ORDER
SMT. AMMINI, J. M. :
This appeal, filed by the assessee, is against the order of the CIT passed under s. 263 directing the AO to treat the entire profits arising from transfer of shares as business profits and to withdraw the deduction allowed under s. 54E and 45(2) (sic) of the IT Act, 1961.
2. The assessee was one of the founder directors and shareholders of a company called Firebricks & Potteries Pvt. Ltd., which was a family concern consisting of the assessee, her sons and other members of the family, who were also shareholders in the limited company. The only income of the assessee was dividend and remuneration from the company. She was holding 262 shares of face value of which was Rs. 100 each. During the assessment year the assessee had sold 2 lots of shares purchased on 19th June, 1989, on 28th Sept., 1991. The assessee filed a return declaring an income of Rs. 12,24,500 on 21st Sept., 1992. The AO completed the assessment accepting the income returned by the assessee.
3. In exercise of the revisional powers under s. 263 the CIT took action. He noticed that on 29th June, 1989, the assessee had purchased 352 shares more of the same company, from S. Ramakrishna and S. Jayakarishnan, for a consideration of Rs. 3,52,000 at Rs. 1,000 per share. It was noticed that the shares were then sold to R. N. Shetty and others at Rs. 7,051 per share. The profit arising out of the sale of the shares had been declared by the assessee under the head capital gains and exemption under ss. 54E and 45(2) (sic) was claimed. The CIT also noticed that before the purchase of 352 shares on 19th June, 1989, the assessee had entered into an agreement with M/s R. N. Shetty and others, on 9th June, 1989, to sell 2,392 shares. These 2,392 shares included the 352 shares that were to be purchased from Ramakrishna and Jayakrishnan. There was an agreement to this effect on 26th Sept., 1991. After going through the clauses of the agreement, the CIT concluded that the transaction was in the nature of adventure of trade as the share were to be sold at a predetermined price and with the intention to make profit. He also held that the profits arising on the sale of the shares had to be assessed under the head business instead of capital gains as done by the AO.
4. A notice under s. 263 was issued calling upon the assessee to file objections, if any. After considering the objections of the assessee, he held that the assessment is erroneous and prejudicial to the interests of Revenue. He set aside the assessment with a direction to the AO to treat the entire profits arising from the transfer of shares as business profits and also to withdrawn the deduction erroneously allowed under ss. 54E and 45(2) (sic) of the IT Act. The assessee is now in appeal before us against the above finding of the CIT under s. 263.
5. There is a delay of 98 days in the presentation of this appeal before us. The assessee filed an affidavit explaining the reason for the delay and seeking condonation of delay. It is stated that as the order of the CIT did not show any demand but a direction to the AO to redo the assessment, she presumed that she would have to contest only on the receipt of the fresh assessment order. So she did not file any appeal. Subsequently, the AO passed an order dt. 30th March, 1994, holding that the income arising on sale of 352 shares as business income and issued a demand notice for a sum of Rs. 10,43,117. It is stated that due to advanced age and keeping indifferent health and having temperature, she did not consult any chartered accountant for some time. She sent the papers to the CA only on 2nd Aug., 1994, for filing the appeal. Thus the delay occurred. The assessee accordingly prayed for condonation of delay and admission of the appeal.
6. The petition for condonation of delay is opposed by the learned Departmental Representative. According to him, the assessee is not an innocent lady but quite experienced. She has engaged a regular chartered accountant. Hence, the delay should not be condoned and, therefore, the appeal should not be entertained.
7. We have gone through the affidavit filed by the assessee. We have also heard the learned Departmental Representative. Having regard to the old age of the assessee and her indifferent health and other circumstances mentioned in the affidavit, we are satisfied with the reasons given by the assessee for condonation of delay in filing the appeal. Hence, we admit the appeal and proceed to dispose it of on merits.
8. The only question that arises for our consideration is whether the profit on sale of shares can be assessed as capital gains or under the head business income. According to Shri K. P. Kumar, the learned counsel for the assessee, the original assessment order treating the profit as capital gains is not erroneous and prejudicial to the interests of Revenue and the provisions of s. 263 should not have been invoked by the CIT. Hence, the order of the CIT under s. 263, he submitted, treating the profit as business income, is liable to the cancelled. The finding of the CIT in his order under s. 263 is that the profit derived from the sale of shares has to be treated as business income instead of capital gains.
