ORDER
Mehta, A.M.
1. This appeal is directed against the order passed by the Commissioner of Income-tax (Appeals) raising for our consideration two separate and specific issues which are embedded in the various grounds raised.
2. The first issue raises the question whether the “excess” of Rs. 2.52 crores realised on the transfer of shares of HCL Ltd. (old) to Hewlett Packard America as per the scheme of arrangement between HCL Ltd. (old) and H.P. America is “an adventure in the nature of trade” liable to be taxed as “income from business” as is the case of revenue or under the head “Long term capital gain” as is the claim made by the assessee.
3. Before we deal with the aforesaid issue we find it necessary to refer to certain relevant facts that are noted and discussed in the orders of the tax authorities as follows :-
A company by the name of M/s. H.C.L. Ltd. (existing Co.) was incorporated on 17-4-1986 and was engaged in “the manufacturing, marketing, maintenance and selling of micro and many range of computers, engineering work stations, for computer-aided design, paper copiers, printed, EPABX, PC based telex, computer preference and test and measuring equipments”. On 2-4-1991 it entered into a “joint venture agreement” with H.P. Company (USA), inter alia, for the purpose of combining the respective computer manufacturing, marketing, servicing and sales activities in India of the existing company and H.P. Company. The joint venture agreement contemplated that H.P. Company would participate in the existing company where certain divisions such as computer, CAD/CAM etc. were to be retained whereas certain other divisions such as reprographics, communications, instruments and investments were to be “spun off” to a new company in which the H.P. Company of USA was not to participate.
4. A “new company” by the name of M/s. HCL – HP Ltd. was incorporated on 15-5-1991 with a paid-up capital of Rs. 70 its main objectives being “identical” to those of the “existing company” i.e. HCL Ltd. It was formed for the purpose of taking over certain divisions of the existing HCL Ltd. which did not form part of the joint venture agreement between the “existing company” and H.P. Company of USA.
5. In order to give effect to the joint venture agreement, the matter travelled to the Hon’ble Delhi High Court which was to accord its “approval” to the “Scheme of Arrangement” between the “existing company” i.e. HCL Ltd. and the new company viz. “HCL-HP Ltd.” and their respective share holders. The Hon’ble High Court approved the scheme of arrangement on 26th November, 1991.
6. Under the “Scheme of arrangement” so approved every share-holder of the “existing company” was to be allotted 32 Equity shares of Rs. 10 each as fully paid-up shares in the “new company” for every 100 equity shares of Rs. 10 each fully paid up as held by such member in the “existing company” on a specified date. There was to be reduction in the paid-up capital of the existing company on a specified date to the extent of Rs. 3.20 per equity share of Rs. 10 each. The equity shares of Rs. 6.80 each (reduced) were to be consolidated into equity shares of Rs. 10 each. After the aforesaid reduction and consolidation 26 per cent share-holding of the “existing company” was to be acquired by “H.P. Company USA” from the share-holders for a consideration of Rs. 46.30 crores. Upon coming into effect of the scheme the “existing company” was to change its name from “HCL Limited” to “HCL-Hewlett Packard Limited”. The new company hitherto called HCL-HP Ltd. was to be renamed “HCL Ltd.” The two companies were to file necessary applications to the Registrar of Companies.
7. As far as the present assessee was concerned its share-holding etc. underwent the following changes as noted by the Assessing Officer in the assessment order :-
“The assessee company initially surrendered its holding of 1495639 fully paid up equity shares of HCL Ltd. with face value of Rs. 10 each to M/s. HCL Ltd. These shares then got converted into 478604 (and a fraction) equity shares of HCL-HP Ltd. which is a new company, registered on 15th May’ 91 and 1017034 (and a fraction) equity shares of the existing company namely HCL Ltd. (old). Out of these 1017034 equity shares, 152820 shares were sold to HP Company USA for a consideration of Rs. 2,57,96,016. Consequent upon this sale the assessee company was left with only 864215 equity shares of HCL Ltd. old (the existing company). Later on the names of HCL Ltd. and HCL-HP Ltd. were interchanged and, therefore, the assessee company was left after this change of name with 864215 equity shares of Rs. 10 each (fully paid) of M/s HCL-HP Ltd. and 478604 equity shares of HCL Ltd. of Rs. 10 each (fully paid).”
8. The following further facts were noted by the Assessing Officer :-
(i) The present HCL-HP Ltd. and HCL Ltd. were entirely different from the old HCL Ltd.;
(ii) Assessee company gave its consent to sell its shares of HCL Ltd. to H.P. Company USA in a meeting called by HCL Ltd. in July, 1991; and
(iii) The assessee never had any management control in HCL Ltd. although it owned 14,95,639 equity shares of the erstwhile HCL Ltd. at the beginning of the accounting year.
9. On the basis of the aforesaid facts, the Assessing Officer opined that the excess realised on sale/transfer of shares of HCL Ltd. to the H.P. Company of USA was “an adventure in the nature of trade” and, therefore, taxable under the head “business”. The following observations crystallise the case of revenue :-
“The assessee company has taken sufficient interest to sell their holding of the shares of HCL Ltd. to the HP Company of USA at an attractive price as soon as they got the opportunity. The deed and action of the assessee company reflect their intention to make a sale of these shares with a view to earn profit. This intention to earn profit is an adventure in the nature of trade. It is immaterial whether the company physically converts the investments into stock-in-trade and then sales them to partake the income the character of business income. What is the relevant is the intention behind the actions of the assessee.
