Asst. CIT, Circle 11(1), Pune V. M/s. KAT Controls Pvt. Ltd., Pune

ITA 574/PUN/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79782 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 1 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 01-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P L PATHADE
• Keywords: Business income; Share purchase agreement; Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE BEFORE: SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 574 /PN/20 1 3 ASSESSMENT YEAR : 200 9 - 10 THE ASSTT. COMMISSIONER OF INCOME T AX, CIRCLE 11(1), PUNE VS. M/S. KAT CONTROLS PVT. LTD., S. NO. GAT NO. 367, PIRANGUT LAVASA ROAD, URAWADE, PUNE (APPELLANT) (RESPONDENT) PAN NO. AAACK7645J APPELLANT BY: SHRI P.L. PATHADE RESPONDENT BY: SHRI C.H. NANIWADEKAR DATE OF HE ARING : 07 - 0 4 - 2014 DATE OF PRONOUNCEMENT : 30 - 0 4 - 2014 ORDER P ER R.S. PADVEKAR , JM : - IN THIS APPEAL , THE REVENUE HAS CHALLENG ED THE IMPUGNED ORDER OF THE LD. CIT(A) - I , PUNE DATED 24 - 12 - 2012 F OR THE A.Y. 200 9 - 10. THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GROUND S IN THE APPEAL: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) GROSSLY ERRED IN TREATING THE INCOME OF RS.1 0,11,81,446/ - RECEIVED BY THE ASSESSEE ON ACCOUNT OF SALE OF A SHARES AS 'CAPITAL GAINS', AS RETURNED BY THE ASSESSEE, INSTEAD OF CONFIRMING THE ASSESSMENT THEREOF, BY THE ASSESSING OFFICER, AS BUSINESS INCOME. 3. THE LEARNED COMMISSIONER OF INCOME - TAX (APPE ALS) GROSSLY ERRED IN FAILING TO APPRECIATE THAT THE CIRCUMSTANCES UNDER WHICH THE ASSESSEE DISPOSED OF THE IMPUGNED SHARES AND THE EFFORTS MADE BY IT TO MAXIMIZE PROFITS FROM THE DISPOSAL, HAD ALL THE INGREDIENTS OF BUSINESS, AND, THEREFORE, THE ASSESSEE WAS JUSTIFIED IN ASSESSING THE RETURNED INCOME AS BUSINESS INCOME. 2 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE 2. THE FACTS WHICH ARE REVEALED FORM THE RECORD AS UNDER. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN THE MANUFACTURING OF ELECTRICAL CONTROL PANELS, DC DRIVES AND MOTORS ETC. THE ASSES SEE FILED THE RETURN OF INCOME FOR THE A.Y. 2009 - 10 ON 27 - 10 - 2009 WHICH WAS SELECTED FOR SCRUTINY AND THE ASSESSEES CASE HAS BEEN COMPLETED U/S. 143(3) OF THE INCOME - TAX ACT . I N RESPECT OF THE ISSUE OF LONG TERM CAPITAL GAIN OF RS.10,11,81,446/ - , T HE FAC TS WHICH ARE REVEALED FROM THE RECORD AS UNDER. AS STATED HERE - IN - ABOVE THE ASSESSEE COMPANY IS IN THE MANUFACTURING OF ELECTRICAL CONTROL PANELS, DC DRIVES AND MOTORS AND OTHER SIMILAR PRODUCTS SINCE 1990 . BAUMULLER NURNBERG GMBH (IN SHORT GERMAN COMPA NY) WAS A GERMAN COMPANY MANUFACTURING SERVO DRIVES AND MOTORS, DIGITAL DC DRIVES AND RELATED EQUIPMENTS USING THEIR TECHNOLOGY. THE ASSESSEE COMPANY AND GERMAN COMPANY ENTERED INTO J OINT V ENTURE AGREEMENT ON 07 - 12 - 1996 AND IN