DCIT, CHENNAI V. NMR Property Development Pvt Ltd., CHENNAI

ITA 565/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64602 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 05-12-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 29-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GURU BASHYAM JT
• Assessee Lawyers: V S JAYAKUMAR
• Keywords: Cost of acquisition; Sham transactions

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER] I.T.A.NO.565/MDS/2011 ASSESSMENT YEAR : 2004-05 THE DY. CIT COMPANY CIRCLE IV(4) CHENNAI VS M/S NMR PROPERTY DEVELOPMENT PVT. LTD OLD NO.19, NEW NO.17 PADMANABHA VIEW APARTMENTS G/A IIND MAIN ROAD GANDHI NAGAR ADYAR, CHENNAI 600 020 [PAN AABCN 3075E] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI GURU BASHYAM, JT. CIT RESPONDENT BY : SHRI V.S. JAYAKUMAR, ADVOCATE DATE OF HEARING : 05-12-2012 DATE OF PRONOUNCEMENT : 07-12-2012 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A)-V, CHENNAI, DATED 5.1.2011. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. I.T.A.NO.565/2011 :- 2 -: 2.1. THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW THE LOSS INCURRED BY THE ASSESSEE ON SALE OF SHARES AS BUSINESS LOSS. 2.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT TH E LOSS AROSE ON ACCOUNT OF LOSS CLAIMED ON SALE OF UNQUOTED SHAR ES TO PERSONS INTERESTED IN THE AFFAIRS OF THE ASSESSEE W HICH WAS HELD AS NOT GENUINE. 2.3 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT TH E OBSERVATION THAT SALE OF SHARES IN M/S IBHAR SOFTW ARE P LTD WAS PURSUANT TO THE PRESSURE TO SELL THE SHARES BY RBI IS IRRELEVANT TO THE ISSUE AS TO WHETHER THE LOSS ON S ALE OF SUCH SHARES IS ALLOWABLE OR NOT. 2.4 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT TH E ASSESSEE DID NOT FURNISH NECESSARY EVIDENCE TO SUBSTANTIATE THE BASIS OF PRICING THE SALE OF THE UNQUOTED SHARES NEITHER DID IT FURNISH THE CERTIFICATE OF VALUATION OF THE SHARES. 2.5 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT TH E ASSESSEE HAD BEEN EVADING QUESTIONS WITH REGARD TO THE PATTE RN OF HOLDING OF M/S IBHAR SOFTWARE P LTD AS SEEN FROM IT S REPLY TO THE ASSESSING OFFICER IN ITS REPLY DATED 10/11/2006, THOUGH THE ASSESSEE CLAIMED IN LETTER DATED 5/12/2006 THAT THE DIRECTORS OF M/S IBHAR SOFTWARE P LTD ARE WELL KNOWN TO THE DIRE CTORS OF THE ASSESSEE .. 2.6 HAVING REGARD TO THE OBSERVATIONS OF THE HON' BLE APEX COURT IN THE CASE OF MCDOWELL COMPANY LTD. V. CTO ( 154 ITR 148) THAT 'COLOURABLE DEVICES CANNOT BE PART OF TAX PLANNING AND IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIE F THAT IT IS HONOURABLE TO AVOID THE PAYMENT OF TAX BY RESORTING TO DUBIOUS METHODS', THE LEARNED CIT(A) OUGHT TO HAVE UPHELD T HE ACTION OF THE ASSESSING OFFICER. 