RENATO FINANCE & INVESTMENT P. LTD, MUMBAI v. DCIT 7(2), MUMBAI

ITA NO.: 115/MUM/09 ASSESSMENT YEAR: 2005-06 PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH MUMBAI [CORAM : N V VASUDEVAN JM AND PRAMOD KUMAR AM] ITA NO.: 115/MUM/09 ASSESSMENT YEAR: 2005-06 RENATO FINANCE & INVESTMENTS LIMITED . AP PELLANT PENINSULA SPENTA 2 ND FLOOR MATHURADAS MILL COMPOUND SENAPATI BAPAT MARG LOWER PAREL MUMBAI 400 013 ( PAN : AAACR6511Q) VS. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 7(2) MUMBAI 400 020 .. RESPONDE NT APPEARANCES: S E DASTUR ALONG WITH NIRAJ SHETH FOR THE APPELLANT B SENTHILKUMAR FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL THE ASSESSEE HAS CALLED I NTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 16 TH OCTOBER 2008 IN THE MATTER OF ASSESSMENT UNDER S ECTION 143 (3) OF THE INCOME TAX ACT 1961 FOR THE ASSESS MENT YEAR 2005-06. 2. GRIEVANCES RAISED BY THE ASSESSEE AS SET OUT IN THE MEMORANDUM OF APPEAL ARE AS FOLLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN REJECTING THE CLAIM OF THE APPELLANT FOR EXEMPTION UNDER SECTION 47(V) BY TREATING THE TRANSACTION OF SALE OF SHARES OF L & T AS ADVENTURE IN THE NATURE OF TRADE AND THEREBY TREATING THE PROFIT ON SALE OF SHARES AS BUSINESS INCOME INSTEAD OF CAPITAL GAIN FROM TH E SALE OF CAPITAL ASSET I.E. SHARES. ITA NO.: 115/MUM/09 ASSESSMENT YEAR: 2005-06 PAGE 2 OF 7 2. HE FURTHER ERRED IN CONFIRMING THE ACTION OF THE AO IN TREATING HOLDING OF SHARES AS STOCK IN TRADE AND NOT AN I NVESTMENT AND TRANSACTION OF SALE AND PURCHASE OF SHARES AS ADVE NTURES IN THE NATURE OF TRADE. 3. HE FAILED TO APPRECIATE AND OUGHT TO HAVE HELD T HAT: I. THE TRANSACTION OF SALE OF SHARES OF L&T WAS A SIN GLE ISOLATED TRANSACTION DURING THE YEAR AND THE INVESTMENT IN L &T WAS A STRATEGIC INVESTMENT. II. TRANSFER OF SHARES FALLS WITHIN THE GUIDELINES SPE CIFIED IN THE CIRCULAR NO. 4/ 2007 DATED 15 TH JUNE 2007 ISSUED BY THE CBDT ON TREATMENT OF INVESTMENT IN SHARES. 4. THE APPELLANT THEREFORE PRAYS THAT INVESTMENT IN SHARES BE TREATED AS INVESTMENT IN CAPITAL ASSET AND NOT AS AN ADVENT URE IN THE NATURE OF TRADE. ALSO GAINS FROM SALE OF SUCH SHARES BE TREAT ED AS LONG TERM CAPITAL GAINS WHICH IS EXEMPT UNDER SECTION 47(V) AND NOT AS BUSINESS INCOME. 3. AS ALL THESE GROUNDS OF APPEAL ARE INTERRELATED AND HIGHLIGHT DIFFERENT FACETS OF THE SAME TRANSACTION WE WILL TAKE UP ALL THESE GRO UNDS OF APPEAL TOGETHER. 