COMMISSIONER OF INCOME TAX Vs. EAST COAST COMMERCIAL CO LTD

JUDGEMENT

(1.) THE assessment years involved in this reference are 1952-53, 1953-54 and 1955-56, corresponding accounting years being 17th July, 1950 to 29th Oct., 1951, 30th Oct., 1951 to 17th Oct., 1952 and 6th Nov., 1953 to 1st July, 1954, respectively.

(2.) THE members of the Kedia family held substantial interest both in the assessee- company and in M/s Anderson Wright Ltd. M/s Anderson Wright Ltd. were appointed managing agents of M/s Khardah Co. Ltd. from 1st July, 1948. THE total number of issued ordinary shares of M/s Khardah Co. Ltd. were 54,000 of the face value of Rs. 100 each. 32,680 of these shares were held by one Mrs. Flora Meyer either in her own name or in the names of her nominees. 9,637 shares were held by M/s Anderson Wright Ltd., and the balance by several other persons. Some time in April, 1950, M/s Anderson Wright Ltd. purchased all the shares of Mrs. Flora Meyer at a price of Rs. 300 per share. THE total price thus came to over a crore of rupees which M/s Anderson Wright Ltd. raised by borrowings from various parties including a sum of Rs. 27,54,000 from the assessee-company. THEre is a resolution by the board of directors of the assessee- company sanctioning loan dt. 15th Feb., 195l, and under this very resolution the directors of the assessee-company also authorised the assessee-cormpany to be a dealer in shares with retrospective effect from 17th July, 1950. Up to and including the asst. yr. 1951-52 the assessee had not been dealing in shares but held shares only as investment. THE memorandum of association of the assessee-company, however, authorised dealing in shares. THE amount of loan advanced by the assessee-company as mentioned hereinbefore to Anderson Wright Ltd. in purchasing shares of Khardah Co. Ltd. was repaid by Anderson Wright Ltd. THE major portion of the shares of Khardah Co. Ltd. came to be owned between Anderson Wright Ltd. and the assessee-company both of which were under the control of Kedia family. For the asst. yr. 1952-53 there was a profit of Rs. 4,495 on the sale of 335 shares of Khardah Co. Ltd. between 16th March, 1951 and 16th May, 1951. THE balance of the stock was valued at the market price at the close of the accounting year and on such valuation, after setting off the aforesaid profit of Rs. 4,495, the assessee suffered a loss of Rs. 9,29,485. In the accounting years relevant to the asst. yrs. 1953-54, 1954-55 and 1955-56 there were no sales of these shares but on the valuation of the closing stock at the prevailing market rates on the closing dates of the respective accounting years, the assessee again suffered a loss of Rs. 6,33,534 for 1953-54, earned a profit for the asst. yr. 1954-55 and again suffered a loss of Rs. 66,040 for the asst. yr. 1955-56. THE assessee claimed loss of Rs. 9,29,485 for the asst. yr. 1952-53, Rs. 6,33,534 for the asst. yr. 1953-54 and Rs. 66,040 for the asst. yr. 1955-56 in respect of its dealings in Khardah Co. Ltd. shares and also claimed transfer charges of Rs. 3,684 for the asst. yr. 1952-53, and Rs. 3,377 for the asst. yr. 1953-54 as the expenditure incurred for the purpose of its business. For the asst. yr. 1954-55, the assessee returned a profit from these shares. While assessing the profit disclosed in respect of the asst. yr. 1954-55, the ITO disallowed the claim for the losses in the asst. yrs. 1952-53, 1953-54 and 1955-56 as capital losses. THE ITO also disallowed the claim for deduction of share transfer expenditures on the ground that these were capital expenditures. THE ITO came to the conclusion that the shares were acquired by the assessee for helping Anderson Wright Ltd. to retain the managing agency of Khardah Co. Ltd. and for preserving the controlling interest of the Kedia family in these companies and that the purchase of these shares was merely an investment and was not intended to be a dealing in shares. THE ITO, in his order for the asst. yr. 1952-53, has set out the genealogical table of the Kedia family and the dates and particulars of purchase of these shares and the sale of these shares during the said assessment year. THE same appears at pages 12 and 13 of the paper book of this reference. It appears that a large block of these shares were purchased from concerns which have been described as sister concerns indicating thereby concerns in which the members of the Kedia family had substantial interest. It also appears from the said particulars that these shares were purchased in different quantities on diverse dates between 18th Sept., 1950, and May, 1951. THEy were purchased from several parties. Some were purchased at rates lower than the prevailing market rates on the relevant dates. Out of this purchase of 13,518 shares of Khardah Co. Ltd., 335 of these shares were sold during the relevant assessment year. Out of these sales about 20 shares were sold to Hindusthan General Produce Co. Ltd., which is also a concern in which the members of the Kedia family had substantial interest. THE ITO has dealt with how the money was obtained by Anderson Wright Ltd. for the purpose of acquiring these shares and how the assessee got this money for the purpose of acquisition of these shares. It appears that the said shares were acquired with borrowed money. THE ITO has also referred to the fact that Mrs. Meyer had substantial interest in the said company and she was unloading those shares and if those shares went out of the Kedia family, they apprehended losing control and as such those shares were acquired in this process for the purpose of continued retention of the control of Kedia family in the said company. THE ITO also referred to the subsequent resolution which authorised dealings of shares with retrospective effect. THE ITO has also referred in his order to the application of the assessee dated March, 1956, to the Central Board of Revenue regarding time for payment of tax. It appears that in that application the assessee had stated : "During the year 1950-51 your memorialist had earned substantial amount in jute and jute goods and had invested this fund in shares and securities." THE ITO has also relied on the fact that all these 1,286 Khardah Co. Ltd. shares were really deposited and lay frozen because they were with the bank for the purpose of overdraft facilities. THE ITO has referred to the fact that, even when market prices were high, the assessee did not sell all these shares but retained a part of it. In respect of the asst. yrs. 1953-54 and 1955-56 he followed his findings in respect of the asst. yr. 1952-53 and disallowed the claim on the said basis.

(3.) THERE was a further appeal before the Tribunal. The Tribunal, after setting out the facts in its order, has referred to the contentions made by the Revenue as well as the main reasons in the order of the ITO and these are :