Case: M/s. Investment Limited Vs. Commissioner of Income Tax, Calcutta

1. The appellant is a public limited company incorporated in 1948 under the Indian Companies Act, 1913. At the commencement of the year of account, the company held Government securities of the value of Rs, 1,93,30,958 and shares of public limited companies of the value of Rs. 64,54,529. During the course of the year the company sold Government securities valued at Rs.92,50,000 and realized a sum of Rs. 79,78,055.50. The company also purchased Government securities of the Value of Rupees 1,00,00,000 and out of those sold securities of the value of Rs, 69,00,000 earning a profit of Rs. 21,0242. In proceedings for assessment ofx for the assessment year, the company claimed allowance for the loss suffered in the sale of the securities. The claim was disallowed by thex Officer. He held that "it was no part of the business of the company to deal in securities, that the transactions in securities did "not appear to be a normal business venture of the company, and that the memorandum and articles of association of the company prohibited transactions of sale of securities and on that account the loss was of a casual nature. The Appellate Assistant Commissioner agreed with thex Officer on the following grounds:(ii) In other years there have been redemption of securities but no sale which shows that the appellant was an investor and not a dealer in securities(iii) In the balance sheets the securities are shown as "investments, They are not valued at market value although the market value was less3. Thex Appellate Tribunal held that the securities were not held ase of the companys business, and dismissed the appeal filed by the company. At the instance of the company, the following question was referred by the Tribunal to the High Court of Madhya Pradesh:"Whether on the facts and in the circumstances proved in the case, the inference that the securities in question were held by the assessee as an investment and not as ae and that the loss incurred thereon was a capital loss, is, in law, justified?The High Court recorded their answer in the affirmative.

Reasoning: 4. The Tribunal held that the loss suffered by the sale of securities was of a capital nature. That finding is not one of factIn the assessment year, the company was allowed a loss of Rs. 2,675 resulting from sale of sharesIn the assessment year, the company had no taxable income from the cinematograph theatre, because against the receipts were set off the depreciation and repairt charges, and the entire receipts of the company were from interest and dividends.On the facts found it is clear that the company was formed with the objects, amongst others, of dealings in shares, debentures and securities, and it effected transactions of sale and purchase of shares and securities of large magnitude. In computing the income of the company, thex Officer accepted by claims of the company in assessment years5 and6 that the shares and securities held by the company were its, and the loss resulting from transactions relating thereto was revenue loss. Prima facie, these facts lead to an inference that the company was a dealer in shares and securities and the loss resulting in the year of account of3 from sale of securities was liable to be treated in the assessment year4 as revenue loss. But the High Court held that the loss was capital, relying mainly upon certain findings recorded by the Appellate Assistant Commissioner and confirmed by the Appellate Tribunal8. In the, it is true, the securities and shares are valued at cost, but no firm conclusion can be drawn from the method of keeping accounts. Ar is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value hise either at cost or market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if in the opinion of the taxing authorities income of the trade cannot be properly deduced therefrom. Valuation of stock at cost is one of the recognised methods. No inference may therefore arise from the employment by the company of the method of valuing stock at cost, that the stock valued was notr is the description of stock in the balance sheet as `investments decisive. The transactions in securities and shares, it is true, were not frequent, but they were of very large amounts. In the year of account, the transactions of sale and purchase of securities were in number substantial and in value considerable9. It is true that the profit earned by sale of securities of the value of Rs. 69,00,000 in3 was not brought into account. But the profit was withheld on the plea that "the transaction was not complete. Whether the plea was in law justified as irrelevant in determining the nature of the transactions. The10. On a careful consideration of the circumstances relied upon by the Tribunal we are unable to hold that they outweigh the inference arising from the nature of the transactions disclosed by the other circumstancesThere is no evidence in support of this contention. The securities were 3 per cent 1975 Loan and they were sold in. In the account submitted by the company they are referred to as transactions of sale, and in the reference made by the Tribunal they are also referred to as sales12. We are unable to agree with the answer recorded by the High Court. We answer the question in the negative.