4. THE ASSESSEE IS AN INVESTMENT COMPANY. WHEN INCO ME TAX RETURN FILED BY THE ASSESSEE WAS SUBJECTED TO SCRUTINY ASSESSMENT IT W AS NOTICED BY THE ASSESSING OFFICER THAT DURING THE RELEVANT PREVIOUS YEAR TH E ASSESSEE HAD SOLD CERTAIN SHARES OF L & T CROSSROADS PVT LTD TO ITS HOLDING COMPANY I.E. PIRAMAL HOLDINGS PVT LTD FOR A CONSIDERATION OF RS 12 00 00 000 AND IN THE PRO CESS EARNED RS 2 52 75 000. THE ASSESSEE HAD CLAIMED THAT THIS GAIN OF RS 2 52 7500 0 WAS LONG TERM CAPITAL GAIN WHICH IN VIEW OF THE PROVISIONS OF SECTION 2(47) A ND IN VIEW OF THE FACT THAT THE SHARES WERE TRANSFERRED TO ITS HOLDING COMPANY WHIC H HELD ALL THE SHARES IN THE ASSESSEE COMPANY WAS EXEMPT FROM TAX IN THE HANDS OF THE ASSESSEE. THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE FOR TWO DIFFERENT REASONS FIRST THAT THE TRANSACTION BETWEEN THE ASSESSEE COMPANY AND PIRAMA L HOLDINGS PVT LTD WAS NOT A TRANSACTION BETWEEN A FULLY OWNED SUBSIDIARY AND HO LDING COMPANY INASMUCH AS NOT ALL THE SHARES OF THE ASSESSEE COMPANY WERE HELD BY PIRAMAL HOLDINGS PVT LTD; AND SECOND- THAT THE PROVISIONS OF SECTION 47 (V) DONOT APPLY TO THE FACTS OF THIS CASE ITA NO.: 115/MUM/09 ASSESSMENT YEAR: 2005-06 PAGE 3 OF 7 INASMUCH AS THE GAINS ON SALE OF SHARES IN L & T CR OSSROADS PVT LTD WERE NOT TAXABLE UNDER THE HEAD CAPITAL GAINS BUT UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS AND PROFESSION. 5. AS REGARDS THE FIRST OBJECTION TAKEN BY THE ASSE SSING OFFICER WE ARE NOT REALLY REQUIRED TO DEAL WITH THIS ASPECT OF THE MATTER IN DETAIL FOR THE REASON THAT THE CIT(A) HAS DECIDED AGAINST THE ASSESSING OFFICER ON THIS ISSUE AND THE ASSESSING OFFICER IS NOT IN APPEAL BEFORE US ON THAT ASPECT O F THE MATTER. IN ANY EVENT TRIBUNALS ORDER IN THE CASE OF ACIT VS PAPILLON IN VESTMENTS PVT LTD (4 SOT 304) BASED ON WHICH THE CIT(A) HAD GRANTED THE RELIEF ON THIS ISSUE AND WHICH WAS NOT FOLLOWED BY THE ASSESSING OFFICER HAS SINCE BEEN A PPROVED BY HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT DATED 28 TH AUGUST 2009. 6. AS REGARDS THE OBJECTION OF THE ASSESSING OFFICE R TO THE EFFECT THAT THE INCOME ON SALE OF L&T SHARES IS IN THE NATURE OF BUSINESS INCOME AND NOT IN THE NATURE OF CAPITAL GAIN THE REASONING ADOPTED BY THE ASSESSIN G OFFICER WAS THIS. THE ASSESSING OFFICER NOTED THAT THE PURCHASE OF THESE SHARES WAS FUNDED BY BORROWINGS FROM PIRAMAL HOLDINGS PVT LTD. HE ALSO NOTED (I) THAT TH E SALE OF SHARES WAS MADE WITHIN A COMPARATIVELY SMALL PERIOD