COMMISSIONER OF INCOME TAX -III V. SRI.VIKRAM VISHWANATH

ITA/580/2013

AI Insights

The case revolves around the interpretation and application of Section 47(xiv) of the Income Tax Act, 1961, which deals with the non-taxability of capital gains under certain conditions during the succession of a sole proprietary concern to a company. The assessee, Vikram Vishwanath, transferred his proprietary business, including shares and assets of Vikram Logistic and Maritime Services Private Limited (VLMS), to AHPL, a company he largely controlled. The revenue challenged the Tribunal's decision that this transfer was a succession and thus not taxable under capital gains. The High Court upheld the Tribunal's decision, emphasizing the business activities and the systematic approach taken by the assessee in transferring his business to a corporate entity.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 701870 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 30-07-2014
• Assessment Year: misc
• Other Referred Cases: DR.J.M.MOKASHI V. COMMISSIONER OF INCOME TAX, BENGAL AND ASSAM INVESTORS LIMITED VS. COMMISSIONER OF INCOME TAX, COMMISSIONER OF INCOME TAX VS. DISTRIBUTORS 24 (BARODA) P.LTD., COMMISSIONER OF INCOME TAX, MADRAS-I vs AMALGAMATIONS (P) LIMITED
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M S SYALI; S PARTHASARATHI
• Assessee Lawyers: E R INDRAKUMAR; E I SANMATHI
• Keywords: Capital Gain; Proprietary concern; Succession; Transfer of Capital Asset; Company takeover
• Section: 45; 47(xiv); 260-A

Judgement Text

" ® IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 30TH DAY OF JULY, 2014 PRESENT THE HON’BLE MR.JUSTICE N KUMAR AND THE HON’BLE MR.JUSTICE B MANOHAR I.T.A. NO.580 OF 2013 BETWEEN: 1. COMMISSIONER OF INCOME TAX – III BANGALORE. 2. THE JOINT COMMISSIONER OF INCOME TAX (OSD) CIRCLE-12(5), BANGALORE ...APPELLANTS (BY SRI E R INDRAKUMAR, SENIOR COUNSEL FOR SRI E I SANMATHI, ADVOCATE) AND: SRI.VIKRAM VISHWANATH 865, 12TH MAIN, III BLOCK NEAR RAMA TEMPLE KORAMANGALA BANGALORE – 560 034 ...RESPONDENT (BY SRI M S SYALI, SENIOR COUNSEL FOR SRI S PARTHASARATHI, ADVOCATE) 2 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961, AGAINST THE ORDER DATED 14.06.2013 PASSED IN ITA NO.154/BANG/2013 FOR THE ASSESSMENT YEAR 2009- 10 AND TO SET ASIDE THE APPELLATE ORDER DATED 14.06.2013 PASSED IN ITA NO.154/BANG/2013 FOR THE ASSESSMENT YEAR 2009-10 BY THE INCOME TAX APPELLATE TRIBUNAL, 'B' BENCH, BANGALORE. THIS INCOME TAX APPEAL COMING ON FOR ADMISSION THIS DAY, N.KUMAR, J. DELIVERED THE FOLLOWING: J U D G M E N T The revenue has preferred this appeal against the order passed by the Tribunal holding that the transfer of the capital asset of the sole proprietary concern of the assessee to a Company is by way of succession, in view of the provisions of Section 47(xiv) of the Income Tax Act, 1961, (for short, ‘the Act’) and therefore, any capital gain arising from such transfer cannot be brought to tax. FACTUAL MATRIX 2. The assessee is an individual. M/s.Vikram Logistic and Maritime Services Private Limited (for short, ‘VLMS’) was incorporated in the year 1992 by the assessee’s father, 3 Mr.C.Vishwanatha Iyer. The main object of the Company was transportation and logistic services. The Company was handling agent for Container Corporation of India, a public sector undertaking. The Company had offices at Whitefield in Bangalore, Thandayarpet and Madras Harbour in Chennai, besides offices in Coimbatore and other places. 3. The family members of the assessee held shares in the said Company. There was a division of business between the members of the family. In that family arrangement, all the shares in VLMS was transferred to the assessee with effect from 7.4.2001, except 10 shares held by Rajalakshmi Vishwanath. The assessee thereafter invested funds into the business and in turn, VLMS issued additional shares to the assessee. 29,800 shares were allotted on 30.3.2003, 2,49,950 shares were allotted on 31.3.2003 and 1,99,960 shares were allotted on 27.3.2004. 4 4. Funds were also infused into the business of VLMS by a foreign investor by name Xanfiretic Holding Company Limited and in turn, 2,46,300 shares of Rs.100/- per share were issued at a premium of Rs.3,173/- per share and allotted by VLMS to the foreign investor. After such allotment, the assessee held 4,99,900 shares of Rs.100/- each. 5. On 26.3.2009, shares of Rs.100/- were sub-divided into shares of Rs.10/- each. Thereafter, bonus shares were issued on the very same day. After the issue of 4,99,900 bonus shares, total share holding of the assessee in VLMS was 9,99,98,000. 6. On 22.6.2007, a Company by name Anuradha Holdings Private Limited (for short, ‘AHPL’) was incorporated. The assessee and his mother, Mrs.Rajalakshmi Vishwanath Iyer were the subscribers to the Memorandum of Association 5 and Articles of Association of AHPL. The main object of AHPL was to acquire, establish or promote companies, render advice and services for project development. Apart from the above main object, one of the object of AHPL was to take over proprietary business investment and assets of the assessee. 7. On 27.3.2009, an agreement for take over of the proprietary business of the assessee by AHPL was entered into. The agreement also narrates as to how the assessee has acquired certain commercial assets with an intention of achieving his business objective to be owned in his proprietary capacity. The agreement further refers to the fact that AHPL was formed only for the purpose of corporatising the business activities of the assessee. The agreement concludes with a view to give effect to the above intention and the assessee transferring all the business and business assets and liabilities of the assessee. The assessee 6 has given a schedule of movable assets less liabilities which were being taken over by AHPL. 8. Clause-2 of the take over agreement provides that the Assignee pursuant to the take over of assignor proprietary business concern and in discharge of the liability and in fulfillment of Section 47(xiv) of the Act, agrees to allot 2 lakh equity shares of Rs.100/- each at a premium of Rs.16,895.44079 per equity share as consideration to the Assignor for the complete take over of the business assets and liabilities. 9. The perusal of the balance sheet of the assessee as on 31.3.2008 shows that all the assets and liabilities referred to in the schedule was taken over except other advances and liabilities mentioned in the last two items. The said two items are stated to be advances given and liabilities incurred 7 between 1.4.2008 till 27.3.2009, the date of agreement for takeover of the business. 10. The assessee filed return of income for the assessment year 2009-10 in which he claimed that there was capital gain on transfer of 9,99,98,000 shares held by him in VLMS to AHPL under the takeover agreement and the same was not chargeable to tax in view of the provisions of Section 47(xiv) of the Act. In respect of the other assets that were subject matter of the takeover, there was no capital gain because they were all advances paid which had to be taken over on the basis of actual payment. 11. The Assessing Authority after getting explanations from the assessee, rejected the contentions of the assessee, holding that the assessee did not conduct any business as a proprietor and did not own any assets and liabilities, except the shares in the two Companies. Hence, there was only 8 transfer of shares held by the assessee in VLMS to AHPL. There was no real transfer of assets and liabilities of the business. By a mere transfer of shares held by him in one Company to another Company, the assessee has attempted to give a colour of those transactions that are not regarded as transfer within the ambit of Section 47 of the Act. The assessee has not satisfied any of the criteria mentioned in Clause-xiv of Section 47 of the Act. Therefore, the Assessing Authority held that the assessee is not entitled to claim exemption under Section 47(xiv) of the Act and the sale consideration is to be taxed as capital gains under Section 45 of the Act. Accordingly, a sum of Rs.3,26,71,17,906/- was determined as long-term capital gains. 12. The Commissioner of Income Tax (Appeals) has affirmed the said finding and dismissed the appeal. As against the said order, the assessee preferred I.T.A.No.154/Bang/2013 before the Tribunal. 9 13. The Tribunal, on consideration of the entire material on record and after noticing the stand of the revenue, held that the assessee was in the business of holding of investments. This is not a case where the assessee satisfied himself with merely making an investment and looking for the dividend. Therefore, there was a business activity in the matter of holding of investments carried on by the assessee. One of the objective for which AHPL was incorporated was to takeover proprietary business investment and assets of the assessee. The purpose behind the provisions of Section 47(xiv) of the Act is to encourage running business in an organised form, viz. as limited liability company rather than in the form of partnership or sole proprietary concern. Such conversion either of a firm into a company or a proprietary concern into a company are encouraged and assets transferred pursuant to such conversion are not regarded as transfer giving raise to tax on capital gains. The approach that needs to be adopted is to assess the business realities and appreciate the inputs of the man behind the veil. As 10 early as June 2007, when AHPL was incorporated, the assessee believed that he was in the business of holding of investments and that this business had to be corporatised. The assessee had conceived a business model of converting his business of holding investments in shares of VLMS to AHPL as early as 2007, when AHPL was incorporated. Transfer of shares of VLMS by the assessee took place in June 2009. It cannot be said that the plea of the assessee is an afterthought. Contemporaneous documents clearly indicate the intention of the assessee of having indulged in the business of holding shares of VLMS as proprietor. The assessee corporatised his business of holding investments (shares) in VLMS by transferring the same to AHPL in which he held virtually all the shares. Therefore, the Tribunal was of the view that the claim of the assessee regarding applicability of the provisions of Section 47 (xiv) of the Act should be accepted as it would advance the purpose behind those provisions. Therefore, the Tribunal upheld the claim of the assessee that there was a succession to the sole 11 proprietary concern of the assessee by a Company as a result of which, the sole proprietary concern sold capital assets or intangible asset to a company and therefore, the transfer by way of succession was not a transfer in view of the provisions of Section 47(xiv) of the Act and therefore, capital gain arising from such transfer could not be brought to tax. Therefore, the appeal was allowed. The impugned orders passed by the authorities were set aside and assessee was given the benefit of exemption. 14. Aggrieved by the said order, the revenue is in appeal. RIVAL CONTENTION 15. The learned Senior Counsel Sri E. R. Indra Kumar appearing for the revenue assailing the impugned order contended that, in the circumstances of the case, the conditions prescribed in clause-xiv of Section 47 are not fulfilled. Firstly, there is no succession which is a condition 12 precedent for application of this provision. Secondly, he contended that all the assets and liabilities held by the assessee are not transferred which is yet another condition that is to be fulfilled before the benefit of the aforesaid provision could be granted. He submitted that this provision / exemption has to be strictly construed as held by the Apex Court in the various judgments and therefore, he submits that the Tribunal committed a serious error in interfering with the well-considered orders passed by the lower authorities and therefore, the impugned order requires to be set aside. 16. Per contra, the learned Senior Counsel Sri M. S. Syali appearing for the assessee submitted that the assessee is in the business of holding of investments. He infused his funds and improved the business. Therefore, he has transferred his share holding in favour of another Company which is completely controlled by him. He received no consideration for such transfer. On the contrary, all the assets and 13 liabilities of his sole proprietary concern was transferred to the new Company without any consideration and as he holds more than 50% of the voting powers in the said Company, the requirements of Clause-xiv of Section 47 is complied with and therefore, the assessee is entitled to the benefit and the Tribunal rightly upheld the claim of the assessee by setting aside the orders passed by the authorities. SUBSTANTIAL QUESTION OF LAW 17. In the light of the aforesaid facts and rival contentions, the substantial question of law that arises for our consideration in this appeal is, “Whether in the facts and circumstances of the case, the Tribunal is justified in holding that the provisions of Section 47(xiv) of the Income Tax Act, 1961, are applicable, without appreciating the fact that the assessee had not carried on business in the capacity of a sole proprietary concern but had only held certain investments?” 14 18. Section 45 of the Act deals with capital gains. It provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall save as otherwise provided in sections 54, 54B, 54D, 54E, 54I(EA), 54(EB), 54(F), 54(G) & 54(H) be chargeable to income tax under the head ‘capital gains’ and shall be deemed to be the income of the previous year in which the transfer took place. However, Section 47 of the Act deals with transactions not regarded as transfer. It reads as under: “47: Nothing contained in section 45 shall apply to the following transfers: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (xiv) Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company Provided that- (a) all the assets and liabilities of the sole proprietary concern relating to the 15 business immediately before the succession become the assets and liabilities of the company; (b) the shareholding of the sole proprietor in the company is not less than fifty percent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and (c) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;” 19. Therefore, it is clear from the aforesaid provisions that when a sole proprietary concern which is carrying on a business, sells or otherwise transfers its capital asset to a company, though it earns any profit or gains from transfer of such capital asset, it shall be deemed to be the income of the previous year in which the transfer took place. Section 45 16 which is the charging section on capital gain is not attracted subject to the assessee satisfying three conditions mentioned in the aforesaid sections. The three conditions to be fulfilled for being eligible for such benefit are: (1) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession becomes the assets and liabilities of the company; (2) the shareholding of the sole proprietor in the successor company should not be less than 50% of the total voting power of the company and its shareholding continues to remain as such, for a period of five years from the date of succession; and (3) for such transfer or sale, the sole proprietor should not receive any consideration or benefit directly or indirectly, in any form or manner other than by way of allotment of shares in the successor company. 17 Once these conditions are satisfied, though by such transfer, the assessee earns capital gains, the same is not chargeable to capital gain tax. SOLE PROPRIETARY CONCERN 20. In this background, it is necessary to understand the meaning of the word ‘sole proprietary concern’ used in the said section, because the said provision exclusively applies only to the sole proprietary concern. In Black’s Law Dictionary, the word ‘proprietary’ is defined as under: Proprietary, n. A proprietor or owner; one who has the exclusive title to a thing; one who possesses or holds the title to a thing in his own right; one who possesses the dominion or ownership of a thing in his own right. Proprietary, adj. : Belonging to ownership; owned by a particular person; belonging or pertaining to a proprietor; relating to a certain owner or proprietor. The word proprietary interest is defined as under: 18 Proprietary interest. The interest of an owner of property together with all rights appurtenant thereto such as the right to vote shares of stock and right to participate in managing if the person has a proprietary interest in the shares. Similarly, the word proprietary rights is defined as under: Proprietary rights: Those rights which an owner of property has by virtue of his ownership. 21. In the case of DR.J.M.MOKASHI V. COMMISSIONER OF INCOME TAX, reported in (1994) 207 ITR 252, explaining the meaning of the word ‘concern’ appearing in section 64 (1) (ii), the Bombay High Court at pages 259 and 260 has held as under: “The assessee has raised a number of controversies in regard to the interpretation of the above provisions and the true meaning of some of the expressions used therein. We shall deal with them one by one. First, we may deal with the controversy in regard to the scope and ambit of 19 the expression ‘concern’. According to the assessee, the expression ‘concern’ refers only to business establishments as contrasted with professional organizations which depend on the personal skill and knowledge of the person concerned. Establishments of professionals like doctors, according to counsel for the assessee, do not fall within the ambit of the expression ‘concern’, and as such, section 64(1)(ii) has no application to payments made by an individual, who is a professional, to the spouse of such individual. We have carefully considered the above submission. We, however, find it difficult to accept the same and give such a narrow and constricted meaning to the word ‘concern’ which is neither natural nor borne out from the setting and context in which it appears. The word ‘concern’ is a word of wide import. It has various shades of meanings. According to the dictionaries, it means ‘something which pertains to a person; business affair. It also means “ a matter that engages a person’s attention, interest or care or that affects his welfare or happiness. In Black’s Law Dictionary (Sixth Edition), it has been defined that : 20 “Concern.- To pertain, relate or belong to; be of interest or importance to; have connection with; to have reference; to involve; to affect the interest of.” From the above definitions, it is evident that the word ‘concern’ is a word of wide import and it conveys different ideas and meanings depending upon the contest and setting in which it appears. In the context of section 64(1)(ii) read with Explanation 2 thereto, it is clear that ‘concern’ includes any company, firm, individual or any other entity carrying on business or professional activity. It cannot be given any restricted meaning to take out of its ambit professional organizations or organizations run as proprietary establishments. It covers all establishments or organizations-whether engaged in business activities or professional activities. This is so also because the word ‘business’ itself is a word of wide import and has been broadly interpreted to include ‘professions, vocations, and callings’. It is in this context that in Barendra Prasad Ray v. ITO (1981) 129 ITR 295, the Supreme Court, while interpreting the expression ‘business 21 connection’ appearing in section 9(1) of the Act, held as follows (at page 306): “The word ‘business’ is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. We are of the view that in the context in which the expression ‘business connection’ is used in section 9(1) of the Act, there is no warrant for giving a restricted meaning to it excluding ‘professional connections’ from its scope.” 22. The word ‘business’ is also defined under the Act in section 2(13) as under: “business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture” 23. The word ‘concern’ is a word of wide import. It has various shades of meanings. According to dictionaries, it means ‘something which pertains to a person; business 22 affair’. It also means “ a matter that engages a person’s attention, interest or care or that affects his welfare or happiness. It cannot be given any restricted meaning. It covers all establishments or organizations whether engaged in business activities or professional activities. Therefore, the meaning to be given to the word ‘concern’ depends upon the context and setting in which it appears. In the context of clause (xiv) of Section 47, the ‘sole proprietary concern’ means a proprietor/an individual of a business which is carried on by him exclusively. 24. It is contended that the assessee was not carrying on business as a sole proprietary concern and therefore, it cannot be said that by such transfer, the transferee company succeeded to the sole proprietary concern. It was contended that mere holding an investment would not constitute a business. In this context, it is useful to refer to few judgments on the point. 23 25. The Supreme Court in the case of BENGAL AND ASSAM INVESTORS LIMITED VS. COMMISSIONER OF INCOME TAX [ (1966) 59 ITR 547] dealing with a case of investment company where the question was, whether its dividend income formed part of its profits and gains chargeable to tax under section 10 of the Indian Income Tax Act, 1922, observed at page 554 as follows: “It seems to us that on principle before dividends on shares can be assessed under section 10, the assessee, be it an individual or a company or any other entity must carry on business in respect of share; that is to say, the assessee must deal in those shares. It is evident that if an individual person invests in shares for the purpose of earning dividend he is not carrying on a business. The only way he can come under section 10 is by converting the shares into stock- in-trade, i.e. by carrying on the business of dealing in stocks and share…..” 26. Again the Supreme Court in the case of COMMISSIONER OF INCOME TAX VS. DISTRIBUTORS 24 (BARODA) P.LTD. [(1972) 83 ITR 377] while dealing with the question as to whether there could be any business of holding of investments, at page 383, it held as follows: “We cannot say that the Legislature did not know its own mind when it used that expression in section 23A. We must give some reasonable meaning to that expression. No part of a provision of a statute can be just ignored by saying that the legislature enacted the same not knowing what it was saying. We must assume that the legislature deliberately used that expression and it intended to convey some meaning thereby. The expression ‘business’ is a well-known expression in income-tax law. It means, as observed by this court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954) 26 ITR 765, ‘some real, substantial and systematic or organized course of activity or conduct with a set purpose’. This is also the meaning given to that expression in the earlier decisions of the High Courts and the Judicial Committee. We must therefore, proceed on the basis that the legislature was aware of the meaning given by courts to that expression when 25 it incorporated section 23A into the Act in 1957. Hence we must hold that when the legislature speaks of the business of ‘holding of investments’, it refers to real , substantial and systematic or organised course of activity of investment carried on by an assessee for a set purpose such as earning profits.” 27. After referring to these two judgments, the Madras High Court in the case of COMMISSIONER OF INCOME TAX, MADRAS-I vs AMALGAMATIONS (P) LIMITED [(1977) 108 ITR 895] held as under: “We have looked into section 23A and we do not find in it any words importing a fiction. It considered two kinds of businesses; one is dealing in investments and the other is holding of them and holding of investment in appropriate cases would, in the view of Parliament, equally be a business as dealing in them. The only requirement is that there must be a real substantial and systematic or organized course of activity or conduct with the set purpose of earning profit which is the test for a business. 26 Examined in this light, it would be found that the assessee is not mere investor in a single company. It has investments in 16 companies. It had taken active interest in the business of those companies as is clear from the services that had been rendered in the shape of export promotion, liaison office at Delhi and internal audit. It also rendered consultation in respect of finance by its directors meeting every day with reference to the needs and requirements of each Company. It was also stated before us that apart from the original acquisitions, the assessee-company itself was responsible for starting several engineering companies and that it held the shares in such companies which it actively promoted. Even without going into the correctness or otherwise of this submission about which the relevant facts do not appear on record, we consider that the assessee company had a systematic or organized course of activity in the matter of working for and advising its subsidiaries. This is not a case where the assessee contented itself with merely making an investment and looking for the dividend We would, therefore, hold that there was a business activity in the matter of holding of 27 investments on the facts here. Even then, the question that would arise is whether the expenditure that has been incurred was wholly and exclusively laid out for the purpose of the assessee’s business. The assessee’s business is the holding of investments. If the assessee had incurred any expenditure in respect of its business, it would certainly be allowable as deduction.” 28. The judgment of the Madras High Court was challenged by the Revenue before the Apex Court. The Apex Court in the case reported in (1997) 226 ITR 188, (COMMISSIONER OF INCOME TAX VS. AMALGAMATIONS PVT.LTD.), dealing with the aforesaid question has observed thus: “We are unable to accept this contention. The High Court, in our opinion, as rightly pointed out that the business of the assessee company is the holding of investments and if with reference to the business of holding investments, any expenditure has been incurred that could have been allowed 28 as deduction. ……. The assessee- company could hold its investment and earn its dividends…….” 29. In fact, the word ‘investment company’ had been defined under section 109 of the Act, prior to its omission, as under: “Investment company means a company whose business consists wholly or mainly in dealing or holding of investment”. Therefore, the law recognized holding of investment by a company as a business. It was submitted this concept is well recognized all over the world. 30. In support of the said contention, reliance was placed on IRAS e-Tax guide. Clause 2.1 reads as under: 2.1 - A business of making investment is different from a business of dealing in investments or passive holding of investments. Based on the facts and business activities of the case, a company, trustee of property trust, partner of an 29 LLP or LP may be considered as carrying on a business of making an investment. Its income would then be taxable under section 10(1)(a) of ITA but the provisions of section 10E would apply from 1996 to determine the income to be brought to tax.” Clause 3.3. reads as under: “3.3. -“To recognise that companies may hold investments not for sale but to derive investment income as a trade, the business of making investments was introduced with an enactment of section 10E. Section 10E prescribes the tax treatment of companies engaged in the business of making investments. It ensures that a company that does not trade in investments would not enjoy the same tax treatment of expenses applicable to a company carrying on the trade of investment dealing. Accordingly, section 10E is not applicable to a company carrying on a trade of dealing in investments.” Clause 4.2. reads as under: “Cl.4.2 – whether an entity is carrying on a business of making of investments is a question 30 of fact. An entity claiming to be carrying such a business must satisfy the comptroller of this fact based on its activities. Once an entity has satisfied this fact, it may then apply the provisions of section 10E to determine its income derived from its business of making investments from that YA onwards. The income so determined is chargeable to tax under section 10(1)(a) of the ITA.” 31. From the aforesaid discussion, it can be seen that holding of investment is treated as a business. If an individual in a systematic or organised course of activity or conduct, with the set purpose, makes investment and holds that investment for the purpose of earning profits, then it constitutes a business. If an individual person invests in shares for the purpose of earning dividend, he is not carrying on a business. But if he converts the shares into stock - in - trade, then it amounts to his carrying on the business of dealing in stocks and shares. Here, we have to bear in mind the distinction. One is dealing in investment 31 and other is holding of them. If an investment is made in equity for the purpose of getting dividends, then it does not amount to business. But, if the investment is made with an intention of deriving profit, then it is a business notwithstanding the fact that even in such cases in addition to profits, dividend is also received. A business of holding of investment is different from a business of making of investments and looking for dividends. The active interest the assessee takes in the business after making investment for the purpose of holding investment, is also a decisive factor. If the investment made is really substantial and systematic or an organized course of activity or conduct with the set purpose of earning profit and active interest is taken in carrying on the business to improve his investment, then it is a business of holding of investment. Such a business may be carried on either by a company, or partnership firm or an individual. Then, if such a business carried on by the sole proprietor is succeeded by a company and such succession is by way of sale or otherwise transfer of any 32 capital asset to the company, then subject to assessee satisfying the conditions mentioned in Section 47 (xiv), the capital gain arising out of such transfer or sale is not liable for payment of capital gain tax. It is only when such business is carried on by an individual/assessee as a sole proprietary concern, clause-(xiv) of section 47 is attracted. Such benefit is not extended to other forms of persons as defined under the Act. The purpose behind the provisions of Section 47(xiv) of the Act is to encourage running business in an organised form, viz. as limited liability company rather than in the form of partnership or sole proprietary concern. Such conversion either of a firm into a company or a proprietary concern into a company are encouraged. It is an incentive to corporatize the sole proprietary concern into a company. Therefore, the tax benefit is extended to encourage such conversion. 32. Whether an entity is carrying on a business of making of investments is a question of fact. Therefore, we have to 33 look at the facts of the case to find out as to whether the assessee satisfies the requirement prescribed under law. 33. In the instant case, the assessee is an individual. He held shares in VLMS to the extent of 4,400 initially. He was actually participating in the business of the said company. He was also employed in the said company. There was a division of business between the members of the family who are other share holders. The other share holders transferred the entire share holding in favour of the assessee, except 10 shares held by Rajalakshmi Vishwanathan, with effect from 7.4.2001. Thereafter, assessee infused funds into business and VLMS issued additional shares to the assessee. On 30.3.2003, 29,800 shares were allotted and on 31.3.2003, 2,49,560 shares were allotted and on 27.3.2004, 1,99,964 shares were allotted. The funds were also infused into the business of VLMS by a foreign investor by name Xanfiretic Holding Company Ltd. In turn 2,46,300/- shares of Rs.100/- per share were issued to the foreign investor at a 34 premium of Rs.3,173 per share. On 26.3.2009, shares of Rs.100/- each were sub divided into shares of Rs.10/- each and thereafter bonus shares were issued on the same day, i.e., as against share holding of 4,99,900 by the assessee, 4,99,900 bonus shares were allotted. Thus, the total share holding of the assessee in VLMS was 9,99,98,000. He was actively involved in carrying of the business of the Company. 34. Much prior to allotment of bonus shares, i.e. on 22.6.2007, a company by name Anuradha Holdings Private Limited (AHPL) was incorporated by assessee and his mother. The main object of AHPL was to acquire, establish or promote companies, render advice and services for project development. One of the main objects of AHPL was to take over proprietary investment business and assets of assessee. On 27.3.2009, an agreement for taking over of the proprietary business of the assessee was entered into. He has transferred all the shares in VLMS held by him along with all the assets and liabilities relating to the business 35 carried on by him in favour of M/s Anuradha Holdings Pvt.Ltd.. In turn, he has been allotted shares of the said company to an extent of 99% of the shareholding of the said company. On the date of such take over, the shares of the assessee was valued at Rs.329,29,34,000/-. In fact, he had also invested money for purchase of land, flat, etc. as is reflected in the schedule of Assets less liabilities for take over. The consideration for the said take over was allotment of 2,00,000 equity shares of Rs.100/- each on a premium of Rs.16,895.44079 per equity share as consideration to the assignor for the complete take over of the business assets and liabilities. It is after such take over, the assessee filed return of income tax for the assessment year 2009-10 claiming a capital gain on transfer of 9,99,98,000 shares held by him in VLMS to AHPS and contended that the same was not chargeable to tax in view of provision of section 47(xiv). 36 35. In this factual background, when we look at the aforesaid provision, it is clear that assessee was a sole proprietary concern and he was holding investment in VLMS. Relating to the said business, he also had incurred expenditure by entering into agreement to purchase the land, flats as set out in schedule of movable assets less liabilities. Under the take over agreement, all the assets and liabilities of sole proprietary concern relating to the business was transferred in favour of AHPL. When he was allotted 2,00,000/- equity shares, his share holding in AHPS had come to 99% of the total shares of AHPL. Though the share of AHPL was valued at Rs.16,895.44079 for a share of Rs.100/- which works to 329,29,34,000/-. The assessee did not receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in the company. Therefore, all the three tests prescribed in section 47(xiv) of the Act are fulfilled. Though by virtue of such transfer or sale, it resulted in profits and gains and consequently capital gains, but by virtue of section 37 47(xiv), the same was not taxable as capital gain. This is precisely what the Tribunal has held. Both lower authorities did not properly appreciate the scope of section 47(xiv) of the Act and fell into error in holding that the assessee is liable to pay capital gain tax under section 45 of the Act. 36. In that view of the matter, we do not find any error committed by the Tribunal in setting aside the orders passed by lower authorities. Thus, the substantial question of law is answered in favour of the assesee and against the revenue. Hence, we pass the following order: Appeal is dismissed. No costs. Sd/- JUDGE Sd/- JUDGE KM/YN "