SURYODAYA INVESTMENT and TRADING CO. vs ASSISTANT COMMISSIONER OF Income Tax.

Per G. E. Veerabhadrappa, Accountant Member - This appeal is by the assessee and arises out of the order dated 10-3-1995 of the Commissioner of Income Tax (Appeals) for the assessment year 1991-92.

The assessee is an investment company. For the assessment year 1991-92, its previous year ended on 31-3-1991. The Assessing Officer found that the assessee had transferred the entire profit on sale of investment to the extent of Rs. 4,13 98,386 to the Capital Reserve Account. The assessee was required to furnish the details of the sale of shares. The assessee, by its letter dated 2-3-1994, stated:

"The company being an investment company, on disposal of its shares, whatever profit was realised was credited to capital reserve account Out of the total profit made, profit amounting to Rs. 57,70,586 was offered as short term capital gain whereas, profit amounting to Rs. 3,56,28,275 was claimed as non-taxable u/s 47(iv) of the L.T. Act, 1961 as the same was arising out of sale of investment made to its wholly owned subsidiary company M/s. Mahalaxmi Holdings Ltd., were bills etc. raised on Mahalaxmi Holdings Ltd., were handed over to you during the course of hearing.

In the light of the above, you would kindly appreciate that whatever is subject to tax, has been offered to you for taxation.

The Assessing Officer treated the assessees transactions in these shares as part of its trading activity. The assessee claimed that it is an investment company and is a promoter of LML Limited and purchased shares of LML Ltd. and sold those shares to its 100% subsidiaries and such transactions were in the capital field. In view of the provisions of section 47(iv), the assessee contended that the transactions should not be regarded as a transfer and no capital gains would arise u/s 45 for the purpose of taxation. The Assessing Officer did not dispute the assessees contention that it is an investment company and did not also dispute the fact that it is the promoter of LML Ltd. but went on to drag the assessee into the various tests laid down by the Supreme Court in the case of G. Venkataswami Naidu and Co. Vs. The Commissioner of Income Tax, to conclude that the transactions were in the field of trading activity and, therefore, the assessee was held not entitled for deduction claimed u/s 47(iv) of the Income tax Act. The profit on sale of investment is treated as income from business for the purpose of assessment. The Commissioner of Income Tax (Appeals) more or less confirmed these findings of the Assessing Officer and the assessee is aggrieved.

The learned counsel for the assessee pointed out that both the revenue authorities have not challenged the fact that the assessee is an investment company and is a promoter of LML Ltd. The assessee submitted that the assessee is a quoted company on the Stock Exchange, incorporated on 7-8-1975 and acquired shares of LML Ltd. from time to time as detailed in page 9 of the order of the CIT (Appeals). Drawing our attention to this extract by the CIT (Appeals), it was pointed out to us that up to the year ending 31-3-1983, the assessee had purchased shares of LML Ltd. and also received the bonus shares from LML Ltd. and it had at the beginning of l-4-1983 shares numbering 8,32,700 and during the period ending 31-12-1983, the assessee had purchased 7,93,854 shares and sold shares to six wholly owned subsidiaries in the assessment year 1984-85. The transactions of the type now entered into in the present assessment year came in for scrutiny by the department in the assessment year 1984-85 and the department has accepted the transactions as falling within the purview of section 47(iv) of the Income Tax Act, 1961. Our attention was drawn to the assessment order for the assessment year 1984-85 at pages 36 to 38 of the paper book. The learned counsel for the assessee further pointed out that no significant transaction took place between 1983 and 1990. Although during the your ending 31-12-1987 75,000 shares of LML Ltd. are shown as purchase and sale, they, in fact, represent the cancellation of the purchase transaction due to the non-delivery of shares by the seller. Our attention was drawn to page 28 of the paper book in support of this contention. Between 1-1-1991 and 31-3-1991 8,32,824 shares of LML Ltd. were purchased and 13,00,000 shares were sold to one of the subsidiary companies, Mahalaxmi Holdings Ltd. There is no dispute that Mahalaxmi Holdings Ltd. is a wholly owned subsidiary of the assessee. The learned

