K.L.ROY, J. - (1.) THIS is a reference under s. 66(1) of the Indian IT Act, 1922 (hereinafter referred to as the Act). The assessment year concerned is 1953-54 for which the relevant accounting period commenced on October 1, 1951, and ended on September 30, 1952. The original assessment for this year was completed by the ITO on November 30, 1953. In making the assessment, the ITO accepted the assessee's profit and loss account which showed a loss on sale of shares of Rs. 5,14,295. Subsequently, the ITO had information that in consequence of an order under s. 23A passed in respect of M/s Sahu Jain Ltd. of which the assessee was a shareholder, dividend deemed to have been distributed to the assessee had escaped assessment. The ITO started reassessment proceedings under s. 34(1)(b) of the Act on February 7, 1958, to assess this deemed dividend income. In the meantime, the ITO had completed the assessee's assessment for the subsequent year 1954-55, and had disallowed the assessee's claim for loss of Rs. 9,93,686 on the sale of shares for that year. In the course of that assessment proceedings the ITO found that, (i) the loss claimed arose from the sale of shares of companies which were under the control of the Sahu Jain group, and (ii) that the purchases and sales of shares by the assessee-company were a part of the general rearrangement and transfer of shares originally held by the companies and others of the Sahu Jain group to gain control over these companies, from one to another with a view to shift the losses due to depreciation. The ITO scrutinised the purchases and sales of the shares by the assessee and found that the shares were purchased from various companies controlled by this group and also from members of the Dalmia or the Jain families and that the shares have ultimately been sold to other companies of the group or to other members of the two families though some of the transactions were effected through share brokers. He also found that the assessee-company commenced business in October, 1949, and closed its accounts for the first year on September 30, 1950. During that year the assessee dealt in cement and purchased shares worth Rs. 7,000 which was shown as investment in its balance-sheet as on September 30, 1950. The share capital of the company as on that date was Rs. 50,000. The share capital was raised to Rs. 5,00,000 in July, 1952. In the second year of business the assessee took a loan of rupees two crores from M/s Dalmia Cement and Paper Marketing Co. Ltd. and this loan was utilised by the assessee to advance a similar sum to another allied company, namely, Ashoka Marketing Co. Ltd. During the accounting year ended September 30, 1951, the assessee's total purchases of shares amounted to Rs. 43,97,932. There were no sales of shares in this year. During the accounting year ended September 30, 1952, that is the year under consideration, the purchases and sales of shares were over Rs. 46,00,000 and Rs. 40,00,000, respectively, while in the immediately succeeding year there were no purchases. The ITO rejected the contention of the assessee that it was a dealer in shares. He referred to the resolutions of the board of directors of the assessee-company dated May 4, 1951, May 26, 1951, and June 13, 1951, respectively, which, while approving the purchases and sales of shares, described such purchases and sales as those of investment. He also referred to the resolution passed by the assessee's board of directors on August 27, 1952, the material portion of which is as follows : "Item 4.--Noted purchase of 4,00,000 ordinary shares in Rohtas Industries Ltd. at the rate of Rs. 7 per share and 70,000 ordinary shares in Shree Krishna Gyanoday Sugar Mills Ltd. at the rate of Rs. 5 per share in pursuance of the directors' resolution dated 18th July, 1952. Resolved that these shares should be held as an investment as distinguished from the shares which till now had been acquired and held as stock-in-trade. Item 5.--Considering the financial position of the company resolved that the funds invested in Punjab National Bank Ltd. shall be liquidated."
(2.) THE ITO further found that the word "investment" had been struck off in the minutes of the earlier meetings though such striking out was not initialled by the chairman of the board of directors. THE ITO, accordingly, held that these shares were being held by the assessee-company as investment and the transactions amounted to transfer of these shares from one company to another under the control of the Sahu Jain group due to some reasons other than the motive of trade and the resulting loss was not a trading loss. THE ITO therefore dissallowed the claim for loss for the asst. yr. 1954-55. It his order of reassessment under s. 34 for the assessment year 1953-54, the ITO examined some of the major transactions of purchases and sales of shares and found that both the ultimate sellers and purchaser of the shares were companies and persons over whom the Dalmia and the Sahu Jain groups had direct or indirect control. Following his reasons for disallowing the claim for loss on sale of shares for the assessment year 1954-55, the ITO disallowed the claim for loss of Rs. 5,14,295 in this year and reduced the loss allowed in the original assessment to that extent. On appeal from the order of assessment, the AAC repelled the assessee's contention that in a proceeding for reassessment the ITO could not include any other item of escaped income except such income in respect of which the s. 34 notice had been issued. He relied on the decision of the Punjab High Court in CIT vs. Jagan Nath Maheshwary (1957) 32 ITR 418 (Punj). The AAC also negatived the assessee's contention that as its account showing the purchases and sales of these shares and all other relevant data were produced before the ITO at the time of the original assessment, the ITO making the reassessment was not entitled to sit in judgment over the decision of his predecessor and hold that the loss was not a trading loss. The AAC found that certain facts were not brought to the notice of the ITO at the time of the original assessment which only came to light at the time of the assessment for the subsequent year. He mentioned that the various resolutions of the board of directors of the assessee- company showing these shares as investments, the sale vouchers of the assessee showing the sales of these shares as those of investments and the fact that the shares had been shown as investment and not as stock-in-trade in the balance-sheet of the earlier years were not brought to the notice of the ITO at the time of the original assessment. The AAC also rejected the further contention of the assessee that it was a dealer in shares. The AAC further found that at the time the resolution of August 27, 1952, was passed, the assessee had already incurred large losses on the sale of these shares. Accordingly, the AAC dismissed the assessee's appeal.