One would do well to remember here that the process actual sale of HCL’s shares to H.P. Company USA did not involve the assessee company directly. In fact, the assessee company has participated in the sale only by proxy. The assessee company surrendered their holding of shares of HCL Ltd. to HCL Ltd. which were in turn sold by HCL Ltd. to HP Company through M/s. Price Water House, a firm of Chartered Accountants. The actual price of sale to H.P. Company USA was in fact determined by HCL Ltd. and H.P. Company USA and the assessee had no role to play in it. The cost on brokerage, stamp duty etc. were decided upon and agreed to by HCL Ltd. and HP Company USA and assessee company did not have any sale in the matter. The sale price was also not based on the market price but was actually much higher, being based on a pre-determined, agreed and attracted price between HCL Ltd. and HP Company. The assessee company merely gave their consent for the surrender of their 152820 shares of HCL Ltd. for sale to HP Company primarily to earn huge profits in the bargain.
There is no doubt that the assessee company has been getting dividend on its investments but in this particular transaction of sale of HCL’s shares to HP Company, the assessee company pre-dominantly displayed an adventure in the nature of trade. The reliance is placed on the Hon’ble Supreme Court decision in the following cases :-
(i) Sh. Raja Bahadur, Kamakhya Narayan Singh v. CIT [1970] 77 ITR 253 SC; and
(ii) Dalmia Cement Ltd. v. CIT [1976] 105 ITR 633. (Supreme Court).
Both these decisions affirmed the conclusion that whether a transaction partakes the character of adventure in the nature of trade is actually matter of both law and facts. Even the Supreme Court decision in the case of 160 ITR 67 in the case of H. Holch Larsen, the Supreme Court has stated that this is a question of both law and facts.
In this case the facts as discussed above justified the conclusion that profit earned by the assessee company, sale of HCL’s shares to HP Company is to be taxed correctly as income from business and not as long term capital gain.
The submissions made by the assessee company AR on this issue were carefully examined and analysed. It was submitted by the assessee company that the main reason for holding the shares was for investment and the assessee company did not have any intention for resale but in fact had the intention to retain these investments. But the very actions and deed of the assessee company belied this claim made by the assessee company. It cannot be claimed by the assessee company that it had no intention to make sale. This is borne out by the fact that the assessee company gave its consent for the sale of shares to HP Company USA, it surrendered its holdings of the shares of the old HCL Ltd. to HCL Ltd. (old) at an attracted price. The conversion of the shares of HCL to HP Company USA took place at a price which was much higher to the market value of those shares. The assessee company has submitted that the shares were never kept or converted into stock-in-trade. There need not be physical conversion on paper of shares held as investments into stock-in-trade in the books of account of the assessee but the very fact that the assessees surrendered its holding of shares of HCL Ltd. to the same company to enable the letter to enter into agreement with HP Company of USA and invite its participation shows that the assessee company has not made a distress sale or had not actually nursed these investments over the years and decided to sell it on account of compelling circumstances but the intention to earn a profit from sale of these shares was, most definitely, the motive behind this entire transaction. One must not forget that by giving its consent for surrender of these shares to HCL Ltd. (old), the assessee knew that it would subsequently realise price much higher than the market price of these shares. It is relevant to discuss here the decision of the Hon’ble Supreme Court cited in 160 ITR page 67 in case of CIT v. H. Holck Larsen, the Hon’ble High Court had held that on account of right shares being issued by the company the value of the shares held by the respondent would have depreciated and, therefore, he had compelling circumstances which forced him to make a sale of these shares. Such circumstances are not there is the case of our assessee. The value of these shares held by the assessee has actually increased after all this completed jugglery and the assessee was well aware of the effect of his consent vis-a-vis the value of his holding.
It is, very definitely, therefore, an adventure in the nature of trade that this assessee has indulged in. Therefore, the total proceeds of sale of 152820 enquiry shares of HCL Ltd. (old) sold to HP Company USA totalling Rs. 2,57,96,016 was reduced by the cost of acquisition of Rs. 5,68,725 i.e. Rs. 2,52,27,291 shall be taxed as income from business arising on account of adventure in the nature of trade indulged in by the assessee in this accounting year.”
10. On further appeal the Commissioner of Income-tax (Appeals) confirmed the view expressed by the Assessing Officer and hence the present appeal before the Tribunal. The learned counsel for the assessee argued at length with reference to the material on record and we, at the outset, propose to extract certain factual and legal submissions made to the Commissioner of Income-tax (Appeals) in writing vide communication dated 28-8-1995 as follows :-
“1. The appellant was incorporated with the main object of carrying on the business of manufacture of plastics and plastic products. However, since its inception it did not carry on any business of manufacture and or sale of plastic and plastic products instead it had been engaged in the business as an ‘Investment company’.
2. The aforesaid company which had been incorporated in the year 1977 underwent a constitutional change in the year 1981 when Shri Y.C. Vaidya and his family members acquired the shares of the aforesaid company from then existing share holders and as such being the largest share-holder Shri Y.C. Vaidya became its Director in the year 1981. Shri Y.C. Vaidya thus took over the control and management of the company was also one of the promoter Director of M/s. Hindustan Computers Ltd. which company had been also formed in the year 1977 and therefore in order to retain the control he diversified the shareholding to its associate companies and as such on becoming its Director he also made investment in the acquisition of shares of that company.
