2004-VIL-334-KER-DT

Equivalent Citation: [2004] 270 ITR 452, 190 CTR 281, 140 TAXMANN 509

KERALA HIGH COURT

Date: 08.06.2004

KERALA SMALL INDUSTRIES DEVELOPMENT CORPORATION LIMITED

Vs

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s)  : G. SIVARAJAN., KURIAN JOSEPH.

JUDGMENT

The judgment of the court was delivered by

G. SIVARAJAN J. - The Income-tax Appellate Tribunal, Cochin Bench, has referred the following two questions for the decision of this court at the instance of the assessee:

"1. Whether, on the facts and in the circumstances of the case and in view of the objects of the assessee contained in its memorandum of association was the Appellate Tribunal right in holding that the investments made in the capital of the co-operative societies cannot be considered as its objects and the loss arising therefrom cannot be treated as a revenue/ business loss allowable under the Income-tax Act?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in disallowing deduction of an amount of Rs. 80,20,588 being the amount written off by the assessee in the profit and loss account, from out of its advance in the form of shares in the cooperative societies which had either become defunct or had gone under liquidation?"

The brief facts relevant for answering the above two questions may be stated. The applicant-assessee is a public sector undertaking, the shares of which are held by the Government of Kerala. It is an assessee to income-tax under the Income-tax Act, 1961 (for short "the Act"). The assessment year concerned is 1983-84 and the relevant accounting period ended on March 31, 1983. The assessment of the applicant was originally completed on March 14, 1986, and the same was revised on May 19, 1986, on a net income of Rs. 3,33,82,490. This was on the basis of the provisional accounts (unaudited accounts submitted by the assessee). On April 19, 1988, the assessee submitted the audited accounts. On the basis of the information contained in the audited accounts, the assessment for the year 1983-84 was reopened under section 147 of the Act. Paragraph 1 of the directors report to the annual accounts for the assessment year 1982-83 contained the following observations:

"The investment in shares in the co-operative societies to the extent of Rs. 80,20,588 has been written off in the profit and loss account considering the present position of these co-operative societies which are either defunct or under liquidation."

The Assessing Officer taking the view that the shares held by the assessee as its investment and in writing off about 90 per cent, of the value of the investment in 24 co-operative societies, the assessee had revalued its investment and debited the loss on revaluation to the profit and loss account as expenditure. According to the Assessing Officer even if the assessee suffered any loss, such loss has to be considered as capital loss provided that the loss arose on the transfer of shares. The Assessing Officer, therefore, held that the loss on revaluation of shares could not be charged against the profits of the assessee. The Assessing Officer accordingly disallowed a sum of Rs. 70,00,671 after noticing that part of the loss had been claimed and disallowed in the earlier years.

Being aggrieved by the said assessment order, the assessee filed appeals before the Commissioner of Income-tax (Appeals). Relying on the decision of the Supreme Court in Vijaya Bank Ltd. v. Addl CIT [1991] 187 ITR 541, the appellate authority upheld the disallowance as a capital loss. This was confirmed by the Tribunal in the second appeal filed by the assessee. Hence, the reference.

Shri Jayasankar Nambiar, learned counsel appearing for the applicant, submits that the shares held by the applicant in the co-operative societies represented its stock-in-trade and form part of its current assets. Counsel also contended that the memorandum of association of the assessee enabled it to continue to carry on the promotional activities by investments in shares in the industrial co-operative societies in order to further its objects to promote the small-scale industries. It is further contended that the very business of the assessee consisted in investing in the co-operative societies and such being the nature of the assessee's business, if the value of the shares held in the co-operative societies had depleted because of their losses or because of their liabilities having exceeded their assets, like any prudent businessman, the assessee had recognised such losses in the value of its trading investment and, therefore, it should be allowed as a trading loss. Counsel also contended that even if it is to be held as a capital loss under the scheme of the Act, the same should be allowed to be set off against the other income of the assessee.

On behalf of the Revenue, Shri P.K.R. Menon, senior counsel, submitted that this is not a case where the assessee was a dealer in shares and as such suffered any loss. Senior counsel further submits that the alleged loss on revaluation of shares in the industrial co-operative societies should neither be considered as a business loss nor as a capital loss.

