Madras H.C : the assessee was a dealer in shares and that the profits arising on the sale of Bank of Madura shares should be assessed as business income

High Court Of Madras

Felspar Credit and Investment (P.) Ltd. vs. CIT

Assessment Years : 1992-93 And 1993-94

Section : 45

Mrs. Chitra Venkataraman And M. Jaichandren, JJ.

Tax Case (Appeal) Nos. 120 And 121 Of 2005

August 2, 2011

JUDGMENT

Mrs. Chitra Venkataraman, J. – The above two tax case appeals are filed by the assessee against the common order of the Tribunal relating to the assessment years 1992-93 and 1993-94. The substantial questions of law raised in T. C. No. 120 of 2005 relating to the assessment year 1992-93 read as under :

“1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that the assessee was a dealer in shares and that the profits of Rs. 8,18,460 arising on the sale of Bank of Madura shares should be assessed as business income ?

2. Is the decision of the Income-tax Appellate Tribunal that the appellant was regularly dealing in shares and the sale of shares in question was in the nature of business adventure sustainable in law or supported by materials or evidence on record ?”

2. As far as T. C. No. 121 of 2005 relating to the assessment year 1993-94 is concerned, apart from two questions referred to above, there is yet another question which reads as follows :

“3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the entire discounted interest on the IDBI bonds received should be assessed in the assessment year 1993-94 ?”

3. Learned counsel for the assessee fairly submitted that the issue raised in the third substantial question of law is covered by the decision in the case of E.I.D. Parry (I.) Ltd. v. CIT reported in [2002] 258 ITR 404 (Mad) and in the case of CIT v. A.R. Santhanakrishnan reported in [2002] 256 ITR 187 (Mad). Accordingly, the third substantial question of law is answered in favour of the Revenue and as against the assessee. Thus, the questions that survive for consideration in the abovesaid two tax case appeals is as regards the character of the receipt on the sale of shares.

4. The assessee herein is a private limited company. The business of the company is stated to be of financing of hire purchase and act as an investment company. A reading of the documents filed before this court would show that the assessee was incorporated on November 26, 1984. The first year account was up to June 30, 1985. Evidently, the company did not have any investment during the relevant accounting year. So too, in the next two accounting years 1986 and 1987. However, starting from the accounting year 1987-88, the company started investing in the equity shares of other companies in the same group. During the accounting year ending March 31, 1991, relating to the assessment year 1991-92, apart from acquiring shares, the assessee started selling shares too. This pattern went on three years thereafter.

5. In the return filed for the assessment year 1992-93, the assessee claimed exemption under section 54E of the Income-tax Act, 1961, in respect of sale of shares held in Bank of Madura on the ground that it had invested in three years IDBI bonds. Originally, under section 143(1)(a), the said claim was disallowed on the ground that the assessee had not placed any material for the investment in IDBI. On appeal, the claim was, however, allowed. By revised order dated February 2, 1995, the said claim was allowed by the Assessing Officer. In the mean time, the Assessing Officer initiated reassessment proceedings by issue of notice under section 148 of the Income-tax Act, 1961, on November 23, 1994, and the order was made on December 18, 1996, whereby the Assessing Officer treated the capital gain as business income. The Assessing Officer viewed that the purchase and sale of shares revealed that the activity of the assessee was akin to that of a dealer in shares. Hence, the question of treating the income earned on the sale of shares as capital did not arise. The facts for the assessment year 1993-94 is not different.

6. In the appeal preferred by the assessee before the Commissioner of Income-tax (Appeals) the assessee reiterated its contention as taken before the Assessing Officer on the sale of shares. It pointed out that the assessee had sold the shares of Bank of Madura to the associate concerns for the purpose of business regrouping. Thus, the assessee contended that the sales were made for reasons other than to make the profit therein. Going by the magnitude of the transactions in the purchase and sales of shares in the last 15 years, indicative of investment pattern, the assessee contended that the profits arising therein should be considered as long-term capital gains. The sale of these shares could not be held as giving rise to business income. The Commissioner of Income-tax (Appeals) accepted the said plea. It was held that going by the nature of the transaction, the purpose of the transaction, the assessee could not be held as engaged in the business of dealing in shares and, hence, he considered the investments and the sale as giving rise to long-term capital gains. The Commissioner of Income-tax (Appeals), thus, upheld the same reasoning for the assessment year 1993-94, thereby, allowed the appeals. Aggrieved by the orders of the Commissioner of Income-tax (Appeals), the Revenue filed appeals before the Tribunal with regard to the abovesaid assessment years.

7. The Income-tax Appellate Tribunal, on considering the extent of investment, purpose of investing in shares, held that it was purely a business venture. The Tribunal held that the facts of the case were not such that the assessee apart from trading in shares also had certain assets as investment to deal with them in case of certain necessities. The Tribunal pointed out that the assessee had not let in any evidence that it had to sell off the shares out of business necessity. The Tribunal accepted the reasoning of the Assessing Officer and set aside the order of the Commissioner of Income-tax (Appeals) only to restore the order of the Assessing Officer. Aggrieved by the same, the assessee is on appeal before this court.

8. Learned counsel appearing for the appellant-assessee submitted that the business of the assessee is essentially one of a hire purchase and lease. The assessee-company never contemplated a business to deal in shares and to hold the shares purchased as stock-in-trade. He further pointed out that ever since the assessee-company started investing in shares, the company did so as a mere investment and had never the intention to carry on business in shares.

9. Going by the abovesaid aspect and further the assessee had shares only in the group concern, the intention that the investment in purchase of the shares was only by way of an investment stood established. Learned counsel further pointed out that in the 15 years of its existence, the assessee held shares only in the two listed companies, out of which, the shares of one company had not at all been sold. Thus, learned counsel pointed out that it was never the intention of the company to carry on business in shares. Considering the fact that the amount invested in share was a long-term investment and showed as an asset, in the absence of systematic organised activity in dealing in shares, the conduct of the assessee could not be treated as adventure in the stock-in-trade and the income as business income.

10. In so holding, learned counsel for the assessee placed reliance on the decisions in the case of Bengal and Assam Investors Ltd. v. CIT reported in [1966] 59 ITR 547 (SC), in the case of CIT v. Distributors (Baroda) (P.) Ltd. reported in [1972] 83 ITR 377 (SC), in the case of CIT v. Amalgamations (P.) Ltd. reported in [1977] 108 ITR 895 (Mad), in the case of CIT v. H. Holck Larsen reported in [1986] 160 ITR 67 (SC), in the case of CIT v. N.S.S. Investments (P.) Ltd. reported in [2005] 277 ITR 149 (Mad.), in the case of CIT v. Trishul Investments Ltd. reported in [2008] 305 ITR 434 (Mad.). He pointed out that given the fact that investment in shares were made by the assessee only as in the ordinary course of business to hold it as asset and the company never intended to deal as stock-in-trade, the decisions referred to above would squarely apply to the case that the profit made on the sale of shares could only be treated to capital gains arising on the sale of the capital asset. He further pointed out that the view of the Tribunal that the assessee was dealing in shares and the gain to be assessed as business income is a perverse finding and unsupported by any materials. The question as to whether the assessee is in carrying stock-in-trade is a mixed question of law. That the assessee is only making as an investment on shares is thus made clear by reason of the fact that for more than one year, the Revenue has accepted the claim of the assessee that the profit made on the sale of shares as assessable as capital gains. He submitted that this court has every jurisdiction to reject the view of the Tribunal and to hold that the profit earned was not in the course of business and, hence, not to be assessed as a business income.

11. Countering the said submissions learned standing counsel appearing for the Revenue pointed out that the profit and loss account showed that in respect of the assessment year 1992-93 in the computation of the total income the assessee had shown only the profit on the sale of shares as its income. Other than this, the assessee had a very minor income in the hire purchase to the tune of Rs. 36,720. He further pointed out that in the context of the memorandum of association, contrary to the assertion of the assessee, it is evident that the assessee was carrying on systematic activity in dealing in shares and the documents filed before this court would clearly show that the assessee is dealing in purchase and sale of shares. He further stated that going by the regularity of shares transaction, the finding of the Tribunal that the assessee was dealing in shares as business is perfectly in order. In this connection, he referred to the decision in the case of G.Venkataswami Naidu and Co. v. CIT reported in [1959] 35 ITR 594 (SC) and submitted that no exception could be taken to the order of the Tribunal.

