TMI Blog1997 (2) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... tax authorities as follows :--- A company by the name of M/s. H.C.L. Ltd. (existing Co.) was incorporated on 17-4-1986 and was engaged in " the manufacturing, marketing, maintenance and selling of micro and many range of computers, engineering work stations, for computer-aided design, paper copiers, printed, EPABX, PC based telex, computer preference and test and measuring equipments ". On2-4-1991it entered into a " joint venture agreement " with H.P. Company (USA), inter alia, for the purpose of combining the respective computer manufacturing, marketing, servicing and sales activities inIndiaof the existing company and H.P. Company. The joint venture agreement contemplated that H.P. Company would participate in the existing company where certain divisions such as computer, CAD/CAM etc. were to be retained whereas certain other divisions such as reprographics, communications, instruments and investments were to be " spun off " to a new company in which the H.P. Company of USA was not to participate. 4. A " new company " by the name of M/s. HCL - HP Ltd. was incorporated on15-5-1991with a paid-up capital of Rs. 70 its main objectives being " identical " to those of the " existi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le the assessee-company was left with only 864215 equity shares of HCL Ltd. old (the existing company). Later on the names of HCL Ltd. and HCL-HP Ltd. were interchanged and, therefore, the assessee-company was left after this change of name with 864215 equity shares of Rs. 10 each (fully paid) of M/s HCL-HP Ltd. and 478604 equity shares of HCL Ltd. of Rs. 10 each (fully paid)." 8. The following further facts were noted by the Assessing Officer :--- (i) The present HCL-HP Ltd. and HCL Ltd. were entirely different from the old HCL Ltd.; (ii) assessee-company gave its consent to sell its shares of HCL Ltd. to H.P. Company USA in a meeting called by HCL Ltd. in July, 1991; and (iii) The assessee never had any management control in HCL Ltd. although it owned 14,95,639 equity shares of the erstwhile HCL Ltd. at the beginning of the accounting year. 9. On the basis of the aforesaid facts, the Assessing Officer opined that the excess realised on sale/transfer of shares of HCL Ltd. to the H.P. Company of USA was " an adventure in the nature of trade " and, therefore, taxable under the head " business ". The following observations crystallise the case of revenue :--- " The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of H. Holch Larsen, the Supreme Court has stated that this is a question of both law and facts. In this case the facts as discussed above justified the conclusion that profit earned by the assessee-company, sale of HCL's shares to HP Company is to be taxed correctly as income from business and not as long term capital gain. The submissions made by the assessee-company AR on this issue were carefully examined and analysed. It was submitted by the assessee-company that the main reason for holding the shares was for investment and the assessee-company did not have any intention for resale but in fact had the intention to retain these investments. But the very actions and deed of the assessee-company belied this claim made by the assessee-company. It cannot be claimed by the assessee-company that it had no intention to make sale. This is borne out by the fact that the assessee-company gave its consent for the sale of shares to HP CompanyUSA, it surrendered its holdings of the shares of the old HCL Ltd. to HCL Ltd. (old) at an attracted price. The conversion of the shares of HCL to HP CompanyUSAtook place at a price which was much higher to the market value of those shares. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions made to the Commissioner of Income-tax (Appeals) in writing vide communication dated 28-8-1995 as follows :--- " 1. The appellant was incorporated with the main object of carrying on the business of manufacture of plastics and plastic products. However, since its inception it did not carry on any business of manufacture and or sale of plastic and plastic products instead it had been engaged in the business as an " Investment company ". 2. The aforesaid company which had been incorporated in the year 1977 underwent a constitutional change in the year 1981 when Shri Y.C. Vaidya and his family members acquired the shares of the aforesaid company from then existing share holders and as such being the largest share-holder Shri Y.C. Vaidya became its Director in the year 1981. Shri Y.C. Vaidya thus took over the control and management of the company was also one of the promoter Director of M/s. Hindustan Computers Ltd. which company had been also formed in the year 1977 and therefore in order to retain the control he diversified the shareholding to its associate companies and as such on becoming its Director he also made investment in the acquisition of shares of that company. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o trade in the aforesaid shares and the shares acquired by it were not held by it for the purpose of trading in the said shares, and in fact as would be seen that assessee never sold any such shares. It is submitted that the main consideration for making the investment in the shares of the aforesaid company was thus to retain control over HCL Ltd. and prior to the arrangement of amalgamation of Hindustan Computers Ltd. It may not be out of place to also state that apart from the aforesaid shareholdings, in the account year ending June, 1988, the assessee-company had further acquired 7500 fully paid up equity shares of Gum Products Pvt. Ltd. for a total consideration of Rs. 75,000, 5000 shares of Space Food Products Pvt. Ltd. and thereafter 400 equity shares of Y.P. Associates a Company under the same management and 400 shares of Vaidya Associates another company under the same control. It is thus on record that the appellant company had never been dealing in shares and that it had no intention at any point of time of transacting in the shares and making profit by selling the same. 3. From the details of the shareholding, it would be noticed that as at 31-3-1991, the appellant com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which also shows that assessee-company was retaining the shares as an investment company and further it had no independent role to play. In fact there was an internal arrangement arrived at between top twenty share holders of HCL Ltd. The aforesaid 152820 shares were thus transferred by the assessee-company out of its total holding for a consideration of Rs. 2,5 7,96,064, which is the subject matter of present dispute in this appeal. 4. The appellant submits that it is an investment company and its main business is to derive income from the investments. In connection with the aforesaid object and to hold control, as a group company over HCL Ltd. of which Shri Y.C. Vaidya was the promoter Director, the appellant company had purchased shares of HCL Ltd. in the various financial years which were duly reflected in the Balance Sheet as " Investment ". No sale was ever made by the assessee-company of the said shares. Such shares so acquired always been held as investment and the appellant never held or declared them as " stock in trade ". Copy of Balance Sheet for the assessment year 1992-93 and that of earlier years appears at page of the paper book. Since, the shares have always b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while holding that the motive of the assessee-company behind this arrangement was primarily to earn huge profits. 7. It is submitted that the assessee-company was holding an aggregate of 1495639 shares of HCL Ltd. which after the splitting up in accordance with the scheme of arrangement duly approved by the Hon'ble High Court stood reduced to 864214 shares of old HCL. On the conversion of shares as approved by the Hon'ble High Court, the assessee-company had in addition acquired 478604 shares of HCL-HP Ltd. It is apparent from the chart referred to above that the shares numbering 152820 to HP CompanyUSAwere out of shares held by the appellant company in the old HCL. It would be incorrect to say that the two companies were entirely different entities. Thus, the finding of the ld DCIT that the sale of shares was that of the new company is erroneous and wholly unsustainable. The ld DCIT has further alleged that the assessee-company never had any management control in HCL Ltd. even though they owned 1495639 equity shares in the said company. It has further been observed that the assessee-company had taken sufficient interest to sell their holdings of the shares to H.P.USAat an attrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver of divesting itself of any of its holdings. It was only as a result of treatment of joint venture agreement that HCL Ltd. agreed to transfer 26% of shares to Hewlett PackardUSAand it was only as a result of this joint venture agreement which was approved by the High Court that the sale of shares had taken place. It has been observed by the ld DCIT that it was immaterial whether the company had converted its investments into stock in trade and then sold them but what was relevant was the intention behind the action of the assessee. As per the facts discussed above, it is clear that the assessee-company had no intention of divesting itself of its share holdings. Further, it has-to be appreciated that it is only a small part of its holdings that has been sold and that too as a result of the joint venture agreement." 11. Another fact which needs mention is a remand report dated 18-101995 forwarded by the Assessing Officer on the assessee's written submissions to the Commissioner of Income-tax (Appeals) and a copy of which was provided to the assessee asking it to give a reply thereto. In the remand report the Assessing Officer reiterated her earlier stand at the assessment stage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the same had to be decided on the basis of facts and circumstances of the case. 14. The decisions relied upon by the Assessing Officer were sought to be distinguished and reliance was placed on : (i) G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 (SC) ; (ii) CIT v. Guest Keen Nesslelold Ltd [1978] 115 ITR 205 (Cal.) ; and (iii) Raja Bahadur Kamakhaya Narain Singh's case (also relied upon by the Assessing Officer). 15. The discussion in the preceding paras sets out the respective case of both the parties, before the Tribunal, but we high-light the following :--- PER ASSESSEE : (1) The Managing Director of the assessee-company was the promoter director of HCL Ltd. and investment was made only for maintaining controlling interest and earning dividends ; (2) No funds were borrowed which a person would normally do when engaging himself as a trader or a businessman ; (3) Shares of the company in question were never sold ; (4) Transfer of shares took place only as a result of the " arrangement " between the parties and the same being approved by the Hon'ble High Court. Further the assessee-company had no role to play in the entire transaction and this a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. These are some of the broad principles. 