TaxTMI 
TaxTMI 
1995 (6) TMI 47
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.... case. Therefore, we are mentioning the facts of only one case, i.e., M/s. Atlas Corporation. 4. Assessee declared its income for the assessment year at Rs. 40,791. According to the assessee the only activity carried on by it was purchase of shares by way of investment and sales thereof. Therefore, it declared income arising out of sale and purchase of shares under the head ' Capital gains '. It also earned income by way of dividend which was declared under the head ' Income from other sources '. Details of income declared by the assessee may be summarised as under : Capital gains Short-term capital loss Rs. 36,97,145 Long-term capital gain Rs. 50,85,681 Less : Deductions Rs. 30,55,008 Rs. 20,30,673 ....
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....bsp; ------------- On detailed investigations made by the AO, two findings were given by him, viz., (i) on the basis of its conduct, assessee neither could be called an investor company not its share transactions could be treated as normal investments and the profit and loss generated from the transactions were, therefore, to be treated as profits and gains from business and, therefore, assessable u/s 28 of the Act and not under the head capital gains as claimed by the assessee ; and (ii) that all the transactions made by the assessee in shares which generated losses were artificial, non-genuine and sham and were transacted with an ulterior motive to evade the taxes. These findings are recorded in paras- 11 and 17 of the assessment order. On appeal, the CIT(A) dis not agree with the AO that the transactions in shares were fictitious or artificial. However, it was held by him that income /loss in purchase of shares was assessable under th....
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....5. Besides this, assessee also earned profit of Rs. 79,900 on the purchase and sales of shares during the year itself. Assessee also paid the balance payment of Rs. 5 per share in respect of 45,000 rights shares. Thus, the holding of shares at the close of this year remained at 45,000 rights shares of M/s. Oswal Agro and these have been shown in the balance-sheet at Rs. 17,62,500. The profit and loss arising out of the aforesaid sales was declared by the assessee as short-term capital gain/loss which has been accepted by the department as such u/s 143(1). 7. In the next year ending on 30-6-1986, relevant for assessment year 1987-88, assessee was again offered 27,900 rights shares of M/s. Oswal Agro which were purchased at the rate of Rs. 25 per share amounting to Rs. 6,97,005. Thus, the total holding of shares of Oswal Agro Mills increased to 72,900 at the end of the year, Besides this, assessee also purchased and sold the debentures during this year itself and incurred loss of Rs. 97,915. This loss was declared as short-term capital loss which was also accepted by the department u/s 143(1). In the next year, i.e., assessment year 1988-89, there was no change in the holding of s....
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....d, assessee also declared short-term capital loss arising from the purchase and sale of shares at Rs. 36,97,145 which has been held by the AO as bogus loss but has been held as business loss by the CIT(A). 10. Before dealing with the contentions of the parties, we would like to refer the reasonings given by the lower authorities in respect to the findings recorded by them. The finding of the AO that assessee was dealer in shares and debentures, has been sustained by the CIT(A) on the following reasons : (i) that the purchase and sale of shares and debentures in assessment year 1990-91 and in earlier years clearly show that assessee AOP was carrying on substantive business activity in a systematic and organised manner with motive to earn profits ; (ii) that assessee had started borrowing funds from assessment year 1989-90 for the purpose of purchasing shares and debentures. The huge borrowings in crores were only with a view to accelerate the business activities on high scales ; (iii) that assessee had purchased and sold shares and debentures mostly of two companies, i.e., M/s. Oswal Agro Mills Ltd., and M/s. Bindal Agro Chem Ltd., which were quoted in the stock exchange....
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.... (ii) Minerva Corporation, (iii) Vikas Corporation, and (iv) assessee-AOP. 11. The learned counsel for the assessee has vehemently argued and assailed the finding of the CIT(A) that assessee was dealer in shares and debentures and, therefore, the resultant income/loss was assessable underthehead " Income from business or profession ". It was submitted by him that all the factors taken into consideration by the CIT(A) were not relevant in arriving at the aforesaid finding. The following are his submissions : (i)(a) that the CIT(A) was wrong in holding that the assessee carried on the activity of purchase and sale of shares and debentures in a systematic and organised manner with a motive to earn profits. He drew our attention to the observations of the CIT(A) at page-11 of his order that assessee had sold 93,750 shares in assessment year 1986-87 and submitted that this observation is factually wrong. He referred to the balance-sheet as on 30-6-1984 appearing at page 7 of the paper book to show that assessee had never purchased 93,750 shares. In fact, it was pointed out by him that Raipur Trading Co., one of the member of the AOP, introduced the right value against 93,750....