PURSUANCE OF THE SAID AGREE MENT THE COMPANY WAS INCORPORATED UNDER THE COMPANIES ACT, 1956 ON 29 - 01 - 1997. THE SAID JOINT VENTURE COMPANY WAS NAMED AS BAUMULLER KAT CONTROLS PVT. LTD. AND MAINLY ENGAGED IN A BUSINESS OF DISTRIBUTING AND SERVICING SERVO DRIVES AND MOTORS, DIGITAL DC DRIVES AND RELATED EQUIPMENTS MANUFACTURED BY THE GERMAN COMPANY AND ITS AFFILIATES. IN THE JOINT VENTURE COMPANY, THE ASSESSEE COMPANY WAS HOLDING 49% SHARES AND GERMAN COMPANY I.E. BAUMULLER NURNBERG GMBH WAS HOLDING 51% SHARES. THE DIRECTOR OF THE ASS ESSEE COMPANY MR. HEMANT KATAKHAR WAS APPOINTED AS MANAGING DIRECTOR OF THE JOINT VENTURE COMPANY AND WAS WORKING IN THE SAID CAPACITY FOR 10 YEARS. 2.1. AFTER DOING BUSINESS FOR MORE THAN 10 YEARS THE ASSESSEE COMPANY AND GERMAN COMPANY DECIDED TO GET S EPARATED AS THE GERMAN COMPANY WAS NOT IN FAVOUR OF THE JOINT VENTURE. THE ASSESSEE WAS NOT DESIRING TO G ET OUT OF THE JOINT VENTURE ACCORDINGLY THEY PUT THE STIFF CONDITIONS FOR TRANSFERRING THEIR SHARES TO THE GERMAN COMPANY. IT WAS CONTENDED BY THE AS SESSEE THAT THE ASSESSEE COMPANY WAS NOT IN THE BUSINESS OF THE 3 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE SHARES BUT IN THE BUSINESS OF MANUFACTURING, SERVICING OF SERVO DRIVES, DC CONTROL PANELS ETC. THE SHARES WERE HELD BY THE ASSESSEE COMPANY IN THE JOINT VENTURE COMPANY AS AN INVESTMENT. THE ASSESSEE APPOINTED ONE MR. VIDHYADHAR HUMNABADKAR TO NEGOTIATE THE PRICE WITH THE GERMAN COMPANY FOR THE SALE OF THEIR 49% SHARES IN THE JOINT VENTURE COMPANY TO THEM. THERE WAS A FULFLEDGED MOU BETWEEN THE ASSESSEE AND MR. VIDHYADHAR HUMNABADKAR. IT WA S CONTENDED BY THE ASSESSEE THAT THE PURPOSE OF APPOINTING MR. VIDHYADHAR HUMNABADKAR WAS TO GET THE BETTER PRICE FOR THEIR 4 9 % EQUITY IN THE JV COMPANY FROM THE GERMAN COMPANY AND FOR THAT PURPOSE CERTAIN COMMISSION TYPE ARRANGEMENT WAS MADE BASED ON THE AMOUNT NEGOTIATED AND RECEIVED FROM THE GERMANY COUNTERPART. IT WAS CONTENDED BY THE ASSESSEE THAT THE ASSESSEE WAS FORCED TO SALE HIS SHARES AND G A VE UP THE PARTNERSHIP IN THE JOINT VENTURE AND FOR THAT PURPOSE ONLY THE ASSESSEE HAS APPOINTED A PROFESSIO NAL WHO C OULD BETTER NEGOTIATE WITH THE GERMAN COMPANY I.E. BAUMULLER NURNBERG GMBH WHICH WAS HOLDING 51% SHARES. 3. THE ASSESSING OFFICER WAS NOT IMPRESSED WITH THE EXPLANATION OF THE ASSESSEE. IN HIS OPINION THE ASSESSEE APPOINTED A MEDIATOR AS AN AGENT TO WHOM THE ASSESSEE PAID THE COMMISSION OF RS.75,00,000/ - . THE ASSESSEES ACT IS A CLEAR CUT INDICATION WITH PROFIT MOTIVE AND IN THE NATURE OF TRADE . THE ASSESSING OFFICER CONCLUDED THAT THE CAPITAL GAIN DECLARED BY THE ASSESSEE IS A BUSINESS INCOME A ND ACCORDINGLY BROUGHT TO TAX THE SAME UNDER THE HEAD PROFIT AND GAIN OF THE BUSINESS PROFESSION. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD. CIT(A). THE ASSESSEE PLACED THE RELIANCE ON THE FOLLOWING DECISIONS: I. SAROJ KUMAR MUJUMDAR VS. CIT 37 ITR 2 42 (SC) II. RAMNARAIN SONS PVT. LTD. VS. CIT 41 ITR 534 (SC) III. AJAX PRODUCTS LTD. VS. CIT 43 ITR 297 (MAD) 4 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE IV. CIT VS. PREMJI GOPAL BHAI 113 ITR 785 (GUJ) V. CIT VS. HINDUSTAN INDUSTRIAL AGENCIES PVT. LTD. 135 ITR 436 (BOM) VI. CIT VS. LAXMI SURGINAL PV T. LTD. 202 ITR 601 (BOM) 4. THE LD. CIT(A) ACCEPTED THE PLEA OF THE ASSESSEE THAT MERELY APPOINTMENT OF MR. VIDHYADHAR HUMNABADKAR FOR NEGOTIATING WITH THE GERMAN COMPANY FOR GETTING THE BETTER PRICE OF THE ASSESSEES SHARES IN JV COMPANY CANNOT BE TR EATED AS AN ORGANIZED ACTIVITY. THE LD. CIT(A) ACCEPTED THE PLEA OF THE ASSESSEE THAT THE CAPITAL GAIN DECLARED BY THE ASSESSEE TO THE EXTENT OF RS.10,11,81,446/ - CANNOT BE ASSESSED AS THE BUSINESS INCOME AND ALLOWED THE CLAIM OF THE ASSESSEE. THE FINDIN GS AND REASONS OF THE LD. CIT(A) ARE AS UNDER: 3.3. I HA VE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE LAW AS ARE APPARENT FROM THE RECORD. THE ADMITTED FACTS ARE THAT THE APPELLANT COMPANY AND BAUMULLER NURNBERG GMBH, A GERMAN COMPANY WERE IN SIMI LAR LINE OF BUSINESS AND ENTERED INTO A JOINT VENTURE ON 7.12.1996. THE JOINT VENTURE COMPANY CALLED BAUMULLER KAT (INDIA) PVT. LTD, WAS REGISTERED UNDER THE COMPANIES ACT ON 29.1.1997. THE APPELLANT WAS HOLDING 49% SHARES IN THE JOINT VENTURE I.E. 1,34, 750 EQUITY SHARES AND THE GERMAN COMPANY HELD 51% I.E. 1,40,250 EQUITY SHARES. THE DIRECTOR OF THE APPELLANT COMPANY WAS APPOINTED AS MANAGING DIRECTOR OF THE JV COMPANY AND WORKED IN THE SAID CAPACITY FOR 10 YEARS. AFTER DOING BUSINESS FOR MORE THAN 10 YE ARS THE FOREIGN COMPANY WANTED TO DO BUSINESS INDEPENDENTLY IN INDIA AND LITERALLY FORCED THE APPELLANT OUT FROM THE JV COMPANY. THE APPELLANT APPARENTLY DECIDED TO ENFORCE THE HIGHEST POSSIBLE SALE CONSIDERATION BY APPOINTING AN AGENT AND WAS ABLE TO SEL L THE SHARES OF THE JV COMPANY AT A GOOD PRICE. ACCORDINGLY, IT ENTERED INTO A SHARE PURCHASE AGREEMENT WITH BAUMULLER NURNBERG ON 16.9.2008 FOR AN AGREED CONSIDERATION OF RS.10,91,00,000. 3.4. THE CRUX OF THE ISSUE THAT NEEDS CLOSE EXAMINATION IS WHETHE R THE SHARES IN QUESTION WERE HELD BY THE APPELLANT AS INVESTMENT OR 5 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE STOCK IN TRADE. THE FORMER WOULD RESULT IN CAPITAL GAINS AND THE LATER WOULD GIVE RISE TO BUSINESS PROFITS. THE CBDT CIRCULAR NO. 4 OF 2007 LAYS DOWN CERTAIN TESTS TO DETERMINE WHETHER SA LE OF SHARES IS CAPITAL OR REVENUE IN NATURE. TO QUOTE FROM THE CIRCULAR INTER ALIA: (I) NO SINGLE PRINCIPLE WOULD BE DECISIVE IN DETERMINING WHETHER IN A GIVEN CASE SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT (AND THEREFORE GIVING RISE TO CAPITAL GAINS) OR STOCK IN TRADE (AND THEREFORE GIVING