Holding

The loss on the sale of government bonds bought to further the assessee's business with the government is a revenue loss deductible as a business loss, and the High Court erred in re‑examining the Tribunal's factual findings.

Summary

Patnaik & Co., an automobile dealer, claimed a loss of Rs.53,650 on the sale of its subscription to the Orissa Government Loan 1972, arguing it was a revenue loss deductible against future profits. The Income Tax Officer treated it as a capital loss, but the Income Tax Appellate Tribunal held it was a business loss because the investment was made to secure government orders and retain goodwill. The Orissa High Court, on a reference, re‑examined the facts and declared the loss a capital loss, exceeding its jurisdiction. The Supreme Court held that the loss was a revenue loss, affirmed the Tribunal’s factual findings, and ruled that the High Court could not re‑evaluate those facts. Consequently, the appeal was allowed, the High Court judgment set aside, and the loss allowed as a business deduction.

Issues considered

Whether the loss incurred on the sale of government bonds purchased to increase business with the government constitutes a capital loss or a revenue (business) loss.
Whether the High Court can re‑examine the factual findings of the Income Tax Appellate Tribunal in a reference under the Income Tax Act.
Whether the Supreme Court may decide the question of law directly to avoid further delay instead of remanding the reference to the High Court.

Legislation cited

Income Tax Act, 1961
Supreme Court Rules, 1966s. Order XL VII Rule 6

Subjects

business losscapital lossrevenue lossgovernment securitiesincome tax deductionappellate tribunalhigh court jurisdictionreference under Income Tax ActSupreme Court Rules

Judgment

r A

PATNAIK & CO. LTD.
v.
THE COMMISSIONER OF INCOME TAX, ORISSA
B
' JULY 16, 1986

I. \
\
[R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.]

Business loss-Purchase of Government bonds or securities with
the object of increasing the assessee's business with the Government
and/or retaining the goodwill of the authorities for the purpose of its c
business and loss incurred thereby-Whether capital loss or revenue
loss.

Jurisdiction of the High Court in a reference under the Income
Tax Act-Interference with finding of facts, whether permissible. D

Supreme Court Rules, 1966 Order XL VII Rule 6-Supreme
Court can itself decide the questions referred to the High Court to avoid

+ further delay instead of remanding the case.

The assessee deals in automobiles and also sells spare motor parts. E
For the assessment year 1963-64 the assessee claimed a loss of Rs.53,650
sustained by ,it on disposing of its subscriptions to the Orissa Govern-
ment floated Loan 1972. It claimed that the loss suffered by it was
) revenue loss and, therefore, deductible against the profits for future
years. The Income Tax Officer and the Appellate Commissioner of
\
mo( Income Tax negatived the claim of the assessee. But ou second appeal, F
the Appellate Tribunal accepted the contention that the subscription to
the Government loan was conducive to its business and that the loss
arose in the course of the business, and that therefore, the assessee was
entitled to a deduction of the loss claimed by it. But the High Court on a
reference to it at the instance of the revenue, held that the loss was a
capital loss. The High Court was of the view that the factual substratum G
of the case had been misconceived by the Appellate Tribunal and that it
.J \ was, therefore, entitled to re-examine the evidence and arrive at its own
findings of fact. Hence this appeal by special leave.

Allowing the appeal, the Court1
H
208 SUPREME COURT REPORTS [1986] 3 S.C.R.

