K.L.ROY, J. - (1.) THE assessee is a company. Its main activity consists in acting as the managing agents of a large number of companies. THE assessee held also substantial shares and securities which in its balance sheet for the year ending March 31, 1955, were shown at cost at over Rs. 1,20,00,000. In the course of its assessment for the year 1955-56, for which the corresponding previous year was the financial year ending March 31, 1955, the ITO found that during the preceding 15 or 16 years the assessee had substantial transactions in the purchase and sale of shares. In this year the assessee had claimed a loss of Rs. 91,963 in its business of dealing in shares. According to the ITO, the loss claimed was on account of losses alleged to have been suffered in the sale of the following shares, viz., 139 debentures in Malwa Sugar Mills Company Limited (loss Rs. 646) ; 200 preference shares in the United Collieries Limited (loss Rs. 4,000) and 2,500 ordinary shares in Karamchand Thapar and Sons Limited (loss Rs. 1,04,592). THE ITO was of the opinion that the assessee was not a dealer in shares and the sales of the shares in which the losses were alleged to have been incurred were not genuine for, inter alia, the following reasons : (i) THE shares sold during the year were mostly shares of companies managed by the assessee and as the managing agents it was incumbent on the assessee to hold the required number of shares in these companies.THE sales were to associated or managed companies and even when sold to regular brokers, the shares ultimately were taken over by these latter companies. (ii) THE shares had been shown under the head "investment" in the assessee's balance sheet and the resultant loss has been shown as loss on sale of assets in its profit and loss account. (iii) THE long period between the purchases and sales of the shares and debentures indicated that these were not acquired for the purpose of the assessee's business as a dealer in shares. (iv) THE bulk of the shares held by the assessee were not quoted in the stock exchange and a dealer in shares would not normally deal in such shares. (v) THE assessee had not taken advantage of the favourable prices for these shares and had mostly shown losses in the past on the sale of such shares. This indicated that the sales were not genuine, but were arranged with a motive to create an artificial loss for setting such loss against other income of the assessee. (vi) THE assessee carried forward huge stocks of unsold shares year after year and the sales in each year were very low in comparison. That was not the normal activity of a trader in shares. THE ITO further found that the 139 debentures in Malwa Sugar Mills Limited were purchased by the assessee in small lots during the month of December, 1954, and the whole lot was sold on the 30th December, 1954, to an associated concern at a loss of Rs. 646.
(2.) THE 200 preference shares in United Collieries Limited were purchased on the 10th October, 1953, and were sold on the 29th July, 1954, at a loss of Rs. 4,000. So far as the 2,500 shares in Karamchand Thapar and Sons Limited were concerned, 110 such shares were acquired on May 20, 1941, and 1,300 on September 17, 1941, in the year the said company was incorporated, while a further 100 shares were acquired on the 31st March, 1950. THEse shares were sold on the 4th March, 1955, at a loss of Rs. 1,04,592. THEse sales were made to M/s Mugneeram Bangur and Company, a well-known firm of stock brokers, but were acquired two years later by another associated concern. THE ITO found that M/s Karamchand Thapar and Sons Limited had been earning substantial profits and declaring good dividends in the preceding 10 or 11 years and the break up value of these shares on the basis of the balance sheet of this company as at 30th June, came to Rs. 175 per share. THEse shares were not quoted in the market. THE ITO held that these shares had been sold much below the market rate. In view of his findings and conclusions, the ITO disallowed the losses on the sale of the shares of the above three companies. THE assessee appealed to the AAC against the aforesaid order of assessment claiming, inter alia, that the ITO was not justified in disallowing the losses claimed on the sale of the shares of the above named three companies and that such losses should have been allowed in full. THE AAC disagreed with the ITO's finding that the assessee was not a dealer in shares and following his own decision in the assessee's appeals for the asst. yrs. 1952-53 and 1953-54, he held that the assessee was a dealer in shares. He also disagreed with the ITO's further finding that the sales of these shares are not genuine sales. He then proceeded to consider whether the aforesaid shares were sold by the assessee as its stock-in-trade or whether any of these shares formed part of its capital investment in order to determine whether the losses were to be allowed as revenue loss or disallowed as capital loss. So far as the losses claimed in respect of the sales of the debentures in Malwa Sugar Mills Limited and of the