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2012 (6) TMI 599 - AT - Income TaxIncome from sale of shares - Business Income vs Long term Capital gains - assessee- company, purchased shares of MABL(unlisted company) having accumulated losses - shares purchased @ Rs.21.30 per share when the book value was nil - infusion of borrowed funds - Held that - Obvious intention of the assessee in 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 supported by the fact that the assessee within the lock-in period sold shares to the other promoters at high profit despite mounting losses. The assessee was 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. Therefore, merely because the shares were shown as investment in the books, it could not be accepted as investment. Hence, the purpose behind the purchase of shares was to earn quick profit on resale of shares and not for earning dividend income. It is a settled legal position that even a single and isolated transaction can be considered as adventure in the nature of trade. In our 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 profit has to be assessed as business income - Decided in favor of Revenue.
Issues Involved:
1. Nature of income earned from the sale of shares: Whether it should be treated as business income or long-term capital gain. Detailed Analysis: 1. Nature of Income Earned from the Sale of Shares: The main issue in this case is the nature of income earned by the assessee from the sale of shares of M/s. Millennium Alcobev P. Ltd. (MABL). The assessee purchased 30,700 shares of MABL, an unlisted company, for Rs.6,54,28,660/- on 7.5.2003 and sold them in the assessment year 2006-07 for Rs.16,66,60,000/-. The income from the sale of shares was declared as long-term capital gain by the assessee, which was computed at Rs.9,64,26,643/- after indexation. The Assessing Officer (AO) noted that the shares were purchased at Rs.21.30 per share when the book value was almost nil, and the company had accumulated losses. The AO observed that the shares were purchased from borrowed funds and that the main director of the assessee company, who was also a director of MABL, was fully aware of the financial position of MABL. The AO concluded that the transaction was for acquiring a business stake and managing MABL, thus treating the income as business income. The assessee argued that it was an investment company and that the shares were purchased as a strategic investment, not for trading. The shares were classified as "investment" in the balance sheet, and the company was not engaged in any organized activity of purchase and sale of shares. The assessee also contended that the shares were purchased out of share application money received from M/s. Feedback Computers Ltd., not from borrowings. The AO, however, was not satisfied with the explanation, stating that the purchase was made with the intention of making a profit on resale. The AO referred to various judicial precedents, including the Hon'ble Supreme Court's judgment in Dalhousie Investment Trust Co. Ltd. vs. CIT, which emphasized the purpose of purchase in determining the nature of income. The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed with the AO, holding that the intention behind the purchase was to gain controlling power and not for trading in shares. The CIT(A) placed reliance on the judgment of the Hon'ble Supreme Court in Ramnarain Sons (Pr.) Ltd., where it was held that shares purchased for acquiring controlling rights were capital assets, and income from their sale was capital gain. Upon appeal, the Tribunal examined the facts and circumstances of the case, including the financial position of MABL and the conduct of the assessee. The Tribunal noted that MABL had significant accumulated losses, and the shares were purchased at a high price despite the book value being almost nil. The Tribunal concluded that no investor would purchase shares at such a high price from borrowed funds without expecting any dividend income, indicating that the intention was to make a profit on resale. The Tribunal found that the purchase and sale of shares constituted an adventure in the nature of trade and should be assessed as business income. Consequently, the Tribunal set aside the order of the CIT(A) and confirmed the AO's decision to treat the income from the sale of shares as business income. Conclusion:In conclusion, the Tribunal held that the income earned from the sale of shares should be treated as business income, not long-term capital gain, based on the intention behind the purchase, the financial position of MABL, and the conduct of the assessee. The appeal of the revenue was allowed, and the order of the AO was confirmed.
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