COMMISSIONER OF INCOME-TAX VS CHASE TRADING CO, 2000 PTD-BOMBAY-HIGH-COURT-INDIA 2336 (1997)

Income-tax---

----Business loss---Firm---Firm dealing in shares---Loss arising from sale of shares to partners---Finding of Tribunal that sale was a commercial transaction---Loss was allowable---Indian Income Tax Act, 1961, S.28.

The assessee was a firm dealing in shares. During the course of business 10,000 shares in a company, K, were acquired at Rs.10 per share. The assessee had shown these shares as its stock-in-trade. Two partners of the assessee-firm, purchased 8,000 and 2,000 shares, respectively, from the assessee at the rate of Rs.4 per share. The assessee claimed a loss of Rs.60,000 as the result of this. transaction as a business loss for the assessment year 1972-73. The Income-tax Officer disallowed the claimbut the Tribunal recorded its finding that the transaction in question, i.e., sale of shares by the assessee-partnership firm to its partners was purely a commercial transaction. It allowed the deduction. On a reference:

Held, that under the Income Tax Act, 1961, a firm is a distinct assessable legal entity. In commercial life, a firm borrowing from or lending to its partners, selling or purchasing goods or other assets to or from its partners or giving premises on lease or taking premises on lease from its partners are common and acceptable. Merely because the transaction is between the firm and its partners, it will not mean that there cannot be a trade or profit between the partnership firm and its partners. On the facts before it; the Tribunal was right in coming to the conclusion that the transaction in question was purely a commercial transaction. The loss was allowable as business loss.

CIT v. Kaluram Puranmal (1979) 119 ITR 564 (Bom.) and Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 (SC) ref.

Dr. V. Balasubramaniam, Senior Advocate with T. U. Khatri and J. P. Deodhar for the Commissioner.

Nemo for the Assessee.

JUDGMENT

A. Y. SAKHARE, J.---By this reference at the instance of the Revenue (Commissioner of Income-tax, Bombay City-IV, Bombay), under section 256(1) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal, Bombay Bench "E", has referred the following two questions of law to this Court for opinion:

"(1) Whether, on the facts and in the circumstances of the case, there was evidence before the Tribunal to hold that the sale of shares of Kay Jay Industries (Pvt.) Ltd. by the -firm to the partners under consideration was a commercial transaction?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that on transfer of shares of Kay Jay Industries (Pvt.) Ltd. by the firm to the partners, the claim of loss is allowable as business loss?"

The assessee---Chase Trading Company, a partnership firm deals in shares. During the course of business 10,000 shares of Kay Jay Industries (Pvt.) Ltd. were acquired at Rs.10 per share. The assessee had shown these shares as its stock-in-trade. The value of the said shares in the balance-sheet of the assessee as on the last date of the accounting period relevant to the assessment year 1972-73 stood at nil. Smt. S. D. Jajodia and Smt. R. D. Jajodia, two partners of the assessee-firm purchased 8,000 and 2,000 shares,respectively, from the assessee at the rate of Rs.4 per share. The assessee claimed a loss of Rs.60,000 a result of this transaction as business loss for the assessment year 1972-73.

The Income-tax Officer disallowed the claim of business loss on the ground that the partnership firm, the assessee, and the partners thereof could not be treated as different entities, therefore, the sale of shares to the two partners amounted to a sale to self and consequential loss as claimed by the assessee could not be allowed. The assessee challenged the said decision in appeal. The Appellate Assistant Commissioner of Income-tax confirmed the order passed by- the Income-tax, Officer. The assessee carried the matter further in appeal to the Income-.tax Appellate Tribunal, Bombay Bench "E", wino was pleased to allow the appeal and declared that the transaction in question was purely commercial transaction, the assessee is a dealer in shares; the assessee has shown the shares as its stock-in-trade and that the assessee will be entitled to claim and must be allowed a business loss as claimed by the assessee.

The Revenue; being dissatisfied of the decision of the Tribunal, sought reference to this Court for its opinion on two questions referred to above. The first question is' whether there was evidence before the Tribunal to come to the conclusion that the transaction in the instant case was a commercial transaction and the second question is whether, on the facts and circumstances of this case, the Tribunal was right in holding that the claim of loss is allowable as business loss.