9. On the other hand, the learned Departmental Representative, Shri Arulappa, supported the view of the CIT in treating the profit arising from the sale of the shares as income under the head business.
10. We have heard the rival submissions. The facts are not in dispute. The assessee is a private limited company (sic). The directors are the assessee (who is the mother) and her sons who are six in number. The total number of shares are 3,250 of Rs. 100 each. According to their holdings, they are divided into three groups. Group A, consisting of the assessee and her four sons, is holding 2,392 shares of Rs. 100 each. Out of the above, the assessee alone is holding 262 shares of Rs. 100 each. Group B consists of her son D. Devaraj, who is having 506 shares of Rs. 100 each. He was not on good terms with the assessee, his mother. S. Ramakrishnan and S. Jayakrishnan consist of C group. They are the grandnephews of the assessee. Together these two are holding 352 shares. It is these 352 shares that the assessee purchased at Rs. 1,000 each and sold them, along with her shares of 262, to Shri R. N. Setty and others at the rate of Rs. 7,031. According to the assessee, the business was running at a substantial loss and there were disputes between the members and to put an end to the family dispute, the members consisting of group A decided to sell their shares to a third party with a view to transferring majority control in the company. The transfer was to R. N. Shetty and others and they were insisting for such transfer. But the move to transfer the majority control was opposed by D. Deveraj belonging to the B group. He was threatening to take legal steps to prevent such transfer. Ignoring the threat from B group. A group entered into an agreement with R. N. Shetty and Associates to sell the entire block of 2,392 shares. The buyers were interested only if the shares were transferred to them en block including the shares held by group C numbering 352. An agreement was also entered into between group A and R. N. Shetty & Associates on 9th June, 1989. Group A also undertook to obtain the transfer of shares held by group C also to the buyer directly. One of the preconditions of the agreement of sale of the shares was the obtaining of the permission of the general body meeting of the company in accordance with its articles of association and if such permission was not obtained, the sale could not be put through at all. In the meantime, B group filed a petition in the Court for obtaining stay order against the transfer of shares to a third party. The legality of the proposed general body meeting was also challenged. The Honble High Court of Karnataka granted a stay. Hence, the transfer of shares became impossible. The shareholders consisting of group C were not interested to get involved in the family feuds. They also did not wish to wait till the litigation was sorted out. Moreover, they did not want to be a party to fulfilling the onerous terms and conditions laid down by R. N. Shetty & Associates for acquiring the shares and for the payment of consideration of Rs. 7,031 per shares. It was under the above compelling circumstances that group C offered to sell their shares to the assessee who was the head of the family. Group C did not want to transfer the shares to anybody else other than the assessee. According to the assessee the purchase of the shares from group C did not constitute a trading activity or adventure in the nature of trade. The stay order was vacated in September 1991, after over two years and three months of the agreement to sell. Since considerable time had elapsed, a fresh agreement was executed on 26th Sept., 1991. Thus, it is argued that the purchase of 352 shares from C group by the assessee was to facilitate the idea of better control of the company and to have more than 75 per cent of the holdings to have right of control over the company. There was no intention to make profits at all in the transaction of purchase of shares from group C. There were no other instances of purchase or sale. This is only an isolated sale. There is no activity of trade or adventure in the nature of trade so as to treat the profits on sale of shares as business income. A solitary instance of sale will not make the transaction a trading activity or adventure in the nature of trade. The intention of the assessee was never in indulging in trading activity of buying and selling shares. The assessee never carried on any business. She is an illiterate lady. Shri Kumar, the learned counsel for the assessee, argued that, on the facts and in the circumstances of the case, it has to be held that the profit arising from the sale of shares is a profit from capital gains and not income from business. In support of his case, he relied on the following decisions :
(i) G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC);
(ii) Janki Ram Bahadur Ram vs. CIT (1965) 57 ITR 21 (SC);
(iii) Michael A. Kallivayalil vs. CIT (1976) 102 ITR 202 (Ker);
(iv) CIT vs. H. Holck Larsen (1986) 160 ITR 67 (SC);
(v) CIT vs. Mahavirprasad R. Morarka (1992) 193 ITR 530 (Bom); and
(vi) CIT vs. Principal Officer, Laxmi Surgical Pvt. Ltd. (1993) 202 ITR 601 (Bom).
