1997 (2) TMI 169 - AT - Income Tax

Assessed Income, Assessing Officer, Assessment Year, Income From Other Sources, Profits And Gains Of Business Or Profession, Purchase And Sale

Summary

Issues Involved:
1. Whether the excess of Rs. 2.52 crores realized on the transfer of shares of HCL Ltd. to Hewlett Packard America is an "adventure in the nature of trade" taxable as "income from business" or "long-term capital gain".
2. Addition of Rs. 1,92,94,012 as notional capital gains due to the alleged "extinguishment" of shares of HCL Ltd. (old).

Issue 1: Nature of Income from Share Transfer
The first issue concerns whether the Rs. 2.52 crores realized on the transfer of shares of HCL Ltd. to Hewlett Packard America is an "adventure in the nature of trade" taxable as "income from business" or "long-term capital gain". The Revenue argued that the transaction was an adventure in the nature of trade, citing the assessee's actions and intentions to earn profit. The Assessing Officer highlighted that the assessee-company surrendered its shares to HCL Ltd., which then sold them to HP Company through M/s. Price Water House at a predetermined price, much higher than the market price. The assessee contended that the shares were held as investments and not for trading, emphasizing that the main reason for holding the shares was for investment and control over HCL Ltd. The Tribunal noted that the shares were consistently shown as investments in the balance sheet, and no sales were made in preceding years. The Tribunal concluded that the transaction did not constitute an adventure in the nature of trade and should be treated under the head "capital gains".

Issue 2: Addition of Rs. 1,92,94,012 as Notional Capital Gains
The second issue pertains to the addition of Rs. 1,92,94,012 made by the Assessing Officer, alleging that there was an "extinguishment" of shares of HCL Ltd. (old), leading to capital gains. The Assessing Officer relied on the judgment of the Hon'ble Gujarat High Court in the case of Kartikey V. Sarabhai v. CIT. The assessee argued that there was no reduction in the face value of the shares and no extinguishment of rights, relying on the judgment of the Hon'ble Supreme Court in the case of CIT v. Vania Silk Mills. The Tribunal found that the various arguments advanced by the assessee were not considered in proper perspective by the lower authorities. The Tribunal set aside the order of the Commissioner of Income-tax (Appeals) and restored the matter to the file of the Assessing Officer for a de novo decision, considering the Tribunal's decision on the first issue and giving a reasonable opportunity to both parties. The Tribunal also directed the Assessing Officer to reconsider the assessee's claim for deduction under section 54-E in light of the decision on the first issue.

Conclusion:
The appeal is partly allowed. The Tribunal concluded that the transaction concerning the transfer of shares should be treated under the head "capital gains" and not as an adventure in the nature of trade. The issue of notional capital gains was remanded back to the Assessing Officer for a fresh decision, considering the Tribunal's findings and providing a reasonable opportunity to both parties. The Assessing Officer was also directed to reconsider the deduction under section 54-E.