1. There are two appeals by two different assessees' involving common issues. There are also two cross-appeals by the revenue in respect of these two assessees. The assessment year involved is 1990-91. Since, facts in both the assessees' cases are identical, these appeals are being disposed of by a common order for the sake of convenience.
2. The first common issue arising out of these two assessees' appeals is whether an income/loss arising from the sales of the shares could be assessed as business income/loss. The other issue which is common in revenue's appeals is whether the loss shown by the assessees on the sale of shares if fictitious or bogus.
3. It has been admitted before us by the learned Counsel for the assessees as well as by the learned-Sr. Departmental Representative that facts in both the cases are identical and, therefore, decision given in one case, would be binding in other case. Therefore, we are mentioning the facts of only one case, i.e., M/s. Atlas Corporation.
4. Assessee declared its income for the assessment year at Rs. 40,791.
According to the assessee the only activity carried on by it was purchase of shares by way of investment and sales thereof. Therefore, it declared income arising out of sale and purchase of shares under the head 'Capital gains'. It also earned income by way of dividend which was declared under the head Income from other sources'. Details of income declared by the assessee rnay be summarised as under:Capital gainsShort-term capital loss Rs. 3 6,97,145Long-term capital gain Rs. 50,85,681 Less: Deductions Rs. 30,55,008 Rs. 20,30,673Long-term capital loss Rs. 99,610 Net capital loss Rs. 17,66,088Income from other sources Less : Deductions Rs. 9,24,653 Rs. 18,06,879 Total income Rs. 40,791 On detailed investigations made by the AO, two findings were given by him, viz., (i) on the basis of its conduct, assessee neither could be called an investor company not its share transactions could be treated as normal investments and the profit and loss generated from the transactions were, therefore, to be treated as profits and gains from business and, therefore, assessable Under Section 28 of the Act and not under the head capital gains as claimed by the assessee; and (ii) that all the transactions made by the assessee in shares which generated losses were artificial, non-genuine and sham and were transacted with an ulterior motive to evade the taxes. These findings are recorded in paras-11 and 17 of the assessment order. On appeal, the CIT(A) dis not agree with the AO that the transactions in shares were fictitious or artificial. However, it was held by him that income/loss in purchase of shares was assessable under the head "Business income". Aggrieved by this order, both the assessees as well as the revenue are in appeal before the Tribunal.
5. In order to understand and appreciate the case correctly, the factual background of the case has to be seen in detail. Assessee was an Association of Persons, formed by a memorandum of association dated 20th April, 1984, comprising of three parties, viz., (i) M/s. Nechville Investment & Trading Co. Ltd. (hereinafter called "Nechville Co."); The object of the AOP was of acquiring and holding of any type of movable and immovable assets including shares, debentures and securities by way of investments or to trade in or deal with them.
Their share in the profit and loss was in the ratio of 61%, 38% and 1% respectively. Initially, M/s. Raipur Trading Co., contributed its capital by way of rights acquired by it on the holding of 93,750 equity shares of M/s. Oswal Agro Mills Ltd., valued at Rs. 13,12,500 at the rate of Rs. 14 per share. This amount was credited to its account. M/s.
Nechville Co., contributed a sum of Rs. 16,50,000 while Shri Abhaykumar Oswal contributed only Rs. 600. Out of the sum of Rs. 16,50,000, a sum of Rs. 3 lakhs was repaid by the association to M/s. Raipur Trading Co., and, therefore, the net capital in the account of M/s. Raipur Trading Co., stood at Rs. 10,12,500 at the end of the year. The assessee was entitled to 45,000 rights shares and 22,500 debentures of the said Oswal Co. Therefore, it applied for 45,000 right shares by making part payment of Rs. 5 per share and for 22,500 debentures by making payment of Rs. 50 per debenture. Thus, the total value of shares and debentures was shown at Rs. 26,62,500 on assets side of the balance-sheet for the year ending 30-6-1984. There was no other transaction in shares or debentures during the year except a small transaction in which a loss of Rs. 94.92 was incurred which was offered as business loss in the return filed by the assessee and accepted as such by the department Under Section 143(1). These details form part of the balance-sheet appearing at page 7 of the paper book.
6. In the next year ending 30-6-1985 relevant to assessment year 1986-87, assessee sold 22,500 debentures which were allotted by Oswal Company in the preceding year. These debentures were sold at a loss of Rs. 1,18,125. Besides this, assessee also earned profit of Rs. 79,900 on the purchase and sales of shares during the year itself. Assessee also paid the balance payment of Rs. 5 per share in respect of 45,000 rights shares. Thus, the holding of shares at the close of this year remained at 45,000 rights shares of M/s. Oswal Agro and these have been shown in the balance-sheet at Rs. 17,62,500. The profit and loss arising out of the aforesaid sales was declared by the assessee as short-term capital gain/loss which has been accepted by the department as such Under Section 143(1).