counsel for the assessee pointed out the shares of LML Ltd. are held by the assessee as investment and not as stock-in-trade. The learned counsel for the assessee further pointed out that these shares purchased by Mahalaxmi Holdings Ltd. have so far not been disposed of. The learned counsel for the assessee pointed out that the tax authorities wholly ignored the fact that under the joint venture agreement with Piaggio of Italy the assessee is not permitted to sell the shares of 15 years except with their permission and only to its wholly owned subsidiaries. Our attention was drawn to pages 10 to 19 of the agreement. The learned counsel for the assessee further pointed out that as a promoter of LML Ltd., the assessee and its wholly owned subsidiaries have given undertakings to Industrial Financial Corporation of India Ltd. in respect of financial facilities extended to LML Ltd. Such undertaking is not to dispose of the shares held by them without their prior approval. Our attention was drawn to the confirmation letter from Industrial Financial Corporation of India Ltd. It was also pointed out, under these Articles, even the Mahalaxmi Holdings Ltd., which purchased the shares from the assessee, is not permitted to sell those shares. The learned counsel for the assessee, drawing support from all these facts, argued that the assessee is only an investor in the shares of LML Ltd. He went on to argue that the burden is on the department to prove that even in such circumstances the assessee has entered into trading in those shares. According to him, the department has not brought any material to advance its case. Our attention was drawn to the decision of the Supreme Court in Saroj Kumar Mazumdar Vs. The Commissioner of Income Tax, West Bengal, Calcutta, . The learned counsel for the assessee further pointed out that as a promoter the assessee and its subsidiary companies are duty-bound to keep a higher stake in the financial structure of LML Ltd. and, therefore, such transactions should be regarded as in the capital field. For this, reliance was placed on to the decision of the Supreme Court in Ramnarain Sons (Pr.) Ltd. Vs. Commissioner of Income Tax, Bombay, . The learned counsel for the assessee further argued the mere objects clause of the assessee that it is entitled to carry on the business as a dealer, etc. in shares does not make all its transactions business. The learned counsel for the assessee pointed out that the Memorandum of Association also indicates that the assessee can from time to time, promote companies and hold investments. According to him, some of the objects, which may include trading in shares, do not conclude that all transactions of the assessee in shares are in the business field. Our attention was drawn to the ratio laid down by Supreme Court in Kishan Prasad and Co. Ltd. Vs. Commissioner of Income Tax, Punjab, . Our attention was specifically drawn to the discussion in pages 51 and 52 of the aforesaid decision. The learned counsel for the assessee further pointed out that mere repetitiveness of certain transactions does not decide that the transaction is one in the nature of trade. For this, our attention was drawn to the decision of the Supreme Court in Raja Bahdur Kamakhya Narain Singh Vs. The Commissioner of Income Tax, Bihar and Orissa, . Our attention was also drawn to the decision of the Supreme Court in Dalhousie Investment Trust Company Ltd. Vs. Commissioner of Income Tax (Central), Calcutta, .

Faced with this, the learned departmental representative heavily relied upon the order of the Commissioner of Income Tax (Appeals) in support of the revenues contention that the impugned transactions of the assessee are really transactions of business and the shares are held by the assessee as stock-in-trade. Our attention was also drawn to the objects clause of the company, which clearly shows that the assessee is a trader in shares and stocks.

Our attention was again drawn to the number of transactions that have taken place in respect of LML shares to hold that the assessee has indulged in trading of LML shares. The learned departmental representative further pointed out that the transactions in LML Ltd. are really adventure in the nature of trade. Reliance was placed on to Bombay High Court decision in Commissioner of Income Tax Vs. Principal Officer, Laxmi Surgical Pvt. Ltd, . The learned departmental representative heavily relied upon the Memorandum of Association and Articles of Association of the company. According to him, these basic documents, which brought the corporate

body into existence, clearly indicate that the assessee is a trader or a dealer in shares.

We have carefully considered the rival submissions in the light of the material to which our attention was drawn at the time of hearing of the appeal. The assessee is an investment company and there is no doubt in the mind of the revenue authorities about the same. It is also established that the assessee is concerned as a promoter of LML Ltd. In fact, the joint venture agreement entered between Piaggio of Italy and the assessee, Goodrock Investment Ltd. and LML Ltd. refers the assessee as a promoter of LML Ltd., which, inter alia, is engaged in the manufacture of two-wheelers. The eight 100% subsidiary companies are included within the expression "Suryodaya" (an expression used in relation to the assessee) according to the terms of agreement.

5.1 Article 1.2 of the agreement reads as under:

"Suryodaya further represents and warrants that all of the following companies arc its 100% owned subsidiaries:

(1) M/s. Akchay Investments Limited (2) M/s. Saurabh Commercial Limited (3) M/s. Saraswati Holdings Limited (4) M/s. Udichi Investments Limited (5) M/s. Udit Investments Limited (6) M/s. Vradhi Investments Limited (7) M/s. Mahalaxmi Holdings Limited (8) M/s. Payal Investment & Trading Limited"

5.2 The terms of agreement with M/s. Piaggio provide that all the Indian companies jointly and severally hold the shares and shall not dispose of them without the prior written consent of Piaggio. The relevant terms are in sections 4 and 5 of Article L which read as under:

"4. The Indian Companies jointly and severally represent, warrant and agree that:

a. their respective shareholding in LML, either directly or through the subsidiaries specified in paragraphs 1.2 and 1.3 above:

i is as set forth in Exhibit B attached hereto and made a part hereof; and

ii. is free and clear of any liens, charges and encumbrances and has not heretofore been dealt with in any mode or manner that affect the aforesaid free and clear nature of the shares and/or in a manner that prevents them from entering into this Agreement and implementing the transaction contemplated herein;

b. they shall not at any time during the validity of this Agreement transfer, sell or otherwise deal with their shares in their respective subsidiaries or their shares in LML or the shares held by their subsidiaries in LML without the prior written consent of PLAGGIO;

c. their respective Balance Sheets and Profit and Loss Accounts for the period ending 31st March, 1990 are as per Exhibits C and C1 respectively annexed hereto and made a part hereof and that the said Balance Sheets and Profit and Loss Accounts shall, prior to the allotment of shares to PIAGGIO as contemplated in Article VIII and, as a condition thereof, not undergo any material change therein.

The shareholders of the Indian Companies as mentioned in Exhibits A and A1 respectively hereby covenant and agree that they are the current lawful shareholders of the respective companies as aforesaid and have not heretofore transferred, sold or otherwise disposed of or dealt with nor shall they hereafter without the written consent of PIAGGIO, transfer, sell or otherwise dispose of or deal with their said shares in a manner that create any right, title or interest in any third parties in respect of their shares in the respective companies."

5.3 The capital structure in LML Ltd. by the Indian companies and their wholly owned subsidiaries and Piaggio are spelt out in page 10 of the Articles of Joint Venture. Article IX, which deals with the transfer and sale of shares, provides as under:

"9.1 Subject to the provisions of paragraph 9.3 hereunder, for a period of fifteen (15) years from the date hereof:

a. each party shall hold and continue to hold all shares in LML held, directly or indirectly, by it and/or through its subsidiaries as specified in paragraph 2.2 above, and

b. the Indian Companies shall hold and continue to hold all the shares held by them at present in their respective subsidiaries,

and shall not, during the said period of fifteen (15) years, sell or otherwise transfer or assign the whole or any part of their aforesaid shares in LML or in the subsidiaries as the case may be except as provided herein:

Provided that notwithstanding anything contained in this Agreement any transfer inter se between the Indian Companies and their subsidiaries as specified in paragraphs 1.2 and 1.3 above on the one hand and PIAGGIO and its subsidiaries on the other, shall be freely permitted subject to a notification of such transfer in writing to all parties hereto. Under all circumstances, Transferor/assignor shall have Transferee/assignee execute a copy of this Agreement."

