GULATI, J. - (1.) THIS is a reference under S. 66(1) of the IT Act, 1922 relating to the asst. yrs. 1957-58 and 1958- 59.
(2.) THE assessee is a limited company and at the material time was the sole selling agent of Swadeshi Cotton Mills Ltd. Jaipuria Bros. Ltd. were the Managing Agents of Swadeshi Cotton Mills. There was another concern by the name of Eland Ltd., which held a large number of shares of Swadeshi Cotton Mills Ltd. The members of the Jaipuria family had at all material time controlled the interest in all the four concerns. On 11th March, 1954, 7400 ordinary shares of Eland Ltd. were purchased by the assessee-company at the rate of Rs. 266 per share of the face value of Rs. 100 each. A second lot of 2788 ordinary shares was purchased by the assessee on 21st Oct., 1954 at the rate of Rs. 130 per share. No part of the shareholding was sold by the assessee during the relevant years. However the assessee re-valued the shares at the end of the previous year and arrived at a loss of Rs. 17,39,936 by valuing the shares at the rate of Rs. 58 per share. This valuation was put on the basis of the report of K.N. Gutgutia & Co., Chartered Accountants given on 13th Oct., 1958. The assessee claimed that the loss in question was a business loss and should be set off against its business profits under S. 10(1) of the Act. The ITO held that the loss was of a capital nature and, as such, was not allowable. The AAC affirmed the finding that the amount was not a business loss. The Tribunal relying upon its earlier decision dt. 29th Nov., 1962 held that the loss claimed by the assessee was not a genuine and bona fide loss and, as such, was not deductible. The assessee is aggrieved and at his instance the following question of law has been referred to this Court for opinion :- "Whether on the facts and in the circumstances of the case the Tribunal was justified in disallowing the claim of the loss of Rs. 17,39,936 on revaluation of shares of Eland Ltd." The Tribunal found that the real value of the shares was Rs. 130 per share and the extra price of Rs. 136 per share paid in respect of 7400 ordinary shares of Eland Ltd. was for extra Commercial considerations. The Tribunal also relied upon the finding of the ITO based upon the admission of the assessee that one of the motives for acquiring these shares was to acquire a controlling interest in the affairs of Jaipuria Bros. Ltd., the Managing Agents of Swadeshi Cotton Mills Co. Ltd., the principles of the assessee. It was contended before the AAC that the assessee derived huge income by way of sole selling agency commission which could not have been available to them just for a song, meaning thereby that the shares were acquired not as stock in trade but in order to maintain its selling agency. The Tribunal also endorsed the finding of the ITO that the assessee was not a dealer in shares and for that reason the profits derived by it from the dealings in shares in the asst. yrs. 1954-55 and 1957-58 were not taxed. The Tribunal also found that the loss claimed by the assessee was a notional loss worked out on the basis of revaluation of shares and, as such, could not be allowed. We are of the opinion that on the findings recorded by the Tribunal that the shares in question were not purchased by the assessee as stock in trade but for acquiring a controlling interest in the affairs of Jaipuria Bros. Ltd. or for maintaining the sole selling agency, it cannot be held that the loss in question was a business loss. Before a loss can be allowed as a business loss it must be shown that it flows directly out of the business of the assessee. The finding of the Tribunal that the shares in question were investment on shares and not stock in trade, therefore, has to be accepted and on these findings the assessee is clearly not entitled to claim the loss as a business loss.
(3.) IN view of the above findings it is not necessary to deal with the other question, namely, as to whether a loss which is arrived at upon re-valuation of stock in trade can be claimed or not.;