3.1 THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT TH E BUSINESS LOSS ON SALE OF SHARES IS ALLOWABLE SINCE THE OBJEC T CLAUSE OF THE ASSESSEE INCLUDED SELLING AND DEALING IN SHARES . 3.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT WH ETHER A SHARE IS HELD AS STOCK IN TRADE OR AS INVESTMENTS E VEN IN RESPECT OF A COMPANY DEALING IN SHARES CAN BE CONCL UDED ONLY WITH RESPECT TO THE INTENTION OF THE ASSESSEE 3.3 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT UP TO ASSESSMENT YEAR 2003-04, THE ASSESSEE HAS BEEN DISC LOSING THE SHARES ONLY UNDER THE SUB HEAD INVESTMENT AND T HE ANNUAL REPORT FOR THE FY 2002-03 STATES THAT' THE COMPANY HAS ONLY LONG TERM INVESTMENTS AND THEY ARE STATED AT COST'. I.T.A.NO.565/2011 :- 3 -: 3.4 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT TH E PRIMARY BUSINESS OF THE ASSESSEE CONTINUED TO BE PROPERTY DEVELOPMENT. THE ASSESSEE DEVIATED FROM THE OBJECT CLAUSE OF SELLING AND DEALING IN SHARES AND THE SHARES WERE H ELD AS INVESTMENTS IN ITS BOOKS OF ACCOUNTS. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING O FFICER RESTORED. 3. THE DR SUBMITTED THAT THE ONLY ISSUE INVOLVED IN TH E PRESENT APPEAL OF THE REVENUE IN ALL THE GROUNDS OF APPEAL TAKEN BY THE REVENUE WAS THAT THE CIT(A) HAS ERRED IN ALLOWING THE LOSS INCURRED BY THE ASSESSEE ON SALE OF SHARES AS BUSINESS LOSS IGNORING THE FACT THAT THE LOSS AROSE ON ACCOUNT OF LOSS CLAIMED ON S ALE OF UNQUOTED SHARES TO PERSONS INTERESTED IN THE AFFAIRS OF THE ASSESSEE WHICH WAS HELD AS NOT GENUINE. 4. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HELD T HE FOLLOWING SHARES AS INVESTMENTS WHICH WERE SOLD DUR ING THE YEAR AND INCURRED LOSS WHICH WAS CLAIMED AS BUSINESS LOSS: S. NO. NAME OF THE SHARE NO. OF SHARES DATE OF PURCHASE COST OF PURCHASE RS. SALE PRICE RS. NAME, ADDRESS, PAN OF BUYER WHETHER THROUGH DEMAT OR OTHERWISE 1. M/S MEGASOFT LIMITED 150700 11.10.2000 1507000 5924000 ADVANI SHARE BROKERS(THROUGH SHARE BROKERS) DEMAT 2. M/S ZYLOG SYSTEMS (P) LTD. 10000 13.03.2000 500000 500000 S.RAJAGOPAL REDDY, NO.11, BAKTHAVATCHALAM NAGAR, 2 ND STREET, ADYAR, PHYSICAL I.T.A.NO.565/2011 :- 4 -: CHENNAI- 600020 3. M/S IBHAR SOFTWARE (P) LTD 148100 21.12.1999 20900000 148100 D.GOPALA KRISHNAN RAJU HOUSE NO.H-17, THULASI APARTMENTS, MADHURA NAGAR, HYDERABAD 500 038 PHYSICAL 5. THE ASSESSING OFFICER OBSERVED THAT DURING THE AS SESSMENT YEAR 2004-05 THE ASSESSEE CHANGED THE NAME OF TH E COMPANY AS NMR PROPERTY DEVELOPMENT (P) LTD. AND SHIFTED ITS BUSINESS TO PROPERTY DEVELOPMENT. HE OBSERVED THAT THE ASSESS EE HAD ADVANCED MONEY FOR PROPERTY DEVELOPMENT. THE RBI REJECTED T HE APPLICATION OF THE ASSESSEE-COMPANY FOR REGISTRATION AS INVESTMENT COMPANY FOR THE REASON THAT THE ASSESSEE HAD MADE HUGE ADVANCES FO R PROPERTY DEVELOPMENT. HENCE, THE ASSESSEES INTENTION WAS NOT TO DO BUSINESS OF BUYING AND SELLING OF SHARES. IT WAS ONLY TO U TILIZE THE FUNDS AVAILABLE WITH THE ASSESSEE-COMPANY THAT THE INVEST MENTS WERE MADE IN SHARES. HENCE, BUYING AND SELLING OF SHARES IS NOT THE BUSINESS OF THE ASSESSEE. 