ITO 3(1)(1), MUMBAI V. ACCRA INVESTMENTS P. LTD, MUMBAI

ITA 5457/MUM/2009

• Counselvise Citation: 545719914 RSA 2009
• Duration Of Justice: 2 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 29-03-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 01-10-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D : MUMBAI BEFORE SHRI B.R. MITTAL, ( JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO. :5457/MUM/2009 ASSESSMENT YEAR : 2006-07 INCOME TAX OFFICER RANGE 3(1)(1) ROOM NO.666, M.K. ROAD AAYAKAR BHAVAN MUMBAI-400 020. M/S. ACCRA INVESTMENTS PVT. LTD. 402-A, BAKHTAWAR, SAHID BHAGATSINGH ROAD OPP. COLABA POST OFFICE MUMBAI-400 005. PAN NO: AADCA 8373 N (APPELLANT) VS. (RESPONDENT) CORRIGENDUM THIS APPEAL IN ITA NO.5457/MUM/2009 FOR ASSESSMENT YEAR 2006-07 HAS BEEN FILED BY THE REVENUE. HOWEVER, IN THE APPELLAT E ORDER DATED 25.4.2012 INADVERTENTLY AT SOME PLACES IT HAS BEEN MENTIONED THAT THE APPEAL HAS BEEN FILED BY THE ASSESSEE. THEREFORE, THE SAID ERROR I S BEING CORRECTED AND THE WORD ASSESSEE APPEARING IN THE 1 ST LINE AND 3 RD LINE AT PAGE-1 OF THE ORDER AND IN THE LAST BUT ONE LINE OF PARA 3.1 IS SUBSTITUTED BY THE WORD REVENUE SD/- SD/- (B.R. MITTAL) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 7.5.2013 JV. 2 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI. IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI BEFORE SHRI B.R. MITTAL, J.M. AND SHRI RAJENDRA S INGH, A.M. ITA NO. :5457/MUM/2009 ASSESSMENT YEAR : 2006-07 INCOME TAX OFFICER RANGE 3(1)(1) ROOM NO.666, M.K. ROAD AAYAKAR BHAVAN MUMBAI-400 020. M/S. ACCRA INVESTMENTS PVT. LTD. 402-A, BAKHTAWAR, SAHID BHAGATSINGH ROAD OPP. COLABA POST OFFICE MUMBAI-400 005. PAN NO: AADCA 8373 N (APPELLANT) VS. (RESPONDENT) APPELLANT BY : MS. RUPINDER BRAR RESPONDENT BY : SHRI YOGESH A. THAR DATE OF HEARING : 29.3.2012 DATE OF PRONOUNCEMENT : 25.4.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER D ATED 29.7.2001 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-07. T HE ONLY 3 DISPUTE RAISED BY THE ASSESSEE IN THIS APPEAL IS REGARDING NATURE OF INCOME EARNED BY THE ASSESSEE FROM THE SALE OF SHARES. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAD PURCHASED 30700 SHARES OF M/S. MILLENNIUM ALCOBEV P. LTD. (MABL), AN UN LISTED COMPANY FOR A SUM OF RS.6,54,28,660/- ON 7.5.2003 IN ASSESSMENT Y EAR 2004- 05. THE SAID SHARES WERE SOLD IN ASSESSMENT YEAR 2006-07 FO R A SUM OF RS.16,66,60,000/-. THE ASSESSEE DECLARED THE INCOME FR OM SALE OF SHARES AS LONG TERM CAPITAL GAIN WHICH WAS COMPUTED AT RS.9,64,26,643/- AFTER INDEXATION. DURING THE ASSESSMEN T PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE HAD ACQUIRED 2 0% SHARE HOLDING OF MABL FOR RS.6,54,28,660/- ON 7.5.2003. T HE REMAINING SHARES OF THE SAID COMPANY WERE HELD BY TWO OTHER PARTI ES I.E., M/S. SCOTTISH & NEW CASTLE INDIA P. LTD. (SINPL) 40% AND M/ S. UNITED BREWERIES LTD.(UBL), THE BALANCE 40%. THE AO ALSO OBSER VED THAT SHRI R.K. JAIN WHO WAS THE MAIN DIRECTOR OF THE ASSESSEE COMPAN Y HOLDING 99.99% SHARE HOLDING, WAS ALSO DIRECTOR OF MABL WHOSE SH ARES WERE PURCHASED BY THE ASSESSEE. THE AO ALSO NOTED THAT AS PER B ALANCE SHEET AS ON 31.3.2002, MABL HAD MEAGER SHARE CAPITAL OF ONLY RS.800/- AND HAD ACCUMULATED LOSSES OF RS.40.46 LACS IN ASSESSME NT YEAR 2002-03 AND RS.18.64 CRORES IN ASSESSMENT YEAR 2003-0 4. THE LOSSES HAD SUBSTANTIALLY INCREASED TO RS.37.13 CRORES AS ON 3 1.3.2005 AND RS.60.35 CRORES AS ON 31.3.2006. THUS THE BOOK VALUE OF THE SHARES OF THE FACE VALUE OF RS.10/- WAS ALMOST NIL AT T IME OF PURCHASE OF SHARES BUT THE ASSESSEE HAD PAID THE PRICE @ RS.21.30 PE R SHARE. FURTHER, ON THE DATE OF PURCHASE ON 7.5.2003, THE ASSESSE E HAD RECEIVED LOANS OF RS.5.93 CRORES FROM M/S. U.B. GENERAL I NVT. LTD. AND RS.61.00 LACS FROM SOME OTHER PARTY, TOTALING RS.6.54 CR ORES WHICH HAD BEEN UTILIZED FOR PAYMENT FOR PURCHASE OF SHARES MA KING IT CLEAR 4 THAT THE SHARES HAD BEEN PURCHASED FROM BORROWED FUNDS. THE AO ALSO NOTED THAT SHRI R.K. JAIN WHO WAS THE DIRECTOR OF MAB L FOR THE LAST MAY YEARS HAD VAST EXPERIENCE IN THE BREWERIES TRADE/BU SINESS AND HE WAS FULLY AWARE THAT MABL WAS INCURRING HUGE LOSSES AND YET HE PURCHASED THE SHARES OF MABL AS DIRECTOR OF THE ASSESSEE COMP ANY @ RS.21.30 PER SHARE WHEN THE BOOK VALUE WAS NIL. HE, TH EREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY TRANSACTION OF PURCHASE AN D SALE OF SHARES SHOULD NOT BE TREATED AS BUSINESS INCOME. 2.1 THE ASSESSEE EXPLAINED TO THE AO THAT IT WAS AN INVE STMENT COMPANY AND 90% OF THE ASSETS WERE HELD AS AN INVESTMENT . THE INCOME EARNED BY THE ASSESSEE COMPANY CONSISTED OF DIVIDEND , INTEREST AND CAPITAL GAIN. THOUGH INVESTMENT COMPANY WA S NOT DEFINED IN THE ACT, A COMPANY UNDER THE PROVISIONS OF SECTION 372 OF THE COMPANYS ACT IS DEFINED AS AN INVESTMENT COMPANY IF THE PRINCIPAL BUSINESS CONSISTS OF ACQUIRING, HOLDING AND DEALING IN SHAR ES AND SECURITIES AND DERIVES INCOME MAINLY FROM INVESTMENTS. IT WAS ALSO SUBMITTED THAT THE INVESTMENTS MADE BY THE ASSESSEE COMPANY WERE ALSO CLASSIFIED AS INVESTMENT IN THE BALANCE SHEET. THE ASSESSEE ALSO SUBMITTED THAT, FOR TREATING INCOME AS BUSINESS, IT WAS R EQUIRED TO BE SHOWN THAT THE ASSESSEE WAS IN THE ORGANIZED ACTIVITY OF PURCHASE AND SALE OF SHARES. THE ASSESSEE IN THIS CASE HAD PURCHASED SHARES OF ONE COMPANY AS A STRATEGIC INVESTOR AND SHARES WERE NOT TRADAB LE AS THE COMPANY WAS UNLISTED. ASSESSEE HAD TO SELL THE SHARES BECAUSE BUSINESS PLAN OF MABL REQUIRED HUGE CAPITAL AND ASSESSEE W AS NOT IN A POSITION TO INFUSE FURTHER CAPITAL AND ACCORDINGLY IT SOL D THE SHARES. THE ASSESSEE HAD PURCHASED SHARES OUT OF SHARE APPLICATION M ONEY RECEIVED FROM M/S. FEED BACK COMPUTERS LTD. AND NOT FR OM ANY BORROWINGS. AS REGARDS PRICE PAID FOR THE PURCHASE OF SHA RES, 5 ASSESSEE SUBMITTED THAT THE COMPANY WAS AN UNLISTED COMPANY, AND THEREFORE, THERE COULD NOT BE ANY MARKET PRICE FOR TH E SHARES. SUCH SHARES HAD TO BE TRANSFERRED ONLY AT A NEGOTIATED PRI CE BETWEEN BUYER AND SELLER WHICH CAN BE DECIDED ON THE BASIS OF FUTURE BU SINESS PLAN OF THE SAID COMPANY. 2.2 THE AO WAS HOWEVER NOT SATISFIED BY THE EXPLANATI ON GIVEN. IT WAS OBSERVED BY HIM THAT THE SHARES HAD BEEN PURCHASED BY THE ASSESSEE WITH A VIEW TO TAKE BUSINESS STAKE IN MABL. HE R EFERRED TO THE AGREEMENT DATED 16-05-2002 FOR PURCHASE OF SHARES I N WHICH ASSESSEE COMPANY WAS DESCRIBED AS MANAGER AND ALSO REFERRED TO AS PROMOTER COMPANY. FURTHER, AT THE TIME OF SALE OF SHA RES, THE ASSESSEE HAD ALSO SURRENDERED THE RIGHTS OF THE ASSESSEE COMPA NY FOR MANAGEMENT OF AFFAIRS WHICH WERE ALSO TERMINATED. AS P ER TERMINATION AGREEMENT, SHRI R.K. JAIN WAS TO RESIGN H IS POST AS MANAGING DIRECTOR AND THEREFORE, WAS GIVEN COMPENSATION OF RS.2.00 CRORES FOR NON-COMPETING, NON-SOLICITATION, NON-DISCLOSURE OF CONFIDENTIAL INFORMATION UPON THE COMPLETION OF SALE O F SHARES. THUS PURCHASE AND SALE WAS FOR ACQUIRING BUSINESS STAKE AND MANAG ING AND RUNNING MABL. MABL HAD HUGE ACCUMULATED LOSSES AS POIN TED OUT EARLIER AND SHRI R.K. JAIN BEING AWARE OF THE FINAN CIAL POSITION OF MABL AS DIRECTOR HAD PURCHASED THE SHARES AT RS.21.30 PER SHARE WHEN THE FACE VALUE ON THE DATE OF PURCHASE WAS PRACTICALLY NIL. SHRI R.K. JAIN WAS FULLY AWARE THAT NO DIVIDEND INCOME WAS POSSIBLE BUT IN THE SHORT PERIOD THERE COULD BE SOME APPRECIATION DUE TO CHANGE I N THE SHARE HOLDING. THUS THE AIM OF THE ASSESSEE COMPANY IN MAKING PURCHASES OF SHARES WAS NOT TO EARN DIVIDEND FROM INVESTMENT. T HE AO REFERRED TO THE JUDGMENT OF HON'BLE SUPREME COURT IN CASE OF DA LHOUSIE INVESTMENT TRUST CO. LTD. VS. CIT (68 ITR 486), IN WHI CH IT WAS HELD 6 THAT THE PRINCIPAL CONSIDERATION FOR DETERMINING THE NATURE OF INCOME FROM SALE OF SHARES, IS TO FIND OUT, THE PURPOSE OF PUR CHASE OF THOSE SHARES. AS THE PURPOSE IN THAT CASE WAS FOUND OUT NOT EA RNING DIVIDEND INCOME BUT TO EARN PROFIT BY RESALE OF THOSE SHARES, IT WAS HELD THAT INCOME HAD TO BE CONSIDERED AS BUSINESS INCOME. 2.3 THE AO ALSO OBSERVED THAT THE ASSESSEE WAS NOT CORRECT I N STATING THAT THE SHARES WERE PURCHASED FROM BORROWED FUN DS. THERE WAS A CLEAR NEXUS BETWEEN BORROWINGS AND PURCHASES AS POIN TED OUT EARLIER THOUGH SUBSEQUENTLY, THE ASSESSEE HAD RECEIVED SUM OF RS.5.50 CRORES FROM M/S. FEED BACK COMPUTERS LTD. AS SHARE APPLICAT ION MONEY BUT, IN FACT NO SHARES WERE ALLOTTED EVEN TILL D ATE. THEREFORE, THE AMOUNT WAS NOTHING BUT LOAN/ADVANCES. THE AO ALSO OBSERVED THAT ENTRY IN THE BOOKS OF ACCOUNT WAS NOT CONCLUSIVE. REGARDIN G NATURE OF PURCHASES, HE FURTHER NOTED THAT EVEN A SINGLE TRANSACTIO N OF PURCHASE AND SALE COULD BE TREATED AS ADVENTURE IN THE NATURE O F TRADE AS HELD BY HON'BLE SUPREME COURT IN CASE OF G. VENKATASWAMI NA IDU VS. C IT (35 ITR 594) AND IN CASE OF CIT VS SUTLEJ COTTON MILL S SUPPLY AGENCY LTD. (100 ITR 706). THE AO ALSO OBSERVED THAT THE AM OUNT RECEIVED ON SALE OF SHARES COULD ALSO BE CONSIDERED AS BUSINESS INCOME UNDER SECTION 28(II) AS PER WHICH ANY COMPENSATION RECEIVED IN CO NNECTION WITH TERMINATION OF THE MANAGEMENT OR MODIFICATION O F TERMS AND CONDITIONS RELATING THERETO BY ANY PERSON MANAGING THE WHOLE OR SUBSTANTIALLY THE WHOLE AFFAIRS OF AN INDIAN CO. HAS TO BE CONSIDERED AS BUSINESS INCOME. MABL HAD ACQUIRED SHARES FOR MANAGEMENT CONTROL AND RUNNING OF THE BUSINESS WHICH HAD BEEN TERMINATED A ND THE AMOUNT RECEIVED ON SALE OF SHARES WHICH WAS LINKED TO THE SAID TERMINATION COULD BE CONSIDERED AS BUSINESS INCOME. THE AO ASSESSED THE INCOME OF RS.10,12,31,340/- AS BUSINESS INCOME. 7 3. THE ASSESSEE DISPUTED THE DECISION OF AO AND REITERATE D THE SUBMISSIONS MADE BEFORE AO THAT THE SHARES HAD BEEN PURCHA SED WITH THE INTENTION OF RUNNING AND GROWING THE COMPANY AND NOT FOR TRADING OF SHARES AS SHARES WERE NOT LISTED AND WERE NOT FREELY T RADE-ABLE. AS REGARDS HIGH PRICE OF SHARES IT WAS SUBMITTED THAT AT TH E TIME OF FORMATION OF NEW COMPANY, THE CAPITAL IS NORMALLY INTR ODUCED BY PROMOTERS AT PREMIUM AND, THEREFORE, FROM THE HIGH P RICE, NO CONCLUSION COULD BE DRAWN THAT THE ASSESSEE HAD PURCHASED THE SHARES FOR TRADING. IT WAS ALSO SUBMITTED THAT PAYMENTS FOR T HE PURCHASE HAD BEEN MADE FROM THE BORROWINGS ONLY FOR 12 DAYS WHICH W ERE SUBSEQUENTLY REPLACED BY SHARE APPLICATION MONEY FROM M /S. FEEDBACK COMPUTERS PVT. LTD. THE ASSESSEE HAD BEEN MAKING PURCHASES AS A STRATEGIC INVESTOR FOR RUNNING A COMPANY AND THESE WERE NOT TRADING INVESTMENTS. THE ASSESSEE DISTINGUISHED THE JUDGMENTS OF HON'BLE SUPREME COURT IN THE CASE OF DALHOUSIE INVESTMENT TRUST CO. LTD. VS. CIT (SUPRA), ON THE GROUND THAT IN THAT CASE THE OBJEC T OF SALE OF SHARES AS GIVEN BY THE ASSESSEE REMAINED UNPROVED. IN CASE OF THE ASSESSEE, IT WAS REDUCED TO MINORITY BY THE OTHER TWO SHAR E HOLDERS HOLDING 80% OF THE SHARES AND WAS PUT IN A POSITION TO SELL THE SHARES TO THEM SO AS TO ACQUIRE FULL CONTROLLING INTEREST OF T HE COMPANY. IT WAS FURTHER SUBMITTED THAT THE CASE OF THE ASSESSEE WAS COVER ED BY THE JUDGMENT OF HON'BLE SUPREME COURT IN CASE OF RAMN ARAIN SONS (PR.) LTD. (41 ITR 534), IN WHICH, UNDER SIMILAR CIRCU MSTANCES, IT HAD BEEN HELD THAT INTENTION FOR PURCHASE OF SHARES WAS NO T TO ACQUIRE THEM AS PART OF STOCK IN TRADE. 3.1 AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CA SE AND RULINGS RELIED UPON BY THE PARTIES, CIT(A) OBSERVED TH AT, IN THE 8 AGREEMENT FOR PURCHASE OF SHARES, SHRI R.K. JAIN WAS SHOW N AS MANAGER. FURTHER, THE SHAREHOLDERS AGREEMENT REGULATE D AND RESTRICTED THE TRANSACTION OF SHARES WHICH COULD ONLY BE SO LD TO THEIR ASSOCIATES. THERE WAS ALSO LOCK-IN PERIOD OF THREE YEARS. B ESIDES, THE SHARES COULD NOT BE SOLD TO THIRD PARTIES EVEN AFTER LOCK ING PERIOD WITHOUT OFFERING THE SAME EXISTING SHARE HOLDING. THUS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE WAS TO GAIN THE CONTRO LLING POWER OF MABL AND THE MANAGER OF THE CO SHRI R.K. JAIN WAS AN EXPERT IN THE FIELD OF LIQUOR AND BREWERIES BUSINESS AND HE WAS NOT A PERSON HAVING EXPERTISE IN FINANCIAL/INVESTMENT ACTIVITIES. THUS THE I NTENTION WAS OF RUNNING THE BUSINESS OF MABL AND MAKING IT VIABLE TO EARN DIVIDEND AND NOT WITH THE INTENTION OF TRADING IN SHARES. CIT( A) AGREED THAT THE CASE OF THE ASSESSEE WAS COVERED BY THE JUDGMENT OF THE HON' BLE SUPREME COURT IN THE CASE OF RAMNARAIN SONS (PR.) LTD. (41 ITR 534) (SUPRA). THOUGH THE SHARES IN THIS CASE HAD BEEN ACQUIRED FROM BORROWED FUNDS, THE SAID BORROWED FUNDS WERE REPLACED BY SHARE APPLICATION MONEY WITHIN A SHORT-SPAN OF 12 DAYS. THOUG H THE MOA OF THE COMPANY AUTHORIZED PURCHASE AND SALE OF SHARES, THIS COULD NOT BE CONCLUSIVE IN DECIDING WHETHER THE ASSESSEE WAS DOING ANY BU SINESS OF DEALING IN SHARES. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, CIT(A) HELD THAT INTENTION OF THE ASSESSEE WAS TO ACQUIR E CONTROLLING POWER AND NOT FOR TRADING IN SHARES. CIT(A) ALSO DID NOT AGREE WITH THE STAND OF THE AO THAT THE SALE CONSIDERATION OF THE SHARE S COULD BE CONSIDERED AS COMPENSATION UNDER SECTION 28(2)(II) OF THE ACT. CIT(A), THEREFORE, CONCLUDED THAT INCOME FROM SALE OF SH ARES HAD TO BE ASSESSED AS CAPITAL GAIN. AGGRIEVED BY THE SAID DECISION, A SSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 9 4. BEFORE US, THE LD. AR FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES THAT THE ASSESSEE WAS O NLY A STRATEGIC INVESTOR AND NOT A TRADER IN SHARES. THE ASSESSEE HAD NOT PURCHASED AND SOLD ANY OTHER SHARES. THE SHARES HAD BEEN ACQUIRED FOR TAKING MANAGEMENT STAKE WITH A VIEW TO MANAGING THE COMPANY. THE ASSESSEE WAS ONE OF THE PROMOTERS AND, THEREFORE, INI TIAL CAPITAL HAD TO BE SUBSCRIBED AT PREMIUM. IT WAS ALSO SUBMITTED TH AT PROVISIONS OF SECTION 28(2)(II) HAD BEEN WRONGLY INVOKE D BY THE AO AND WERE NOT APPLICABLE TO THE FACTS OF THE PRESENT CA SE. IT WAS FURTHER POINTED OUT THAT CIT(A) HAD PASSED A REASONED ORDER WH ICH SHOULD BE ACCEPTED. THE LD. AR PLACED RELIANCE ON THE FINDINGS GIV EN IN THE APPELLATE ORDER. HE ALSO RELIED UPON THE DECISION OF T HE TRIBUNAL IN CASE OF RENATO FINANCE AND INVESTMENTS LIMITED VS. DCIT IN ITA NO.115/M/2009 FOR ASSESSMENT YEAR 2005-06, DATED 19.1.1 1. 4.1 THE LD. DR ON THE OTHER HAND STRONGLY SUPPORTED THE ORDERS OF AO AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE ASSE SSMENT ORDER. IT WAS SUBMITTED THAT THE FINANCIAL POSITION OF MABL W AS WELL-KNOWN AT THE TIME OF PURCHASE OF SHARES AND CONSIDERING THE HUGE ACCUMULATED LOSS WHICH WENT ON INCREASING IN THE SUBSEQUENT YEARS, TH E ASSESSEE COULD NOT BE EXPECTED TO EARN ANY DIVIDEND AND, THERE FORE, THE PURCHASES COULD NOT BE CONSIDERED AS INVESTMENT. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING NATURE OF INCOME EARNED BY THE ASSESSEE FROM SALE OF SHARES OF MABL. THE A SSESSEE COMPANY IN WHICH SHRI R.K. JAIN WHO WAS MAIN DIRECTOR H OLDING 99.9% SHARE, HAD PURCHASED 30700 SHARES OF MABL AN UNLISTED CO MPANY ON 7.5.2003 FOR A SUM OF RS.6,54,28,660/- @ 21.30 PER SHA RE. SHRI R.K. 10 JAIN WAS ALSO DIRECTOR OF MABL. THE REMAINING SHARES OF MABL WERE HELD 40% EACH BY SINPL A BRITISH COMPANY AND M/S. UNIT ED BREWERIES. SINCE THE SHARES WERE ACQUIRED AS PROMOTERS, THESE SHARES H AD LOCK-IN PERIOD OF THREE YEARS AND EVEN AFTER THE LOCK-IN PERI OD THESE COULD BE SOLD ONLY AFTER GIVING NOTICE TO OTHER SHARE HOLDERS. HOWEVER, SHARES COULD BE SOLD TO OTHER SHAREHOLDERS WITHIN THE LOCK-IN P ERIOD ALSO. THE ASSESSEE HAD SOLD THE SHARES IN ASSESSMENT YEAR 2006-07 TO THE OTHER PROMOTERS FOR A SUM OF RS.16,66,60,000/-. THE ASSESSEE DECL ARED THE INCOME FROM SALE AS LONG TERM CAPITAL GAIN WHICH WAS COMPU TED AT RS.9,64,26,643/- AFTER INDEXATION. THE CASE OF THE ASSESS EE IS THAT IT WAS AN INVESTMENT COMPANY WHICH WAS EARNING INCOME FROM DIVIDEND, INTEREST AND CAPITAL GAIN. THE SHARES HAD BEEN SHOWN AS I NVESTMENT IN THE BALANCE SHEET. THE ASSESSEE WAS NOT ENGAGED IN ANY OR GANIZED ACTIVITY FOR PURCHASE AND SALE OF SHARES. THEREFORE, INCO ME COULD NOT BE ASSESSED AS BUSINESS INCOME AS HELD BY THE AO. IT HAS ALSO BEEN SUBMITTED BY THE ASSESSEE THAT IT WAS ONLY A STRATEGIC INV ESTOR AND NOT A TRADER IN SHARES. THE ASSESSEE HAS ALSO DISPUTED THE CLAIM OF AO THAT THE SHARES HAD BEEN PURCHASED FROM BORROWED FUNDS A ND HAS CONTENDED THAT SHARES WERE ACQUIRED FROM SHARE APPLICATIO N MONEY RECEIVED FROM M/S. FEED BACK COMPUTERS LTD. 5.1 THE AO HAS NOT ACCEPTED THE CONTENTIONS OF THE ASSESSEE . IT HAS ALSO BEEN OBSERVED BY HIM THAT THE ASSESSEE WAS INCURRING H UGE LOSSES WHICH WAS RS.18.64 LACS TILL ASSESSMENT YEAR 2003-04 WHI CH HAD INCREASED TO RS.37.13 CRORES AS ON 31.3.2005 AND RS.60 .35 CRORES AS ON 31.3.2006. SHRI R.K. JAIN WHO WAS THE DIRECTOR O F MABL FOR THE LAST MANY YEARS HAD VAST EXPERIENCE IN THE BREWERIES BUSI NESS AND WAS FULLY AWARE THAT THE SHARES WERE NOT GOING TO YIEL D ANY DIVIDEND INCOME. NO INVESTOR WOULD HAVE PURCHASED THE SHARES AT A HIGH PRICE 11 OF RS.21.30 PER SHARE WHEN THE BOOK VALUE WAS ALMOST N IL. THE ASSESSEE HAD ALSO MADE PAYMENT FOR PURCHASE OF SHARES FROM T HE BORROWED FUNDS WHICH WAS LATER REPLACED BY SHARE APPLICA TION MONEY RECEIVED FROM M/S. FEED BACK COMPUTERS BUT NO SHARES WERE ALLOTTED EVEN TILL DATE. THEREFORE, SOURCE OF INVESTMENT REMAI NED THE BORROWINGS FROM OTHER CONCERNS. THE AO, THUS CONCLUDED TH AT SHARES HAD BEEN PURCHASED WITH A VIEW TO MAKE PROFIT ON SALE IN FUTURE AND, THEREFORE, THE PURCHASE OF SHARES WAS OF THE NATURE OF ADVENTURE IN NATURE OF TRADE. 5.2 ALTERNATIVELY THE AO HAS ALSO HELD THAT THE SHARES HAD BEEN PURCHASED WITH A VIEW TO ACQUIRE BUSINESS STAKE FOR MANAGI NG MABL AS SHRI R.K. JAIN WAS APPOINTED THE MANAGING DIRECTOR OF THE SAID COMPANY AND, THEREFORE, SALE VALUE OF SHARES COULD ALSO B E LINKED TO COMPENSATION RECEIVED IN CONNECTION WITH THE TERMINATION OF MANAGEMENT OR MODIFICATIONS OF TERMS AND CONDITIONS WHI CH WAS BUSINESS INCOME UNDER SECTION 28(II). THE AO HAS POINTED O UT THAT SHRI R.K. JAIN HAD ALREADY BEEN PAID COMPENSATION OF RS.2.0 0 CRORES FOR NON-COMPETING, NON-SOLICITING ETC. BY THE SAID COMPANY. THE AO HAS ACCORDINGLY ASSESSED THE SALE VALUE OF THE SHARES AS BUSINESS IN COME. 5.3 CIT(A) HAS NOT AGREED WITH THE FINDINGS RECORDED BY THE AO AND HAS AGREED WITH THE ASSESSEE THAT SHARES HAD BEEN PURCHASED AS A STRATEGIC INVESTOR FOR RUNNING THE COMPANY AS THE ASSESSE E IN THE SHARE-HOLDERS AGREEMENT RELATING TO THE PURCHASE OF SHA RES HAD BEEN REFERRED TO AS MANAGER. THE INTENTION OF THE ASSESSEE W AS THUS TO ACQUIRE CONTROLLING POWER AND NOT FOR TRADING IN SHARE S. CIT(A) THEREFORE ACCEPTED THE CLAIM OF THE ASSESSEE THAT THE GAI N WAS OF THE NATURE OF CAPITAL. CIT(A) HAS PLACED RELIANCE ON THE J UDGMENT OF 12 HON'BLE SUPREME COURT IN THE CASE OF RAMNARAIN SONS (PR .) LTD.(41 ITR 534) (SUPRA), IN WHICH INCOME FROM SALE OF SHARES PUR CHASED FOR ACQUIRING CONTROLLING STAKE WAS HELD TO BE CAPITAL IN NA TURE AND NOT BUSINESS. 5.4 ON CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCE O F THE CASE AND ON PERUSAL OF JUDGMENTS RELIED UPON, WE ARE UN ABLE TO AGREE WITH THE VIEW TAKEN BY THE CIT(A) THAT THE SHARES HAD BEEN PURCHASED BY THE ASSESSEE AS INVESTMENT. IT IS A SETTLED LEGAL POSIT ION THAT FOR UNDERSTANDING THE TRUE NATURE OF TRANSACTIONS FOR PURCHA SE AND SALE OF SHARES, THE PRINCIPLE CONSIDERATION IS TO UNDERSTAND THE PURPOSE OF PURCHASE OR THE TRUE INTENTION OF THE ASSESSEE AT THE TIM E OF PURCHASE. THE INTENTION IS REQUIRED TO BE GATHERED FROM THE FA CTS AND CIRCUMSTANCES OF THE CASE AND FROM THE SUBSEQUENT CONDUCT OF T HE ASSESSEE IN DEALING WITH THE SHARES PURCHASED. THE ASSESSEE HA D PURCHASED THE SHARES OF MABL IN WHICH THE M.D OF THE COMP ANY WAS ALSO A DIRECTOR. THERE IS NO DISPUTE THAT MABL HAD ACCUMU LATED LOSSES OF RS.18.64 CRORES IN ASSESSMENT YEAR 2003-04 WHICH WENT ON INCREASING IN THE SUBSEQUENT YEARS AND HAD REACHED A LAR GE FIGURE OF RS. 60.35 CRORES AS ON 31.5.06. SHRI R.K. JAIN WHO HA D VAST EXPERIENCE IN THE BREWERIES BUSINESS AND WAS ALSO DIRECTOR OF MABL WAS FULLY AWARE THAT MABL WAS NOT GOING TO DECLARE ANY DIVIDEND FOR MANY YEARS IN FUTURE. DESPITE THIS, HE DECIDED TO ACQU IRE 20% SHAREHOLDING IN MABL AT THE RATE OF RS.21.30 PER SHARE OF FACE VALUE OF RS. 10.00 WHEN THE BOOK VALUE OF SHARE WAS ALMOST NIL. 5.5 NO INVESTOR WILL PURCHASE THE SHARES AT SUCH HIGH PR ICE WHEN THERE WAS NOT GOING TO BE ANY RETURN IN THE YEARS TO COME. FURTHER THE SHARES HAD BEEN PURCHASED FROM BORROWED FUNDS AS THER E WAS 13 CLEAR NEXUS REGARDING PAYMENT OF MONEY FROM BORROWED FUNDS. THOUGH, SUBSEQUENTLY, THESE FUNDS WERE REPLACED BY SHARE APPLICATION MONEY RECEIVED BY THE ASSESSEE FROM M/S. FEEDBACK COMPUTE RS LTD., THE SHARES WERE NEVER ALLOTTED AND, THEREFORE, NATUR E OF THE MONEY RECEIVED REMAINED AS BORROWINGS. NO INVESTOR WILL PUR CHASE SHARES OF A LOSS MAKING COMPANY AT SUCH PRICE FROM BORROWED FUNDS, W HEN IT IS NOT GOING TO EARN ANY DIVIDEND INCOME. THE EXPLANAT ION OF THE ASSESSEE TO SELL THE SHARES IS THAT IT HAD TO SELL THE SHARES AS IT WAS MINORITY SHAREHOLDER AND WAS NOT IN A POSITION TO INFU SE FURTHER CAPITAL. THE EXPLANATION, IN OUR VIEW, IS NOT SATISFAC TORY. IT WAS KNOWN AT THE TIME OF PURCHASE OF SHARES ITSELF THAT THE ASSESSEE WAS ONLY A MINORITY SHAREHOLDER WITH 20% OF THE SHARE HO LDING AND IT WAS ALSO KNOWN THAT FURTHER INFUSION OF CAPITAL WILL BE RE QUIRED AS ASSESSEE COMPANY WAS INCURRING HUGE LOSSES. THEREFORE, THE EXPLAN ATION IS NOT ACCEPTABLE. THE ASSESSEE IN OUR VIEW HAD PURCHASED THE SHA RES WITH A VIEW TO MAKE PROFIT ON RESALE OF SHARES DUE TO EXPECT ED HIGH VALUATION OF SHARES BECAUSE OF STRONG REPUTATION OF OTHER TWO PROM OTERS I.E. THE BRITISH COMPANY AND THE UNITED BREWERIES. 5.6 THE FINDING OF THE CIT(A) THAT INTENTION BEHIN D THE PURCHASE OF SHARES WAS TO ACQUIRE CONTROLLING POWER AND BUSINESS STAKE I N MABL WHICH WAS A CAPITAL ASSET IS NOT CORRECT. THE ASSESSEE HAD ONL Y 20% OF THE SHAREHOLDING. THEREFORE, BECAUSE OF SHAREHOLDIN G, IT COULD NOT HAVE ANY CONTROLLING STAKE IN THE COMPANY. THE ASSESSEE CO MPANY IN THE SHAREHOLDERS AGREEMENT HAD BEEN DESCRIBED AS MANAG ER BECAUSE DAY TO DAY MANAGEMENT OF THE COMPANY HAD BEEN ENTRUS TED TO ITS MD SHRI R.K. JAIN, WHO WAS ALSO THE MD OF MABL, BECAUSE OF HIS VAST EXPERIENCE IN BREWERIES BUSINESS AND NOT BECAUSE OF 20% SHA RE- HOLDING IN THE ASSESSEE COMPANY. SHRI R.K. JAIN WAS ALSO T HE DIRECTOR 14 OF MABL EARLIER. IN CASE, SHARE HOLDING WAS THE BASIS TO GIVE DAY TO DAY MANAGEMENT OF THE COMPANY, THE SAME SHOULD HAVE GO NE TO THE OTHER PROMOTERS WHO WERE HOLDING 40% EACH. THERE IS N OTHING IN THE SHAREHOLDERS AGREEMENT OR IN SHARE SUBSCRIPTION AGREEM ENT TO INDICATE THAT ACQUISITION OF 20% OF SHARE HOLDING WAS A CONDITION FOR GIVING MANAGEMENT RIGHTS TO THE ASSESSEE COMPANY. IN FA CTS THE ASSESSEE COMPANY DID NOT HAVE ANY MANAGEMENT RIGHTS. IT HAS BEEN REFERRED TO AS MANAGER IN THE AGREEMENT BECAUSE IT MD SHRI R.K. JAIN, HAD BEEN GIVEN THE JOB OF DAY TO DAY MANAGEMENT OF MABL BECAUSE OF HIS VAST EXPERIENCE IN THE BREWERIES BUSINESS AND NOT BECA USE OF SHAREHOLDING OF THE ASSESSEE COMPANY WHICH WAS ONLY 20%. TH IS IS CLEAR FROM THE FACT THAT THE SHARE SUBSCRIPTION AGREEMENT REFERRED TO SHRI R.K. JAIN AS HAVING SUBSTANTIAL EXPERIENCE IN TH E BREWING INDUSTRY. THE APPOINTMENT OF SHRI R.K. JAIN WAS NOT BECAUSE OF SH AREHOLDING OF THE ASSESSEE COMPANY. FURTHER, THE CLAUSE (4.1) IN SHAREHO LDERS AGREEMENT CLEARLY PROVIDED THAT THE SUPERVISION OF BU SINESS OPERATIONS, AFFAIRS AND ACTIVITY OF THE COMPANY INCLUD ING ACTIVITY OF THE MD, SHRI R.K. JAIN OR EXECUTIVE COMMITTEE WAS THE R ESPONSIBILITY OF THE BOARD WHICH ALSO INCLUDED THE REPRESENTATIVES OF OT HER PROMOTERS. THUS SHRI R.K. JAIN HAD TO WORK UNDER THE OVERALL CON TROL AND SUPERVISION OF THE BOARD OF DIRECTORS. THE CLAUSE 4.4.2 OF THE SHAREHOLDERS AGREEMENT ALSO PROVIDED THAT SHRI R.K. J AIN, THE MD WILL EXERCISE HIS AUTHORITY IN CONSULTATION WITH THE EXECUTIVE COMMITTEE. THE ASSESSEE COMPANY THUS, DID NOT HAVE ANY MANAGING RIG HTS DUE TO SHAREHOLDING. 5.7 THE RELIANCE BY THE CIT(A) ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF RAMNARAIN SONS (P) LTD. IS MISPLACE D. IN THE SAID CASE, THE ASSESSEE HAD PURCHASED SHARES OF A TEXTILE COMPANY A T A 15 PRICE MUCH HIGHER THAN THE MARKET PRICE TO ACQUIRE THE CONTROLLING VOTING RIGHTS WHICH GAVE THE ASSESSEE THE MANAGING AGENCY RIGHTS. THE MANAGING AGENCY WAS ONE OF THE BUSINESSES OF THE ASSESSEE COMPANY. IT HAD ACQUIRED CONTROLLING RIGHTS OVER THE COMPANY IN ORDER TO GET MANAGING AGENCY RIGHTS. THE HON'BLE SUPREME CO URT HELD THAT THE INTENTION TO ACQUIRE THE SHARES WAS TO GET MANAGIN G AGENCY RIGHTS WHICH WAS A CAPITAL ASSET AND ACCORDINGLY IT WAS HELD THAT LOSS ON SALE OF SHARES WAS A CAPITAL LOSS. IN THE PRESENT CASE, THE SHARE S HAD NOT BEEN ACQUIRED TO GIVE THE CONTROLLING RIGHTS TO THE ASSE SSEE BECAUSE THE ASSESSEE COULD NOT GET CONTROLLING RIGHTS BY 20% SHARE HOLDING. OBVIOUSLY, THE JOB OF MANAGING THE DAY TO DAY AFFAIR S OF THE COMPANY HAD BEEN ENTRUSTED TO THE MD OF THE ASSESSEE COMPANY BECAU SE OF HIS VAST EXPERIENCE AND NOT BECAUSE OF THE SHAREHOLDING. TH E SAID CASE IS, THEREFORE, NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE DECISION OF THE TRIBUNAL IN THE CASE OF RENATO FINANCE AND INV ESTMENT P. LTD. IS ALSO DISTINGUISHABLE. IN THAT CASE SHARES OF A PRIVATE COMP ANY HAD BEEN PURCHASED FROM BORROWINGS FROM THE HOLDING COMPANY WHICH ACTUALLY OWNED BY THE ASSESSEE COMPANY, WHICH WAS CONSIDERED BY THE TRIBUNAL MORE OF THE NATURE OF CAPITAL. SHARES HAD AL SO BEEN SOLD TO THE HOLDING COMPANY AFTER HOLDING FOR ALMOST FOUR YE ARS, WHICH IS NOT SO IN THE PRESENT CASE. THE SAID CASE IS, THEREFORE, OF N O HELP TO THE ASSESSEE. 5.8 IN OUR VIEW, THE OBVIOUS INTENTION OF THE ASSESSEE I N PURCHASING THE SHARES WAS TO MAKE PROFIT ON RESALE OF THE SHARES AS THE SHARE PRICE COULD RISE BECAUSE OF STRONG MARKET REPUTATION AND GOODWILL OF THE OTHER PROMOTERS. THIS CONCLUSION IS FURTHER SUPPORTE D BY THE FACT THAT THE ASSESSEE WITHIN THE LOCK-IN PERIOD SOLD SHARES TO THE OTHER PROMOTERS AT HIGH PROFIT DESPITE MOUNTING LOSSES. THE A SSESSEE WAS 16 NOT EXPECTED TO EARN ANY DIVIDEND FROM THE INVESTMENT BECAUSE OF HUGE LOSSES. NO PERSON WILL PURCHASE SHARES FROM BORROWED FUNDS FOR INVESTMENT WHEN NO DIVIDEND IS EXPECTED. THE ENTRIES IN THE BOOKS OF ACCOUNT ARE NOT CONCLUSIVE IN UNDERSTANDING THE TRUE NAT URE OF THE TRANSACTIONS. THEREFORE, MERELY BECAUSE THE SHARES WERE SHO WN AS INVESTMENT IN THE BOOKS, IT COULD NOT BE ACCEPTED AS INVE STMENT. CONSIDERING THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES, W E ARE OF THE FIRM VIEW THAT THE PURPOSE BEHIND THE PURCHASE OF SHARE S WAS TO EARN QUICK PROFIT ON RESALE OF SHARES AND NOT FOR EARNING DI VIDEND INCOME. THE EXPLANATION OF THE ASSESSEE THAT THE SALE OF SHARES WA S BECAUSE IT WAS REDUCED TO MINORITY STATUS AND DUE TO ITS INABILITY TO INFUSE FURTHER CAPITAL, AS HELD EARLIER, IS NOT CONVINCING AND HAS TO BE REJECTED. IT IS A SETTLED LEGAL POSITION THAT EVEN A SINGLE AND ISOLATED TRANSACTION CAN BE CONSIDERED AS ADVENTURE IN THE NATURE OF TRADE. IN OU R VIEW, THE PURCHASE AND SALE OF THE SHARES ON THE FACTS OF THE CASE HAS TO BE CONSIDERED AS ADVENTURE IN THE NATURE OF TRADE AND PRO FIT HAS TO BE ASSESSED AS BUSINESS INCOME. WE, THEREFORE, SET ASIDE THE ORD ER OF CIT(A) AND CONFIRM THE ORDER OF AO. 6. IN THE RESULT APPEAL OF THE REVENUE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25.4.2012. SD/- SD/- (B.R. MITTAL) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 25.4.2012. JV. COPY TO: THE APPELLANT 17 THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER SD/- DY/ASSTT. REGISTRAR, ITAT, MUMBAI.