12. Heard both sides.

13. The question as to whether the income earned from the activity of purchase and sale of shares could be treated as income from business or in the nature of trade came up for consideration in the decision in the case of Bengal and Assam Investors Ltd. v. CIT reported in [1966] 59 ITR 547 (SC). In considering the question as to whether the dividend income earned in shares held by the company could be assessed under section 10 of the Indian Income-tax Act, 1922, the apex court pointed out that the mere holding of the property or investment by itself would not amount to a business within the meaning of the term “business”.

14. The apex court held that the word “business” would not include a mere holding of investments where the company like an individual purchases shares and holds them as an investment, the treatment could not be in any manner different from that of an individual, who invests his monies in shares for the purpose of getting dividends. Thus, on the facts, the apex court pointed out that a mere investment in shares per se would not bring company into the ambit of the term “business” for the purpose of treating the income earned therein as a business income.

15. The said principle was once again considered in the decision in the case of CIT v. H. Holck Larsen reported in [1986] 160 ITR 67 (SC). Referring to the decision of the House of Lords in the case of J.P. Harrison (Watford) Ltd. v. Griffiths (H. M. Inspector of Taxes) reported in [1962] 40 TC 281 (HL), the Supreme Court pointed out that the question as to whether the buying and selling of shares had an element of trading has to be seen from the first step of investment made, viz., purchase of the shares. When there is evidence to show that the purchase of the shares was not in the course of the trade/business, then the sale of the shares could not be held as one in the nature of business.

16. Hence, given the fact that the purchase itself was only by way of an investment, gain on the sale of shares, must receive the same treatment by extending the principle, which govern the investment at the purchase point. The Supreme Court further pointed out that the question as to whether the transaction of sale and purchase of shares were trading transactions or were in the nature of investment was a mixed question of law and fact. In so holding, the Supreme Court held that when the findings are not based on necessary legal principles or where there was an misapplication of law on the facts therein, it is open to the court to interfere with such a finding. The apex court pointed out therein that if a transaction was related to the business, which was normally carried on by the assessee, though not directly part of it, an intention to launch upon, an adventure in the nature of trade might readily be inferred. Thus, referring to the series of decisions of the apex court, it was pointed out that the question as to whether the transaction was of one kind or the other, ultimately rested on facts and that the mere investment in shares with intention to sell in future to bring a higher price, by itself, will not necessarily mean that the transaction was in the nature of trade. The decision in the case of CIT v. Distributors (Baroda) (P.) Ltd. reported in [1972] 83 ITR 377 (SC) is on the same line as had been held in Bengal and Assam Investors Ltd. v. CIT reported in [1966] 59 ITR 547 (SC). In the said decision, interpreting the phrase “wholly or mainly in the dealing in or holding of investment”, as appearing in clause (i) of Explanation 2 to section 23A of the Indian Income-tax Act, 1922, the Supreme Court held as under (page 382) :

“The word ‘mainly’ in that clause as well as in the main section 23A must necessarily take its colour from the word ‘wholly’ preceding the word, in those provisions. In other words, the company which comes within the scope of those provisions must be one whose primary business must be ‘in the dealing in or holding of investments’. If a company engages itself in two or more equally or nearly equally important business activities, then it cannot be said that the company’s business consists ‘wholly or mainly’ in dealing in a particular thing. Further, even in cases where a company has more than one business activity and one of its activities is more substantial than the others, unless that activity is the primary activity of the company, it cannot be said that that company is engaged in ‘wholly or mainly’ in any one of its business activities.”

17. The apex court held section 23A of the Indian Income-tax Act, 1922, would apply only to cases where the primary activity of the company is in the dealing in or holding of investments.

18. The judgments thus referred to above point out the principle that the question as to whether the assessee is engaged in dealing in shares as a course of business activity or not, rests on appreciation of materials, the starting point being the purchase of shares as an investment or stock-in-trade. If the purchase is a mere investment, then the result on the sale must necessarily be taken to the logical end to treat it as an asset yielding to capital gains. However, when investment itself is for the purpose of making it as a business then the income earned on dealing with such shares is to be treated as business income only.

19. In the background of the decisions of the apex court, when we analyse the facts herein in this case, it is seen that the assessee had declared on the dividend income received as well as on the profit of sale of shares apart from profits that the assessee had on the finance business. The fact remains that right from the beginning of the incorporation of the company, it had held shares only as an investment and 90 per cent. of its investment were only in the group companies. The assessee never intended to keep them as stock-in-trade and the Revenue also accepted the contention of the assessee for the preceding years and in the two following assessment years too. In respect of the assessment year 1992-93, the assessee claimed exemption under section 54E in respect of long-term capital gains arising on the sale of the shares held in Bank of Madura on the ground that it had invested the gains in three years IDBI bonds. The claim was rejected originally under section 143(1)(a) of the Act was, however, allowed in the appeal filed by the assessee. In reopening of the assessment under section 143(3) read with 148 of the Act, the Income-tax Officer treated the same amount as “business income”. The assessee went on appeal before the Commissioner of Income-tax (Appeals), who allowed the same in his order dated February 11, 1997, and treated the income from the shares as capital gains. The pattern is the same for the assessment year 1993-94. During the assessment year 1991-92, when the first sale of shares was effected by the company and a sum of Rs. 18,000 was offered as capital gains, the said claim was allowed by the Assessing Officer. However, the issue arises only for the assessment years 1992-93 and 1993-94, that too when the assessee had made a substantial profit on the sale. As held by the Supreme Court, the extent of income earned from the sale of shares cannot be the criteria to hold that the assessee was dealing in shares as a business venture. When the Revenue had no grievance on the same pattern of transaction done in the preceding years and in the subsequent years, the mere fact that the assessee had a profit in the assessment years 1992-93 and 1993-94, by itself, cannot change the nature of business of hire purchase as one dealing in shares.

20. It is seen from the facts projected before this court that the assessee-company, in its 15 years of existence till March 31, 1999, had made a total purchase of shares to the value of Rs. 3,35,42,536, whereas the cost of shares sold during the same period is Rs. 20,36,946.50. The total sales thus works out to less than 6.07 per cent. of the purchases. Considering the fact that the investments were made only in the group concern, that the assessee never considered these investments as stock-in-trade for the purpose of business and applying the decision of the apex court referred to above, we have no hesitation in holding that the Tribunal committed serious error in treating the income from shares as business income.

21. Leaving aside the regularity of carrying on business in shares, when the materials on record, as accepted by the Assessing Officer, show that the assessee never had the intention of investing in shares as stock-in-trade to carry on business as a main business activity, the sale of shares by the assessee-company could not be treated as sale in the course of business. Learned counsel for the Revenue pointed out that the memorandum of association clearly provided for the assessee carrying on its business on shares too. As held in the decision reported in Bengal and Assam Investors Ltd. v. CIT reported in [1966] 59 ITR 547 (SC), the memorandum of association by itself, would not be a conclusive material for holding that the sale of shares was of the shares held as stock-in-trade. Thus, when the investment originally made in the group concern and holding of shares therein are not by way of stock-in-trade, the result following therein, cannot be held as business to result in business income.

22. The Tribunal’s observation that the investment in share was clearly business venture was totally unsupported by any material, so too, the observation that the assessee had not shown the necessity for sale is also not supported by any documents. It is seen from the materials produced by the assessee before this court that the sale during the year was of the shares of the Bank of Madura and was only on account of reorganising the business. Thus, going by the facts thus seen, we have no hesitation in accepting the plea of the assessee that the profit that the assessee made on the sale of shares are assessable to capital gains and not as business income. The order of the Tribunal confirming the order of the Assessing Officer is not supported by any valid materials. Thus, the first two substantial questions of law in T. C. Nos. 120 and 121 of 2005 are answered in favour of the assessee. The order of the Tribunal in this regard be stands set aside. Accordingly, the tax case appeals stand allowed. No costs.

[Citation : 346 ITR 121]

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