6. THE ASSESSING OFFICER HELD THAT THE TRANSACTIONS IN PURCHASE AND SALE OF SHARES WERE OF INVESTMENTS AND THEREFOR E, CANNOT BE TREATED AS BUSINESS ACTIVITY OF THE ASSESSEE. IN D OING SO, THE ASSESSING OFFICER HAS OBSERVED THAT PERUSAL OF PROF IT & LOSS ACCOUNT AND BALANCE SHEET OF THE ASSESSEE REVEALS THAT TH E ASSESSEE DOES I.T.A.NO.565/2011 :- 5 -: NOT HOLD THE SHARES AS STOCK-IN-TRADE, THE SHARES W ERE HELD ONLY AS INVESTMENT AND THERE IS NO REGULARITY IN SALE/PURCH ASE OF SHARES. THE ASSESSEE HAS NOT PURCHASED OR SOLD SHARES DURING TH E ASSESSMENT YEAR 2002-03 AND 2003-04, HENCE, IT WAS CLEAR THAT ASSE SSEE DID NOT ACTUALLY CARRY OUT ANY ACTIVITY IN BUYING AND SELLI NG OF SHARES. THE ASSESSING OFFICER ALSO OBSERVED THAT THE LOSS ON SA LE OF INVESTMENT WAS NOT GENUINE AND THAT THE TRANSACTIONS WERE SHAM TRA NSACTION. WHILE DOING SO, THE ASSESSING OFFICER OBSERVED THAT UNQUO TED SHARES HAD BEEN SOLD AT A LOSS TO THE DIRECTOR OF THE COMPANY, SHRI RAJAGOPAL REDDY AND SHRI D. GOPALA KRISHNAN RAJU, DIRECTOR OF M/S FINCITY INVESTMENTS(P) LTD, A SHAREHOLDER OF THE ASSESSEE-C OMPANY. HE FURTHER OBSERVED THAT FROM THE DETAILS OF SALE OF S HARES IT IS SEEN THAT 1,48,100 SHARES OF M/S IBHAR SOFTWARE (P) LTD WERE PURCHASED FOR ` 2,09,00,000/- AND 10,000 SHARES OF M/S ZYLOG SYSTEM S (P) LTD. FOR ` 5,00,000/-. THE SHARE ALLOTMENT CERTIFICATE SHOWS THAT 1,48,100 SHARES OF M/S IBHAR SOFTWARE (P) LTD. WERE ALLOTTED AT A F ACE VALUE OF ` 10/- I.E ALLOTTED FOR A CONSIDERATION OF ` 14,81,000/-. SIMILARLY, THE SHARES OF M/S ZYLOG ZYSTEMS (P) LTD. WERE ALSO ALLOTTED AT A FACE VALUE OF ` 10/-. THESE SHARES HAVE BEEN SUBSEQUENTLY SOLD TO THE DIRECTOR OF THE ASSESSEE-COMPANY SHRI RAJAGOPAL REDDY AND SHRI GOPA LA KRISHNAN RAJU, WHO IS THE DIRECTOR OF M/S FINCITY INVESTMENT S(P) LTD. WHICH IS HOLDING 19.7% SHARES IN THE ASSESSEE-COMPANY. THE SHARES OF THE I.T.A.NO.565/2011 :- 6 -: COMPANIES BEING UNQUOTED SHARES, THE CERTIFICATE OF VALUATION OF UNQUOTED SHARES BY THE CHARTERED ACCOUNTANT WAS NOT FILED. IN ABSENCE OF ANY EVIDENCE TO SUBSTANTIATE THE VALUE O F THESE UNQUOTED SHARES, THE LOSS CLAIMED CANNOT BE ALLOWED. THE A SSESSEE HAS NOT BROUGHT ON RECORD ANY EVIDENCE TO SHOW THAT NO OTHE R BUYERS APART FROM THE DIRECTORS WERE WILLING TO PURCHASE THESE S HARES. THE TRANSFER OF UNQUOTED SHARES AT A LOSS TO THE PERSONS INTERES TED IN THE AFFAIRS OF THE ASSESSEE-COMPANY CANNOT BE TREATED AS GENUINE T RANSACTION. THE ASSESSEE HAS NOT FILED ANY DETAILS OF ACTUAL TRANSF ER OF FUNDS. THERE HAS BEEN NO ACTUAL MOVEMENT OF FUNDS IN THE ACTUAL TRANSACTION. 