Kapur J.
1. The assessment year with which we are concerned is 1959-60. The reference made to this court is under s. 66(1) of the Indian I.T. Act, 1922, and the questions referred are :
'(1) Whether, on the facts and in the circumstances of the case, the loss of Rs. 23,58,304 was rightly disallowed as a capital loss
(2) Whether, on the facts and in the circumstances of the case, the amount of Rs. 9,120 incurred on account of Commission of Inquiry expenses was allowable as revenue expenses
(3) Whether, on the facts and in the circumstances of the case, the amount of Rs. 25,229 on account of expenses of the Law Department was allowable as a deduction against the assessed's profits ?'
2. The statement of case submitted to this court covers a lot of extra grounds because it is concerned with a number of questions which have not been referred. It is convenient, thereforee, first to deal with the last two questions as they are already covered by a reported judgment. In the assessed's own case for the assessment year 1958-59, this court has already decided in South Asia Industries (P.) Ltd. v. CIT : [1981]132ITR144(Delhi) , that amounts spent on the Commission of Enquiry expenses and amounts spent on account of expenses of the Law Department were allowable as business expenditure. Following that judgment, we would hold that questions Nos. 2 and 3 have to be answered in favor of the assessed in the affirmative and these expenses have to be treated as business expenses.
3. The main question in this case is the one concerning the loss of Rs. 23,58,304, which is a loss resulting from sale of shares. The facts of this case are somewhat extraordinary. The company had purchased the shares of Asia Udyog Private Ltd. at Rs. 3 per share and sold them at the rate of Re. 0.05 per share and thus made a heavy loss. The number of shares was 7,99,425, but the entire lot was sold for Rs. 39,971 to a company, Manav Sahyog Private Ltd. The assessed company and the purchasing company were in the Dalmia group. The ITO held that this loss was entirely an artificial loss arising out of artificial transactions between the companies controlled by the same group. This finding was confirmed by the AAC.
4. However, when the assessed appealed to the Tribunal, a different finding was recorded. It was submitted that the company was empowered to deal in shares by its memorandum of association and these shares were its stock-in-trade. In any case, the loss, if not a business loss, would be a loss under 'other sources' and it was further submitted that the Tribunal had in the immediately preceding year held that similar transactions were not sham. According to the departmental representative, Asia Udyog Private Ltd. had suffered losses and the shares could not have been bought at Rs. 3 per share, so the loss was an artificial loss and not genuine.
5. The Tribunal held that the transactions could not be held to be sham and the loss was a capital loss. It is this finding of the Tribunal that has led to the main contentions before this court.
6. It is convenient to reproduce the conclusion of the Tribunal on the facts :
'This issue was considered by the Tribunal in great detail for the immediately preceding year and by a coincidence, the main scrips considered were that of AUP. One of us was a party to that decision. The Tribunal held that it was not possible to uphold the finding of the income-tax authorities that the transactions were sham. It, however, went on to hold that the loss claimed was a loss on capital account and should be considered as such. With respect, we do not see any reason for taking a view different from the view taken by the Tribunal for the earlier year. It was not suggested that the transactions were not actually entered into by the parties concerned on terms reflected in the respective books of account. It was not as if the shares were not at all transferred and it was only represented that they were transferred. Nor was it the position that the shares were transferred on considerations different from that reflected in the books. For instance, it was not suggested that although the price received for AUP shares was at the rate of 5 paise per share, in fact, something more was received. Unless it was established that the income had already accrued to the assessed and the assessed had entered into the transaction to screen or camouflage accrual, no adverse inference could be drawn against the assessed by reason only of the fact that the terms of the transactions were strikingly unfavorable to it. It was, thereforee, not possible to brand the transactions as bogus or sham or artificial. It was, however, not possible to uphold the claim of the assessed that the loss in question was a business loss. The shares in question could not be considered to be part of the trading stock of the assessed. The shares were such as could not possibly be treated as a part of the trading stock of a dealer. The shares were shares of private limited companies, the shares were not quoted at the stock exchange and the shares were not dealt in as a trading stock. The condition of the companies in question was also such that it would be ridiculous to suggest that their shares would be dealt with by dealers as part of the trading stock. Prima facie it looked as if the shares were just instruments in the hands of the controlling group either for securing or for continuing the control of other companies. These were transactions between different members of the same group in respect of shares of companies belonging to the same group. The only idea that became conspicuous was the idea of preserving the hold of the group on the companies concerned and the transactions undertaken with this idea have necessarily to be taken as of a capital nature. They do not relate to routine or day to day operations of the carrying on of the business of the company. They relate to the investment of the business of the company in the shares of other companies in the same group. The loss was, thereforee, clearly a capital loss and should be treated as such.'