The applicant, Kerala Small Industries Development Corporation Ltd., is a company incorporated under the Companies Act, 1956. Earlier, the name of the company was Kerala State Small Industries and it was later changed to Kerala Small Industries Development Corporation Ltd. with effect from November 14, 1986. As per the memorandum of association, the main objects to be pursued by the company on its incorporation are:

"1. To take over by transfer the whole or any part of the undertakings' property or liabilities of Kerala State Small Industries Corporation Ltd., and Kerala Employment Promotion Corporation Ltd., in accordance with the Companies Act, 1956.

2. To aid, counsel, finance, protect and promote the interests of small industries in the State, stabilise and run by industrial undertakings, projects or enterprise whether owned or run by the Government, statutory body, company, co-operative society, firm or individuals by providing them with capital, credit, means, resources, supply of machinery and equipments on hire-purchase, procurement and distribution of scarce raw materials, advice on import control policy and export promotion procedures, marketing and sales of the products, revitalisation of sick units and rehabilitation of defunct units, adequate information and publicity, construction, maintenance, management and administration of industrial estates and development of plots, provision of all infrastructural facilities, technical and managerial assistance for the prosecution of their work and business.

3. To promote employment and entrepreneurship among the skilled, semiskilled, trained, experienced and educated members of the public by promoting, establishing and undertaking the development of small-scale and medium industries, industrial estates, development areas and plots, growth centres, common facility or service centres or other infra-structural works on its own or as agents of Governments or any other body corporate or co-operative society or person.

4. To promote and operate schemes for industrial development and to develop entrepreneurship by providing package consultancy services, including pre investment services, investment services and post investment services and for that purpose to prepare and get or cause to be prepared reports, studies, surveys, procedures, designs, blueprints, statistics and other information necessary for successful implementation of industrial projects."

The objects incidental or ancillary to the attainment of the above main objects are also provided in sub-clauses 1 to 54 of clause IIIB of the memorandum of association. The other objects for which the company is established are also stated in the said memorandum of association. Among the objects incidental or ancillary to the attainment of the main objects, sub-clauses 10,11,15,35 and 36 reads as follows:

"10. To promote other companies, firms, establishments, concerns, cooperative societies or undertakings on industrial townships for any purpose calculated to benefit the industrial development of Kerala.

11. To promote and establish companies, associations, advisory boards and other suitable bodies and co-operative societies for the prosecution or execution of industrial undertakings, works, projects and enterprises of any description, whether of a private or public character, which in the opinion of the company would contribute to the industrial development of Kerala, and to acquire and dispose of shares and interests in such companies or associations or in any other companies or associations or in the undertakings thereof and to function as a holding company.

15. To direct the management, control and supervision of any company, association or concern or co-operative society by nominating directors, controllers, supervisors, advisers or otherwise, or to collaborate with any company or association or concern or co-operative society formed for carrying on any manufacturing or other business within the objects of the company.

35. To receive grants, loans, advances or other moneys or deposits or otherwise from State or Central Government, banks, companies, trusts, individuals, financial institutions, corporations or co-operative societies with or without an allowance of interest thereon so however that this company shall not carry on the business of banking as defined in the Banking Regulation Act, 1949.

36. To lend money to such persons or companies or concerns or cooperative societies and on such terms as may seem expedient, and in particular to customers and others having dealings with the company and to guarantee the performance of contracts by any such persons or companies, or concerns or co-operative societies provided that such lending shall not be for the purposes of banking business."

The applicant, a company by name Kerala Employment Promotion Corporation Ltd. (KEPCO Ltd.), an undertaking fully owned by the Government of Kerala held shares in co-operative societies and as part of its main objects to assist and promote employment schemes through investments in the industrial co-operative societies under the "half a million jobs" scheme of the Planning Commission of India. According to the assessee the shares held by KEPCO Ltd. represented its stock-in-trade and formed part of its current assets. Later KEPCO Ltd., and another undertaking fully owned by the Government of Kerala, namely, Kerala Small Scale Industries Ltd., were amalgamated and the assessee-company, Kerala State Small Industrial Development and Employment Corporation Ltd., was Formed taking over the assets and liabilities of the predecessor company. It is the contention of the assessee that the character and nature of the assets taken over including the investment in the industrial co-operative societies were the same in the hands of the assessee as they were in the hands of the predecessor. The assessee had written off in the profit and loss account a sum of Rs. 80,20,588 being investment in shares in the co-operative societies since the position of the co-operative societies was either defunct or under liquidation.

