Commissioner of Income-tax Vs. Prakash Chand Maheshwari (Huf) - Court Judgment

1. The present application by the Commissioner under Section 256(2) of the Income-tax Act, 1961, relates to the assessment year 1985-86. The application is at the instance of the assessee. The assessee has claimed a loss of Rs. 86,055 on account of transacting in shares of private limited companies by treating those shares to be stock-in-trade. The assessing authority has computed the income of the assessee by deleting loss of Rs. 98,669 of which Rs. 86,055 concerned in respect of the shares of private limited companies. The assessing authority made an order under Section 143(3) of the Income-tax Act by accepting the income returned as it is.

2. The Commissioner of Income-tax under Section 263 held the order to be erroneous and prejudicial to the interests of the Revenue and directed the Assessing Officer not to consider the amount of loss arising from the transaction in the shares of the private limited company under the head 'Profit and gains from business'. Accordingly, the assessing authority gave effect to that order. In appeal against the assessment order, the Commissioner of Income-tax (Appeals) gave partial relief by allowing the loss which was related to the dealings in the shares of public limited companies but aggrieved by the order of the assessing authority in respect of the loss arising out of the dealings in the shares of private limited companies in second appeal before the Tribunal, the issue was confined as far as the assessee was concerned on account of disallowance of loss of Rs. 86,055 in respect of the transactions of shares of private limited companies. That part of the assessee's contention was accepted following its decision in earlier years for 1983-84 and 1984-85 by which the Tribunal accepted the transaction of the shares of private limited companies as stock-in-trade of the assessee.

3. In the aforesaid circumstances, the Commissioner of Income-tax had made an application before the Tribunal under Section 256(1) for referring the following question of law to this court for its decision :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in directing the Assessing Officer to consider the loss suffered by the assessee in respect of the shares of private limited companies as business loss and adjust the same against other income ?'

That application has been rejected by the Tribunal by holding that since like application for earlier years has been rejected by holding that the question whether a particular asset is a stock-in-trade or a capital investment is a question of fact and does not give rise to question of law. This has led to the filing of this application under Section 256(2) by the Commissioner of Income-tax.

4. We have heard learned counsel for the parties. It is true, whether a particular commodity forms part of stock-in-trade or investment is ordinarily a question of fact but here we are concerned with a commodity which is governed by the statutory provisions. Ordinarily, the shares of private limited companies are issued to its members as subscription to share capital on the condition that they are not transferable without the permission of the company. In these circumstances, a question arises whether in view of the provisions of the Companies Act, the shares of a private limited company can at all be held as stock-in-trade by anyone so as to deal with freely as a commodity resulting in business profit or loss. This certainly cannot be said to be a question of fact. In this view of the matter, the Tribunal was clearly in error in rejecting the application under Section 256(1) by holding the question to be a question of fact and not a question of law.

5. As a result, this application is allowed. The question framed by the Revenue, in our opinion, does not bring out clearly the controversy arising in this case and needs to be modified. The question, which the Tribunal is directed to refer to this court, shall be as follows :

'Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that the shares of a private limited company can also be stock-in-trade particularly if considered in the light of the provisions of the Companies Act.'

6. There shall be no orders as to costs.