TMI Blog2010 (12) TMI 1081X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms thereof, the rival Counsels made their submissions with reference to the records for the assessment year 2004-05. The rival submissions have been heard and the relevant material perused. 3. We accordingly consider ITA No 1407/PN/08 pertaining to the assessment year 2004-05 to appreciate the facts and the controversy involved. For the assessment year 2004-05, the assessee company filed a return of income on 29.10.2004, which was accompanied by audited Balance sheet, Profit and loss account, etc. declaring an income of Rs 2,93,62,740/-. The income so returned, inter alia, consisted of income from short term capital gain and long term capital gain of Rs 16,93,757/- and Rs 3,59,14,921/- respectively. The short term capital gain was on redemption of mutual fund units and, in so far as the long term capital gain was concerned, the same was on account of sale of shares of M/s Kirloskar Brothers Ltd. The Assessing Officer, in the course of assessment proceedings, show caused the assessee as to why the gain on sale of shares be not treated as business income and taxed accordingly. The primary reason advanced by the Assessing Officer in the show cause notice dated 11.12.2006 was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rloskar group also. Secondly, it has been noticed in paragraph 5.1, that during the year assessee sold a large chunk of units of mutual funds. As per the Assessing Officer, mutual fund units sold during the year included units brought forward from earlier years and also shares and units purchased during the year. The Assessing Officer further noted that assessee had pledged some of its investments as security for the loans raised by various group companies. It was also noted that after effecting the sales, the amounts realised were again put into the purchase of shares/units, which reflected a systematic and organized trading activity. Apart from the aforesaid, Assessing Officer observed that during the year under consideration assessee has earned major income from a single activity of sale and purchase of shares. Reference was made to certain judicial pronouncements, notably judgment of the Hon ble Supreme Court in the case of CIT v Sutlej Cotton Mills Supply Agency Ltd. 100 ITR 706 (SC), and on that basis, it was observed by the Assessing Officer that even in a case where a single purchase and sale was undertaken, the Hon ble Supreme Court upheld that the same tantamounts to an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that it was a case of subscription and redemption of units and not of a purchase and sale. Assessee parked the surplus funds available with it with various mutual funds in the month of January, 2004 and once better opportunities for better deployment of these funds arose, the said units were redeemed and used in March 2004 for purchasing shares of group companies as well as advancing ICDs to other companies for a better return than that offered by mutual funds. Thus, according to the assessee, the subscription to the units of Mutual Funds and their redemption thereafter was a pure case of short term investment for a temporary period of 2/3 months and there was no intention of carrying out any organised trading activity. According to assessee, such short term parking was purely on investment account and, thus, the income was correctly shown as capital gains. 6. It was further submitted by assessee before the Commissioner of Income-tax (Appeals) that on a perusal of Schedule 5 of the Balance Sheet, it would become apparent, that assessee had sold the units which were brought forward from past year and the same were shown as investments in the earlier year. It was also sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld shares of a single company, namely, Kirloskar Brothers Ltd., but even a single transaction in shares could constitute a business activity as per the judgment of the Hon ble Supreme Court in the case of Sutlej Cotton Mills Supply Agency Ltd (supra). Regarding the treatment of purchase of shares as Investment in books of account, the Commissioner of Income-tax (Appeals) observed that the same is not determinative of the character of a transaction. The Commissioner of Income-tax (Appeals) also noted that the only activity undertaken during the year and also in the past, was purchase and sale of shares and Mutual Fund units. For all the above reasons, the Commissioner of Income-tax (Appeals) has sustained the action of the Assessing Officer in taxing the short term and long term capital gain declared by the assessee as income from business. 9. Before us, the learned counsel for the assessee has made varied submissions. Explaining the background, it was pointed out that the assessee company was formed in 1989 and its shareholders belong to one family of Kirloskars. The assessee company has invested in shares of Kirloskar group companies for long and has never traded such shares i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the intention of the assessee was to acquire and control the share holdings in Kirloskar group of companies and, there is no intention to undertake trading in shares. It has been pointed out from the details in the Paper Book at pages 17 to 54, that the investments have been made and held by the assessee company for more than 10 years in majority of the cases. In sum and substance, the claim of the learned counsel is that there was no justification for the lower authorities to have assessed the impugned gain as business income, having regard to the conduct of the assessee. 11. With regard to the observation of the Assessing Officer that the assessee has purchased shares of companies, other than Kirloskar group, i.e. Ashok Leyland, Bharat Forge. Cotton Greaves etc., it was pointed out that the same are insignificant in number and have not been purchased during the year under consideration, in any case; that these shares were purchased by the assessee company in the year 2000-01 or even earlier, and the company continues to hold these shares even presently. It was, therefore, contended that this aspect would not defeat the plea of the assessee that the gains in question are a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under. In the instant case, the dominant issue is whether the gain arising to the assessee of Rs 3,59,14,921/-on the sale of shares of Kirloskar Brothers Ltd. is assessable as long term capital gain or business income. The assessee company is undisputably a part of Kirloskar group of companies and it is holding shares of various manufacturing/business companies of the Kirloskar group. It has also been pleaded, without controversion by the Revenue, that the assessee is registered with the Reserve Bank of India as a NBFC and has been declared as a promoter-entity for the Kirloskar group companies with the SEBI. At pages 17 to 54 of the Paper Book, scrip-wise detail of purchases and sales effected by the assessee during the assessment years 2001-02 to 2004-05 have been placed. It transpires from the said details that in the assessment year 2001-02 the assessee had purchased 25499 shares of Kirloskar Oil Engines Ltd. mainly and 0.96 fractional shares were sold on account of merger of a company M/s Shivaji Works Ltd. with said investee company. In the assessment year 2002-03, assessee purchased 511833 shares of Kirloskar Oil Engines Ltd. and sold 1449585 shares, which is stated to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles of res judicata do not apply to income-tax proceedings, yet it is a trite law that it is impermissible for the Revenue to depart from an accepted position in a subsequent year without pointing out any change on facts and in law, because the principles of consistency are as much applicable to the income-tax proceedings, particularly in the case of the same assessee, of-course having regard to the facts and circumstances remaining identical. In fact, on this aspect, the learned counsel for the appellant referred to a recent judgment of the Hon ble Bombay High Court in the case of Gopal Purohit (supra).The issue in the said case was whether the income on sale of shares was assessable as capital gain or business income, with assessee canvassing that the same was assessable as capital gains. The Tribunal accepted the stand of the assessee that the income was assessable as capital gains in view of the consistent practice of the past years of treating similar transactions as investment transactions, and the facts and circumstances had remained identical during the year in question. The Hon ble High Court affirmed the order of the Tribunal on the principles of consistency, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade. Dealing with the above question, this court observed: By purchasing the shares which facilitated acquisition of the managing agency, a capital asset was acquired and merely because the managing agency could be utilized for earning profit, the acquisition of the shares which led to the acquisition of the managing agency could not, in the absence of an intention to trade in those shares, be regarded as acquisition of stock-in-trade of the share business. The appellants had undoubtedly purchased the shares of the Dawn Mills with money borrowed at interest, but that circumstance by itself does not evidence an intention to trade in the shares. Nor is the fact that the appellants are dealers in shares and their memorandum of association authorizes them to carry on business in shares of any importance in the circumstances of the case. It was further observed: Subsequent disposal of some out of the shares by the appellants could also not convert what was a capital acquisition into an acquisition in the nature of trade. We are, therefore, of the view that the answer given by the High Court to question No (i) was not correct. In our opinion, there was material for the fini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the frequency of purchase and sale of shares was regular and recurring. Although, the said factor by itself is not a decisive or conclusive test, as held by the Hon ble Bombay High Court in the case of H. Holck Larsen v CIT 85 ITR 285 (Bom), which stood affirmed by the Hon ble Supreme Court in the case of CIT v H Holck Larsen 160 ITR 67 (SC), however, on facts also, we find little support for such a proposition in the present case. Again referring to the scrip-wise details of transactions carried out for the four assessment years placed in the Paper Book pages 17 to 54, it is seen that in so far as the purchases are concerned, the transactions have been made on multiple days. For instance, during the year under consideration, purchases of shares of Kirloskar Brothers Ltd. have been undertaken in 28 days for buying 349408 shares. However, sale of 350000 shares has been made on a single instance which, as explained, was made to a group company in order to comply with the NBFC norms of Reserve Bank of India. Similarly, during the year assessee has purchased 898000 shares of Kirloskar Pneumatic Company Ltd in six instances, but no sale has been undertaken. Similarly, in the case of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shares of Kirloskar Brothers Ltd. has been undertaken as a part of assessee s overall activities of nursing the investments of promoter family in the Kirloskar group companies and to acquire and exercise control on such companies, surplus arising therefrom cannot constitute income assessable under the head profits and gins of business . Therefore, the authorities below erred in law and on facts during the year in construing long term capital gain earned by the assessee as assessable under the head profits and gains of business . 19. Before parting, we may refer to the case laws relied upon by the Revenue before us. Firstly, reliance was placed on the decision of the Pune Bench of the Tribunal in the case of Ajinkya Electromelt P. Ltd (supra). In the said case, facts were that assessee company was a dealer in various steel items and deriving business income thereof. The assessee purchased shares of certain steel companies and earned short term capital gain on sale of such shares. The Assessing Officer treated such short term capital gains as business income, which was affirmed by the Tribunal. In coming to such decision, the Tribunal noted that assessee undertook the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Departmental Representative was the judgment of the Hon ble Supreme Court in the case of Sutlej Cotton Mills Supply Agency Ltd (supra). We have carefully perused the said decision. The assessee before the Hon ble Supreme Court was a public company, and held shares in a sister concern, which were acquired in the past. In the year before the Hon ble Supreme Court, the assessee sold certain shares at a profit, and the same was held to be in the nature of business adventure by the Revenue, which was affirmed by the Tribunal. One of the material factor to come to such conclusion was that assessee was found to be a dealer in shares in the past years and further that in one of the earlier years a loss in dealing of shares was also claimed as business loss and allowed. Other factors were also enumerated to come to a factual conclusion that the transaction was an adventure in the nature of trade. Factually speaking, the facts in the present case are quite different. In this case, the past position in-fact points to the assessee having being considered as an investor of shares and not a dealer in shares, which was not the case before the Hon ble Supreme Court. Hence, the judgment of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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