TMI Blog1995 (6) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be binding in other case. Therefore, we are mentioning the facts of only one case, i.e., M/s. Atlas Corporation. 4. Assessee declared its income for the assessment year at Rs. 40,791. According to the assessee the only activity carried on by it was purchase of shares by way of investment and sales thereof. Therefore, it declared income arising out of sale and purchase of shares under the head ' Capital gains '. It also earned income by way of dividend which was declared under the head ' Income from other sources '. Details of income declared by the assessee may be summarised as under : Capital gains Short-term capital loss Rs. 36,97,145 Long-term capital gain Rs. 50,85,681 Less : Deductions Rs. 30,55,008 Rs. 20,30,673 ------------- Long-term capital loss Rs. 99,610 ------------- Net capital loss Rs. 17,66,088 Income from other sources Dividend income Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri Abhaykumar Oswal contributed only Rs. 600. Out of the sum of Rs. 16,50,000, a sum of Rs. 3 lakhs was repaid by the association to M/s. Raipur Trading Co., and, therefore, the net capital in the account of M/s. Raipur Trading Co., stood at Rs. 10, 12,500 at the end of the year. The assessee was entitled to 45,000 rights shares and 22,500 debentures of the said Oswal Co. Therefore, it applied for 45,000 right shares by making part payment of Rs. 5 per share and for 22,500 debentures by making payment of Rs. 50 per debenture. Thus, the total value of shares and debentures was shown at Rs. 26,62,500 on assets side of the balance-sheet for the year ending 30-6-1984. There was no other transaction in shares or debentures during the year except a small transaction in which a loss of Rs. 94.92 was incurred which was offered as business loss in the return filed by the assessee and accepted as such by the department u/s 143(1). These details form part of the balance-sheet appearing at page 7 of the paper book. 6. In the next year ending 30-6-1985 relevant to assessment year 1986-87, assessee sold 22,500 debentures which were allotted by Oswal Company in the preceding year. These debent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res purchased during this year. The assessee declared short-term capital loss of Rs. 3,47,795 in the purchase and sale of shares made during this year itself. Again, this loss was accepted by the revenue as such u/s 143(1). 9. In the assessment year 1990-91, with which we are concerned, assessee dissolved the said association on 31-3-1990, terms of which were reduced into writing on the 7th day of April, 1990. During this year, out of 1,37,640 shares of Oswal Agro relating to original holdings, 21,000 shares were sold to M/s. Jagjit Sugar Mills. Balance 1, 16,640 shares of Oswal Agro which relate to original holdings as well as 38,250 shares of M/s. Bindal Agro Chem Ltd. which remained unsold at the time of dissolution were distributed between the two members of the association, viz., Nechville Co., and Raipur Trading Co., in the ratio of 61 % and 39% as per the terms of memorandum of association and dissolution deed. The value of these shares was taken at the market value which is not in dispute. The income arising out of such distribution of shares among members amounted to Rs. 50,85,681 which was offered by the assessee as long-term capital gain. This has been assessed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) that the losses have been generated by circuitous transactions, i.e., shares were purchased from and sold to the same person ; (iii) that the losses were always in proportion to the income received by the assessee ; (iv) that after adjustment of losses and other income assessee had shown a very nominal income ; (v) that losses have been generated in each year and total losses in all the years were to the extent of Rs. 46,09,669 which was a staggering amount in comparison with the capital base of Rs. 50,000 only ; (vi) that assessee always dealt in shares of Oswal Agro Mills and Bindal Agro Chem Ltd. ; (vii) that there was no broker involved in making these transactions ; (viii) that huge amount had been advanced by Bindal Agro Chem Ltd., and Oswal Agro Mills without any securities ; (ix) that object of these transactions was to generate losses in order to reduce the profits ; and (x) that assessee-AOP was constituted a`long with other three AOPs which have been floated by Shri Abhaykumar Oswal. All the AOPs adopted the same modus operandi. The loss and income of all the AOPs are identical and even the deductions of each AOP are also identical. These four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page-11 of his order inasmuch as the assessee had neither shown income nor loss in respect of debentures in assessment year 1990-91. What is disputed in the present appeal is the income/loss arising from the sale of shares which are different in nature from the debentures. (c) Regarding observations of the CIT(A) that assessee had been carrying on activity in an organised manner with a motive to earn profits, his submission was that this is not a decisive factor. Motive to earn profit is there in both the situations whether assessee acts either as a dealer or an investor. He further submitted that there was no organisation as such. He referred to the profit loss account of various years to show that negligible expenses were incurred by the assessee. For example, these expenses were Rs. 92 for the assessment year 1986-87, Rs. 2,465 for 198788, Rs. 2,376 for 1988-89, Rs. 3,261 for the year 1989-90 and Rs. 1,813 for the assessment year 1990-91. There was no office premises, telephone, or employees