A HELD: 1.1 Whether Government bonds or securities were pur-
chased by the assessee with a view to increasing his business with the
Government or with the object of retaining the goodwill of the
authorities for the purpose of his business, the loss incurred on the sale
of such bonds or securities was allowable as a business loss. l212F-GI
B
1.2. Having regard to the sequence of events and the close prox-
imity of the investment with the receipt of Government orders i; is clear
that the investment, in the instant case, was made in order to further
the sales of the assessee and boost its business. In the circumstances, the
investment was made by way of commercial expediency for the purpose
I
I
of carrying on the assessee's business and therefore the loss suffered by
c the assessee on the sale of the investment must be regarded as a revenue
loss. [211H; 212A-BJ

1.3 No enduring benefit was brou~ht about by the assessee invest-
ing in the loan so far as the orders from the Government Departments
D were concerned. The material on record shows that on August 30, 1961
it was decided to purchase 16 jeeps, 8 trucks and 4 one.tonne pick up
vans. There was nothing to show that there was any reason for the
assessee to hold on to the investment in the loan indefinitely. The invest-
ment did not bring in an asset of a capital nature, and that in the

E
circumstances of the case the loss suffered by the assessee was a revenue
loss and not a capital loss. l212D-F] +
Commissioner of Income· Tax v. Industry and Commerce Enter-
prises (P) Ltd., I1979] 118 ITR 006 (Orissa); Additional Commissioner
of Income-tax, Madras-II v. B.M.S. (P) Ltd., [1979] 119 ITR 321
(Mad); Commissioner of Income-tax, Tamil Nadu-V v. Dhandayutha-
F pani Foundry (P) Ltd., [1980[ 123ITR 709 (Mad) approved.
I
:)Im
2. It is now well settled that the Appellate Tribunal is the final
fact-finding authority under the Income-tax Act and that the Court has
no jurisdiction to go behind the statements of fact made by the Tribunal
in tis appellate order. The Court may do so only if there is no evide~ce to
G support them or the Appellate Tribunal has misdirected itself in law in
arriving at the findings of fact. But even there the Court cannot disturb the
findings of fact given by the Appellate Tribunal unless a challenge is
directed specifically by a question framed in a reference agiiinst the validity
of the impugned findings of fact on the gronnd that there is no evidence to
support them or they are the result of a misdirection in law. [2 IOE-G]
H
PATNAIK & CO. v. C.l.T. [PATHAK, J.J 209

India Cements Ltd. v. C.I. T., 60 ITR 52, 64; Hazarat Pirahomed A
Shah Saheb Roza Committee v. CIT, 63 ITR 490, 495-6; C.I. T. v.
Greaves Cotton & Co. Ltd., 68 ITR 200; C./. T. v. Meenakshi Mills
Ltd., 63 ITR 609, 613; C.I. T. v. Madan Gopal Rad/,ey Lal, 73 ITR
652, 656; Hooghly Trust Ltd. v. C./. T., 73 ITR 685, 690; C.I.T. v.
Imperial Chemical Industries (India) Ltd., 14 ITR 17; Aluminium B
Corporation of India Ltd. v. C./. T., 86 ITR 11 and Commissioner of
Income-tax, Bihar and Orissa v. S.P. Jain, 81 ITR 370 referred to.

'
\

~-
3. In the case of a reference under the Income Tax Act which has
remained pending through its successive stages for the last several years
and as a result of the Supreme Court setting aside the judgment of the
High Court, the case has to go back to the concerned High Court to
answer the question of law referred to it, the Supreme Court to avoid
further delay can itself decide the said question oflaw. l211C-D I
C

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1359
~cl~ D
From the Judgment and Order dated 11.1.1974 of the Orissa
High Court in Special Jurisdiction Case No. 62 of 1972.

t Govind Das, P.N. Misra, D.C. Taneja and P.K. Juneja for the
Appellant, E
V.S.Desai, P.K. Bhatnagar and Miss A. Subhashini for the
Respondent.

) The Judgment of the Court was delivered by
F
PATHAK, J. This appeal by special leave is directed against the
judgment of. the High Court of Orissa and raises the familiar question
whether a loss suffered by the assessee is a capital loss or a revenue
loss.

