Sudhindra Mohan Guha, J. - (1.) In this reference under Section 256(2) of the Income-tax Act, 1961, the short point posed before us is " whether the loss of Rs. 42,327 incurred by the assessee-company in the sale of shares of M/s. Lajpat Potteries Pvt. Ltd. is capital in nature as held by the income-tax authorities or whether it is a trading loss as claimed by the assessee ? "
(2.) The statement of the case relates to the assessment year 1969-70. The assessee is a limited company and it is not a dealer in shares. It carries on business as a distributor of cutlery and crockery manufactured by various producers and M/s. Lajpat Potteries Pvt. Ltd. was one of the companies that supplied goods to it for such distribution, Its memorandum of association authorises it, amongst others, to do business as financiers also.
(3.) M/s. Lajpat Potteries Pvt. Ltd. was incurring heavy Josses on account of indifferent management and was about to close down in 1963, and, then, the assessee being interested in a regular and ensured supply of goods from that company, in its own business interest, purchased in May and September, 1963, in all, 1,633 of its shares for Rs. 52,534, thereby to-acquire about 51% of its total subscribed capital of 3,200 shares and thus a controlling interest therein. However, even such intervention of the assessee did not save the situation, as that manufacturing company continued to show frightful losses even in the years that followed. All attempts to stop the loss failed and ultimately the factory itself was closed down in 1966. It was when matters reached such a head that in this assessment year the assessee for good sold those shares and realised only Rs. 10,000. The assessee-company claimed before the Income-tax Officer that the loss resulting from sale of those shares amounting to Rs. 42,327 was a revenue loss which should be allowed as a deduction in computing the business income. This claim was, however, disallowed by the Income-tax Officer.;