ASHOKA VINIYOGA LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under s. 66(1) of the Indian IT Act, 1922 (hereinafter referred to as the Act). The assessment year concerned is 1953-54 for which the relevant accounting period commenced on October 1, 1951, and ended on September 30, 1952. The original assessment for this year was completed by the ITO on November 30, 1953. In making the assessment, the ITO accepted the assessee's profit and loss account which showed a loss on sale of shares of Rs. 5,14,295. Subsequently, the ITO had information that in consequence of an order under s. 23A passed in respect of M/s Sahu Jain Ltd. of which the assessee was a shareholder, dividend deemed to have been distributed to the assessee had escaped assessment. The ITO started reassessment proceedings under s. 34(1)(b) of the Act on February 7, 1958, to assess this deemed dividend income. In the meantime, the ITO had completed the assessee's assessment for the subsequent year 1954-55, and had disallowed the assessee's claim for loss of Rs. 9,93,686 on the sale of shares for that year. In the course of that assessment proceedings the ITO found that, (i) the loss claimed arose from the sale of shares of companies which were under the control of the Sahu Jain group, and (ii) that the purchases and sales of shares by the assessee-company were a part of the general rearrangement and transfer of shares originally held by the companies and others of the Sahu Jain group to gain control over these companies, from one to another with a view to shift the losses due to depreciation. The ITO scrutinised the purchases and sales of the shares by the assessee and found that the shares were purchased from various companies controlled by this group and also from members of the Dalmia or the Jain families and that the shares have ultimately been sold to other companies of the group or to other members of the two families though some of the transactions were effected through share brokers. He also found that the assessee-company commenced business in October, 1949, and closed its accounts for the first year on September 30, 1950. During that year the assessee dealt in cement and purchased shares worth Rs. 7,000 which was shown as investment in its balance-sheet as on September 30, 1950. The share capital of the company as on that date was Rs. 50,000. The share capital was raised to Rs. 5,00,000 in July, 1952. In the second year of business the assessee took a loan of rupees two crores from M/s Dalmia Cement and Paper Marketing Co. Ltd. and this loan was utilised by the assessee to advance a similar sum to another allied company, namely, Ashoka Marketing Co. Ltd. During the accounting year ended September 30, 1951, the assessee's total purchases of shares amounted to Rs. 43,97,932. There were no sales of shares in this year. During the accounting year ended September 30, 1952, that is the year under consideration, the purchases and sales of shares were over Rs. 46,00,000 and Rs. 40,00,000, respectively, while in the immediately succeeding year there were no purchases. The ITO rejected the contention of the assessee that it was a dealer in shares. He referred to the resolutions of the board of directors of the assessee-company dated May 4, 1951, May 26, 1951, and June 13, 1951, respectively, which, while approving the purchases and sales of shares, described such purchases and sales as those of investment. He also referred to the resolution passed by the assessee's board of directors on August 27, 1952, the material portion of which is as follows :

(2.) THE ITO further found that the word "investment" had been struck off in the minutes of the earlier meetings though such striking out was not initialled by the chairman of the board of directors. THE ITO, accordingly, held that these shares were being held by the assessee-company as investment and the transactions amounted to transfer of these shares from one company to another under the control of the Sahu Jain group due to some reasons other than the motive of trade and the resulting loss was not a trading loss. THE ITO therefore dissallowed the claim for loss for the asst. yr. 1954-55.

(3.) ON further appeal by the assessee to the Tribunal it was contended, inter alia, (i) that action under s. 34 having been taken to assess the deemed dividend from M/s Sahu Jain Ltd. it was not open to the ITO to consider afresh the claim for losses on share dealing and to disallow the same ; (ii) that a successor ITO could not sit in judgment on his predecessor's order. ON the merits it was contended that the frequency of the transactions and the financing of transactions by resort to borrowing would clearly indicate that the transactions were, in fact, dealings in shares. Further, the assessee's articles of association permitted the assessee to deal in shares. It was further contended that the word "investment" was inadvertently used in the earlier resolutions of the board of directors and that the resolution of August 27, 1952, correctly showed the position that the shares were held as stock-in-trade. It was further submitted that the magnitude and the volume of the transactions and the close intervals at which the purchases and sales were made clearly showed that these were trading transactions. The Tribunal negatived all the aforesaid contentions of the assessee. It held that as proceedings under s. 34 had been validly initiated in this case to reasses the dividend income deemed to have been distributed by virtue of the order under s. 23A, the ITO was competent to include items other than those in respect of which notice had been issued and for this proposition it relied on the decision of the Punjab High Court in Jagan Nath's case (supra), referred to by the AAC. The Tribunal further observed that neither the order sheet nor the records of the original assessment showed that the minutes book or the sale vouchers were produced before the ITO at the time of the original assessment. The ITO had merely accepted the loss as per the assessee's profit and loss account without making any investigation whatsoever. All that s. 34(1)(b) required was that the ITO must have in his possession information and in consequence of such information he would have reason to believe that income had escaped tax. Both these requirements had been satisfied in this case. The additional information which came into the ITO's possession in course of the assessment for the subsequent year had led him to believe that income had escaped assessment. The Tribunal accordingly held that the proceedings under s. 34(1)(b) initiated by the ITO resulting in the assessment was legal and valid.