Ita/580/2013 Of Commissioner Of Income Tax -Iii v. Sri.vikram Vishwanath

(R IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THR 30 DAY OF JULY, 2014 PRESENT THE HON’BLE MR.JUSTICE N KUMAR AND THE HON’BLE MR.JUSTICE B MANOHAR LT.A. NO.580 OF 2013 BETWEEN: 1.)COMMISSIONBR OF INCOME TAX — IIIBANGALORE.BANGALORE. iaTHR JOINT COMMISSIONEROF INCOME TAX (OSD)OF INCOME TAX (OSD) CIRCLE-12(5), BANGALORE .. APPELLANTS (BY SRI E R INDRAKUMAR, SENIOR COUNSEL FORSRI E I SANMATHI, ADVOCATE) AND: SRI.VIKRAM VISHWANATH805, 12 MAIN, II] BLOCKNKRAR RAMA TKEMPL KORAMANGALABANGALORE — 560 034 RBSPONDENT (BY SRI MS SYALI, SENIOR COUNSEL FOR,SRI S PARTHASARATHI, ADVOCATE)SRI S PARTHASARATHI, ADVOCATE) THIS INCOMB TAX APPKAL [IS FILED UNDERSECTION 260-A OF INCOME TAX ACT, 1961, AGAINST THE|ORDERDATEHD14.06.2013|PASSEDINITA|NO.194/BANG/2013 FOR THE ASSESSMENT YEAR 2009-10 AND TO SBT ASIDE THR APPBKELLATK ORDER DATE14.06.2013 PASSED IN ITA NO.154/BANG/2013 FOR THE)ASSESSMENT YERBAR 2009-10 BY THR INCOME TAAPPELLATE TRIBUNAL, 'B' BENCH, BANGALORE. THIS INCOMB TAX APPEAL COMING ON FOR.ADMISSION THIS DAY,N.AUMAR, JDELIVERED THERRKROLLOWING JU DBGMENT The revenue has preferred this appeal against the|order passed by the Tribunal holding that the transfer of thecapital asset of the sole proprietary concern of the assesseeto a Company is by way of succession, in view of theprovisions of Section 47(xiv) of the Income Tax Act, 1961, (forshort, ‘the Act’) and therefore, any capital gain arising from|such transfer cannot be brought to tax. FACTUAL MATRIX 2 |The assessee is an individual. M/s.Vikram Logistic|and Maritime Services Private Limited (for short, “VLMS’) wasincorporated in the year 1992 by the assessee’s father, Mr.C.Vishwanatha Iyer. The main object of the Companywas transportation and logistic services. The Company washandling agent for Container Corporation of India, a publicsector undertaking. The Company had offices at Whitefieldin Bangalore, Thandayarpet and Madras Harbour inChennai, besides offices in Coimbatore and other places. 3. CThe family members of the assessee held shares in the|said Company. There was a division of business between themembers of the family. In that family arrangement, all theshares in VLMS was transferred to the assessee with effect|from 7.4.2001, except 10 shares held by RajalakshmiVishwanath. The assessee thereafter invested funds into thebusiness and in turn, VLMS issued additional shares to theassessee. 29,800 shares were allotted on 30.33.2003,2,49,950 shares were allotted on 31.38.2003 and 1,99,960shares were allotted on 27.3.2004. 4 4Funds were also infused into the business of VLMS by| a foreign investor by name Xanfiretic Holding CompanyLimited and in turn, 2,46,300 shares of Rs.100/- per sharewere issued at a premium of Rs.3,1/73/- per share andallotted by VLMS to the foreign investor. After suchallotment, the assessee held 4,99,900 shares of Rs.100/-each. 5.On 206.3.2009, shares of Rs.100/- were sub-dividedinto shares of Rs.10/- each. Thereafter, bonus shares wereissued on the very same day. After the issue of 4,99,900bonus shares, total share holding of the assessee in VLMSwas 9,99,98,000. 6.|On 22.6.2007, a Company by name Anuradha|Holdings Private Limited (for short, ‘AHPL’) was incorporated.The assessee and his mother, Mrs.Rajalakshmi VishwanathIyer were the subscribers to the Memorandum of Association and Articles of Association of AHPL. The main object ofAHPL was to acquire, establish or promote companies,render advice and services for project development. Apartfrom the above main object, one of the object of AHPL was totake over proprietary business investment and assets of theaSSECSSCEC, 5.On 206.3.2009, shares of Rs.100/- were sub-dividedinto shares of Rs.10/- each. Thereafter, bonus shares wereissued on the very same day. After the issue of 4,99,900bonus shares, total share holding of the assessee in VLMSwas 9,99,98,000. 6.|On 22.6.2007, a Company by name Anuradha|Holdings Private Limited (for short, ‘AHPL’) was incorporated.The assessee and his mother, Mrs.Rajalakshmi VishwanathIyer were the subscribers to the Memorandum of Association and Articles of Association of AHPL. The main object ofAHPL was to acquire, establish or promote companies,render advice and services for project development. Apartfrom the above main object, one of the object of AHPL was totake over proprietary business investment and assets of theaSSECSSCEC, [.On 27.3.2009, an agreement for take over of the)proprietary business of the assessee by AHPL was enteredinto. The agreement also narrates as to how the assesseehas acquired certain commercial assets with an intention ofachieving his business objective to be owned in hisproprietary capacity. The agreement further refers to thefact that AHPL was formed only for the purpose otfcorporatising the business activities of the assessee. Theagreement concludes with a view to give effect to the aboveintention and the assessee transferring all