Itxa/1672/2011 Of The Commissioner Of Income Tax -7 v. Renato Finance And Investment Ltd

sas IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1672 OF 2011 The Commissioner of Income Tax-7, Mumbai ..Appellant. V/s. Renato Finance & Investment Ltd. ..Respondent. Mr. Abhay Ahuja for the appellant. Mr. J.D. Mistri, Senior Advocate with Atul K. Jasani for the respondent. CORAM : J.P. DEVADHAR AND M.S. SANKLECHA, JJ. DATED : 4TH MARCH, 2013 P.C. :- 1.In this appeal by the revenue for the assessment year 2005-06 following question of law has been raised for our consideration:- (a)Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the profit on sale of shares of Rs.2,52,75,000/- as capital gain instead of business income ignoring the fact that the transaction in shares carried out law, the Tribunal was justified in treating the profit on sale of shares of Rs.2,52,75,000/- as capital gain instead of business income ignoring the fact that the transaction in shares carried out by the assessee were adventure in the nature of trade ? (b)Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the exemption under section 47(v) of the I.T. Act, 1961 on sale of shares ignoring the fact that the said transaction has been treated as business income and the shares held by the assessee company were not an investment but shares sold to Piramal Holding Ltd. were actually stock of the assessee and similar transactions have been held as business activity by decision of the Apex Court in the case of Sutlej Cotton Mills Agency Ltd. (1975) 100 ITR 706, 711 (SC) ? 2.The respondent during the relevant previous year sold shares of L & T Crossroads Pvt. Ltd. to its holding company i.e. Piramal Holdings Pvt. Ltd. for a consideration of Rs.12 crores. In the process, the respondent -assessee earned Rs.2.52 crores which was declared as long term capital gains. Further exemption was claimed in view of Section 47(v) of the Income Tax Act, 1961 (the Act). However, the assessing officer did not accept the contention of the respondent-assessee and inter alia held that the sale of shares by the respondent-assessee to its holding company was not taxable under the head capital gains but were taxable under the head profits and gains of business and profession. The assessing officer inter alia proceeded on the basis that the shares held by L & T Crossroads Pvt. Ltd. was held by the respondent-assessee for a period of 8 months before its sale. 3.In appeal, the CIT(A) upheld the order of the assessing officer and held that the profits on sale of shares was to be taxed as business income. However, the CIT(A) held that the subject shares were held by the respondent-assessee for four years and not eight months as held by the assessing officer. 4.Being aggrieved, the respondent-assessee carried the matter in appeal to the Tribunal The Tribunal by the impugned order allowed the appeal by holding that the profits made on sale of shares of the private limited company i.e. L & T Crossroads Pvt. Ltd. by the respondent-assessee is profit to be taxed under the head capital gains and not as profit of business. The Tribunal held that the shares of a private limited company are not tradeable in the market and consequently, such shares cannot be considered to be stock in trade. The Tribunal further held that as the shares in L & T Crossroads Pvt. Ltd. were purchased from the funds borrowed / received from its holding company i.e. Piramal Holdings Pvt. Ltd. to the extent of Rs.9.47 crores. This borrowing was not in the nature of a commercial borrowing but more in the nature of the capital being infused in the subsidiary company by the holding company. This is for the reason that no lender would lend an amount to an extent where the net worth of the borrower is less than 1% of the amount lent for investment in shares. The Tribunal recorded a finding of fact that the same was in the nature of introduction of capital rather than commercial borrowing. In these circumstance, the Tribunal concluded that the funds borrowed by the respondent-assessee per se would not lead to the conclusion that the investment is shares were for the purposes of trading. On the aforesaid facts, the Tribunal concluded that the gain of Rs.2.52 crores has correctly been declared by the respondent-assessee as being long term capital gains and the same is not taxable as business income. The Tribunal also placed reliance upon the decision of the Supreme Court in the matter of Ramnarain & Sons Pvt. Ltd. V/s. CIT reported in 41 ITR 534 to conclude that even if the shares were acquired for the purposes of acquiring control of a company, it cannot be treated as stock in tade. 5.Mr. Abhay Ahuja, learned counsel for the revenue submits that even a single transaction of purchase and sale outside the assessee's line of business may constitute a adventure in the nature of trade. In support reliance was placed upon the decision of the Supreme Court in the matter of CIT V/s. Sutlej Cotton Mills Supply itxa1672-11 Agency reported in 100 ITR 706 (SC). The Supreme Court in the matter of Sutlej Cottom Mills Supply Agency Ltd. (supra) while holding that in given facts even single transaction of purchase and sale may constitute adventure in the nature of trade, yet, the same has to be decided taking into account all the facts and circumstances of the case and not on the application of any single principle or test. We find that the Tribunal has considered the cumulative effect of all the facts and arrived at a conclusion that the transaction was not an adventure in the nature of trade, therefore, classifiable as capital gains. 6.Moreover, as held by the Supreme Court in the matter of Sutlej Cotton Mills Supply Agency Ltd. (supra) that whether the profit or loss has to be assessed under the head business gains or under the head capital gains is primarily dependent upon a finding of fact. In the present case, the Tribunal after considering all the facts and particularly the fact that the shares sold by the respondent-assessee to its holding company was not tradeable in the market like any other normal trading asset, concluded that the gains arising from the sale of shares has to be tax under the head capital gains. In the above view of the matter, the decision of the Tribunal is based on a finding of fact, we see no reason to entertain question (a). itxa1672-11 7.So far as question (b) is concerned, it is merely consequential to question (a). The case of the revenue is that Section 47(v) of the Act would not apply as the same applies only to capital gains and not to income taxed as business income. Therfore, this question does not survive in view of the fact that we have found no reason to interfere with the finding of the Tribunal that the gains on sale fo shares is to be taxed as capital gains. 8.Accordingly, the appeal is dismissed with no order as to costs. (M.S. SANKLECHA, J.) (J.P. DEVADHAR, J.)