In the reassessment order (annexure A) the Assessing Officer has dealt with the issue in paragraph 1. It was observed that the assessee-company is not a dealer in shares, that these shares are held by the company as its investments and in writing off about 90 per cent, of the value of investments (in 36 co-operative societies) the company has revalued its investments and the loss on revaluation is debited to the profit and loss account as expenditure. Out of the shares in 36 co-operative societies the value of shares in 24 co-operative societies are revalued at Re. 1 per share even though in many cases the paid-up value of one share is Rs. 1,000. The Assessing Officer was of the view that even where the above loss is incurred by the assessee during the sale of these shares, it can only be considered as a capital loss as the assessee-company is not a dealer in shares and that the shares are held even prior to 1978-79 which is a long-term capital loss which cannot be set off against income from business. The Assessing Officer has also noted that in the schedules accompanying c the balance-sheet of the company the investment in equity shares in the cooperative societies is shown as a "non-trade asset". It was observed that the shares in the co-operative societies do not fall under the category of depreciable asset under section 32 also. It was further noted that similar disallowances were made in the earlier assessment year 1980-81 and that the assessee had not filed any appeal against this.

In the appeal, the first appellate authority considered the contention of the assessee in paragraph 5 of the appellate order. The first appellate authority observed that admittedly, even on the date of investment, these societies were not viable units. Hence, the investment could be considered only as a means of expanding the investment base of the industrial co-operative societies and that there is no reason to hold the loss as revenue in nature. The first appellate authority then relied on the decision in Vijaya Bank's case [1991] 187 ITR 541 (SC) which held that any investment made by a banking company in acquisition of securities has the character of a capital outlay. The first appellate authority accordingly sustained the disallowance of the claim for deduction of an amount of Rs. 70,00,671 as revenue expenditure.

The Income-tax Appellate Tribunal referred to the memorandum of association of the assessee-company and the relevant clauses thereof relied on by the assessee which we have already extracted above and noted the contention of the appellant that the very objective is to invest in the capital of firms, co-operative societies, etc., as a part of its promotional activity in the industrial development of a backward State like Kerala. The Tribunal observed that the objects are laudable though it is anybody's guess whether these objects were realised in the context of the industrial co-operative societies either becoming defunct or being found in insolvent circumstances in many a case. It was also observed that the investments made in the capital of the co-operative societies cannot by itself be considered as an object though it is described as an object, but can be viewed only as an exercise of power to enable the appellant-company to promote industrialisation in the small sectors in the Kerala State. It was it in modern terminology the power to disinvest after a certain stage of the development in the small industrial sectors. It was, therefore, observed that the investment made by the appellant-company in the capital of the co-operative societies can be viewed only as its capital stock and cannot be viewed as part of its trading capital or circulating capital and, therefore, if at all there was any loss on the shares representing the investments, it cannot be viewed as part of its trading capital or circulating capital. It was observed that if at all there was any loss in the shares representing the investments, it cannot be viewed as a trading loss or a revenue loss. The Tribunal held that the Assessing Officer was right when he contends that the assessee is not a dealer in shares in the absence of any provision in the memorandum of association for disinvestment in the shares held by the appellant. The alternate contention of the assessee was that the loss on the revaluation of the shares held by the assessee in the capital of the defunct co-operative societies should at least be viewed as a capital loss. The Tribunal observed that the assessee would be right if such loss was really incurred by it either by transfer, sale, exchange, relinquishment or extinguishment of such shares or the rights represented by such shares in the capital of the co-operative societies. The Tribunal then observed that there has been no transfer by the appellant of the shares held in the co-operative societies and as a matter of fact the assessee has no right to transfer the shares in view of the absence of the provision for disinvestment. It was also observed that the reduction of the value of the share from Rs. 100 to Re. 1 effected by means of book entries, unaided or unattended by transfer of such shares, i.e., mere revaluation of its investment on some basis may be a basis on which such revaluation was justified. The Tribunal after observing that "it is settled law that no man can make profit or loss out of trading with himself" held that the reduction in the value of the shares effected through book entries cannot be construed as a loss arising out of the transactions of trading in capital assets, much less revenue assets.

The Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 considered the question whether the assessee's claim for the exchange loss of Rs. 11 lakhs for the assessment year 1957-58 in respect of remittances of profit from Pakistan was not allowable as a deduction. The assessee, a company, which had its office in Calcutta, had a cotton mill situated in West Pakistan where it manufactured and sold cotton fabrics. During the assessment year 1954-55, the assessee earned huge profit in textile business amounting to Rs. 1,68,97,232 converted at the then prevailing rate of exchange of Rs. 100 Pakistani rupees to 144 Indian rupees. There was devaluation of Pakistani rupees restoring the parity between the Indian rupee and the Pakistani rupee. During the accounting period relevant to the assessment years 1957-58 and 1959-60, the assessee, after getting permission from the Reserve Bank of Pakistan remitted two sums, Rs. 25 lakhs and Rs. 12.5 lakhs, respectively. The assessee claimed that on remittance it suffered a loss of Rs. 11 lakhs and a Rs. 5.5 lakhs which has to be deducted in the computation of its total income. This was rejected by the Department and by the Tribunal. The High Court, on a reference, held that no loss was sustained on remittance of the amounts from West Pakistan and that in any event, the loss cannot be said to be a business loss because it was not arising in the course of the business of the assessee. The Supreme Court did not agree with the view of the High Court that no loss was suffered by the assessee on the remittance of the two amounts.

The Supreme Court then considered the question whether the loss suffered by the assessee was a trading loss. The court observed that this loss is not an allowable deduction under any express provision of section 10(2) but if it was a trading loss, it would be liable to be deducted in computing the taxable profit of the assessee under section 10(1). The Supreme Court observed as follows:

"The argument which found favour with the High Court was that the loss was caused on account of devaluation of the Pakistani rupee which was an act of the sovereign power and it could not, therefore, be regarded as a loss arising in the course of the business of the assessee or incidental to such business. This argument is plainly erroneous and cannot stand scrutiny even for a moment. It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it as pointed out by Venkatarama Aiyar, J., speaking on behalf of this court in Badridas Daga v. CIT [1958] 34 ITR 10 (SC), but it would not be correct to say that where a loss arises in the process of conversion of foreign currency which is part of trading asset of the assessee, such loss cannot be regarded as a trading loss because the change in the rate of exchange which occasions such loss is due to an act of the sovereign power. The loss is as much trading loss as any other and it makes no difference that it is occasioned by devaluation brought about by an act of State. It is not the factor or circumstance which causes the loss that is material in determining the true nature and character of the loss, but whether the loss has occurred in the course of carrying on the g business or is incidental to it. If there is loss in a trading asset, it would be a trading loss, whatever be its cause, because it would be a loss in the course of carrying on the business. Take for example, the stock-in-trade of a business which is sold at a loss. There can be little doubt that the loss in such a case would clearly be a trading loss. But the loss may also arise by reason of the stock-in-trade being stolen or burnt and such a loss, though occasioned by external agency or act of God, would equally be a trading loss. The cause which occasions the loss would be immaterial: the loss, being in respect of a trading asset, would be a trading loss. Consequently, we find it impossible to agree with the High Court that since the loss in the present case arose on account of devaluation of the Pakistani rupee and the act of devaluation was an act of sovereign power extrinsic to the business, the loss could not be said to spring from the business of the assessee . . ."

It was further observed that whether the loss suffered by the assessee was a

B trading loss or not would depend on the answer to the question whether the loss was in respect of a trading asset or a capital asset. It was observed thus:

"In the former case, it would be a trading loss but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital. This is the formulation of the test which is to be found in some of the English decisions. It is, of course, not easy to define precisely what is the line of demarcation between fixed capital and circulating capital, but there is a well recognised distinction between the two concepts. Adam Smith in his Wealth of Nations describes 'fixed capital' as what the owner turns to profit by keeping it in his own possession and 'circulating capital' as what he makes profit of by parting with it and letting it change masters. 'Circulating capital' means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursement, while 'fixed capital' means capital not so employed in the business, though it may be used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business. Vide Golden Horse Shoe (New) Ltd. v. Thurgood [1933] 18 TC 280 (CA). If there is any loss resulting from depreciation of the foreign currency which is embarked or adventured in the business and is part of the circulating capital, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss. ..."

The Supreme Court after referring to various decisions of the English and Indian courts, particularly the decisions of the Supreme Court in CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 and CIT v. Canara Bank Ltd. [1967] 63 ITR 328 held thus:

"The law may, therefore, now be taken to be well-settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. ..."

In determining the question as to whether the loss suffered by the assessee was a trading loss and whether the loss was in respect of a trading asset or a capital asset, the memorandum and articles of association of the company are also very relevant. We have already extracted the salient features and objects from the memorandum of association. It is seen that one of the main objects of the assessee-company was to aid, assist, finance and promote the interests of small industries in the State, run any industrial undertakings, projects or enterprise, whether owned or run by the Government, statutory body, private company, co-operative society, etc., by providing them with capital, credit, means or resources, supply of machinery and equipments on hire-purchase basis, etc., and also rehabilitation of defunct units, etc.

