whether of a private or public character, which in the opinion of the company would contribute to the industrial development of Kerala, and to acquire and dispose of shares and interests in such companies or associations or in any other companies or associations or in the undertakings thereof and to function as a holding company. 15. To direct the management, control and supervision of any company, association or concern or co-operative society by nominating directors, controllers, supervisors, advisers or otherwise, or to collaborate with any company or association or concern or co-operative society formed for carrying on any manufacturing or other business within the objects of the company. 35. To receive grants, loans, advances or other moneys or deposits or otherwise from State or Central Government, banks, companies, trusts, individuals, financial institutions, corporations or co-operative societies with or without an allowance of interest thereon so however that this company shall not carry on the business of banking as def....
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....are is Rs. 1,000. The Assessing Officer was of the view that even where the above loss is incurred by the assessee during the sale of these shares, it can only be considered as a capital loss as the assessee-company is not a dealer in shares and that the shares are held even prior to 1978-79 which is a long-term capital loss which cannot be set off against income from business. The Assessing Officer has also noted that in the schedules accompanying c the balance-sheet of the company the investment in equity shares in the cooperative societies is shown as a "non-trade asset". It was observed that the shares in the co-operative societies do not fall under the category of depreciable asset under section 32 also. It was further noted that similar disallowances were made in the earlier assessment year 1980-81 and that the assessee had not filed any appeal against this. In the appeal, the first appellate authority considered the contention of the assessee in paragraph 5 of the appellate order. The first appellate authority observed that admittedly, even on the date of investment, these societies were not viable units. Hence, the investment could be considered only as a means of expandin....
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.... in the shares held by the appellant. The alternate contention of the assessee was that the loss on the revaluation of the shares held by the assessee in the capital of the defunct co-operative societies should at least be viewed as a capital loss. The Tribunal observed that the assessee would be right if such loss was really incurred by it either by transfer, sale, exchange, relinquishment or extinguishment of such shares or the rights represented by such shares in the capital of the co-operative societies. The Tribunal then observed that there has been no transfer by the appellant of the shares held in the co-operative societies and as a matter of fact the assessee has no right to transfer the shares in view of the absence of the provision for disinvestment. It was also observed that the reduction of the value of the share from Rs. 100 to Re. 1 effected by means of book entries, unaided or unattended by transfer of such shares, i.e., mere revaluation of its investment on some basis may be a basis on which such revaluation was justified. The Tribunal after observing that "it is settled law that no man can make profit or loss out of trading with himself" held that the reduction in ....
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....rse of the business of the assessee or incidental to such business. This argument is plainly erroneous and cannot stand scrutiny even for a moment. It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it as pointed out by Venkatarama Aiyar, J., speaking on behalf of this court in Badridas Daga v. CIT [1958] 34 ITR 10 (SC), but it would not be correct to say that where a loss arises in the process of conversion of foreign currency which is part of trading asset of the assessee, such loss cannot be regarded as a trading loss because the change in the rate of exchange which occasions such loss is due to an act of the sovereign power. The loss is as much trading loss as any other and it makes no difference that it is occasioned by devaluation brought about by an act of State. It is not the factor or circumstance which causes the loss that is material in determining the true nature and character of the loss, but whether the loss has occurred in the course of carrying on the g business or is incidental to it. If there is loss in a trading asset, it would be a trading loss, whatever be its cause, because it would be....
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.... the business and is part of the circulating capital, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss. ..." The Supreme Court after referring to various decisions of the English and Indian courts, particularly the decisions of the Supreme Court in CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 and CIT v. Canara Bank Ltd. [1967] 63 ITR 328 held thus: "The law may, therefore, now be taken to be well-settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by ....
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....ad invested money in the co-operative societies in the form of shares of the said societies. Whether these investments can be treated as stock-in-trade or trading asset is the question to be decided. The memorandum and articles of association of the company does not provide either for withdrawing the shares or for transferring such shares in the cooperative societies under any circumstances. Clause 36 deals with lending of monies to co-operative societies but, however, it is specifically stated that such lending shall not be for the purpose of banking business. Section 16 of the Kerala Co-operative Societies Act provides for membership in the co-operative societies. Section 22 provides for registration on holding shares. Section 23 deals with restriction on transfer of share or interest and section 24 deals with restrictions on withdrawal of shares. Section 16 also provides for the eligibility condition for being a member of the society. Section 22 provides that in any society no member other than the Government, any statutory or non-statutory board, committee or corporation approved by the Government in this behalf or any other society, shall hold more than such portion of the tot....
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....purpose of the business. The claim for deduction made by the assessee admittedly will not fall under sections 30 to 36. We have already taken the view that the expenditure of the nature claimed is a capital loss. Can it be said that the expenditure is for the purpose of the business of the assessee? The word "business" is defined in section 2(13) of the Act which includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. A Constitution Bench of the Supreme Court in Narain Swadeshi Weaving Mills v. Commr. of Excess Profits Tax [1954] 26 ITR 765 considered the question whether lease money obtained by the assessee-firm could legally be treated as business profits liable to excess profits tax. In that context the Supreme Court considered the definition of the word "business" in section 2(5) of the Excess Profits Tax Act which is similar to the definition of the word "business" in section 2(13) of the Act and observed thus: "Whether a particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture is always a difficult question to answer. On the one hand, it ....
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....er referring to the clauses in the memorandum and articles of association of the assessee has observed that the investment made in the capital of the co-operative societies cannot by itself be considered as an object, though it is described as an object but can be viewed only as an exercise of power to enable the appellant-company to promote industrialisation in the small sectors in Kerala State. The Tribunal further observed that there is no power to withdraw the investment or to put it in modern terminology the power to disinvest after a certain stage of the development in the small industrial sectors. The Tribunal has accordingly held that the investment made by the appellant-company in the capital of the co-operative societies can be viewed only as its capital stock and cannot be viewed as part of its trading capital or circulating capital. It is in this view of the matter it was held that if at all there was any loss on the shares representing the investments, it cannot be viewed as a trading loss or a revenue loss. The Tribunal accepted the contention of the Department that the assessee is not a dealer in shares. The aforesaid findings of the Tribunal considered in the light ....