TMI Blog1980 (10) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... account of Shri T.R. Balachandran had become bad only in the previous year for this assessment year. It was also claimed that the debt of Rs. 4,12,447 in the account of Kathayee Cotton Mills became bad during the previous year for this assessment year because of the transaction on 17th Feb., 1972 by which one V.G. Kotak had agreed to purchase the shares held by the assessee and others in Kathayee Cotton Mills for a sum which was very much below the face-value of the shares. The amount of Rs. 4,12,447 represented the outstanding debt due to the assessee from Kathayee Cotton Mills Ltd. In respect of the loss of Rs. 8,69,500 under the head Capital-Gains, the assessee had shown this loss under this head because the assessee had parted with its shareholdings in Kathayee Cotton Mills for a sum which was very much below its cost of acquisition of the shares. The facts in this regard will be dealt with in detail later. The ITO considered that the bad debt claimed of Rs. 4,12,447 undoubtedly connected with this transaction V.G. Kotak involving the transfer of the share holdings of the assessee in Kathayee Cotton Mills and, therefore, it was a loss on capital account and not a bad debt allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cotton Mills Ltd. The shares of Kathayee Cotton Mills were closely held in that 50 per cent of the share holdings were held by the family of S/Shri Natarajan and Dhandapani and the balance being held by the family of late E.M. Muthappa Chettiar represented by the sons Shri E.M. Chocklingam and E.M. Periannan. On 30th Sept., 1969, a sum of Rs. 12,61,811.46 was due to the assessee by Kathayee Cotton Mills Ltd. The financial position of Kathayee Cotton Mills Ltd. was bad in 1967 due to paucity of working capital. It was found at that stage that large scale modernisation involving substantial investments was needed. A loan of Rs. 20 lakhs was applied for by the company to the Kerala Financial Corporation which stipulated that before the loan is granted to the company, the company should be converted in to a public limited company and its share capital increased from Rs. 10 lakhs to Rs. 25 lakhs. A further stipulation was made that the Directors should give an undertaking that the existing advances to the company by the firm, its partners and their relatives will not be drawn until after the clearance of the loan advanced by the Corporation. There was another stipulation that no intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u of the loans advanced by it to the cotton mills in the course of its business that the shares so taken should, therefore, be considered to be the stock-in-trade of the assessee and that the loss arising on the transfer of such shares which was computed at Rs. 6,45,000 should be treated as business, loss. 7. It has been urged on behalf of the Revenue that the assessee had in the original return claimed this only as a capital loss, that the assessee had purchased the share of Rs. 7,50,000 to manage the Kathayee Cotton Mills Ltd., and that, therefore, the acquisition of these shares should be treated as a capital account and that, therefore, the loss arising therefrom should only be treated as a capital loss. It was urged that though the shares of Rs. 7,50,000 face value was received by the assessee in lieu of the loans advanced by it to the company, the advance had undergone a change from a trading asset to a fixed asset and that the loss arising on the sale of the fixed asset should be treated as a capital loss. It was pointed out that in the balance sheet of the assessee, after the assessee had acquired these shares of Rs. 7,50,000 in the manner aforesaid these shares were grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted by the department. 9. The circumstances under which part of such advances were converted into shares in M/s. Kathayee Cotton Mills Ltd. have been narrated earlier. The increase in the share capital of this company was one of the conditions imposed by the Kerala State Financial Corporation Ltd. for providing financial assistance to that company and the conversion of the debts due to the conversion of the debts due to the assessee as share capital in the company to the extent of Rs. 7,50,000 was to fulfil this condition imposed by the Kerala Finance Corporation. This conversion was done with the approval of the Kerala State Finance Corporation. This conversion was done with the approval of the Kerala State Finance Corporation. The shares so obtained to the extent of Rs. 7,50,000 by conversion of an existing trade debt would, therefore, be the stock in trade of the assessee firm. This position is now well settled by a number of judicial decisions of which the following may be mentioned: Arunachalam Chettiar vs. CIT (1964) 14 ITR 61; Coimbatore Anuppam Palayam Bank Ltd. vs. CIT (1961) 42 ITR 576; Narain Dutt Chhimwal vs. CIT (1972) 83 ITR 413; CIT vs. Bhavnagar Trust Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of such assets taken over in lieu of the trade debt. If the income and expenditure in respect of such assets are not brought into the business accounts of the lender, the property so converted was held to be on capital or investment account. If, on the other hand, the income and expenditure in respect of such property is brought into the business accounts of the assessee, the property continues as stock-in-trade. In the case of the property in question here, there have been no dividends and, therefore, no income. The loss on the realisation has been however, dealt with in the business accounts although entered only in the balance sheet. It must, therefore, be held that the shares of the face value of Rs. 7,50,000 in Kathayee Cotton Mills Ltd. taken by the assessee in lieu of part of the debt due to it from this company continued to be the stock-in-trade of the assessee and, therefore, the loss of Rs. 6,45,000 computed by the CIT (A) as arising out of the realisation of these shares during the previous year for the assessment year should be treated as the business loss of the assessee for this assessment year. 12. The departmental appeal is, therefore, dismissed. - - TaxTMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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