OF EIGHT MONTHS WHEREAS INVESTMENTS ARE GENERALLY MADE FOR LONGER PERIOD OF TIME (II) THAT THE ASSES SEE HAD NO INTENTION OF HOLDING THE SHARES AS EVIDENT FROM BULK PURCHASES OF SHARES OF A SINGLE COMPANY (III) THAT THE ASSESSEE HAD SOLD THE SHARES IN A PERIOD WHEN SHARE PRICES CONTINUED TO RISE AND NO INVESTOR WOULD DO THAT AND (IV) THAT NO ORDINARY P ERSON CAN THINK OF MAKING A HEAVY INVESTMENT IN BULK PURCHASES OF SHARES IN A S INGLE COMPANY UNLESS THERE IS A DEFINITE INSIDE INFORMATION ABOUT WORKING OF THAT C OMPANY. THE ASSESSING OFFICER NOTED THAT EVEN THOUGH THERE IS ONLY ONE TRANSACTIO N OF SALE AND PURCHASE OF SHARES IT IS A WELL SETTLED LEGAL POSITION THAT EVEN A SIN GLE TRANSACTION CAN BE SAID TO BE AN ADVENTURE IN THE NATURE OF TRADE AND TOTALITY OF F ACTS AND CIRCUMSTANCES IS TO BE TAKEN INTO ACCOUNT TO DETERMINE THAT ASPECT OF THE MATTER. HE ALSO OBSERVED THAT IT IS NOT REALLY MATERIAL AS TO HOW THESE SHARES WERE DISCLOSED IN THE BALANCE SHEET BECAUSE AS HELD BY HONBLE SUPREME COURT IN THE CA SE OF KETTLEWEL BULLETIN VS CIT (53 ITR 261) THE NOMENCLATURE GIVEN BY THE ASSESS EE TO SPECIFY THE ITEM IN THE ITA NO.: 115/MUM/09 ASSESSMENT YEAR: 2005-06 PAGE 4 OF 7 BALANCE SHEET WOULD NOT BE FINAL AS TERMED BY THE A SSESSEE WHEN THE FACTS OF THE CASE REFLECTS TO SOME OTHER TRANSACTION AS DISCUSSE D ABOVE. HE ALSO REFERRED TO HONBLE SUPREME COURT JUDGMENTS IN THE CASES OF MCD OWELL & CO LTD VS COMMERCIAL TAX OFFICER VS. COMMERCIAL TAX OFFICER (154 ITR 148 ) AND WORKMEN OF ASSOCIATED RUBBER INDUSTRY LTD VS ASSOCIATED RUBBER INDUSTRY L TD (157 ITR 77) IN SUPPORT OF THE PROPOSITION THAT COLOURABLE DEVICES CANNOT BE P ART OF TAX PLANNING AND THAT IT IS DUTY OF THE COURT IN EVERY CASE WHERE INGENUITY IS EXPENDED TO AVOID TAXING AND WELFARE LEGISLATION TO GET BEHIND THE SMOKE SCREEN AND DISCOVER THE TRUE STATE OF AFFAIRS. WITH THESE DISCUSSIONS THE ASSESSING OFFI CER CONCLUDED THAT THUS THE SHARES HELD BY THE ASSESSEE WERE NOT INVESTMENT BUT SHARES SOLD TO PIRAMAL HOLDINGS PVT LTD WERE ACTUALLY STOCK OF THE ASSESSEE AND T HEREFORE GAINS ON SALE OF THESE SHARES WAS REQUIRED TO BE TREATED AS BUSINESS INCOM E WHICH IS NOT COVERED BY THE SCOPE OF EXEMPTION UNDER SECTION 47(V). AGGRIEVED B Y THE STAND SO TAKEN BY THE ASSESSING OFFICER ASSESSEE CARRIED THE MATTER IN A PPEAL BEFORE THE CIT(A) BUT WITHOUT SUCCESS. WHILE THE CIT(A) DID AGREE WITH T HE ASSESSEE THAT THE CORRECT HOLDING PERIOD WAS NOT EIGHT