J.K. Traders Ltd. Vs. Commissioner of Income-tax - Court Judgment

Excerpt:
- u.p. zamindari abolition & lands reforms act, 1951 [act no. 1/1951]. section 3(4) & u.p. land revenue act, (3 of 1901). sections 14-a (3) & 14; [s.rafat alam, r.k.agarwal & ashok bhushan, jj] expression collector- held, it includes additional collector. powers and functions of collector can be exercised by additional collector under section 198(4) of 1950 act, provided he has been so directed by collector of the district. [1996 aihc 3628 overruled]. - the appeal filed by the applicant before the tribunal had also failed.1. the income-tax appellate tribunal, allahabad, has referred the following two questions of law under section 256(1) of the income-tax act, 1961 (hereinafter referred to as 'the act'), for the opinion of this court:'1. whether, on the facts and in the circumstances, the tribunal was justified in rejecting the assessee's claim that rs. 23,158 be allowed while computing the assessees' total income as the said expenses had been incurred by it in running the company ?2. whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the assessee-company had earned capital gain of rs. 23,072 on the acquisition of the shares of national insurance company ltd., of the face value of rs. 5,82,742 by the general insurance corporation of india ltd., for rs. 6,05,815 on the nationalisation of the general insurance business during the accounting period corresponding to the assessment year 1975-76 ?'2. the applicant company during the assessment year 1975-76 derived income from dividend amounting to rs. 1,35,514 and had also received a sum of rs. 11,760 as management compensation from national insurance company ltd. the income-tax officer brought to tax both the aforesaid items as income from other sources under section 56 of the act. the applicant had claimed certain expenses aggregating to rs. 23,157.84. the details of which are as follows :rs. insurance 1,514.65 charges general 4,894.65 travelling and conveyance 2,084.58 car expenses 4,901.18 subscription and cost of books 2,585.80 commission and discount 168.10 directors fees 1,500.00 loss on sale of car 125.88 depreciation 5,383.00 ---------23,157.84----------3. it was claimed that these were business expenses and, therefore, deduction ought to have been allowed while computing the taxable income. in the capital reserve account, there was an addition of rs. 23,072 which represented surplus arising to the applicant on the acquisition of 4,500 ordinary shares of national insurance company ltd., by the government of india on account of the nationalisation of the insurance company. the government of india has paid a sum of rs. 6,05,814. the book value of these shares was rs. 5,82,742. according to the income-tax officer, it was surplus chargeable to capital gains under section 45 of the act and as shares were kept for more than five years, f 'it would be subjected to long-term capital gains'. the income-tax officer, while making the assessment did not allow the business expenditure of rs. 23,157.84, as according to him the applicant was not carrying on any business and these expenses have not been incurred for earning dividend income. in the appeal filed by the applicant before the appellate assistant commisg sioner, it was contended by the applicant that it had received shares of m. p. industries limited whose value was only rs. 6.52 per share in the market and, therefore, the applicant instead of making any capital gain has actually suffered loss of rs. 1,27,761 which should have been allowed instead of taxing it as capital gains. the appellate assistant commissioner did not accept the plea of the appellant and upheld the assessment. the appeal filed by the applicant before the tribunal had also failed.4. we have heard shri r. s. agrawal, learned counsel for the appellant, and shri govind krishna learned counsel appearing for the revenue. learned counsel for the appellant submitted that the applicant had incurred expenses during the assessment year in question, which was for business purposes since it was making all efforts to restart the business and, therefore, the same should have been allowed deduction while computing the income. he further a submitted that the market value of the shares of m. p. industries ltd., which the applicant got in lieu of the shares of national insurance company limited ought to have been taken into consideration while computing the capital gains/losses and necessary benefit should have been given.5. shri govind krishna, learned counsel for the revenue, however, submitted that under section 57 of the act only such expenses which are enumerated therein can be deducted from the income chargeable under the head 'income from other sources'. moreover, under section 37 of the act, such expenditure which has been laid out or expended wholly and exclusively for the purposes of business or profession is to be allowed deduction while computing the income chargeable under head 'profits and gains of business or profession'. he submitted that as in the assessment year in question, there was no income under the head 'profits and gains of business or profession', as the applicant was not carrying on any business, expenditure has rightly not been allowed. so far as the question of capital gains is concerned, he submitted that on the nationalisation of national insurance company ltd., by the government of india, the applicant had received a sum of rs. 6,05,814 as compensation and if instead of receiving the amount, the applicant had preferred to have shares of m. p. industries limited, the applicant is not justified in claiming capital loss by treating the market value of the share of m. p. industries at rs. 6.52.6. having heard learned counsel for the parties, we find that all the authorities including the tribunal has found as a matter of fact that the only business which the applicant was carrying on was that of working as a sole selling agent of j. k. iron and steel company limited which was terminated from july 31,1968. it could not start any other business till the tribunal decided the appeal giving rise to the present reference. the tribunal was of the view that the purpose of temporary lull can be ignored but inability to carry on business or start a new business for about nine years cannot be treated as temporary lull and, therefore, in the absence of any business being carried on by the applicant, there is no question of allowing expenditure as claimed by it. we have also perused the items of expenditure claimed by the applicant and are g of the considered opinion that none of these expenses fall under any of the clauses mentioned under section 57 of the act. moreover, as the applicant was not carrying on business during the assessment year in question, these expenses cannot be allowed as deduction under section 37 of the act.7. so far as the question of capital gains on the amount of compensation h received by the applicant in respect of 3,500 shares of national insurance company ltd., is concerned, it may be mentioned here that the amount of compensation was quantified by the union of india at rs. 6,05,814 and the book value was rs. 5,82,742. thus, the surplus is liable to be treated as capital gains. merely because the applicant had purchased shares of m.p. industries or had taken shares of m. p. industries in lieu of the compensation amount till such time it is sold or transferred by the applicant, the question of any loss occurring to the applicant would not arise. thus, the tribunal was justified in holding the surplus of rs. 23,072 as capital gains liable to tax as a long-term capital gains.8. in view of the foregoing discussions, we answer both the questions of law referred to us in the affirmative, i.e., in favour of the revenue and against the assessee. however, the parties shall bear their own costs.