5.4 Section 9.10 of Article IX provides as under:

"9.10 Except as provided herein, no party shall transfer, sell, assign, pledge, hypothecate, or in any manner create any right, title or interest to, or in, or otherwise encumber any shares held by it or any of its subsidiaries in LML or do or allow to be done any act leading or likely to lead to the foregoing without the express prior written consent of the other."

5.5 The above extract clearly gives the nature of the assessees investment in shares of LML Ltd. We agree with Shri Dastur that the assessee as a promoter is concerned with a higher stake in the capital structure of LML Ltd. Apart from it, the assessee is also required to satisfy the various undertakings given to Piaggio in the joint venture agreement, to which the assessee and its subsidiaries are parties. The department is not entitled to ignore all these presents and circumstances in which the assessee is holding the investments or dealing with them. All these presents clearly indicate that the assessee is absolutely an investor in relation to shares of LML Ltd. Merely because certain permissible transactions took place within the group concerns, they do not entitle the department to hold the transactions of shares in the field of business. Mere repetitiveness of the transactions by itself does not conclusively decide the transaction is one of business. Reference may be made to the decision of the Supreme Court in Raja Bahadur Kamakhya Narain Singhs case (supra) wherein it was held that the profit made on sale of shares acquired with the intention of acquiring control over the management and not for dealing in them, would be on capital and not on revenue account. In the facts of this case, the assessee acquired from time to time shares to have a control over the company and to keep such control within the wholly owned subsidiaries by transferring those shares to them. The idea of the assessee was not making profits or in dealing with those shares as a trader. In Ramnarain Sons (P.) Ltds case (supra), the assessee was a dealer in shares and securities and also carried on business as managing agents of other companies. In order to acquire the managing agency of a textile mill, the assessee purchased from Sassoon and Company, who were the managing agents thereof, 1507 shares of the mill at Rs. 2321 per share at a time when the market price of the shares was at Rs. 1,610 per share. Two months later, the assessee sold 400 shares and incurred loss and this loss was claimed as a trading loss. The Supreme Court held that purchase of shares in that company was for acquiring its managing agency and is a transaction on investment account and not trading transaction. From the facts of this case it is clear that even in the case of an assessee, who is a dealer in shares, all his dealings in shares do not amount to a trading activity. Transactions in some of the shares could, very well, be in the capital field. In the facts before us, the assessee is primarily a dealer in shares but as regards the shares of LML Ltd., the assessee has special interest and concern, i.e. to keep its stake as a part of its undertaking given to Piaggio. The Supreme Court in Kishan Prasad & Co. Ltd.s case (supra) was also concerned with the investment in shares for acquiring a managing agency. Although the objects clause of the assessee-company provided for trading in money, notes, bills, hundies and other securities, yet the Supreme Court held that as long as the object of the purchase was to acquire the managing agency, the transaction was not in the sphere of business but in the field of capital. The department appears to have considered the frequency of the transactions alone as the criterion for deciding whether the transaction in shares is one on investment account or on trading account. In our view, frequency of the transactions cannot be the only test and the department is not entitled to ignore the whole set of circumstances under which the assessee is buying and selling the shares and also the attendant obligations of the assessee to keep the shares only in the group companies. The close identity that exists between a company and its wholly owned subsidiary has made the Legislature to provide u/s 47(iv) that such transactions of the capital assets between them will not be regarded as a transfer. The provisions of section 47(iv) and (v) read as under:

Nothing contained in section 45 shall apply to the following transfers :-

(i) ........................................................... ......

(ii) ........................................................... ........

(iii) ........................................................... .....

(iv) any transfer of a capital asset by a company to its subsidiary company, if -

(a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and

(b) the subsidiary company is an Indian company;

(v) any transfer of a capital asset by a subsidiary company to the holding company, if -

(a) the whole of the share capital of the subsidiary company is held by the holding company, and

(b) the holding company is an Indian company;"

Further in section 49(1)(iii)(e), the cost of acquisition in such cases of transfer shall be deemed to be the cost for which the previous owner of the property has acquired it. All these provisions are only intended to recognize that the transactions between a holding company and its 100% subsidiary are only in the field of capital. A similar transaction took place in the assessment year 1984-85 wherein the Assessing Officer has accepted the transactions as falling within the capital field and his finding in the assessment order reads as under:

"During the year under consideration the company transferred/sold some shares to its wholly subsidiary company and earned substantial profit. This transfer comes within the purview of section 47(iv) and as such the profit earned on this account does not attract tax liability as it does not amount as a transfer."

