TMI Blog1994 (12) TMI 138X X X X Extracts X X X X X X X X Extracts X X X X ..... ares were sold to a Private Limited Company known as M/s. R. Krishnaswamy Investments (P.) Ltd. The Assessing Officer held that the transactions converting the investment into stock-in-trade was a colourable transaction and was effected with the sole intention of avoiding capital gains. Hence, based on the decision of the Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148, he concluded that there was no conversion from investment to stock-intrade. In this connection the Assessing Officer also observed that M/s. R. Krishnaswamy Investments (P.) Ltd. (the company to whom the shares were sold by the assessees) had only three shareholders, namely, the assessees and Smt. K. Srivalli, wife of Sri R. Krishnaswamy. In the circumstances, he brought the capital gains to tax as long-term capital gains. 4. The CIT(A) held that the transaction was not sham. He also held that R. Krishnaswamy Investments (P.) Ltd. was incorporated on 14-12-1983 with the object of dealing in shares and the company was carrying out regular business in shares. Thereafter the CIT(A) held that in view of the affidavits regarding conversion, there was conversion of the shares from capital asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee" " M/S. Rajesh Associates : Balance sheet as on 31-12-1983 Liabilities Rs. Assets Rs. Capital Account : Cash at bank 301-00 Minor, Rajesh 4,99,441-50 Stock of shares 5,337-50 Rs. Rs. Less : Net loss 9,386-00 Minor Rajesh ---------------------- Individual 4,90,142-00 Rs. 4,90,055-50 Current Liabilities : M/s. S.K. Ranganathan 5,725-00 ----------------------- ------------------------ 4,95,780-50 4,95,780-50 ----------------------- ------------------------- for M/s. Rajesh Associates, Sd/- R. Krishnasamy Assessee." He stated that the capital account of R.Krishnaswamy shows the balance of Rs. 9,97,150 whereas a liability of Rs. 9,56,767 is shown. Similarly the credit balance in the capital account of minor Rajesh would show Rs. 4,99,441-50 and on assets side his individual account show a sum of Rs. 4,90,142. He pointed out that, in accounting these two entries on both assets and liabilities side cannot appear. Admittedly in the case of minor Rajesh there cannot be a debit and credit both appearing in the account. He stated that it is the normal accounting principle that these balances should be netted. If this is done, then R. Krishnaswamy's ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds on transfer of shares received from Krishnaswamy Investments (P.) Ltd. The payments had been received from the company and these transactions were genuine. He also stated that the assessees had entered into transactions for business through M/s. Subramaniam Co. (Members, Madras Stock Exchange Ltd.) where Krishnaswamy Associates had purchased the shares and also they had entered into contract with M/ s. S.K Ranganathan for 50 shares each of Malayalam Plantations and Ennore Foundaries for both Krishnaswamy Associates and Rajesh Associates. He stated that this activity had been carried out in the course of dealing in shares. This was not a sham transaction. The transactions between Krishnaswamy Investments (P.) Ltd. and the assessees were genuine and were supported by the transfer of funds. Everything that was required to be done for setting up of business like filing of declaration for conversion into stock-in-trade, filing ref. notification under the MRTP Act, opening of bank account had been done and there was nothing further required to be done. The transactions were not sham. He, therefore, supported the orders of the CIT(A). 8. We have considered the rival submissions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t find any reference to the accounts. Thus, the amount of capital that ought to have been reflected is the net capital, i.e., Rs. 30,393 in the case of Krishnaswamy Associates and Rs. 9,299 in the case of Minor Rajesh. 10. It needs to be taken into consideration that the only shareholders for Krishnaswamy Investments (P.) Ltd. are Sri Krishnaswamy, his wife Srivalli and master Rajesh. The memorandum prepared as seen from the printed memo (perhaps the date for lodging the document to the Registrar of Companies is 3-11-1983) was signed Sri. Krishnaswamy and his wife Smt. Srivalli. The conversion took place on 9-11-1983, the company was incorporated on 14th December and the shares which were converted were sold to the company on 15-12-1983. This shows that there were common efforts by assessees and common intention of setting up of a company to deal in shares. R. Krishnaswamy Investments (P.) Ltd. was accordingly incorporated and which stated functioning and the shares were immediately sold to the company. In our opinion all these transactions should be read together to reflect common intentions. These are transactions by interested parties. We are inclined to agree with the Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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