METAL DISTRIBUTORS LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) In this reference under Section 256(2) of the Income-tax Act, 1961, at the instance of the assessee, the following questions of law relevant for the assessment year 1968-69 have been referred to this court :

(2.) The facts leading to this reference are stated hereafter.

(3.) The assessee is a private limited company. It passed a resolution at the meeting of its board of directors on June 10, 1967, that 2,800 shares in Indian Iron and Steel Co. Ltd., 69,665 shares in Binani Metal Works Ltd., 93 shares in Multimetals Ltd., 1,130 shares in Metal Distributors Ltd., 200 shares in Metal Corporation of India Ltd. and 1,000 shares in Wellman Incandescent India Ltd., which were hitherto held as investment, may from now onwards be held as stock-in-trade and that appropriate transfer entries be made in the account books for this purpose. It was further resolved that the transfer entries should be made on the basis of the market value of the shares on the date of the resolution, i.e. June 10, 1967, and the value of these shares on the last day of each accounting year should be taken on the basis of the cost or market value, whichever was lower. On this basis, transfer entries were made in the books of the company and the assessee claimed a loss of Rs. 2,45,667 in share dealing. The Income-tax Officer, in the course of assessment proceedings for the assessment year 1968-69, however, came to the conclusion that there was an earlier sale of a large block of shares in Multimetals Ltd. on May 6, 1967, i.e., about a month earlier when 41,800 shares were sold for Rs. 4,15,492, and, therefore, the assessee was a dealer in shares not with effect from June 10, 1967, as was claimed before him but with effect from the beginning of the account year, i.e., November 12, 1966. The Income-tax Officer, therefore, recast the share trading account, made a deduction for under valuation of opening stock of shares in Binani Metal Works Ltd. and Metal Distributors Ltd. to the extent of Rs. 82,592 and an addition for overvaluation of stock of Multimetals Ltd. to the extent of Rs. 2,19,450 on the basis of the market value of these shares at the beginning of the previous year, i.e., November 12, 1966. There was thus a net addition of Rs. 1,36,858 in the assessment.