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TMI Blog2012 (6) TMI 599X X X X Extracts X X X X X X X X Extracts X X X X ..... other parties i.e., M/s. Scottish & New Castle India P. Ltd. (SINPL) 40% and M/s. United Breweries Ltd.(UBL), the balance 40%. The AO also observed that Shri R.K. Jain who was the main director of the assessee company holding 99.99% share holding, was also director of MABL whose shares were purchased by the assessee. The AO also noted that as per balance sheet as on 31.3.2002, MABL had meager share capital of only Rs.800/- and had accumulated losses of Rs.40.46 lacs in assessment year 2002-03 and Rs.18.64 crores in assessment year 2003-04. The losses had substantially increased to Rs.37.13 crores as on 31.3.2005 and Rs.60.35 crores as on 31.3.2006. Thus the book value of the shares of the face value of Rs.10/- was almost nil at time of purchase of shares but the assessee had paid the price @ Rs.21.30 per share. Further, on the date of purchase on 7.5.2003, the assessee had received loans of Rs.5.93 crores from M/s. U.B. General Invt. Ltd. and Rs.61.00 lacs from some other party, totaling Rs.6.54 crores which had been utilized for payment for purchase of shares making it clear that the shares had been purchased from borrowed funds. The AO also noted that Shri R.K. Jain who was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to as promoter company. Further, at the time of sale of shares, the assessee had also surrendered the rights of the assessee company for management of affairs which were also terminated. As per termination agreement, Shri R.K. Jain was to resign his post as Managing Director and therefore, was given compensation of Rs.2.00 crores for non-competing, non-solicitation, non-disclosure of confidential information upon the completion of sale of shares. Thus purchase and sale was for acquiring business stake and managing and running MABL. MABL had huge accumulated losses as pointed out earlier and Shri R.K. Jain being aware of the financial position of MABL as director had purchased the shares at Rs.21.30 per share when the face value on the date of purchase was practically nil. Shri R.K. Jain was fully aware that no dividend income was possible but in the short period there could be some appreciation due to change in the share holding. Thus the aim of the assessee company in making purchases of shares was not to earn dividend from investment. The AO referred to the judgment of Hon'ble Supreme Court in case of Dalhousie Investment Trust Co. Ltd. vs. CIT (68 ITR 486), in which it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chased the shares for trading. It was also submitted that payments for the purchase had been made from the borrowings only for 12 days which were subsequently replaced by share application money from M/s. Feedback Computers Pvt. Ltd. The assessee had been making purchases as a strategic investor for running a company and these were not trading investments. The assessee distinguished the judgments of Hon'ble Supreme Court in the case of Dalhousie Investment Trust Co. Ltd. vs. CIT (supra), on the ground that in that case the object of sale of shares as given by the assessee remained unproved. In case of the assessee, it was reduced to minority by the other two share holders holding 80% of the shares and was put in a position to sell the shares to them so as to acquire full controlling interest of the company. It was further submitted that the case of the assessee was covered by the judgment of Hon'ble Supreme Court in case of Ramnarain Sons (Pr.) Ltd. (41 ITR 534), in which, under similar circumstances, it had been held that intention for purchase of shares was not to acquire them as part of stock in trade. 3.1 After considering the facts and circumstances o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voked by the AO and were not applicable to the facts of the present case. It was further pointed out that CIT(A) had passed a reasoned order which should be accepted. The ld. AR placed reliance on the findings given in the appellate order. He also relied upon the decision of the Tribunal in case of Renato Finance and Investments Limited vs. DCIT in ITA No.115/M/2009 for assessment year 2005-06, dated 19.1.11. 4.1 The ld. DR on the other hand strongly supported the orders of AO and placed reliance on the findings given in the assessment order. It was submitted that the financial position of MABL was well-known at the time of purchase of shares and considering the huge accumulated loss which went on increasing in the subsequent years, the assessee could not be expected to earn any dividend and, therefore, the purchases could not be considered as investment. 5. We have perused the records and considered the rival contentions carefully. The dispute is regarding nature of income earned by the assessee from sale of shares of MABL. The assessee company in which Shri R.K. Jain who was main director holding 99.9% share, had purchased 30700 shares of MABL an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a view to make profit on sale in future and, therefore, the purchase of shares was of the nature of adventure in nature of trade. 5.2 Alternatively the AO has also held that the shares had been purchased with a view to acquire business stake for managing MABL as Shri R.K. Jain was appointed the Managing Director of the said company and, therefore, sale value of shares could also be linked to compensation received in connection with the termination of management or modifications of terms and conditions which was business income under section 28(ii). The AO has pointed out that Shri R.K. Jain had already been paid compensation of Rs.2.00 crores for non-competing, non-soliciting etc. by the said company. The AO has accordingly assessed the sale value of the shares as business income. 5.3 CIT(A) has not agreed with the findings recorded by the AO and has agreed with the assessee that shares had been purchased as a strategic investor for running the company as the assessee in the Share-holders Agreement relating to the purchase of shares had been referred to as manager. The intention of the assessee was thus to acquire controlling po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e explanation of the assessee to sell the shares is that it had to sell the shares as it was minority shareholder and was not in a position to infuse further capital. The explanation, in our view, is not satisfactory. It was known at the time of purchase of shares itself that the assessee was only a minority shareholder with 20% of the share holding and it was also known that further infusion of capital will be required as assessee company was incurring huge losses. Therefore, the explanation is not acceptable. The assessee in our view had purchased the shares with a view to make profit on resale of shares due to expected high valuation of shares because of strong reputation of other two promoters i.e. the British Company and the United Breweries. 5.6 The finding of the CIT(A) that intention behind the purchase of shares was to acquire controlling power and business stake in MABL which was a capital asset is not correct. The assessee had only 20% of the shareholding. Therefore, because of shareholding, it could not have any controlling stake in the company. The assessee company in the Shareholders Agreement had been described as manager because day to day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court held that the intention to acquire the shares was to get managing agency rights which was a capital asset and accordingly it was held that loss on sale of shares was a capital loss. In the present case, the shares had not been acquired to give the controlling rights to the assessee because the assessee could not get controlling rights by 20% share holding. Obviously, the job of managing the day to day affairs of the company had been entrusted to the MD of the assessee company because of his vast experience and not because of the shareholding. The said case is, therefore, not applicable to the facts of the present case. The decision of the Tribunal in the case of Renato Finance and Investment P. Ltd. is also distinguishable. In that case shares of a private company had been purchased from borrowings from the holding company which actually owned by the assessee company, which was considered by the Tribunal more of the nature of capital. Shares had also been sold to the holding company after holding for almost four years, which is not so in the present case. The said case is, therefore, of no help to the assessee. 5.8 In our view, the obv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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