7. The transactions having been held to be genuine, it is urged by learned counsel for the assessed, this case cannot be distinguished from another case decided by this court, which is Bharat Development (P) Ltd. v. CIT : [1982]133ITR470(Delhi) . In that case, which also was concerned with a company in the Dalmia group, this court held that the surplus in similar dealings was an income from 'business' and not an income from 'other sources'. Learned counsel contends that if the transactions are genuine, it can hardly be said that there is any difference between Bharat Development Private Limited's case : [1982]133ITR470(Delhi) and South Asia Industries (P) Ltd. : [1981]132ITR144(Delhi) .
8. We find from page 472 of the report that the grounds on which the ITO had held that the income was chargeable under 'other sources' and not as income from 'business' were that the shares were of private limited companies and even Dalmia Dadri Cement Ltd. was also controlled by R. Dalmia and nobody dealt with these shares and none of the shares were quoted on the stock exchange. Further, all the shares had been treated as investments in the balance-sheet.
9. One of the noteworthy features of that case noted by the ITO was that the purchases and sales of shares were only to those companies which were controlled by R. Dalmia and most of the purchases and sales were either to or from R. Dalmia or to or from his nominees or to and from the employees of the companies controlled by him. This court repelled the contention and the Bench held as follows (p. 475) :
'The Tribunal, in our opinion, has rightly come to the conclusion that all the elements of a business are present in this case. There have been a series of transactions in shares and there is nothing to show that these transactions were artificial and unreal. The mere fact that these were transactions between inter-connected companies does not take away the character of business from these transactions. The Tribunal, however, seems to have come to the conclusion that in the present case the transactions should not be treated as business transactions, because the transactions were not voluntary and so did not amount to 'sales'. We are unable to find any material or justification for this conclusion of the Tribunal.'
10. Mr. Sharma submits, on behalf of the assessed, that in this case also there is hardly any difference. The conclusion of the Tribunal was different in the present case because it was observed as follows. The relevant part of the passage is again quoted here :
'The shares in question could not be considered to be part of the trading stock of the assessed. The shares were such as could not possibly be treated as part of the trading stock of a dealer. The shares were shares of private limited companies, the shares were not quoted on the stock exchange and the shares were not dealt in as a trading stock. The condition of the companies in question was also such that it would be ridiculous to suggest that their shares would be dealt with by dealers as part of trading stock. Prima facie it looked as if the shares were just instruments in the hands of the controlling group either for securing or for continuing the control of other companies. These were transactions between different members of the same group...'
11. Thus, it is urged by Mr. Sharma that the mere fact that the transactions have resulted in a loss in the present case and a gain in the case of Bharat Development (P) Ltd. does not make any difference because otherwise the facts are similar. There was a gain in one year and a loss in the other.
12. In reality, this case represents an example of what follows from discarding the Income-tax Officer's view that the transactions were sham. The shares were bought for Rs. 3 per share and sold for practically nothing resulting in a huge loss. The time interval was very small and all the transactions were private in nature, because the shares were not quoted on the stock exchange, and all the dealings were between members of the same group. However, once it is held that the transactions are genuine and not sham, it has to be found out whether the loss is a business loss or a loss of capital. It is noteworthy that in the Bharat Development's case : [1982]133ITR470(Delhi) , nobody said that the profit was a capital gain. It was taken for granted that it was a business gain or a gain under the head 'Other sources'. The shares were similar, but the transactions resulted in a profit. Learned counsel for the respondent urges that the difference was the number of transactions. However, it appears that the number of shares in the present case is also very large because the shares were about 8,00,000 in number and were purchased at Rs. 3 per share. Learned counsel for the Department submits that this was an investment, pointing out that the Tribunal has held that nobody would do business in shares of this type. On the other hand, it could equally be said that nobody would invest in shares of this type as Asia Udyog (P) Ltd. had practically closed down.