the business andbusiness assets and liabilities of the assessee. The assessee 6 has given a schedule of movable assets less Habilities whichwere being taken over by AHPL. 8S.Clause-2 of the take over agreement provides that the|Assignee pursuant to the take over of assignor proprietarybusiness concern and in discharge of the lability and infulfillment of Section 47(xiv) of the Act, agrees to allot 2 lakhequitysharesotRs.100/-|eachaT|apremiumotRs.16,895.44079 per equity share as consideration to theAssignor for the complete take over of the business assetsand liabilities. QOThe perusal of the balance sheet of the assessee as on)31.33.2008 shows that all the assets and liabilities referred toin the schedule was taken over except other advances andliabilities mentioned in the last two items. The said twoitems are stated to be advances given and liabilities incurred wa between 1.4.2008 till 27.3.2009, the date of agreement fortakeover of the buSiness.| 10..The assessee filed return of income for the assessment.year 2009-10 in which he claimed that there was capital gainon transfer of 9,99,98,000 shares held by him in VLMS toAHPL under the takeover agreement and the same was notchargeable to tax in view of the provisions of Section 47(xiv)of the Act. In respect of the other assets that were subjectmatter of the takeover, there was no capital gain becausethey were all advances paid which had to be taken over onthe basis of actual payment. 11.)The Assessing Authority after getting explanations|from the assessee, rejected the contentions of the assessee,holding that the assessee did not conduct any business as aproprietor and did not own any assets and liabilities, exceptthe shares in the two Companies. Hence, there was only 8 transfer of shares held by the assessee in VLMS to AHPL.There was no real transfer of assets and liabilities of thebusiness. By a mere transfer of shares held by him in oneCompany to another Company, the assessee has attemptedto give a colour of those transactions that are not regardedas transter within the ambit ot Section 47 oft the Act. Theassessee has not satisfied any of the criteria mentioned inClause-xiv of Section 47 of the Act. Therefore, the AssessingAuthority held that the assessee is not entitled to claimexemption under Section 47(xiv) of the Act and the saleconsideration is to be taxed as capital gains under Section45 of the Act. Accordingly, a sum of Rs.3,26,/71,17,906/-was determined as long-term capital gains. 12.The Commissioner of Income Tax (Appeals) has!alfirmed the said finding and dismissed the appeal. Asagainstthesaidorder,theaSSeSSeCepreferred L.T.A.No.154/Bang/2013 before the Tribunal. OQ 12.The Commissioner of Income Tax (Appeals) has!alfirmed the said finding and dismissed the appeal. Asagainstthesaidorder,theaSSeSSeCepreferred L.T.A.No.154/Bang/2013 before the Tribunal. OQ 13.The Tribunal, on consideration of the entire materialon record and after noticing the stand of the revenue, heldthat the assessee was in the business of holding ofinvestments. This is not a case where the assessee satisfiedhimself with merely making an investment and looking forthe dividend. Therefore, there was a business activity in thematter of holding of investments carried on by the assessee.One of the objective for which AHPL was incorporated was totakeover proprietary business investment and assets of theassessee. The purpose behind the provisions of Section47(xiv) of the Act is to encourage running business in anorganised form, viz. as limited lability company rather thanin the form of partnership or sole proprietary concern. Suchconversion either of a firm into a company or a proprietaryconcern into a company are encouraged and assetstransferred pursuant to such conversion are not regarded astransfer giving raise to tax on capital gains. The approachthat needs to be adopted is to assess the business realitiesand appreciate the inputs of the man behind the veil. As early as June 2007, when AHPL was incorporated, theassessee believed that he was in the business of holding ofinvestments and that this business had to be corporatised.The assessee had conceived a business model of convertinghis business of holding investments in shares of VLMS toAHPL as early as 2007, when AHPL was incorporated.Transfer of shares of VLMS by the assessee took place inJune 2009. It cannot be said that the plea of the assessee isan aitterthought. Contemporaneous documents clearlyindicate the intention of the assessee of having indulged inthe business of holding shares of VLMS as proprietor. Theassessee corporatised his business of holding investments(shares) in VLMS by transferring the same to AHPL in whichhe held virtually all the shares. Therefore, the Tribunal wasof the view that the claim of the assessee regardingapplicability of the provisions of Section 47 (xiv) of the Actshould be accepted as it would advance the purpose behindthose provisions. Therefore, the Tribunal upheld the claim otfthe assessee that there was a succession to the sole proprietary concern of the assessee by a Company as aresult of which, the sole proprietary concern sold capitalassets or intangible asset to a company and therefore, thetransfer by way of succession was not a transfer in view ofthe provisions of Section 47/(xiv) of the Act and therefore,capital gain arising from such transfer could not be broughtto tax. Therefore, the appeal was allowed. The impugnedorders passed by the authorities were set aside and assesseewas given the benefit of exemption. 