1995 (6) TMI 47 - AT - Income Tax

Bonus Shares, Business Income, Business Loss, Capital Gains, Loss On Sale, Right Shares, Sale Proceeds

Issues Involved:
1. Whether the income/loss arising from the sales of shares could be assessed as business income/loss.
2. Whether the loss shown by the assessees on the sale of shares is fictitious or bogus.

Detailed Analysis:

Issue 1: Assessment of Income/Loss from Sales of Shares

Factual Background:
The assessees declared income from the purchase and sale of shares under 'Capital gains' and dividend income under 'Income from other sources'. The AO found that the assessees' conduct indicated they were not investor companies, and their share transactions were business activities, thus assessable under Section 28 of the Act. The CIT(A) agreed that the transactions were business activities but did not find them fictitious.

Arguments by Assessee:
1. The CIT(A) wrongly considered the assessees' activities as systematic business activities.
2. The purchase and sale of shares and debentures in earlier years were not relevant to the assessment year in question.
3. The assessees did not borrow funds for acquiring the shares in question.
4. The shares were shown as investments in balance sheets and were never treated as stock-in-trade.
5. The predominant object of the assessees was to acquire shares by way of investment.

Tribunal's Findings:
1. The Tribunal found that the acquisition of 1,37,640 shares of Oswal Agro Mills (comprising rights and bonus shares) was by way of investment, not as stock-in-trade. The shares were held intact and distributed upon dissolution.
2. The acquisition of 38,250 shares of Bindal Agro Chem was also by way of investment, purchased directly from the company during a public issue and held until dissolution.
3. The Tribunal agreed that the bonus shares are always on capital account and cannot be considered stock-in-trade unless shown otherwise.
4. The Tribunal concluded that the income from these shares should be assessed under 'Capital gains' and not as business income.

Issue 2: Fictitious or Bogus Losses

Factual Background:
The AO claimed that the losses from share transactions were artificial and sham, aimed at evading taxes. The CIT(A) disagreed, finding the transactions genuine.

Arguments by Revenue:
1. The losses were generated through circuitous transactions with the same entities.
2. The losses were proportionate to the income received, indicating manipulation.
3. The transactions were settled by journal entries without involving brokers.
4. The assessees dealt only in shares of Oswal Agro Mills and Bindal Agro Chem.
5. Huge credits were allowed by Jagatjit Sugar Mills without direct payments.

Arguments by Assessee:
1. There is no legal bar to forming multiple AOPs or dealing with the same person.
2. The shares were registered and dividends were received, indicating genuine transactions.
3. The assessees had substantial capital and did not rely solely on a small capital base.
4. The losses were not deliberately shown to reduce profits; they were genuine business outcomes.

Tribunal's Findings:
1. The Tribunal found the revenue's stance contradictory, as the AO assessed the dividend income from the same shares while claiming the transactions were sham.
2. The Tribunal noted that the shares were registered in the assessees' names and transferred to Jagatjit Sugar Mills, with proper documentation.
3. The Tribunal rejected the claim that the assessees operated with a nominal capital base, noting substantial capital contributions.
4. The Tribunal concluded that the transactions were genuine and upheld the CIT(A)'s findings.

Conclusion:
The Tribunal dismissed the departmental appeals and partly allowed the assessees' appeals. The income from the shares was to be assessed under 'Capital gains,' and the transactions were found to be genuine. The order of the CIT(A) was modified accordingly.

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