In the instant case, the loss suffered and claimed by the assessee-company relates to the investment made in the industrial co-operative societies to the tune of Rs. 80,20,588. The directors of the assessee-company in their report to the annual accounts for the year 1982-83 stated that the investment in shares in the co-operative societies to the extent of Rs. 80,20,588 has been written off in the profit and loss account considering the present position of these co-operative societies which are either defunct or under liquidation. This report of the directors of the assessee-company was the basis for reopening the assessment already completed.

The question as to whether the investment made by the assessee-company (in the instant case by the predecessor) pursuant to the objects of the company in the co-operative societies can be treated as stock-in-trade or a trading asset will necessarily have to be decided with reference to the memorandum and articles of associations of the assessee-company, of course, subject to the provisions of the Kerala Co-operative Societies Act. As already noted, one of the main objects of the company was to aid, counsel, finance, project and promote the interest of small-scale industries in the State, inter alia, co-operative societies. The assessee-company had invested money in the co-operative societies in the form of shares of the said societies. Whether these investments can be treated as stock-in-trade or trading asset is the question to be decided. The memorandum and articles of association of the company does not provide either for withdrawing the shares or for transferring such shares in the cooperative societies under any circumstances. Clause 36 deals with lending of monies to co-operative societies but, however, it is specifically stated that such lending shall not be for the purpose of banking business. Section 16 of the Kerala Co-operative Societies Act provides for membership in the co-operative societies. Section 22 provides for registration on holding shares. Section 23 deals with restriction on transfer of share or interest and section 24 deals with restrictions on withdrawal of shares. Section 16 also provides for the eligibility condition for being a member of the society. Section 22 provides that in any society no member other than the Government, any statutory or non-statutory board, committee or corporation approved by the Government in this behalf or any other society, shall hold more than such portion of the total share capital of the society, not exceeding one-fifth thereof, as may be prescribed. Section 23 provides that the transfer of a share or interest of a member in the capital of a society shall be subject to such conditions and restrictions as to the maximum holdings as are specified in section 22. It further provides that no transfer by a member of his share or interest in any society shall be valid unless the member has held such share or interest for not less than three years and the transfer is approved by the committee of the society. Section 24 provides that subject to the other provisions of this Act no withdrawal by a member of his share in a society shall be valid unless the member has held such share for not less than three years and such withdrawal is in accordance with the bye-laws of the society. These provisions would clearly show that the investment in a co-operative society in the form of shares cannot be attributed with the character of stock-in-trade, for transfer of a stock-in-trade there shall not be any restriction of the nature specified in the aforesaid provisions. As already pointed, there is no provision in the memorandum and articles of association of the assessee-company for transfer of the shares in the co-operative society at any point of time. Factually also, there is no instance of transfer of any shares in the industrial co-operative societies either by the assessee or by their predecessors.

There is no express provision in the Act providing for deduction of the amount claimed being the amount written off by the assessee in the profit and loss account. The claim for deduction of the said amount is made only under section 37 of the Act. Under section 37 of the Act any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Thus, in order to be eligible for the deduction of the expenditure incurred by an assessee, the expenditure should not be of the nature prescribed in sections 30 to 36 of the Act. It should not be of the nature of capital expenditure. It must be laid out or expended wholly and exclusively for the purpose of the business. The claim for deduction made by the assessee admittedly will not fall under sections 30 to 36. We have already taken the view that the expenditure of the nature claimed is a capital loss. Can it be said that the expenditure is for the purpose of the business of the assessee? The word "business" is defined in section 2(13) of the Act which includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. A Constitution Bench of the Supreme Court in Narain Swadeshi Weaving Mills v. Commr. of Excess Profits Tax [1954] 26 ITR 765 considered the question whether lease money obtained by the assessee-firm could legally be treated as business profits liable to excess profits tax. In that context the Supreme Court considered the definition of the word "business" in section 2(5) of the Excess Profits Tax Act which is similar to the definition of the word "business" in section 2(13) of the Act and observed thus:

"Whether a particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture is always a difficult question to answer. On the one hand, it has been pointed out by the judicial committee in CIT v. Shaw Wallace and Co. [1932] 2 Comp Cas 276; [1932] ILR 59 Cal 1343, that the words used in that definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity. The word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is."

The Supreme Court also observed that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to the ordinary commonsense principles. On the facts of that case, applying the legal principle, it was held that it is impossible to hold that the letting out of the plant, machinery, etc., was at all a business operation when its normal business activity had come to a close. The Supreme Court in Badridas Daga v. CIT [1958] 34 ITR 10 considered a claim for deduction of a loss sustained by a business by reason of embezzlement by an employee and held that it is an admissible deduction under section 10(1) of the Indian Income-tax Act, 1922, if it arises out of the carrying on of the business and is incidental to it. Venkatarama Aiyar, J., who delivered the judgment observed at page 15 of the report thus:

"The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act."

In this case the investment in the shares in the industrial co-operative societies cannot be treated as a trading activity, for, there is no purchase and sale involved in such transaction. In fact, the Tribunal, after referring to the clauses in the memorandum and articles of association of the assessee has observed that the investment made in the capital of the co-operative societies cannot by itself be considered as an object, though it is described as an object but can be viewed only as an exercise of power to enable the appellant-company to promote industrialisation in the small sectors in Kerala State. The Tribunal further observed that there is no power to withdraw the investment or to put it in modern terminology the power to disinvest after a certain stage of the development in the small industrial sectors. The Tribunal has accordingly held that the investment made by the appellant-company in the capital of the co-operative societies can be viewed only as its capital stock and cannot be viewed as part of its trading capital or circulating capital. It is in this view of the matter it was held that if at all there was any loss on the shares representing the investments, it cannot be viewed as a trading loss or a revenue loss. The Tribunal accepted the contention of the Department that the assessee is not a dealer in shares. The aforesaid findings of the Tribunal considered in the light of the principles laid down by the Supreme Court in the abovementioned cases are perfectly legal and justified. Going by the clauses in the memorandum and articles of association of the assessee-company and the provisions of the Kerala Co-operative Societies Act and the Rules, it is only to be held that the investment made by the assessee-company in the form of shares in the co-operative societies are only in the nature of capital investments in furtherance of the objects of the company and not as trading capital or circulating capital of the assessee-company.

The second contention of the assessee that even assuming that the shares in the co-operative societies cannot be treated as trading asset of the company, the loss on revaluation of the shares held by the assessee in the capital of the defunct industrial co-operative societies should at least be viewed as a capital loss was also not accepted by the Tribunal stating that such a contention would have been accepted if such loss was really incurred by it either by transfer, sale, exchange, relinquishment or extinguishment of such shares or the rights represented by such shares in the capital of the co-operative societies. The Tribunal observed that this is not the case of the appellant because there has been no transfer by the appellant of the shares held in the co-operative societies and as a matter of fact it cannot transfer the shares in view of the absence of the provision for disinvestment. The Tribunal took the view that the assessee had made only a revaluation of its investment on some basis without an extinguishment of the assets or rights therein as the shares are still existing with rights intact. The Tribunal has accordingly held that the reduction in the value of the shares effected through book entries cannot be construed as a loss arising out of transactions of trading in capital assets, much less revenue assets. Admittedly, there is no transfer of shares in the industrial co-operative societies resulting in any capital loss. The shares of the co-operative societies are kept intact despite the fact that the co-operative societies are either defunct or under liquidation. The assessee had only revalued the shares. For example, the value of the share was reduced from Rs. 100 to Re. 1 by means of book entries even though there was no transfer of such shares. Such revaluation though permissible in respect of stock-in-trade/trading assets and deduction can be allowed under section 37 of the Act in respect of the loss on such revaluation vide judgment dated March 1, 1999, in I.T.R. Nos. 52 and 53 of 1995 (CIT v. South Indian Bank Ltd. [2000] 241 ITR 374), the same cannot be allowed as a deduction in respect of the loss on account of revaluation of a capital asset. As already noted, there is no transfer of the shares held by the assessee-company in the co-operative societies and, therefore, there is no question of any loss being allowed. We do not find any illegality in the said findings of the Tribunal. We are in full agreement with the reasoning and conclusion of the Tribunal.

Though counsel for the parties relied on a few other decisions of the Supreme Court and other High Courts in support of their respective contentions, none of those decisions has any direct bearing on the legal issue involved in this case. Hence, we think it unnecessary to refer to those decisions in this judgment. In the circumstances, we answer the first question referred in the affirmative, i.e., in favour of the Revenue and against the assessee. The second question is also answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

 

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