14.)Agegrieved by the said order, the revenue is in|appeal. RIVAL CONTENTION 15.The learned Senior Counsel|Sri E. R. Indra Kumar.appearing for the revenue assailing the impugned ordercontended that, in the circumstances of the case, theconditions prescribed in clause-xiv of Section 47 are notfulfilled. Firstly, there is no succession which is a condition precedent for application of this provision. Secondly, hecontended that all the assets and liabilities held by theassessee are not transferred which is yet another conditionthat is to be fulfilled before the benefit of the aforesaidprovision could be granted. He submitted that this provision/ exemption has to be strictly construed as held by the ApexCourt in the various judgments and therefore, he submitsthat the Tribunal committed a serious error in interferingwith the well-considered orders passed by the lowerauthorities and therefore, the impugned order requires to beset aside. precedent for application of this provision. Secondly, hecontended that all the assets and liabilities held by theassessee are not transferred which is yet another conditionthat is to be fulfilled before the benefit of the aforesaidprovision could be granted. He submitted that this provision/ exemption has to be strictly construed as held by the ApexCourt in the various judgments and therefore, he submitsthat the Tribunal committed a serious error in interferingwith the well-considered orders passed by the lowerauthorities and therefore, the impugned order requires to beset aside. 16.Per contra, the learned Senior CounselSri M. S. Syalt1appearing for the assessee submitted that the assessee is in the business of holding of investments. He infused his fundsand improved the business. Therefore, he has transferred|his share holding in favour of another Company which is completely controlled by him. He received no consideration|for such transfer. On the contrary, all the assets and_| liabilities of his sole proprietary concern was transferred tothe new Company without any consideration and as he holdsmore than 50% of the voting powers in the said Company,the requirements of Clause-xiv of Section 47 is complied withand therefore, the assessee is entitled to the benefit and theTribunal rightly upheld the claim of the assessee by settingaside the orders passed by the authorities. SUBSTANTIAL QUESTION OF LAW 17.In the light of the aforesaid facts and rival contentions,the substantial question of law that arises for our|consideration in this appeal is, “Whether in the facts and circumstances|of the case, the Tribunal is justified in holdingthat the provisions of Section 47/(xiv) of theIncome Tax Act, 1961, are applicable, without|appreciating the fact that the assessee had not|carried on business in the capacity of a sole|proprietary concern but had only held certain|investments?” 14. 18.section 45 of the Act deals with capital gains. It!provides that any profits or gains arising from the transfer ofa capital asset effected in the previous year shall save asotherwise provided in sections 94, 54B, 54D, o4E, o4I(EA),O4(EB), o4(F), 54(G) & 34(H) be chargeable to income taxunder the head ‘capital gains’ and shall be deemed to be theincome of the previous year in which the transfer took place.However, Section 47 of the Act deals with transactions notregarded as transfer. It reads as under: “47: Nothing contained in section 45 shall applyto the following transfers:to the following transfers: D,@, ©, ©, ©, ©, ©, ©, ©, ©, ©, ©, (xiv)Where a sole proprietary concern 1s'Succeeded.byaCOTTLDQEin|thebusiness carried on by it as a result ofwhich the sole proprietary concern sellsor otherwise transfers any capital asset)or intangible asset to the company ©Succeeded.byaCOTTLDQEin|thebusiness carried on by it as a result ofwhich the sole proprietary concern sellsor otherwise transfers any capital asset)or intangible asset to the company © Providedthat- (a)all the assets and liabilities of the sole)proprietary COrcer;rrelating totheproprietary COrcer;rrelating tothe 15) (b) (c} DuSINeSSimmediatelybeforethesuccession become the assets andliabilities of the company; the shareholding of the sole proprietor inthe company is not less than fiftypercent of the total voting power in the’companyandhisShareholding continues to remain as such for a period|of fwe years from the date of thesuccession; and | the sole proprietor does not receive anyconsideration or