1994 (12) TMI 138 - AT - Income Tax

Summary

Issues Involved:
1. Whether the conversion of shares into stock-in-trade by the assessees was genuine.
2. Whether the transactions were a colorable device to avoid capital gains tax.
3. The validity of the affidavits and subsequent transactions related to the shares.

Issue-wise Detailed Analysis:

1. Whether the conversion of shares into stock-in-trade by the assessees was genuine:

The assessees, holding shares in Rajalakshmi Mills Ltd., Lakshmi Mills Co. Ltd., Premier Mills Ltd., and Premier Breweries Ltd. from 1969, claimed to have converted these investments into stock-in-trade on 9-11-1983. This conversion was documented through affidavits filed before the Assessing Officer. Subsequently, the shares were sold to a Private Limited Company, M/s. R. Krishnaswamy Investments (P.) Ltd., on 15-12-1983. The CIT(A) held that the transaction was not sham, noting that R. Krishnaswamy Investments (P.) Ltd. was incorporated on 14-12-1983 with the objective of dealing in shares and had been carrying out regular business in shares. The CIT(A) accepted the affidavits regarding conversion and allowed the assessees' appeals, ruling that there were no capital gains involved due to the conversion of the shares from capital assets to stock-in-trade.

2. Whether the transactions were a colorable device to avoid capital gains tax:

The Assessing Officer, referencing the Supreme Court decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148, concluded that the conversion was a colorable transaction intended solely to avoid capital gains tax. The Departmental Representative argued that the incorporation of Krishnaswamy Investments (P.) Ltd. on 14-12-1983, the preparation of the memorandum on 9-11-1983, and the subsequent affidavits were all orchestrated to avoid tax liabilities. The rapid sequence of events-conversion on 9-11-1983, incorporation on 14-12-1983, and sale on 15-12-1983-indicated a common intention to set up a company for the purpose of transferring shares and avoiding taxes.

3. The validity of the affidavits and subsequent transactions related to the shares:

The affidavits listed the shares held by the assessees and declared their conversion into stock-in-trade. However, the Departmental Representative pointed out discrepancies in the balance sheets of Krishnaswamy Associates and Rajesh Associates, suggesting that the capital accounts were not accurately presented. The significant reduction in capital from Rs. 9,97,150 to Rs. 30,393 for Krishnaswamy Associates and from Rs. 4,99,441 to Rs. 9,299 for Rajesh Associates, within a short period, was not justified by business losses and indicated a lack of genuine business intention. The transactions ceased after the incorporation of the company, and the business in shares was carried on independently by the company, further supporting the argument that the conversion was a device to avoid taxes.

Conclusion:

The Tribunal concluded that the transactions, if not sham, were definitely a colorable device to avoid taxes on long-term capital gains. The affidavits and subsequent transactions were orchestrated to reflect a business setup that did not genuinely exist. Consequently, the Tribunal reversed the orders of the CIT(A) and restored the orders of the Assessing Officer, bringing the capital gains to tax. The appeals by the Revenue were allowed.