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TMI Blog2003 (5) TMI 192X X X X Extracts X X X X X X X X Extracts X X X X ..... in brief, are that the assessee filed its return of income declaring income of Rs. 54,725 on 30th Dec., 1992. The same was processed under s. 143(1)(a) and the returned income was accepted. Later on, the case was taken up for scrutiny. The AO observed that the assessee was dealing in sale and purchase of shares and securities. He further noted that during the year under consideration, the assessee had traded in the sale and purchase of shares of JP Industries, Orkay Silks and had made total sales of the value of Rs. 14,36,500. Besides that, the assessee also earned dividend income and interest income amounting to Rs. 11,80,392 and Rs. 2,86,521, respectively. The AO further noticed that the assessee during the year under consideration entered into an agreement with M/s Pioneer Distributors Ltd. for the sale of 1 lac equity shares of DCM Ltd. with distinctive Nos. 4125098-4205097 = 80,000, 4780489-4795488 = 15,000 and 2658255-2663254 = 5,000. As per the agreement M/s Pioneer Distributors (P) Ltd. had agreed to purchase the aforesaid 1 lac equity shres on spot delivery basis against full payment at a price of Rs. 270 per share and the sale transaction was to be completed on 29th June, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (P) Ltd. for sale of 1 lac equity shares of DCM Ltd. and in that agreement, it was provided that the purchaser shall purchase the share at the price of Rs. 270 per share for a total consideration of Rs. 2.70 crores. In accordance with the agreement, the aforesaid transaction was to be completed on 29th June, 1991 and the purchaser for timely fulfilment of its obligation and also in consideration of the promises to purchase the shares paid a sum of Rs. 20 lacs as the earnest money. In the return filed, the assessee indicated as under: "During the year the company forfeited Rs. 20 lacs being the earnest money received in terms of an agreement to sell some of its investments on account of non-fulfilment of the terms of agreement by other party. This amount has been credited to capital reserve and claimed as capital receipt not liable to tax." It was further stated that the assessee was holding shares of DCM Ltd. numbering 3,59,218 and those shares were held to manage and control the DCM Ltd. It was also stated that the assessee had not carried on the business in shares and, therefore, the amount of Rs. 20 lacs received and forfeited was capital receipt. It was explained that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Supreme Court in the case of Escorts Ltd. vs. Union of India 59 Comp Cas. 548 (SC). The assessee further referred to s. 50 of the IT Act, which provides that an advance/earnest money forfeited would reduce the cost at the time when the asset is finally sold. Accordingly, it was submitted that the transaction in question was capital in nature and not of the revenue nature. In support of this contention, the assessee furnished a copy of agreement with M/s Pioneer Distributors (P) Ltd., Memorandum & Articles of Association, copies of audited accounts and relevant letters, etc. On the basis of the aforesaid documents, it was contended that although the main object of the assessee was to carry on the business as a holding and an investment company but there were many other objects also. The assessee also relied on various judgments viz.,: (1) Imperial Chemical Industries Ltd. vs. ITO (1978) 111 ITR 614 (Cal) (2) Oriental Investment Co. Ltd. vs. CIT (1957) 32 ITR 664 (SC) (3) Ramnarain Sons (P) Ltd. vs. CIT, Bombay (1961) 41 ITR 534 (SC) (4) Rameshwar Prasad Bagla vs. CIT, UP 1973 CTR (SC) 459 : (1973) 87 ITR 421 (SC). The assessee further stated that the receipt of Rs. 20 lacs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 6.1 In view of the above legal position, the learned CIT(A) held that the transaction in question was of capital nature. He further observed that the assessee had filed complete details of investment and those details had clearly shown that the assessee's main intention for purchasing the shares of DCM Ltd. was not that of trading but controlling the company, as such, the shares could not be treated as stock-in-trade for the purpose of trading. He, therefore, held that the amount of Rs. 20 lacs was not a trading receipt and hence was not taxable. He further pointed out that the provisions of s. 51 will come into force at the appropriate time. Accordingly, the addition made by the AO amounting to Rs. 20 lacs was deleted. 7. Now, the Department is in appeal. 8. The learned Departmental Representative while strongly supporting the order of the AO submitted that the main object of the assessee was trading in shares and there was no merit in this contention of the assessee that the shares of DCM Ltd. were acquired to control the management since the holding was only of 6.25 per cent of the total shares of DCM Ltd. He further pointed out that at the time of purchase the price of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2000) 160 CTR (SC) 1 : (2000) 243 ITR 158 (SC). As regards to the observations of the AO that the forfeiture of the earnest money had been treated by the purchaser as trading loss, the learned counsel for the assessee submitted that a claim by purchaser, i.e. M/s Pioneer Distributors (P) Ltd. would not be relevant to determine the character of receipt in the hands of the assessee-company. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Kamal Behari Lal Singha, wherein it has been held that in order to find out whether a receipt is capital receipt or a revenue receipt one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. Accordingly, it was submitted that the nature of payment in the hands of the purchaser was irrelevant as regards to the nature of receipt in the hands of the assessee. The learned counsel for the assessee further pointed out that the purchaser was not connected with the assessee in any manner, so there was no merit in this contention of the learned Departmental Representative that the transaction, in question, was a colourable device. Furthermore, it was stated that it is also no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DCM Ltd. It is also one of the contentions of the assessee that no trading activity was undertaken to dispose of the equity shares of DCM Ltd. which were being held for the purpose of control of DCM Ltd. It is noticed that the AO nowhere pointed out that the assessee had undertaken trading activities in the equity shares of the DCM Ltd. The AO himself admitted that the assessee had traded in the sale and purchase of shares of JP Industries, Orkay Silks, etc. and nowhere it has been brought on record that any trading activity was undertaken by the assessee in respect of equity shares of DCM Ltd. It is true that the shares of a company can be held in two counts, i.e., the shares can be held as an investment which may be treated as asset and also the shares can be held in the shape of stock-in-trade and if any receipt is related to the shares held as an investment, that receipts can be considered as capital in nature while any receipt related to the shares held as stock-in-trade can be treated as revenue in nature. In the present case, it is noticed that the assessee was holding 3,59,418 equity shares of DCM Ltd. from the very beginning and those shares were shown as an investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-holdings should not have been taken into consideration individually but by the group as a whole. In other words, the shares held by the assessee as well as other concerns belonging to the same group can be considered for that purpose. It is not the case of the Department that the major share-holding was not in the hands of the group to which the assessee belonged. We, therefore, do not see any merit in the aforesaid contention of the learned Departmental Representative. In the instant case, it is not disputed at any stage that the assessee was owing a huge amount of debt towards SPF Ltd. and to repay the amount, the assessee decided to dispose of 1 lac shares out of the shares of DCM Ltd. held by it since the yield from the shares was not commensurate in enabling the assessee to repay the amount. In other words, the assessee decided to dispose of the equity shares, which were held by it as an investment, but not stock-in-trade and, therefore, earnest money forfeited by it was a capital in nature. It is also noticed that the assessee filed chart showing details of investments made in shares. On perusing the aforesaid chart, it would be clear that the number of shares of DCM Ltd. h ..... 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