From the perusal of the details as given in the Annexure ‘A’, the pattern of acquisition of shares by the appellant company of Hindustan Computers Ltd., shows that in order to hold control and management of Hindustan Computers Ltd. the assessee company being the associate company acquired 2240 shares for an aggregate consideration of Rs. 5,97,543 soon after Shri Y.C. Vaidya and his family members acquired the shares of the company of which Shri Y.C. Vaidya was the promoter Director and thereafter it kept on acquiring shares of the aforesaid company almost in each of the financial year depending on the availability of surplus finances in the years thereafter. It also acquired the share holding of other group companies, namely : (i) Hindustan Instruments Ltd. (HIL) and (ii) Hindustan Reprographics Ltd. (HRL) till 30th June, 1988. The appellant company had thus acquired the shares of Hindustan Computers Ltd., Hindustan Instruments Ltd. (HIL for short) and Hindustan Reprographics Ltd. (HRL for short) for an aggregate value of Rs. 12,60,259.
Subsequently, as a result of a Scheme of amalgamation between Hindustan Computer Ltd. HRL, HIL and Indian Computers Software Network Ltd. a new company was formed as HCL Ltd. (as distinguished from Hindustan Computers Ltd.). The shares held by the assessee company, were converted into the shares of HCL Ltd. and aggregated to 1105458 shares equivalent to the cost value of investment which aggregate to Rs. 12,60,350. It, would therefore, be evident from the annexed charge (Annexure ‘A’) that as at 30th June, 1988, the assessee company had 1105458 shares as its share holdings, acquired by it in the various account years as a part of its investment and further again acquired in the same year 9000 shares for a total consideration of Rs. 1,79,346 as a part of further investment. Perusal of the aforesaid annexure clearly reveals the growth of the shareholdings of the assessee in the aforesaid company over the years. It is submitted the details on record shows that the assessee company had been acquiring shares by way of investment particularly because Shri Y.C. Vaidya, the Director of the appellant company was a promoter share holder of HCL and had interest in the aforesaid company and therefore to have the control over HCL the investments were being made by the appellant company. It is submitted that the assessee never intended to trade in the aforesaid shares and the shares acquired by it were not held by it for the purpose of trading in the said shares, and in fact as would be seen that assessee never sold any such shares. It is submitted that the main consideration for making the investment in the shares of the aforesaid company was thus to retain control over HCL Ltd. and prior to the arrangement of amalgamation of Hindustan Computers Ltd.
It may not be out of place to also state that apart from the aforesaid shareholdings, in the account year ending June, 1988, the assessee company had further acquired 7500 fully paid up equity shares of Gum Products Pvt. Ltd. for a total consideration of Rs. 75,000, 5000 shares of Space Food Products Pvt. Ltd. and thereafter 400 equity shares of Y.P. Associates a Company under the same management and 400 shares of Vaidya Associates another company under the same control. It is thus on record that the appellant company had never been dealing in shares and that it had no intention at any point of time of transacting in the shares and making profit by selling the same.
3. From the details of the shareholding, it would be noticed that as at 31-3-1991, the appellant company had held 1495639 shares of HCL Ltd. being its share holdings as at 31-3-1989 after the conversion of shares and the purchase made by it in the account year ending 31-3-1989 of 381181 shares of the said company for an amount of Rs. 41,26,362 thereafter M/s. H.C.L. Ltd. entered into a joint venture which Hewlett Packard (America) (H.P. in short) in April, 1991. As a result of the aforesaid arrangement, since H.P. America was interested only in three units out of five units it was decided that HCL will be split in the two companies. As a result of such an arrangement the assessee company a shareholder was allotted 68% share in HCL Ltd. and 32% share in a new company so formed as a result of the aforesaid arrangement, known as HCL-Hewlett Packard Ltd.
Further, as a result of the aforesaid arrangement the name of the HCL Ltd. was also changed and it was renamed as HCL-HP Ltd. and as such the assessee became share holder of the aforesaid company instead of HCL Ltd. as was named earlier. Similarly, the new company which thus came into existence, as a result of the said arrangement, was re-named as HCL Ltd. instead of HCL-HP Ltd. This arrangement was duly approved by the Hon’ble Delhi High Court in the scheme of Reconstruction, by its order dated 26-11-1991.
Since the assessee company was holding 1495639 shares it thus was reallotted under the aforesaid arrangement 68% shares numbering 1017034 shares of HCL-HP Ltd. and 478604 being 32% of HCL Ltd. The assessee company out of the said holding was also required to dispose off 152820 shares compulsorily in favour of HP company, America, in view of the Scheme of arrangement duly approved by the Hon’ble Delhi High Court wherein it was provided as under :-
(c) As far as the persons mentioned in Annexure-A to the Scheme are concerned, the shares to be transferred to HP Co. are those indicated in the Annexure-A. As far as rest of the shareholder are concerned, they are bound and liable as a condition of the scheme for the pro-rated transfer of shares out of their holding to HP Co. to the extent of 26%.
By this arrangement as is obvious, assessee was since not directly involved was only required on pro-rata basis to transfer 26% of its holding, since Shri Y.C. Vaidya was the Manager Director of the appellant company he could manage for the transfer of lesser number of shares i.e. 152280 shares as against 264423 shares, which also shows that assessee company was retaining the shares as an investment company and further it had no independent role to play. In fact there was an internal arrangement arrived at between top twenty share holders of HCL Ltd. The aforesaid 152820 shares were thus transferred by the assessee company out of its total holding for a consideration of Rs. 2,57,96,064, which is the subject matter of present dispute in this appeal.
4. The appellant submits that it is an investment company and its main business is to derive income from the investments. In connection with the aforesaid object and to hold control, as a group company over HCL Ltd. of which Shri Y.C. Vaidya was the promoter Director, the appellant company had purchased shares of HCL Ltd. in the various financial years which were duly reflected in the Balance Sheet as “Investment”. No sale was ever made by the assessee company of the said shares. Such shares so acquired always been held as investment and the appellant never held or declared them as ‘stock in trade’. Copy of Balance Sheet for the assessment year 1992-93 and that of earlier years appears at page of the paper book. Since, the shares have always been shown as ‘investment’ and income earned therefrom by way of dividend has also been declared as ‘income from other sources’.
5. It is submitted that the Ld. DCIT has failed to discharge the burden which lay upon her before coming to a conclusion that the transaction as a result of the scheme of arrangement was adventure in the nature of trade. She has based her findings merely surmises. It is submitted that it is not a matter of merely counting the number of facts and circumstances and pro and con and it is important to consider their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determine the character of the transaction. It has to be first seen that as to whether the transaction in dispute was or was not in the line of business of the assessee and whether it was an isolated or a single instance of the business or there was a series of similar transactions. The appellant submits that the Ld. DCIT has failed to point out any of the above circumstances existing in the instant transaction.
6. The findings recorded in the assessment order are contradictory and supports the assessee’s case. The Ld. DCIT at page 6 in last para has recorded a finding which reads as under :-
`One would do well to remember here that the process actual sale of HCL’s shares to HP Company USA did not involve the assessee company directly. In fact, the assessee company has participated in the sale only by proxy. The assessee company surrendered that holding of shares of HCL Ltd. which were in turn sold by HCL Ltd. to HP Company through M/s. Price Water House, a firm of Chartered Accountants. The actual price of sale to HP Company USA was in fact determined by HCL Ltd. and HP Company USA and the assessee had no role to play in it. The cost on brokerage, stamp duty etc. were decided upon and agreed to by HCL Ltd. and HP Company USA and assessee company did not have any sale in the matter. The sale price was also not based on the market price but was actually much higher, being based on a pre-determined, agreed and attracted price between HCL Ltd. and HP Company. The assessee company merely gave their consent for the surrender of their 152820 shares of HCL Ltd. for sale to HP Company primarily to earn huge profits in the bargain.’
A perusal of the aforesaid finding would reveal that the Ld. DCIT has acted contrary to the same while holding that the motive of the assessee company behind this arrangement was primarily to earn huge profits.
7. It is submitted that the assessee company was holding an aggregate of 1495639 shares of HCL Ltd. which after the splitting up in accordance with the scheme of arrangement duly approved by the Hon’ble High Court stood reduced to 864214 shares of old HCL. On the conversion of shares as approved by the Hon’ble High Court, the assessee company had in addition acquired 478604 shares of HCL-HP Ltd. It is apparent from the chart referred to above that the shares numbering 152820 to HP Company USA were out of shares held by the appellant company in the old HCL. It would be incorrect to say that the two companies were entirely different entities. Thus, the finding of the Ld. DCIT that the sale of shares was that of the new company is erroneous and wholly unsustainable.
The Ld. DCIT has further alleged that the assessee company never had any management control in HCL Ltd. even though they owned 1495639 equity shares in the said company. It has further been observed that the assessee company had taken sufficient interest to sell their holdings of the shares to H.P. USA at an attractive price as soon as they get the opportunity. The deed and action of the assessee company reflect their intention to make a sale of the shares with a view to earn profit. The Assessing Officer has concluded that the intention was to earn profit and thus the instant transaction is an adventure in the nature of trade.
As submitted that while observing as above, the Ld. DCIT, in fact, has contradicted herself as would be evident from the findings recorded by her in earlier part of the assessment order and which have also been extracted above. In fact, the transaction pertaining to sale of shares to HP Company USA was as a result of the joint venture agreement between HCL Ltd. and HP Company USA whereby the division pertaining to computer division and allied lines was to be continued with the old company with the HP Company USA participating in the said company to the extent of 26%. It is an admitted fact that the assessee company belonged to the controlling group of share holders of old HCL. The observation of the learned Assessing Officer that the assessee company took sufficient interest to sell their share-holding to HP-USA at an attractive price is therefore without any basis. It has to be appreciated that the total number of shares of old HCL which were transferred to HP USA were of the order of 2070641 out of which only the fraction of shares i.e. 152820 were those belonging to the assessee company. It has therefore to be concluded that there was no interest on the part of the assessee company to earn profit on sale of the shares leading to an adventure in the nature of trade. Rather it would be seen from the chart annexed to the paper book that all along and onwards from the accounting period 30th June, 1984, the assessee company continued to acquire shares in HCL Ltd. and its aggregate holding as on 31st March, 1989 was of 1495639 shares. At no point of time any sale of shares of HCL was conducted by the assessee company. Rather the assessee company kept on acquiring shares in the said company. It has to be noted that all along these shares were reflected in the balance sheets of the assessee company as non-trade quoted investments. From the above conduct of the assessee company, it is absolutely clear that the company treated these shares as investment more so since it belonged to the controlling group of share-holders and it had no intention whatsoever of divesting itself of any of its holdings. It was only as a result of treatment of joint venture agreement that HCL Ltd. agreed to transfer 26% of shares to Hewlett Packard USA and it was only as a result of this joint venture agreement which was approved by the High Court that the sale of shares had taken place. It has been observed by the ld. DCIT that it was immaterial whether the company had converted its investments into stock in trade and then sold them but what was relevant was the intention behind the action of the assessee. As per the facts discussed above, it is clear that the assessee company had no intention of divesting itself of its share holdings. Further, it has to be appreciated that it is only a small part of its holdings that has been sold and that too as a result of the joint venture agreement.”
11. Another fact which needs mention is a remand report dated 18-10-1995 forwarded by the Assessing Officer on the assessee’s written submissions to the Commissioner of Income-tax (Appeals) and a copy of which was provided to the assessee asking it to give a reply thereto. In the remand report the Assessing Officer reiterated her earlier stand at the assessment stage primarily that the shares in question had been disposed of with a view to earn profit which was an adventure in the nature of trade. According to the Assessing Officer “intention” behind the action of the assessee was a relevant factor. Further observations were to the effect that the “assessee company had not made a distress sale or had not actually nursed these investments over the years nor decided to sell it on account of any compelling circumstances………..”. By referring to certain reported decisions the Assessing Officer opined that where direct evidence was absent then surrounding facts and circumstances were required to be taken into account for ascertaining the real “motive”. These were CIT v. H. Holck Larsen [1986] 160 ITR 67/26 Taxman 305 (SC) and Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC).
12. The Assessing Officer also called out the principles for deciding what constituted “an adventure in the nature of trade” from the judgment of the Hon’ble Patna High Court in the case of Eclat Construction (P.) Ltd v. CIT [1988] 172 ITR 84 (Pat.) as follows :-
“1. An adventure in the nature of trade need not be business itself. Any activity akin to business may be taken to be an adventure in the nature of trade;
2. A single transaction may also constitute an adventure in the nature of trade. There need not be regularity or repetitiveness in the activity;
3. Whether a transaction is in the nature of trade and commerce must be decided on the facts and circumstances of each case ?
4. The activity alleged/claimed to be an adventure in the nature of the trade need not be allied to the already existing activity of the assessee; and
5. The activity or the transaction said to be an adventure in the nature of trade must be with the object of earning profit.”
13. The aforesaid submissions of the Assessing Officer were opposed by the assessee in the sense that it was reiterated that the sole purpose of making the initial as also the subsequent purchases of shares of HCL Ltd. was to acquire and maintain control over the management of the said company and not to trade or deal in the shares. Attention was also invited to the fact that the assessee had not been purchasing or selling any other shares. On the question of terming a transaction as an “adventure in the nature of trade” argument primarily was to the effect that the same had to be decided on the basis of facts and circumstances of the case.
14. The decisions relied upon by the Assessing Officer were sought to be distinguished and reliance was placed on :
(i) G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC);
(ii) CIT v. Guest Keen & Nesslefold Ltd. [1978] 115 ITR 205 (Cal.); and
(iii) Raja Bahadur Kamakhaya Narain Singh’s case (supra) (also relied upon by the Assessing Officer).
15. The discussion in the preceding paras sets out the respective case of both the parties, before the Tribunal, but we high-light the following :-
PER ASSESSEE :
(1) The Managing Director of the assessee company was the promoter director of HCL Ltd. and investment was made only for maintaining controlling interest and earning dividends;
(2) No funds were borrowed which a person would normally do when engaging himself as a trader or a businessman;
(3) Shares of the company in question were never sold;
(4) Transfer of shares took place only as a result of the “arrangement” between the parties and the same being approved by the Hon’ble High Court. Further the assessee company had no role to play in the entire transaction and this aspect having been accepted by the Assessing Officer as well;
(5) The assessee had an attractive offer to dispose of 2.64 lakh shares but it divested itself off only 1.52 lakh shares and this was also a small percentage as compared to the total of 14.95 lakhs at the beginning;
(6) That nothing in law precluded an assessee to dispose of at the best available price and earn a profit; and
(7) “Intention” had to be judged at the time of purchase/acquisition and not at the time of sale.
PER REVENUE :
(1) Shri Vaidya was interested in both the companies and was aware of the activities/transactions taking place; and
(2) The assessee company did not sell the shares as required by the arrangement approved by the High Court but sold less. This showed that it had discretion to part with lesser number of shares.
REPLY BY ASSESSEE :
1. No attempt was made by Revenue to tax HCL Ltd. on the transaction; and
2. Assessee was able to prevail upon other share-holders to part with 26 per cent of their shares, but was not interested in disposing of such a percentage but succeeded in giving up a lesser number of shares. Further decision relied upon by the assessee’s counsel were :-
(i) CIT v. Mrs. A Ghosh [1983] 139 ITR 119/[1986] 25 Taxman 81 (Cal.);
(ii) CIT v. Gillanders Arbuthnot & Co & Ltd. [1983] 139 ITR 337/[1982] 8 Taxman 184 (Cal.);
(iii) Ramnarian Sons (P.) Ltd. v. CIT [1961] 41 ITR 534 (SC);
(iv) L. Sohanlal Gupta v. CIT [1958] 33 ITR 786 (All.); and
(v) Atlas Corpn. v. ITO [1996] 57 ITD 139 (Bom.).
16. We have examined the rival submissions and have also perused the orders passed by the tax authorities. The material on record to which our attention was invited during the course of the hearing has also been taken into account along with the decisions cited at the bar.
17. The principles laid down by courts to decide the nature of a transaction whether “adventure in the nature of trade” or otherwise do not require much elucidation on our part as they have been amply discussed while reproducing the arguments of the parties. We need only say that each case has to be decided on its own merits i.e., facts and circumstances and the aspect of “intention” is of utmost importance. Then again, a single transaction can constitute “an adventure in the nature of trade” and it need not be business itself but even an activity akin to business. These are some of the broad principles.
18. Examining the case of the assessee with reference to the aforesaid, the following facts un-challenged by the Revenue emerge :-
(i) The shares in question were reflected as “investment” in the balance-sheet all along and not as “stock-in-trade”;
(ii) Dividend income earned on the shares was returned as “income from other sources” either in their original form or after amalgamation with other companies;
(iii) No sales of the shares had been effected in any of the preceding years till the transfer of 1.52 lakh shares which led to the present controversy;
(iv) The assessee company had not dealt in the purchase and sale of shares of any other companies except some nominal purchases in the previous year ending 30-6-1988 of 4 companies including 2 under the same management;
(v) The transfer of 1.52 lakh shares came about as a result of the joint venture agreement entered into between HCL Ltd. (old) and HP Amercia, subsequently leading to the “Scheme of Arrangement” between the said HCL Ltd. (old) and the newly formed company i.e. “HCL-HP Ltd.” which in turn was approved by the Hon’ble Delhi High Court.
The Assessing Officer in her remand report to the Commissioner of Income-tax (Appeals) stated :-
“The process of actual sale of HCL’s shares to HP Co. of USA did not involve the assessee coy. directly. In fact, the assessee coy. has participated in the sale only by proxy. The assessee coy. surrendered their holding of shares of HCL Ltd. to HCL Ltd. which were, in turn sold by HCL Ltd. to HP Co. through M/s. Price Water House, a firm of CAs. The actual price of sale to HP Co. was in fact determine by HCL Ltd. and HP Co. of USA and the appellant had no role to play in it. The sale price was also not based on the market price but was actually much higher being based on a pre-determined, agreed and attracted price between HCL Ltd. and HP Co.”
(vi) That the transfer of 1.52 lakh shares constituted a small portion of the total share-holding of 14.95 lakh equity shares of HCL Ltd. (old) at the beginning of the accounting year.
19. A combined reading of the aforesaid facts along with others can lead to only one conclusion and that being to the effect that the transaction under consideration does not constitute “an adventure in the nature of trade” since the apparent motive or intention of the assessee company was not to act as a dealer in shares, but to keep intact its share-holding of HCL Ltd. (old) whether in the original form or otherwise. The pattern of acquisition depicted in Annexure “A” (referred to in the order of the Assessing Officer) reveals purchase of the shares on a regular and consistent basis from year to year the sales being totally absent. Then again, as stated by the learned counsel the assessee company did not give up 26 per cent of its share-holding, but a lesser amount and to this is connected his other argument that if profit on a commercial basis was the motive then the percentage stipulated i.e. 26 should have been given up.
20. In our opinion, selling something at a profit is the motive or intention of everyone whether it is as a businessman, as a trader or as a person who does not fall in any of these categories and is some one who is not even remotely connected. But every profit earning activity does not necessarily mean that it is on commercial or business account or an “adventure in the nature of trade” since to prove so the burden lies squarely on the Revenue and which in this case has not been discharged. The Assessing Officer herself has accepted both in the assessment order and subsequently in the remand report that the assessee company was not privy to either the actual sale of shares of HCL Ltd. and nor was it instrumental in determining the sale price which was not the market price but a pre-determined and agreed price between HCL Ltd. and HP Company. The learned counsel in fact stated to the effect that the assessee company had no option, but to give up the shares in question.
21. Under the aforesaid circumstances, we fail to understand as to how the transaction in question can be termed as “an adventure in the nature of trade” and this conclusion we arrive at after keeping mind the principles laid down by the Hon’ble Supreme Court and High Courts in numerous judgments including those relied upon by the assessee’s counsel. In opining so, we have duly considered the decisions relied upon by the Revenue at various stages of the proceedings. In the final analysis, we hold that the transaction in question is to be considered under the head “capital gains” as claimed by the assessee. The Assessing Officer may, however, verify the assessee’s computation while giving effect to our order.
22. The second issue in the appeal pertains to an addition of Rs. 1,92,94,012 made by the Assessing Officer with reference to the transaction discussed in the earlier ground. According to the Assessing Officer, the assessee company had 14,95,639 equity shares of HCL Ltd. (old) at the beginning of the accounting year, but subsequently as a result of the scheme of arrangement approved by the Hon’ble Delhi High Court the assessee was left with 8,64,215 equity shares of HCL-HP Ltd. and 4,78,604 equity shares of HCL Ltd. In other words, 14,95,639/equity shares of old HCL Ltd. were “surrendered” by the company out of which 1,52,820 shares were sold by the erstwhile HCL Ltd. to HP Company USA and the shares of the two other companies which were totally new entities remained. The Assessing Officer, in other words, concluded that there had been an “extinguishment” in respect of the erstwhile HCL Ltd. resulting in capital gains. In opining so the Assessing Officer placed reliance on the judgment of the Hon’ble Gujarat High Court in the case of Kartikey V. Sarabhai v. CIT [1982] 138 ITR 425/8 Taxman 214.
23. The case of the company, on the other hand, was to the effect that the aforesaid decision was not applicable as there had been no reduction in the face value of the shares and there had been no extinguishment of the right to dividend and share distribution. These arguments were, however, rejected by the Assessing Officer, who referred to the judgment of the Hon’ble Delhi High Court in Company Petition No. 122 of 1991 dated 26th November, 1991 pertaining to the approval of the Scheme of Arrangement. Para 13 of the judgment was reproduced in the assessment order and the net result of the whole exercise was to make the impugned addition by adopting the market price on the basis of the “earliest listed value” available with the Delhi Stock Exchange after an effective date” i.e. after 23rd December, 1991. For the shares of HCL-HP Ltd. a figure of Rs. 40 per share was adopted the corresponding figure for share of HCL Ltd. (new) being Rs. 20.
24. Another aspect which requires mention is the claim for deduction under section 54-E in respect of an investment of Rs. 1,30,42,000 made in UTI and IDBI. According to the Assessing Officer the claim for deduction was not allowable in respect of the transfer of 1,52,820 shares of old HCL Ltd. since the transaction had been treated as being on business account and even on the assumption that it resulted in capital gains, the same were short-term and not long-term. The Assessing Officer, however, allowed deduction under section 54-E in respect of the “extinguishment” of the shares of erstwhile HCL Ltd. in a sum of Rs. 1,15,65,462 as against assessee’s claim of Rs. 1,27,54,464 pertaining to the transfer of 1,52,820 shares as a result of the “Scheme of Arrangement”. In the present appeal, the assessee is aggrieved with tile lesser relief allowed to it under section 54-E as also on the main question of subjecting to tax as long-term capital gains a sum of Rs. 1.92 crores. On further appeal, the Commissioner of Income-tax (Appeals) upheld the view taken by the Assessing Officer.
25. We have heared both the parties and have also perused the orders passed by the tax authorities. The material on record, to which our attention was invited during the course of the hearing had also been considered. The learned counsel for the assessee reiterated the arguments advanced before the lower authorities whereas the learned Departmental Representative supported the orders passed by the tax authorities.
26. In our opinion, the issue has to be re-examined firstly in the light of the decision that we have taken on the first issue treating the transaction pertaining to transfer of 1,58,820 shares of old HCL Ltd. as giving rise to capital gains and not income under the head “business”. That apart we find that the various arguments advanced on behalf of the assessee at the earlier stages were not considered in proper perspective as would emerge from the material on record. We would, at the outset, reproduce certain submissions made in writing to the Commissioner of Income-tax (Appeals) vide communication dated 28th August, 1995, as follows :-
“In respect of the second issue pertaining to the notional capital gains of Rs. 1,92,94,012, it is submitted that the ld. DCIT in her order has held that as a result of the aforesaid arrangement, the assessee company was holding 14,95.639 equity shares of HCL Ltd. (old) at the beginning of the accounting year. The assessee company had finally been left with 864215 equity shares of HCL-HP Ltd. and 478604 shares of HCL Ltd. (new) after it had transferred 152820 shares of HCL Ltd. (old) to HP Co. USA which has been held to be a transaction in the nature of ‘adventure in the nature of trade’. She has, therefore, held that the assessee company has surrendered 1495639 equity shares of HCL Ltd. (old) of HCL Ltd. and had in lieu received 864215 shares of HCL-HP Ltd. which is totally a new entity and 478604 equity shares of HCL Ltd. which is also a totally new entity. She, therefore, held that there was extinguishment of shares of the erstwhile HCL Ltd. which has lead to capital gain.
It is submitted that the aforesaid conclusion of the ld. DCIT is factually incorrect. At the first instance, it is submitted that the assessee company, on account of its share holding of 1495639 equity shares, had received 10,17,034 shares of HCL-HP Ltd. and 478604 shares of HCL Ltd. As such there was no occasion to suggest that there was an extinguishment of shares of erst-while HCL Ltd. It is submitted that due to above transition which was as per the scheme of arrangement there is no transfer in law and thus there is no extinguishment of right in shares and for this purpose, the assessee seeks to rely upon the judgment of the Hon’ble Supreme Court in the case of CIT v. Vania Silk Mills [1991] 191 ITR 647. It may be clarified that the appellant company as stated above as at 31-3-1991 held 1495639 shares of then existing HCL Ltd. Further, as a result of the arrangement it retained 1017034 shares in HCL Ltd. As such it is evident that there is no transfer made by the assessee company in the instant year to HCL Ltd. or HCL-HP Ltd. other than 152820 shares which were transferred to HP Co. USA, submissions in respect of which have been made supra. It is, therefore, evident that the ld. DCIT has erred in proceeding to assume that there is a transfer made by the assessee company of 864214 shares of HCL-HP Ltd. (being the difference of 1117034-152820 shares) as mere change in the name of the company does not lead to any gain arising to the company. As such the action of the Ld. DCIT erred in treating the same as extinguishment of shares is highly arbitrary and un-reasonable. Since, there is no transfer as such section 45 is wholly inapplicable. It is thus submitted that the finding of the ld. DCIT that there was extinguishment of right of the assessee in the shares of HCL Ltd. (old) is totally perverse.
So far as the addition of capital gain in respect of shares of HCL Ltd. (new) allotted to the assessee company representing 32% of HCL Ltd. (old) is concerned, the ld. DCIT has erred in assuming that the assessee had made a profit on the receipt of the said shares. In fact, the shares held by the assessee company of HCL (old) aggregating to 1495639 were merely converted into shares of two companies as stated above, and as such where is the justification to say that the assessee’s right in the said company got extinguished resulting into capital gains. Reliance placed by the ld. DCIT upon the judgment of the Hon’ble Gujarat High Court is totally misplaced and there is absolutely no semblance or resemblance of the facts of the two cases. Here too what has happened was that the assessee company received 478604 shares of HCL Ltd. (new) against its holding of the shares of HCL (old) aggregating to 1495639 shares. It is not a case where assessee has received 478604 shares of HCL (new) on transfer of 478604 shares of HCL Ltd. (old) representing 32% of the assessee’s share-holding in HCL Ltd. (old). It is submitted that the transaction has to be viewed as a single transaction and not an isolated transaction.
Apart therefrom, the ld. DCIT has erred in adopting the value for the purposes of determining capital gains by taking the market value of the shares of HCL-HP Ltd. at Rs. 40 per share and of HCL Ltd. (new) at Rs. 20 per share. In fact the last question of HCL Ltd. (old) as on 18-12-1991 was Rs. 69.50 and therefore, if at all there was any alleged gain, then it would be a case of capital loss because the last quotation of the shares of HCL Ltd. (old) was Rs. 69.50 whereas the earliest quotation of the shares of HCL-HP Ltd. was Rs. 40 on 3-2-1992 which was after the date of alleged transfer.
Further, the ld. DCIT has adopted the value of the shares of HCL Ltd. (new) at Rs. 20 which was also the first quotation on 13-2-1992. It may be reiterated that the date of transfer is 28th December, 1991. The market value of the shares of HCL (old) on 18th December, 1991 was Rs. 69.50 whereas the first quotation of the shares of HCL-HP Ltd. was only on 3rd February, 1992. The ld. DCIT instead of accepting the rate of shares on the date of alleged transfer should have adopted the rate of shares nearer to the date of transfer i.e. the rate as on 18-12-1991 instead of adopting the rates on a subsequent date.”
27. Then again, we would refer to the extract of the decision of the Hon’ble Delhi High Court brought out in the assessment order lay the Assessing Officer to come to the conclusion that there had been a reduction in the face value of the shares and which tantamounted to an extinguishment. It is apparent that these were the submissions of the counsel before the Hon’ble Delhi High Court and it would be appropriate to extract para 17 of the judgment which was referred to by the learned counsel before us, as follows :-
“Next, the observation regarding reduction of share capital also is of little consequence. The provisions made in the Scheme of Arrangement clearly show that there is no diminution of liability in respect of unpaid share capital or payment to any share-holder of any paid-up share capital so as to attract the procedure envisaged under section 101(2) of the Act. In the existing company, the shares are fully paid-up and the proposal is one whereby some divisions of the existing company are being spun off into the new company. There is really no reduction in capital as the bifurcation involves both the assets and the liabilities to go with the divisions which are being spun off. The divisions which are to spin off into the new company would discharge these liabilities to the creditors. The creditors of the existing company would become the creditors of the new company and the new company, upon which the assets and liabilities are devolved under the Scheme of Arrangement, is to discharge the liabilities from the assets which are available and represented in the divisions transferred. The cash and bank balances are also partially bifurcated as is evident from the split balance-sheet. It is unnecessary in these circumstance. to make an order directing the existing company to add to its name as the last words thereof the word ‘and reduced’.”
28. Then again, the assessee in the written submissions to the Commissioner of Income-tax (Appeals) categorically urged that on the assumption that there had been an extinguishment then the market price of the shares in question had been erroneously taken and in case the proper figure was adopted then there would be a capital loss. We do not find any adjudication on the aforesaid submissions either in the order of the Assessing Officer or in the order passed by the Commissioner of Income-tax (Appeals). The latter in fact has disposed of the matter in a short and cursory manner without referred to the material on record, to which his attention was invited and without considering the various submissions made at length. The learned counsel, during the course of the hearing also referring to the contradictory stand adopted by the Assessing Officer whereby the transfer of 1,52,820 shares of old HCL Ltd. was treated as a business proposition whereas the same transaction was treated as long term capital gains for purposes of subjecting to tax the sum of R. 1.92 crores. It was stated by the learned counsel before us that the old HCL Ltd. continued with a change in name and with a further reiteration that there had been no act which could lead to the conclusion that there had been an extinguishment. We need only mention that the learned Departmental Representative supported the orders passed by the tax authorities.
29. In view of the discussion in the preceding paras and in the light of the decision which we have taken on the first issue, we set aside the order passed by the Commissioner of Income-tax (Appeals) with reference to the addition of Rs. 1,92,94,012 and restore the matter back to the file of the Assessing Officer for a decision de novo on merits, after giving a reasonable opportunity to both the parties. The grievance of the assessee in respect of the deduction under section 54-E is also disposed of in the sense that the Assessing Officer would be obliged to consider the same once again in the light of our decision in respect of the first issue.
30. In the result, the appeal is partly allowed.