COMMISSIONER OF INCOME TAX-II, CHANDIGARH V. M/S PUNJAB AGRO INDUSTRIES CORPORATION LTD.

ITA/320/2010

AI Insights

The case revolves around the classification of income from the sale of shares by M/s Punjab Agro Industries Corporation Ltd., a Punjab Government Undertaking, which was involved in promoting agro/horticulture based industries. The Income Tax Department contended that the income should be classified as 'business income' due to the nature of the transactions, while the assessee argued it was 'capital gains'. The Tribunal and the High Court both sided with the assessee, emphasizing the non-business nature of the share transactions and the principle of consistency in tax assessment.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 739012 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 07-10-2013
• Assessment Year: misc
• Other Referred Cases: PSIDC Ltd. vs. CIT, Khan Bahadur Ahmed Alladin and Sons vs. CIT, Commissioner of Income Tax, Nagpur vs. M/s Sutlej Cotton Mills Supply Agency Limited, Venkataswami Naidu & Co. vs. CIT, Leeming vs. Jones, Saroj Kumar Mazumdar vs. CIT, Janki Ram Bhadur Ram vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: URVASHI DHUGGA
• Keywords: Business income; Capital Gain; Investment in shares; Principle of consistency; Taxable income
• Section: 143(1); 115JB; 260A

Judgement Text

"ITA No. 320 of 2010 -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA No. 320 of 2010 (O&M) Date of Decision: 7.10.2013 Commissioner of Income Tax-II, Chandigarh ....Appellant. Versus M/s Punjab Agro Industries Corporation Ltd. ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE JASPAL SINGH. PRESENT: Ms. Urvashi Dhugga, Advocate for the appellant. None for the respondent. AJAY KUMAR MITTAL, J. 1. The revenue has preferred this appeal under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 3.8.2009 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “A”, Chandigarh (hereinafter referred to as “the Tribunal”) in ITA No. 113/Chandi/2009 relating to the assessment year 2005-06. The appeal was admitted vide order dated 4.8.2010 for considering the questions of law as mentioned in para 7 of the appeal which are as under:- (i) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT was correct in holding that the sale of shares by the assessee was a capital gain and not profit and Singh Gurbachan 2013.10.31 14:38 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 320 of 2010 -2- gain from business? (ii) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT was correct in directing the department to follow the principal of consistency and holding that the department cannot depart from the accepted position in the earlier years?” 2. Put shortly, the facts necessary for adjudication of the present appeal as narrated therein are that the assessee is a Punjab Government Undertaking and its principal objects are to promote agro/ horticulture based industry in the state of Punjab. The assessee filed its return for the assessment year 2005-06 on 9.9.2005 declaring total business loss at ` 91,10,197/-, income from house property at ` 22,31,670/-, short term capital gain of ` 2,17,476/- and long term capital loss of ` 1,98,13,348/-. The tax was paid under Section 115JB of the Act on book profit of ` 3,83,04,304/-. The said return was processed under Section 143(1) of the Act on 20.3.2006. The case was selected for scrutiny and notice was issued to the assessee. The Assessing Officer vide order dated 6.12.2007 (Annexure A-1) held that the surplus/ loss resulting to the assessee on sale of the shares was to be considered as a business income/loss since investment in shares amount to a business activity whereas the assessee had declared surplus/loss on the shares as capital gain/loss. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [for brevity, “the CIT (A)”]. The CIT(A) vide order dated 28.11.2008 (Annexure A-2) partly allowed the appeal. Being dissatisfied with the order of the CIT(A), the revenue filed an appeal before the Tribunal, who vide order dated Singh Gurbachan 2013.10.31 14:38 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 320 of 2010 -3- 3.8.2009 (Annexure A-3) upheld the order of the CIT(A) and dismissed the appeal holding that the sale of investments of shares by the assessee was exigible to tax under the head capital gain instead of business income. Hence, the present appeal by the revenue. 3. Learned counsel for the appellant submitted that the investments made by the assessee in the shares and the sales thereof was exigible under the head profit and gain from business and not capital gains as has been held by the Tribunal. 4. After hearing learned counsel for the appellant, we do not find any merit in the appeal. The Tribunal while rejecting the contention of the revenue had held as under:- “5. We have considered the rival submissions carefully. We have also perused the precedent referred the CIT (Appeals) in support of his conclusion that the activity of the assessee in investing in shares is not a business activity but is liable to be taxed under the head 'capital gain'. In our view, the nature of activity of taking up the shares in the private companies which are jointly promoted with the private entrepreneurs cannot be equated to an ordinary investor who takes up the shares as a dealer in shares. The assessee corporation undertakes investment in projects in terms of collaboration agreement with the private entrepreneurs with a view to promote agriculture/horticulture industries in the State of Punjab. At the time of investment itself, it is agreed that the private entrepreneurs shall purchase Singh Gurbachan 2013.10.31 14:38 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 320 of 2010 -4- the shares held by the assessee after completion of five years from the date of start of the commercial production. In fact, the CIT(Appeals) in para 8 of his order has also enumerated the mechanism by which the sale consideration is arrived at. It is provided that in case shares are not quoted the stock exchange, interest on the amount invested is included upto the date of disinvestment at 1% above the bank rate of interest. The interest so calculated is added to the principal amount to work out the sale consideration of the shares. In case of stock exchange quoted shares, sale consideration is calculated as per the interest method stated above or the value at which the shares are quoted in the stock exchange, whichever is higher. We are referring to the aforesaid terms & conditions of the investment made by the assessee only to point out that it is not a case where a person is investing in shares as a business proposition of deal in the shares. The investment made in the shares of the companies which are jointly promoted by the assessee along with the private entrepreneurs, is with the basic object of promoting agro/horticulture based industry in the State of Punjab and not as a dealer in shares with the object of trading. In fact, the object of trading in shares is lacking in as much as the financial collaboration agreement itself prescribes that the shares shall be bought back by the private promoter Singh Gurbachan 2013.10.31 14:38 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 320 of 2010 -5- after a specified period at a defined consideration. In fact, in the case of PSIDC Ltd. (supra), the Tribunal has also considered similar aspects and have held that the realization of such investment is liable to be taxed under the head 'capital gains' and not as a 'business activity.' 6. Apart from the aforesaid, we also find that the assessee contended that in the past years all along, such activity of the assessee has been accepted as a pure investment activity and not a business activity. Therefore, even on the principle of consistency, the position taken by the assessee and having been accepted by the Department in the earlier assessment years, cannot be departed without cogent cause and justification. The Revenue has not brought out any change in the facts or in law which would justify departure from the accepted position in the earlier years.” 5. Further, the Tribunal had relied upon its decision in the case of Punjab State Industrial Development Corporation Ltd. (ITA No. 1333/Chandi/94 and ITA Nos. 944 & 1591/Chandi/95) decided on 22.11.1996 against which reference had been filed before this Court which was numbered as ITR No. 20 of 2000. Question No.2 at the instance of the revenue therein was as under:- “2. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that the investment in shares of companies Singh Gurbachan 2013.10.31 14:38 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 320 of 2010 -6- jointly promoted by the Corporation along with other industrial undertakings, is in the nature of investment and not stock-in-trade and profit realised on disinvestment in these shares, is not business income but a capital gain?” 6. This Court vide judgment dated 30.9.2010 held as under:- “11. In the present case, as has been found by the Tribunal, the assessee was advancing the industrial policy of the State and in that process, investment was made in the new projects and after level of self- sufficiency was achieved, disinvestment was done. The view of the Tribunal that realization of investment was liable to tax under the head capital gains was certainly a possible view, particularly when the revenue itself has been accepting this position upto the assessment year 1989-90. Judgment of Madras High Court, in facts of the present case, does not support the stand of the revenue. 12. Whether income in a particular case falls under the head of capital gains or business depends upon nature of business of the assessee and attending circumstances. At times, the dividing line for deciding the head of income may be very thin and the heads may overlap. Parameters for deciding this question have been discussed by the Hon'ble Supreme Court, inter-alia, in Khan Bahadur Ahmed Alladin and Sons v. CIT, (1968) 68 ITR 573 = AIR 1968 SC 788 Singh Gurbachan 2013.10.31 14:38 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 320 of 2010 -7- and Commissioner of Income Tax, Nagpur v. M/s Sutlej Cotton Mills Supply Agency Limited, (1975) 100 ITR 706 = AIR 1975 SC 2106. 13. In M/s Sutlej Cotton Mills Supply Agency, it was observed:- “11. The principles underlying the distinction between a capital sale and an adventure in the nature of trade were examined by this Court in Venkataswami Naidu & Co. v. CIT, (1959) 35 ITR 594 = AIR 1959 SC 359, where this Court said that the character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. Ultimately, it is a matter of first impression with Court whether a particular transaction is in the nature of trade or not it has been said that a single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of the trade; but mere purchase/sale of shares-if that is all that is involved in the plunge-may fall short of anything in the nature of trade. Whether It is in the nature f trade will depend on the facts and circumstances. XX XX XX XX 13. Where a purchase is made with the Singh Gurbachan 2013.10.31 14:38 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 320 of 2010 -8- intention of resale, it depends upon the conduct of the assessee and the circumstances of the case whether the venture is on capital account or in the nature of trade. A transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale [see Jenkinson v. Freeland (1961) 39 Tax Cases 636; Radha Debi Jalan v. ClT (1951) 20 ITR 176 (Cal); India Nut Co. Ltd. v. ClT (1960) 39 ITR 234 = AIR 1959 Ker 298; M/s. Sooniram Poddar v. ClT (1939) 7 ITR 470 (478-479) = AIR 1939 Rang 337; at p. 338; Ajax Products Ltd. v. ClT (1961) 43 ITR 297 (310) (Mad); Gustad Irani v. ClT (1957) 31 ITR 92 (Bom); and Mrs. Alexander v. ClT (1952) 22 ITR 379, 402 = AIR 1953 Mad 166, 170). 14. A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment [see Leeming v. Jones (1930) 15 Tax Cases 333 and also the decisions of this Court in Saroj Kumar Mazumdar v. ClT (1959) 37 ITR 242 (250-251) = AIR 1959 SC 1252, 1258-1259 and Janki Ram Bhadur Ram v. CIT (1965) 57 ITR 21 = AIR 1965 SC 1898).” Singh Gurbachan 2013.10.31 14:38 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 320 of 2010 -9- 7. In view of the above, the substantial questions of law are answered against the revenue and in favour of the assessee. Consequently, the appeal stands dismissed. (AJAY KUMAR MITTAL) JUDGE October 7, 2013 (JASPAL SINGH) gbs JUDGE Singh Gurbachan 2013.10.31 14:38 I attest to the accuracy and integrity of this document High Court Chandigarh "