DALHOUSIE HOLDINGS LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this reference under S. 256 (1) of the IT Act, 1961 ('the Act') for the asst. yr. 1972-73, the following question of law has been referred to this Court.

(2.) SHORTLY stated, the facts are that the assessee is a limited company and derives income from shares of profits, dividend, interest, etc. The assessee incurred a loss of Rs. 1,46,136 in shares. It claimed the loss as business loss. The ITO in the original assessment noted that there was a profit to the assessee in the asst. yr. 1970-71 and the assessee itself claimed this gain as capital gain. The ITO found that the assessee was an investor and hence, the loss incurred by it was capital loss. The assessee's appeal against the order of the ITO was heard by the AAC who set aside the order of the ITO vide his order dt. 25th June, 1976. Thereafter, the ITO passed a fresh assessment order dt. 31st Aug., 1977. In this order, the ITO re-examined the issue in the light of the directions of the AAC and came to the conclusion that the assessee was only an investor. The ITO also observed that the assessee did not have any share transactions in the fives earlier years. He also found that the assessee did not treat the shares as stock-in-trade and the profit earned by the assessee during the asst. yrs. 1969-70 and 1970-71 had been taken as capital gains. The ITO readjusted the loss claimed by the assessee at Rs. 1,44,894 and treated the same as long-term capital loss and allowed the same to be carried forward to be set off against future profit. This order of the ITO was set aside by the CIT (A) by an order dates 9th Nov., 1982. A fresh assessment order dt. 10th Dec., 1984 was, thereafter, passed by the ITO. Against the aforesaid order of the ITO, the assessee went in appeal before the CIT (A) who in his final order dt. 4th July, 1986 came to the conclusion that the assessee was not a dealer in shares and found that the assessee was a partner in Orr. Dignam &Co. and was enjoying the firm's income. There partners were holding directorship in various companies and, accordingly, the shares were held in the company. It also found that the director's fees and commission received by the firm were assessed as income from other sources. Accordingly, he was of the opinion that the loss incurred by the assessee was a capital loss.

(3.) THE Tribunal came to the finding that the assessee held several shares in different companies by which the partners of the parent firm became directors in those companies and, accordingly, enjoyed director's fees, remuneration and /or commission. Therefore, the shares were held by the company not in its trading operation. The shares were compulsorily held by the assessee as qualification shares in order to get the directorship. It is also the finding of the Tribunal that the ultimate aim of the company was to hold shares in the company so that the partners of the firm could get directorship in the company. If the shares are held in the said situation to get directorship by virtue of the qualification shares, it could not be said that the shares were held by the assessee-company in its normal trading operation. The facts establish that the shares were held by the assessee as an investor in order to get directorship. This fact is further strengthened by the acts of the assessee when the assessee earned the profit for the asst. yrs. 1969-70 and 1970- 71 and the assessee itself claimed the said profit as capital gain. Further, in last five years there was no transaction at all. Further, if the shares are sold when the assessee ceases to be a director of the company, the assessee-company only liquidates its investments which was not truthful because the assessee used to be a director of the company. Under the circumstances, after considering the facts and the case law relied upon by the assessee, it is correct that the assessee was only an investor and, therefore, the loss incurred by the assessee was a capital loss.