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TMI Blog2006 (4) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessment stage, the Assessing Officer held that the profit arising to assessee on sale of shares is chargeable as part of the business profits and that includes sale of shares of M/s. Penta Soft Ltd. and M/s. Satyam Computers Ltd. This is against the assessee s claim that the said profit is chargeable to tax as long-term capital gain. The assessee, during the year under consideration, had claimed as having sold bonus shares of these two companies, which were allotted to it in September, 1999. Considering that the assessee held the said bonus shares for the period exceeding 12 months, it had claimed profit arising thereunder on sale of shares as chargeable to tax as long-term capital gains at a concessional rate. Besides this, the assessee had also shown sale of certain other shares that was claimed as short-term investments and, therefore, the profit arising therefrom was shown as short-term capital gains. This claim of the assessee was, however, not accepted by the Assessing Officer who observed that in the preceding accounting year, the assessee had been consistently engaged in the business of acquisition and sale of shares. Further, the holdings of these shares were most ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sisting of its paid-up share capital of Rs. 12,00,200 and reserves and surplus in the nature of share premium received during the first year being financial year 1999-2000 amounting to Rs. 2,88,00,000 as on the last date of the first year being 31-3-2000. The company could not keep this huge fund lying idle and, hence, ventured on the other activity as per Clause 29 of the "Other Objects" of the Company as per its Memorandum of Association, which reads as under : "To carry on the business of an Investment Company and to invest in, and require and hold, sell, buy or otherwise deal in shares, debentures, debenture stocks, bonds, units, obligations and securities issued or guaranteed by Indian or foreign Governments, States, dominions, sovereigns, municipalities, or public authorities or bodies and shares, stocks, debentures, debenture stocks, bonds, obligations and securities issued and guarnteed by any company, corporation, firm or person whether incorporated or established in India or elsewhere." 2.3 Thus the intention of the company, almost after its inception, was to act as an investment company in the line of shares and stocks. This is evident from the conduct of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as held by the Hon ble Supreme Court in the case of Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 . The learned Authorised Representative of the assessee relied on the ratio of Privy Council in the case of CIT v. Khemchand Ramdas [1938] 6 ITR 414 , wherein it was held that once a final assessment has been made, it cannot be reopened except and insofar as provided in the Act. This principle has been approved further in the following cases : ( a ) ITO v. S.K. Habibullah [1962] 44 ITR 809 (SC); ( b ) CIT v. Tribune Trust [1948] 16 ITR 214 (PC); ( c ) Ahmedabad Mfg. Calico Printing Co. Ltd. v. G. Mehta [1963] 48 ITR 154 (SC); and ( d ) Controller of Estate Duty v. N.A. Merchant [1975] 101 ITR 270 (Guj.) affirmed by the Supreme Court. 2.6 According to this principle, the Assessing Officer cannot change his mood and try to reopen a closed state of affairs. In the instant case, therefore, it was stated that once the position of the shares being held in the investment portfolio, which was accepted in the order under section 143(1) of the Act for the assessment year 2000-01, the Assessing Officer cannot try to change the position subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hope of a surge in the market and, ultimately, selling the shares when the declining trend of the price became very prominent, just to avoid further erosion of the values of the shares, distinguishes the character of the assessee-company as an investor rather than as a trader in shares. A trader would have reacted much more sharply and also promptly to a declining trend in the market, it is only investor who goes on cherishing hope for a revival in the market conditions. It was further submitted that the assessee-company chose a particular line of shares viz. , shares of software companies mostly for the purpose of making investments. For a regular dealer in shares, dealing in shares of different types of companies would have been the usual feature. 2.8 It was further pointed out by the learned Authorised Representative of the assessee that the assessee-company even acquired unquoted shares of companies like Dolat Capital Market and Nirpan Securities Limited through private arrangements in the hope of good performance by the companies coupled with the expectation of appreciation in the value of the shares. A regular trader would have hardly touched unquoted share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for his own purpose, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business; in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity." ( v )In the present case, on the authority of this judgment that, although, the assessee-company might have acted as a dealer in respect of the other shares in which it had rather quick acquisition and disposal, at least so far as the shares of Pentafour Software Ltd. and Satyam Computers Ltd. are concerned, it displayed all the characteristics of an investor