TMI Blog2013 (9) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... ment dated 16 May 2002 there was a three years lockin period in respect of the subscribed share capital and the appellant could not sell the same during that period. In case the appellant had to sell during three years lock in period the sale was restricted only to the other two parties to the shareholders agreement. Moreover, even after the three year lock in period was over, the other two parties to the agreement continue to have right of preemption in respect of the appellant's shareholding. The shares had been purchased out of borrowed funds and yet the Apex Court held that the same would not by itself indicate/evidence an intent to deal in shares. Taking all the cumulative factors including the decision of the Supreme Court in Ramnarain Sons (P) Ltd. [1960 (12) TMI 3 - SUPREME Court] the impugned order was incorrect in holding that 20% shares of M/s. MABL subscribed to by the appellant was stock in trade of the appellant and not its capital asset, as contended by the revenue. - Decided in favor of assessee. Though the appellant had right to appoint its nominee as a Manager of M/s. MABL yet the nominee could not exercise authority as a Manager on his own but had to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned order dated 25 April 2012. This Court by order dated 15 January 2013 disposed of the above notice of motion staying the recovery of the disputed tax and interest till the appellant's Miscellaneous Application filed under Section 254(2) of the Act was disposed of by the Tribunal. 4) On 10 May 2013, the Miscellaneous Application filed by the appellant under Section 254(2) of the Act was dismissed by the Tribunal. The appellant thereafter amended the present appeal and also challenged the order dated 10 May 2013 dismissing the Miscellaneous Application. However, no substantial questions of law have been raised by the appellant as arising out of the order dated 10 May 2013 on its Miscellaneous Application. 5) While amending its memorandum of appeal the appellant took out another notice of motion being Notice of Motion Lodging No.1135 of 2013 seeking stay of recovery of disputed tax and interest aggregating to Rs.6.46 crores till the disposal of the appeal. When this second notice of motion came up for hearing, Counsel for both the sides requested that the appeal itself be taken up for hearing as the controversy is within a narrow compass viz. whether the profit made on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare. (d) The Assessing Officer by order dated 29 December 2009 held that the amounts earned on sale of shares by the appellant would be taxable under the head profit and gains of business and not under the head capital gains. This was after negating the appellant's contention that they had subscribed to the shares in M/s. MABL as a strategic investment in an unlisted company. The Assessing officer held that the appellant was not an investor in shares as it had subscribed to the shares in May 2003 out of borrowed funds, which according to him no investor would do. Besides holding that the appellant had subscribed to 20% of the issued equity shares capital of M/s. MABL at the price of Rs.21.30 per share even when the book value of the shares was almost Nil. This according to the Assessing Officer would also not be done by an investor. In the alternative the Assessing Officer held that the consideration received on sale of shares by the appellant was in the nature of compensation for termination of the appellant's position as Manager of M/s. MABL. Therefore, the excess received on sale of the shares was consideration received by the appellant for termination/surrender of its manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. MABL. So far as the application of Section 28(ii) of the Act to the present facts is concerned the CIT(A) held that the amount received on sale of shares is not an amount received on surrendering its right to manage M/s. MABL. Therefore, application of Section 28(ii) of the Act to the present facts is not legally tenable. In these circumstances, the CIT(A) by order dated 29 July 2009 allowed the appellantassessee's appeal before it. (f) Being aggrieved by the order dated 29 July 2009 the revenue filed an appeal to the Tribunal. The Tribunal by its order dated 25 April 2012 allowed the revenue's appeal holding that the amounts earned on sale of shares is to be brought to tax under the head business income and not under the head capital gains. The basis of arriving at the above conclusion was as under: ( i) In 2003, when the appellant invested/subscribed to the shares of M/s. MABL having face value of Rs.10/of which the book value was Nil, yet the appellantassessee had subscribed to 20% share holding in M/s. MABL at the rate of Rs.21.30 per share. Thus, the Tribunal concluded that no investor would purchase share at such high price when there is no return in the offing. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the matter of Ramnarain Sons (P) Ltd. (supra). The distinction made by the Tribunal in the impugned order that in this case no managing agency right was acquired, failing to appreciate that right to manage M/s. MABL was acquired by subscribing to 20% of shares of M/s. MABL Thus, in view of the Apex Court order Ramnarain Sons (P) Ltd. (supra), the appeal be allowed; (ii) The finding of the Tribunal in the impugned order that M/s. MABL had accumulated losses and its book value being Nil, no investor will purchase shares at such a high price when no dividend is likely to be declared in the foreseeable future, is perverse. The investor in this case was not a passive investor, but an investor with right to manage, who could precieve a potential in M/s. MABL leading to its investment. In fact it is stated that investors like Warren Buffet invest in companies having losses in which they see potential and hold shares in them for a fairly long time. Such purchase of shares is in the nature of investments. Therefore, only in view of the fact that the appellant had purchased the shares at a higher price then its book value would not by itself result in the investment made in shares becomi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the present facts. This is in view of the fact that in the case of Ramnarian Sons (P) Ltd. (supra) the appellant had acquired control of the managing agency by virtue of purchase of shares at a price higher than the market value, while this case 20% acquisition of equity shares of M/s. MABL does not give the appellant controlling interest in M/s. MABL and therefore, the aforesaid decision is inapplicable. (ii) During the course of the hearing before the Tribunal the appellant has not pointed out the fact that the shares had been subscribed to by the other two partners namely UB and S N at Rs.39.85 per share and Rs.89.95 per share respectively. Therefore, the Tribunal has had no occasion to consider this issue. Consequently the appellant is barred from relying upon the price at which other shareholders have subscribed to the shares of M/s. MABL in support of its contention that the price at which the appellant subscribed to the shares of M/s. MABL was more than justified. (iii) In any case, merely having the information tucked away in the appeal papers would not amount to disclosing those facts before the Tribunal. In support he draws attention to Explanation 1 to Section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Apex Court. In the above case, market price of shares of Dawn Mills was Rs.1610/while the appellant had purchased them at the rate of Rs.2321/per share. It was a assessee's contention before the Supreme Court that the purchase of shares which led to the acquisition of managing agency was in the nature of carrying on trade in the shares and the subsequent sale of such shares or part thereof should is a revenue loss. The Apex Court negatived the assessee's contention and held that the shares of Dawn Mills were purchased for the purpose of acquiring its managing agency. The fact that the Managing agency could be utilized for earning profit could not lead to the conclusion that shares so purchased were on revenue account in the absence of any intent to trade in those shares. The Apex Court did not accept the assessee's submission that in view of being able to manage Dawn Mills, the purchase of shares should be held to be an adventure in nature of trade. The Apex Court also held that even though the shares had been purchased with borrowed money, that fact by itself, would not indicate that there was any intent to trade in those shares. The fact that shares were purchased at a pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the person who subscribes to such shares would not do so for the purpose of trading in it as the transferability of the shares is very restricted making it a most unsuitable instrument for purposes of trading. Further the fact that the appellant held shares for almost 31 months before selling them is another factor to indicate that these shares were not subscribed to by the appellant for the purpose of trading in them. In the matter of M/s. Ramnarian Sons (P) Ltd. (supra) also the shares had been purchased out of borrowed funds and yet the Apex Court held that the same would not by itself indicate/evidence an intent to deal in shares. In this case the appellant had borrowed funds from outside for a period of 12 days without interest. Thereafter, the amounts were sourced from its sister company M/s. Feedback Computers Ltd. in which the appellant's 99.99 shareholder one Mr. R.K. Jain enjoyed majority interest to the extent of 83.93% shareholding. Thus the borrowing of funds even in this case is not evidence of the appellant, wanting to trade in the subscribed shares of M/s. MABL. 15) Therefore, taking all the cumulative factors including the decision of the Supreme Court in Ramnara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant was solitary and unique, it would make no difference. 17) Be that as it may, even if the price at which the shares were subscribed to were higher than its book value that again by itself would not lead to the conclusion that in such cases purchase has been done not by investor in share but by trader in shares. On the contrary the investor in shares would in the normal course hold shares for a longer period of time even in liquor business (though not affected by business cycle prevailing in most of the industries) as time would be taken to establish a place in the market. Therefore, the scrip may become profitable over a period of time. In contrast a trader in shares normally holds shares for a shorter period of time and looks for quick returns. In such circumstances, he is less likely to purchase share at price higher than the market value and in case of unquoted shares at a price higher than its book value. Therefore, test applied by the Tribunal in the impugned order to hold that subscription of 20% shares in M/s. MABL at a higher price then the book value of the equity shares to conclude that the appellant is a trader, is perverse. 18) Similarly the finding in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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