11. On the other hand, the learned Departmental Representative Shri Arulappa argued that the claim of the assessee that she never intended to indulge in trading activity cannot be accepted. The agreement to purchase of 352 shares from group C was entered into on 19th June, 1989. There is an agreement dt. 9th June, 1989 itself with M/s R. N. Shetty & Associates to sell 2,392 shares including the 352 shares that were to be purchased under the agreement dt. 19th June, 1989. Therefore, he argued that the intention of the assessee in buying and selling the shares was only to make profit and nothing else. The purchase was at the rate of Rs. 1,000 per share whereas the sale was at the rate of Rs. 7,031. If the business was running at a loss, as claimed by the assessee, Shri Arulappa contended that she could have sold her shareholdings rather than purchasing some more shares and selling them. Nowhere in the agreement with M/s R. N. Shetty & Associates that they insisted upon having 75 per cent of the shares in order to have control over the company. On his part, the following decisions were relied upon :
(i) the Kerala High Court decision in the case of Michael A. Kallivayalil (supra);
(ii) the Karnataka High Court decision in the case of CIT vs. R. Ramaiah & Ors. (1984) 146 ITR 39 (Kar) and
(iii) the Supreme Court judgment in the case of CIT vs. H. Holck Larsen (supra).
12. In reply, Shri Kumar contended that the assessee could not have sold the property for that would have resulted in 400 workers squandering on 18 acres of Timblu building. As per the provisions of the Company law one can have control over the company only if he/she has more than 75 per cent shareholdings.
13. From the facts and circumstances narrated above, we hold that there was no intention on the part of the assessee to purchase and sell the shares with an intention of making profits. She is old and illiterate. This is not in dispute. In this case, the shares are held by three groups. The assessee, with her four sons, are in group A. They together hold 2,392 shares. Group B is of Devaraj who is none other than a son of the assessee and he is having 506 shares. He is also hostile to A group. C group is admittedly of the grandnephews of the assessee who were holding 352 shares. The fact that the company was running in loss and A group was intending to sell the shares to R. N. Shetty & Associates and B group was trying to prevent the sale of the shares to R. N. Shetty & Associates is not in dispute. It is also a fact that B group filed a company petition and obtained stay of the transfer of shares to R. N. Shetty & Associates by group A. It is also an admitted fact that the assessee is not running any business. The Revenue has not been able to show any other instance of purchase and sale except the solitary sale of the shares to R. N. Shetty & Associates. For this the assessees reasons are that the business was running at a loss and also there were disputes between the family members. This cannot be brushed aside. There are three agreements in this case. The agreement dt. 9th June, 1989, is between A group and M/s R. N. Shetty & Company, by which the first part (A group) has agreed that Shri S. Ramakrishna and Shri S. Jayakrishna of Madras (C group in this case) are holding 176 shares each in M/s. Firebricks & Potteries Pvt. Ltd. (this is the company referred to by us in the order) and that they will arrange for transfer of the said shares to the parties of the second part (M/s R. N. Shetty & Company). It was also stated that the parties of the second part have agreed to purchase the shares and are desirous of reducing the terms agreed into writing. In pursuance of the foregoing and in consideration of the price agreed, the party of the first part agreed and undertook to obtain transfer of the 352 shares of the face value of Rs. 100 each held by group C in the company in favour of the parties of the second part or their nominees. Subsequently, on 19th June, 1989, the assessee and S. Jayakrishnan entered into an agreement to purchase his share of 176 shares at a face value of Rs. 1,000 each. Similar agreement is also entered into by the assessee with S. Ramakrishnan to sell his share of 176 at the face of Rs. 1,000. In the meantime B group filed company petition and obtained stay and the stay was vacated later. Subsequently, the assessee again executed an agreement on 26th Sept., 1991, with R. N. Shetty and others which witnessed :
“whereas Parties of the First Part are the Shareholders of Firebricks & Potteries (p) Ltd., (hereinafter referred to as the “company”), have entered into an Agreement dt. 9th June, 1989, with M/s R. N. Shetty & Company, M/s. Naveen Hotels Ltd., and Mr. R. N. Sehtty (hereinafter referred to as the agreement holders) agreeing to sell/transfer 2392 shares held by the Parties of the First Part to the Agreement Holders or their nominees at a price of Rs. 7,031 per share”.
