Judgment:
1. ITA 1818/Delhi/00 ITA 1744/Delhi/01 : These are appeals by the revenue against two orders of Commissioner (Appeals)-XXIX, New Delhi dated 12-1-2000 and 7-2-2002 for assessment years 1996-97 and 1997-98 respectively.
2. The only common issue for consideration in these two appeals is as to whether the Commissioner (Appeals) was justified in directing the assessing officer to assess the income arising from sale and purchase of shares under the head capital gains" as against the action of the assessing officer in treating the same as Business Income.
3. The facts as far as assessment year 1996-97 is concerned are as follows. The assessee is a company. The main objects of the assessee-company as per its MOU is to carry on the business of hotel, restaurant, cafe, beer house, restaurant room, etc. During the previous year the assessee sold shares and earned a profit of Rs. 65,32,100 which was offered to tax under the head 'Capital gains'. The assessing officer noticed that the assessee was carrying on the activity of purchase and sale of shares on a regular basis. In this reged the assessing officer has made a reference to the investment in shares and profit on sale of shares made by the assessee for the assessment year ended 31-3-1994 to 31-3-1996. He was therefore of the view that the LTCG claimed by the assessee was also liable to be assessed as business income. The assessee in reply to the proposal of the assessing officer as to why the Long Term Capital Gain (LTCG) should not be treated as business income gave the following explanation. The assessee explained that the LTCG arise out of the sale of Rs. 2,75,000 shares of Jai Prakash Industries Ltd. (JPIL) the details of which were given by the assessee as follows: (a) Sale of 95,000 shares of JPIL were originally acquired in 1990-91.
The shares are held for more than one year hence are treated as long-term capital asset. Due to the following facts, the income from sale of 95,000 shares has to be treated as Long Term Capital Gain.
(i) These shares were acquired on 18-4-1990 @ Rs. 12.50 per share but not a single share has been sold till 31-3-1992 though the price of the share had increased substantially and reached to the level of Rs. 268 per share. Had the same been acquired from business point of view the company must have disposed off the shares at that time.
(ii) The company received right shares in the years 1992-93 and 1993-94 at the subsidized rates and also received 345975 bonus shares in the financial year 1993-94.
(iii) These shares have already been assessed as investment and not as stock-in-trade in the assessment years 1991-92, 1992-93 and 1993-94. That the Hon'ble Supreme Court of India held in the case of Raja Bahadur Kamakhya Narain Singh v. CIT that profit made on the sale of shares where the assessing officer has not brought any material on record to show that the shares held by the assessee as investment in earlier year were converted into stock-intrade of his business will be treated as capital gain and not business income. This has also been followed by the ITAT in the case of Shri Arjun Kapur.
(b) Sale of 1,60,000 right shares of JPIL acquired in 1992-93 and 1993-94. The shares are held for more than one year hence treated as longterm capital asset. The profit from the sale of right shares, 1,42,000 acquired in 1992-93 and 18,000 acquired in 1993-94 will be treated as capital gain and not business income. The assessee acquired the right shares only to prevent the erosion of its capital in original shares was bound to depreciate. If the assessee had not purchased the same his original investment would have depreciated in value and in a sense the transactions entered into are to nurse his investments. The Hon'ble Supreme Court in the case of CIT v. H. Holck Larsen on the facts parallel and comparable to the case of the assessee has held that profit from sale of right shares are in the nature of capital gains and not business income.
(c) Sale of 20,000 shares of JPIL acquired from market in 1993-94.
The shares are held for more than one year hence treated as Long Term Capital Asset. The profit from sale of shares acquired in 1993-94, will be treated as capital gains and not business income due to following reasons: (ii) These shares are sold at loss to repay the interest bearing loan; (iii) The shares are transferred in the name of the company, as evident from dividend income.
4. The assessee thus pleaded that the assessee hold all the aforesaid shares as an investor and not as a trader of shares and that it satisfies all the conditions as prescribed under Section 45 of the Income Tax Act, 1961. Hence the aforesaid gain or loss has to be treated as Long Term Capital Gain/Loss and not the business gain/loss.
5. The stand of the assessee may be summarized as given in the Chart below: 6. The assessing officer however rejected the plea raised on behalf of the assessce for. the following reasons a. That in assessment year 1994-95 the assessing officer had taken a view that the income on sale of shares by the assessee was to be assessed as business income and the Commissioner (Appeals) had upheld the order of the assessing officer.
b. The conduct of the assessee (frequency as well as the income generated by sale of shares) did indicate that the intention of the assessee was to be a trader rather than a mere investor.
c. The fact that shares were shown as investment in the books of account of the assessee is not conclusive in the matter.
d. The fact that similar claim of the assessee was accepted by the assessing officer in assessment for assessment year 1994-95 was held to be not a bar to take a different view in the present assessment year since principle of res judicata do not apply in income tax proceedings.
e. Clause 26 of the Memorandum of Association of the company dealing with 'other objects' contained the business of purchase and sale of shares by the assessee.
f. Expenses on purchase of shares shown as investment in the books of account have been claimed against business income.
g. Dividend earned on shares was marginal compared to the investment and the capital appreciation of these shares which by itself was an indication of assessee's intention to hold these shares as stock-intrade of his business of dealing in shares.
h. Shares held as investments had been purchased out of borrowed funds and interest paid on such borrowed funds have been claimed as business expenses.