benefit, directly orindirectly, in any form or manner, otherthan by way of allotment of shares inthe company; ~ 19. Therefore, it is clear from the aforesaid provisions thatwhen a sole proprietary concern which is carrying on abusiness, sells or otherwise transfers its capital asset to acompany, though it earns any profit or gains from transfer ofsuch capital asset, it shall be deemed to be the income of theprevious year in which the transfer took place. Section 45 16. the shareholding of the sole proprietor inthe company is not less than fiftypercent of the total voting power in the’companyandhisShareholding continues to remain as such for a period|of fwe years from the date of thesuccession; and | the sole proprietor does not receive anyconsideration or benefit, directly orindirectly, in any form or manner, otherthan by way of allotment of shares inthe company; ~ 19. Therefore, it is clear from the aforesaid provisions thatwhen a sole proprietary concern which is carrying on abusiness, sells or otherwise transfers its capital asset to acompany, though it earns any profit or gains from transfer ofsuch capital asset, it shall be deemed to be the income of theprevious year in which the transfer took place. Section 45 16. which is the charging section on capital gain is not attractedsubject to the assessee satisfying three conditions mentionedin the aforesaid sections. The three conditions to be fulfilledfor being eligible for such benefit are: (1) all the assets and liabilities of the soleproprietaryCONnCe.)relatingTOthebDuSINeSSimmediatelybeforethe.SUCCeSSIONbecomesthe.assetsandliabilities of the company; (2) the shareholding of the sole proprietor inthe successor company should not be lessthan 50% of the total voting power of the|company and its shareholding continues|to remain as such, for a period of fiveyears from the date of succession; and (3) for such transfer or sale, the _ solproprietorshouldnotreceivean»nconsiderationOT|benefit directlyOT|indirectly, in any form or manner other|than by way of allotment of shares in the|SsSuCCESsOr COMpany. Once these conditions are satisfied, though by such transfer,the assessee earns capital gains, the same is not chargeableto capital gain tax. SOLE PROPRIETARY CONCERN YAO.In this background, it is necessary to understand the|meaning of the word ‘sole proprietary concern’ used in thesaid section, because the said provision exclusively appliesonly to the sole proprietary concern. In Black’s LawDictionary, the word ‘proprietary’ is defined as under: Proprietary, n. A proprietor or owner; one|who has the exclusive title to a thing; one whopossesses or holds the title to a thing in his ownright; one who possesses the dominion orownership of a thing in his own right. | Proprietary2adj.BelongingToownership; owned byaparticular person;belonging or pertaining to a proprietor; relating toa certain owner or proprietor. The word |proprietary interestis defined asunder: Proprietary interest. The interest of an ownerof property together with all rights appurtenantthereto such as the right to vote shares of stockand right to participate in managing if the personhas a proprietary interest in the shares. similarly, the wordproprietary rightsis defined asunder:| Proprietary rights:— Those rights which anowner ofproperty has by virtue of his ownership. O11. In the case of|DR.J.M.MOKASHI V. COMMISSIONER OF INCOME TAX3,reported in.&'(()*207 ITR 252,explaining the meaning of the word|‘concern’appearing in|section 64 (1) (11), the Bombay High Court at pages 259 and|260 has held as under: “The assessee has raised a number of,controversies in regard to the interpretation of theabove provisions and the true meaning of some ofthe expressions used therein. We shall deal withthem one by one. First, we may deal with the|controversy in regard to the scope and ambit of 19° similarly, the wordproprietary rightsis defined asunder:| Proprietary rights:— Those rights which anowner ofproperty has by virtue of his ownership. O11. In the case of|DR.J.M.MOKASHI V. COMMISSIONER OF INCOME TAX3,reported in.&'(()*207 ITR 252,explaining the meaning of the word|‘concern’appearing in|section 64 (1) (11), the Bombay High Court at pages 259 and|260 has held as under: “The assessee has raised a number of,controversies in regard to the interpretation of theabove provisions and the true meaning of some ofthe expressions used therein. We shall deal withthem one by one. First, we may deal with the|controversy in regard to the scope and ambit of 19° the expression ‘concern’. According to theassessee, the expression ‘concern’ refers only tobusiness establishments as contrasted withprofessional organizations which depend on thepersonal skill and knowledge of the personconcerned. Establishments of professionals likedoctors, according to counselfor the assessee, donot fall within the ambit of the expression‘concern’, and as such, section 64(1)(u) has noapplication to payments made by an individual,who is a professional, to the spouse of suchindividual. We have carefully considered theabove submission. We, however, find it difficultto accept the same and give such a narrow andconstricted meaning to the word ‘concern’ whichis neither natural nor borne out from the settingand context in which it appears. The word‘concern’ is a word of wide import. It has variousShades of meanings. According to thedictionaries, it means ‘something which pertainsto a person; business affair. It also means “amatter that engages a person's attention, interestor care or that affects his welfare or happiness. In|Black’s Law Dictionary (Sixth Edition), it has beendefined that : 20| “Concern.