As per this agreement the assessee sold the shares. Shri Arulappas argument is that the transaction has to be treated as an adventure in the nature of trade because even before the purchase of shares from Ramakrishna & Jayakrishnan, the agreement between the assessee and R. N. Shetty and others was in existence. But the conditions was that the buyer will purchase the shares from the assessee only if she purchased the shares from Ramakrishna and Jayakrishnan their 352 shares. They were prepared to purchase those 352 shares along with the shares of the assessee. Hence, the argument of the learned Departmental Representative that the agreement to sell the shares belonging to the assessee to R. N. Shetty and others will go to show that the assessee purchased the shares from Ramakrishna and Jayakrishnan with an intention to make profits out of sale cannot be accepted.
14. Now we shall refer to the decisions relied on by Shri Kumar, in support of his contention that the income from sale of the shares by the assessee to M/s R. N. Shetty and others cannot be treated as income from business but only as capital gain.
(a) In the judgment of the Supreme Court reported in 35 ITR 594 (supra), the Supreme Court held :
“If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital creation and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are relevant, such as e.g., whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it; the nature and quantity of the commodity purchased and resold; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable; any act prior to the purchase showing a design or purpose, the incidents associated with the purchase and resale, the similarity of the transaction to operations usually associated with trade or business; the repetition of the transaction; the element of pride of possession. A person may purchase a piece of art, hold if for some time and if a profitable offer is received, sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld that would be a factor against the transaction being in the nature of trade. The presence of all these relevant factors may help the Court to draw an inference that a transaction is in the nature of trade; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.”
Keeping the above observations of the Supreme Court, we proceeded to examine the present case. In this case, the assessee is an old lady. She is only a director of the company. From the facts and circumstances of this case, it is clear that the assessee has purchased 352 shares from her grandnephews, Ramakrishna and Jayakrishnan, only to sell the same along with her shares to R. N. Shetty and others It is true that the assessee was able to set a better value for the shares than what was paid to her grandnephews. But the question is whether it can be said that the assessee has purchased and sold the shares only with the intention to get profits. In our opinion, the fact and circumstances leading to the purchase and sale of the shares, would not suggest that the intention of the assessee was to make a profit out of the transaction.
(b) The next decision relied on on behalf of the assessee is also of the Supreme Court reported at 57 ITR 21 (supra). It is held by their Lordship of the Supreme Court therein :
“On the facts, that the purchase and sale of the property was not an adventure in the nature of trade within the meaning of s. 2(4) and the profit realised therefrom was not taxable under s. 10 of the Indian IT Act, 1922. The facts that the appellant made a profitable bargain when it purchased the property and that it had a desire to sell the property if a favourable offer was forthcoming could not without other circumstances justify an inference that the appellant intended by purchasing the property to start a venture in the nature of trade.
It is for the Revenue to establish that the profit earned in a transaction is within the taxing provisions and is on that account liable to be taxed as income. The nature of the transaction must be determined on a consideration of all the facts and circumstances which are brought on the record of the IT authorities.”
In this case also the Revenue has not brought out any material to show that the profit earned in the transaction of sale of shares to R. N. Shetty and others is within the taxing provision and is also liable to be taxed as income.
(c) The next case law relied on by Shri Kumar is of the Kerala High Court reported in 102 ITR 202 (supra). Their Lordships considered what all factors to be taken into consideration in deciding whether a transaction of purchase and sale amounts to an adventure in the nature of trade. In that case, the assessee had borrowed money for purchasing land. He intended to resale the land at a profit. It was held that that alone would not mean that the transaction was an adventure in the nature of trade. The assessee who bought land was an estate owner who already owned a thousand acres of land and was making his living by managing estates. He never dealt in purchase of land or estates. It was not shown that he had any business or trade. The bulk of the estates purchased had been retained by him. It was held by the Kerala High Court that on the facts and circumstances of the case the Tribunal was not justified in holding that the sale of the land by the assessee represented an adventure in the nature of trade.
