TMI Blog2006 (2) TMI 218X X X X Extracts X X X X X X X X Extracts X X X X ..... in new ventures. As a part of this activity, the assessee had participated in the promotion of GSL by subscribing to 55,480 shares of GSL and to 8,74,533 shares of KTI. The shares in GSL were acquired in December, 1994 and those of KTI during the financial years 1992-93 and 1995-96. Along with this activity, the assessee also carried on the activity of dealing in shares. This is evident from the balance sheet of the company as on 31st March, 1998. The assessee has trading activity only in shares. The shares in which it trades are separately shown in the balance sheet as stock-in-trade. The shares in which it does not trade or in other words the shares which are held as longterm investments are shown under the head investments . Since the assessee did not purchase further shares, strengthens the contentions of the assessee that they were held as investments. Moving further the shares have been sold after holding them for about four to six years. If the intention of the assessee was to deal in these shares, then perhaps, it would not have waited for this long a period to dispose off the shares. Moving still further, it is seen that the assessee has sold its entire holding in GSL and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein the assessee was described as having adequate technical and managerial expertise in promoting and setting up sugar factory. According to the AO this was completely divorced from reality. According to him, there was no evidence to show that the assessee possessed either all or any of the four essentials of entrepreneurship viz. land, labour, capital and organization. He also observed that the transaction was not at arm's length insofar as that GSL and Hind Industrial Resources Ltd. (HIR) were companies of the same group. Therefore, he held that the sum of Rs. 42,50,000 received by the assessee was an income in the line of the assessee's business and hence added it to the total income of the assessee. 3. The CIT(A) observed that the non-compete agreement was a part of a broader design whereby a compensatory payment had been made to the assessee to sell its shareholding in GSL. He also observed that no source of income of the assessee had been extinguished or sterilized. Thus, he concurred with the view of the AO holding the agreement to be a sham one. 4. After apprising us of the facts as narrated above, the learned counsel took us to the various clauses of the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The letter also mentioned that as a condition for paying the compensation, the assessee would give a formal undertaking to refrain from selling or accepting any agency for explosives or other commodities competitive with those covered by the agency agreement. The assessee claimed this as a capital receipt not liable to tax. The Supreme Court took note of the fact that the formal undertaking required from the assessee to refrain from selling or accepting any agency for explosives was never given by the assessee. Also, it appeared that at the time of payment of the compensation and thereafter also both sides ignored this condition. The payment did not appear to be to enforce the undertaking. Whether the assessee carried out any competitive business was never investigated. The payment clearly appeared to be for the termination of the agency. While considering the facts and the arguments of the assessee in this context, the Supreme Court observed as follows: The principal question in dispute is whether the amounts received by the appellant as compensation for loss of agency are of the nature of capital or revenue. It is necessary in the first instance to eliminate two subsidiary con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financiers has to be construed in a wide term. If the term financiers has to be construed in a narrow sense, then, there was no need to mention the object of moneylending. Moneylending is certainly a narrower term than, financiers. Moneylending would constitute merely giving money as a loan with or without interest. On the other hand, financier would be including not only moneylending but would also include an activity like financing a project. Financing a project may be in any of the modes like giving money as loan or subscribing to the capital or providing capital in kind. Thus, it cannot be said that by being one of the promoters of GSL, the assessee had acted beyond the objects permitted by its memorandum of association. In fact, providing capital is one of the ingredients of entrepreneurship as mentioned by the AO in his order. The assessee does possess this ingredient which is evident from the fact that as on31st March, 1998, total funds available with it were to the tune of Rs. 5.33 crores. With the help of these funds only, the assessee had acquired 21 per cent shareholding in GSL by a meagre investment of Rs. 3,28,450. If this financial muscle is not a threat to GSL, what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those held as stock-in-trade. Thus, he strongly supported the orders of the authorities below. 11. We have duly considered the rival contentions and the material on record. At the outset, it may be mentioned that there can be no dispute with regard to the two main arguments of the learned Departmental Representative that law cannot follow the changing footprints of accountancy and that the entries in the books are not determinative of the issue. In questions like the one before us, the Supreme Court provides the best guidance which we find in the case of CIT vs. H. Hlock Larsen (1986) 58 CTR (SC) 53 : (1986) 160 ITR 67 (SC). In the said judgment their Lordships referred to the judgment of the House of Lords in J.P. Harrison (Watford) Ltd. vs. Griffths (40 Tax Case 281). As per the said judgment, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step-the purchase of the shares-was not taken as, or in the course of, a trading transaction. Let us examine the facts of the case in the light of these principles. 12. While dealing with the first ground of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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