MONTHS AS WAS NOTED B Y THE ASSESSING OFFICER BUT MORE THAN FOUR YEARS THE CIT(A) HELD THAT THE GAIN S ON SALE OF THESE SHARES WERE TO BE TAXED AS BUSINESS INCOME. HE CAME TO THIS CONCLU SION ON THE BASIS OF HIS FINDING THAT THE ASSESSEE HAD MADE INVESTMENT OF RS 9.47 CR ORES AS AGAINST ITS NET WORTH OF ONLY RS 6.38 LAKHS IN L& T CROSSROADS PVT LTD THA T THIS INVESTMENT WAS MADE OUT OF FUNDS BORROWED FROM ITS HOLDING COMPANY I.E. PIRAMA L HOLDINGS PVT LTD THAT PIRAMAL HOLDINGS PVT LTD WAS ALSO HAVING SUBSTANTIAL HOLDIN GS TO THE TUNE OF RS 12 CRORES IN L&T CROSSROADS LIMITED AND THAT THE ASSESSEE ALON GWITH ITS GROUP COMPANIES WAS ENGAGED IN ACQUIRING CONTROLLING HOLDINGS IN L&T CR OSSROADS LTD AN ACTIVITY IN THE LIGHT OF HONBLE CALCUTTA HIGH COURTS JUDGMENT IN THE CASE OF CIT VS RAJEEVA LOCHAN KANORIA CONSTITUTES A BUSINESS ACTIVITY. THE CIT(A ) HELD THAT ANALYZED VARIOUS JUDICIAL PRECEDENTS TO SUPPORT THE PROPOSITION THAT A PURCHASES MADE WITH A VIEW TO MAKE PROFITS ON SALE WILL CONSTITUTE ADVENTURE IN THE NATURE OF TRADE AND THAT IT IS A COMBINATION OF VARIOUS FACTORS WHICH NEEDS TO BE TA KEN INTO ACCOUNT TO DETERMINE WHETHER THE PURCHASE AND SALES CAN BE HELD TO BE B USINESS IN NATURE. THE CIT(A) WAS OF THE VIEW THAT THE FACTS OF THE PRESENT CASE INDICATE THAT THE PURCHASES WAS MADE TO SELL THE SHARES AT A HIGHER PRICE AND THE REFORE IT WAS A BUSINESS TRANSACTION IN NATURE. THE FACT THAT THE SHARES WER E HELD FOR OVER FOUR YEARS IN THE OPINION OF THE CIT(A) DOES NOT ALTER THE BUSINESS NATURE OF TRANSACTION. IT WAS THUS ITA NO.: 115/MUM/09 ASSESSMENT YEAR: 2005-06 PAGE 5 OF 7 HELD THAT THE GAINS ON SALE OF THE SHARES WERE IN T HE NATURE OF BUSINESS PROFITS AND ACCORDINGLY EXEMPTION UNDER SECTION 47(V) IS NOT A DMISSIBLE TO THE ASSESSEE. THE ASSESSEE IS NOT SATISFIED WITH THE ORDER OF THE CIT (A) AS WELL AND IS IN FURTHER APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE A PPLICABLE LEGAL POSITION. 8. WE HAVE NOTED THAT THE SHARES WHICH WERE HELD BY THE ASSESSEE WERE SHARES IN A PRIVATE LIMITED COMPANY I.E. L&T CROSSROADS PVT LTD WHICH ARE NOT EVEN FREELY TRANSFERABLE. IT IS DIFFICULT TO COMPREHEND AS TO HOW AN ITEM WHICH IS NOT EVEN TRADABLE IN THE OPEN MARKET CAN BE CONSIDERED TO BE PART OF THE STOCK IN TRADE AS THE AUTHORITIES BELOW HAVE PROCEED TO TREAT THE L&T SHARES. AS LEARNED COUNSEL FOR THE ASSESSEE RIGHTLY POINTS ONE CAN BE A TRADER IN THE SHARES ONLY WHEN THE SHARES ARE TRADABLE BUT