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TMI Blog2015 (1) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... obviously such an activity cannot be categorized as ‘business’. It is well understood that no business is carried out with an intention of making a loss, rather the intention is always to make profits. Therefore, by taking an overall view of the facts and circumstances of the present case, we are unable to uphold the stand of the lower authorities that the transaction in the shares of HCL Technologies Ltd. is a business transaction. We hereby set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to re-compute the capital gain/loss on the sale of shares of HCL Technologies Ltd. considering it to be assessable under the 20 head capital gains as per law. Thus, on this aspect assessee succeeds. - ITA No. 764/PN/2012, ITA No. 824/PN/2012 - - - Dated:- 30-1-2015 - G. S. Pannu (Accountant Member) And R. S. Padvekar (Judicial Member) For the Assessee : S. N. Inamdar R. S. Abhyeenkar For the Department : A. K. Modi ORDER G. S. Pannu (Accountant Member) The captioned are cross-appeals, each by the assessee and the Revenue, pertaining to the assessment year 2007-08, which were heard together and are being disposed-off by way of a consol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 16.03.2007, as per intimation to the stock exchanges. The assessee purchased 4,71,517 equity shares of HCL Technologies Ltd. from 28.02.2007 to 13.03.2007 i.e. within a span of two weeks, with an average purchase price of ₹ 622/- per share, which was cum-bonus. Bonus shares were issued by the investee company on 16.03.2007 and accordingly assessee received 4,71,517 bonus shares. Therefore, assessee effected sale of 4,71,500 shares out of the original shares at ex-bonus rates between 15.03.2007 to 28.03.2007 at an average selling rate of ₹ 303/- per share, which resulted in a short term capital loss of ₹ 14,95,84,935/-, which was claimed in the computation of income. In this context also, Assessing Officer concluded that the frequency of purchase and sale carried out by the assessee indicated that assessee was a trader in shares and not an investor. As per the Assessing Officer, the dealings in the shares of HCL Technologies Ltd. indicated a pre-mediated intention to set-off the loss incurred on account of bonus stripping of HCL Technologies Ltd. s shares against the long term capital gain earned on the sale of unlisted equity shares of City Parks Pvt. Ltd.. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. as a business loss at ₹ 39,41,287/-, as against assessee s stand of determining a short term capital loss on sale of such shares at ₹ 14,95,84,935/-. 11. In the above background, assessee is in appeal before us challenging the order of the CIT(A) with respect to the treatment of the transaction of purchase and sale of shares of HCL Technologies Ltd. whereas the Revenue in its cross-appeal is challenging the action of the CIT(A) in treating the gain arising from sale of shares of City Park Pvt. Ltd. as capital gain and not as profits and gains of business. 12. In this background, both the parties have advanced their submissions. First, we shall take-up the appeal of the Revenue, wherein the Grounds of Appeal read as under :- 1) Whether on the facts and in the circumstances of the case, Ld. CIT (A) was justified in holding that the profit on sale of shares of M/s City Parks Pvt. Ltd. as Capital Gain when there was a clear cut adventure in the nature of trade on the part of the assessee. 2) Without prejudice to the above ground, whether on the facts and in the circumstances of the case, Ld. CIT (A) was justified in holding that the capital gain on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares to a passive investor. Of course, the fact that 50% interest in City Park P. Ltd. was held by the Poonawallas, allotment of shares at face value only reflected his defacto and dejure control over the affairs of City Park Pvt. Ltd. d. After having done all the hard work, Dr. Cyrus Poonawalla, gifted the shares in City Park Pvt. Ltd., impregnated with value from development of land in the company, to his son. The fruits of his labor were dropped by the father in the lap of his son. e. Adar Poonawalla was also actively involved in City Park Pvt. Ltd. in as much as he is the controlling shareholder of Apoorva Realtors Pvt. Ltd., co-owned with this father. As mentioned earlier, Apoorva Realtors held 50% interest in City Park Pvt. Ltd. till Dr. Cyrus Poonawalla was also allotted shares. f. The entire company, City Park Pvt. Ltd. along with its 100 acres of developed land with SEZ notification, was sold to Peninsula Land Ltd., thereby encashing the undistributed value and profits from the company. The company, City Park P. Ltd., was