Tekson P. Ltd. vs Commissioner of Income Tax

U.T. Shah, J.—As per the direction of the Supreme Court in Civil Appeal No. 939(MT) of 1978 dated May 1, 1978, the Tribunal has drawn up a statement of the case and referred the following question to this court :

1"Whether, on the facts and in the circumstances of the case, the sum of Rs. 81,755 was allowable as a short-term capital loss ?"

The assessee is a private limited company and carries on the business of manufacture and sale of radiators, heat exchangers, oil coolers, brake hoses and hydraulic high pressure hoses. The assessment year is 1971-72 and the relevant previous year ended on March 31, 1971.

The assessee had floated a new company at Singapore under the name and style of Cooling Systems and Flexibles Pvt. Ltd. with the approval of the Central Government for the manufacture of automobile ancillaries. The total paid-up share capital of the Singapore company was to be Rs. 53,62,000 of which the equity contribution of the assessee was sanctioned at Rs. 12,80,000. Out of the equity contribution of Rs. 12,80,000, the assessee was required to contribute plant and machinery worth Rs. 12,50,000 and the balance of Rs. 30,000 in cash. The assessee purchased machinery aggregating to Rs. 12,73,560 during the relevant previous year and exported machinery valued at Rs. 9,49,230 to the Singapore company, in the next year. In the process of purchasing machinery and exporting the same to the Singapore company, the assessee suffered a loss of Rs. 81,755 as under :

During the assessment proceedings, the assessee claimed deduction of Rs. 81,755 as a trading loss or in the alternative as a short-term capital loss. It is not in dispute that the machinery purchased by the assessee was in fact sent to the Singapore company within a period of six months. The Income Tax Officer, however, disallowed the claim made by the assessee both in respect of trading loss as well as capital loss by way of "short-term capital loss". The action of the Income Tax Officer was confirmed both by the Appellate Assistant Commissioner of Income Tax as well as by the Tribunal.

Learned counsel for the assessee strongly argued that, since the assessee had purchased capital assets which were transferred to the Singapore company in exchange for equity shares worth Rs. 12,80,000, the loss suffered by the assessee was a short-term capital loss and should have been allowed as such by the Income Tax authorities as well as the Tribunal. In this connection, he invited our attention to the definition of the word "transfer" contained in section 2(47) of the Act as well as the provisions relating to capital gains contained in the Act, more particularly sections 45, 47, 48, and 49. According to him, the Income Tax authorities as well as the Tribunal have failed to appreciate the assessee''s case in the proper perspective as the assessee was required to purchase machinery in India which was a capital asset in its hands and was required to send the same to the Singapore company in exchange of equity shares as per the approval of the Government of India. He also pointed out that, in fact, the assessee was given duty drawback and cash assistance on the export of the machinery. He, therefore, submitted that the loss suffered by the assessee should be allowed as a short-term capital loss.

Learned counsel for the Revenue, on the other hand, supported the action of the Income Tax authorities as well as the Tribunal. In this connection, he read out certain portions of the order of the Tribunal to impress upon us that the loss suffered by the assessee cannot be treated as a short-term capital loss. According to him, the assessee has transferred nothing to the Singapore company as, under the approval of the Government of India, the assessee was required to supply machinery to the Singapore party. He, therefore, urged that we should hold that the loss suffered by the assessee cannot be treated as a short-term capital loss.

On a due consideration of the submissions of the parties and the material available on record, it is difficult to resist the claim made by the assessee about the short-term capital loss in purchasing machinery in India and exporting it to the Singapore company. It is quite apparent that, under the approval of the Government of India, the assessee was required to purchase and supply machinery to the Singapore company against which it would receive equity shares of Rs. 12,50,000. If this transaction is to be looked at in the proper perspective then there is no doubt in our mind that there was a transfer of a capital asset by the assessee to the Singapore company and, in the process of the transfer of the said capital asset, the assessee had suffered a loss of Rs. 81,755 as worked out above.

In this view of the matter, we answer the question which is before us in the affirmative and in favour of the assessee. No order as to costs.