9911796707
TMI Blog1997 (10) TMI 394X X X X Extracts X X X X X X X X Extracts X X X X ..... gains of business' or under the head 'Capital gains'. The revenue implications of the issue are substantial as capital gains are assessed at a lower tax and also are eligible for certain deductions under section 48 of the Income-tax Act. 3. For understanding the issue raised in this appeal, it will be useful to set out the earlier transactions of the assessee. The assessee did not maintain any books of accounts; she, however, had certain bank accounts and current account in certain concerns. She had certain shareholdings and other assets and details of her investments are given at page 54 of the appellant's paper book and they are reproduced below : As at Mar. 89 As at Mar. 90 As at Mar. 91 As at Mar. 92 Hindalco Inds. Ltd. 2000 3200 3200 Hindustan Gas & Inds. 5585 5585 5585 Manjushree Plantations 2025 2025 3037 Grasim Inds. Ltd. 120 120 120 Birla Consultants P. Ltd. 3080 3080 3080 Grasim Inds. Ltd. (Debnt) 45 45 45 S. Kumars Synfabs Ltd. Unit Trust of India (ME) 1000 2000 Unit Scheme-1964 980 980 MRPL MRPL (Debentures) Indo Gulf Fertilisers &. Chem 25000 25000 700000 9% IRFC Bonds 28000 It may be observed that apart from the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,65,000 584 29-6-1990 1,50,000 ₹ 28,12,500 585 29-6-1990 1,50,000 ₹ 28,50,000 587 29-6-1990 75,000 ₹ 14,32,500 ₹ 99,60,000 It may be observed that the total shares purchased from M/s. Jhawar & Co., and M/s. S.S. Dalmia aggregated 7,00,000 shares and the cost of acquisition work out to ₹ 1,32,08,500 and along with the share transfer fees of ₹ 1,17,000 the aggregate works out to ₹ 1,33,25,500. The cost of acquisition of these shares was met subsequently through the sale proceeds of the first lot of 2,50,000 shares which were received on 11-10-1990. So, initially the cost of acquisition was met through temporary accommodation given by the brokers concerned. It may be observed that the above lot of 7,00,000 shares was purchased after the assessee's marriage and the total share holdings of the assessee in IGFCCL at one stage is of the order of 9,50,000 shares. 4.1 The assessee subsequently sold the first lot of 2,50,000 shares held in IGFCCL through M/s S.S. Dalmia for ₹ 1,05,25,000 on 11-9-1990 as follows: 1,50,000 shares at the rate of ₹ 42 per share Rs. 63,00,000 1,00,000 shares at the rate of ₹ 42.25 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-1989 ₹ 8,65,749 31-3-1990 ₹ 16,87,411 31-3-1991 ₹ 17,09,411 This account has also been squared up by 24-12-1991. 4.6 From the above debit balances in this current accounts of the assessee with the two family concerns, it may be observed that even the acquisition of the 2,50,000 shares is only out of borrowed funds. We have already indicated hereinabove the other investments held by the assessee, the value of which as on 31-3-1991 was only of the order of about ₹ 12,50,000. So, it is clear that the purchase of both the first lot of 2,50,000 shares of IGFCCL and the second lot of 7,00,000 shares of IGFCCL was made substantially out of the borrowed funds, whether it be from family concerns or from outside parties. 4.7 At this stage we may also mention that the funds borrowed from the family concerns are said to be interest free. It may also be observed that the shareholdings or other assets of the assessee before her engagement to Mr. Kumarmangalam Birla, i.e., before the acquisition of the first lot of 2,50,000 shares of IGFCCL were not really big. In the statement filed by the assessee before us and reproduced hereinabove the shareholdings as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade." The Assessing Officer has also observed in page-7 of his order that at one point of time the assessee was having about 9,50,000 shares of M/s. IGFCCL. He observed that no ordinary person can think of purchasing such huge quantity of shares of this company and that too only with borrowed funds. He also refuted the argument of the assessee that the assessee was having substantial amount of her own funds available for deployment in the purchase of 7,00,000 shares of IGFCCL as the sale of 2,50,000 shares of IGFCCL was three months after the purchase of 7,00,000 shares. The assessee failed in its appeal before the CIT(Appeals) also who observed that the Assessing Officer had discharged the burden of establishing that the transaction of purchase and sale of 7,00,000 shares was an adventure in the nature of trade. He made the following observations also : "(ii)It is a well-settled law that even solitary transaction may be treated as an adventure if the circumstances so permit; (iii)she had utilised borrowed capital and the first borrowing made by her for investment in the first lot of shares was interest free. The utilisation of borrowed capital, as she did not ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds to make the purchases, has the trappings of a business nature; (iv)the sale of second lot of shares was made within a comparatively small period of 16 months calculated with reference to the dates of their acquisition, whereas the investments with the intention to earn dividend income are not generally made for such small periods; (v )she had no intention of holding the shares for herself as is evident from the bulk purchase of shares of a single company; (vi)the repetition of the transaction, appears to be in pursuance of a scheme to deal in the shares and earn the income; "In view of the foregoing, it is hold that the acceptance of the claim of the assessee in respect of the long-term capital gains on sale of shares of IGFCCL and allowing the deduction of ₹ 44,05,000 under section 48(2) of the Act was erroneous and prejudicial to the interests of revenue. The underassessment has resulted into the loss of legitimate revenue. As a logical corollary to this finding, the Assessing Officer has to ascertain the amount of interest that is to be allowed against income from business relating to the transactions of the aforesaid shares. It would not be legally permi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes up substantially. But to conclude that the said transaction was intended with a profit motive in the circumstances of the case is not correct because, as observed earlier, the desire was to hold larger number of shares by funding the purchase by sale of lesser number of shares by taking into account the share value as going up in the market. In the circumstances of the case, we are of the view that the transaction was one of capital trans- action and not of business and, therefore, the result of the transaction, the gain thereof, is obviously a long-term capital gain because it suffice the condition of holding of shares. Coming to the legality of the revision, we may observe that the Gujarat High Court in CWT v. Amichand C. Shah (HUF) case (supra) had categorically held that the subsequent year's findings could not be the basis for revision of an earlier assessment order. In that case the property was valued at a particular amount. In the subsequent assessment year the assessee had declared a higher value for the property. Because of such higher value declared by the assessee revision was proposed for the earlier assessment year. The Gujarat High Court was concerned with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyment of dividend of 6,92,500 on these shares which was duly returned for tax purposes. The learned counsel went further and argued that all the facts relating to the purchase and sale of the second lot of 7,00,000 shares, which is the subject-matter of this appeal were considered by the Tribunal in the aforesaid order for the assessment year 1991-92 and the Tribunal has actually held that the purchase of 7,00,000 shares was also on capital account. He pointed out that the very basis for taking of action under section 263 for the assessment year 1991-92 was the order of the CIT(A) for the assessment year 1992-93 in which he confirmed the view taken by the Assessing Officer that the purchase and sale of 7,00,000 shares was an adventure in the nature of trade. So, according to the learned counsel for the assessee, the issue raised in the present appeal has already been decided by the Tribunal for the assessment year 1991-92. In this context, he has relied upon the remarks of the Tribunal in its order for the assessment year 1991-92, which we have extracted hereinbefore. In particular, he relied on the observation of the Tribunal that the desire to hold large number of shares and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been held by the Tribunal as mentioned before to be on capital account. 8. The ld. Departmental Representative, on the other hand, contended that the issue before the Tribunal for the assessment year 1991-92 was only with regard to the purchase and sale of the first lot of 2,50,000 shares and so any decision given in respect of the assessment year 1991-92 should not come in the way of deciding afresh the issue in respect of a different transaction, i.e., the purchase and sale of 7,00,000 shares of IGFCCL in the second lot, in the present assessment year. He has also pleaded that there is no res judicata in income-tax matters and the Tribunal can come to a different conclusion in a subsequent year particularly when additional details became available. In this context, he has relied upon the decision of the jurisdictional High Court in the case of H.A.Shah & Co. v. CIT [1956] 30 ITR 618 (Bom.) and the decision of the Apex Court in the case of New Jehangir Vakil Mills & Co. Ltd. v. CIT [1963] 49 ITR 137 and another decision of the Apex Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321/ 60 Taxman 248. It is pleaded that the Tribunal did not notice that in the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the decision of the Allahabad High Court in the case of CIT v. Raja Jagdish Pratap Sahi [1971] 79 ITR 235 . It is also pointed out that even if the first lot of 2,50,000 shares were purchased on capital account, it does not necessarily follow that the subsequent acquisition of 7,00,000 shares was also on capital account. 9. In the rejoinder, the learned counsel for the assessee mentioned that even though there is no res judicata in income-tax proceedings, the Tribunal cannot take a different view unless there are additional circumstances. He pleaded that the loan element in the cost of acquisition of the 7,00,000 shares is not substantial. The sale proceeds of 2,50,000 shares of IGFCCL would be available to buy about 5,50,000 shares. Out of the second lot of 7,00,000 shares of IGFCCL, only about 1,50,000 shares had to be bought out of a loan taken for that purpose. He further proceeded to argue that even when the assessee bought the first lot of 2,50,000 shares, she had no funds of her own and, inspite of this, the Tribunal held in favour of the assessee for the assessment year 1991-92 and the same logic would hold good for the assessment year 1992-93 also. In other words, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old that the Tribunal decided the issue raised in the present appeal in its order for the assessment year 1991-92, it would, to our mind, tantamount to, what is called, begging the question, i.e., assuming the very premise that is to be decided or proved. We cannot take shelter behind the order of the Tribunal and hold that the issue has already been decided. The issue raised in the present appeal is not like the status of an assessee, which, once decided, becomes applicable necessarily for all the years. Whether shares are held as trading assets or investments is an issue, which cannot be decided once for all. Such an issue has to be examined separately for each assessment year in the light of the circumstances prevailing in that year. We are of the view that the issue relating to the purchase and sale of 7,00,000 shares has to be gone into by us and for this purpose, the cumulative effect of all the factors available for consideration for this assessment year has to be considered. 11. It is common ground between the parties that even a single transaction of purchase and sale of shares can, in certain circumstance, be of the nature of an adventure in the nature of trade. It is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that they were purchased from borrowed money on which interest was paid. So, unless there are exceptional circumstances, which are indicative of a contrary position, borrowed funds on which interest is paid is normally indicative of a trading transaction. 13. Similar is the view taken by the Apex Court in the case of Rameshwar Prasad Bagla v. CIT [1973] 87 ITR 421 wherein also the shares purchased with borrowed funds to acquire a managing agency of a company were held as investments. The Hon'ble Allahabad High Court in the case of Raja Jagdish Pratap Sahi (supra), held that when the intention of the assessee at the time of acquisition of the shares is to resell them at a profit when the market appreciates, the shares are to be regarded as its stock-in-trade whereas, when an ordinary investor changes his investments, the surplus realised is capital in nature. In this case, Zamindari bonds were sold and invested in Tata ordinaries and the subsequent sale of the shares was held to be on capital account as the Tribunal found on material on record that the assessee had no intention at any time to use his shareholdings as stock-in-trade and to make a profit by the sale thereof. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per share. The relevant details of the purchase had already been given by us hereinbefore. 17. Now, the question to be seen is, what could be the intention of the assessee when she bought 7,00,000 shares i.e. whether they were bought with an intention of trading in them or not. There is no way of ascertaining the intetion except from the surrounding circumstances. The argument advanced before us was that the 7,00,000 shares in question were bought substantially with the sale proceeds of 2,50,000 shares purchased earlier. It is also made out that the assessee had to take only a loan of about ₹ 30,00,000 from a broker towards meeting the balance of the acquisition cost of 7,00,000 shares. We have to examine the correctness of this argument. When she bought the 7,00,000 shares in the month of June, 1990 at the average rates ranging between ₹ 18 to ₹ 19.10 per share, she could reasonably have expected to sell her 2,50,000 shares only at these rates. She actually sold them on 11-9-1990 at rates ranging between ₹ 42 and ₹ 42.68 per share. This wind-fall by way of a rise in the value of her shareholdings could not, we are constrained to observe, have been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear the liability. To our mind she launched on an adventure in the nature of trade as defined by the Apex Court in the case of Sutlej Cotton Mills, cited supra. 19. We do not find any circumstance of sufficient weight to indicate that the assessee did not intend to trade in the 7,00,000 shares. The shares were not bought even to acquire control of the company. At any rate, no such argument has been advanced before us. One argument advanced before us was that the assessee did retain the shares till she enjoyed the dividend of ₹ 6,92,500 which was returned. To our mind, this factor does not counter the weight of the fact that the 7,00,000 shares were purchased only out of interest bearing borrowed funds. Dividend is a natural incident of shareholdings and the very smallness of the return on the investment indicates that the assessee could not have discharged even her interest liability through the dividend income. It is made out that the assessee did not have books of account and that she could not have traded in shares because, she was only a young and inexperienced lady. For an adventure in the nature of trade, no big organization by way of an office is required. To our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,50,000 shares was subsequent to the acquisition of 7,00,000 shares. We do not find any reference in the order of the Tribunal to the fact that the sale proceeds of 2,50,000 shares was not available to the assessee on the day or days she acquired 7,00,000 shares. Further, it appears that the assessee sold away even the bonds of the Indian Railway Finance Corporation which were acquired out of surplus left with the assessee out of the sale proceeds of 7,00,000 shares. As these facts of significance were not considered by the Tribunal, we are of the view that the finding given by the Tribunal for the assessment year 1991-92 in no way precludes us from coming to a contrary conclusion about the acquisition and sale of the 7,00,000 shares which is altogether a different issue. 22. Lastly, we may consider the argument of the ld. counsel for the assessee that no poor man can ever invest in shares, if it is held that acquisition of shares out of borrowed funds is necessarily indicative of a trading transaction. We are not holding that borrowed funds always and necessarily indicate a trading transaction. Our finding is based upon a consideration of the cumulative effect of the factors p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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