Adar Poonawalla,, Pune vs Assessee

Adar Poonawalla, Sarosh Bhavan, 16-B/1, Dr. Ambedkar Road, Pune - 411 001. PAN : AFEPP9955N .... Appellant

Vs.

Addl. Commissioner of Income Tax, Range- 7, Pune. .... Respondent

ITA No.824/PN/2012 (Assessment Year : 2007-08)

Asstt. Commissioner of Income Tax, Central Circle- 1(1), Pune. .... Appellant

Vs.

Shri Adar Cyrus Poonawalla, 11, Gidney Park, Pune - 411 037. PAN : AFEPP9955N .... Respondent

Assessee by : Mr. S. N. Inamdar & Mr. R.S. Abhyeenkar Department by : Mr. A. K. Modi Date of hearing : 01-12-2014 Date of pronouncement : 30-01-2015

ORDER

PER G. S. PANNU, AM

The captioned are cross-appeals, each by the assessee and the

Revenue, pertaining to the assessment year 2007-08, which were heard

together and are being disposed-off by way of a consolidated order for the

sake of convenience and brevity.

2. The captioned cross-appeals are directed against the order of the

Commissioner of Income Tax (Appeals)-III, Pune dated 28.02.2011 which, in 2 ITA No.764/PN/2012 ITA No.824/PN/2012

turn, has arisen from an order dated 22.12.2009 passed by the Assessing

Officer u/s 143(3) of the Income Tax Act, 1961 (in short "the Act").

3. In brief, the facts relevant to appreciate the controversy in the

respective appeals can be summarized as follows. The assessee is an

individual who filed a return of income for assessment year 2007-08 declaring

total income of Rs.5,51,54,026/- which, inter-alia, included a net long term

capital gain of Rs.2,24,68,231/- as detailed hereunder :-

"Long Term Capital Gain 17,32,46,580 Short Term Capital Loss Set off of b/f (14,95,84,935) - Long Term Capital Loss (7,41,504) - Short Term Capital Loss (4,51,910) ---------------------- Net Long Term Capital Gains 2,24,68,231"

4. The Assessing Officer noted that the long term capital gain of

Rs.17,32,46,580/- was in respect of sale of shares of City Park Pvt. Ltd., to

M/s Peninsula Land Ltd.. The short term capital loss of Rs.14,95,84,935/- was

mainly on account of sale of shares of one company, namely, HCL

Technologies Ltd.. The dispute in the captioned appeals revolves around the

aforesaid transactions.

5. In so far as the transaction of sale of shares of City Park Pvt. Ltd. is

concerned, the Assessing Officer treated the same as income from business

of trading in shares. The said business income was worked out by the

Assessing Officer as under :-

"B. Profit on sale of City Park Pvt. Ltd. shares Sale of 66,70,000 shares @ Rs.270/- per share Rs.18,00,90,000/- Purchase of 66,70,000 shares @ Rs.10 per share Rs. 66,70,000/- ------------------------- Rs.17,34,20,000/-" 3 ITA No.764/PN/2012 ITA No.824/PN/2012

6. With respect to the other transaction by way of sale of shares of HCL

Technologies Ltd., Assessing Officer noticed that the said company had

announced bonus issue of 1:1 on 12.02.2007 and the record date was fixed

on 16.03.2007, as per intimation to the stock exchanges. The assessee

purchased 4,71,517 equity shares of HCL Technologies Ltd. from 28.02.2007

to 13.03.2007 i.e. within a span of two weeks, with an average purchase price

of Rs.622/- per share, which was cum-bonus. Bonus shares were issued by

the investee company on 16.03.2007 and accordingly assessee received

4,71,517 bonus shares. Therefore, assessee effected sale of 4,71,500 shares

out of the original shares at ex-bonus rates between 15.03.2007 to 28.03.2007

at an average selling rate of Rs.303/- per share, which resulted in a short term

capital loss of Rs.14,95,84,935/-, which was claimed in the computation of

income. In this context also, Assessing Officer concluded that the frequency

of purchase and sale carried out by the assessee indicated that assessee was

a trader in shares and not an investor. As per the Assessing Officer, the

dealings in the shares of HCL Technologies Ltd. indicated a pre-mediated

intention to set-off the loss incurred on account of bonus stripping of HCL

Technologies Ltd.'s shares against the long term capital gain earned on the

sale of unlisted equity shares of City Parks Pvt. Ltd..