in the lines as discussed above in detail and since these shares (bonus shares) were held by the assessee-company for seventeen months, the resultant gains arising to the assessee-company on ultimate disposal of these two sets of shares should be considered as long-term capital gains. The assessee-company acquired the shares of the two companies under consideration with the expectation of gaining bonus shares on the original holdings acquired by it, derived the bonus shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e perused the reasoning given in the impugned order and we are of the view that the learned CIT(A) had taken correct decision in the matter." Apart from assessee relied on the ratio laid down in the case of Asstt. CIT v. Kethan Kumar A. Shah [2000] 242 ITR 83 , wherein the Hon ble Kerala High Court observed as under : "that profit on sale of certain shares held by the assessee, a share broker, as personal investment is assessable as capital gains and not as business income when the same were not converted by him into stock-in-trade, in the absence of any material to show that these shares were acquired in the course of the assessee s business." On above line order of authorities below was opposed and Ld. DR supported the order of authorities below. 3. After going through the rival submission and material on record we find that in the present case, the stand of the assessee is that the assessee-company had never worked as a share broker. It is rather a new company and there is no history of the assessee-company being engaged in share dealings. The judgments, cited above, acknowledge the principle that a share broker or a dealer in shares may also have a separate chara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s mentioned in above. However, the assessee possessed considerable amount of funds consist- ing of its paid-up share capital and reserves and surplus of the nature of share premium received during the first year being financial year 1999-2000 as a prudent businessman the assessee ventured on the other activity as per Clause 29 of the "Other Objects" of the Company as per its Memorandum of Association as discussed above. As per the said Clause, the assessee engaged its funds in the line of share and stocks. The assessee held shares of a few selected companies for dividend on the shareholdings and also to have the benefit of appreciation in the values of the shareholdings. 3.3 In the financial year 1999-2000 being the first year of existence of the company, corresponding to the assessment year 2000-01, the assessee-company earned gross income of Rs. 51,28,391.51 by way of profit on sale of investments. The assessee returned total income of Rs. 49,17,003 consisting of mainly short-terms capital gains of Rs. 51,28,392 and business loss of Rs. 1,57,601 being expenses for running the set-up only. The said return showing mostly short-term capital gains was duly accepted by the Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year under consideration. The long-term capital gains had arisen in this year only on the disposal of these bonus shares in January, 2001, i.e., after about seventeen months from the date of acquisition of the original shares. Meanwhile, the assessee-company enjoyed dividend of Rs. 2,92,379 and Rs. 33,717 on the shares of Pentafour Software and Satyam Computers Ltd. respectively. The disposal of shares of these two companies in the current year fetched of Rs. 5.01 crores only as against their market value as on 31-3-2000 of Rs. 13.24 crores. It shown that the assessee-company was not like a trader in shares who watched the fluctuation in market very keenly and catch-hold of the earlier opportunity to dispose of their shares at the time when the prices of the shares reach or are very near the peak. On the other hand, this very fact of keeping the shares for a rather long time in the hope of a surge in the market and, ultimately, selling the shares when the declining trend of the price became very prominent, just to avoid further erosion of the values of the shares, distinguishes the character of the assessee-company as an investor rather than as a trader in shares. A trader ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because the transaction was undertaken with the intention of earning profit because the company had suffered losses in the past but that by itself was not enough to given it the character of stock-in-trade or to bring the transaction within the ambit of an adventure in the nature of trade." 3.8 Similar view was taken by Mumbai Bench of the Tribunal in the cases of Sri Sunder Iyer ( supra ) and in the case of CIT v. Sri Ramdeo Agarwal [IT Appeal No. 4912 (Mum.) of 2001 and also in the case of Kethan Kumar A. Shah ( supra ) as discussed above. It is new Company and there is no history of the assessee-company being engaged in share dealing. The above decision acknowledge the principle that a share broker or a dealer in shares may also have a separate character as an investor in shares. So far as the assessee-company is concerned, it has all along displayed all the characteristics of any investor only as already discussed above elabo-rately. It is not justified on the part of the Department to deviate from earlier to settled portions. There is nothing on record to suggest that the assessee-company had ever indulged in bulk trading in shares or in any speculative activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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