- To pertain, relate or belong to;|be of interest or importance to; have connectionwith; to have reference; to involve; to affect theinterest of.” From the above definitions, it is evident that theword ‘concern’ is a word of wide import and itconveys different ideas and meanings depending|upon the contest and setting in which it appears.In the context of section 64(1)(u) read withExplanation 2 thereto, it is clear that ‘concern’includes any company, firm, individual or anyother entity carrying on business or professionalactivity. It cannot be given any restrictedmeaning to take out of its ambit professionalorganizations or organizations run as proprietaryestablishments. It covers all establishments ororganizations-whetherengagedinbusinessactivities or professional activities. This is soalso because the word ‘business’ itself is a wordof wide import and has been broadly interpretedto include ‘professions, vocations, and callings’. |It is in this context that in Barendra Prasad Rayv. ITO (1981) 129 ITR 295, the Supreme Court,whtleinterpretingthe|expression‘business 21 connection’ appearing in section 91) of the Act,held as follows (at page 306): “The word ‘business’ is one of wide import and itmeans an activity carried on continuously andsystematically by a person by the application ofhis labour or skul with a view to earning anincome. We are of the view that in the context inwhich the expression ‘business connection’ isused in section 9(1) of the Act, there is no warrantfor giving a restricted meaning to it excluding‘professional connections’from its scope.” o?. The word °business’is also defined under the Act in section 2(13) as under: “business” includes any trade, commerceor manufacture or any adventure or concern inthe nature of trade, commerce or manufacture’ 23.The word ‘concern’ is a word of wide import. It has|various shades of meanings. According to dictionaries, it |means ‘something which pertains to a person; business “The word ‘business’ is one of wide import and itmeans an activity carried on continuously andsystematically by a person by the application ofhis labour or skul with a view to earning anincome. We are of the view that in the context inwhich the expression ‘business connection’ isused in section 9(1) of the Act, there is no warrantfor giving a restricted meaning to it excluding‘professional connections’from its scope.” o?. The word °business’is also defined under the Act in section 2(13) as under: “business” includes any trade, commerceor manufacture or any adventure or concern inthe nature of trade, commerce or manufacture’ 23.The word ‘concern’ is a word of wide import. It has|various shades of meanings. According to dictionaries, it |means ‘something which pertains to a person; business affair’. It also means “ a matter that engages a person’sattention, interest or care or that affects his welfare orhappiness. It cannot be given any restricted meaning. It covers all establishments or organizations whether engagedin business activities or professional activities. Therefore,the meaning to be given to the word ‘concern’ depends uponthe context and setting in which it appears. In the contextof clause (xiv) of Section 47, the ‘sole proprietary concern’means a proprietor/an individual of a business which iscarried on by him exclusively. D4It is contended that the assessee was not carrying on|business as a sole proprietary concern and therefore, it cannot be said that by such transfer, the transferee companysucceeded to the sole proprietary concern. It was contendedthat mere holding an investment would not constitute abusiness. In this context, it 1s useful to refer to fewjudgments on the point. © 23| 29. The Supreme Court in the case of)BENGAL ANDASSAM INVESTORS LIMITED VS. COMMISSIONER OF' INCOME TAX [ (1966) 59 ITR 547]|dealing with a case ofinvestment company where the question was, whether itsdividend income formed part of its profits and gainschargeable to tax under section 10 of the Indian Income TaxAct, 1922, observed at page 954 as follows: “It seems to us that on principle before dividendson shares can be assessed under section 10, theassessee, be it an individual or a company or anyother entity must carry on business in respect ofShare; that is to say, the assessee must deal inthose shares. It is evident that ff an individualperson invests in shares for the purpose ofearning dividend he is not carrying on abusiness. The only way he can come undersection 10 is by converting the shares into stock-in-trade, 1.e. by carrying on the business ofdealing in stocks and share..... 