preference shares in United Collieries Limited, the AAC was of the view that there was no reason for disallowing the claim in respect of those sales. The sales were made shortly after the purchase, the purchasers were separate and distinct entities and there was nothing to show that the sales were at concessional rates. The AAC, therefore, allowed the claim for losses on the sale of these shares. Regarding the loss of Rs. 1,04,592 claimed on the sale of shares of M/s Karamchand Thapar and Sons Limited, the AAC noted the finding of the ITO that substantial profits had been earned by this company in the preceding years and also that the break up value of these shares on the basis of the balance sheet of the company as on the 30th June, 1954, came to Rs. 173 per share. He also noted that these shares were not quoted in the stock exchange. A letter from M/s Stewart and Co., Stock and Share Brokers, dated the 26th November, 1951, was produced by the assessee before the AAC in which the share brokers had appraised the estimated market value of the shares of Karamchand Thapar and Sons Ltd. at Rs. 50 per fully paid ordinary shares on the basis of the balance sheet of that company for the year 1950. The AAC remarked that the assessee had purchased 100 shares on the 31st of March, 1950, at Rs. 75 per share when, according to the assessee, the market value of these shares was Rs. 50 per share. Considering that the position of the company was very sound and that there was a possibility of earning large dividends on these shares and also considering that no sales had been made of these shares for a period of 14 years, the AAC came to the conclusion that these shares were held by the assessee as investment and not as stock-in trade in its business as a trader in shares. The AAC also found that the assessee was the managing agents of that company and remained so till 1956 and was of the opinion that the 2,400 shares, which were acquired at an initial stage, must have been acquired in connection with the acquisition or retention of the managing agency of that company. The AAC, therefore, held that these shares had not been acquired as stock-in-trade but as capital investment in connection with the acquisition of the managing agency of M/s Karamchand Thapar and Sons Ltd. or for earning dividends. He, therefore, upheld that decision of the ITO in disallowing the claim of loss for Rs. 1,04,592 on the sale of these shares.
(3.) ON further appeal by the assessee to the Tribunal against the disallowance by the AAC of its claim for loss on the sale of the shares of M/s Karamchand Thapar and Sons Ltd., the Tribunal observed as follows : "We will take it for granted, since the AAC has so observed, that the assessee is a dealer in shares. We will also take it for granted that so far as the sales of shares in question are concerned, they are genuine sales. The question, however, remains as to whether it was the sale of stock-in-trade or merely a change of investments and hence the loss which accrued was a capital loss. In order to judge the nature of the dealings as to whether it was a trading deal or an investment deal, one has primarily to see the way in which the assessee has himself treated his stocks, namely, whether as investment or as stock-in-trade. In this particular case, we find that the shares have been shown under the head 'investment' in the balance sheet and in fact the loss accruing to the assessee on the sale of these shares has been shown in the profit and loss account as a loss on the sale of assets. Then there are further indications in the conduct of the assessee himself which amply go to show that these shares were held purely as investment and sold as such. We have already indicated above that in the balance sheet the assessee had shown these shares as being held as investments. The further fact that it held the shares for all these fourteen years, from the year 1941, is mostly compatible with persons who seek to keep shares as investments. Moreover it does not stand to reason if, as the assessee's counsel states it was held as stock- in- trade, that they should not have been sold out when there was good and favourable market for those shares. Now this is not the conduct of a person who claims to be a dealer in shares. Having considered the reasons given by the authorities below, which in our opinion validly, point to the conclusion that this deal was a deal regarding the investment and not of the stock-in- trade, and also having considered the arguments placed on behalf of the assessee, which does not dislodge us from that opinion, we hold that the loss was a loss on the sale of investments and a capital loss and the learned AAC was justified in disallowing the assessee's claim." At the instance of the assessees the following question of law has been referred to this Court by the Tribunal under s. 66(1) of the Indian IT Act, 1922 : "Whether, on the facts and in the circumstances of the case, the loss of Rs. 1,04,592, on the sale of the shares of M/s Karamchand Thapar and Sons Ltd., had been rightly disallowed as a capital loss ?" ;