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TMI Blog1995 (6) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... on-taxable under section 47(iv) of the I.T. Act, 1961 as the same was arising out of sale of investment made to its wholly owned subsidiary company M/s. Mahalaxmi Holdings Ltd., were bills etc. raised on Mahalaxmi Holdings Ltd., were handed over to you during the course of hearing. In the light of the above, you would kindly appreciate that whatever is subject to tax, has been offered to you for taxation." The Assessing Officer treated the assessee's transactions in these shares as part of its trading activity. The assessee claimed that it is an investment company and is a promoter of LML Limited and purchased shares of LML Ltd. and sold those shares to its 100% subsidiaries and such transactions were in the capital field. In view of the provisions of section 47(iv), the assessee contended that the transactions should not be regarded as a transfer and no capital gains would arise under section 45 for the purpose of taxation. The Assessing Officer did not dispute the assessee's contention that it is an investment company and did not also dispute the fact that it is the promoter of LML Ltd. but went on to drag the assessee into the various tests laid down by the Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary of the assessee. The learned counsel for the assessee pointed out the shares of LML Ltd. are held by the assessee as investment and not as stock-in-trade. The learned counsel for the assessee further pointed out that these shares purchased by Mahalaxmi Holdings Ltd. have so far not been disposed of. The learned counsel for the assessee pointed out that the tax authorities wholly ignored the fact that under the joint venture agreement with Piaggio of Italy the assessee is not permitted to sell the shares of 15 years except with their permission and only to its wholly owned subsidiaries. Our attention was drawn to pages 10 to 19 of the agreement. The learned counsel for the assessee further pointed out that as a promoter of LML Ltd., the assessee and its wholly owned subsidiaries have given undertakings to Industrial Financial Corporation of India Ltd. in respect of financial facilities extended to LML Ltd. Such undertaking is not to dispose of the shares held by them without their prior approval. Our attention was drawn to the confirmation letter from Industrial Financial Corporation of India Ltd. It was also pointed out, under these Articles, even the Mahalaxmi Holdings Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee are really transactions of business and the shares are held by the assessee as stock-in-trade. Our attention was also drawn to the objects clause of the company, which clearly shows that the assessee is a trader in shares and stocks. Our attention was again drawn to the number of transactions that have taken place in respect of LML shares to hold that the assessee has indulged in trading of LML shares. The learned departmental representative further pointed out that the transactions in LML Ltd. are really adventure in the nature of trade. Reliance was placed on to Bombay High Court decision in CIT v. Principal Officer, Laxmi Surgical (P.) Ltd [1993] 202 ITR 601. The learned departmental representative heavily relied upon the Memorandum of Association and Articles of Association of the company. According to him, these basic documents, which brought the corporate body into existence, clearly indicate that the assessee is a trader or a dealer in shares. 5. We have carefully considered the rival submissions in the light of the material to which our attention was drawn at the time of hearing of the appeal. The assessee is an investment company and there is no doubt i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eets and Profit and Loss Accounts shall, prior to the allotment of shares to PIAGGIO as contemplated in Article VIII and as a condition thereof, not undergo any material change therein. 5. The shareholders of the Indian Companies as mentioned in Exhibits 'A' and 'A1' respectively hereby covenant and agree that they are the current lawful shareholders of the respective companies as aforesaid and have not heretofore transferred, sold or otherwise disposed of or dealt with nor shall they hereafter without the written consent of PIAGGIO, transfer, sell or otherwise dispose of or deal with their said shares in a manner that create any right, title or interest in any third parties in respect of their shares in the respective companies." 5.3 The capital structure in LML Ltd. by the Indian companies and their wholly owned subsidiaries and Piaggio are spelt out in page 10 of the Articles of Joint Venture. Article IX, which deals with the transfer and sale of shares, provides as under : " 9.1 Subject to the provisions of paragraph 9.3 hereunder, for a period of fifteen (15) years from the date hereof : a. each party shall hold and continue to, hold all shares in LML held, directly or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Narain Singh's case wherein it was held that the profit made on sale of shares acquired with the intention of acquiring control over the management and not for dealing in them, would be on capital and not on revenue account. In the facts of this case, the assessee acquired from time to time shares to have a control over the company and to keep such control within the wholly owned subsidiaries by transferring those shares to them. The idea of the assessee was not making profits or in dealing with those shares as a trader. In Ramnarain Sons (P.) Ltd.'s case , the assessee was a dealer in shares and securities and also carried on business as managing agents of other companies. In order to acquire the managing agency of a textile mill, the assessee purchased from Sassoon and Company, who were the managing agents thereof, 1507 shares of the mill at Rs. 2321 per share at a time when the market price of the shares was at Rs. 1,610 per share. Two months later, the assessee sold 400 shares and incurred loss and this loss was claimed as a trading loss. The Supreme Court held that purchase of shares in that company was for acquiring its managing agency and is a transaction on investment acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the subsidiary company, and (b) the subsidiary company is an Indian company; (v) any transfer of a capital asset by a subsidiary company to the holding company, if--- (a) the whole of the share capital of the subsidiary company is held by the holding company, and (b) the holding company is an Indian company; " Further in section 49(i)(iii)(e), the cost of acquisition in such cases of transfer shall be deemed to be the cost for which the previous owner of the property has acquired it. All these provisions are only intended to recognize that the transactions between a holding company and its 100% subsidiary are only in the field of capital. A similar transaction took place in the assessment year 1984-85 wherein the Assessing Officer has accepted the transactions as falling within the capital field and his finding in the assessment order reads as under : " During the year under consideration the company transferred/sold some shares to its wholly subsidiary company and earned substantial profit. This transfer comes within the purview of section 47(iv) and as such the profit earned on this account does not attract tax liability as it does not amount as a transfer." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------- Short term capital loss 27,19,101.00 " ------------------------ The assessee's computation of the above loss is based on the decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia v. CIT[1967] 63 ITR 651. During the year M/s. LML Ltd. came out with their right issue under which the assessee was offered 1,31,013 equity shares for subscription. The aforesaid right entitlement was disposed of for a consideration of Rs. 3,27,532. The assessee took the sale proceeds as full value of consideration and deducted therefrom the diminution in the value of its holding. Such diminution is claimed to be a short term capital loss by placing reliance on : (1) Miss Dhun Dadabhoy Kapadia's case; (2) CIT v. H. Holck Larsen [1986] 160 ITR 67 (SC); and (3) CIT v. K.A. Patch [1971] 81 ITR 413 (Bom.). 6.1 We have heard the parties and perused the details. There is no dispute about the facts and the computation. The only reason why the department has not followed the ratio of the Supreme Court is that, in the case of Miss Dhun Dadabhoy Kapadia, it was the case of an individual and the assessee before us is a corporate body. The case of Miss Dhun Dadabhoy Kapadia wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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