13. In this respect, it is useful to reproduce the conclusions of the ITO. He said :
'I have looked into the balance-sheets of the companies whose shares have been purchased and sold resulting in the alleged losses and I find that no genuine dealer in shares would go near the shares of these private companies for none of them had any prospects of any appreciation. I am fully aware with the past records of the above-named companies having dealt with their assessments or having looked into their balance-sheets for the various years. Asia Udyog has been a company of negative value right from 1953 onwards and particularly after it had sold out its disposable stock of goods in 1966, it had been left with hardly any business; its books of accounts had been seized by the Special Police Establishment in 1953; and it had not prepared the balance-sheet for and from that year. All these facts were naturally known to the assessed-company, it being of the same group and being managed by the same group of persons and it, thereforee, in the course of its assessment for the year 1958-59, admitted the knowledge of these facts about Asia Udyog (vide its letter dated February 18, 1963). It was also admitted in the aforesaid letter of the company that from July 1, 1956, the State Trading Corporation had taken over the distribution of cement and, thereforee, even though Asia Udyog continued to be the sole selling agent for Dalmia Dadri Cement Limited, the quantum of selling agency work had been considerably reduced with effect from July 1, 1956. Thus the company knew full well that the worth of shares of Asia Udyog was nothing or negligible. All the same, the assessed acquired a large number of shares of this company...'
14. Thus, the ITO was of the view that no genuine dealer would deal in these shares but equally no genuine investor would invest in these shares on the same reasoning. Later on, the ITO continued :
'A genuine dealer in shares never acts in the manner the company has been acting. Moreover, as I have brought out in this order in the very beginning, the company has acquired the shares of various private companies of R. Dalmia not with a view to trade in them but with manifold purposes, chief of which are controlling the various private companies of R. Dalmia group according to the wishes of R. Dalmia, who is 100% beneficial owner of this company, and acting according to an overall scheme of tax evasion. For these reasons and for reasons given in the earlier assessment orders, it has to be held that the assessed did not deal in shares and that the losses suffered on their sale could not be treated to be a loss because it arose out of sham and collusive transactions with a solitary motive of evading taxation.'
15. Thus, the conclusion of the ITO was that the whole series of transactions were bogus or sham and it was neither a case of dealing in shares nor a case of investing in the shares.
16. We must take it for granted that the Tribunal's conclusion about the genuineness of the transactions is not open to attack in this court. So, we are left with the question of determining whether this particular loss is a 'business loss' or a 'capital loss'. The test for determining whether a particular loss is a 'capital loss' or a 'business loss' has to be determined by the intention of the party that had entered into the transaction. This is what has been held by the Supreme Court in several cases. So, the test is whether the assessed company in the present case bought the shares of M/s. Asia Udyog (P.) Ltd. for the purpose of investment or for the purpose of selling the same at a profit, i.e., the question is whether the assessed company was an investor or a dealer in shares of M/s. Asia Udyog (P.) Ltd. Shortly stated, the difference between an investor and a dealer in shares is that one is interested in the dividend and the other is interested in the appreciation of the prices.
17. We have been at a loss to determine whether any investor or dealer would buy the shares of a practically defunct company at a fancy price. If we are left with no choice, we would have to determine whether the assessed is a dealer or an investor in shares of M/s. Asia Udyog (P.) Ltd. The number of shares held by the assessed company was 7,99,425 shares which had all been acquired from other companies of R. Dalmia group. They were also sold only at 5nP. per share to Manav Sahyog (P.) Ltd., which is another company of Dalmia group. The gap between the purchase and sale of the shares was only a few months. As the Tribunal has held the purchase and sale to be genuine, we can take it for granted that the amount actually paid or the amount shown in the books of the assessed company was genuine and we can also accept the fact that these shares were sold for practically nothing to another company of the same group. But, the question is : Can this be described as the action of an investor or, can it be described as the action of a dealer The total loss resulting from the transaction was Rs. 23,58,304 as stated in the question referred to us.
18. Turning now to the other cases. In Investment Ltd. v. CIT : [1970]77ITR533(SC) , certain securities worth Rs. 92,50,000 had been purchased between July, 1948, and March, 1949, which were eventually sold at a loss. The Tribunal had held that the loss was capital in nature. It was eventually held by the Supreme Court on the basis of the past record of the company as follows (P. 537) :
'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 of 1952-53 form sale of securities was liable to be treated in the assessment year 1953-54 as revenue loss.'
