Commissioner Of Income Tax Chennai v. Malladi Project Management Centre Pvt. Ltd., 52 Jawaharlal Nehru Road, Ekkaduthangal, Chennai – 600 097

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 06.07.2011 Coram THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANANDTHE HONOURABLE MR.JUSTICE M.JAICHANDREN Tax Case (Appeal) Nos.754 and 755 of 2004 Commissioner of Income TaxChennai. .... Appellant in both TCsVs. Malladi Project Management CentrePvt. Ltd.,52 Jawaharlal Nehru Road,Ekkaduthangal, Chennai – 600 097..... Respondent in both TCs Appeals under Section 260 A of the Income Tax Act, 1961 againstthe 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 theCommissioner 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 IVagainst the order of the Assistant Commissioner of Income Tax CompanyCircle-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 theorder of the Income Tax Appellate Tribunal, Chennai, dated 17.2.2004.The substantial question of law raised for the consideration of thisCourt is as follows: "Whether in the facts and circumstances of thecase, the Tribunal was right in holding that the losssuffered on sale of shares is to be treated as abusiness loss and not capital loss?" https://hcservices.ecourts.gov.in/hcservices/ 2. The assessment in the present appeals relates to theassessment year 1989-90. The only question that arises forconsideration is as to whether the loss incurred in the sale ofshares, by the assessee, is to be treated as a business loss or aloss under the head capital gains. 3. The assessee is engaged in the business of offeringtechnology in the pharmaceuticals field, including basic and detailedengineering facilities, procurement and supervision and fabricationof plant and machinery. The assessee had filed the return of incomeof Rs.9,016/-, under Section 115 J of the Income Tax Act, 1961, forthe assessment year 1989-1990. 4. The Assessing Officer had completed the assessment, on24.3.1993. On a scrutiny of the assessment order and the relevantrecords pertaining to the matter, it was found that the assessee hadshown a sum of Rs.11,67,712.80, as the loss on account of sale ofassets. During the previous year relevant to the assessment year1989-1990, the assessee had sold 62,111 equity shares of FarinaChemicals Ltd., and 67,493 equity shares of Malladi Drugs andPharmaceuticals Ltd. and had incurred a loss of Rs.5,58,999/- andRs.6,07,437/-, respectively. The shares of Farina Chemicals Ltd., hadbeen acquired during the period between 1982 and 1988, and theshares of Malladi Drugs and Pharmaceuticals Ltd., had been acquiredduring the period, between 1980 and 1986, as shown below. 5. The capital loss on the sale of shares was Rs.11,66,436/-.Since, the said point had not been discussed in the originalassessment order, and as the said order was found to be erroneous andprejudicial to the interests of the revenue, a show cause notice,under Section 263 of the Income Tax Act, 1961, had been issued to theassessee Company to file its objections, if any, against the decisionof the Department, either to modify, redo, set aside, enhance orcancel the said assessment order. 5. The capital loss on the sale of shares was Rs.11,66,436/-.Since, the said point had not been discussed in the originalassessment order, and as the said order was found to be erroneous andprejudicial to the interests of the revenue, a show cause notice,under Section 263 of the Income Tax Act, 1961, had been issued to theassessee Company to file its objections, if any, against the decisionof the Department, either to modify, redo, set aside, enhance orcancel the said assessment order. 6. The representative of the assessee Company had stated, interalia, that the assessee Company is in the field of developing andsupplying the technical know-how in the field of pharmaceuticals, andit has been developing certain pioneering techniques in India, forthe first time. In such circumstances, for having a greaterinvolvement in the transfer and implementation of the technology,certain investments had been made on account of commercialexpediency. The said investments have not been made with a view toinvest 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 againstthe business profits of the Company. 7. Relying on certain decisions, the representative of theassessee Company had pleaded that the investments had been made, byway of commercial expediency and therefore, the loss suffered by theassessee Company should be treated only as a revenue loss. However,from the given facts and circumstances, the Commissioner of IncomeTax, Chennai, in his order, dated 24.8.1990, made under Section 263of the Income Tax Act, 1961, had found that, as per the Memorandumand Articles of Association of the assessee Company, the main objectof the Company is to offer technology to various chemical Companiesand to carry on other similar activities. 