Although the holding company and subsidiary company are two different legal entities, but for all accounting purposes they are one unit.

5.6 As regards the decision of Bombay High Court in Principal Officer, Laxmi Surgical (P.) Ltd. (supra), to which the departmental representative has heavily relied upon, it was pointed out by the Bombay High Court that it is not possible to evolve any legal test or formula which can be applied in determining whether a transaction is 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 relevant factors and circumstances proved therein and which determine the character of the transaction. The fact that the original purchase was made with an intention to resell if an enhanced price could be obtained is by itself not enough, but, in conjunction with the conduct of the assessee and other circumstances, it may point to the trading character of the transaction. Whether the transaction of the assessee is a trading or an adventure in the nature of trade in the light of the principle, will depend upon the total impression and effect of all the relevant factors and circumstances of the case. The total impression and the effect of all the relevant facts of the case clearly lead us that the assessee is an investor in the shares of LML Ltd. and the transactions in shares with its wholly owned subsidiaries do fall under the provisions of section 47(iv) of the Act. The addition made, therefore, stands deleted.

The second dispute of the assessee relates to the assessees claim for deduction of short term capital loss amounting to Rs. 27,19,101 arising on renouncing the rights entitlement of LML equity shares. The assessee claimed a notional loss of Rs. 27,19,101 in respect of sale of rights. The assessee computed the short term capital loss as under:

Computation of Short term capital loss:

Diminution in the value of 3,93,114 shares in respect of which the above right were received in the Rs. Rs. ratio 3:1 @ Rs. 7.75 per share as follows: 30,46,633.50

Value of share before right (5-3-91) as per Bombay Stock Exchange quotation 34.00

Less: Value of share after right (on 7-3-1991) as per Bombay Stock Exchange 26.25

7.75

Less: Sale proceeds of

1,31,013 rights of LML @ RS. 2.50 3,27,532.50

Short term capital loss 27,19,101.00"

The assessees computation of the above loss is based on the decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia Vs. Commissioner of Income Tax, Bombay, . During the year M/s. LML Ltd. came out with their right issue under which the assessee was offered 1,31,013 equity shares for subscription. The aforesaid right entitlement was disposed of for a consideration of Rs. 3,27,532. The assessee took the sale proceeds as full value of consideration and deducted therefrom the diminution in the value of its holding. Such diminution is claimed to be a short term capital loss by placing reliance on:

(1) Miss Dhun Dadabhoy Kapadia''s case (supra);

(2) Commissioner of Income Tax, Bombay Vs. H. Holck Larsen, ; and

(3) Commissioner of Income Tax, Bombay City I Vs. K.A. Patch, .

6.1 We have heard the parties and perused the details. There is no dispute about the facts and the computation. The only reason why the department has not followed the ratio of the Supreme Court is that, in the case of Miss Dhun Dadabhoy Kapadia (supra), it was the case of an individual and the assessee before us is a corporate body. The case of Miss Dhun Dadabhoy Kapadia was the case of an investor and not a dealer in stock-in-trade. ln a foregoing paragraph we have already held that the assessee is an investor in shares. The Bombay High Court in K.A. Patch''s case (supra), held that the principle laid down by the Supreme Court in Miss Dhun Dababhoy Kapadias case (supra) applies even in the case of dealer in shares. Having accepted the position that the assessee is an investor in shares and, therefore, is entitled to claim the short term capital loss in respect of the renouncement of the rights, the principles laid down by the Supreme Court in Miss Dhun Dadabhoy Kapadia''s case (supra) and K.A. Patch''s case (supra) clearly support the case of the assessee.

In the result, appeal is allowed.