18. Examining the case of the assessee with reference to the aforesaid, the following facts unchallenged by the Revenue emerge : (i) The shares in question were reflected as " investment " in the balance-sheet all along and not as " stock-in-trade "; (ii) Dividend income earned on the shares was returned as " income from other sources " either in their original form or after amalgamation with other companies ; (iii) No sales of the shares had been effected in any of the preceding years till the transfer of 1.52 lakh shares which led to the present controversy ; (iv) The assessee-company had not dealt in the purchase and sale of shares of any other companies except some nominal purchases in the previous year ending 30-6-1988 of 4 companies including 2 under the same management ; (v) The transfer of 1.52 lakh shares came about as a result of the joint venture agreement entered into between HCL Ltd. (old) and HP Amercia, subsequently leading to the " Scheme of Arrangement " between the said HCL Ltd. (old) and the newly formed company i.e. " HCL-HP Ltd." which in turn was approved by the Hon'ble Delhi High Court. The Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer herself has accepted both in the assessment order and subsequently in the remand report that the assessee-company was not privy to either the actual sale of shares of HCL Ltd. and nor was it instrumental in determining the sale price which was not the market price but a pre determined and agreed price between HCL Ltd. and HP Company. The learned counsel in fact stated to the effect that the assessee-company had no option, but to give up the shares in question. 21. Under the aforesaid circumstances, we fail to understand as to how the transaction in question can be termed as " an adventure in the nature of trade " and this conclusion we arrive at after keeping mind the principles laid down by the Hon'ble Supreme Court and High Courts in numerous judgments including those relied upon by the assessee's counsel. In opining so, we have duly considered the decisions relied upon by the Revenue at various stages of the proceedings. In the final analysis, we hold that the transaction in question is to be considered under the head " capital gains " as claimed by the assessee. The Assessing Officer may, however, verify the assessee's computation while giving effect to our order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been treated as being on business account and even on the assumption that it resulted in capital gains, the same were short-term and not long-term. The Assessing Officer, however, allowed deduction under section 54-E-in respect of the " extinguishment " of the shares of erstwhile HCL Ltd. in a sum of Rs. 1,15,65,462 as against assessee's claim of Rs. 1,27,54,464 pertaining to the transfer of 1,52,820 shares as a result of the " Scheme of Arrangement ". In the present appeal, the assessee is aggrieved with the lesser relief allowed to it under section 54-E as also on the main question of subjecting to tax as long-term capital gains a sum of Rs. 1.92 crores. On further appeal, the Commissioner of Income-tax (Appeals) upheld the view taken by the Assessing Officer. 25. We have heared both the parties and have also perused the orders passed by the tax authorities. The material on record, to which our attention was invited during the course of the hearing had also been considered. The learned counsel for the assessee reiterated the arguments advanced before the lower authorities whereas the learned Departmental Representative supported the orders passed by the tax authorities. 26. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as stated above as at31-3-1991held 1495639 shares of then existing HCL Ltd. Further, as a result of the arrangement it retained 1017034 shares in HCL Ltd. As such it is evident that there is no transfer made by the assessee-company in the instant year to HCL Ltd. or HCL-HP Ltd. other than 152820 shares which were transferred to HP Co. USA, submissions in respect of which have been made supra. It is, therefore, evident that the ld DCIT has erred in proceeding to assume that there is a transfer made by the assessee-company of 864214 shares of HCL HP Ltd. (being the difference of 1117034-152820 shares) as mere change in the name of the company does not lead to any gain arising to the company. As such the action of the ld DCIT erred in treating the same as extinguishment of shares is highly arbitrary and unreasonable. Since, there is no transfer as such section 45 is wholly inapplicable. It is thus submitted that the finding of the ld DCIT that there was extinguishment of right of the assessee in the shares of HCL Ltd. (old) is totally perverse. So far as the addition of capital gain in respect of shares of HCL Ltd. (new) allotted to the assessee-company representing 32% of HCL Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order lay the Assessing Officer to come to the conclusion that there had been a reduction in the face value of the shares and which tantamounted to an extinguishment. It is apparent that these were the submissions of the counsel before the Hon'ble Delhi High Court and it would be appropriate to extract para 17 of the judgment which was referred to by the teamed counsel before us, as follows :--- " Next, the observation regarding reduction of share capital also is of little consequence. The provisions made in the Scheme of Arrangement clearly show that there is no diminution of liability in respect of unpaid share capital or payment to any share-holder of any paid-up share capital so as to attract the procedure envisaged under section 101(2) of the Act. In the existing company, the shares are fully paid-up and the proposal is one whereby some divisions of the existing company are being spun off into the new company. There is really no reduction in capital as the bifurcation involves both the assets and the liabilities to go with the divisions which are being spun off. The divisions which are to spin off into the new company would discharge these liabilities to the creditors ..... X X X X Extracts X X X X X X X X Extracts X X X X
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