The intention of the assessee in acquiring the shares is the primary factor in determining whether the loss on the sale of shares is a capital loss or a trading loss.

Headnote:
INCOME TAX - Loss on sale of shares - Whether capital loss or trading loss - Intention of assessee - Acquisition of shares at price considerably higher than market price - Acquisition of managing agency and other agencies - Shares not treated as part of stock-in-trade - Loss on sale set off against profits - Held, loss was capital loss.
Fact of the Case:

The assessee Company, National Finance Ltd., purchased 3,000 shares of Madhusudan Mills Ltd. at a price considerably higher than the market price. The shares were acquired from Messrs. Bhadani Brothers Ltd., who were the managing agents of the Mills. The assessee Company also obtained the selling and purchasing agency of the Mills. The assessee Company sold the shares at a loss in the same year. The Income-tax Officer and the Appellate Assistant Commissioner held that the loss was a capital loss. The Appellate Tribunal, Delhi Bench, reversed the decision and held that the loss was a trading loss.
Finding of the Court:

The Court held that the loss on the sale of shares was a capital loss. The Court found that the shares were acquired at a price considerably higher than the market price, and that the intention of the assessee Company was to acquire a capital asset of an enduring nature, namely, the managing agency and other agencies of the Mills. The Court also found that the shares were not treated as part of the stock-in-trade of the assessee Company, and that the loss on the sale was set off against the profits of the assessee Company, thus cancelling the profits and saving them from taxation.
Issues: Whether the loss on the sale of shares was a capital loss or a trading loss.
Ratio Decidendi: The Court held that the loss on the sale of shares was a capital loss. The Court found that the shares were acquired at a price considerably higher than the market price, and that the intention of the assessee Company was to acquire a capital asset of an enduring nature, namely, the managing agency and other agencies of the Mills. The Court also found that the shares were not treated as part of the stock-in-trade of the assessee Company, and that the loss on the sale was set off against the profits of the assessee Company, thus cancelling the profits and saving them from taxation.
Final Decision: The Court allowed the appeal and held that the loss on the sale of shares was a capital loss.

Judgment

HIDAYATULLAH, J.: This is an appeal against the order of the Income-tax Appellate Tribunal Delhi Bench, dated May 1/14, 1957, by which the Tribunal, reversing the order of the Appellate Assistant Commissioner, held that a loss arising from the sale of certain shares by the respondent Company was a capital loss. Subsequent to the order of the Tribunal impugned here, the Commissioner of Income-tax, New Delhi, who is the appellant before us, had moved the Tribunal for a reference to the High Court on certain questions of law said to arise out of the order of the Appellate Tribunal. That application was found to be barred by one day, and since under the law, the Tribunal had no jurisdiction to extend the time, the application was dismissed. Against the decision of the Tribunal, an application was filed in the High Court under S. 66(3) of the Income-tax Act; but the High Court dismissed the application, agreeing with the Tribunal that the application to the tribunal for a reference was barred by time. The Commissioner of Income-tax then applied for special leave against the order passed by the Tribunal in the appeal before it, and the present appeal, with special leave, has been fled.

2. Before we examine the merits of the case, we shall deal with a preliminary objection raised on behalf of the respondent that the appeal is incompetent, in view of the decision of this Court in Chandi Prasad Chokhani v. State of Bihar, (1961) 43 ITR 498, where it was held that this Court would not entertain an appeal directly from an order of the Tribunal bypassing the decision of the High Court, except in very exceptional circumstances. The appellant relies upon the decision of this Court in Baldev Singh v. Commr. of Income-tax, (1960) 40 ITR 605 and contends that the exceptional circumstances existing in the latter case and adverted to in the former, govern the present case.

3. The facts relating to the filing of the application for reference together with the relevant dates are these: The Tribunal s order was passed by two learned Members, who signed their respective orders on different dates. The Accountant Member signed his order on May 1, 1957 and the Judicial Member, on May 14, 1957. The notice of the order was sent to the Commissioner of Income-tax, New Delhi, and reached his office by registered post on July 15, 1957. It was received by one Motilal Pathak, a clerk in the office of the Commissioner. Motilal s affidavit shows that he suddenly felt ill, and had to take casual leave for the day. He returned to the office the next day, and dealt with the notice received from the Tribunal. By a mischance, which is easy to appreciate, the date stamp of the receipt of the papers was affixed on the 16th, and bore that date instead of the real date, viz., the 15th, on which the papers had actually been received. Relying upon the date stamp, everybody took it for granted that limitation would expire on the 60th day, counting time from July 16, 1957. The application was filed on the last day of limitation on that supposition. Actually, the application was barred by a day. The Income-tax Tribunal, therefore, dismissed the application on December 4, 1957. The decision of the Tribunal was unsuccessfully challenged before the High Court. It is evident that the decision of the Tribunal was quite correct, and the Tribunal had no option but to dismiss the application, since the law gives no jurisdiction to the Tribunal to extend limitation, as is done under S. 5 of the Indian Limitation Act.

4. This Court then granted special leave against the order of the Tribunal passed in the appeal before it, and the question is whether the appeal should be heard or the leave revoked, in view of the decision in Chokhani s case, (1961) 43 ITR 498. In Chokhani s case, (1961) 43 ITR 498, the attempt was to bypass the decision of the High Court on a question referred to the High Court for decision and also another decision of the High Court that no other point of law aro

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Judicial Analysis

1962 Supreme(SC) 31

The intention of the assessee in acquiring the shares is the primary factor in determining whether the loss on the sale of shares is a capital loss or a trading loss.

Cases Referred (4)

Judicial Analysis