2006 (6) TMI 78 - HC - Income Tax

Shares sold as part of trading activity taxed as business income, not investment. Court rules in favor of Revenue.

The court held that the excess amount received from the sale of shares by the assessee was liable to be taxed as business income, as the shares were ... Excess amount received from the sale of shares - liable to capital gains tax or should be treated as capital receipt - '(1) Whether the assessee is a dealer in shares or a mere investor in the shares and whether the excess amount of Rs. 2,70,000 received from the sale shares is liable to capital gains tax or should be treated as capital receipt? (2) Whether the Tribunal was not justified in holding that the sum of Rs. 2,70,000 received by the assessee-company under deed of settlement dated March 28, 1988, was transferred towards the sale of shares, and not for allowing other group of shareholders to take over the management of the said company?' – shares were purchased on May 7, 1986, April 9, 1986 and October 3, 1986, and were sold during the assessment year 1988-89, and as such, it could not be said that this was an investment in shares independent of the trading activity of the company. - what was received by the assessee by selling the shares, was the consideration for the shares and therefore was assessable to tax. - we answer question No. 1 in favour of the Revenue - question No. 2 is a question of fact and not a question of law and therefore we decline to answer the said question. Issues Involved:1. Whether the assessee is a dealer in shares or a mere investor in the shares and whether the excess amount received from the sale of shares is liable to capital gains tax or should be treated as capital receipt.2. Whether the Tribunal was justified in holding that the sum received by the assessee-company was transferred towards the sale of shares and not for allowing another group of shareholders to take over the management of the company.Issue-wise Detailed Analysis:Issue 1: Nature of Assessee's Activity (Dealer vs. Investor)The primary issue is whether the assessee's activity in shares constitutes trading (dealer) or investment (investor). The assessee purchased shares in various companies and sold them during the assessment year 1988-89. The Income-tax Officer argued that these shares were acquired for future sale, thus the profits should be assessed under 'Business'. The assessee contended that the profit derived from surrendering shares was a capital receipt, not taxable. However, both the Commissioner of Income-tax (Appeals) and the Tribunal found that the excess consideration received had a close nexus with the shareholding in the company XL Telcom P. Ltd. The Tribunal confirmed the order, leading to the present reference.Issue 2: Nature of Settlement AmountThe second issue was whether the sum received by the assessee-company was for the sale of shares or for allowing another group to take over the company's management. The court declined to answer this question, deeming it a question of fact rather than law.Analysis of Relevant Judgments and Clauses:The court examined various clauses in the deed of settlement, highlighting that the second party agreed to abstain from interfering with the management and running of the third-party company. The court found the terms curious, questioning how the second party could interfere after selling all their shares. The court referred to several judgments to elucidate the nature of the transaction:1. Patna High Court in Raghubar Narain Singh v. CIT: The court found that the price received was not just for shares but also for delegating managing director powers. However, the present case showed an outright sale of shares, with the money received being the consideration for the shares.2. Madras High Court in Venkatesh (Minor) v. CIT: The court held that controlling interest in a company is an incidence of shareholding and cannot be transferred without transferring shares. The price paid for shares remains the price of those shares, enhancing their value due to controlling interest.3. Supreme Court in Dalhousie Investment Trust Co. Ltd. v. CIT: The court concluded that shares were purchased and sold with the motive of earning profit, not merely for investment to derive income.4. Supreme Court in New Era Agencies P. Ltd. v. CIT: The court observed that the entire amount received was for the shares, not a composite payment for shares and controlling rights.5. Supreme Court in Juggilal Kamlapat v. CIT: The court reinforced that the nature of the transaction indicated trading activity rather than mere investment.Conclusion:The court concluded that the shares were purchased and sold as part of the trading activity, not as an independent investment. Therefore, the excess amount received from the sale of shares is liable to be taxed as business income. The court answered question No. 1 in favor of the Revenue and against the assessee, and declined to answer question No. 2 as it was a question of fact.