On the first question, i.e., sale of shares by the assessee-partnership firm to its partners is purely a commercial transaction. The said conclusion/finding is arrived at by the Tribunal on the basis that the assessee is a dealer in shares, has shown the shares as its stock-in-trade and this fact has not been disputed by the Revenue. The said fact is also borne out by the accounts maintained by the assessee. The Tribunal has further recorded that the Revenue stated before it that the Revenue would have taxed the assessee, if the transaction had resulted in profit. On this reasoning, the Tribunal has found that the transaction in question is purely a commercial transaction. We find no reason to differ--with the said finding. On the facts before the Tribunal, the Tribunal was right in coming to the conclusion that the transaction in question was a purely commercial transaction.

On the second question, the Tribunal has held that the assessee can Claim the loss as business loss. As stated hereinabove the shares were acquired by the assessee at the rate of Rs 10 per share and were sold to its two partners at the rate of Rs.4 per share. In this transaction, tile assessee suffered loss of Rs.60,000. The assessee claimed That this loss is allowable as business loss.

The Income-tax Officer and the Appellate Assistant Commissioner of Income-tax, have disallowed the assessee's claim on the ground that the partners could not be treated as different entities from the partnership firm, the sale of shares by the partnership firm to its partners amounted to a sale to self, the partnerships firm could not be assessed to income independent of its partners and whatever belongs to the partnership firm, in fact, belongs to the partners. The Tribunal has found that there can be a transaction between the partnership firm and its partners and the present transaction being a commercial transaction the assessee was entitled to claim business loss. Under the Income-tax Act, a partnership firm is a distinct/separate assessable legal entity. In commercial life, the partnership firm borrowing from or lending to its partners, selling or purchasing goods or other assets to or from its partners or giving premises on lease or taking premises on lease from its partners are common and, acceptable. Merely because the, transaction is between the partnership firm and its partners; it will not result in the consequence of, application of the principle that there cannot be a trade or, profit between the partnership firm and its partners. This Court, in- a judgment delivered, in the case of CIT v. Kaluram Puranmal (1979)119 ITR 564, has held as under (headnote):

"In income-tax law a partnership firm is a distinct assessable legal entity. From this it would not follow that all transactions between the firm and its partners, whatever be their nature, whatever be the reasons there for, are to be regarded as equivalents of ordinary transactions between two separate legal entities: Similarly, from the fact that in general jurisprudence a firm is not. invested with, legal. personality, it would not follow that any, transaction between the firm and its partners will be required to be considered as an internal partnership arrangement and- cannot be regarded as giving rise to legal consequences similar to a transaction between two separate entities. In the realities of commercial life one will find a firm borrowing from or lending to its partner, giving premises on lease to or taking premises on lease from its partner and, similarly, selling or purchasing goods and other assets to or from its partner or partners. Merely because a transaction is between a firm and its partner it will not result in the consequence or application of the principle that since the firm is not separate in law from its partners, there cannot be any, trade or profit as between the two or flowing from the transaction between the two."

On behalf of the Revenue, reference was made to the decision of the Supreme Court in the case of Malabar Fisheries Co. v. CIT (1979) 120 ITR 49. The reliance placed upon the aforesaid decision is misconceived as the Supreme Court was dealing with the case of distribution of assets between the partners after dissolution of partnership. The test applicable to the distribution of assets after a partnership is dissolved will be totally different from the test which will be applicable to transactions between an existing partnership firm and its partners. As the Supreme Court has dealt with the question of distribution of assets to its partners after the partnership is dissolved, the law laid down by the Supreme Court will not be applicable to the facts of the present case.

Thus, in the present case, the transaction between the partnership firm and its partners being a commercial transaction, the assessee must be allowed the loss suffered by it as its business loss.

In view of the above, the question referred to us will have to be answered in favour of the assessee and against the Revenue.

Answer to question No.l is in the affirmative and against the Revenue.

Answer to question No.2 is also in the affirmative and against the Revenue.

Reference is disposed of accordingly. Parties to bear their respective costs of the reference.

M.B.A./4158/FCOrder accordingly.