except a part-time accountant. Even no motive in respect of original acquisition of shares could be attributed as these were kept intact and were merely distributed between the members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of purchasing shares at a lesser value. (v) Regarding observation of the CIT(A) that magnitude of the transaction was very large, it was submitted that there was no magnitude of the transaction till assessment year 1988-89. Even the subsequent purchases were got registered in the name of the assessee and dividend income was earned thereon. He further submitted that at least purchase and sale of shares in the assessment year 1989-90 could not be decisive factor as far as income from 1,37,640 shares of Oswal Agro Mills and 38,250 shares of Bindal Agro Chem are concerned, as these shares were never sold by the assessee. (vi) Another observation of the CIT(A) was that the assessee itself credited or debited the sale of shares to profit and loss account which showed that assessee had treated these transactions as business transactions. The submission of the learned counsel for the assessee was that this was the only way to show the income/loss arising out of the transactions. He further submitted that nomenclature was not decisive. Whether assessee describes the gain by the name of profit loss account or income/expenditure account is irrelevant in deciding the issue either way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the assessee by way of investment. (ix) On other legal aspect it was argued by him that receipt of bonus shares was always on capital account irrespective of holding of shares, unless shown to the contrary. He drew our attention to the judgment of Hon'ble Supreme Court in the case of CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 in support of his contention. He further submitted that assessee had never converted bonus shares into stock-in-trade and, therefore, income in respect of these shares could not be assessed as business income. (x) In support of his above submissions, he also relied on the following judgments---- (a) L. Sohan Lal Gupta v. CIT [1958] 33 ITR 786 (All.) (b) CIT v. Mrs. A. Ghosh [1983] 139 ITR 119 (Cal.) (c) CIT v. Ganeshilal Shamlal [1966] 61 ITR 408 (Punj.) and (d) Karamchand Thapar Bros. (P.) Ltd. v. CIT [1971] 82 ITR 899 (SC). 12. On the other hand, the learned Sr. Departmental Representative strongly opposed the contentions of the assessee and reiterated the reasonings given by the CIT(A) in support of his order. Therefore, all the arguments of the revenue need not be repeated again as we have already referred to it in the ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date. The shares of the members in all AOPs were in identical terms and the transactions by all AOPs were also similar. Income/loss shown by all AOPs were similar as is apparent from page 9 of the order of the AO. Besides this, he drew our attention to the following facts and circumstances relied upon by the AO in arriving at the conclusion that all the transactions effected by the AOPs which generated losses were sham and artificial : (a) that losses have been generated in each year ; (b) that the losses generated were always proportionate to the income of the year, i.e., higher losses have been shown in the year in which there was higher income and low losses were shown where there was low income ; (c) that losses have been generated through circuitous transactions, i.e., shares were purchased from and sold to the same person, viz., M/s. Jagatjit Sugar Mills Co. Ltd.; (d) that assessee always dealt in shares of only two companies, viz, (i) Oswal Agro Mills Ltd. and (ii) Bindal Agro Chem Ltd. ; (e) that losses and income shown in case of all the four AOPs were identical ; (f) that the deductions claimed by the assessee in each assessment year were also identical ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Investment and Raipur Trading Co., who were members of the AOP ; (v) that the contention of the revenue that assessee had always shown losses every year is also wrong. He drew our attention to the profit and loss account for the assessment year 1986-87 to show that there was also profit in shares amounting to Rs. 79,900 ; (vi) that the department is wrong in observing that assessee had deliberately shown the losses in order to reduce the profits. He submitted that no investor would like to loose the capital. He also drew our attention to the fact that on the basis of the right value, assessee was under obligation to purchase debentures along with the shares. The normal feature of this trade is that after the issue of shares/debentures the price of shares fluctuates but the value of debentures normally declines and, therefore, the assessee had to sell the debentures in assessment year 1986-87 at loss in order to avoid the future losses ; (vii) that the department could not be allowed to blow hot and cold. The assessee had received dividend of Rs. 21,48,282 in respect of shares on the sale of which loss of Rs. 36,97,145 had been incurred by the assessee. The department had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls. The change is duly recorded in the register of shareholders. The observation of the AO that the assessee was making huge transactions with a capital base of Rs. 50,000 only is also factually wrong. The balance-sheet for the first year as on 30-6-1984 shows that the capital of the assessee-AOP was Rs. 26,63, 100. The AO seems to be influenced by the balance-sheet of the assessee as on 30-6-1987 where under the head ' Capital account ' the investment of members is stated to be Rs. 50,000. But he has overlooked t he current