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....the association. The fact that the assessee did not sell these shares when the prices were high, itself shows that there was no motive to earn profit in the capacity of a trader. In view of these facts, it was submitted by him that the CIT(A) was not justified in holding that the assessee was carrying on business activity on an organised manner. (ii) The CIT(A) was not justified in observing that assessee had started borrowing funds for purchase and sale of shares/debentures. He submitted that the assessee had shown long-term capital gain of Rs. 50,85,681 in respect of 1,37,640 shares of Oswal Agro Mills Ltd., and 38,250 shares of Bindal Agro Chem and for the purchase of such shares it had never borrowed funds. He took us through the various balance-sheets for various years to show that no funds were borrowed for acquisition of these shares. Therefore, the observation of the CIT(A) is factually wrong insofar as these shares are concerned. Regarding the borrowings shown in assessment year 1989-90 in the names of River Finance Ltd., and Jagatjit Sugar Mills, it was clarified by him that the sum of Rs. 1, 19,58,975 in the name of Jagatjit Sugar Mills represents the amount payable t....
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....ong in holding that predominate object of the assessee was to carry on the business in shares and debentures. He took us through the preamble and other terms of the memorandum of association to show that the object of the association was to acquire shares, debentures, securities and other movable items by way of investments or to deal in such assets. The object was for both the purposes and, therefore, it cannot be said that predominant object was to carry on business in shares and debentures. He also stated that assessee had filed Form No. 49A in which activity has been shown as purchase of shares and debentures by way of investments. He further submitted that assessee had always shown them as investments. The profit & loss shown by the assessee under the head " Capital gain " has been accepted as such by the department. Assessee had never shown the holding of shares as stock-in-trade. The acquisition of shares of Oswal Agro Chem in earlier years remained with the assessee intact and assessee never sold them but they were distributed among the members in accordance with the terms of the Dissolution Deed. All these facts only show that these shares had been purchased with intention....
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....to other aspects to which our attention was drawn by the learned Sr. Departmental Representative, viz., (i) that even the initial acquisition of shares was out of borrowed funds. He referred to the balance-sheet of Raipur Trading Co. as on 30-12-1984 which showed borrowings of Rs. 20,25,000 in the name of Progressive Commercial Enterprises. (ii) That assessee itself had shown the holding of shares for the first time as investment in the balance-sheet as on 30-6-1987. His submission was that in earlier years assessee had not shown them as investments. In reply, the learned counsel for the assessee strongly objected to the admission of the fresh material, i.e., the balance sheet of Raipur Trading Co., since it was never before the lower authorities. However, at later stage he did not object to its admission but argued that this fact is not relevant for deciding the issue. He submitted that Raipur Trading Co. was a hundred per cent subsidiary company of Progressive Commercial Enterprises and, therefore, the said amount could not be treated as borrowings in real sense. He further argued that the borrowing was not by the assessee-AOP and if any member of the AOP has brought its capital ....
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....ated in order to reduce the profits so as to avoid the payment of taxes ; (h) that there was no broker involved in all these transactions ; (i) that huge credits were allowed by Jagatjit Sugar Mills and there was no direct payment to the company but the transactions were settled by journal entries ; (j) that assessee had made huge transactions in crores only with a capital base of Rs. 50,000 ; and (k) that the behaviour of the assessee was that of a trader and not of an investor. In view of the above facts and circumstances of the case, the learned Sr. Departmental Representative concluded that the CIT(A) was not justified in holding these transactions as genuine. 14. On the other hand, the learned counsel for the assessee has strongly opposed the contentions of the learned Sr. Departmental Representative. He has made the following submissions : (i) that there was no legal bar in forming various AOPs at the same time. Even the Supreme Court had held that there could be various genuine firms having same partners having the same ratio in the profit and loss. On the contrary in the present case the members of all four AOPs were not the same ; (ii) that it is no....
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.... dividend but surprisingly held the transaction of purchase and sale of shares as artificial. The shares were registered in the name of the assessee and later on were duly transferred in the name of Jagatjit Sugar Mills. The requisite stamps were affixed on the transfer deed. The change had been duly recorded in the register of shareholders ; (viii) the other factors such as absence of brokers, purchase of shares on credits, Shri Abhaykumar Oswal being connected with Oswal Agro & Bindal Agro are irrelevant consideration in deciding the genuineness of the transaction. In view of the above submissions, the learned counsel for the assessee concluded that the CIT(A) was justified in holding the transactions of purchase and sale of shares as genuine because in law there was no bar in purchase and selling of shares from and to the same person, particularly when the change has been duly recorded in the register of shareholders. 15. Both the parties have been heard at length and the materials to which our attention was drawn by both the parties had been considered carefully. First, we would like to dispose of the departmental appeal since the contention of the revenue is that enti....
