Transactions between a partnership firm and its partners can be commercial transactions, and the firm can claim business losses arising from such transactions.

A. Y. SAKHARE, J.

( 1 ) BY this reference at the instance of the Revenue (Commissioner of Income- tax, Bombay City-IV, Bombay) under section 256 (1) of the Income Tax Act, 1961, the Income Tax appellate Tribunal, Bombay Bench E , has referred the following two questions of law to this Court for opinion :1. Whether, on the facts and in the circumstances of the case, there was evidence before the Tribunal to hold that the sale of shares of M/s Kay Jay Industrial Pvt. Ltd. by the firm to the partners under consideration was a commercial transaction?2. Whether, on the facts and in the circumstances of the case the Tribunal was right in holding that on transfer of shares of Kay Jay Industrial Pvt. Ltd. by the firm to the Partners, the claim of loss is allowable as business loss?

( 2 ) THE assessee-Chase Trading Company, a partnership firm deals in shares. During the course of business 10,000 shares of Kay Jay industries Pvt. Ltd. were acquired at Rs. 10/- per share. The assessee had shown these shares as its stock in trade. The value of the said shares in the balance-sheet of the assessee as on the last date of accounting period relevant to the assessment year 1972-1973 stood at nil. Smt. S. D. Jajodia and Smt. R. D. Jajodia, two partners of assessee-firm purchased 8,000 and 2,000 shares respectively from the assessee at the rate of Rs. 4/- per share. The assessee claimed a loss of Rs. 60,000/- as result of this transaction as business loss for the assessment year 1972-1973.

( 3 ) THE Income-Tax Officer disallowed the claim of business loss on the ground that the partnership firm-assessee and the partners thereof could not be treated as different entities, therefore, the sale of shares to two partners amounted to sale to self and consequential loss as claimed by the assessee could not be allowed. The assessee challenged the said decision in appeal. The Appellate Assistant Commissioner of Income Tax confirmed the order passed by the Income-Tax officer. The assessee carried the matter further in appeal to the Income-Tax Appellate Tribunal, bombay Bench E , who was pleased to allow the appeal and declared that the transaction in question was purely a commercial transaction, the assessee is a dealer in shares, the assessee has shown shares as its stock in trade and that the assessee will be entitled to claim and must be allowed a business of loss as claimed by the assessee.

( 4 ) THE Revenue, being dissatisfied of the decision of the tribunal sought reference to this court for its opinion on two questions referred to above. The first question is whether there was evidence before the tribunal to come to the conclusion that the transaction in the instant case was commercial transaction and second question is whether on the facts and circumstances of this case, the tribunal was right in holding that the claim of loss is allowable as business loss.

( 5 ) ON first question, the tribunal has recorded its finding that the transaction in question i. e. sale of shares by the assessee - partnership firm to its partners is purely a commercial transaction. The said conclusion/finding is arrived at by the tribunal on the basis that the assessee is a dealer in shares, has shown shares as its stock in trade and this fact has not been disputed by the Revenue. The said fact is also borne out by the accounts maintained by the assessee. The tribunal has further recorded that Revenue stated before it that the Revenue would have taxed the assessee, if the transaction had resulted in profit. On these reasonings the tribunal has found that the transaction in question is purely commercial transaction. We find no reason to differ with the said finding. On facts before the tribunal, the tribunal was right in coming to the conclusion that the transaction in question was purely a commercial transaction.

( 6 ) ON second question, the tribunal has held that the assessee can claim loss as business loss. As stated hereinabove the shares were acquired by the as