TMI Blog1996 (7) TMI 170X X X X Extracts X X X X X X X X Extracts X X X X ..... 12,24,500 on 21-9-1992. The Assessing Officer completed the assessment accepting the income returned by the assessee. 3. In exercise of the revisional powers under section 263, the CIT took action. He noticed that on 29-6-1989 the assessee had purchased 352 shares more of the same company, from S. Ramakrishna and S. Jayakrishnan, for a consideration of Rs. 3,52,000 at Rs. 1,000 per share. It was noticed that the shares were then sold to R. N. Shetty and others at Rs. 7,051 per share. The profit arising out of the sale of the shares had been declared by the assessee under the head 'Capital gains' and exemption under sections 54E 45(2) was claimed. The CIT also noticed that before the purchase of 352 shares on 19-6-1989, the assessee had entered into an agreement with M/s. R. N. Shetty and others, on 9-6-1989, to sell 2,392 shares. These 2,392 shares included the 352 shares that were to be purchased from Ramakrishna and Jayakrishnan. There was an agreement to this effect on 26-9-1991. After going through the clauses of the agreement, the CIT concluded that the transaction was in the nature of adventure of trade as the shares were to be sold at a predetermined price and with the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling the appeal. Hence, we admit the appeal and proceed to dispose it of on merits. 8. The only question that arises for our consideration is whether the profit on sale of shares can be assessed as capital gains or under the head 'Business income'. According to Shri K. P. Kumar, the learned counsel for the assessee, the original assessment order treating the profit as capital gains is not erroneous and prejudicial to the interests of revenue and the provisions of section 263 should not have been invoked by the CIT. Hence, the order of the CIT, under section 263, he submitted, treating the profit as business income, is liable to be cancelled. The finding of the CIT in his order under section 263 is that the profit derived from the sale of shares has to be treated as business income instead of capital gains. 9. On the other hand, the learned departmental representative, Shri Arulappa, supported the view of the CIT in treating the profit arising from the sale of the shares as income under the head 'Business'. 10. We have heard the rival submissions. The facts are not in dispute. The assessee is a private limited company. The directors are the assessee (who is the mother) and her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C were not interested to get involved in the family feuds. They also did not wish to wait till the litigation was sorted out. Moreover, they did not want to be a party to fulfilling the onerous terms and conditions laid down by R. N. Shetty Associates for acquiring the shares and for the payment of consideration of Rs. 7,031 per share. It was under the above compelling circumstances that Group C offered to sell their shares to the assessee who was the head of the family. Group C did not want to transfer the shares to anybody else other than the assessee. According to the assessee, the purchase of the shares from Group C did not constitute a trading activity or adventure in the nature of trade. The stay order was vacated in September 1991, after over two years and three months of the agreement to sell. Since considerable time had elapsed, a fresh agreement was executed on 26th September, 1991. Thus it is argued that the purchase of 352 shares from C group by the assessee was to facilitate the idea of better control of the company and to have more than 75 per cent of the holdings to have right of control over the company. There was no intention to make profit at all in the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chael A. Kallivayalil; (ii) the Karnataka High Court decision in the case of CIT v. R. Ramaiah [1984] 146 ITR 39/17 Taxman 164 and (iii) the Supreme Court judgment in the case of H. Holck Larsen. 12. In reply, Shri Kumar contended that the assessee could not have sold the property for that would have resulted in 400 workers squandering on 18 acres of Timblu building. As per the provisions of the Company Law, one can have control over the company only if he/she has more than 75 per cent shareholdings. 13. From the facts and circumstances narrated above, we hold that there was no intention on the part of the assessee to purchase and sell the shares with an intention of making profits. She is old and illiterate. This is not in dispute. In this case, the shares are held by three groups. The assessee, with her four sons, are in Group A. They together hold 2,392 shares. Group B is of Devaraj who is none other than a son of the assessee and he is having 506 shares. He is also hostile to A Group. C Group is admittedly of the grand-nephews of the assessee, who were holding 352 shares. The fact that the company was running in loss and A Group was intending to sell the shares to R. N. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as the 'Agreement Holders') agreeing to sell/transfer 2,392 shares held by the Parties of the First Part to the Agreement Holders or their nominees at a price of Rs. 7,031 per shares; " As per this agreement, the assessee sold the shares. Shri Arulappa's argument is that the transaction has to be treated as an adventure in the nature of trade because even before the purchase of shares from Ramakrishna and Jayakrishnan, the agreement between the assessee and R. N. Shetty Ors. was in existence. But the condition was that the buyer will purchase the shares from the assessee only if she purchased the shares from Ramakrishna and Jayakrishnan their 352 shares. They were prepared to purchase those 352 shares along with the shares of the assessee. Hence, the argument of the learned departmental representative that the agreement to sell the shares belonging to the assessee to R. N. Shetty Ors. will go to show that the assessee purchased the shares from Ramakrishna Jayakrishnan with an intention to make profits out of sale cannot be accepted. 14. Now we shall refer to the decisions relied on by Shri Kumar, in support of his contention that the income from sale of the shares by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nan, only to sell the same along with her shares to R. N. Shetty Ors. It is true that the assessee was able to set a better value for the shares than what was paid to her grand-nephews. But the question is whether it can be said that the assessee has purchased and sold the shares only with the intention to get profits. In our opinion, the facts and circumstances leading to the purchase and sale of the shares, would not suggest that the intention of the assessee was to make a profit out of the transaction. (b) The next decision relied on behalf of the assessee is also of the Supreme Court in Janaki Ram Bahadur Ram's case. It is held by their Lordships of the Supreme Court therein : " on the facts, that the purchase and sale of the property was not an adventure in the nature of trade within the meaning of section 2(4) and the profit realised therefrom was not taxable under section 10 of the Indian Income-tax Act, 1922. The facts that the appellant made a profitable bargain when it purchased the property and that it had a desire to sell the property if a favourable offer was forthcoming could not without other circumstances justify an inference that the appellant intended by pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se is also relied on on behalf of the assessee. It is held therein that the question whether the transactions of sale and purchase of shares were trading transactions or were in the nature of investment was a mixed question of law and fact. Consideration of all relevant facts involves appreciation of all the facts in their proper perspective. If that is not done, it cannot be said that there has been consideration of all relevant factors. The Hon'ble Supreme Court has given the guidelines to decide a question whether a transaction of sale and purchase of shares was a trading transaction or in the nature of investment. (f) Another decision relied on by Shri Kumar is the one Mahavirprasad R. Morarka's case.The decision is by the Bombay High Court. Here also it is held by their Lordships that in all cases in which a receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provision. Where, however, a receipt is of the nature of income, the burden of proving that it is not taxable, because it falls within an exemption provided by the Act, lies upon the assessee. The mere earning of the surplus or realisation of profits is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion that the intention of the assessee was to trade in shares. 15. The learned departmental representative also relied on the decision of the Hon'ble Karnataka High Court in R. Ramaiah's case. Their Lordships held : " that the assessees did not sell any land in the condition in which they bought it. They made convenient building sites and sold the same. They did not even dispose of all the sites in one year. They went on selling the sites year after year realising more and more profits. The fact that all the assessees started converting their lands into building sites almost simultaneously in 1967 itself was an indication of their intention to trade in the lands as a venture. They made it commercially more attractive by converting and dividing into plots. Hence, the only inference that could be drawn was that they had no intention to hold the lands as an investment. They dealt with the lands as their stock-in-trade. Therefore, the surplus arising on the sale of the building sites was assessable as business income. " The facts of the case on hand have no parity with the facts of the reported case. Hence, that decision cannot be relied upon to hold that the transaction, in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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