8. He had found there was nothing on record to prove that theinvestment was made purely for the purpose of earning consultancyincome. Even assuming that the assessee Company had made investmentswith the view to obtain business for consultancy, such acquisition ofshares do not lose their character of investment. The fact was thatthe assessee had purchased the shares, as they appear in the balancesheet of the assessee company, under the head 'Investments'. Hence,the Commissioner of Income Tax, Chennai, had held that, when theshares were sold, subsequently, the profit and loss arising onaccount of such sales is to be assessed only under the head "capitalgains". 9. He had also held that the sale of shares cannot be treated asspeculation loss, either under Section 73 of the Act, or as per theexplanation found thereunder. The Commissioner of Income Tax,Chennai, had held that the order passed by the Assessing Officer waserroneous and hence, prejudicial to the interest of the revenue. Insuch circumstances, the assessment order passed by the assessingofficer was set aside and he had been directed to pass a freshassessment order, as per law, after giving a reasonable opportunityof 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, theAssessing Officer had passed an order, in compliance of the orderpassed by the Commissioner of Income Tax, under Section 263 of theIncome Tax Act, 1961. As against the said order of the AssessingOfficer, the assessee had filed another appeal before the Tribunal. 11. The Tribunal, by a common order, dated 17.2.2004, hadallowed the appeals filed by the assessee, holding that there was nodispute with regard to the fact that the assessee is renderingtechnical service to the companies in which the investments were madeand had incurred a loss on the sale of shares. The investment hadbeen made only as a part of the business requirements and the 11. The Tribunal, by a common order, dated 17.2.2004, hadallowed the appeals filed by the assessee, holding that there was nodispute with regard to the fact that the assessee is renderingtechnical service to the companies in which the investments were madeand had incurred a loss on the sale of shares. The investment hadbeen 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 theshares, as an investor, but as are investment in the course of itsregular business activities, so as to impress upon the investorCompany about the viability of the project and to ensure a smoothtransfer and implementation of the technology supplied by theassessee, with greater involvement. Further, it had been found thatFarina Chemicals Ltd., could not complete its project and there weredifferences of opinion amongst the promoters of the Company. TheTribunal had pointed out that the investments had been made onaccount of commercial expediency to improve its own business oftransfer of technology, and therefore, the loss in such a situationwould have to be considered only as business loss. Accordingly, theorder of the Commissioner of Income Tax, dated 24.8.1993, had beenvacated. Consequently, the order passed by the Assessing Officer,pursuant to the revision order of the Commissioner of Income Tax, hadbeen held to be infructuous. Thus, both the appeals filed by theassessee had been allowed. Challenging the said order passed by theTribunal, the present appeals had been filed by the Revenue. 12. The learned standing counsel appearing for the Revenue hadsubmitted that the assessee had not shown the expenditure incurred onthe purchase of shares in the balance sheet and therefore, the losson such investments cannot treated as business loss. In support ofhis contention, he had relied on a decision of the Supreme Court, inRameshwar Prasad Bagla V. Commissioner of Income Tax (1973) 87 ITR421) wherein, it had been held that the profit on the sale of theshares constituted capital gains, chargeable under Section 12B of theIncome Tax Act, 1922. 13. It is not in dispute that the Tribunal had found, based onfacts, that the assessee had made the investments only due tocommercial expediency. In the decision of the Supreme Court inPatnaik & Co. Ltd., V. Commissioner of Income Tax, Orissa (161 ITR365) the Supreme Court had held "Where Government bonds or securitiesare purchased by an assessee with a view to increasing his businesswith the Government or with the object of retaining the goodwill ofthe authorities for the purpose of his business, the loss incurred onthe sale of such bonds or securities is allowable as a business loss." 14. As far as the present case is concerned, the findings ofthe Tribunal are that the investments had been made out of commercialexpediency and for securing consultancy service with the saidconcerns. Hence, as the findings of the Tribunal remain unchallengedand as it is binding on the Revenue, applying the decision of theSupreme Court, in Patnaik & Co. Ltd., V. Commissioner of Income Tax,Orissa (1986) 161 ITR 365), we do not find any ground to interfere with the order of the Tribunal. Accordingly, the question isanswered in favour of the assessee. Hence, the Tax Case (Appeals) aredismissed. No costs. Sd/-Asst. Registrar //true copy// sl/lan Sub Asst.Registrar 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-343. 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.401262 cc to Mr.T.Ravikumar, Advocate, Sr.No.39997 NG {CO}TP/15.9.2011. T.C.(A) Nos.754 and 755 of 2004 https://hcservices.ecourts.gov.in/hcservices/