TMI Blog2012 (6) TMI 599X X X X Extracts X X X X X X X X Extracts X X X X ..... gal position that even a single and isolated transaction can be considered as adventure in the nature of trade. In our view, the purchase and sale of the shares on the facts of the case has to be considered as adventure in the nature of trade and profit has to be assessed as business income - Decided in favor of Revenue. - ITA No.5457/Mum/2009 - - - Dated:- 25-4-2012 - B R Mittal, Rajendra Singh, JJ. For Appellant: Ms Rupinder Brar For Respondent: Shri Yogesh A Thar ORDER Per: Rajendra Singh: This appeal by the assessee is directed against the order dated 29.7.2001 of CIT(A) for the assessment year 2006-07. The only dispute raised by the assessee in this appeal is regarding nature of income earned by the assessee from the sale of shares. 2. The facts in brief are that the assessee had purchased 30700 shares of M/s. Millennium Alcobev P. Ltd. (MABL), an unlisted company for a sum of Rs.6,54,28,660/- on 7.5.2003 in assessment year 2004- 05. The said shares were sold in assessment year 2006-07 for a sum of Rs.16,66,60,000/-. The assessee declared the income from sale of shares as long term capital gain which was computed at Rs.9,64,26,643/- after indexation. Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re also classified as investment in the balance sheet. The assessee also submitted that, for treating income as business, it was required to be shown that the assessee was in the organized activity of purchase and sale of shares. The assessee in this case had purchased shares of one company as a strategic investor and shares were not tradable as the company was unlisted. Assessee had to sell the shares because business plan of MABL required huge capital and assessee was not in a position to infuse further capital and accordingly it sold the shares. The assessee had purchased shares out of share application money received from M/s. Feed Back Computers Ltd. and not from any borrowings. As regards price paid for the purchase of shares, assessee submitted that the company was an unlisted company, and therefore, there could not be any market price for the shares. Such shares had to be transferred only at a negotiated price between buyer and seller which can be decided on the basis of future business plan of the said company. 2.2 The AO was however not satisfied by the explanation given. It was observed by him that the shares had been purchased by the assessee with a view to tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in case of G. Venkataswami Naidu vs. CIT (35 ITR 594) and in case of CIT Vs Sutlej Cotton Mills Supply Agency Ltd. (100 ITR 706) . The AO also observed that the amount received on sale of shares could also be considered as business income under section 28(ii) as per which any compensation received in connection with termination of the management or modification of terms and conditions relating thereto by any person managing the whole or substantially the whole affairs of an Indian Co. has to be considered as business income. MABL had acquired shares for management control and running of the business which had been terminated and the amount received on sale of shares which was linked to the said termination could be considered as business income. The AO assessed the income of Rs.10,12,31,340/- as business income. 3. The assessee disputed the decision of AO and reiterated the submissions made before AO that the shares had been purchased with the intention of running and growing the company and not for trading of shares as shares were not listed and were not freely trade-able. As regards high price of shares it was submitted that at the time of formation of new company, the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case had been acquired from borrowed funds, the said borrowed funds were replaced by share application money within a short-span of 12 days. Though the MOA of the company authorized purchase and sale of shares, this could not be conclusive in deciding whether the assessee was doing any business of dealing in shares. Considering the facts and circumstances of the case, CIT(A) held that intention of the assessee was to acquire controlling power and not for trading in shares. CIT(A) also did not agree with the stand of the AO that the sale consideration of the shares could be considered as compensation under section 28(2)(ii) of the Act. CIT(A), therefore, concluded that income from sale of shares had to be assessed as capital gain. Aggrieved by the said decision, assessee is in appeal before the Tribunal. 4. Before us, the ld. AR for the assessee reiterated the submissions made before the lower authorities that the assessee was only a strategic investor and not a trader in shares. The assessee had not purchased and sold any other shares. The shares had been acquired for taking management stake with a view to managing the company. The assessee was one of the promoters and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO. It has also been submitted by the assessee that it was only a strategic investor and not a trader in shares. The assessee has also disputed the claim of AO that the shares had been purchased from borrowed funds and has contended that shares were acquired from share application money received from M/s. Feed Back Computers Ltd. 5.1 The AO has not accepted the contentions of the assessee. It has also been observed by him that the assessee was incurring huge losses which was Rs.18.64 lacs till assessment year 2003-04 which had increased to Rs.37.13 crores as on 31.3.2005 and Rs.60.35 crores as on 31.3.2006. Shri R.K. Jain who was the director of MABL for the last many years had vast experience in the breweries business and was fully aware that the shares were not going to yield any dividend income. No investor would have purchased the shares at a high price of Rs.21.30 per share when the book value was almost nil. The assessee had also made payment for purchase of shares from the borrowed funds which was later replaced by share application money received from M/s. Feed Back Computers but no shares were allotted even till date. Therefore, source of investment remained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a director. There is no dispute that MABL had accumulated losses of Rs.18.64 crores in assessment year 2003-04 which went on increasing in the subsequent years and had reached a large figure of Rs. 60.35 crores as on 31.5.06. Shri R.K. Jain who had vast experience in the breweries business and was also director of MABL was fully aware that MABL was not going to declare any dividend for many years in future. Despite this, he decided to acquire 20% shareholding in MABL at the rate of Rs.21.30 per share of face value of Rs. 10.00 when the book value of share was almost nil. 5.5 No investor will purchase the shares at such high price when there was not going to be any return in the years to come. Further the shares had been purchased from borrowed funds as there was clear nexus regarding payment of money from borrowed funds. Though, subsequently, these funds were replaced by share application money received by the assessee from M/s. Feedback Computers Ltd., the shares were never allotted and, therefore, nature of the money received remained as borrowings. No investor will purchase shares of a loss making company at such price from borrowed funds, when it is not going to earn any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company. Further, the clause (4.1) in Shareholders Agreement clearly provided that the supervision of business operations, affairs and activity of the company including activity of the MD, Shri R.K. Jain or Executive Committee was the responsibility of the Board which also included the representatives of other promoters. Thus Shri R.K. Jain had to work under the overall control and supervision of the Board of Directors. The clause 4.4.2 of the Shareholders Agreement also provided that Shri R.K. Jain, the MD will exercise his authority in consultation with the executive committee. The assessee company thus, did not have any managing rights due to shareholding. 5.7 The reliance by the CIT(A) on the judgment of Hon'ble Supreme Court in the case of Ramnarain Sons (P) Ltd. is misplaced. In the said case, the assessee had purchased shares of a textile company at a price much higher than the market price to acquire the controlling voting rights which gave the assessee the managing agency rights. The managing agency was one of the businesses of the assessee company. It had acquired controlling rights over the company in order to get managing agency rights. The Hon'ble Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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