The assessee deals in automooiles and also sells spare. motor G
parts. For the assessment year 1963-64, the relevant accounting period
being the year ended March 31, 1963, the assessee claimed ·a loss of
Rs.53,650 sustained by it on disposing of its subscription to the Orissa
Government Floated Loan 1972. It claimed that the loss suffered by it
was revenue loss and, therefore deductible against its profits for the
year. The Income-tax Officer disallowed the loss in the view that it was H
210 SUPREME COURT REPORTS [1986) 3 S.C.R.

A a capital loss. The assessee's appeal was dismissed by the Appellate
Assistant Commissioner of Income-tax. But on second appeal the
Income-tax Appellate Tribunal accepted the contention of the asses-
see that the subscription to the Government Loan was conducive to its
business and that the toss arose m the course of the business, and that
B therefore, the assessee was entitled to a deduction of the loss claimed
by it. The Accountant Member and the Judicial Member wrote sepa-
rate but concurrent orders. At the instance of the Revenue the Appel-
late Tribunal referred the case to the High Court of. Orissa for its
opinion on the following question of law·

"Whether, in the facts and circumstances of the case, the
C loss of Rs.53,650 sustained by the assessee on the sale of
the Government Loan is a capital loss or a revenue loss."

Disagreeing with the findings of the Appellate Tribunal the High
Court held that the loss was a capital loss and accordingly answered
D the reference in favour of the revenue and against the assessee.

At the outset, we find it necessary to note that the High Court
has taken the view that the factual substratum of the case has been
misconceived by !he Appellate Tribunal and that it is, therefore, en-
titled to re-examine the evidence and arrive at its own findings of fact.
E We think the High Court fell into serious error in doing so. It is now
well settled that the Appellate Tribunal is the final fact-finding author-
ity under the Income-tax Act and that the Court has·no jurisdiction to
go behind the statements of fact made. by the Tribunal in its appellate
order. The Court may do so only if there is no evidence to support them
or the Appellate Tribunal has misdirected itself in law in arriving at the \
F findings of fact. But even there the Court cannot disturb the findings
of fact given by the Appellate Tribunal unless a challenge is directed
specifically by a question framed in a reference against the validity of
the impugned findings of fact on the ground that there is no evidence to
support them or they are the result of a misdirection in law. There is a
long line of cases decided by this Court laying down this proposition.
G See India Cements Ltd. v. C.I. T, 60 ITR 52, 64; Hazarat Pirmahomed
Shah Saheb Roza Committee v. C.I. T, 63 ITR 490, 495-6; C.I. T. v.
Greaves Cotton & Co. Ltd., 68 ITR200; C.I.T. v. Meenakshi Mills Ltd.,
63 ITR 609, 6I3; C.I. T. v. Madan Gopal Radhey Lal, 73 ITR 652, 656;
Hooghly Trnst ?...td. v. C.I. T., 73 ITR 685, 690; C.I. T. v. Imperial
Chemical Industries (India) Ltd., 74 ITR 17 and Aluminium Corpon.
H of India Ltd. v. C.l. T., 86 ITR 11. The High Court has relied on Com-
PATNAIK& CO. v. C.l.T. [PATIIAK, J.[ 211

missioner of Income-tax, J:J1har and Orissa v. S. P. Jain. 87 !TR 370 to A
justify its re-examination of the evidence and to supersede the findings
of fact rendered by the Appellate Tribunal by findings of fact reached
by itself. In that case, however, the questions raised in the Reference
before the High Court included questions specifically challenging the
findings of fact reached by the Appellate Tribunal as being invalid in B
law. In the present case the question referred to the High Court was
framed on the assumption that it had to be decided in the factual ,
matrix delineated by the Appellate Tribunal: In the circumstances, the
findings of fact set forth in the judgment of the High Court must be
vacated. We would have sent the case back to the High Court requir-
ing it to answer the question of law referred to it on the basis of the
facts found by the Appellate Tribunal but we refrain from doing so and C
propose to dispose of the Reference ourselves on the statements of
fact contained in the appellate order of the Appellate Tribunal. The
case has remained pending through its successive stages for the last
over 20 years, and it is appropriate that it should be disposed of now
without further delay. D