19. The observations of the Supreme Court in CIT v. National Finance Ltd. : [1962]44ITR788(SC) , had also contained some observations regarding when a loss was a trading loss or a capital loss. It was there pointed out that the question was one of fact but not one of pure fact being a mixed question of fact and law. The court observed (headnote) :
'The problem must be approached in such cases in the light of the intention of the assessed, having regard to the legal requirements which are associated with the concept of trade or business.'
20. Thus, we are left with the question of determining whether the intention of the assessed was to make a profit by capital appreciation or was the intention to hold the shares as an investor.
21. Counsel for the assessed had submitted before us that one of the objects of the company was dealing in shares. The company was originally the Lahore Electric Supply Co. Ltd., which was renamed as South Asia Industries Pvt. Ltd. Originally, this was a public limited company, but had become a private limited company in December, 1955.
22. In CIT v. Ramnarain Kapur and Co. Pvt. Ltd. : [1968]69ITR719(Bom) , it was held that a large block of shares was purchased to acquire the managing agency of another two companies. The transaction was compatible both with business and capital, but as the object was acquisition of managing agency of two companies, it was a transaction in capital account. In Lala Ram Kishan Gupta v.CIT : [1964]52ITR991(All) , a large block of shares was purchased for the purpose of acquiring a managing agency, but this was not possible. So, the shares were sold at a profit. It was, thereforee, held that the profit was of a business nature.
23. In CIT v. Associated Industrial Development Co. (P.) Ltd. : [1971]82ITR586(SC) , it was held by the Tribunal that the company was a dealer in shares, but the High court reversed the decision holding that it was a capital loss. The Supreme Court restored the Tribunal's decision. The decision was based on the Supreme Court's conclusion that there was nothing to show that the assessed had established that the shares were part of its capital investment.
24. In CIT v. Central Kurkhend Coal Co. Ltd. : [1978]113ITR483(Cal) , the shares of a member of the same group had been sold after dividend had been received. The resultant loss was treated as a revenue loss because the object of the investment was found to be one for making a profit and not for investment.
25. If we are left with the choice of finding whether the transaction was one of investment or one in which the company had bought the shares for profit and for no other purpose, we are hard put to determine why the company entered into the transaction.
26. As already noted earlier, M/s. Asia Udyog (P.) Ltd. was practically a defunct company and was defunct for quite some time. The question we have to ask is whether any investor would buy shares of this type. We think that it is hardly likely that any investor would buy such shares. But then, would a dealer in shares buy such shares It is also unlikely that any dealer would buy such shares because there is hardly any chance of capital appreciation. Then why should the assessed company have bought the shares If it is neither an investment nor a case of dealing in shares, we are at a loss to know what type of transaction this is. A closer examination would show that the transaction is more akin to a gift. It is like some benevolent uncle buying the broken down car of his nephew at a fancy price. Or, the same uncle might sell some treasured article to his nephew for a song. It may be a sale, but essentially it would be a gift. The present transactions are genuine, but the stark reality cannot escape one. The shares were bought for near by Rs. 24,00,000 and sold a few months later for Rs. 40,000. There were no quotations, no market indicating that the price had gone up or down. There was no feature to indicate that the shares were worth either Rs. 24,00,000 or Rs. 40,000. Thus, a gift was made in respect of the shares either when the price was paid for them at much more than they were worth or, at the time they were sold, because if they were worth Rs. 24,00,000, they were sold for much less than they were worth. As the buyer and the seller, the brain behind the transactions and the controller of the purse strings was essentially one person, it appears surely to be a case of giving money for nothing. For what purpose was the company impoverished to the extent of over Rs. 23,00,000 Not with the object of making an investment or with the object of dealing in these shares of a defunct company. There was no other buyer for these shares except the members of the same group. The transaction cannot be described either as a business transaction or as an investment. It is more akin, as stated above, to the making of a gift. If you buy a worthless object for a large amount and throw it away, it is neither an investment nor a dealing. The shares of M/s. Asia Udyog (P.) Ltd. were practically valueless. If the shares were bought at a fancy price or sold for practically nothing, it would be a sure indication that the transaction was neither for business nor an investment.
27. We would accordingly answer the first question referred to us in the affirmative to hold that it was a capital loss because the transaction does not have all the ingredients which would go to show that it is a business loss. The answer is, thereforee, in the affirmative, in favor of the Commissioner of Income-tax and against the assessed. As the assessed has partially succeeded, we leave the parties to bear their own costs.