sold lock stock and barrel through sale of entire shares for about ₹ 65 crores when the value of land as per books of City Park ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him father (i.e. Cyrus S. Poonawalla) in the preceding year, i.e. on 01.09.2006. The fact-position emerging from the orders of the authorities below reveals that such shares were indeed held by assessee s father as an investment. In such a scenario, especially in the absence of any notable instances of other purchase and sale of shares of City Park Pvt. Ltd. by the assessee during the year under consideration, in our view, the onus was on the Revenue to demonstrate that the sale of shares of City Park Pvt. Ltd. by the assessee was a transaction akin to an adventure in the nature of trade. 17. The CIT(A) has observed that the investee company i.e. City Park Pvt. Ltd. is an unlisted Pvt. Ltd. Company and therefore its shares are not freely marketable or tradable. According to the CIT(A), shares of an unlisted private limited company do not have the basic characteristics of a marketable product, that are associated with the shares of a stock exchange listed company. On this aspect, we find no reason to differ with the observations of the CIT(A). The investee company, City Park Pvt. Ltd. was in the business of dealing in property, development of land, construction of building, deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by the articles of association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. 18. On this aspect, we may also refer to the discussion by the CIT(A) in para 5.1.3 of his order wherein he has referred to the CBDT Circular dated 15.06.2007. As per the CIT(A), following the criteria laid down in the CBDT Circular, the shares in question are to be understood as investment thereby giving rise to capital gain on its sale. The aforesaid finding of the CIT(A) has not been negated by the Revenue before us and is accordingly affirmed. 19. Another aspect raised by the Assessing Officer was that assessee or his father were not merely passive investors in City Park Pvt. Ltd. but were actively involved in the business operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case and we find no reason to interfere with the same. In any case, there is no material to suggest that any colourable device has been adopted by the assessee to avoid tax while carrying on the transaction of sale of shares of City Park Pvt. Ltd. to Peninsula Land Ltd.. 22. In view of the aforesaid discussion, we hereby affirm the order of the CIT(A) holding that the surplus arising on the sale of shares in City Park Pvt. Ltd. is assessable as capital gain and not as profits and gains of business. Thus, on this aspect, Revenue fails. 23. Now, we may take-up the appeal of the assessee which relates to the nature and quantification of loss incurred by the assessee on sale of shares of HCL Technologies Ltd.. 24. To recapitulate, the background of the dispute in assessee s appeal can be summarized as follows. The assessee before us is an individual, who is Executive Director of Serum Institute of India Ltd.. In the period from 28.02.2007 to 13.03.2007, assessee purchased 4,71,517 equity shares of HCL Technologies Ltd. for a total consideration of ₹ 29,36,28,768/- (inclusive of brokerage, etc.). The average purchase price of above purchase was ₹ 622 per share. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnologies Ltd. as stock-in-trade and therefore the loss of ₹ 39,41,287/- treated as a business loss. The CIT(A) has affirmed both the stands of the Assessing Officer, namely, that the transaction in the shares of HCL Technologies Ltd. was a business transaction, and, secondly that the methodology of loss computed by the Assessing Officer was correct. 26. Before us, the Ld. Representative for the assessee vehemently argued that the lower authorities have erred in treating the activity of dealing in the shares of HCL Technologies Ltd. as a business activity. According to the Ld. Representative, assessee was whole-time involved as Executive Director of Serum Institute of India Ltd.; and, that there was neither an organized activity of trading in shares and nor was there any organizational support in this regard. With regard to the profit motive, it has been contended by the Ld. Representative that be it be a business transaction or an investment transaction, profit maximization is an element which is always present. It has also been contended that the lower authorities have erred in confirming that bonus shares received formed part of the stock-in-trade and taking the cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Revenue has reiterated that the magnitude and frequency of the transactions in the HCL Technologies Ltd. shares was quite substantial which reflects that the intention of the assessee was to trade in such shares. With regard to assessee s intention, it was pointed out that at the time of undertaking transactions in HCL Technologies Ltd. shares, assessee was aware that he was considering the sale of shares of City Park Pvt. Ltd., which was to yield him substantial amount of capital gain and therefore he undertook the impugned transaction in shares of HCL Technologies Ltd. in order to incur a loss. According to the Ld. Departmental Representative, it is a common knowledge that share prices come down after the issue of the bonus shares, since the bonus shares are allotted after capitalizing the free reserves of a company. Therefore, assessee bought the shares of HCL Technologies Ltd. on cum bonus basis and after having received the bonus shares, the original shares were sold in the market at the reduced prices. According to the Ld. Departmental Representative, sequence of events clearly indicate that the purchase and sale of shares was undertaken with the sole intention of boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r viewed the whole transaction as a dubious tax planning. In this context, a reference has been made to the judgement of the Hon ble Supreme Court in the case of Walfort Share Stock Brokers (P.) Ltd. (supra). In the case before the Hon ble Supreme Court, assessee purchased mutual fund units on 24.03.2000 and became entitled to dividend on the units @ ₹ 4 per unit and earned a dividend of ₹ 1,82,12,862/-. As a result of the dividend payout the value of the units reduced from ₹ 17.23 to ₹ 13.23 per unit on March 27, 2000, when assessee sold all the units and collected an amount of ₹ 5,90,55,207/- as well as other incentives of ₹ 23,76,778/-. In all, assessee received back ₹ 7,96,44,847/- as against initial payout of ₹ 8,00,00,000/-. In the return of income, assessee claimed dividend of ₹ 1,82,12,862/- as exempt u/s 10(33) of the Act and also claimed a set-off ₹ 2,09,44,793/- as loss incurred on sale of units. The Revenue disallowed the set-off of loss claimed which was negated by the Tribunal and thereafter the Hon ble Supreme Court. As per the Hon ble Supreme Court, it stood established that there was a sale and that asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Finance (No.2) w.e.f. 01.04.2005, and it provides that loss arising on bonus stripping of units is to be ignored after 01.04.2005. The phraseology of section 94(8) of the Act itself reveals that the Parliament in its wisdom restricted the scope of bonus stripping u/s 94(8) of the Act only to the units and did not extend it to the shares while the scope of the dividend stripping contained in section 94(7) of the Act applied both to shares/securities as well as units. Therefore, on the strength of section 94(8) of the Act also and having regard to the parity of reasoning laid down by the Hon ble Supreme Court in the case Walfort Share Stock Brokers (P.) Ltd. (supra), the transactions of purchase and sale of shares of HCL Technologies Ltd. are to be understood as a genuine transaction and are not covered by the provisions of section 94(8) of the Act. 33. Now, with regard to the stand of the assessee that he has acted as an investor and not as a trader while carrying out the aforesaid transaction in the shares of HCL Technologies Ltd.. In this context, the sum and substance of the case made out by the Revenue is that within a short period of time assessee has carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogies Ltd. is substantial. In our considered opinion, in the present case, the nature of the assessee s dealing in shares as an investor stands established in past as well as also in future years. The assessee is full time involved in other activity of being Executive Director of Serum Institute of India Ltd.. There is no material to suggest that any organizational structure or infrastructure is possessed by the assessee to undertake trading in shares as a business activity. There is no material to say that assessee acted as a frequent dealer in shares over an extended period of time. No doubt, for a short spell of time in the months of February and March, assessee has undertaken transactions in the shares of HCL Technologies Ltd.. But the same by itself cannot be categorized as a business activity, as it is not a continuous activity. Moreover, we also find weight in the plea setup by the Ld. Representative before us that if the intention was to incur loss, as canvassed by the Assessing Officer, then obviously such an activity cannot be categorized as business . It is well understood that no business is carried out with an intention of making a loss, rather the intention is always ..... X X X X Extracts X X X X X X X X Extracts X X X X
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