Commissioner of Income Tax (Central) vs Bhandari and Co.

Ramanujam, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following question for the opinion of

this court :

Whether, on the facts and in the circumstances of the case, the loss incurred by the assessee in the sale of National Defence Remittance

Certificates was a business loss ?

The assessee is a registered firm having four partners. For the assessment year 1967-68, it declared a loss of Rs. 39,392 on account of loss

said to have been incurred by the purchase and sale of National Defence Remittance Certificates (for short ""N.D.R. Certificates""). The ITO,

however, took the view that as per s. 2(42A) of the I.T. Act, a certificate issued by an authorised dealer as defined in clause (ai) of s. 2 of the

Foreign Exchange Regulation Act as evidence of remittance of foreign currency or other foreign exchange is not to be treated as short-term capital

loss, the loss in this case arising out of the sale of N.D.R. Certificates should be treated as having arisen out of the transfer of long-term capital

assets. He, therefore, determined the income as under :

He also held that the loss arising out of the sale of N.D.R. Certificates cannot be treated to be a business loss as the purchase and sale of the

said certificates had no nexus to the actual business carried on by the assessee as importers and exporters. He also held that the loss determined as

above cannot be allowed to be carried forward for the return of income was not filed within the time allowed under s. 139(1).

Aggrieved by the order of the ITO, the assessee appealed to the AAC, contending that the loss arising out of the transfer of the certificates

should be treated as a loss arising out of the sale of short-term capital assets, even assuming that the loss is not a business loss. The AAC agreed

with the ITO that the loss is not a business loss and that the loss cannot also be treated as a loss arising out of the sale of short-term capital assets.

The assessee took the matter on further appeal to the Tribunal. The Tribunal was of the view that the nature of the transfer indicated that the

purchase and sale of the certificates were not solitary transactions and, therefore, the income arising out of such transactions could not be

considered as capital income as contended by the Revenue. The Tribunal also held that the transaction of sale and purchase of N.D.R. Certificates

having occurred during the normal course of business carried on by the assessee, the loss incurred in such a transaction should be considered as

business loss. The Tribunal having held that the loss in question is a business loss, it did not go into the question as to whether the loss could be

taken as a loss arising out of the sale of short-term capital assets as alleged by the assessee or as long-term capital assets as alleged by the

Revenue. Aggrieved by the decision of the Tribunal, the Revenue has come before us by way of this reference.

The form of the question referred to us is very much restricted and the question for our consideration is whether the loss arising out of the sale of

the N.D.R. Certificates is a business loss.

Admittedly, the assessee is carrying on business as importers and exporters as also money-lending business. The partnership deed under which

the firm was constituted provides that the assessee-firm was to carry on business in import and export and any other business as decided by the

partners of the firm. According to the assessee, the purchase and sale of N.D.R. Certificates directly arose out of the line of business carried on by

the assessee-firm. According to the assessee for the import and export business which was one of the authorised lines of business carried on by the

assessee, the assessee was required to carry on the sale and purchase of N.D.R. Certificates and, therefore, the sale and purchase of the said

certificates should be taken to be interlinked with the said business of import and export. This contention of the assessee has straightaway been

accepted by the Tribunal and on that basis, the Tribunal has taken the view that the purchase and sale of N.D.R. Certificates are connected with

the business of import and export. But the Tribunal has not referred to any material from which an inference is possible that the purchase and sale

of N.D.R. Certificates is actually interlinked with the business of import and export. It has not been shown by the assessee that the purchase and

the holding of N.D.R. Certificates was necessary or essential for carrying on the business of import had export, and that but for the purchase and

sale of N.D.R. Certificates, the assessee would not have been able to carry on the business of import had export. Further, it is seen that the

certificates had been purchased from six different parties on a particular day and they were sold also to different parties in November, 1966.

Though the transactions are not of a casual nature as has been found by the Tribunal, still the question is whether the purchase and sale of the

N.D.R. Certificates are in the course of carrying on the assessee''s business in import and export. The fact that the assessee has purchased the

certificates from different parties and sold them later to other parties cannot establish that it is a line of business that has been carried on by the

assessee apart from its usual business sin exports and imports. Even assuming that the partnership deed authorises the partners to carry on any

other business as decided by the partners of the partnership, the purchase and sale of N.D.R. Certificates cannot be taken to be a distinct business

or part of the business of import and export. We are, therefore, not inclined to agree with the Tribunal that the loss arising out of the purchase and

sale of N.D.R. Certificates is a business loss.

Apart from this aspect, it is seen that the statute itself postulates that a loss incurred on account of the purchase and sale of N.D.R. Certificates

should be treated as a long-term capital loss. Section 2(42A) of the Act brought in by the Finance Act of 1966 with effect from April 1, 1966,

defines ""short-term capital asset"" as under :

S. 2(42A) ''short-term capital asset'' means a capital asset held by an assessee for not more than twenty-four months immediately preceding the

date of its transfer but does not include a capital asset, being a certificate issued by an authorised dealer as defined in clause (ai) of section 2 of of

the Foreign Exchange Regulation Act, 1947 (VII of 1947), as evidence of the remittance of foreign currency or other foreign exchange [as defined

respectively in clause (c) and clause (d) of the said section] to India from a country outside India in accordance with the provisions of the said Act

and any rules made thereunder, during the period commencing on the 26th day of October, 1965, and ending on the 28th day of February, 1966,

or such later date as the Central Government may, by notification in the Official Gazette, specify in this behalf, notwithstanding that such capital

asset has been held by the assessee for not more than twenty-four months immediately preceding the date of its transfer.

It cannot be disputed that the N.D.R. Certificates are being issued normally by the Reserve Bank of India or by an authorised dealer as defined

in s. 2(ai). Thus s. 2(42A) considers the certificates such as N.D.R. Certificates as a long-term capital asset though such certificates have been held

by the assessee for more than twelve months which was the period relevant for this case. Therefore, the loss arising out of the transfer of the

N.D.R. Certificates should be taken to be a loss arising out of the sale of a long-term capital asset, in which case it cannot be taken to be a

business loss as has been held by the Tribunal. It cannot also be disputed that the assessment year in question falls within the period referred to in

s. 2(42A). When the statute makes a specific provision that the loss arising out of the sale of the N.D.R. Certificates should be taken to be a loss

arising out of the sale of long-term capital assets, it is not possible to hold, on the facts of this case, that the loss arising out of the sale of the

certificates will be a business loss. In this view of the matter, we are not inclined to agree with the view taken by the Tribunal in this case. The

question referred to us is, therefore, answered in the negative and in favour of the Revenue. There will be no order as to costs.