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....of shares on credits and Abhaykumar Oswal being connected with the companies, viz., Oswal Agro Mills and Bindal Agro Chem, are irrelevant in deciding the character of the transaction. Keeping in view all the facts of the case, we are of the opinion that the transactions entered into by the assessee are genuine transactions and, therefore, the order of the CIT(A) is upheld on this issue. 16. Now we take up the appeal of the assessee. The issue raised in this appeal is whether on the facts of the case can it be said that the assessee is a dealer in shares and debentures. It is pertinent to note that answer to this question would depend upon the facts of each case and no test can be laid down for universal application. In this connection it is worthwhile to note the following observations of Lord Justice Clerk in the case of Californian Copper Syndicate v. Harris [1904] 5 TC 165 which have been approved by the Hon'ble Supreme Court in the case of P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 : " 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 ....
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....ference No. 16 of 1948] that bonus shares received by a shareholder who carries on business in shares and securities " Ipso facto become accretion to his stock-in-trade ". Bonus shares would normally be deemed to be distributed by the company as capital and the shareholder receives the shares as capital. The bonus shares are accretions to the shares in respect of which they are issued, but on that account those shares do not become stock-in-trade of the business of the shareholder. A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of business ; in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity. Bonus shares having been received by the assessees in respect of their stock-in-trade did not, therefore, become part of their stock-in trade, merely because they were accretions to the stock-in-trade. The bonus shares were received as capital ; they could be converted by the assessees into their sto....
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.... these 72,900 rights shares remained intact up to 31-3-1990 when the association was dissolved. Ultimately these shares were distributed between the two members, viz., Nechville Investment Co. and Raipur Trading Co., in the manner provided in cl. (14) of the memorandum of association. These shares were never sold in spite of high prices during this period. The shares were acquired with its own capital. Assessee had shown these shares in the balance-sheet as investment. During all these years, assessments have been framed by the AO treating the assessee as an investor. From the details furnished, it appears that assessee had always shown income/loss on the sale of either shares or debentures as short-term capital gain/loss in the returns of preceding years and the department had been accepting the same as such. During all these years it had been enjoying income by way of dividends on these shares. All these facts considered as a whole lead to the only conclusion that assessee acted as an investor so far as these 72,900 shares of Oswal Agro Mills arc concerned. Therefore, we hold that assessee was not a dealer in these shares and the income shown by the assessee on distribution of th....
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.... in our way. Motive to earn profit is always there in both the situations. This is not a decisive factor by itself. The conduct of the assessee does not show that it kept these shares as stock-in-trade. The other factors considered by the CIT(A) and relied upon by the revenue are not relevant insofar as acquisition of these shares are concerned. We would like to point out that observations of the CIT(A) that assessee had sold 93,750 shares in assessment year 1986-87 are factually wrong. We have already stated while discussing the facts of the case that one of the member had contributed the right value of 93,750 shares of Oswal Agro Mills and not the shares itself. It was an intangible asset which was contributed by the member. Hence, we hold that the CIT(A) was wrongly influenced by this circumstance. Another factor which influenced the CIT(A) is that the assessee had been showing losses every year. The chart given by the CIT(A) at page-11 of his order shows that these are short-term losses accrued to the assessee on the sale of debentures up to assessment year 1988-89 which is distinct and separate in nature from shares. It is only in 1989-90 that losses are in respect of shares. ....
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....assessed as capital gain. So, we are required to decide the nature of acquisition of 2,10,730 shares only. From the details furnished in the paper-book, we find that assessee had no funds of its own for the purchase of these huge quantity of shares. The balance-sheet for assessment year 1988-89 shows that its own capital had been exhaustive in acquiring 72,900 rights shares of Oswal Agro Mills and 38,250 equity shares of Bindal Agro Chem Ltd. The net fund available as on 30-6-1987 was Rs. 10,908 by way of cash and bank balances. No other capital is brought by the members of the association. From pages 8 & 9 of assessee's ledger it appears that shares had been purchased from Jagatjit Sugar Mills Ltd. on credit and the payment thereof had been made from time to time. The balance-sheet of the assessee as on 31-3-1989 shows that unpaid amount to the company was substantial one, i.e., Rs. 1, 19,58,975. It also shows that assessee had obtained loans amounting to Rs. 1 crore from River Finance Ltd. and Rs. 1,38,153 from State Bank of Patiala. No other asset has been acquired in this year. All these facts clearly show that these shares were purchased by the assessee out of borrowed funds. ....