2012 (12) TMI 256 - AT - Income Tax

Sale of Shares - whether Business ( adventure in the nature of trade or business ) or LTCG (as per Assesssee) - sole criterion of abnormal profits cannot lead to conclude that the sale of asset was an adventure in the nature of trade - held that - Assessee is not a dealer in shares and has acquired shares consequent to the re-organization of the business as per the terms approved by the Hon ble Bombay High Court and as the entire group was getting reorganized and foreign investor was acquiring the controlling interest in the part of group business, the shares were sold to M/s Mysore Breweries Ltd. Since the abnormal profit as considered by AO arose in the peculiar circumstances of the case, it cannot be considered that the realization of profit can be considered as adventure in nature of trade. Assessee continued to have its beer business and income from beer business of Rs.6.54 crores was also offered - if assessee s acquisition of shares is not to be accepted then the shares are to be considered as held by the holding company M/s PDPL and in its hands the income would have been capital gain again - principle company i.e. Shaw Wallace Company Ltd, as AO noted that the entire income has to be considered as income of SWCL substantially and in case it was upheld, the order in assessee s case will be modified accordingly - order of the CIT (A)is uphold - held as taxable as LTCG - appeal by Revenue is dismissed.

Summary

Issues Involved:
1. Classification of income from sale of shares: Whether it should be treated as 'Long Term Capital Gain' or 'business income' (adventure in the nature of trade).
2. Admission of fresh evidence by CIT (A) in contravention of Rule 46A without giving an opportunity for cross-examination to the AO.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue in this appeal is whether the income declared by the assessee on the sale of shares should be assessed as Long Term Capital Gain (LTCG) or as business income (adventure in the nature of trade). The assessee, a subsidiary of Primo Distributors Pvt. Ltd. (PDPL), sold shares of Shaw Wallace Breweries Limited (SWBL) to Mysore Breweries Ltd and declared a long-term capital gain of Rs. 187,06,52,136/-. The AO treated the transaction as an adventure in the nature of trade and taxed the entire sale consideration as business income, citing several reasons including the assessee's Memorandum of Association, the lack of consideration paid for acquiring the shares, and the performance-based increase in sale consideration as unusual for an investor.

The CIT (A) rebutted each of the AO's contentions, concluding that the shares were not acquired with a profit motive but were a part of a demerger scheme sanctioned by the High Court. The CIT (A) emphasized that the appellant did not purchase the shares with the motive to earn profit and that the transaction did not constitute an adventure in the nature of trade. The CIT (A) also noted that the reversion of the beer business to PDPL was permissible under the Companies Act and that the appellant maintained regular books of account for the beer business.

The Tribunal agreed with the CIT (A), stating that the assessee is not a dealer in shares and acquired the shares as part of the business reorganization approved by the Bombay High Court. The Tribunal noted that the abnormal profit arose due to the peculiar circumstances of the case and should not be considered as an adventure in the nature of trade. The Tribunal upheld the CIT (A)'s finding that if the shares were held by PDPL, the income would have been capital gain, not business income.

2. Admission of Fresh Evidence:
The second issue raised by the Revenue was that the CIT (A) admitted fresh evidence in contravention of Rule 46A without giving an opportunity for cross-examination to the AO. The Tribunal found no additional evidence being admitted by the CIT (A) and dismissed this ground as it did not arise out of the CIT (A)'s order.

Conclusion:
The Tribunal upheld the CIT (A)'s order, agreeing that the income from the sale of shares should be treated as Long Term Capital Gain and not as business income. The Tribunal dismissed the Revenue's appeal, concluding that the gains realized on the sale of shares were not from an adventure in the nature of trade and that no fresh evidence was admitted by the CIT (A) without giving an opportunity to the AO for cross-examination. The appeal by the Revenue was dismissed.