TaxTMI 
TaxTMI 
1992 (9) TMI 127
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of business. The total consideration received on sale of shares of HMM Ltd. is Rs. 73,23,073 out of which the profit of Rs. 70,52,361 has been derived by the assessee. There is no dispute about the quantum of profit. The dispute is about the head under which it is assessable. Whereas assessee claims the profit to be assessable as capital gains. Revenue is of the view that it is assessable as profit and gains of business. The difference in assessment of this profit under different heads is that if it is assessed as capital gains, deduction under s. 80T would be permissible to the assessee whereas if it is assessed as profits and gains of business, entire profits would be assessable to tax. That is the reason for the assessee to pursue the matter with the claim that the income on the sale of shares of HMM Ltd. in fact is assessable as capital gains and not as profits of business. The claim of the assessee has not been accepted by the Revenue mainly considering the fact that assessee is a dealer in shares and the shares including the shares of HMM Ltd. had been reflected as stock-in-trade. Assessee had sold some of the shares of M/s HMM Ltd. in the preceding year, the profit whereof....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st in reflecting these shares as stock-in-trade should not be capitalised by the Revenue for the purposes of assessment. According to the learned counsel though the assessee acquired the shares in 1976-77, no sale had taken place upto asst. yr. 1982-83. According to the learned counsel, the sale of shares was effected under compulsion of circumstances. Learned counsel referred to the bank certificates, paper book on pages 115, 8, 116, in support of the contention that the Bank of India had sold the shares of HMM Ltd. in order to liquidate the debt of subsidiary companies of the assessee. There was no intention of the assessee to deal in these shares as stock-in-trade and, therefore, the profit from sale of these shares could not be assessed as income from business. The learned counsel further contended that the mere fact that assessee was getting an advantage by showing the income as capital gains would not be a bar for allowance of the claim of the assessee. In this connection, reliance was placed on the decision of the Supreme Court in the case of Ram Narain Sons P. Ltd. vs. CIT (1961) 41 ITR 534 (SC). The learned counsel contended that the transaction must be approached in the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the past with any amount of frequency was not sufficient to establish that these shares were held as an investment. He pointed out that the sale of shares had taken place in preceding years and income assessed as profits and gains of business. Reliance was placed on the decision of the Supreme Court in the case of New Era Agencies P. Ltd. vs. CIT (1968) 68 ITR 585 (SC) in support of the contention that frequency of transaction is not a decisive factor for determining the nature of income. It was contended that the mere fact that assessee had held these shares for a long time and had derived income from dividend is also not enough to hold that these shares were held as investment and not as stock-in-trade. According to the learned Departmental Representative the fact remains that assessee bought these shares with the clear intention of trading and, therefore, the income was assessable as income from business. 5. We have given our careful consideration to the rival contentions. The question for our consideration is as to whether the assessee held the shares of HMM Ltd. as investments or as to whether these shares were held as stock-in-trade. The fact that assessee is a dealer in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 4,46,000. As per details at papar book page No. 110 the cost of these shares has been shown at Rs. 45,873. There was thus a gain of Rs. 4,00,127 in respect of sale of HMM Ltd. shares. We do not have details of any expenditure having been incurred by the assessee in connection with the sale. A perusal of the assessment order reveals that assessee had disclosed a gain of Rs. 3,12,127 on sale of investments. This amount has been assessed as disclosed. The assessment order does not contain any details about the nature of investments nor do we find any deduction under s. 80T having been allowed to the assessee. In view of these facts, we cannot give much weight to the assessment of profits on sale of shares of HMM Ltd. as profit on sale of investment, during asst. yr. 1985-86. 6. Assessee had acquired the shares of HMM Ltd. for the first time in asst. yr. 1976-77. Upto asst. yr. 1981-82 sale of these shares had not been effected. However, for asst. yr. 1982-83 onwards assessee has been selling these shares. The claim of the assessee that the sale of shares was under compulsion of circumstances and in fact it was the Bank of India that sold the shares to recover the loans advanced t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....shares took place. Was it under the instructions of the assessee that the Bank of India sold the shares or otherwise is not clear from these letters. There is a letter dt. 18th Aug., 1986 on page 117 of the paper book written by Shri Hanumant Singh, Director of the company to the Manager (Security Section), Bank of India asking the Bank of India to deliver 15,000 equity shares of M/s HMM Ltd. to J.S. Sahni & Co., 25Stock Exchange Building, Asaf Ali Road, New Delhi against which a payment of Rs. 15 lakhs in three instalments of Rs. 5 lakhs each was promised to be made. The bank was also asked to return the balance of equity shares of HMM Ltd. on the satisfaction of loan of M/s Steels. Whereas these letters do not conclusively establish that the sale of shares took place at the instance of the assessee, these equally do not establish that the sale took place against the wishes of the appellant. In any case, as has been observed from the list of sale transactions effected during the year under appeal in respect of shares of HMM Ltd. assessee had sold the shares in different lots prior to the sale effected by the bank during this year. The sale of shares of HMM Ltd. has also taken plac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ish that the shares were held by the assessee as part of investment. In the case of Saroj Kumar Majumudar vs. CIT (1959) 37 ITR 242 (SC) their Lordships of the Supreme Court have held that where a transaction was not in the line of business of the assessee but was an isolated transaction the onus was on the Department to prove that the transaction was an adventure in the nature of trade. However, in this case assessee is in business in the purchase and sale of shares and sale of shares of HMM Ltd. was not the isolated transaction and, therefore, it was for the assessee to establish that such transactions were not business transactions. In the case of Ram Narain Sons P. Ltd. vs. CIT their Lordships of the Supreme Court have held that the initial intention of the assessee is an important factor in considering about the nature of transactions. In this case, we do not find any material on record to support the assessee's claim that the intention of the assessee was not to acquire these shares as stock-in-trade. As already observed the mere fact that upto asst. yr. 1981-82 no sale of shares took place out of shares of M/s HMM Ltd. is also not a decisive factor for considering the nature....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ift, has taken place in the year under appeal. In case it is found that no sale of bonus shares or the shares received by way of gift have been made during the year under appeal, no further probe would be necessary as the entire profit on the sale of shares out of the purchased lots would be assessable as profits and gains of business. However, if it is found that assessee has sold some bonus shares or/and shares received by way of gift of HMM Ltd. the Assessing Officer shall have to consider as to whether these shares had been converted by the assessee as stock-in-trade and held as such before effecting the sale. We may clarify that presumption in respect of bonus shares and the shares received by way of gift is that these are initially received on capital assets as held by their Lordships of the Supreme Court in the case of Madan Gopal Radhey Lal. It would, however, be permissible for the Revenue to show that these shares had been converted by the assessee as stock-in-trade before its sale. However, the burden squarely rests upon the Revenue in this regard. The issue shall be decided accordingly afresh in accordance with law and our directions after giving reasonable opportunity ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee they found that there was no hope of recovery of any amount from these two companies against the loans provided to them by the assessee-company. It was sought to be explained that the liability of the company even after clearing the bank liabilities towards other creditors excluding the assessee-company were to the tune of Rs. 95.57 lakhs and Rs. 25.41 lakhs respectively. It was accordingly claimed that assessee decided to get the shares allotted to the extent possible from the two companies against the loans and advances given by the assessee-company. According to the assessee this was done because the assessee-company was of the view that with the shares there was some possibility of transferring the same and recovering part of it whereas otherwise in the case of unsecured loans there was no question of any recovery. The assessee accordingly claimed to have suffered a genuine loss and allowable as a deduction in computing its income. 9. The Assessing Officer, considering the fact that the allotment of shares was by the two subsidiary companies of the appellant and the fact that the sale of shares effected to Bhavani Trading Corporation, a partnership concern in which a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee and these have been sold. These transactions, according to Shri Sharma, are real transactions and not sham transactions. Reliance was also placed on the decision of the Supreme Court in the case of Union of India & Ors. vs. Playworld Electronics P. Ltd. (1990) 184 ITR 308 (SC) and another decision in the case of Ensign Tankers (Leasing) Ltd. vs. Stokes (Inspector of Taxes) (1991) 191 ITR 419 (CA) at page 435 to support the contention that avoidance of tax by legal means was permissible. It was accordingly pleaded that the loss incurred by the assessee in the sale of shares may be allowed as a deduction. 