The assessing officer held that the income of Rs. 65,32,100 was to be assessed as business income.
7. Before the Commissioner (Appeals) apart from reiterating the stand as was taken before the assessing officer the assessee submitted that the shares of JPIL were held as investment. It was further submitted that the controlling interest in JPIL was held by S.K. Jain and his family members. Mr. S.K. Jain is Vice Chairman and M.D. of JPIL. It was submitted that the assessee-company is one of the Holding Companies and a channel of investments in JPIL by S.K. Jain and his family. It was further submitted that the shares of JPIL were purchased by the assessee not with an intention to trade in shares but with a view to have a hold in the management of the company JPIL. The assessee also pointed out that when the shares were quoted at a very high price of Rs. 250 per share yet they were not sold. The assessee also pointed out that the assessee had to sell shares during the previous year only with a view to retire interest bearing debts so as to reduce the interest burden on the asscssee . It was also pointed out that the main objects of the company did not consist of dealing in shares. The Commissioner (Appeals) was of the view that several circumstances need to be taken into account in ascertaining the intention of the assessee in purchasing and selling of these shares. He held that the shares of JPIL were purchased by the asscssee only with a view to enable S.K. Jain and his family members to have a say in the management of JPIL. He also relied on the circumstances viz., the assessee not selling shares even when their values were quoted at a very high price. The Commissioner (Appeals) held that the sale during the previous year was done only to retire interest bearing loans. He, therefore, held that the shares were bought and sold with a view to hold the investments. He accordingly directed the assessing officer to assess the income from sale of shares under the head 'Capital gains'.
8. As far as facts with regard to the assessment year 1997-98 are concerned they are identical. In the assessment year 1997-98 the assessee had declared income arising out of transfer of shares under the head 'Capital gains'. The assessing officer however considered the same as a business income. The Commissioner (Appeals) however held that the income on sale of shares has to be assessed under the head 'Capital gains'. In doing so, the Commissioner (Appeals) followed the order of the Commissioner (Appeals) in assessee's own case for the assessment year 1996-97. In assessment year 1997-98 also the sale of shares were that of JPIL.
9. When this appeal was taken up for hearing there was no appearance on behalf of the assessee. The learned Counsel for the assessee had duly taken note of the hearing of the appeal on 9-5-2006. But none appeared when the appeal was called for hearing. The appeal is therefore decided on merits after hearing the submissions of the learned Departmental Representative. The learned Departmental Representative principally placed reliance on the order of the assessing officer. According to him the intention of the assessee as explained by the assessing officer in the order of assessment for the assessment year 1996-97 was to hold the shares as stock in trade of business and not as a capital asset.
10. We have considered his submissions. At the outset we may mention that the fact that purchase and sale of shares was described as one of the items of business in the Objects clause of the MOA is not conclusive as to whether the assessee carried on the business of dealing in shares. So also the fact that the assessee in its books of account treated the holding of shares in JPIL as an investment and not as a capital asset is not conclusive in the matter. One of the test often applied is to ascertain the nature of such transactions and the treatment given to such transactions as reflected in the treatment given by the assessee in its books of account viz., to show it as an investment or as a stock in trade of business. The Hon'ble Supreme Court in the case of Raja Bahadur Kamakhya Narain Singh v. CIT has laid down the above test. In the case of Bengal & Assam Investors Ltd. v. CIT it had been laid down that the income from the sale of shares should be so connected with the carrying of assessee's business that it can be firmly said that the income in question was in the shape of business. In case of Ramnarain Sons (P) Ltd. v. CIT , it has been held that where shares were purchased for acquiring a managing agency right, sale of such shares could not be treated as adventure in the nature of trade.
The Supreme Court further held that managing agency is the source of profit of assessee but the shares purchased and managing agency acquired were both assets of a capital nature and would not constitute stock in trade of a trading venture. In the present case the accounting treatment given by the assessee in his books of account by treating these shares as being held as investments and as a capital asset supports the plea of the assessee that profit on sale of these shares was to be assessed under the head 'Capital gains'. The main objects of the company is to run hotel, restaurant etc. The fact that in one of the other Objects clause of the Memorandum there is an authority to carry on purchase and sale of shares cannot lead to the conclusion that the assessee held the shares as a stock in trade of a business. The assessee has been holding shares with a view to enable S.K. Jain and his family members to have a controlling interest in the company JPIL.
When shares are so held it cannot be said that they were held as stock in trade of the business of dealing in shares. Such holdings are generally held to have a controlling interest over the companies whose shares are held by the assessee. One very vital circumstance viz., retaining the shares even when the shares were quoted at a very high price in the Stock Exchange also throws light on the intention of the assessee to hold these shares with a view to have controlling interest in the company JPIL. All these circumstances taken together in our view clearly shows the intention of the assessee to hold these shares as an investment and not as a stock in trade of any business. The capital gain on sale of these shares was therefore rightly directed to be assessed under the head 'Capital gains'. We do not see any justification to interfere with the order of the Commissioner (Appeals). Consequently both these appeals by the revenue are dismissed.