THEN THE SHARES HELD BY THE ASSE SSEE WERE NOT TRADABLE. AS REGARDS THE USE OF BORROWED FUNDS TO ACQUIRE THE SHARES ON WHICH SO MUCH OF EMPHASIS HAS BEEN PLACED BY THE AUTHORITIES BELOW AS INDEED BY T HE LEARNED DEPARTMENTAL REPRESENTATIVE IT IS IMPORTANT TO BEAR IN MIND THE FACT THAT AS NOTED BY THE ASSESSING OFFICER HIMSELF AS AGAINST A NET WORTH O F 6.38 LAKHS THE ASSESSEE HAD BORROWED RS 9.47 CRORES FROM PIRAMAL HOLDINGS PVT L TD TO ACQUIRE THESE SHARES. BY NO STRETCH OF LOGIC THIS BORROWING COULD BE TREATE D AS A COMMERCIAL BORROWING AS NO LENDER WOULD GRANT LOAN AMOUNTING TO 100% OF INVEST MENT IN SHARES WHEN NET WORTH OF THE BORROWER IS LESS THAN 1% OF THE INVESTMENT I N SHARES. IT IS IMPORTANT TO BEAR IN MIND THE FACT THAT THE BORROWING IS FROM THE HOL DING COMPANY WHICH FULLY OWNS THE ASSESSEE COMPANY AND IT IS THUS MORE OF A MODE OF CAPITAL RATHER THAN A COMMERCIAL BORROWING. NOT ONLY THAT SUCH AN INTRA- GROUP FINANCIAL ARRANGEMENT CANNOT BE EQUATED WITH A COMMERCIAL BORROWING TO AC QUIRE SHARES WHICH MAY HAVE HAD SOME BEARING ON THE QUESTION THAT THE SHARES HA VE NOT BEEN PURCHASED TO SELL FOR PROFIT THE USE OF BORROWED FUNDS PER SE CANNOT BE A DECISIVE FACTOR TO COME TO THE CONCLUSION THAT SHARES WERE NOT ACQUIRED AS INV ESTMENTS. LEARNED DEPARTMENTAL REPRESENTATIVES RELIANCE ON DECISION OF A COORDINATE BENCH IN THE CASE OF NEERJA BIRLA VS ACIT (66 ITD 148) IS NOT OF MUCH RELEVANCE AS THIS DECISION ITA NO.: 115/MUM/09 ASSESSMENT YEAR: 2005-06 PAGE 6 OF 7 ITSELF INTER ALIA STATES THAT WE ARE NOT HOLDIN G THAT BORROWED FUNDS ALWAYS AND NECESSARILY INDICATE A TRADING TRANSACTION. OUR FIN DING IS BASED UPON A CONSIDERATION OF THE CUMULATIVE EFFECT OF THE FACTO RS PREVAILING IN THIS CASE. THE SHARES SOLD BY THE ASSESSEE WERE OF A PRIVATE COMP ANY WHICH ARE NOT TRADABLE IN THE MARKET THE PERIOD OF HOLDING THESE SHARES WAS ALMO ST FOUR YEARS THIS WAS THE ONLY TRANSACTION IN SHARES THAT THE ASSESSEE WAS INVOLVE D IN AND THE TRANSFER OF SHARES WAS ONLY TO THE HOLDING COMPANY WHICH OWNS THE ASS ESSEE COMPANY ANYWAY. ON THESE FACTS AND ON THE ENTIRETY OF THIS CASE WE ARE UNABLE TO SEE ANY LEGALLY SUSTAINABLE MERITS IN CIT(A)S CONCLUSION THAT THE ASSESSEE WAS ENGAGED IN BUSINESS OF TRADING IN SHARES. IN ANY EVENT WHEN EVEN SOLIT ARY TRANSACTION IS WITH A HOLDING COMPANY WHICH FULLY OWNS THE ASSESSEE COMPANY IT IS WHOLLY DEVOID OF ANY RATIONALE TO SUGGEST THAT THE ASSESSEE WAS ENGAGED IN AN ADVENTURE IN THE NATURE OF TRADE. 