26. |AgainthepupremeCourt1nNtheCase;5COMMISSIONER OF INCOME TAX VS. DISTRIBUTORS DS| (BARODA) P.LTD. [(1972) 83 ITR 377]while dealing with|the question as to whether there could be any business ofholding of investments, at page 383, it held as follows: “We cannot say that the Legislature did not knowits own mind when it used that expression in|section 23A. We must give some reasonablemeaning to that expression. No part of alprovision of a statute can be just ignored by|saying that the legislature enacted the same notknowing what it was saying. We must assume.thatthelegislaturedeliberatelyused|thatexpression and it intended to convey some.meaning thereby. The expression ‘business’ 1s awell-known expression in income-tax law. It|means, as observed by this court in NarainSwadesht Weaving Mills v. Commissioner of|Excess Profits Tax (1954) 26 ITR 765, ‘some real, substantial and systematic or organized course ofactivity or conduct with a set purpose’. This is.also the meaning given to that expression in the.earlier decisions of the High Courts and the.Judicial Committee. We must therefore, proceedon the basis that the legislature was aware of themeaning given by courts to that expression when| 25| 25| it incorporated section 23A into the Act in 1957.Hence we must hold that when the legislaturespeaksofthebusinessof‘holdingofinvestments’, it refers to real , substantial andsystematic or organised course of activity ofinvestment carried on by an assessee for a setpurpose such as earning profits.” oO. |After referring to these two judgments, the.Madras High Court in the case ofCOMMISSIONER OFINCOME TAX, MADRAS-I vs AMALGAMATIONS (P) LIMITED|(1977) 108 ITR 895]‘held as under: “We have looked into section D3A and we do notfind in it any words importing a fiction. Itconsidered two kinds of businesses; one isdealing in investments and the other is holding ofthem and holding of investment in appropriatecases would, in the view of Parliament, equallybe a business as dealing in them. The onlyrequirement is that there must be a realsubstantial and systematic or organized course ofactivity or conduct with the set purpose of earning|profit which is the testfora business. 26| Examined in this light, it would be found|that the assessee is not mere investor in a singlecompany. It has investments in 16 companies. Ithad taken active interest in the business of thosecompanies as is clear from the services that hadbeen rendered in the shape of export promotion,liaison office at Delhi and internal audit. It alsorendered consultation in respect offinance by itsdirectors meeting every day with reference to theneeds and requirements of each Company. Itwas also stated before us that apart from theoriginal acquisitions, the assessee-company itselfwas responsible for starting several engineeringcompanies and that it held the shares in suchcompanies which it actively promoted. Evenwithout going into the correctness or otherwise ofthis submission about which the relevant factsdo not appear on record, we consider that theassessee company had a systematic or organizedcourse of activity in the matter of working for andadvising its subsidiaries. This ts not a casewhere the assessee contented itself with merelymaking an investment and looking for thedividend We would, therefore, hold that therewas a business activity in the matter of holding of investments on the facts here. Even then, thequestion thatwould arise 1S.whether the'expenditure that has been incurred was whollyand exclusively laid out for the purpose of theassessee’s business. The aqssessee’s DusineSs 1S.the holding of investments. If the assessee hadincurred any expenditure in respect of itsbusiness, it would certainly be allowable asdeduction. ” 28. The judgment of the Madras High Court was challengedby the Revenue before the Apex Court. The Apex Court in|the case reported in123345226 I1ITR 188, (COMMISSIONER OF INCOME TAX VS. AMALGAMATIONS PVT.LTD.), dealing with the aforesaid question has observed thus: “We are unable to accept this contention. TheHigh Court, in our opinion, as rightly pointed outthat the business of the assessee company is theholding of investments and tf with reference to thebusiness of holding investments, any expenditurehas been incurred that could have been allowed| QS| as deduction. ....... The assessee- company cohold its investment and earn its dividends.......” QO,In fact, the word ‘investment company’ had been|defined under section 109 of the Act, prior to its omission, asunder: “Investment company means a company whose|business consists wholly or mainly in dealing orholding of investment”. Therefore, the law recognized holding of investment by a|company as a business. It was submitted this concept is |well recognized all over the world. 