7. In sum and substance, the transactions of sale of equity shares of M/s

City Park Pvt. Ltd. as well as the purchase and sale of HCL Technologies

Ltd.'s shares were considered by the Assessing Officer to be a trading activity

done by the assessee in shares. The profit/loss on sale of 4,71,500 equity

shares of HCL Technologies Ltd. was worked out by the Assessing Officer as

under :-

"Computation of business income :

A. Profit on sale of HCL Technologies share

Particulars Amt.(Rs) Particulars Amt.(Rs) Opening stock NIL Sale of 471500 14,28,67,804 4 ITA No.764/PN/2012 ITA No.824/PN/2012

shares* Purchase of 29,36,28,768 Closing stock 14,68,19,677 471517 shares * 471534 shares **

471517 bonus NIL shares Profit (-) 39,41,287

* Purchase Cost and Sales are inclusive of brokerage and other charges.

** Cost based on average price Rs.311.37 per share inclusive of bonus shares."

8. As a consequence of the aforesaid action, Assessing Officer worked

out the net income from business by way of trading in shares of

Rs.16,94,78,713/- [i.e. (-) Rs.39,41,287/- + Rs.17,34,20,000/-].

9. Both the aforesaid stands of the Assessing Officer were carried in

appeal before the CIT(A). Before the CIT(A), assessee challenged the action

of the Assessing Officer in law and on facts. The CIT(A) accepted the plea of

the assessee that so far as the gain arising on the transfer of shares in City

Park Pvt. Ltd. is concerned, it was assessable as 'capital gains' and not

business income, as done by the Assessing Officer. Thus, on this aspect,

assessee succeeded before the CIT(A).

10. Further, with regard to the transaction in the shares of HCL

Technologies Ltd., the CIT(A) treated the same as a trading activity; and, he

also upheld the methodology adopted by the Assessing Officer in computing

the profit/loss on sale of 4,71,500 shares. Consequently, the CIT(A) has

upheld the action of the Assessing Officer in working out the loss on purchase

and sale of 4,71,500 shares of HCL Technologies Ltd. as a business loss at

Rs.39,41,287/-, as against assessee's stand of determining a short term

capital loss on sale of such shares at Rs.14,95,84,935/-.

11. In the above background, assessee is in appeal before us challenging

the order of the CIT(A) with respect to the treatment of the transaction of 5 ITA No.764/PN/2012 ITA No.824/PN/2012

purchase and sale of shares of HCL Technologies Ltd. whereas the Revenue

in its cross-appeal is challenging the action of the CIT(A) in treating the gain

arising from sale of shares of City Park Pvt. Ltd. as 'capital gain' and not as

profits and gains of business.

12. In this background, both the parties have advanced their submissions.

First, we shall take-up the appeal of the Revenue, wherein the Grounds of

Appeal read as under :-

"1) Whether on the facts and in the circumstances of the case, Ld. CIT (A) was justified in holding that the profit on sale of shares of M/s City Parks Pvt. Ltd. as Capital Gain when there was a clear cut adventure in the nature of trade on the part of the assessee.

2) Without prejudice to the above ground, whether on the facts and in the circumstances of the case, Ld. CIT (A) was justified in holding that the capital gain on account of sale of shares of M/s City Parks Pvt. Ltd.

is Long Term Capital Gain when the underlying asset which got transferred due to sale of shares was 'land' and holding period of which was less than 36 months.

3) Without prejudice to the first ground, whether on the facts and in the circumstances of the case, Ld. CIT (A) was justified in holding that the capital gain on sale of shares of M/s City Parks Pvt. Ltd. as Long Term Capital Gain ignoring the provisions of section 2(47)(vi), as the underlying asset in this case is 'land' and holding period of which was less than 36 months."

13. In the context of the appeal of the Revenue, the learned Departmental

Representative pointed out that as per analysis of the Assessing Officer the

earning of a huge capital gain on sale and purchase of shares of an unlisted

company i.e. City Park Pvt. Ltd. was an unusual transaction. In support, the

learned Departmental Representative has referred to the following discussion

in the assessment order :-

"a. City Park was formed as a partnership firm in December 2004 with Dr. Cyrus Poonawalla and Adar Poonawalla representing Poonawalla Group through Apoorva Realtors Pvt. Ltd., a closely held company with only Dr. Cyrus Poonawalla and Shri. Adar Poonawalla as the shareholders.

b. The firm City Park was converted to a Private Limited Company on 17-1-2006 and Apoorva Realtors Pvt. Ltd. owned and held by Dr. Cyrus Poonawalla and Shri. Adar Poonawalla, held 50% of shares of City Park Pvt. Ltd.