9. AS REGARDS REVENUES RELIANCE ON HONBLE CALCUTT A HIGH COURTS JUDGMENT IN THE CASE OF RAJEEV LOCHAN KANORIA (SUPRA) THERE WAS NO DISPUTE IN THIS CASE THAT THE SHARES ACQUIRED BY THE ASSESSEE WERE CAPITAL ASSETS I.E. INVESTMENTS IN NATURE BUT THE QUESTION WAS WHETHER DEDUCTION UNDER SECTION 36 (1)(III) IN RESPECT OF BORROWINGS TO ACQUIRE THOSE SHARES WILL BE ADMISSIB LE SINCE THE INVESTMENT IN SHARES WAS CLEARLY CONNECTED WITH BUSINESS OPERATIO NS OF THE ASSESSEE. AFFIRMING THE ORDER OF THE TRIBUNAL THEIR LORDSHIPS NOTED TH AT THERE IS NO DISPUTE THAT IN THIS CASE COMPUTATION OF INCOME UNDER SECTION 28 HA S TAKEN PLACE IN THE ASSESSMENT ORDER AND THAT THERE IS NOTHING IN SEC TION 36(1)( III ) WHICH JUSTIFIES DISALLOWANCE OF INTEREST ON CAPITAL BORROWED FOR TH E PURPOSE OF BUSINESS FROM THE BUSINESS INCOME OF THE ASSESSEE ASSESSED BY THE ASS ESSING OFFICER. WE ARE UNABLE TO SEE AS TO HOW DOES THIS CASE SUPPORT THE STAND O F THE REVENUE. QUITE TO THE CONTRARY IN THE CASE OF RAMANARAIN & SONS PVT LTD VS CIT ( 41 ITR 534) HONBLE SUPREME COURT HAS HELD THAT THE GAINS ON SALE OF SH ARES WHICH WERE PURCHASED TO FACILITATE ACQUISITION OF MANAGING AGENCY WAS TAXA BLE AS CAPITAL GAINS AND NOT AS BUSINESS PROFITS EVEN THOUGH THE ASSESSEE HAPPENED TO BE TRADING IN SHARES AS WELL. IT IS THUS CLEAR THAT EVEN IF AN INVESTMENT ARE MADE FOR ACQUIRING CONTROLLING SHARES IT CANNOT BE TREATED AS STOCK IN TRADE. ITA NO.: 115/MUM/09 ASSESSMENT YEAR: 2005-06 PAGE 7 OF 7 10. IN VIEW OF THE ABOVE DISCUSSIONS AS ALSO BEARI NG IN MIND ENTIRETY OF THE CASE WE ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN HOLDING THAT THE GAINS ON SALE OF SHARES BY THE AS SESSEE TO ITS HOLDING COMPANY ARE TO BE TREATED AS BUSINESS INCOME. THAT IS THE ON LY REASON BECAUSE OF WHICH CIT(A) UPHELD DENIAL OF EXEMPTION UNDER SECTION 47(V). TO THIS EXTENT WE DISAPPROVE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICE R TO GRANT THE RELIEF ACCORDINGLY. 11. IN THE RESULT THE APPEAL IS ALLOWED IN THE TER MS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 19 TH DAY OF JANUARY 2011. SD/- SD/- (N V VASUDEVAN) (P RAMOD KUMAR) JUDICIAL MEMBER ACC OUNTANT MEMBER MUMBAI; 19 TH DAY OF JANUARY 2011. COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER - MUMBAI 4. COMMISSIONER (APPEALS) MUMBAI 5. DEPARTMENTAL REPRESENTATIVE BENCH MUMBAI 6. GUARD FILE TRUE COPY BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI