TaxTMI 
TaxTMI 
2006 (6) TMI 78
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....ndustries Ltd., on April 9,1986, and XL Telcom P. Ltd., on October 3, 1986. All these shares were retained by the assessee till the assessment year 1988-89 when they were sold. The assessee incurred loss of Rs. 36,325 on the sale of shares of first mentioned two companies, but derived a profit of Rs. 2,70,000 on the sale of the shares of the last mentioned company. The shares of XL Telcom P. Ltd. were surrendered to the company on March 28, 1988. In the said transaction, the assessee got a profit of Rs. 2,70,000 and the net gain was assessed as Rs. 2,33,675. The case of the Revenue all along was that these shares were acquired for selling purpose at a future date and therefore the profits were assessable under the head "Business". The Income-tax Officer gave a show-cause notice as to why the income derived from the sale of shares should not be assessed under the head "Business". The assessee took the plea that profit derived on surrender of shares to XL Telcom P. Ltd. was in the nature of capital receipt and was not liable to tax. In their objections, the assessee also claimed that XL Telcom P. Ltd. was consisting of Shankarlal Agarwal and his family as one group and Shri Sunderlal....
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....les hereinbelow." In para. 1, it is further stated: "In consideration of the parties of the second party abstaining from interference with the management and running of the third party company and agreeing to sell their shares to the members of the first party or to their nominees, the members of the party of the first part have Agreed to purchase 3,800 equity shares: (total) from the members of the second party as set out herein below: 1. Kumari Sheetaladevi Agarwal Rs. 1,25,000 for 500 equity shares 2. Kumari N.K. Agarwal Rs. 1,25,000 for 500 equity shares 3. Shri Shankerlal Agarwal Rs. 70,000 for 300 equity shares 4. M/s. N.K. Leasing and Constructions P. Ltd. Rs. 5,20,000 for 2,500 equity shares Total Rs. 8,40,000 for 3,800 equity shares" There are some curious terms of settlement, whereby the second party would agree to abstain from interference with the management and running of the third party company. After selling all their shares, how was it possible for them to interfere with the management of the company? By clause 5 also it was agreed that the second party would be getting out of the company without any goodwill or any dividen....
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....tion to control the management, that the interest held by him in the company is generally referred to as controlling interest. Without control over the shares there can be no question of any controlling interest. It is only by virtue of the ownership of the shares that the composition of the board of directors of the company can be controlled by exercise of the voting rights attached to those shares for the purpose of electing or removing a director. It is by reason of the control from within the board of directors that it is possible to co-opt the directors of the choice of the person holding the controlling interest. The price paid for the shares by the vendee is therefore the price paid for acquiring the shares and the entire consideration is required to be considered for the purpose of computing the capital gains in the hands of the assessees." Learned counsel for the respondents has referred to a judgment of the Supreme Court in Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486. In this case, the relevant facts, which were before the Supreme Court, were that the principal activity of the assessee was investment of its capital in shares and stocks. It changed its i....
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....nt. It is true that the principal business of the assessee was to invest capital and to derive income from dividends on shares and interest on other investments; but, at the same time, the object contained in the memorandum of association of the assessee company clearly showed that one of the objects was also to deal in shares, stocks, debentures, etc., by acquiring, holding, selling and transferring them ...." Learned counsel for the respondents has also placed reliance on another judgment reported in New Era Agencies P. Ltd. v. CIT [1968] 68 ITR 585 (SC). In this judgment, the Supreme Court referred to the observations of Lord Justice Clerk in Californian Copper Syndicate v. Harris [1904] 5 Tax Cas 159, 165-166 (Court of Exch). The observations taken note of are: "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 in the sense of Schedule D of the Income-tax Act, 1842 assessable to income tax. But it is equally well established that enhanced values obtained from reali....