7. In the next year ending on 30-6-1986, relevant for assessment year 1987-88, assessee was again offered 27,900 rights shares of M/s. Oswal Agro which were purchased at the rate of Rs. 25 per share amounting to Rs. 6,97,005. Thus, the total holding of shares of Oswal Agro Mills increased to 72,900 at the end of the year. Besides this, assessee also purchased and sold the debentures during this year itself and incurred loss of Rs. 97,915. This loss was declared as short-term capital loss which was also accepted by the department Under Section 143 (1). In the next year, i. e., assessment year 1988-89, there was no change in the holding of shares of Oswal Agro Mills. However, assessee purchased 38,250 shares of Bindal Agro Chem Ltd., directly from the company at the rate of Rs. 10 per share at the time of public issue. So, the shareholding of both these companies was shown by the assessee in the balance-sheet by way of investments. Assessee had also purchased and sold debentures of Oswal Agro Mills and Bindal Agro Chem Ltd., during this year itself and incurred a loss of Rs. 2,07,754 which was declared by the assessee as short-term capital loss and the department again accepted the same as such Under Section 143(1).
8. In the next year, i.e., assessment year 1989-90 (previous year ending on 31-3-1989) there was no change in the investment in shares of M/s. Bindal Agro Chem Ltd. However, there was a change in the holding of shares of Oswal Agro Mills as the assessee had received 64,740 bonus shares of Oswal Agro Mills. The shareholding in respect of shares of Oswal Agro Mills relatable to original holding increased to 1,37,640.
However, the total holding in the shares of Oswal Agro Mills by way of investment was shown by the assessee at 3,48,010 shares. The difference represents the shares purchased during this year. The assessee declared short-term capital loss of Rs. 3,47,795 in the purchase and sale of shares made during this year itself. Again, this loss was accepted by the revenue as such Under Section 143(1).
9. In the assessment year 1990-91, with which we are concerned, assessee dissolved the said association on 31 -3-1990, terms of which were reduced into writing on the 7th day of April, 1990. During this year, out of 1,37,640 shares of Oswal Agro relating to original holdings, 21,000 shares were sold to M/s. Jagjit Sugar Mills. Balance 1,16,640 shares of Oswal Agro which relate to original holdings as well as 38,250 shares of M/s. Bindal Agro Chem Ltd. which remained unsold at the time of dissolution were distributed between the two members of the association, viz., Nechville Co., and Raipur Trading Co., in the ratio of 61 % and 39% as per the terms of memorandum of association and dissolution deed. The value of these shares was taken at the market value which is not in dispute. The income arising out of such distribution of shares among members amounted to Rs. 50,85,681 which was offered by the assessee as long-term capital gain. This has been assessed by the AO as business income. On the other hand, assessee also declared short-term capital loss arising from the purchase and sale of shares at Rs. 36,97,145 which has been held by the AO as bogus loss but has been held as business loss by the CIT(A).
10. Before dealing with the contentions of the parties, we would like to refer the reasonings given by the lower authorities in respect to the findings recorded by them. The finding of the AO that assessee was dealer in shares and debentures, has been sustained by the CIT(A) on the following reasons: (i) that the purchase and sale of shares and debentures in assessment year 1990-91 and in earlier years clearly show that assessee AOP was carrying on substantive business activity in a systematic and organised manner with motive to earn profits; (ii) that assessee had started borrowing funds from assessment year 1989-90 for the purpose of purchasing shares and debentures. The huge borrowings in crores were only with a view to accelerate the business activities on high scales; (iii) that assessee had purchased and sold shares and debentures mostly of two companies, i.e., M/s. Oswal Agro Mills Ltd., and M/s.
Bindal Agro Chem Ltd., which were quoted in the stock exchange and were easily saleable in the market; (iv) that mostly shares of Oswal Agro Mills and Bindal Agro Chem Ltd., were obtained by allotment at the cost of Rs. 10 and some premium per share at a time when the market price was around Rs. 100 per share; (v) tha't the magnitude of the transaction was very large in earlier years as well as in assessment year 1990-91; (vi) that the assessee had shown income from the sale of shares in the profit and loss account which indicated that assessee had treated the transactions as business venture in the books of account; and (vii) that the assessee-AOP was formed with the object of dealing in shares and debentures. The main purpose of forming the AOP was to earn income by carrying the business activities of purchase and sale of shares, etc.
The other finding of the AO that all the transactions made by the assessee in shares which generated losses were artificial, ungenuine and sham, was arrived at after taking into consideration the following circumstances : (i) that the income earned by way of interest and dividend were neutralised by loss generated by sale of shares and debentures; (ii) that the losses have been generated by circuitous transactions, i.e., shares were purchased from and sold to the same person; (iii) that the losses were always in proportion to the income received by the assessee; (iv) that after adjustment of losses and other income assessee had shown a very nominal income; (v) that losses have been generated in each year and total losses in all the years were to the extent of Rs. 46,09,669 which was a staggering amount in comparison with the capital base of Rs. 50,000 only; (vi) that assessee always dealt in shares of Oswal Agro Mills and Bindal Agro Chem Ltd.; (vii) that there was no broker involved in making these transactions; (viii) that huge amount had been advanced by Bindal Agro Chem Ltd., and Oswal Agro Mills without any securities; (ix) that object of these transactions was to generate losses in order to reduce the profits; and (x) that assessee-AOP was constituted along with other three AOPs which have been floated by Shri Abhaykumar Oswal. All the AOPs adopted the same modus operandi. The loss and income of all the AOPs are identical and even the deductions of each AOP are also identical. These four AOPs are-- 11. The learned Counsel for the assessee has vehemently argued and assailed the finding of the CIT(A) that assessee was dealer in shares and debentures and, therefore, the resultant income/loss was assessable under the head "Income from business or profession". It was submitted by him that all the factors taken into consideration by the CIT(A) were not relevant in arriving at the aforesaid finding. The following are his submissions : (i)(a) that the CIT(A) was wrong in holding that the assessee carried on the activity of purchase and sale of shares and debentures in a systematic and organised manner with a motive to earn profits. He drew our attention to the observations of the CIT(A) at page-11 of his order that assessee had sold 93,750 shares in assessment year 1986-87 and submitted that this observation is factually wrong. He referred to the balance-sheet as on 30-6-1984 appearing at page 7 of the paper book to show that assessee had never purchased 93,750 shares. In fact, it was pointed out by him that Raipur Trading Co., one of the member of the AOP, introduced the right value against 93,750 shares of Oswal Agro Mills Ltd. held by it as its capital which was valued at the rate of Rs. 14 per share and, therefore, shown as part of the asset in the balance-sheet. The CIT(A) has wrongly assumed this as purchase of the shares. He further pointed out that, in fact, on the basis of this right assessee was entitled to 45,000 rights shares and 22,500 debentures for which assessee had made payments during this year amounting to Rs. 2,25,000 and Rs. 11,25,000 respectively. He further pointed out that value of rights contributed by Raipur Trading Co., formed part of such shares and debentures and that is why the total value was shown at Rs. 26,52,500. It was clarified that what was sold in assessment year 1986-87 was either 22,500 debentures acquired in the preceding year or the shares purchased during the assessment year 1986-87 itself. Therefore, the CIT(A) was wrongly influenced by this fact which is factually wrong.
(b) He further submitted that the CIT(A) has wrongly relied on the fact that the assessee had been purchasing and selling debentures in assessment years 1986-87, 1987-88 and 1988-89 as is apparent from the order of the CIT(A) at page-11 of his order inasmuch as the assessee had neither shown income nor loss in respect of debentures in assessment year 1990-91. What is disputed in the present appeal is the income/loss arising from the sale of shares which are different in nature from the debentures.
(c) Regarding observations of the CIT(A) that assessee had been carrying on activity in an organised manner with a motive to earn profits, his submission was that this is not a decisive factor.
Motive to earn profit is there in both the situations whether assessee acts either as a dealer or an investor. He further submitted that there was no organisation as such. He referred to the profit & loss account of various years to show that negligible expenses were incurred by the assessee. For example, these expenses were Rs. 92 for the assessment year 1986-87, Rs. 2,465 for 1987-88, Rs. 2,376 for 1988-89, Rs. 3,261 for the year 1989-90 and Rs. 1,813 for the assessment year 1990-91. There was no office premises, telephone, or employees except a part-time accountant. Even no motive in respect of original acquisition of shares could be attributed as these were kept intact and were merely distributed between the members of the AOP on the dissolution of the association. The fact that the assessee did not sell these shares when the prices were high, itself shows that there was no motive to earn profit in the capacity of a trader. In view of these facts, it was submitted by him that the CIT(A) was not justified in holding that the assessee was carrying on business activity on an organised manner.
(ii) The CIT(A) was not justified in observing that assessee had started borrowing funds for purchase and sale of shares/debentures.
He submitted that the assessee had shown long-term capital gain of Rs. 50,85,681 in respect of 1,37,640 shares of Oswal Agro Mills Ltd., and 38,250 shares of Bindal Agro Chem and for the purchase of such shares it had never borrowed funds. He took us through the various balance-sheets for various years to show that no funds were borrowed for acquisition of these shares. Therefore, the observation of the CIT(A) is factually wrong insofar as these shares are concerned. Regarding the borrowings shown in assessment year 1989-90 in the names of River Finance Ltd., and Jagatjit Sugar Mills, it was clarified by him that the sum of Rs. 1,19,58,975 in the name of Jagatjit Sugar Mills represents the amount payable to the said company on account of purchase of shares and, therefore, this could not be treated as borrowed funds. Regarding the River Finance Ltd., it was submitted by him that it was a short-term loan and was paid within a period of twenty days out of the sale proceeds of the shares.
(iii) That the CIT(A) was wrongly influenced by the fact that assessee had been purchasing and selling shares of only two companies, i.e., Oswal Agro Mills Ltd., and Bindal Agro Chem whose shares were quoted in stock exchange. According to him, this is not a relevant factor for deciding the character of the transaction.
(iv) Regarding observation of the CIT(A) that most of the shares of Oswal Agro Mills were purchased at a lesser value to enjoy the maximum profit at a future date, it was submitted that 1,37,640 shares of Oswal Agro Mills were acquired either on the basis of rights or by way of bonus shares. Therefore, CIT(A) was wrongly influenced by this factor so far as profit on these shares is concerned. Similarly, 38,250 shares of Bindal Agro Chem were purchased directly from the company on application at the time of public issue. Hence, there was no question of purchasing shares at a lesser value.
(v) Regarding observation of the CIT(A) that magnitude of the transaction was very large, it was submitted that there was no magnitude of the transaction till assessment year 1988-89. Even the subsequent purchases were got registered in the name of the assessee and dividend income was earned thereon. He further submitted that at least purchase and sale of shares in the assessment year 1989-90 could not be decisive factor as far as income from 1,37,640 shares of Oswal Agro Mills and 38,250 shares of Bindal Agro Chem are concerned, as these shares were never sold by the assessee.
(vi) Another observation of the CIT(A) was that the assessee itself credited or debited the sale of shares to profit and loss account which showed that assessee had treated these transactions as business transactions. The submission of the learned Counsel for the assessee was that this was the only way to show the income/loss arising out of the transactions. He further submitted that nomenclature was not decisive. Whether assessee describes the gain by the name of profit & loss account or income/ expenditure account is irrelevant in deciding the issue either way.
(vii) That the CIT(A) was wrong in holding that predominate object of the assessee was to carry on the business in shares and debentures. He took us through the preamble and other terms of the memorandum of association to show that the object of the association was to acquire shares, debentures, securities and other movable items by way of investments or to deal in such assets. The object was for both the purposes and, therefore, it cannot be said that predominant object was to carry on business in shares and debentures. He also stated that assessee had filed Form No. 49A in which activity has been shown as purchase of shares and debentures by way of investments. He further submitted that assessee had always shown them as investments. The profit & loss shown by the assessee under the head "Capital gain" has been accepted as such by the department. Assessee had never shown the holding of shares as stock-in-trade. The acquisition of shares of Oswal Agro Chem in earlier years remained with the assessee intact and assessee never sold them but they were distributed among the members in accordance with the terms of the Dissolution Deed. All these facts only show that these shares had been purchased with intention of holding them by way of investment.
(viii) On the legal aspects, it was submitted by him that in law a person can hold shares and debentures partially by way of investment and partially by way of stock-in-trade. It will depend upon the facts of each case. He further submitted that even if it is held that assessee was also dealing in shares and debentures then on the facts of the case, it cannot be held that the acquisition of 1,37,640 shares of Oswal Agro Mills was by way of stock-in-trade.
Assessee had acquired 45,000 shares on the basis of rights in the assessment year 1985-86. Further acquisition of 22,900 shares was also by way of rights in assessment year 1987-88. Besides, 64,740 bonus shares were received on 2-2-1988 on the basis of earlier holdings. Out of these, 21,000 shares were sold on 3-11 -1989 to Jagatjit Sugar Mills and remaining 1,16,640 shares remained intact with the assessee till the dissolution of the AOP while these shares were distributed between the members as per the terms of the deed.
Therefore, it was argued that at least profit arising out of these shares could not be treated as business income as these shares were held by the assessee by way of investment.
(ix) On other legal aspect it was argued by him that receipt of bonus shares was always on capital account irrespective of holding of shares, unless shown to the contrary. He drew our attention to the judgment of Hon'ble Supreme Court in the case of CIT v. Madan Gopal Radhey Lal[1969] 73 ITR 652 in support of his contention. He further submitted that assessee had never converted bonus shares into stock-in-trade and, therefore, income in respect of these shares could not be assessed as business income.
(x) In support of his above submissions, he also relied on the following judgments-- (d) Karamchand Thapar & Bros. (P.) Ltd. v. CIT[1971] 82 ITR 899 (SC).
12. On the other hand, the learned Sr. Departmental Representative strongly opposed the contentions of the assessee and reiterated the reasonings given by the CIT(A) in support of his order. Therefore, all the arguments of the revenue need not be repeated again as we have already referred to it in the earlier paragraphs. We will refer to other aspects to which our attention was drawn by the learned Sr.
Departmental Representative, viz., (i) that even the initial acquisition of shares was out of borrowed funds. He referred to the balance-sheet of Raipur Trading Co. as on 30-12-1984 which showed borrowings of Rs. 20,25,000 in the name of Progressive Commercial Enterprises, (ii) That assessee itself had shown the holding of shares for the first time as investment in the balance-sheet as on 30-6-1987.
His submission was that in earlier years assessee had not shown them as investments. In reply, the learned Counsel for the assessee strongly objected to the admission of the fresh material, i.e., the balance sheet of Raipur Trading Co., since it was never before the lower authorities. However, at later stage he did not object to its admission but argued that this fact is not relevant for deciding the issue. He submitted that Raipur Trading Co. was a hundred per cent subsidiary company of Progressive Commercial Enterprises and, therefore, the said amount could not be treated as borrowings in real sense. He further argued that the borrowing was not by the assessee-AOP and if any member of the AOP has brought its capital even after borrowing, that would not determine the character of activity carried on by the assessee. He also submitted that the assessee had acquired the rights shares of M/s.