30.In support of the said contention, reliance was placed|on IRAS e-Tax guide. Clause 2.1 reads as under: 2.1-A business of making investment is different from a business of dealing in investments or|passive holding of investments. Based on the|facts and business activities of the case, a|company, trustee of property trust, partner of an QI| QO,In fact, the word ‘investment company’ had been|defined under section 109 of the Act, prior to its omission, asunder: “Investment company means a company whose|business consists wholly or mainly in dealing orholding of investment”. Therefore, the law recognized holding of investment by a|company as a business. It was submitted this concept is |well recognized all over the world. 30.In support of the said contention, reliance was placed|on IRAS e-Tax guide. Clause 2.1 reads as under: 2.1-A business of making investment is different from a business of dealing in investments or|passive holding of investments. Based on the|facts and business activities of the case, a|company, trustee of property trust, partner of an QI| LLP or LP may be considered as carrying on abusiness of making an investment. Its incomewould then be taxable under section 10(1)(a) ofITA but the provisions of section 1OE would applyfrom 1996 to determine the income to be broughtto tax.” Clause 3.3. reads as under: ¢3.3.-“To recognise that companies may holdinvestments not for sale but to derive investmentincome as a trade, the business of makinginvestments was introduced with an enactment ofsection 1OE. section IOE prescribes the taxtreatment of companies engaged in the business.of making investments. It ensures that a|company that does not trade in investments.would not enjoy the same tax treatment of|expenses applicable to a company carrying on thetrade of investment dealing. Accordingly, sectionIOE its not applicable to a company carrying on atrade of dealing in investments.” | Clause 4.2. reads as under: —<CL4.2--— whether an entity is carrying on abusiness of making of investments is a question| 30| of fact. An entity claiming to be carrying such abusiness must satisfy the comptroller of this factbased on its activities. Once an entity hasSatisfied this fact, it may then apply theprovisions of section 1OE to determine its incomederived from its business of making investmentsfrom that YA onwards. The income sodetermined is chargeable to tax under section1O(1)(a) of the ITA.” S31.From the aforesaid discussion, it can be seen thatholding of investment is treated as a business. If an|individual in a systematic or organised course of activity or conduct, with the set purpose, makes investment and holds|that investment for the purpose of earning profits, then it constitutes a business. If an individual person invests in |shares for the purpose of earning dividend, he is not|carrying on a business. But if he converts the shares into|stock - in - trade, then it amounts to his carrying on the|business of dealing in stocks and shares. Here, we have to|bear in mind the distinction. One is dealing in investment| 31 and other is holding of them. If an investment is made in|equity for the purpose of getting dividends, then it does not|amount to business. But, if the investment is made with anintentionOT|derivingprofit,thenit|1S abusiness|notwithstanding the fact that even in such cases in addition|to profits, dividend is also received. A business of holding ofinvestment is different from a business of making of investments and looking for dividends. The active interest|the assessee takes in the business after making investment|for the purpose of holding investment, is also a decisive|factor. If the investment made is really substantial and|systematic or an organized course of activity or conduct withthe set purpose of earning profit and active interest is takenin carrying on the business to improve his investment, thenit is a business of holding of investment. Such a business|may be carried on either by a company, or partnership firmor an individual. Then, if such a business carried on by thesole proprietor is succeeded by a company and such|succession is by way of sale or otherwise transfer of any| capital asset to the company, then subject to assessee|satisfying the conditions mentioned in Section 47 (xiv), the|capital gain arising out of such transfer or sale is not liablefor payment of capital gain tax. It is only when such|business is carried on by an individual/assessee as a sole|proprietary concern, clause-(xiv) of section 47 is attracted.such benefit is not extended to other forms of persons as|defined under the Act. The purpose behind the provisions ofsection 47(xiv) of the Act is to encourage running business|in an organised form, viz. as limited liability company ratherthan in the form of partnership or sole proprietary concern.such conversion either of a firm into a company or a|proprietary concern into a company are encouraged. It is anincentive to corporatize the sole proprietary concern into a|company. Therefore, the tax benefit is extended to.encourage such conversion. 32.Whether an entity is carrying on a business of making of investments is a question of fact. Therefore, we have to| look at the facts oft the case to find out as to whether theassessee satisfies the requirement prescribed under law. 33. |In the instant case, the assessee is an individual. He.held shares in VLMS to the extent of 4,400 initially. He wasactually participating in the business of the said company.He was also employed in the said company. There was adivision of business between the members of the family whoare other share holders. The other share holders transferredthe entire share holding in favour of the assessee, except 10shares held by Rajalakshmi Vishwanathan, with effect from/.4.2001. Thereaiter, assessee infused funds into businessand VLMS issued additional shares to the assessee. On30.3.2003, 29,800 shares were allotted and on 31.3.2003,2,49,5600 shares were allotted and on 27.3.2004, 1,99,960shares were allotted. The funds were also infused into thebusiness of VLMS by a foreign investor by name XanfireticHolding Company Ltd. In turn 2,46,300/- shares of|Rs.100/- per share were issued to the foreign investor at a 34| premium of Rs.3,173 per share. On 26.3.2009, shares ofRs.100/- each were sub divided into shares of Rs.10/- eachand thereafter bonus shares were issued on the same day,i.e., aS against share holding of 4,99,900 by the assessee,4,.99,900 bonus shares were allotted. Thus, the total shareholding of the assessee in VLMS was 9,99,98,000. He wasactively involved in carrying of the business of the Company. 34.Much prior to allotment of bonus shares, i.e. on22.6.2007, a company by name Anuradha Holdings PrivateLimited (AHPL) was incorporated by assessee and hismother. The main object of AHPL was to acquire, establishor promote companies, render advice and services for projectdevelopment. One of the main objects of AHPL was to takeover proprietary investment business and assets of assessee.On 27.3.2009, an agreement for taking over of the|proprietary business of the assessee was entered into. Hehas transferred all the shares in VLMS held by him alongwith all the assets and liabilities relating to the business carried on by him in favour of M/s Anuradha HoldingsPvt.Ltd... In turn, he has been allotted shares of the saidcompany to an extent of 99% of the shareholding of the saidcompany. On the date of such take over, the shares of theassessee was valued at Rs.329,29,34,000/-. In fact, he hadalso invested money for purchase of land, flat, etc. as isreflected in the schedule of Assets less lhabilities for takeover. The consideration for the said take over was allotmentof 2,00,000 equity shares of Rs.100/- each on a premium ofRs.16,895.44079 per equity share as consideration to theassignor for the complete take over of the business assetsand liabilities. It is after such take over, the assessee filedreturn of income tax for the assessment year 2009-10claiming a capital gain on transfer of 9,99,98,000 sharesheld by him in VLMS to AHPS and contended that the samewas not chargeable to tax in view of provision of section47(xiv). 35. |In this factual background, when we look at the)aforesaid provision, it is clear that assessee was a soleproprietary concern and he was holding investment in VLMS.Relating to the said business, he also had incurredexpenditure by entering into agreement to purchase theland, flats as set out in schedule of movable assets lessliabilities. Under the take over agreement, all the assets andliabilities of sole proprietary concern relating to the businesswas transferred in favour of AHPL. When he was allotted2,00,000/- equity shares, his share holding in AHPS hadcome to 99% of the total shares of AHPL. Though the shareof AHPL was valued at Rs.10,895.44079 for a share ofRs.100/- which works to 329,29,34,000/-. The assessee didnot receive any consideration or benefit directly or indirectly|in any form or manner other than by way of allotment ofshares in the company. Therefore, all the three testsprescribed in section 47(xiv) of the Act are fulfilled. Thoughby virtue of such transfer or sale, it resulted in profits andgains and consequently capital gains, but by virtue of section 47(xiv), the same was not taxable as capital gain. This isprecisely what the Tribunal has held. Both lower authoritiesdid not properly appreciate the scope of section 47(xiv) of theAct and fell into error in holding that the assessee is liable topay capital gain tax under section 45 of the Act. 36. |In that view of the matter, we do not find any error|committed by the Tribunal in setting aside the orders passedby lower authorities. Thus, the substantial question of law|is answered in favour of the assesee and against therevenue. Hence, we pass the following order: Appeal is dismissed. No costs. | Sd/-JUDGE Sd/-) JUDGE KM/YN