(d) This decision is also relied on by the learned Departmental Representative. He distinguished the facts of the case decided by the High Court from the facts of this case. He argued that this decision is also helpful to the Department to hold that the sale of shares, in this case, is in the nature of adventure in trade. But a reading of the judgment as a whole would go to show that it is more in favour of the assessee. Therefore, this decision also strengthens our view that the sale of shares by the assessee, in this case, cannot be held to be an adventure in the nature of trade. Here also the assessee is not a trader and the sale of the shares is a solitary transaction.
(e) The judgment of the Supreme Court reported in (1986) 160 ITR 67 (SC) (supra) is also relied on on behalf of the assessee. It is held therein that the question whether the transactions of sale and purchase of shares were trading transactions or were in the nature of investment was a mixed question of law and fact. Consideration of all relevant facts involves appreciation of all the facts in their proper perspective. If that is not done, it cannot be said that there has been consideration of all relevant factors. The Honble Supreme Court has given the guidelines to decide a question whether a transaction of sale and purchase of shares was a trading transactions or in the nature of investment.
(f) Another decision relied on by Shri Kumar is the one reported in (1992) 193 ITR 530 (Bom) (supra). The decision is by the Bombay High Court. Here also it is held by their Lordships that in all cases in which a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision. Where, however, a receipt is of the nature of income, the burden of proving that it is not taxable, because it falls within an exemption provided by the Act, lies upon the assessee. The mere earning of the surplus or realisation of profits is not equivalent to embarking upon an adventure in the nature of trade. It is also held that it is not sufficient for the Revenue to succeed by merely showing that the transaction was entered into having in mind the possibility of making a profit and, in addition to this aspect of the matter, it must bear the indicia of trade.
The fact of this case are clearly applicable to the facts of the case on hand. The contention of the Department is that the assessee had the intention to sell the shares to R. N. Shetty and others at the time of purchasing the 352 shares from her grandnephews, viz., Ramakrishna and Jayakrishnan. What is to be seen is whether there is any element of profit in order to hold that the profit arising out of the sale of shares is business income. Here, in this transaction, no intention of selling the shares for profit can be attributed to the assessee.
(g) In the decision of the Bombay High Court also relied on on behalf of the assessee reported at (1993) 202 ITR 601 (Bom) (supra), their Lordships observed :
“It is not possible to evolve any legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. If the transaction is in the ordinary line of the assessees business, there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue if he deals in them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough, but, in conjunction with the conduct of the assessee and other circumstances, it may point to the trading character of the transaction.”
Here, the assessee is not a trader. The circumstances leading to purchase of the shares from Ramakrishna and Jayakrishnan and selling them along with the shares held by the assessee would not lead to the conclusion that the intention of the assessee was to trade in shares.
15. The learned Departmental Representative also relied on the decision of the Honble Karnataka High Court reported in (1984) 146 ITR 39 (Kar) (supra). Their Lordships held :
“that the assessees did not sell any land in the condition in which they bought it. They made convenient building sites and sold the same. They did not even dispose of all the sites in one year. They went on selling the sites year after year realising more and more profits. The fact that all the assessees started converting their lands into building sites almost simultaneously in 1967 itself was an indication of their intention to trade in the lands as a venture. They made it commercially more attractive by converting and dividing into plots. Hence, the only inference that could be drawn was that they had no intention to hold the lands as an investment. They dealt with the lands as their stock-in-trade. Therefore, the surplus arising on the sale of the building sites was assessable as business income.”
The facts of the case on hand have no parity with the facts of the reported case. Hence, that decision cannot be relied upon to hold that the transaction, in this case, has to be treated as an adventure in the nature of trade.
16. For the foregoing discussion, we hold that the CIT is not justified in directing the AO to treat the entire profits arising from the transfer of shares as business profit and to withdraw the deductions allowed under ss. 54E and 48(2) of the IT Act, 1961. Therefore, we cancel the order of the CIT passed under s. 263 and restore the original assessment order of the AO.
17. In the result, the appeal filed by the assessee is allowed.