(3.) ON further appeal by the assessee to the Tribunal it was contended, inter alia, (i) that action under s. 34 having been taken to assess the deemed dividend from M/s Sahu Jain Ltd. it was not open to the ITO to consider afresh the claim for losses on share dealing and to disallow the same ; (ii) that a successor ITO could not sit in judgment on his predecessor's order. ON the merits it was contended that the frequency of the transactions and the financing of transactions by resort to borrowing would clearly indicate that the transactions were, in fact, dealings in shares. Further, the assessee's articles of association permitted the assessee to deal in shares. It was further contended that the word "investment" was inadvertently used in the earlier resolutions of the board of directors and that the resolution of August 27, 1952, correctly showed the position that the shares were held as stock-in-trade. It was further submitted that the magnitude and the volume of the transactions and the close intervals at which the purchases and sales were made clearly showed that these were trading transactions. The Tribunal negatived all the aforesaid contentions of the assessee. It held that as proceedings under s. 34 had been validly initiated in this case to reasses the dividend income deemed to have been distributed by virtue of the order under s. 23A, the ITO was competent to include items other than those in respect of which notice had been issued and for this proposition it relied on the decision of the Punjab High Court in Jagan Nath's case (supra), referred to by the AAC. The Tribunal further observed that neither the order sheet nor the records of the original assessment showed that the minutes book or the sale vouchers were produced before the ITO at the time of the original assessment. The ITO had merely accepted the loss as per the assessee's profit and loss account without making any investigation whatsoever. All that s. 34(1)(b) required was that the ITO must have in his possession information and in consequence of such information he would have reason to believe that income had escaped tax. Both these requirements had been satisfied in this case. The additional information which came into the ITO's possession in course of the assessment for the subsequent year had led him to believe that income had escaped assessment. The Tribunal accordingly held that the proceedings under s. 34(1)(b) initiated by the ITO resulting in the assessment was legal and valid. The Tribunal examined the minutes book of the meetings of the board of directors of the assessee-company and found that the resolutions dated May 26, 1952, and June 13, 1952, approved the purchases and sales of investments as detailed thereunder. The Tribunal further found that the words "of investment" had been struck out in the minutes book without anybody initialling the cutting. The Tribunal also examined the internal vouchers of the assessee-company for the sale of shares and found that in these vouchers the sales were described as those of investment. The Tribunal observed that in the past years the shares held by the assessee had been shown under the head "investment" in the respective balance-sheets. It was only in the balance- sheet for the year ending September 30, 1952, that the assessee had shown investments under two parts, namely, (i) investments held as stock-in-trade and, (ii) investments held as investments, and the Tribunal referred to the resolution of the board of directors dated August 27, 1952, and observed that it was only under that resolution and in pursuance thereof that the assessee had shown part of its investment in shares as its stock-in-trade. The Tribunal remarked that the loss claimed arose on the sale of shares purchased before August 27, 1952, and that the resolution approving these purchases specifically spoke of the purchases as on account of investment. The Tribunal further found that negotiations for the sale of the shares had been finalised on June 12, 1952, when the assessee was aware of its position regarding loss on the sale of these shares. The resolution of August 27, 1952, describing the shares, which had been acquired till then, as stock-in-trade was deliberately passed in order to prepare a case for the claim for the loss. The Tribunal agreed with the AAC that the purchase of the shares, on the sale of which the loss occurred, had been originally made as capital investment and it was only at the end of August, 1952, when the assessee had already incurred huge losses on the sale of these shares, that the assessee thought of recording the resolution treating those shares as stock-in-trade. The Tribunal was not impressed with the assessee's contention that the magnitude and frequency of the purchases and sales as also the short interval between transactions indicated that the purchases and sales were made under a scheme of profit-making. The Tribunal ultimately held that there was ample evidence on record to establish that the shares which were disposed of during the accounting period were acquired earlier as a measure of investment and that they were not purchased in the course of the assessee's business as a dealer in shares. The Tribunal accordingly upheld the disallowance of the claim for loss by the authorities below.;