1966 (3) TMI 1 - HC - Income Tax

Loss in sale of securities - when securities were held by the assessee as an investment and not as a stock-in-trade then the loss incurred thereon would be capital loss

Summary

Issues:
Determination of whether securities held by the assessee were investments or stock-in-trade, and the classification of the loss incurred on their sale as capital loss or revenue loss.

Analysis:
The case involved a question of law referred to the High Court by the Income-tax Appellate Tribunal regarding the nature of securities held by the assessee and the treatment of losses incurred on their sale. The assessee, a company, had purchased Government securities and sold them at a loss during the relevant accounting year. The company's memorandum of association allowed for investment activities. The balance-sheet indicated the securities as investments, not stock-in-trade.

The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claimed loss, asserting that the transaction was of a capital nature, not a normal business venture. The Tribunal agreed, considering factors like the company's past activities, valuation methods, and frequency of transactions. The Tribunal found the securities were investments of an enduring character, leading to a capital loss on their sale.

The High Court analyzed the grounds put forth by the Appellate Assistant Commissioner and the Tribunal, emphasizing the importance of commercial practice in determining the nature of securities held. The Court highlighted the rule of valuing closing stock at cost or market price, whichever is lower, in considering whether securities were stock-in-trade. The Court also rejected the argument that the sale of securities was for varying investments, citing a Supreme Court case where sales linked to business activities were considered trading profits.

The Court distinguished the present case from previous rulings where sales were linked to business financing needs. In this case, the securities were sold only in the specific accounting year without clear business justifications. Ultimately, the Court concluded that the securities were held as investments, not stock-in-trade, and the loss incurred was a capital loss. The question was answered accordingly, with the assessee directed to pay the costs of the reference.