7. THE ASSESSING OFFICER RELIED ON THE DECISION OF TH E HON'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS SHEKHAWAT I RAJPUTANA TRADING CO. (P) LTD, 236 ITR 950, WHEREIN IT WAS HE LD THAT THE SALE OF UNQUOTED SHARES TO THE CHAIRMAN OF THE ASSESSEE-COM PANY WAS NOT GENUINE AND THAT NO COMMERCIAL PRUDENCE IS INVOLVED IN SELLING UNQUOTED SHARES TO THE CHAIRMAN AT A LOSS. THE HIG H COURT ALSO OBSERVED THAT AS THERE IS NO ACTUAL MOVEMENT OF FUN DS BETWEEN HE ASSESSEE-COMPANY AND ITS CHAIRMAN, THE SAID TRANSAC TION IS SHAM AND NOT GENUINE. THE HIGH COURT ALSO OBSERVED THAT ONU S IS ON THE ASSESSEE TO PROVE THAT THE TRANSACTION IS GENUINE. THE HIGH COURT HELD THAT THIS ARRANGEMENT HAS THE CHARACTER OF WELL PLA NNED SCHEME OF TAX I.T.A.NO.565/2011 :- 7 -: AVOIDANCE. THE ASSESSING OFFICER ALSO OBSERVED THA T THE CONTENTION OF THE ASSESSEE THAT THE SHARES WERE SOLD ON THE DIRE CTION OF RBI AND HENCE THE LOSS SHOULD BE ALLOWED IS NOT ACCEPTABLE. THE DIRECTION OF THE RBI WAS ONLY TO DISPOSE THE FINANCIAL ASSETS WI THIN THREE YEARS FROM THE DATE OF THE ORDER. THE DIRECTION WAS NOT TO SELL THE SHARES AT A LOSS. 8. ON APPEAL, THE CIT(A) ALLOWED THE LOSS AS BUSINESS LOSS BY OBSERVING THAT THE ASSESSEE-COMPANY WAS UNDER PRESS URE TO SELL THE EQUITY SHARES OF OTHER COMPANIES HELD BY IT IN ORDE R TO FULFILL THE INSTRUCTIONS FROM RBI, A COPY OF WHICH WAS PLACED B EFORE HIM AND IT WAS NOTICED THAT THE INTENTION OF THE ASSESSEE-COMP ANY TO SELL THE SHARES WAS NOT TO BOOK THE LOSS BUT TO COMPLY WITH THE ORDERS OF RBI. HE FURTHER OBSERVED THAT THE MAIN OBJECTS CLAUSE OF THE ASSESSEE- COMPANY WAS AS UNDER: I. TO CARRY ON THE BUSINESS OF AN INVESTMENT C OMPANY, IN ALL ITS BRANCHES AND WITHOUT PREJUDICE TO THE GENERALIT Y OF THE FOREGOING TO BUY, UNDERWRITE INVEST IN AND ACQUIRE AND HOLD, LEASE, SELL AND DEAL IN SHARES, STOCKS, DEBENTURES- STOCKS, BONDS, OBLIGATIONS AND SECURITIES ISSUED OR GUARANT EED BY ANY GOVERNMENT, STATE, DOMINIONS, COMMISSIONERS, PU BLIC BODY OR AUTHORITIES, MUNICIPAL, LOCAL OR OTHERWISE, FIRM, COMPANY, ASSOCIATION OR PERSON IN INDIA OR ELSEWHER E AND TO INVEST IN LAND, BUILDINGS AND IN OTHER IMMOVABLE PROPERTIES IN INDIA OR ELSEWHERE AND TO ACT AS FINA NCIAL CONSULTANTS, INVESTMENTS ADVISERS BONDS AND SECURIT IES AND TO RENDER ANY KIND OF MANAGEMENT AND CONSULTANC Y SERVICES CONCERNING FOREGOING MATTERS AND THINGS BU T NOT TO CARRY ON ANY BANKING BUSINESS AS DELINED UNDER BAN KING REGULATIONS ACT, 1949. I.T.A.NO.565/2011 :- 8 -: II. TO CARRY ON BUSINESS, PROFESSION OR VOCATION O F ACTING AS CONSULTANTS, ADVISORS, MANAGERS, TRUSTEES, ATTORNEY S AND AGENTS FOR ALL MATTERS AND PROBLEMS ARISING OUT OR RELATING TO OR TOUCHING UPON THE FIELD OF FINANCE, INVESTMEN TS AND REAL ESTATE. 