H.N. Seth, J. - (1.) THE Income-tax Appellate Tribunal, Allahabad, has made this reference under Section 66(2) of the Indian Income-tax Act, 1922, at the instance of the assessee, Messrs. J. P. Srivastava and Sons, Kanpur.
(2.) THE assessee is an association of persons and the relevant assessment year is 1959-60. In January, 1951, the assessee purchased 3,040 shares of Messrs. Gwalior Agriculture Co. Ltd. for a sum of Rs. 1,52,000. Out of these shares, it transferred 700 shares to Messrs. J. P. Srivastava and Sons Private Ltd. for a sum of Rs. 35,000 on 1st of April, 1953. Balance of 2,340 shares valued at Rs. 1,17,000 remained with the assessee. Due to certain reasons, on 15th December, 1954, the assessee wrote off a sum of Rs. 1,16,999 from the value of 2,340 shares amounting to Rs. 1,17,000. THE result was that in the assessee's books the value of these 2,340 shares was shown as rupee one only. THE assessee claimed the amount written off in its assessment for the year 1955-56, which claim was disallowed. Subsequently, the assessee repurchased 700 shares which had been sold to Messrs. J. P. Srivastava and Sons Private Ltd. for a sum of Rs. 35,000. In the result it again became possessed of 3,040 shares, but in the account books these shares were valued at Rs. 35,001. In the relevant accounting year, the assessee sold these 3,040 shares for a sum of Rs. 3,04,000. After deducting the sum of Rs. 35,001, the book value of these shares, there was a surplus of Rs. 2,68,999. It may also be mentioned that during the year 1951-52, the assessee had made a claim for a sum of Rs. 1,05,067 as loss suffered by it. This claim was rejected by the income-tax authorities on the ground that the loss claimed by the assessee was of a capital natupe and as such it could not be deducted from the assessee's income for that year. THE assessee purported to carry forward this loss of Rs. 1,05,667 all through and up to the assessment year involved in this case. THE assessee claimed that, in computing its capital gains for the year in question, following factors should be considered : (1) It should be given the benefit of the amount of Rs. 1,16,999, the amount written off from the value of the shares in its books. (2) In computing the capital gains made by the assessee the fair market value of the shares should be taken into consideration under the third proviso to Section 12B(2); and (3) That capital loss of Rs. 1,05,067 incurred by it, in the year 1951-52 and not adjusted in subsequent years, should be carried forward and adjusted against the surplus amount of Rs. 2,68,999 under Section 24(2B). The Income-tax Officer accepted the assessee's case that the amount of Rs. 1,16,999 written off in the assessee's account books should be taken into consideration while determining its capital gains for the year in question. In this connection he observed as follows : "The assessee's first claim amounts to allowing it to adopt the assessee's cost of acquisition of these shares ignoring the earlier write off done in the assessment year 1955-56. This claim of the assessee is justified and while working out capital gains the cost of these shares will be taken to be the cost of acquisition of these shares by the assessee." So far as the assessee's claim that, while computing the capital gains, the Income-tax Officer should consider the fair market value of the shares and substitute it for the actual cost of those shares under the third proviso to Section 12B(2) is concerned, the Income-tax Officer observed that the assessee was given an opportunity to lead evidence for establishing the value of the shares as on January 1, 1954, but despite this opportunity, the assessee did not produce any evidence in support of this claim. He also observed that the assessee's own conduct in writing off the value of the shares in its account books showed that the value of these shares had not increased. The assessee also produced the balance-sheets of Messrs, Gwalior Agriculture Co. Ltd., for the years ending 30th June, 1953, and 30th June, 1954, which were the relevant years for determining the higher value under the third proviso to Section 12B(2). It was found that the company had suffered losses in both these years. In the circumstances, there was no case for placing a value higher than the cost of acquisition of the shares in question, as on January 1, 1964.
(3.) SO far as the assessee's claim that the capital losses suffered by it in the year 1951-52 should be carried forward and set off against the surplus of Rs. 2,68,999 is concerned, the Income-tax Officer held that under the law it was not possible to carry forward that loss and to adjust the same in the capital gains for the year 1958-59. In the result he determined the capital gains of the assessee at Rs. 1,52,000 and included this amount while computing its taxable income. The assessee went up in appeal before the Appellate Assistant Commissioner, The Appellate Assistant Commissioner agreed with the Income-tax Officer. He rejected the assessee's case that it was entitled to carry forward the loss of Rs. 1,05,067 suffered by it in the year 1951-52 to the assessment year 1959-60 and to set it off against the capital gains for that year. SO far as the question whether the assessee was entitled to the benefits of the third proviso to Section 12B(2) is concerned, the Appellate Assistant Commissioner observed that in the year 1951-52 there was no provision in the Income-tax Act for computing the capital gains. There was, accordingly, no determination of any such loss in that year. What had happened was that a claim for a bad debt of Rs. 1,05,067 had been rejected by the Income-tax Officer on the ground that failure to realise that amount resulted into a loss of capital nature. Although, after the change effected in the Income-tax Act, 1922, by the Finance Act of 1949, the provisions of Section 12B were not operative in respect of transactions taking place after April 1, 1948, and the provisions relating to set off and carry forward of capital loss as contained in Sections 24(2A) and 24(2B) of the Act were not changed, still those sections remained consequential Sections, and as after April, 1948, as the provision of Section 12B itself was suspended, the provisions relating to carrying forward and setting off loss could not remain operative. In connection with the assessee's case that it was entitled to the benefit of the third proviso to Section 24(2B), it was urged before the Appellate Assistant Commissioner that the company had laid out large amounts for increasing its production capacity and, therefore, the market value of its shares, as on April 1, 1954, was higher. The Appellate Assistant Commis sioner did not accept the assessee's case that the balance-sheet of Messrs. Gwalior Agriculture Co. Ltd. showed a loss because of the developmental activities undertaken by the company He held that the Income-tax Officer was justified in not placing higher value on the shares of the company while computing the assessee's capital gains. The assessee then took the matter before the Income-tax Appellate Tribunal. The Tribunal also affirmed the orders passed by the two lower authorities. It observed that as between the years 1947-48 and 1956-57 there was no provision for computing income under the head "capital gains" and as such the provisions relating to set off and carry forward of capital loss, as contained in Sections 24(2A) and 24(2B), were of no avail. The assessee could not carry forward the loss of Rs. 1,05,067 suffered by him in the year 1951-52 and to adjust the same as against the capital gains in respect of the assessment year in question.;