RISE TO BUSINESS PROFITS). THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSIDERED TO DETERMINE WHETHER IN A GIVEN CASE SHARES ARE HELD BY THE ASSESSEES AS INVESTMENT OR STOCK IN TRADE. IT IS NOT POSSIBLE TO EVOLVE ANY SINGLE LEGAL TEST OR FORMULA WHICH CAN BE APPLIED IN DETERMINING WHETHER A TRANSACTION WAS AN ADVENTURE IN THE NATURE OF TRADE OR NOT. THE ANSWER TO THE QUESTION MUST NECESSARILY DEPEND IN EACH CASE ON THE TOTAL IMPRESSION AND EFFECT OF ALL THE RELEVA NT FACTORS AND CIRCUMSTANCES PROVED THEREIN AND WHICH DETERMINE THE CHARACTER OF THE TRANSACTION. THE TOTALITY OF ALL THE FACTS WILL HAVE TO BE BORNE IN MIND. (II) IT IS POSSIBLE FOR A TAXPAYER TO SIMULTANEOUSLY HOLD TWO PORTFOLIOS I.E. INVESTMENT PORTFOLIO CO MPRISING SECURITIES WHICH ARE TO BE TREATED AS TRADING ASSETS, AND A TRADING PORTFOLIO COMPRISING STOCK IN TRADE WHICH IS TO BE TREATED AS TRADING ASSETS. IN SUCH A CASE, THE ASSESSEE MAY HAVE INCOME UNDER BOTH THE HEADS I.E. CAPITAL GAINS AS WELL AS BUSIN ESS INCOME. (III) WHETHER TRANSACTIONS OF SALE AND PURCHASE OF SHARES WERE TRADING TRANSACTIONS OR WHETHER THESE WERE IN THE NATURE OF INVESTMENT IS A MIXED QUESTION OF LAW AND FACT. (IV) WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK IN TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD IN NORMAL CIRCUMSTANCES BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT IS MAINTAINED IN DISTINCTION BETWEEN THOSE SHA RES WHICH ARE ITS STOCK IN TRADE AND THOSE WHICH ARE HOLD BY WAY OF INVESTMENT. (V) ORDINARILY, PURCHASE AND SALE OF SHARES WITH THE MOTIVE OF EARNING OF PROFIT WOULD RESULT IN A TRANSACTION BEING IN THE 6 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE, BUT W HERE THE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC 1 ., THERE THE PROFITS ACCRUING FROM SALE THEREOF WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT. THE REAL QUESTION IS WHETHER THE LATTER STAGES OF THE WHOLE OPERATION SHOW THAT THE FIRST STAGE I.E. PURCHASE OF SHARES, WAS NOT TAKEN AS OR IN THE COURSE OF A TRADING TRANSACTION. (VI) THE GENERAL LINE OF INQUIRY IS TO SEE WHETHER A TRANSACTION THAT IS SAID TO HAVE GIVEN RISE TO TAXABLE PROFIT BEARS ANY OF THE 'BADGE S OF TRADE'. THE BADGES OF TRADE IDENTIFIED BY 'ROYAL COMMISSION ON TAXATION OF PROFITS & INCOME OF ENGLAND' WHICH HAVE BEEN CITED BY THE HON'BLE SUPREME COURT IN H. HOLCK LARSEN (SUPRA) ARE: (1) THE SUBJECT - MATTER OF THE REALIZATION. WHILE' ALMOST ANY FORM O F PROPERTY CAN BE ACQUIRED TO BE DEALT IN, THOSE FORMS OF PROPERTY SUCH AS COMMODITIES OR MANUFACTURED ARTICLES, WHICH ARE NORMALLY THE SUBJECT OF TRADING ARE ONLY VERY EXCEPTIONALLY THE SUBJECT OF INVESTMENT. AGAIN PROPERTY WHICH DOES NOT YIELD TO ITS OWN ER AN INCOME OR PERSONAL ENJOYMENT MERELY BY VIRTUE OF ITS OWNERSHIP IS MORE LIKELY TO HAVE BEEN ACQUIRED WITH THE OBJECT OF A DEAL THAN PROPERTY THAT DOES. (2) THE LENGTH OF THE PERIOD OF OWNERSHIP. GENERALLY SPEAKING, PROPERTY MEANT TO BE DEALT IN IS REA LIZED WITHIN A SHORT TIME AFTER ACQUISITION. BUT THERE ARE MANY EXCEPTIONS TO THIS AS A UNIVERSAL RULE. (3) THE FREQUENCY OR NUMBER OF SIMILAR TRANSACTIONS BY THE SAME PERSON. IF REALIZATIONS OF THE SAME SORT OF PROPERTY OCCUR IN SUCCESSION OVER A PERIOD O F YEARS OR THERE ARE SEVERAL SUCH REALIZATIONS AT ABOUT THE SAME DATE, A PRESUMPTION ARISES THAT THERE HAS BEEN DEALING IN RESPECT OF EACH. (4) SUPP LEMENTARY WORK ON OR IN CONNECTION WITH THE PROPERTY REALIZED. IF THE PROPERTY IS WORKED UP IN ANY WAY DURIN G THE OWNERSHIP SO AS TO BRING IT INTO A MORE MARKETABLE CONDITION; OR IF ANY SPECIAL EXERTIONS ARE MADE TO FIND OR ATTRACT PURCHASERS, SUCH AS THE OPENING OF AN OFFICE OR LARGE - SCALE ADVERTISING, THERE IS SOME EVIDENCE OF DEALING. FOR, WHEN THERE IS AN OR GANIZED EFFORT 7 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE TO OBTAIN PROFIT, THERE IS A SOURCE OF TAXABLE INCOME. BUT IF NOTHING AT ALL IS DONE, THE SUGGESTION TENDS THE OTHER WAY. (5) THE CIRCUMSTANCES THAT WERE RESPONSIBLE FOR THE REALIZATION. THERE MAY BE SOME EXPLANATION, SUCH AS A SUDDEN EMERGE NCY OR OPPORTUNITY CALLING FOR READY MONEY, THAT NEGATIVES THE IDEA THAT ANY PLAN OF DEALING PROMPTED THE ORIGINAL PURCHASE. (6) MOTIVE. THERE ARE CASES IN WHICH THE PURPOSE OF TRANSACTION OF PURCHASE AND SALE IS CLEARLY DISCERNIBLE. MOTIVE IS NEVER IRREL EVANT IN ANY OF THESE CASES. WHAT IS DESIRABLE IS THAT IT SHOULD B,E REALIZED CLEARLY THAT IT CAN BE INFERRED FROM SURROUNDING CIRCUMSTANCES IN THE ABSENCE OF DIRECT EVIDENCE OF THE SELLER'S INTENTIONS AND EVEN, IF NECESSARY, IN THE FACE OF HIS OWN EVIDENC E.' (VII) THE MERE FACT THAT THE COMPANY HAD WITHIN ITS OBJECTS DEALING IN INVESTMENT IN SHARES DOES NOT GIVE THE COMPANY THE CHARACTERISTICS OF A DEALER IN SHARES, BUT IF OTHER CIRCUMSTANCES ARE PROVED, IT MIGHT BE RELEVANT FOR THE PURPOSES OF DETERMINING THE NATURE OF ACTIVITIES OF THE COMPANY. (VIII) THE TEST IS WHETHER THE SUM OF GAIN THAT HAS BEEN MADE WAS A MERE ENHANCEMENT OF VALUE BY REALIZING A SECURITY OR IT WAS A GAIN 'MADE IN A OPERATION OF BUSINESS IN CARRYING OUT A SCHEME FOR PROFIT MAKING. ( IX) IF A TRANSACTION IS RELATED TO BUSINESS WHICH IS NORMALLY CARRIED ON BY THE ASSESSES THOUGH NO DIRECTLY A PART OF IT, AN INTENTION TO LAUNCH UPON AN ADVENTURE IN THE NATURE OF TRADE MIGHT READILY BE INFERRED. 3.5. THE APPELLANT HAS SUBMITTED THAT AL THOUGH THE COMPANY IS IN EXISTENCE SINCE THE YEAR 1990, THIS WAS THE ONLY JV TRANSACTION IN ITS HISTORY. THE COMPANY HAS NEVER BEEN INVOLVED IN EVEN AN ISOLATED TRANSACTION OF TRADING IN SHARES. IN THE BOOKS OF ACCOUNTS OF THE COMPANY WHICH ARE PRODUCE D BEFORE ME FOR AND FROM F.Y. 2003 - 04, THE SHARES IN THE JV COMPANY ARE SHOWN UNDER THE HEADING OF INVESTMENT AND NOT STOCK IN TRADE. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT THE SAME IS THE POSITION WITH REFERENCE TO THE PRECEDING YEARS ALSO. TH E VALUE OF THE SHARES ON BALANCE SHEET DATE IS CONSISTENTLY MADE ON THE 8 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE PRINCIPLE OF FACE VALUE AND NOT ON MARKET OR COST WHICHEVER IS LESS. WHEN THE TREATMENT OF THE SHARES OF JV COMPANY IN THE BOOKS OF APPELLANT ARE TESTED W.R.T. THE CBDT CIRCULAR, IT CA N BE SEEN THAT THERE WAS A CLEAR INTENTION TO HOLD ASSET IN QUESTION AS AN INVESTMENT AND NOT AS A TRADING ASSET. IT HAS ALSO BEEN POINTED OUT TO ME THAT THE JV COMPANY BAUMULLER KAT (INDIA) PVT. LTD. BEING A PRIVATE LIMITED COMPANY IS NOT, AND CANNOT BE, LISTED ON THE STOCK EXCHANGE. UNDER THE COMPANIES ACT 1956, THERE IS INHERENT RESTRICTION OF TRANSFER OF SHARES OF A PRIVATE LIMITED COMPANY AND THESE CANNOT BE TRANSFERRED AT WILL OR WITHOUT THE CONSENT OF BOARD OF DIRECTORS NOR CAN THESE BE TRADED FREELY IN THE MARKET. 3.6. THE ASSESSING OFFICER HAS MENTIONED IN THE ASSESSMENT ORDER THAT THE APPELLANT HAS ENGAGED IN ORGANIZED ACTIVITY ON A LARGE SCALE BEING CARRIED ON BY THE APPELLANT. FROM THE AUDITED ACCOUNTS RELEVANT FOR A.Y. 2004 - 05 ONWARDS THAT ARE P RODUCED BEFORE ME, NO SUCH EVIDENCE IS DISCERNIBLE IN THE ACCOUNTS OF THE APPELLANT. WHATEVER THE APPELLANT EARNED EVERY YEAR BY WAY OF SURPLUS IS INVESTED IN MUTUAL FUNDS. THE LEARNED AR HAS APPRISED THAT MOST OF THE SALE CONSIDERATION OF RS.10 CRORES REC EIVED FROM THE SALE OF JV SHARES DURING THE YEAR HAVE BEEN ALSO INVESTED IN MUTUAL FUNDS. 3.7. THE SECOND OBJECTION OF THE ASSESSING OFFICER IS REGARDING THE APPOINTMENT OF AN AGENT WHO ADMITTEDLY HAS BEEN ENGAGED BY THE APPELLANT FOR ACHIEVING MAXIMUM VAL UE ON SALE OF ASSETS. THIS OBJECTION HAS BEEN MET BY THE APPELLANT WHO STATES THAT UNDER THE CIRCUMSTANCES IN WHICH THE APPELLANT WAS FORCED TO SELL THESE SHARES, IT WAS BUT NATURAL, AS A PRUDENT BUSINESSMAN, THAT THE APPELLANT WOULD RESORT TO ALL MEANS IN ORDER TO MAXIMIZE HIS GAINS AND MINIMIZE HIS DAMAGES/COSTS. THE APPELLANT HAS SUBMITTED THAT ONE MR. VIDHYADHAR S. HUMNABADKAR, WHO WAS IN GOOD RELATIONS WITH THE FOREIGN COMPANY, BEING A REPRESENTATIVE DIRECTOR ON THE BOARD OF DIRECTORS OF BAUMULLER K AT (INDIA) PVT. LTD. WAS APPOINTED TO NEGOTIATE THE DEAL BETWEEN THE APPELLANT AND THE FOREIGN COMPANY. THE FOREIGN COMPANY HAD ASSIGNED THE JOB OF NEGOTIATIONS TO ONE DR. MANUEL VERMEER FROM HEIDELBERG AND REQUESTED AND'ALSO PROPOSED THE APPELLANT TO APPO INT SHRI HUMNABADKAR TO NEGOTIATE AND ARBITRATE AS THE APPELLANT'S 9 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE REPRESENTATIVE SINCE THE CONCERNED PERSONNEL IN THE FOREIGN COMPANY ARE AWARE OF HIM AND HE IS ALSO NOT DIRECTLY ASSOCIATED WITH BAUMULLER KAT (INDIA) PVT. LTD, CONSEQUENTLY, THE APPELLANT SIGNED AN MOU ON 3.12.2007 WITH MR. HUMNABADKAR FOR NEGOTIATING THE SALE OF SHARES OF THE APPELLANT. SHRI HUMNABADKAR WAS TO VISIT NUREMBERG, OR OTHER PLACES AS MAY BE REQUIRED FOR NEGOTIATIONS, AT HIS OWN EXPENSE AND WOULD USE HIS BEST CONTACTS TO IMPROVE THE STRAINED RELATIONS BETWEEN THE APPELLANT AND THE FOREIGN COMPANY. FURTHER, HE WAS REQUIRED TO PROPOSE THE LAWYER, COMPANY SECRETARY AND OTHER CONSULTANTS AS MAY BE REQUIRED FOR THE PURPOSES OF FINALIZING THE SHARE TRANSFER AGREEMENT. ACCORDINGLY, HE W AS PAID AS PER CLAUSE 4 OF THE MOU, A CERTAIN PERCENTAGE OF THE SALE CONSIDERATION RECEIVED AFTER DEDUCTION OF NECESSARY TAXES IN ACCORDANCE WITH THE PROVISIONS OF INCOME TAX ACT, 1961. AS PER CLAUSE 4(D) OF THE MOU, THE PAYMENT HAS BEEN MADE TO HIM AFTER THE RECEIPT OF THE SALE CONSIDERATION FROM THE FOREIGN COMPANY. 3.8. THE ASSESSING OFFICER IS OF THE VIEW THAT APPOINTMENT OF AGENT PER SE PROVES THE INTENTION OF THE APPELLANT TO CONDUCT TRADING AND EARN PROFITS THEREON. I FAIL TO APPRECIATE THIS ARGUMENT OF THE ASSESSING OFFICER. THE AGENT HAS BEEN APPOINTED FOR THE I LIMITED TASK OF OVERSEEING THE SUCCESSFUL SALE OF THE SHARES IN THE JV COMPANY BY THE APPELLANT. HIS NAME HAS BEEN PROPOSED BY THE FOREIGN COMPANY FOR CONDUCTING NEGOTIATIONS BETWEEN THE APP ELLANT AND THE FOREIGN COMPANY. HE WAS ALSO TO PROPOSE THE CONSULTANTS, LAWYERS AND OTHER TECHNICALLY QUALIFIED PERSONNEL WHO WOULD BE APPOINTED FOR THE PURPOSES OF FINALIZING THE AGREEMENT OF SALE OF SHARES OF JV COMPANY. MERE APPOINTMENT OF AN AGENT TO M AXIMIZE THE APPELLANT'S RETURN ON INVESTMENT DOES NOT SUPPORT THE CASE THAT THE APPELLANT INDULGED IN TRADING OF SHARES AS AN ORGANIZED ACTIVITY. THE SALE OF SHARES WAS A LIMITED TRANSACTION RELATED TO THE 1,34,750 EQUITY SHARES AND 12,250 BONUS SHARES SUB SEQUENT RECEIVED BY THE APPELLANT IN THE JV COMPANY. THE APPELLANT HAS NOT ENGAGED IN ANY SHARE TRADING AS CAN BE SEEN AND VERIFIED FROM THE AUDITED ACCOUNTS FOR AND FROM 2004 - 05 ONWARDS. THE ASSESSING OFFICER HAS RELIED ON CERTAIN DECISIONS FO R THE PROPOSITION THAT THE APPELLANT HAS CARRIED OUT SYSTEMATIC ORGANIZED ACTIVITY OF SALE AND PURCHASE OF SHARES. HOWEVER, THIS IS NOT SUPPORTED BY FACTS OR; EVIDENCES THAT ARE ON RECORD. ON THE CONTRARY, THE APPELLANT HAS RELIED UPON THE 10 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE HON'BLE SUPR EME COURT'S DECISION IN RAMNARAIN SONS PVT. LTD. VS CIT REPORTED IN 41 ITR 534 WHEREIN THE CONTEXT OF PURCHASE OF SHARES FOR PURPOSES OF ACQUIRING A MANAGING AGENCY, IN THE ABSENCE OF THE INTENTION TO TRADE IN SHARES, IT WAS HELD THAT SUCH ACQUISITION COUL D NOT BE REGARDED AS ACQUISITION OF STOCK IN TRADE, DESPITE THE FACT THAT THE ASSESSEE WAS A DEALER IN SHARES. 3.9. FURTHER, IT IS SEEN THAT THE ASSESSING OFFICER HAS NOT DOUBTED THE GENUINENESS OF THE COMMISSION PAID TO SHRI HUMNABADKAR NOR HAS HE DISPUTE D THE FACT THAT SERVICES AS PER MOD 1 HAD ACTUALLY BEEN RENDERED BY HIM. TAKING THE TOTALITY OF FACTS AND CIRCUMSTANCES INTO CONSIDERATION AS DISCUSSED IN THE PRECEDING PARAGRAPHS, IT IS HELD THAT THE INCOME RETURNED BY THE APPELLANT OF RS.10,11,81,446 IS I N THE NATURE OF CAPITAL GAINS AND NOT BUSINESS INCOME. GROUND NO. 1 STANDS ALLOWED IN FAVOUR OF THE APPELLANT. NOW THE REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE RECORD. THE FACTS ARE NOT IN DIS PUTE IN THIS CASE. IT IS ALSO NOT DISPUTED THAT THE ASSESSE COMPANY ENTERED INTO A JOINT VENTURE COMPANY WITH THE GERMAN COMPANY I.E. BAUMULLER NURNBERG GMBH AND THEY FO RMED A NEW COMPANY. IT IS ALSO NOT DISPUTED BY THE ASSESSING OFFICER THAT THE ASSESSE E WAS HOLDING 49% SHARES IN THE JOINT VENTURE COMPANY AND THE GERMAN COMPANY WAS HOLDING 51% SHARES. IT IS ALSO NOT DISPUTED THAT THE DIRECTOR OF THE ASSESSEE COMPANY WAS APPOINTED AS A MANAGING DIRECTOR OF JV COMPANY AND WORKED IN THE SAID ACTIVITY FOR 1 0 YEARS. AFTER DOING BUSINESS FOR MORE THAN 10 YEARS , THE GERMAN COMPANY WANTED TO DO BUSINESS INDEPENDENTLY IN INDIA AND IT APPEARS THAT THE GERMAN COMPANY GAVE OFFERED TO THE ASSESSEE TO GO OUT OF JV COMPANY AND TRANSFERRED THEIR 49% OF SHARES IN FAVOUR OF THE GERMAN COMPANY. IT IS ALSO SEEN THAT THE GERMAN COMPANY ALSO ENGAGED A MIDDLE MAN TO NEGOTIATE THE PRICE OF THE 49% SHARES HELD BY THE ASSESSEE COMPANY IN JV COMPANY TO TRANSFER SAME TO BAUMULLER NURNBERG GMBH. ON THE 11 I TA NO. 574 /PN/2013, M/S. KAT CONTROLS PVT. LTD., PUNE PERUSAL OF THE ASSESSMENT OR DER WE FIND THAT IN A VERY CRYPTIC MANNER THE ASSESSING OFFICER HAS CONCLUDED THAT THE EFFORTS MADE BY THE ASSESSEE COMPANY WITH ITS COUNTERPART I.E. GERMAN COMPANY FOR GETTING THE BETTER PRICE FOR TRANSFERRED ITS SHARES STATED IN THE ORGANIZED ACTIVITY . N OWHERE IT IS A CASE OF THE ASSESSING OFFICER THAT THE ASSESSEE ALSO ENGAGED IN DEALING OF THE SHARES . A FTER CONSIDERING THE TOTALITY OF THE FACTS IN OUR OPINION THE LD. CIT(A) HAS RIGHTLY HELD THAT THE EFFORTS MADE BY THE ASSESSEE COMPANY FOR GETTING THE BETTER PRICE FOR ITS SHARES FROM ITS COUNTERPART IN THE JV COMPANY CANNOT BE TREATED AS BUSINESS INCOME. WE, ACCORDINGLY, CONFIRM THE ORDER OF THE LD. CIT(A) AND GROUNDS TAKEN BY THE REVENUE ARE DISMISSED. 6. IN THE RESULT, THE REVENUES APPEAL IS DIS MISSED. PRONOUNCED IN THE OPEN COURT ON 30 - 0 4 - 201 4 SD/ - SD/ - ( R.K. PANDA ) ( R.S. PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER RK /PS PUNE , DATED : 30 TH APRIL, 2014 COPY TO 1 ASSESSEE 2 DEPARTMENT 3 THE CIT(A) - I , PUNE 4 THE CIT - I , PUNE 5 THE DR, ITAT, A BENCH, PUNE . 6 GUARD FILE. //TRUE COPY// BY ORDER PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE