IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 06.07.2011 Coram THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN AND THE HONOURABLE MR.JUSTICE M.JAICHANDREN Tax Case (Appeal) Nos.754 and 755 of 2004 Commissioner of Income Tax Chennai. .... Appellant in both TCs Vs. Malladi Project Management Centre Pvt. Ltd., 52 Jawaharlal Nehru Road, Ekkaduthangal, Chennai – 600 097. .... Respondent in both TCs Appeals under Section 260 A of the Income Tax Act, 1961 against the order dated 17.2.2004 made in I.T.A.Nos.322(mds)/96 & 49 (Mds)/ 2000 on the file of the Income Tax Appellate Tribunal Madras 'C' Bench for the assessment year 1989-90. against the order of the Commissioner of Income Tax Tamil Nadu-IV, 121, Uttamar Gandhi Salai, Madras-600 034 dated 24.8.93 and made in C.No.1321 (26)/92-93/TN IV against the order of the Assistant Commissioner of Income Tax Company Circle-IV(2), Madras-34 dated 24.3.92 and made in PAN/GIR No.9M,47- 066-CY-3453. For Appellant : Mr.T.Ravikumar Sr Standing Counsel for IT Dept For Respondent : Mr.C.V.Rajan C O M M O N J U D G M E N T (Judgment of the Court was delivered by M.JAICHANDREN,J.) These appeals have been preferred by the Revenue as against the order of the Income Tax Appellate Tribunal, Chennai, dated 17.2.2004. The substantial question of law raised for the consideration of this Court is as follows: "Whether in the facts and circumstances of the case, the Tribunal was right in holding that the loss suffered on sale of shares is to be treated as a business loss and not capital loss?" https://hcservices.ecourts.gov.in/hcservices/ 2. The assessment in the present appeals relates to the assessment year 1989-90. The only question that arises for consideration is as to whether the loss incurred in the sale of shares, by the assessee, is to be treated as a business loss or a loss under the head capital gains. 3. The assessee is engaged in the business of offering technology in the pharmaceuticals field, including basic and detailed engineering facilities, procurement and supervision and fabrication of plant and machinery. The assessee had filed the return of income of Rs.9,016/-, under Section 115 J of the Income Tax Act, 1961, for the assessment year 1989-1990. 4. The Assessing Officer had completed the assessment, on 24.3.1993. On a scrutiny of the assessment order and the relevant records pertaining to the matter, it was found that the assessee had shown a sum of Rs.11,67,712.80, as the loss on account of sale of assets. During the previous year relevant to the assessment year 1989-1990, the assessee had sold 62,111 equity shares of Farina Chemicals Ltd., and 67,493 equity shares of Malladi Drugs and Pharmaceuticals Ltd. and had incurred a loss of Rs.5,58,999/- and Rs.6,07,437/-, respectively. The shares of Farina Chemicals Ltd., had been acquired during the period between 1982 and 1988, and the shares of Malladi Drugs and Pharmaceuticals Ltd., had been acquired during the period, between 1980 and 1986, as shown below. (i) 62,111 equity shares of Farina Chemicals Ltd Rs.6,20,240/- (ii) 67,493 equity shares of Malladi Drugs and Pharmaceuticals Ltd. Rs.6,75,000/- 5. The capital loss on the sale of shares was Rs.11,66,436/-. Since, the said point had not been discussed in the original assessment order, and as the said order was found to be erroneous and prejudicial to the interests of the revenue, a show cause notice, under Section 263 of the Income Tax Act, 1961, had been issued to the assessee Company to file its objections, if any, against the decision of the Department, either to modify, redo, set aside, enhance or cancel the said assessment order. 6. The representative of the assessee Company had stated, inter alia, that the assessee Company is in the field of developing and supplying the technical know-how in the field of pharmaceuticals, and it has been developing certain pioneering techniques in India, for the first time. In such circumstances, for having a greater involvement in the transfer and implementation of the technology, certain investments had been made on account of commercial expediency. The said investments have not been made with a view to invest the excess funds. Therefore, the loss on the sale of such https://hcservices.ecourts.gov.in/hcservices/ shares would have to be treated as business loss and deducted against the business profits of the Company. 7. Relying on certain decisions, the representative of the assessee Company had pleaded that the investments had been made, by way of commercial expediency and therefore, the loss suffered by the assessee Company should be treated only as a revenue loss. However, from the given facts and circumstances, the Commissioner of Income Tax, Chennai, in his order, dated 24.8.1990, made under Section 263 of the Income Tax Act, 1961, had found that, as per the Memorandum and Articles of Association of the assessee Company, the main object of the Company is to offer technology to various chemical Companies and to carry on other similar activities. 8. He had found there was nothing on record to prove that the investment was made purely for the purpose of earning consultancy income. Even assuming that the assessee Company had made investments with the view to obtain business for consultancy, such acquisition of shares do not lose their character of investment. The fact was that the assessee had purchased the shares, as they appear in the balance sheet of the assessee company, under the head 'Investments'. Hence, the Commissioner of Income Tax, Chennai, had held that, when the shares were sold, subsequently, the profit and loss arising on account of such sales is to be assessed only under the head "capital gains". 9. He had also held that the sale of shares cannot be treated as speculation loss, either under Section 73 of the Act, or as per the explanation found thereunder. The Commissioner of Income Tax, Chennai, had held that the order passed by the Assessing Officer was erroneous and hence, prejudicial to the interest of the revenue. In such circumstances, the assessment order passed by the assessing officer was set aside and he had been directed to pass a fresh assessment order, as per law, after giving a reasonable opportunity of hearing to the assessee. 10. Aggrieved by the order of the Commissioner of Income Tax, the assessee went on appeal before the Income Tax Appellate Tribunal, Chennai. During the pendency of the appeal before the Tribunal, the Assessing Officer had passed an order, in compliance of the order passed by the Commissioner of Income Tax, under Section 263 of the Income Tax Act, 1961. As against the said order of the Assessing Officer, the assessee had filed another appeal before the Tribunal. 11. The Tribunal, by a common order, dated 17.2.2004, had allowed the appeals filed by the assessee, holding that there was no dispute with regard to the fact that the assessee is rendering technical service to the companies in which the investments were made and had incurred a loss on the sale of shares. The investment had been made only as a part of the business requirements and the https://hcservices.ecourts.gov.in/hcservices/ assessee's intention of making the investment was not to hold the shares, as an investor, but as are investment in the course of its regular business activities, so as to impress upon the investor Company about the viability of the project and to ensure a smooth transfer and implementation of the technology supplied by the assessee, with greater involvement. Further, it had been found that Farina Chemicals Ltd., could not complete its project and there were differences of opinion amongst the promoters of the Company. The Tribunal had pointed out that the investments had been made on account of commercial expediency to improve its own business of transfer of technology, and therefore, the loss in such a situation would have to be considered only as business loss. Accordingly, the order of the Commissioner of Income Tax, dated 24.8.1993, had been vacated. Consequently, the order passed by the Assessing Officer, pursuant to the revision order of the Commissioner of Income Tax, had been held to be infructuous. Thus, both the appeals filed by the assessee had been allowed. Challenging the said order passed by the Tribunal, the present appeals had been filed by the Revenue. 12. The learned standing counsel appearing for the Revenue had submitted that the assessee had not shown the expenditure incurred on the purchase of shares in the balance sheet and therefore, the loss on such investments cannot treated as business loss. In support of his contention, he had relied on a decision of the Supreme Court, in Rameshwar Prasad Bagla V. Commissioner of Income Tax (1973) 87 ITR 421) wherein, it had been held that the profit on the sale of the shares constituted capital gains, chargeable under Section 12B of the Income Tax Act, 1922. 13. It is not in dispute that the Tribunal had found, based on facts, that the assessee had made the investments only due to commercial expediency. In the decision of the Supreme Court in Patnaik & Co. Ltd., V. Commissioner of Income Tax, Orissa (161 ITR 365) the Supreme Court had held "Where Government bonds or securities are purchased by an assessee with a view to increasing his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities is allowable as a business loss." 14. As far as the present case is concerned, the findings of the Tribunal are that the investments had been made out of commercial expediency and for securing consultancy service with the said concerns. Hence, as the findings of the Tribunal remain unchallenged and as it is binding on the Revenue, applying the decision of the Supreme Court, in Patnaik & Co. Ltd., V. Commissioner of Income Tax, Orissa (1986) 161 ITR 365), we do not find any ground to interfere https://hcservices.ecourts.gov.in/hcservices/ with the order of the Tribunal. Accordingly, the question is answered in favour of the assessee. Hence, the Tax Case (Appeals) are dismissed. No costs. Sd/- Asst. Registrar //true copy// Sub Asst.Registrar sl/lan To 1. The Assistant Registrar, Income Tax Appellate Tribunal Madras 'C' Bench Rajaji Bhavan, III Floor, Besant Nagar, Chennai-90. 2. The Commissioner of Income Tax, Tamil Nadu -IV, Madras-34 3. Assistant Commissioner of Income Tax, Company Circle-IV(2), Madras – 34. 4. The Commissioner of Income Tax, Chennai. 1 cc to Mr.C.V.Rajan, Advocate, Sr.No.40126 2 cc to Mr.T.Ravikumar, Advocate, Sr.No.39997 T.C.(A) Nos.754 and 755 of 2004 NG {CO} TP/15.9.2011. https://hcservices.ecourts.gov.in/hcservices/