account of the members which shows a credit balance of Rs. 18,89,410 in the account of Nechville Investment Co. and Rs. 10, 16,098 in the account of Raipur Trading Co. and Rs. 694 in the name of Shri A. Oswal. The observation of the AO that losses have been shown every year is also not correct. The profit loss account of the assessee for the period ending on 30-6-1985 shows profit in sale and purchase of shares at Rs. 79,900. The stand of the revenue that assessee had shown losses deliberately also cannot be accepted since no material has been brought on record to show that shares had been sold at a price below the market rate. The other circumstances, i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1985-86 27,900 rights shares in assessment year 1987-88 and 64,740 Bonus shares in assessment year 1989-90 -------- 1,37,640 Shares -------- Out of the bonus shares, 21,000 shares had been sold on 3-11-1989 and rest of the 1, 16,640 shares remained intact with the assessee till the dissolution of the association when these shares were distributed between the two members, viz., Nechville Investment Co., and Raipur Trading Co., in the ratio of 61%: 39% as per the terms of the memorandum of association. There facts are not in dispute. 17. As far as bonus shares are concerned, we agree with the contention of the learned counsel for the assessee that acquisition of bonus shares is always on capital account irrespective of the nature of holding of shares on the basis of which bonus shares are issued. Such proposition has been laid down by the Hon'ble Supreme Court in the case of Madan Gopal Radhay Lal. The relevant observations of their Lordships reported at page-655 are being reproduced as under : " We are unable to agree with the judgment of the Bombay High Court (to which reference was made by the Tribunal) in CIT v. Maniklal Chunnilal Sons Ltd. [IT Ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the parties. If any authority is required, reference may be made to the judgment of the Hon'ble Supreme Court in the case of Ramnarain Sons (P.) Ltd. v. CIT [1961] 41 ITR 534 wherein it has been held that holding of a particular lot of shares by an assessee who is a dealer in shares can be by way of investment. In the light of this legal position, we have to appreciate the facts of the case. The object of the memorandum of association was to acquire shares and debentures by way of investment as well as to deal in shares and debentures as is apparent from the preamble of the memorandum of association. The object of the association by itself is not a decisive factor but certainly is a relevant factor in deciding the issue. So in such cases one has to see the conduct of the assessee. It is undisputed fact that right value of 93,750 shares was contributed by one of the member of the association, viz., Raipur Trading Co., as its capital on the basis of which assessee acquired 45,000 rights shares in the year of inception. Later on another 27,900 rights shares were acquired on the basis of same holding in the month of June 1986 relevant to assessment year 1987-88 and acquisition of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Sr. Departmental Representative had drawn our attention to the fact that Raipur Trading Co. was financed by Progressive Commercial Enterprises for purchase of 93,750 shares. In our opinion, the learned Sr. Departmental Representative is not justified in arguing that initially purchase of shares was out of borrowed funds. Raipur Trading Co. was a hundred per cent subsidiary company of Progressive Commercial Enterprises and, therefore, it cannot be said that any amount was borrowed by Raipur Trading Co. in the real sense. Secondly, this factor is not a relevant factor because the assessee-AOP has not borrowed any funds. We have to see the conduct of the assessee and not that of a member. Even otherside Raipur Trading Co. had contributed the right value of shares and not the cash. Raipur Trading Co. has not borrowed the right value. Even in a given set of facts an investor may also borrow, but that fact by itself would not decide the character. Since we find that assessee has not borrowed the funds, we reject this contention of the Departmental Representative. Similarly, the contention of the revenue that shares were purchased with a motive to earn profit does not come in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion, the facts of the case taken as a whole lead to the conclusion that assessee acted as an investor. Therefore, we hold that income shown by the assessee in respect of these shares cannot be assessed as business income but has to be assessed under the head ' Capital gain '. 22. Now we take up to decide the nature of transaction in respect of which assessee had shown loss of Rs. 36,97,141. The CIT(A) has mentioned at page-12 of this order that assessee had purchased 2,75,110 shares of Oswal Agro Mills in assessment year 1989-90 which seems to be factually wrong. The total shares of Oswal Agro Mills as on 30-6-1987 were 72,900 while as on 31-3-1989 it were 3,48,010 shares. The CIT(A) seems to have taken the difference as purchases during this year. Actually he seems to have ignore the fact that assessee had received 64,740 bonus shares on 2-2-1988, so the actual purchases during assessment year 1989-90 would come to 2,10,370 shares. These shares along with 21,000 bonus shares were sold in subsequent year which tallies with the figure of 2,31,370 shares as mentioned by the CIT(A) in his order at the same page. We have already held that income out of bonus shares is to be ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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