9. HE, THEREFORE, HELD THAT THE LOSS INCURRED WAS IN T HE REGULAR COURSE OF ASSESSEES BUSINESS. HE FURTHER OBSERVE D THAT THE COMPELLING REASON WAS THE DIRECTION GIVEN BY THE RB I IN ITS LETTER DATED 25.11.2002 TO CHANGE THE OBJECTS AND NAME OF THE CO MPANY AS IT WAS NOT QUALIFIED TO PURSUE THE BUSINESS AS A NBFC AND FURTHER THE RBI ALSO DIRECTED THE ASSESSEE-COMPANY TO SELL ITS INVE STMENT IN THE SHARES OF OTHER COMPANIES WITHIN A PERIOD OF THREE YEARS. SINCE THE SHARES OF M/S ZYLOG SYSTEMS (P) LTD AND M/S IBHAR SOFTWARE ( P) LTD WERE UNQUOTED SHARES, THE SAME WERE SOLD TO THE DIRECTOR AND SHAREHOLDER OF THE ASSESSEE-COMPANY AND IN FACT, THE ASSESSEE- COMPANY MADE A HANDSOME PROFIT IN SELLING THE SHARES OF MEGASOFT L TD WHICH WERE QUOTED SHARES. THESE FACTS ARE NOT ENOUGH TO PROVE THAT THE ASSESSEE-COMPANY WAS ENGAGED IN A COLOURABLE DEVICE TO LOWER ITS TAXABLE INCOME, SINCE THE ENTIRE SERIES OF FACTS AR E ON RECORD AND THE TRANSACTION CANNOT BE SAID TO BE A SHAM. ACCORDING LY, HE DIRECTED THE ASSESSING OFFICER TO ALLOW THE LOSS INCURRED BY THE ASSESSEE. I.T.A.NO.565/2011 :- 9 -: 10. THE DR VEHEMENTLY ARGUED AND SUPPORTED THE ORDER OF THE ASSESSING OFFICER. HE SUBMITTED THAT BESIDES THE P URCHASE OF SHARES OF THREE COMPANIES, VIIZ. M/S MEGASOFT LTD., M/S ZYLOG SYSTEMS (P) LTD. AND M/S IBHAR SOFTWARE (P) LTD., THE ASSESSEE HAD NOT PURCHASED AND SOLD SHARES OF ANY OTHER COMPANY. THE SHARES IN QU ESTION WERE PURCHASED IN THE YEAR 2000. THERE WAS NO PURCHASE AND SALE OF SHARES IN ASSESSMENT YEARS 2002-03 AND 2003-04. TH E ASSESSEE HAD SHOWN THE SHARES AS INVESTMENT IN ITS BALANCE SHEET . THEREFORE, THE INTENTION OF THE ASSESSEE-COMPANY WAS TO HOLD THE S HARES AS INVESTMENT AND AS NOT STOCK-IN-TRADE. HE FURTHER S UBMITTED THAT THE ARGUMENT OF THE ASSESSEE THAT THE SHARES WERE SOLD AT A LOSS BECAUSE OF THE DIRECTION FROM THE RBI ALSO CANNOT BE ACCEPT ED AS THE DIRECTION WAS GIVEN BY THE RBI REJECTING THE APPLICATION OF T HE ASSESSEE FOR REGISTRATION OF IT AS NBFC AS THE RBI OBSERVED THAT MAJORITY OF FUNDS WERE UTILIZED FOR PURCHASE OF IMMOVABLE PROPERTIES AND NOT IN THE BUSINESS OF FINANCE. THIS ALSO SHOWS THAT IT WAS N EVER THE INTENTION OF THE ASSESSEE TO DEAL IN PURCHASE AND SALE OF SHARE S AND HENCE, THE LOSS INCURRED FROM THE SHARE TRANSACTIONS IN QUESTI ON CANNOT BE HELD TO BE A BUSINESS LOSS OF THE ASSESSEE. I.T.A.NO.565/2011 :- 10 -: 11. ON THE OTHER HAND, THE A.R OF THE ASSESSEE SUPPORT ED THE ORDER OF THE CIT(A). HE SUBMITTED THAT THE LOSS W AS INCURRED BECAUSE THE ASSESSEE HAD TO SELL THE SALES IN TERMS OF THE DIRECTION OF THE RBI VIDE LETTER DATED 25.11.2002. HE FURTHER SUBMITTED THAT THE LOSS WAS INCURRED ON SALE OF SHARES OF THE COMPANY, M/S IB HAR SOFTWARE (P) LTD. TO SHRI D.GOPALA KRISHNAN RAJU, AS THESE SHA RES WERE UNQUOTED IN ANY STOCK EXCHANGE. HE FURTHER SUBMITTED THAT T HE THERE WERE NO BUYERS FOR THE SHARES AND HENCE, UNDER THE COMPELLI NG CIRCUMSTANCES, THE ASSESSEE HAD TO SELL THE SHARES TO SHRI D.GOPA LA KRISHNAN RAJU, WHO WAS THE DIRECTOR OF M/S FINCITY INVESTMENTS(P) LTD. WHICH HAS BEEN HOLDING 19.7% SHARES IN THE ASSESSEE-COMPANY. HE ARGUED THAT THE SHARES WERE PURCHASED ORIGINALLY WITH THE INTEN TION OF TRADING IN SHARES, THEREFORE, THE LOSS WAS A BUSINESS LOSS ELI GIBLE FOR DEDUCTION TO THE ASSESSEE. WHEN QUESTIONED BY THE BENCH THAT W HETHER THE ASSESSEE WAS ENGAGED IN TRANSACTION OF PURCHASE AND SALE OF SHARES OTHER THAN THE SHARES IN QUESTION, THE A.R OF THE ASSESSEE VERY FAIRLY CONCEDED THAT NO OTHER TRANSACTION OF PURCHASE AND SALE OF SHARES WAS UNDERTAKEN BY THE ASSESSEE. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, THE ASSESSEE-COMPANY WAS INCORPORATED AS NMR I.T.A.NO.565/2011 :- 11 -: INVESTMENTS PVT. LTD. ON 3.8.1998 WITH ONE OF ITS MAIN OBJECTS AS INVESTMENT IN EQUITY SHARES OF COMPANIES. THE COMPA NY INVESTED IN 1,50,700 EQUITY SHARES OF M/S MEGASOFT LTD. ON 11.1 0.2000 AT AN INVESTMENT OF ` 15,07,000/-, 10,000 EQUITY SHARES OF M/S ZYLOG SYSTEMS (P) LTD. ON 13.3.2000 AT AN INVESTMENT OF ` 5,00,000/- AND 1,48,100 EQUITY SHARES OF M/S IBHAR SOFTWARE (P) LT D. ON 21.12.1999 AT AN INVESTMENT OF ` 2,09,00,000/-. THE COMPANY APPLIED TO RBI FOR REGISTRATION AS INVESTMENT COMPANY WHICH WAS REJECT ED BY THE RBI VIDE ITS LETTER DATED 25.11.2002 AND THE COMPANY WA S INSTRUCTED TO SELL THE SHARES HELD AS INVESTMENT WITHIN THREE YEARS FR OM THE DATE OF REJECTION. THE COMPANY SOLD THE SHARES OF M/S MEGA SOFT LTD. AT A PROFIT OF ` 44,17,000/- IN BOMBAY STOCK EXCHANGE, IT SOLD THE SHARES OF M/S ZYLOG SYSTEMS (P) LTD. AT THE COST PRICE THEREB Y NOT MAKING ANY PROFIT OR LOSS. IT SOLD THE SHARES OF M/S IBHAR SO FTWARE (P) LTD. FOR ` 1,48,100/- INCURRING LOSS OF ` 2,07,51,900/-. THE ASSESSEE, IN THE RETURN OF INCOME CLAIMED NET LOSS OF ` 1,63,38,150/- AS BUSINESS LOSS. THE ASSESSING OFFICER HELD THAT THE LOSS WAS NOT A BUSINESS LOSS AS ON PERUSAL OF PROFIT & LOSS ACCOUNT AND BALANCE SHEET, HE FOUND THAT THE ASSESSEE HELD THE SAME AS INVESTMENT IN ITS BALANCE SHEET AND NOT AS STOCK-IN-TRADE. THERE WAS NO REGULARITY IN PURCHAS E AND SALE OF SHARES. THE ASSESSEE HAD NOT PURCHASED OR SOLD SH ARES DURING THE PRECEDING TWO ASSESSMENT YEARS 2002-03 AND 2003-04. THE ASSESSING I.T.A.NO.565/2011 :- 12 -: OFFICER FURTHER HELD THAT THE LOSS WAS NOT GENUINE AS THE SHARES OF M/S ZYLOG SYSTEMS PVT. LTD. WERE SOLD TO ONE OF ITS DIR ECTOR SHRI RAJAGOPAL REDDY AND THE SHARES OF M/S IBHAR SOFTWARE (P) LTD. WERE SOLD TO SHRI D.GOPALA KRISHNAN RAJU, WHO WAS DIRECTOR OF M/S FIN CITY INVESTMENTS (P) LTD. WHICH WAS HOLDING 19.7% SHARES IN THE ASSE SSEE-COMPANY. THE ASSESSEE COULD NOT PRODUCE EVIDENCE THAT IT CO ULD NOT SELL THE SHARES AND HAD TO SELL THE SAME TO THE AFORESAID PE RSONS. THE ASSESSEE HAD ALSO NOT FILED A CERTIFICATE OF CHARTE RED ACCOUNTANT IN SUPPORT OF THE SALE PRICE OF SHARES OF PRIVATE LIMI TED COMPANIES WHICH WAS UNQUOTED. 13. ON APPEAL, THE CIT(A) HELD THE LOSS IN SHARE TRANSA CTIONS AS GENUINE LOSS AND ALSO HELD THE SAME AS BUSINESS LO SS FOR THE REASON THAT THE MEMORANDUM OF ASSOCIATION OF THE COMPANY A UTHORIZED THE ASSESSEE-COMPANY TO DEAL IN PURCHASE AND SALE OF S HARES. FURTHER, THE SHARES WERE SOLD AS PER THE DIRECTION OF THE RB I. 14. WE FIND THAT THE REVENUE HAS BROUGHT NO MATERIAL BE FORE US TO SHOW THAT THE SALE TRANSACTIONS OF SHARES ENTERE D INTO BY THE ASSESSEE-COMPANY IN PURSUANCE TO THE DIRECTIONS OF RBI WERE SHAM TRANSACTIONS. NO MATERIAL WAS BROUGHT ON RECORD TO SHOW THAT THE ASSESSEE ACTUALLY RECEIVED ANY CONSIDERATION MORE T HAN THE AMOUNT DISCLOSED BY IT IN THE RETURN OF INCOME. THE ASSES SING OFFICER HAS I.T.A.NO.565/2011 :- 13 -: TREATED THE SALE TRANSACTIONS OF SHARES IN QUESTION AS BOGUS BY RELYING UPON THE DECISION OF HON'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS SHEKHAWATI RAJPUTANA TRADING CO.(P) LTD (SUPRA). W E FIND THAT THE FACTS OF THAT CASE ARE QUITE DISTINGUISHABLE FROM T HE FACTS OF THE INSTANT CASE. IN THAT CASE, IT WAS OBSERVED THAT THE ASSES SEE-COMPANY SOLD CERTAIN SHARES TO ITS CHAIRMAN ON 10.7.1981 AND REP URCHASED THEM AGAIN ON 14.9.1981. IT WAS OBSERVED THAT THE CHEQU E WAS ISSUED BY THE CHAIRMAN WITHOUT HAVING BALANCE IN THE BANK ACC OUNT AND SIMILARLY, THE COMPANY ISSUED CHEQUE TO THE CHAIRMA N WITHOUT ANY BALANCE IN HIS BANK ACCOUNT. ON LOOKING INTO THE WH OLE GAMUT OF TRANSACTIONS IT WAS EVIDENT THAT THE TRANSACTIONS W ERE FICTITIOUS AND WERE ARRANGED WITH THE MOTIVE TO BENEFIT THE CHAIRM AN. IN CONTRAST TO THE FACTS OF THAT CASE, IN THE INSTANT CASE, SHARES WERE SOLD TO COMPLY WITH THE INSTRUCTIONS OF THE RBI AND IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE, AFTER SHOWING SALE OF THE SHARE S AGAIN REPURCHASED THE SAME SHARES FROM THE VERY SAME PERSON. IN THE ABOVE CIRCUMSTANCES, WE FIND THAT THE AFORESAID DECISION OF THE HON'BLE CALCUTTA HIGH COURT IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 15. SIMPLY BECAUSE THE ASSESSEE COULD NOT PRODUCE ANY E VIDENCE TO SHOW THAT NO OTHER PERSON WAS INTERESTED IN PURC HASING THE SHARES AND THE SHARES WERE SOLD TO CLOSE ASSOCIATES, IT CA NNOT BE HELD THAT THE I.T.A.NO.565/2011 :- 14 -: SALE TRANSACTIONS WERE NOT GENUINE. IN ABSENCE OF A NY POSITIVE MATERIAL BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT THE S ALE TRANSACTIONS OF THE SHARES WERE FICTITIOUS, WE DO NOT FIND ANY M ERIT IN THE CONTENTION OF THE REVENUE THAT THE SALE TRANSACTION S WERE NOT GENUINE OR THE LOSS SUFFERED ON SALE OF SHARES WERE NOT GEN UINE. 16. HOWEVER, WE FIND MERIT IN THE ARGUMENT OF THE DR TH AT SIMPLY BECAUSE THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE- COMPANY AUTHORIZED THE ASSESSEE TO DEAL IN SHARES DOES NOT PROVE THAT THE TRANSACTIONS OF SHARES WERE IN THE COURSE OF BUSINESS TRANSACTIONS OF THE ASSESSEE. IT IS AN ESTABLISHE D POSITION OF LAW THAT TO ASCERTAIN WHETHER THE TRANSACTIONS OF SHARES WER E ON CAPITAL ACCOUNT OR WERE BUSINESS TRANSACTIONS, ONE HAS TO ASCERTAIN THE INTENTION OF THE ASSESSEE-COMPANY OF ACQUIRING THOSE SHARES. THE IN TENTION IS TO BE DECIPHERED BY LOOKING INTO ALL THE ATTENDANT FACTS AND CIRCUMSTANCES LIKE VOLUME OF TRANSACTIONS, PERIOD OF HOLDING OF S HARES AND OTHER FACTORS LIKE THE MANNER IN WHICH THE SHARES WERE CL ASSIFIED IN THE BALANCE SHEET BY THE ASSESSEE. 17. WE ARE ALIVE TO THE FACT THAT NOT A SINGLE FACTOR I S CONCLUSIVE IN DECIDING WHETHER THE TRANSACTIONS WERE ON CAPITA L FIELD OR ON ACCOUNT OF BUSINESS ACTIVITY, BUT THE CUMULATIVE EF FECT OF ALL THE FACTORS SHOULD BE TAKEN INTO ACCOUNT TO DECIDE THE ISSUE. IN THE INSTANT CASE, I.T.A.NO.565/2011 :- 15 -: WE FIND THAT THE ASSESSEE-COMPANY PURCHASED ONLY SH ARES OF THREE COMPANIES AND THOSE SHARES WERE HELD FOR MORE THAN TWO YEARS BEFORE ITS SALE. THE SALE TRANSACTIONS WERE ENTERED INTO ONLY TO COMPLY WITH THE INSTRUCTIONS OF THE RBI. THE ASSESSEE-COMPANY HAS NOT ENTERED INTO ANY TRANSACTIONS OF PURCHASE OR SALE OF SHARES IN THE TWO PRECEDING ASSESSMENT YEARS. FURTHER, IT IS ALSO IM PORTANT TO TAKE NOTE OF THE FACT THAT THE ASSESSEE CLASSIFIED ITSELF TH E SHARES AS INVESTMENT IN ITS BALANCE SHEET. FURTHER, IT IS ALSO OBSERVED THAT OUT OF THE THREE SHARES, TWO SHARES WERE OF PRIVATE LIMITED COMPANIE S WHICH ARE NOT READILY TRADABLE IN THE OPEN MARKET. CONSIDERING T HESE FACTS, IN OUR CONSIDERED VIEW, THE CIT(A) WAS NOT JUSTIFIED IN HO LDING THAT THE SHARES WERE STOCK-IN-TRADE OF THE ASSESSEE AND THE LOSS SUFFERED BY THE ASSESSEE ON THESE SHARES WAS ASSESSABLE AS BUSINESS LOSS. IN OUR CONSIDERED OPINION, THE SHARES WERE HELD BY THE AS SESSEE AS CAPITAL INVESTMENT AND THEREFORE, THE LOSS SUFFERED BY THE ASSESSEE ON SALE OF SUCH SHARES ARE ASSESSABLE UNDER THE HEAD CAPITAL GAINS. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND DI RECT THE ASSESSING OFFICER TO TREAT THE LOSS SUFFERED BY THE ASSESSEE ON SALE OF SHARES IN QUESTION AS LOSS UNDER THE HEAD CAPITAL GAINS. T HUS, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED AS ABOVE. I.T.A.NO.565/2011 :- 16 -: 18. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED. ORDER PRONOUNCED ON FRIDAY THE 07 TH OF DECEMBER, 2012, AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 07 TH DECEMBER, 2012 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR