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Judgment
Ajay Kumar Mittal, J.—The revenue has preferred this appeal u/s 260A of the income tax Act, 1961 (in short "the Act") against the order dated 3.8.2009 passed by the Income Tax Appellate Tribunal, Chandigarh Bench "A", Chandigarh (hereinafter referred to as "the Tribunal") in ITA No. 113/Chandi/2009 relating to the assessment year 2005-06. The appeal was admitted vide order dated 4.8.2010 for considering the questions of law as mentioned in para 7 of the appeal which are as under:--
(i) Whether on the facts and in the circumstances of the case and in law, the Hon''ble ITAT was correct in holding that the sale of shares by the assessee was a capital gain and not profit and gain from business?
(ii) Whether on the facts and circumstances of the case and in law, the Hon''ble ITAT was correct in directing the department to follow the principal of consistency and holding that the department cannot depart from the accepted position in the earlier years?
Put shortly, the facts necessary for adjudication of the present appeal as narrated therein are that the assessee is a Punjab Government Undertaking and its principal objects are to promote agro/horticulture based industry in the State of Punjab. The assessee filed its return for the assessment year 2005-06 on 9.9.2005 declaring total business loss at Rs. 91,10,197/-, income from house property at Rs. 22,31,670/-, short term capital gain of Rs. 2,17,476/- and long term capital loss of Rs. 1,98,13,348/-. The tax was paid u/s 115JB of the Act on book profit of Rs. 3,83,04,304/-. The said return was processed u/s 143(1) of the Act on 20.3.2006. The case was selected for scrutiny and notice was issued to the assessee. The Assessing Officer vide order dated 6.12.2007 (Annexure A-1) held that the surplus/loss resulting to the assessee on sale of the shares was to be considered as a business income/loss since investment in shares amount to a business activity whereas the assessee had declared surplus/loss on the shares as capital gain/loss. Feeling aggrieved, the assessee filed an appeal before the Commissioner of income tax (Appeals) [for brevity, "the CIT(A)"]. The CIT(A) vide order dated 28.11.2008 (Annexure A-2) partly allowed the appeal. Being dissatisfied with the order of the CIT(A), the revenue filed an appeal before the Tribunal, who vide order dated 3.8.2009 (Annexure A-3) upheld the order of the CIT(A) and dismissed the appeal holding that the sale of investments of shares by the assessee was exigible to tax under the head capital gain instead of business income. Hence, the present appeal by the revenue.
Learned counsel for the appellant submitted that the investments made by the assessee in the shares and the sales thereof was exigible under the head profit and gain from business and not capital gains as has been held by the Tribunal.
After hearing learned counsel for the appellant, we do not find any merit in the appeal. The Tribunal while rejecting the contention of the revenue had held as under:--
We have considered the rival submissions carefully. We have also perused the precedent referred the CIT (Appeals) in support of his conclusion that the activity of the assessee in investing in shares is not a business activity but is liable to be taxed under the head ''capital gain''. In our view, the nature of activity of taking up the shares in the private companies which are jointly promoted with the private entrepreneurs cannot be equated to an ordinary investor who takes up the shares as a dealer in shares. The assessee corporation undertakes investment in projects in terms of collaboration agreement with the private entrepreneurs with a view to promote agriculture/horticulture industries in the State of Punjab. At the time of investment itself, it is agreed that the private entrepreneurs shall purchase the shares held by the assessee after completion of five years from the date of start of the commercial production. In fact, the CIT(Appeals) in para 8 of his order has also enumerated the mechanism by which the sale consideration is arrived at. It is provided that in case shares are not quoted the stock exchange, interest on the amount invested is included up to the date of disinvestment at 1% above the bank rate of interest. The interest so calculated is added to the principal amount to work out the sale consideration of the shares. In case of stock exchange quoted shares, sale consideration is calculated as per the interest method stated above or the value at which the shares are quoted in the stock exchange, whichever is higher. We are referring to the aforesaid terms & conditions of the investment made by the assessee only to point out that it is not a case where a person is investing in shares as a business proposition of deal in the shares. The investment made in the shares of the companies which are jointly promoted by the assessee along with the private entrepreneurs, is with the basic object of promoting agro/horticulture based industry in the State of Punjab and not as a dealer in shares with the object of trading. In fact, the object of trading in shares is lacking inasmuch as the financial collaboration agreement itself prescribes that the shares shall be bought back by the private promoter after a specified period at a defined consideration. In fact, in the case of PSIDC Ltd. (supra), the Tribunal has also considered similar aspects and have held that the realization of such investment is liable to be taxed under the head ''capital gains'' and not as a ''business activity.''
Apart from the aforesaid, we also find that the assessee contended that in the past years all along, such activity of the assessee has been accepted as a pure investment activity and not a business activity. Therefore, even on the principle of consistency, the position taken by the assessee and having been accepted by the Department in the earlier assessment years, cannot be departed without cogent cause and justification. The Revenue has not brought out any change in the facts or in law which would justify departure from the accepted position in the earlier years.
Further, the Tribunal had relied upon its decision in the case of Punjab State Industrial Development Corporation Ltd. [IT Appeal Nos. 1333 (Chd.) of 1994, 944 & 1591 (Chd.) of 1995], decided on 22.11.1996] against which reference had been filed before this Court which was numbered as ITR No. 20 of 2000. Question No. 2 at the instance of the revenue therein was as under:--
Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that the investment in shares of companies jointly promoted by the Corporation along with other industrial undertakings, is in the nature of investment and not stock-in-trade and profit realised on disinvestment in these shares, is not business income but a capital gain?
This Court vide judgment dated 30.9.2010 held as under:--
In the present case, as has been found by the Tribunal, the assessee was advancing the industrial policy of the State and in that process, investment was made in the new projects and after level of self-sufficiency was achieved, disinvestment was done. The view of the Tribunal that realization of investment was liable to tax under the head capital gains was certainly a possible view, particularly when the revenue itself has been accepting this position up to the assessment year 1989-90. Judgment of Madras High Court, in facts of the present case, does not support the stand of the revenue.
Whether income in a particular case falls under the head of capital gains or business depends upon nature of business of the assessee and attending circumstances. At times, the dividing line for deciding the head of income may be very thin and the heads may overlap. Parameters for deciding this question have been discussed by the Hon''ble Supreme Court, inter alia, in Khan Bahadur Ahmed Alladin and Sons Vs. Commissioner of Income Tax, Andhra Pradesh, and Commissioner of Income Tax, Nagpur Vs. Sutlej Cotton Mills Supply Agency Ltd., .
In Sutlej Cotton Mills Supply Agency (supra), it was observed:--
The principles underlying the distinction between a capital sale and an adventure in the nature of trade were examined by this Court in G. Venkataswami Naidu and Co. Vs. The Commissioner of Income Tax, , where this Court said that the character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. Ultimately, it is a matter of first impression with Court whether a particular transaction is in the nature of trade or not it has been said that a single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of the trade; but mere purchase/sale of shares - if that is all that is involved in the plunge - may fall short of anything in the nature of trade. Whether it is in the nature of trade will depend on the facts and circumstances.
.. .. ..
Where a purchase is made with the intention of resale, it depends upon the conduct of the assessee and the circumstances of the case whether the venture is on capital account or in the nature of trade. A transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale [see Jenkinson v. Freeland [1961] 39 Tax Cases 636; RADHA DEBI JALAN AND OTHERS Vs. COMMISSIONER OF Income Tax, CALCUTTA., ; The India Nut Company Ltd., Quilon Vs. The Commissioner of Income Tax, Mysore, T.C. and Coorg, Bangalore, ; AIR 1939 337 (Rangoon); Ajax Products Ltd. Vs. Commissioner of Income Tax, Madras, ; Gustad Dinshaw Irani Vs. Commissioner of Income Tax, Bombay City, ; and Mrs. D.M. Alexander Vs. The Commissioner of Income Tax, Madras, ].
A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment [see Leeming v. Jonas [1930] 15 Tax Cases 333 and also the decisions of this Court in Saroj Kumar Mazumdar Vs. The Commissioner of Income Tax, West Bengal, Calcutta, and Janki Ram Bahadur Ram Vs. Commissioner of Income Tax, Calcutta, ].
In view of the above, the substantial questions of law are answered against the revenue and in favour of the assessee. Consequently, the appeal stands dismissed.