TMI Blog1982 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... statement of the case, and the orders annexed thereto. A firm name " Dayaram Surajmal ", consisting of five partners, including Pannalal Lahoti, was acting as the managing agents of M.S K. Mills situated at Gulbarga (now in the State of Karnataka). This firm was initially constituted in 1926 ; but, thereafter, there was a reconstitution under a partnership deed dated September 2, 1946. The business of this firm was banking, oil mills, commission, ginning, press, factories and money-lending. Pannalal Lahoti died on April 26, 1956, leaving behind him his widow, Smt. Bhima Bai, and his daughter, Godavari Bai. He had executed a will dated April 21, 1956, appointing his wife and his brother-in-law, Sri B. M. Bhandari, as executors. Consequent on the death of Pannalal Lahoti, the aforesaid firm was dissolved on October 31, 1959, and a deed of dissolution recorded on July 4, 1960. Meanwhile, Smt. Bhima Bai, the widow of Pannalal Lahoti, also died after adopting one Sri Sureshchandra Lahoti, in exercise of the power given to her by her husband. On the dissolution of the said firm 54,974 shares of M. S. K. Mills, out of the shares held by the firm, were allotted to the share of Lahoti. Ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1975, or till the amount of Rs. 60 lakhs advanced by the Government was repaid, whichever was earlier. It was further agreed that the dividend or bonus that might be declared by the mills relating to the said 17% of shares, should be paid over to the principal shareholders. In pursuance of the above agreement, 45,365 shares out of 54,974 shares held by Lahoti's estate, were transferred by the executor, Sri Bhandari, to the Government of Karnataka, at the rate of 2 1/2 paise per share, i.e., for total sum of Rs. 1,135. The estate of the deceased Lahoti valued the remaining 9,609 shares at Rs. 48,045, at the rate of Rs. 5 per share, and thus arrived at a loss of Rs. 2,25,690, and claimed it as a revenue loss in the relevant accounting year. The ITO accepted this claim but the Commissioner, exercising his power under s. 263, set aside the order of the ITO. The Commissioner held that the transferred shares constituted capital asset in the hands of the executor and, therefore, any loss resulting from the said transaction was a capital loss. Further, he made a distinction between 17% of the shares which were agreed to be conveyed back to the principal shareholders, and the remaining 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e partner. Then he posed the question: whether there were any circumstances to come to the conclusion that, in the present case, they constituted the stock-in-trade in the hands of the assessee ? He then noted the fact that Pannalal Lahoti was registered as a dealer in shares and that, after his death, the executor, Sri Bhandari, also took out a similar licence for dealing in shares. He, however, observed that, even a dealer in shares may hold some shares as investments, and the others as stock-in-trade ; and one has, therefore, to consider whether there was anything in the manner of acquisition, the treatment given in the books, and the circumstances attending the sale of these shares, upon which it could be held that the assessee treated these shares as stock-in-trade. Another principle enunciated by the third Member was that, where a person inherits a business but continues to carry it on, there is a simultaneous acquisition of a capital asset and the conversion of its stock into his stock-in-trade. Looked at from this angle, he observed, there were some aspects in the present case which made it appear that the assessee had agreed to take the shares in lieu of his interest in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s control over the mills, but only with a view to see that the value of the shares is enhanced ; and his interest in doing all this was only that of dealer in shares. He observed further that, when the assessee was selling away a major portion of his shares, it cannot be said that he was doing all that to retain control over the mills. He observed finally that the transaction entered into with the Govt. of Karnataka was one that dealer in shares would enter into and that, it was the best bargain which the assessee, in the circumstances, could enter into, to salvage his stock. In this referred case, it is contended by Sri M. S. Murthy, the learned standing counsel for the Department, that the conclusion of the majority of the Members of the Tribunal, is unsustainable in the facts and circumstances of the case, judged in the light of the relevant legal principles. He submitted that the question, whether the loss was a capital loss or revenue loss, is a mixed question of fact and law, and not a pure question of fact. He submitted that, once it is held that the shares allotted to the assessee on the dissolution of the firm, M/s. Dayaram Surajmal, constituted a capital asset in his ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, though the latter seeks to qualify it by saying that that is a prima facie rule. The third Member has given three reasons for holding that " the assessee may have agreed to take these hares in lieu of his interest in the firm as he was a sharedealer and hoped eventually to make a good bargain out of what was bad asset". Firstly, the third Member has not recorded a definite finding. What all he says is that the assessee " may have agreed " to take the shares in lieu of his interest in the firm as he was a dealer in shares, and hoped eventually to make a good bargain. Secondly, we find that the three reasons given by him, viz., (i) the acquisition of shares at their market value, (ii) admission of the executor as a member of the stock exchange at about that time, and (iii) the value of the shares as investment on that date was very poor do not lead to the conclusion, which he did. We are of the opinion that two of the three reasons given by the third Member in this behalf are not at all relevant. We are unable to see as to how the fact that these shares were allotted to Lahoti's estate at their market value on the date of their allotment is relevant to say that the executor rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of Rs. 2 per share on the date of their sale to the Govt. of Karnataka, their sale @ 2 1/2 paise per share is not the conduct of a dealer in shares. but that of a person who is holding them as an investment and is seeking to salvage the same. This has been met by the third Member with reference to a certain record placed before the Tribunal, showing that " the intrinsic value of the shares was ' nit ' as on September 30, 1962, computed on the company's balance-sheet as on that date ". Now, firstly, it may be noticed that neither the Accountant Member nor the third Member have recorded a finding of fact that, on the date of sale, the value of the shares was " nil ". That their value was " nil " on September 30, 1962, i.e., two years later, is of little consequence, because, admittedly, on October, 1957, when they were allocated between the partners, their market value was Rs. 5 per share. The circumstance mentioned by the Commissioner cannot be said to be an irrelevant one, while determining the question whether the assessee, in any manner, converted the said shares into stock-in-trade. Now, coming to the circumstances attending the sale, the third Member agrees that the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttedly held by him as stock-in-trade were not being valued at the end of each accounting year. But that does not mean that this circumstance can be taken as one indicating the intention of the assessee to convert the said shares into stock-in-trade. We have already pointed out that the fact of the executor, Sri Bhandari, getting himself admitted as a member of the stock exchange at about the time of allotment of these shares, is not indicative of the requisite intent. The executor, admittedly, held a number of shares in stock-in-trade ; and for dealing in them, or to deal in other shares on the share market, he has to get himself admitted as such. It must be remembered that Pannalal Lahoti died in April, 1956, and the executor got himself registered in or about October, 1957, as a dealer in shares. This circumstance, therefore, is also not indicative of the requisite intention on the part of the assessee. It is also pointed out by Sri N. V. Ranganadham that the fact that the shares were kept unsold from October, 1957, till 1960, cannot be said to be indicative of the fact that they were continued to be treated as capital asset. May be so; but that does not solve the assessee's prob ..... X X X X Extracts X X X X X X X X Extracts X X X X
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