12. The Departmental Representative, on the other hand, contended that the value of shares of M/s Durable Steels P. Ltd. and Hanuman Steels P. Ltd. was determined at Rs. 6 per share as against which assessee has got the shares allotted at Rs. 100 per share. The companies of which the shares were allotted are subsidiaries of the assessee-company and the sale of shares has also been made to a firm in which the appellant company has got substantial interest. According to the learned Departmental Representative when the market value of the shares has been determined at R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....this meeting that the appellant-company shall have no objection if the address is used by the firm for getting registration with Government authorities. 14. Shri Hemant Singhji is one of the directors of the appellant-company. His wife Smt. Deergh Kaur is also one of the directors of the appellant-company. These two directors are having 66% (2/3rd) share in the partnership firm of Bhavani Trading Corporation. Bhavani Trading Corporation has been allowed to use appellant's premises free of rent for its business activities. The Assessing Officer has also pointed out in the assessment order that the third partner in Bhavani Trading Co. is the son of one of the directors of the company. From the facts stated above, it is abundantly clear that the parties to the transactions of allotment of shares and sale of shares are closely connected. It is in the light of these facts, we have to consider the genuineness of the transactions of allotment of shares and sale thereof. There are two separate transactions involved in respect of this issue. One transaction is allotment of shares by the subsidiary companies of the appellant-company and the second transaction is that of sale of shares. Le....
X X X X Extracts X X X X
X X X X Extracts X X X X
....debt as claimed. Firstly, the contention of the assessee that his debt was not secured and, therefore, he had no chance of recovery does not hold water. We have pointed out elsewhere in this order that assessee was almost holding the entire shares in the subsidiary companies and was in command of taking decisions in respect of payment of debts. The contention of the assessee that the decision to get the shares allotted was in the interests of the assessee with a view to ensure recovery of the debt to the extent possible, lacks credibility. Moreover, the very fact that the shares have been sold to a firm in which two of the directors are having 66% (2/3rd) shares and 1/3rd by son of another director also supports the view of the Revenue that the transaction entered into by the assessee for the acquisition of shares and the sale thereof was a sham transaction. In this connection, we may refer to the decision of the Supreme Court in the case of Playworld Electronics P. Ltd. where their Lordships have held that even though a corporation might be a legal personality distinct from its members the Court is entitled to lift the mask of corporate entity, if the concept is used for the tax e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....clared in the opening stock. Assessee claimed that the company M/s Krishna Fabrics P. Ltd. have suffered heavy losses and accordingly it was justified in reducing the value of these shares by 50%. The claim of the assessee has been rejected for want of evidence. The position has not improved before us. In fact, learned counsel for the assessee did not seem to be serious about pressing this ground of appeal. Considering the facts and circumstances of the case we have no reason to interfere in the finding of the CIT(A). 16. Next ground of appeal is relating to the loss of Rs. 6,95,125. The loss claimed by the assessee has been disallowed by the Assessing Officer as fictitious. Assessee had claimed a loss of Rs. 6,95,125 on transactions conducted through M/s L.R. Munjal, a share broker. Loss was disallowed by the Assessing Officer on the ground that purchase and sale of shares through the aforementioned broker was a colourable devise adopted by the assessee company in collusion with the share broker to reduce its tax liability. It was observed by the Assessing Officer that all the transactions relating to the sale and purchase of shares in respect of which loss was claimed by the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Officer was that whereas the ledger account with M/s L.R. Munjal filed by the assessee company showed the purchase price having been credited on 7th, 11th and 12th July, 1986 but the day book of the broker showed that the shares in question were purchased on behalf of the assessee company on 7th, 11th, 12th and 18th Aug., 1986. The Assessing Officer accordingly came to the conclusion that the loss claimed by the assessee was not a genuine loss and he accordingly disallowed the same. The Assessing Officer further observed that the broker had accommodated the assessee as it had large dealings with him in the past. 17. The learned counsel for the assessee contended that the transaction of purchase and sale had been substantiated by the assessee by supporting evidence. The authorities below were not justified in declining the claim of the assessee. In this connection, reliance was placed on the statement of the broker. Learned counsel contended that there is no presumption that a witness will come forward to accommodate the assessee. The learned Departmental Representative, on the other hand, contended that the loss claimed by the assessee was not established to have been genuinely....