Oswal Agro Mills by way of investment and it had never shown them as stock-in-trade. Merely because those shares have been shown as investments in the assessment year 1988-89, no adverse inference could be drawn against the assessee.
13. Now, we shall refer to the arguments of the learned Sr.
Departmental Representative in respect of departmental appeal, who has vehemently argued that the CIT(A) was not justified in holding that transactions of purchase and sale of shares resulting in losses were genuine transactions. His submission was that CIT(A) has ignored the facts and circumstances mentioned by the AO in his order. He also emphasised that all the four AOPs, viz., (i) Regal Syndicate (ii) Minerva Corporation (iii) Vikas Corporation and (iv) Atlas Corporation, were formed by one Shri Abhaykumar Oswal who or his wife were only the natural persons as member of all the AOPs. The other members were the companies controlled by him. All the AOPs were formed and dissolved on the same date. The shares of the members in all AOPs were in identical terms and the transactions by all AOPs were also similar. Income/loss shown by all AOPs were similar as is apparent from page 9 of the order of the AO. Besides this, he drew our attention to the following facts and circumstances relied upon by the AO in arriving at the conclusion that all the transactions effected by the AOPs which generated losses were sham and artificial: (b) that the losses generated were always proportionate to the income of the year, i.e., higher losses have been shown in the year in which there was higher income and low losses were shown where there was low income; (c) that losses have been generated through circuitous transactions, i.e., shares were purchased from and sold to the same person, viz., M/s. Jagatjit Sugar Mills Co. Ltd.; (d) that assessee always dealt in shares of only two companies, viz, (i) Oswal Agro Mills Ltd. and (ii) Bindal Agro Chem Ltd.; (e) that losses and income shown in case of all the four AOPs were identical; (f) that the deductions claimed by the assessee in each assessment year were also identical; (g) that losses were generated in order to reduce the profits so as to avoid the payment of taxes; (i) that huge credits were allowed by Jagatjit Sugar Mills and there was no direct payment to the company but the transactions were settled by journal entries; (j) that assessee had made huge transactions in crores only with a capital base of Rs. 50,000; and (k) that the behaviour of the assessee was that of a trader and not of an investor.
In view of the above facts and circumstances of the case, the learned Sr. Departmental Representative concluded that the CIT(A) was not justified in holding these transactions as genuine.
14. On the other hand, the learned Counsel for the assessee has strongly opposed the contentions of the learned Sr. Departmental Representative. He has made the following submissions : (i) that there was no legal bar in forming various AOPs at the same time. Even the Supreme Court had held that there could be various genuine firms having same partners having the same ratio in the profit and loss. On the contrary in the present case the members of all four AOPs were not the same; (ii) that it is not the case of the revenue that the AOPs are not genuine. On the contrary all the four AOPs have been assessed by the department. Therefore, the fact that four AOPs were formed and dissolved on the same date is irrelevant; (iii) that there is no bar to purchase and sale the shares from and to the same person. The shares sold to M/s Jagatjit Sugar Mills had been registered in the name of that company after the sale of shares; (iv) that it is not the case of the department that price of shares was much more than the price at which they were sold to Jagatjit Sugar Mills. On the contrary the shares had been sold at the market price: (v) that the observation of the AO that assessee had done huge business with capital base of Rs. 50,000 is factually wrong. He drew our attention to the balance-sheet of various years. The balance-sheet as on 30-6-1984 shows capital of Rs. 26,63,600 which is the first year. He submitted that the AO wrongly influenced by the figure of balance-sheet as on 30-7-1987. He drew our attention to this balance-sheet to show that there was credit balances of Rs. 18,89,410 and Rs. 10,16,098 in the current account of Nechville Investment and Raipur Trading Co., who were members of the AOP; (v) that the contention of the revenue that assessee had always shown losses every year is also wrong. He drew our attention to the profit and loss account for the assessment year 1986-87 to show that there was also profit in shares amounting to Rs. 79,900; (vi) that the department is wrong in observing that assessee had deliberately shown the losses in order to reduce the profits. He submitted that no investor would like to loose the capital. He also drew our attention to the fact that on the basis of the right value, assessee was under obligation to purchase debentures along with the shares. The normal feature of this trade is that after the issue of shares/debentures the price of shares fluctuates but the value of debentures normally declines and, therefore, the assessee had to sell the debentures in assessment year 1986-87 at loss in order to avoid the future losses; (vii) that the department could not be allowed to blow hot and cold. The assessee had received dividend of Rs. 21,48,282 in respect of shares on the sale of which loss of Rs. 36,97,145 had been incurred by the assessee. The department had assessed the assessee on such dividend but surprisingly held the transaction of purchase and sale of shares as artificial. The shares were registered in the name of the assessee and later on were duly transferred in the name of Jagatjit Sugar Mills. The requisite stamps were affixed on the transfer deed. The change had been duly recorded in the register of shareholders; (viii) the other factors such as absence of brokers, purchase of shares on credits, Shri Abhaykumar Oswal being connected with Oswal Agro & Bindal Agro are irrelevant consideration in deciding the genuineness of the transaction.
In view of the above submissions, the learned Counsel for the assessee concluded that the CIT(A) was justified in holding the transactions of purchase and sale of shares as genuine because in law there was no bar in purchase and selling of shares from and to the same person, particularly when the change has been duly recorded in the register of shareholders.
15. Both the parties have been heard at length and the materials to which our attention was drawn by both the parties had been considered carefully. First, we would like to dispose of the departmental appeal since the contention of the revenue is that entire transactions of purchase and sale of shares generating losses are artificial and sham.
After considering the rival contentions of the parties as well as the materials produced before us, we are of the view that the contention of the revenue cannot be accepted. The stand of the revenue, in our opinion, is contradictory. On one hand, the AO had tried to establish that all the four AOPs including the assessee-AOP were bogus while on the other hand, the AO has assessed all the four AOPs. Similarly, on one hand, the AO has held all the transactions of shares resulting into losses as sham and artificial while on the other hand, the AO has assessed the dividend income of Rs. 21,48,282 received by the assessee in respect of such shares. In our opinion, the revenue cannot be permitted to blow hot and cold simultaneously. We agree with the learned Counsel for the assessee that there is no provision in law in purchasing and selling shares from and to the same person. In fact, the shares purchased by the assessee were registered in its name and the dividend was received by the assessee. After sale the shares have been transferred in the name of Jagatjit Sugar Mills. The change is duly recorded in the register of shareholders. The observation of the AO that the assessee was making huge transactions with a capital base of Rs. 50,000 only is also factually wrong. The balance-sheet for the first year as on 30-6-1984 shows that the capital of the assessee-AOP was Rs. 26,63,100. The AO seems to be influenced by the balance-sheet of the assessee as on 30-6-1987 where under the head 'Capital account' the investment of members is stated to be Rs. 50,000. But he has overlooked the current account of the members which shows a credit balance of Rs. 18,89,410 in the account of Nechville Investment Co. and Rs. 10,16,098 in the account of Raipur Trading Co. and Rs. 694 in the name of Shri A. Oswal. The observation of the AO that losses have been shown every year is also not correct. The profit & loss account of the assessee for the period ending on 30-6-1985 shows profit in sale and purchase of shares at Rs. 79,900. The stand of the revenue that assessee had shown losses deliberately also cannot be accepted since no material has been brought on record to show that shares had been sold at a price below the market rate. The other circumstances, i. e., absence of brokers, purchase of shares on credits and Abhaykumar Oswal being connected with the companies, viz., Oswal Agro Mills and Bindal Agro Chem, are irrelevant in deciding the character of the transaction.
Keeping in view all the facts of the case, we are of the opinion that the transactions entered into by the assessee are genuine transactions and, therefore, the order of the CIT(A) is upheld on this issue.
16. Now we take up the appeal of the assessee. The issue raised in this appeal is whether on the facts of the case can it be said that the assessee is a dealer in shares and debentures. It is pertinent to note that answer to this question would depend upon the facts of each case and no test can be laid down for universal application. In this connection it is worthwhile to note the following observations of Lord Justice Clerk in the case of Californian Copper Syndicate v. Harris [1904] 5 TC 165 which have been approved by the Hon'ble Supreme Court in the case of P.M. Mohammed Meerakhan v. CIT[1969] 73 ITR 735 : It is quite a well-settled principle in dealing with questions of assessment of income-tax that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit... assessable to income-tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business... .
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being--is the sum of gain that has been made a mere enhancement of value by realising a security, or is it again made in an operation of business in carrying out a scheme for profit-making The facts of the case have already been stated in detail. During this year, assessee had shown long-term capital gain of Rs. 50,85,681 and short-term capital loss of Rs. 36,97,145. First, we take up the contention of the assessee relating to the acquisition of 1,37,640 shares of Oswal Agro Mills Ltd. The details of acquisition of these shares are given as under : 45,000 rights shares in assessment year 1985-86 27,900 rights shares in assessment year 1987-88 and 64,740 Bonus shares in assessment year 1989-901,37,640 Shares Out of the bonus shares, 21,000 shares had been sold on 3-11-1989 and rest of the 1,16,640 shares remained intact with the assessee till the dissolution of the association when these shares were distributed between the two members, viz., Nechville Investment Co., and Raipur Trading Co., in the ratio of 61% : 39% as per the terms of the memorandum of association. There facts are not in dispute.
17. As far as bonus shares are concerned, we agree with the contention of the learned Counsel for the assessee that acquisition of bonus shares is always on capital account irrespective of the nature of holding of shares on the basis of which bonus shares are issued. Such proposition has been laid down by the Hon'ble Supreme Court in the case of Madan Gopal Radhay Lal (supra). The relevant observations of their Lordships reported at page-655 are being reproduced as under: We are unable to agree with the judgment of the Bombay High Court (to which reference was made by the Tribunal) in CIT v. Maniklal Chunnilal & Sons Ltd. [IT Reference No. 16 of 1948] that bonus shares received by a shareholder who carries on business in shares and securities "Ipso facto become accretion to his stock-in-trade".
Bonus shares would normally be deemed to be distributed by the company as capital and the shareholder receives the shares as capital. The bonus shares are accretions to the shares in respect of which they are issued, but on that account those shares do not become stock-in-trade of the business of the shareholder. A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of business; in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity.
Bonus shares having been received by the assessees in respect of their stock-in-trade did not, therefore, become part of their stock-in-trade, merely because they were accretions to the stock-in-trade. The bonus shares were received as capital; they could be converted by the assessees into their stock-in-trade or retained as their capital asset.
It is clear from the above observations that even in a case where shares are held by an assessee as stock-in-trade and bonus shares are acquired on the basis of such holding, even then bonus shares are to be treated on capital account and, therefore, profit on sale of such shares is to be assessed as capital gain and not as business income unless it is shown that assessee had converted them into stock-in-tracie. In the present case, there is no material to hold that assessee ever converted any of such shares as stock-in-trade.
Therefore, respectfully following the judgment of the Hon'ble Supreme Court it is held that income arising in respect of such bonus shares cannot be assessed as business income but has to be assessed under the head "Capital gains".
18. Regarding the acquisition of 72,900 shares, we have to examine the relevant facts. It is well-settled law that a person may hold shares or any other asset partially by way of investment and partially in the capacity of a trader. A dealer in shares may also acquire a particular lot of shares by way of investment and vice verso. This proposition of law is not disputed by either of the parties. If any authority is required, reference may be made to the judgment of the Hon'ble Supreme Court in the case of Ramnarain Sons (P.) Ltd. v. CIT[1961] 41 ITR 534 wherein it has been held that holding of a particular lot of shares by an assessee who is a dealer in shares can be by way of investment. In the light of this legal position, we have to appreciate the facts of the case. The object of the memorandum of association was to acquire shares and debentures by way of investment as well as to deal in shares and debentures as is apparent from the preamble of the memorandum of association. The object of the association by itself is not a decisive factor but certainly is a relevant factor in deciding the issue. So in such cases one has to see the conduct of the assessee. It is undisputed fact that right value of 93,750 shares was contributed by one of the member of the association, viz., Raipur Trading Co., as its capital on the basis of which assessee acquired 45,000 rights shares in the year of inception. Later on another 27,900 rights shares were acquired on the basis of same holding in the month of June 1986 relevant to assessment year 1987-88 and acquisition of these 72,900 rights shares remained intact up to 31-3-1990 when the association was dissolved.
Ultimately these shares were distributed between the two members, viz., Nechville Investment Co. and Raipur Trading Co., in the manner provided in Clause (14) of the memorandum of association. These shares were never sold in spite of high prices during this period. The shares were acquired with its own capital. Assessee had shown these shares in the balance-sheet as investment. During all these years, assessments have been framed by the AO treating the assessee as an investor. From the details furnished, it appears that assessee had always shown income/loss on the sale of either shares or debentures as short-term capital gain/loss in the returns of preceding years and the department had been accepting the same as s uch. During all these years it had been enjoying income by way of dividends on these shares. All these facts considered as a whole lead to the only conclusion that assessee acted as an investor so far as these 72,900 shares of Oswal Agro Mills are concerned. Therefore, we hold that assessee was not a dealer in these shares and the income shown by the assessee on distribution of these shares at the time of dissolution of the association cannot be assessed as business income but has to be assessed as long-term capital gain.
19. In support of our conclusion we would like to refer to the decision of the Supreme Court in the case of Karamchand Thupar & Bros. (P.) Ltd. (supra). In that case assessee had acquired 2,400 shares of a company in two lots in 1941 and 100 shares in 1950 and had sold the entire block of shares in 1955 at a loss. The Tribunal held that loss to be capital loss after considering the facts, viz., (i) that the shares were shares of a company managed by the assessee; (ii) that they were shown in the account books and balance-sheet as investment shares (iii) they were not sold when their prices was high and (iv) that the shares were not sold for about fourteen years. The Hon'ble Supreme Court held that the Tribunal was justified in drawing an inference that loss was a capital loss. The facts of the present case though not identical, but are similar and, therefore, the conclusion of ours is supported by the above judgment of the Supreme Court.
20. The contention of the revenue that initially the shares were purchased by borrowed funds is not tenable. The learned Sr.
Departmental Representative had drawn our attention to the fact that Raipur Trading Co. was financed by Progressive Commercial Enterprises for purchase of 93,750 shares. In our opinion, the learned Sr.
Departmental Representative is not justified in arguing that initially purchase of shares was out of borrowed funds. Raipur Trading Co. was a hundred per cent subsidiary company of Progressive Commercial Enterprises and, therefore, it cannot be said that any amount was borrowed by Raipur Trading Co. in the real sense. Secondly, this factor is not a relevant factor because the assessee-AOP has not borrowed any funds. We have to see the conduct of the assessee and not that of a member. Even otherside Raipur Trading Co. had contributed the right value of shares and not the cash. Raipur Trading Co. has not borrowed the right value. Even in a given set of facts an investor may also borrow, but that fact by itself would not decide the character. Since we find that assessee has not borrowed the funds, we reject this contention of the Departmental Representative. Similarly, the contention of the revenue that shares were purchased with a motive to earn profit does not come in our way. Motive to earn profit is always there in both the situations. This is not a decisive factor by itself.
The conduct of the assessee does not show that it kept these shares as stock-in-trade. The other factors considered by the CIT(A) and relied upon by the revenue are not relevant insofar as acquisition of these shares are concerned. We would like to point out that observations of the CIT(A) that assessee had sold 93,750 shares in assessment year 1986-87 are factually wrong. We have already stated while discussing the facts of the case that one of the member had contributed the right value of 93,750 shares of Oswal Agro Mills and not the shares itself.
It was an intangible asset which was contributed by the member. Hence, we hold that the CIT(A) was wrongly influenced by this circumstance.
Another factor which influenced the CIT(A) is that the assessee had been showing losses every year. The chart given by the CIT(A) at page-11 of his order shows that these are short-term losses accrued to the assessee on the sale of debentures up to assessment year 1988-89 which is distinct and separate in nature from shares. It is only in 1989-90 that losses are in respect of shares. At the most one may say that assessee was dealing in debentures. Even assuming for a moment that assessee was a dealer in shares and debentures, no adverse inference could be drawn against the assessee insofar as these shares are concerned, as we have already held that in law one may hold the asset partially as in investor and partially as a trader. In our view none of the factor mentioned by the CIT(A) shows that assessee acted as a trader so far as these shares are concerned.
21. Now we take up to decide the nature of acquisition of 38,250 shares of Bindal Agro Chem. The details furnished by the assessee show that these shares were purchased on 15-12-1986 and were never sold by the assessee till the dissolution of association when these were also distributed between the two members as per the terms of the memorandum of association. Assessee had keen enjoying the dividend income throughout. The shares had been purchased directly from the company at the time of public issue and not from the open market. These were purchased from the own funds as is seen from the statement of accounts.
Right from the inception till the date of purchase the assessee had not borrowed any funds. In our opinion, the facts of the case taken as a whole lead to the conclusion that assessee acted as an investor.
Therefore, we hold that income shown by the assessee in respect of these shares cannot be assessed as business income but has to be assessed under the head 'Capital gain'.
22. Now we take up to decide the nature of transaction in respect of which assessee had shown loss of Rs. 36,97,141. The CIT(A) has mentioned at page-12 of this order that assessee had purchased 2,75,110 shares of Oswal Agro Mills in assessment year 1989-90 which seems to be factually wrong. The total shares of Oswal Agro Mills as on 30-6-1987 were 72,900 while as on 31 -3-1989 it were 3,48,010 shares. The CIT(A) seems to have taken the difference as purchases during this year.
Actually he seems to have ignore the fact that assessee had received 64,740 bonus shares on 2-2-1988, so the actual purchases during assessment year 1989-90 would come to 2,10,370 shares. These shares along with 21,000 bonus shares were sold in subsequent year which tallies with the figure of 2,31,370 shares as mentioned by the CIT(A) in his order at the same page. We have already held that income out of bonus shares is to be assessed as capital gain. So, we are required to decide the nature of acquisition of 2,10,730 shares only. From the details furnished in the paper-book, we find that assessee had no funds of its own for the purchase of these huge quantity of shares. The balance-sheet for assessment year 1988-89 shows that its own capital had been exhaustive in acquiring 72,900 rights shares of Oswal Agro Mills and 38,250 equity shares of Bindal Agro Chem Ltd. The net fund available as on 30-6-1987 was Rs. 10,908 by way of cash and bank balances. No other capital is brought by the members of the association. From pages 8 & 9 of assessee's ledger it appears that shares had been purchased from Jagatjit Sugar Mills Ltd. on credit and the payment thereof had been made from time to time. The balance-sheet of the assessee as on 31 -3 -1989 shows that unpaid amount to the company was substantial one, i.e., Rs. 1,19,58,975. It also shows that assessee had obtained loans amounting to Rs. 1 crore from River Finance Ltd. and Rs. 1,38,153 from State Bank of Patiala. No other asset has been acquired in this year. All these facts clearly show that these shares were purchased by the assessee out of borrowed funds. These shares have been sold at a short interval and out of the sale proceeds the loans and unpaid price of shares were cleared. The purchase and sale of shares were in large numbers. In the earlier years the assessee was purchasing and selling shares as is apparent from the computation of income for the assessment years 1986-87 and 1989-90. We are not expressing our view regarding the nature of the shares acquired in these two years but this fact is a relevant factor in deciding the nature of transaction of shares in the present year. The conduct of the assessee is to be seen from overall facts and circumstances of the case. Keeping in view these facts, it cannot be said that the conduct of the assessee was that of an investor. On the contrary, we are of the opinion that the assessee acted as a trader. Therefore, we hold that losses arising out of these transactions were business losses and the CIT(A) was justified in holding so.
23. It has been agreed by both the parties before us that facts of the Atlas Corporation as well as of Vikas Corporation are identical and the decision of the Tribunal would be binding on both the assessees. In view of the above findings given by us in preceding paras, the departmental appeals in both the cases are dismissed while the appeals of both the assessees are allowed in part. The order of the CIT(A) is modified accordingly.