According to the statement of the case drawn up on the basis of
the appellate order of the Appellate Tribunal the assessee was told
that if it subscribed for the Government Loan preferential treatment
would be granted to it in the placing of orders for motor vehicles
required by the various Government Departments and to the further E
benefit of an advance from the Government up to 50 per cent of the
value of the orders placed. Pursuant to that understanding, an advance
to the extent of Rs.18,37,062 was received by the assessee and a Circu-
lar was also issued by the State Government to various Departments to
) make purchases of the vehicles required by them from the assessee.
Because of the advance received from the Government, the assessee F
..... was able to save Rs.45,000 as bank interest during the year. It was also
noticed that the sales shot up substantially. On September 4, 1961 the
assessee made a deposit of Rs.5 Lakhs consequent upon a Resolution
of the Board of Directors passed about 6 weeks before after a state-
ment made by the Chairman during the Board meeting that the Gov-
ernment had approached him to subscribe to the Government Loan G
and that the Company should do so as good orders could be expected.
The purchase of the loan was approved by the Board of Directors and
was ratified in the Annual General Meeting of the shareholders held
on December 31, 1961. The Appellate Tribunal found that having
regard to the sequence of events and the close proximity of the invest-
l)lent with the receipt of Government orders the conclusion was ines- H
212 SUPREME COURT REPORTS [1986] 3 S.C.R.

A capable that the investment was made in order to further the sales of
the assessee and boost its business. In the circumstances, the Appel-
late Tribunal held that the investment was made by way of commercial
expediency for the purpose of carrying on the assessee's business and
that therefore, the loss suffered by the assessee on the sale of the
B investment must be regarded as a revenue loss. We are .of opinion that
the Appellate Tribunal is right.

The.High Court, as has been mentioned, re-examined the facts
on the record and found that the investment was not connected with
the orders placed by. the Govermnent with the assessee and the
advance payment made by the Government Departments to the asses-
c see, and it was in that context that the High Court held that the
investment in the Loan was a capital asses! and the loss was a capital
loss. The High Court took the view that the investment was of endur-
ing benefit to the assessee and therefore it could not be allowed. We
find it difficult to hold that an enduring benefit was brought about by
D the assessee investing in the Loan. So far as orders from the Govern·-
ment Departments were concerned the material on record shows that
.on August 30, 1961 it was decided to purchase 16 jeeps, 8 trucks and 4
one-tonne pick-up vans. There is nothing to show that there was any
reason for the asscssee to hold on to the investment in the loan indefi-
nitely. There was no enduring advantage. Accordingly we hold that
E the investment did not bring in an asset of a capital nature, and that in
the circumstances of the case the loss suffered by the assessee was a
revenue loss and not a capital loss. It was held by the Orissa High
Court in Commissioner of Income-tax v. Industry and Commerce En-
terprises (P) Ltd., [1979] 118 ITR 606 and by the Madras High Court in
Additional Commissioner of Income-tax, Madras-II v. B.M.S. (P) \
F Ltd., [1979] 119 ITR 321 and again in Commissioner of Income-tax,
Tamil Nadu-V v. Dhandayuthapani Foundry (P) Ltd, [1980] 123 ITR
709, that where Government bonds or securities were purchased by
the assessee with a view to increasing his business with the Govern-
ment or with the object of retaining the goodwill of the authorities for
the purpose of his business, the loss incurred on the sale of such bonds
G or securities was allowable as a business loss.

We hold that the High Court has erred in the view taken by it and
that the Tribunal was right in allowing the appeal.

H
PATNAIK & CO. v. C.l.T. [PATHAK, J.J 213
A
In the result the appeal is allowed, the judgment of the High
Court is set aside and inasmuch as the loss is a revenue loss the
question referred to the High Court is answered in favour of the asses-
see and against the Revenue. The assessee is entitled to its costs of this
appeal.
B
S.R. Appeal allowed.

j