6 ITA No.764/PN/2012 ITA No.824/PN/2012 c. Apart from ownership of 50% interest in City Park Pvt. Ltd., through share holding of Apoorva Realtors Pvt. Ltd., Dr. Cyrus Poonawalla in his individual capacity, and Dr. Cyrus Poonawalla and Adar Poonawalla as beneficial owner of closely held Poonawalla group companies advanced interest free loans to M/s. City Park and later City Park Pvt. Ltd. to the tune of Rs. 25 crores, indicating their deep interest. A passive investor would not advance unsecured loans interest free unless he is a promoter of the business, a fact acknowledged by Shri. Deshpande.

d. City Park Pvt. Ltd. purchased lands exceeding 100 acres and developed it thereby raising the value of the company. Yet additional shares were allotted to Dr. Cyrus Poonawalla in his individual capacity at face value. This is clearly in the nature of reward to a promoter rather than allotment of shares to a passive investor. Of course, the fact that 50% interest in City Park P. Ltd. was held by the Poonawallas, allotment of shares at face value only reflected his defacto and dejure control over the affairs of City Park Pvt. Ltd.

d. After having done all the hard work, Dr. Cyrus Poonawalla, gifted the shares in City Park Pvt. Ltd., impregnated with value from development of land in the company, to his son. The fruits of his labor were dropped by the father in the lap of his son.

e. Adar Poonawalla was also actively involved in City Park Pvt. Ltd. in as much as he is the controlling shareholder of Apoorva Realtors Pvt. Ltd., co-owned with this father. As mentioned earlier, Apoorva Realtors held 50% interest in City Park Pvt. Ltd. till Dr. Cyrus Poonawalla was also allotted shares.

f. The entire company, City Park Pvt. Ltd. along with its 100 acres of developed land with SEZ notification, was sold to Peninsula Land Ltd., thereby encashing the undistributed value and profits from the company. The company, City Park P. Ltd., was sold lock stock and barrel through sale of entire shares for about Rs.65 crores when the value of land as per books of City Park P. Ltd. was about Rs.15 crores. It is noted that City Park Pvt. Ltd. never issued any dividends to the shareholders nor paid any taxes on development or sale of land. Shares allotted at face value of Rs.10/- were sold for Rs.270/- per share."

14. On the basis of discussion, the learned Departmental Representative

sought to point out that the real intent behind sale of unlisted equity shares of

City Park Pvt. Ltd. was to transfer the land acquired and developed by the said

investee company, and such an activity has to be reckoned as an adventure in

nature of trade in the hands of the assessee shareholder. On this point, it is

also sought to be emphasized by the learned Departmental Representative

that the purchase and sale of shares of HCL Technologies Ltd. was also done

by the assessee in the proximate period with the motive of creating an

apparent loss in order to set-off the same against the gain from sale of shares 7 ITA No.764/PN/2012 ITA No.824/PN/2012

of City Park Pvt. Ltd.. Thus, the share held in City Parks Pvt. Ltd. and HCL

Technologies Ltd. were to be understood as stock-in-trade and therefore both

the transactions were to be viewed as business transactions.

15. On the aspect of assessability of the gain on the sale of shares in City

Park Pvt. Ltd., the learned counsel for the assessee has defended the order of

the CIT(A). It was pointed out by the learned counsel that so far as the shares

of City Park Pvt. Ltd. are concerned, assessee received the same as a gift

from his father, an aspect which has not been disputed by the Assessing

Officer, and therefore any sale thereof cannot be viewed as a trading activity.

In sum and substance, reliance has been placed on the findings of the CIT(A)

in terms of which the gain on sale of shares of City Park Pvt. Ltd. has been

accepted to be assessable as capital gains.

16. We have carefully considered the rival submissions. Factually

speaking, shares of City Park Pvt. Ltd. sold by the assessee were neither

purchased and nor acquired by the assessee on his own volition, but the same

have been received as gift from his father. Notably, out of the total of 6,67,000

shares, the investee company allotted 6,66,333 shares to Cyrus S.

Poonawalla (assessee's father) on 27.01.2006 on par (@ Rs.10/- each) and

the balance 667 shares were allotted to him on 09.06.2006 on par. These

shares were received by the assessee as a gift from him father (i.e. Cyrus S.

Poonawalla) in the preceding year, i.e. on 01.09.2006. The fact-position

emerging from the orders of the authorities below reveals that such shares

were indeed held by assessee's father as an investment. In such a scenario,

especially in the absence of any notable instances of other purchase and sale

of shares of City Park Pvt. Ltd. by the assessee during the year under

consideration, in our view, the onus was on the Revenue to demonstrate that

the sale of shares of City Park Pvt. Ltd. by the assessee was a transaction

akin to an adventure in the nature of trade.

8 ITA No.764/PN/2012 ITA No.824/PN/2012

17. The CIT(A) has observed that the investee company i.e. City Park Pvt.

Ltd. is an unlisted Pvt. Ltd. Company and therefore its shares are not freely

marketable or tradable. According to the CIT(A), shares of an unlisted private

limited company do not have the basic characteristics of a marketable product,

that are associated with the shares of a stock exchange listed company. On

this aspect, we find no reason to differ with the observations of the CIT(A).

The investee company, City Park Pvt. Ltd. was in the business of dealing in

property, development of land, construction of building, development of

industrial park, information technology park, etc.. It is emerging from the

orders of the authorities below that during the period when assessee held the

shares of the said company and even during the period held by the assessee's

father, the said company acquired land/other assets and undertook activities

which enhanced the value of lands/other assets of the investee company,

which did result in appreciation in the value of shares of the said investee

company. It is, for this reason assessee canvassed before the lower

authorities that he was offered a better price of the shares and therefore he

decided to sell the shares held by him to Peninsula Land Ltd., when the said

concern approached him. To the contrary, the plea of the Revenue is that the

sale of shares of City Park Pvt. Ltd. by the assessee was intended to transfer

the lands acquired by the investee company. Therefore, according to the

Revenue, the shares of City Park Pvt. Ltd. were held by assessee as stock-in-

trade and any sale thereof constitutes an adventure in nature of trade. We are

unable to accept the aforesaid plea of the Revenue because the business and

assets of a corporate entity are not business and assets of its shareholders, as

held by the Hon'ble Supreme Court in the case of Mrs. Bacha F. Guzdar vs.

CIT, (1955) 27 ITR 01 (SC). The CIT(A), in our view, made no mistake in

disregarding the aforesaid plea of the assessee by relying on the judgement of

the Hon'ble Supreme Court in the case of Mrs. Bacha F. Guzdar (supra). The

following observations of the Hon'ble Supreme Court in the case of Mrs. 9 ITA No.764/PN/2012 ITA No.824/PN/2012

Bacha F. Guzdar (supra) is worthy of notice, and which clearly support the

conclusion of CIT(A) :-

"That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the Sholapur Mills case [1950] SCR 869 at

904. That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by the articles of association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders."

18. On this aspect, we may also refer to the discussion by the CIT(A) in

para 5.1.3 of his order wherein he has referred to the CBDT Circular dated

15.06.2007. As per the CIT(A), following the criteria laid down in the CBDT

Circular, the shares in question are to be understood as 'investment' thereby

giving rise to capital gain on its sale. The aforesaid finding of the CIT(A) has

not been negated by the Revenue before us and is accordingly affirmed.

19. Another aspect raised by the Assessing Officer was that assessee or

his father were not merely passive investors in City Park Pvt. Ltd. but were

actively involved in the business operations of the company and therefore the

shares held by them in City Park Pvt. Ltd. attain the character of stock-in-

trade. In our considered opinion, whether a shareholder is an active or a

passive investor in an investee company is of no consequence to examine the

nature of the shares held by him. In our view, the CIT(A) was justified in

negating the aforesaid plea of the Assessing Officer in the process of

determining the nature of the share holding of assessee in City Park Pvt. Ltd.. 10 ITA No.764/PN/2012 ITA No.824/PN/2012

20. Before parting, we may also refer to a plea of the Assessing Officer that

assessee had adopted a colourable device to avoid tax and in this context

reliance was placed on the judgement of the Hon'ble Supreme Court in the

case of McDowell and Co. Ltd. vs. CTO, 154 ITR 148 (SC). This objection of

the Assessing Officer has been dealt with by the CIT(A) in para 5.1.5 of his

order, which reads as under :-

"5.1.5 The Assessing Officer has placed reliance on the judgment of Hon'ble Supreme Court in case of Mc. Dowell & Co. Ltd. and other authorities and observed that a colorable device was adopted by the appellant to avoid tax. However, in this case, the issue involved is taxability of gains arising on sale of impugned shares under the head "capital gains"

or as "profits of business". The conversion of erstwhile partnership firm into private limited company, holding of shares by appellant's father in City Park, receipt of shares by the appellant way of gift, subsequent sale of shares, genuineness of the transactions are not doubted by the Assessing Officer. It cannot also be glossed over that 50% of the shares in the company were held by other prompters, namely Mr. Anirudha Deshpande, Mr. Vithal Maniyar, Namrata Film Enterprises Ltd. In such circumstances, in so far as acquisition and sale of shares of City Pak are concerned, it is difficult to say that the appellant adopted colorable device to avoid tax. The manner in which the transaction in shares of City Park has been entered into by the appellant's father and appellant can at best be termed as tax planning, but it cannot be regarded as tax evasion. Tax planning is permissible as held by the Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan 263 ITR 706."

21. In our view, the aforesaid discussion by the CIT(A) is fair and apt,

having regard to the facts and circumstances of the case and we find no

reason to interfere with the same. In any case, there is no material to suggest

that any colourable device has been adopted by the assessee to avoid tax

while carrying on the transaction of sale of shares of City Park Pvt. Ltd. to

Peninsula Land Ltd..

22. In view of the aforesaid discussion, we hereby affirm the order of the

CIT(A) holding that the surplus arising on the sale of shares in City Park Pvt.

Ltd. is assessable as capital gain and not as profits and gains of business.

Thus, on this aspect, Revenue fails.

11 ITA No.764/PN/2012 ITA No.824/PN/2012

23. Now, we may take-up the appeal of the assessee which relates to the

nature and quantification of loss incurred by the assessee on sale of shares of

HCL Technologies Ltd..

24. To recapitulate, the background of the dispute in assessee's appeal can

be summarized as follows. The assessee before us is an individual, who is

Executive Director of Serum Institute of India Ltd.. In the period from

28.02.2007 to 13.03.2007, assessee purchased 4,71,517 equity shares of

HCL Technologies Ltd. for a total consideration of Rs.29,36,28,768/- (inclusive

of brokerage, etc.). The average purchase price of above purchase was

Rs.622 per share. On 12.02.2007, HCL Technologies Ltd. announced bonus

issue of shares in the ratio of one share for every one share held and the

record date was fixed as 16.03.2007. Consequently, on account of his

purchase of 4,71,517 equity shares, assessee received 4,71,517 bonus

shares also. Subsequently, between 15.03.2007 to 28.03.2007 assessee sold

4,71,500 shares of HCL Technologies Ltd. out of the original 4,71,517 shares

acquired by him. Such shares were sold for a consideration of

Rs.14,28,67,804/- which reflected an average sale price of Rs.303 per share.

Assessee declared a short term capital loss on sale of such shares of

Rs.15,01,80,424/-.

25. The Assessing Officer has differed with the assessee on the treatment

of the aforesaid transaction. As per the Assessing Officer, the aforesaid

transaction reflected active involvement of the assessee as a 'trader', rather

than as an investor. As per the Assessing Officer, assessee regularly dealt in

the shares of HCL Technologies Ltd. which reflected a trading intention.

Secondly, the stand of the Assessing Officer was that the motive for carrying

out the aforesaid set of transactions in the shares of HCL Technologies Ltd.

was to incur loss on account of bonus striping and then set-off such loss

against the long term capital gain accruing to the assessee on sale of shares 12 ITA No.764/PN/2012 ITA No.824/PN/2012

of City Park Pvt. Ltd.. As per the Assessing Officer, the motive of the

assessee in dealing in the shares of HCL Technologies Ltd. was tax

avoidance and a dubious tax planning. Ultimately, the Assessing Officer

disagreed with the assessee with nature and the quantification of loss on the

sale of 4,71,500 equity shares of HCL Technologies Ltd.. The Assessing

Officer computed the loss at Rs.39,41,287/- as per the Tabulation which we

have reproduced earlier in this order. The point of difference on this aspect

between the assessee and the Assessing Officer was with regard to the cost

of the shares sold. The Assessing Officer followed the methodology of

spreading the cost of original shares to total shares i.e. the original shares plus

bonus shares. In other words, the total shares held by the assessee (i.e.

original shares 4,71,517 + bonus shares 4,71,517) were considered to have

been acquired for an amount of Rs.29,36,28,768/-, i.e. the price originally

incurred by the assessee. The Assessing Officer treated the shares of HCL

Technologies Ltd. as stock-in-trade and therefore the loss of Rs.39,41,287/-

treated as a business loss. The CIT(A) has affirmed both the stands of the

Assessing Officer, namely, that the transaction in the shares of HCL

Technologies Ltd. was a business transaction, and, secondly that the

methodology of loss computed by the Assessing Officer was correct.

26. Before us, the Ld. Representative for the assessee vehemently argued

that the lower authorities have erred in treating the activity of dealing in the

shares of HCL Technologies Ltd. as a business activity. According to the Ld.

Representative, assessee was whole-time involved as Executive Director of

Serum Institute of India Ltd.; and, that there was neither an organized activity

of trading in shares and nor was there any organizational support in this

regard. With regard to the profit motive, it has been contended by the Ld.

Representative that be it be a business transaction or an investment

transaction, profit maximization is an element which is always present. It has

also been contended that the lower authorities have erred in confirming that 13 ITA No.764/PN/2012 ITA No.824/PN/2012

bonus shares received formed part of the stock-in-trade and taking the cost of

shares sold on average basis was also wrong. In this context, reliance has

been placed on the judgement of Hon'ble Supreme Court in the case of CIT

vs. Madan Gopal Radhyey Lal, 73 ITR 652 wherein the Supreme Court held

that in the hands of the dealer of shares, any bonus shares received constitute

a 'capital asset' unless specifically converted into stock-in-trade. Based on the

aforesaid judgement, it is contended that the assessee received the bonus

shares as a 'capital asset' and never converted the bonus shares into stock-in-

trade. It is submitted that in the subsequent assessment years, the sale

proceeds in respect of bonus shares sold were offered to tax under the head

'capital gain' after considering their cost of acquisition as Nil and such a

treatment has been accepted by the Assessing officer in scrutiny

assessments. It was therefore contended that the quantity of bonus shares

could not be considered while determining the cost of the original shares sold

during the year under consideration. According to the Ld. Representative, this

is also on par with section 55(2)(aa)(iiia) of the Act wherein the cost of bonus

shares is to be taken as Nil and the entire cost is liable to be adjusted on the

original shares.

27. At the time of hearing, it has also been pointed out that during the year

under consideration, assessee had sold other shares and units of mutual

funds, and profit arising from such transactions have been accepted by the

Assessing Officer to be assessable as 'capital gains'. Furthermore, it was

pointed out that in the preceding assessment years as well as in the

subsequent assessment years, the Assessing Officer has assessed the gain

on sale of shares as an income assessable under the head capital gains, even

in the course of scrutiny assessment. For all the aforesaid reasons, it has

been canvassed that there was no scope for treating the impugned transaction

as business transactions. It was also vehemently argued that there was no

material to impeach the genuineness of the transactions and that at best the 14 ITA No.764/PN/2012 ITA No.824/PN/2012

transaction can be termed as a 'use of the provisions of law' and it cannot be

said to be 'a abuse of law', as was observed by the Hon'ble Supreme Court in

the case of CIT vs. Walfort Share & Stock Brokers (P.) Ltd., 326 ITR 1 (SC) in

a somewhat similar situation.

28. On the other hand, the Ld. Departmental Representative appearing for

the Revenue has reiterated that the magnitude and frequency of the

transactions in the HCL Technologies Ltd. shares was quite substantial which

reflects that the intention of the assessee was to trade in such shares. With

regard to assessee's intention, it was pointed out that at the time of

undertaking transactions in HCL Technologies Ltd. shares, assessee was

aware that he was considering the sale of shares of City Park Pvt. Ltd., which

was to yield him substantial amount of capital gain and therefore he undertook

the impugned transaction in shares of HCL Technologies Ltd. in order to incur

a loss. According to the Ld. Departmental Representative, it is a common

knowledge that share prices come down after the issue of the bonus shares,

since the bonus shares are allotted after capitalizing the free reserves of a

company. Therefore, assessee bought the shares of HCL Technologies Ltd.

on cum bonus basis and after having received the bonus shares, the original

shares were sold in the market at the reduced prices. According to the Ld.

Departmental Representative, sequence of events clearly indicate that the

purchase and sale of shares was undertaken with the sole intention of booking

a loss so as to set-off the same against the gain from sale of shares of City

Park Pvt. Ltd. and take the benefit of provisions of section 10(38) of the Act,

thereby claiming the capital gain on sale of bonus shares as exempt on a later

date.

29. We have carefully considered the rival submissions. In the present

case, the fundamental aspect which is permeating through the entire exercise

carried out by the Assessing Officer is that the short term capital loss incurred 15 ITA No.764/PN/2012 ITA No.824/PN/2012

by the assessee on sale of 4,71,500 shares of HCL Technologies Ltd. has

been set-off against the long term capital gain earned by the assessee on the

sale of shares of City Park Pvt. Ltd.. The appellant purchased 4,71,517 equity

shares of HCL Technologies Ltd. at an average price of Rs.622 per share

between 28.02.207 to 13.02.2007. After receipt of 4,71,517 bonus shares,

assessee sold 4,71,500 shares out of original shares between 16.03.2007 to

28.02.2007 at an average selling price of Rs.303 per share. Ostensibly, after

the issue of bonus shares, the price of HCL Technologies Ltd. declined in the

market and therefore the sale price realized by the assessee was only Rs.303

per share as against as the purchase price of cum-bonus shares of Rs.622 per

share. The resultant loss was canvassed to be a short capital loss. In the

subsequent years, assessee sold the balance shares remaining with him i.e.

bonus shares of 471517 and the 17 out of the original 471517 shares. As the

period of holding that was in excess of 12 months, in subsequent years the

gain on sale of such shares has been accepted by the Assessing Officer as

long term capital gain, which was exempt u/s 10(38) of the Act. Notably, while

computing such capital gain, the cost of acquisition of the bonus shares was

taken as 'Nil' by application of the provisions of section 55(2)(aa)(iia) of the

Act. The aforesaid position has been accepted by the Assessing Officer in

scrutiny assessment, as asserted by the assessee in the course of the hearing

before us, and this material has not been repudiated from the side of the

Revenue.

30. In the current year, assessee computed the loss on sale of 4,71,500

original shares by considering the average acquisition cost of Rs.622 per

share. Ostensibly, it resulted in a loss because the sale price realized was

only Rs.303 per share. First of all, the Assessing Officer viewed the whole

transaction as a dubious tax planning. In this context, a reference has been

made to the judgement of the Hon'ble Supreme Court in the case of Walfort

Share & Stock Brokers (P.) Ltd. (supra). In the case before the Hon'ble 16 ITA No.764/PN/2012 ITA No.824/PN/2012

Supreme Court, assessee purchased mutual fund units on 24.03.2000 and

became entitled to dividend on the units @ Rs.4 per unit and earned a

dividend of Rs.1,82,12,862/-. As a result of the dividend payout the value of

the units reduced from Rs.17.23 to Rs.13.23 per unit on March 27, 2000, when

assessee sold all the units and collected an amount of Rs.5,90,55,207/- as

well as other incentives of Rs.23,76,778/-. In all, assessee received back

Rs.7,96,44,847/- as against initial payout of Rs.8,00,00,000/-. In the return of

income, assessee claimed dividend of Rs.1,82,12,862/- as exempt u/s 10(33)

of the Act and also claimed a set-off Rs.2,09,44,793/- as loss incurred on sale

of units. The Revenue disallowed the set-off of loss claimed which was

negated by the Tribunal and thereafter the Hon'ble Supreme Court. As per the

Hon'ble Supreme Court, it stood established that there was a sale and that

assessee received a dividend, which was tax-free. In this context, the Hon'ble

Supreme Court noted that the entire transaction could not be seen as 'abuse

of law' but the assessee had made use of the "provisions of section 10(33)".

The Hon'ble Supreme Court observed that even if it was to be assumed that

there was a pre-planned action yet there was nothing to impeach the

genuineness of the transaction. Adverting to the provisions of section 94(7) of

the Act, the Hon'ble Supreme Court noted that in the case of assessment,

before 01.04.2002 i.e. before insertion of section 94(7) of the Act, losses

pertaining to the exempted income could not be disallowed. The assessment

year before the Hon'ble Supreme Court was before the insertion of section

94(7) of the Act. It has also been observed by the Hon'ble Supreme Court that

even after applying section 94(7) to cases for assessment years after

01.04.2002, the loss to be ignored would be only to the extent of the dividend

received and not the entire loss. In other words, the losses over and above

the dividend received would still be allowed to be set-off. Considering the

aforesaid scheme of the Act, the Hon'ble Supreme Court held that the

Parliament has not treated the dividend stripping transaction as sham or

bogus.

17 ITA No.764/PN/2012 ITA No.824/PN/2012

31. In our considered opinion, the parity of reasoning laid down by the

Hon'ble Supreme Court in the case of Walfort Share & Stock Brokers (P.) Ltd.

(supra) is definitely attracted in the present case too. In the present case,

even if it is taken that the transaction in the shares of HCL Technologies Ltd.

was pre-planned, but the inference drawn by the Assessing Officer that it was

a dubious tax planning cannot be upheld because there is nothing to impeach

the genuineness of the transaction carried out by the assessee. In the case

before the Hon'ble Supreme Court also, similar situation prevailed and the

Revenue had cast doubt on the transaction because of pre-planned nature of

the transaction. The Hon'ble Supreme Court negated the stand of the

Revenue, as noted by us earlier. Applying the similar parity of reasoning in

the present case, the stand of the Assessing Officer that the transaction was

pre-meditated with the intention of incurring loss and setting-off against capital

gains income is an "abuse of law" cannot be affirmed.

32. We may also refer to section 94(8) of the Act, which has been inserted

by the Finance (No.2) w.e.f. 01.04.2005, and it provides that loss arising on

bonus stripping of units is to be ignored after 01.04.2005. The phraseology of

section 94(8) of the Act itself reveals that the Parliament in its wisdom

restricted the scope of bonus stripping u/s 94(8) of the Act only to the units

and did not extend it to the shares while the scope of the dividend stripping

contained in section 94(7) of the Act applied both to shares/securities as well

as units. Therefore, on the strength of section 94(8) of the Act also and having

regard to the parity of reasoning laid down by the Hon'ble Supreme Court in

the case Walfort Share & Stock Brokers (P.) Ltd. (supra), the transactions of

purchase and sale of shares of HCL Technologies Ltd. are to be understood

as a genuine transaction and are not covered by the provisions of section

94(8) of the Act.

18 ITA No.764/PN/2012 ITA No.824/PN/2012

33. Now, with regard to the stand of the assessee that he has acted as an

investor and not as a trader while carrying out the aforesaid transaction in the

shares of HCL Technologies Ltd.. In this context, the sum and substance of

the case made out by the Revenue is that within a short period of time

assessee has carried out substantial purchase/sale transactions in the shares

of HCL Technologies Ltd.. As per the Assessing Officer, the transaction has

been carried out in a systematic and organized manner and the intent was to

incur a loss, which could be set-off against the capital gains income.

Therefore, according to the Revenue, the transactions have to understood as

a 'business activity'.

34. It is trite law that whether a particular transaction is an adventure in the

nature of trade or is an investment simplicitor is a mixed question of law and

facts. It is also evident that there is a plethora of judicial rulings on this aspect.

Nevertheless, a common thread which emerges from various judicial rulings is

that no single test is conclusive but the entire conspectus of facts and

circumstances of a given case have to be cumulatively appreciated in order to

determine as to whether the transaction in question is an adventure in the

nature of trade or is an investment simplicitor. In this background, we may

examine the factual matrix of the present case. At the outset, the Ld.

Representative pointed out that the gain derived on sale of other shares and

mutual funds in this year has been accepted by the Assessing Officer to be

assessable under the head 'capital gains'. It has also been pointed out that in

the scrutiny assessment for the preceding assessment years as well as for the

subsequent assessment years the profit on sale of shares earned by the

assessee has been accepted as assessable under the head 'capital gains'.

Notably, even with regard to the gain on sale of bonus shares of HCL

Technologies Ltd., it was stated at Bar that in subsequent assessment years it

has been accepted by the Assessing Officer as an income assessable under

the head 'capital gains'. On all these aspects, the Revenue has not 19 ITA No.764/PN/2012 ITA No.824/PN/2012

controverted the factual matrix brought out by the assessee. In this

background, in our considered opinion, the onus was on the Revenue to

establish that the transaction in the shares of HCL Technologies Ltd. was not

assessable under the head 'capital gains', as declared by the assessee in the

return of income. The moot point is as to whether or not, having regard to the

discussion in the orders of the authorities below, such an onus has been

discharged by the Revenue.

35. The only point made by the Revenue is that magnitude and frequency

of the transaction in HCL Technologies Ltd. is substantial. In our considered

opinion, in the present case, the nature of the assessee's dealing in shares as

an investor stands established in past as well as also in future years. The

assessee is full time involved in other activity of being Executive Director of

Serum Institute of India Ltd.. There is no material to suggest that any

organizational structure or infrastructure is possessed by the assessee to

undertake trading in shares as a business activity. There is no material to say

that assessee acted as a frequent dealer in shares over an extended period of

time. No doubt, for a short spell of time in the months of February and March,

assessee has undertaken transactions in the shares of HCL Technologies

Ltd.. But the same by itself cannot be categorized as a business activity, as it

is not a continuous activity. Moreover, we also find weight in the plea setup by

the Ld. Representative before us that if the intention was to incur loss, as

canvassed by the Assessing Officer, then obviously such an activity cannot be

categorized as 'business'. It is well understood that no business is carried out

with an intention of making a loss, rather the intention is always to make

profits. Therefore, by taking an overall view of the facts and circumstances of

the present case, we are unable to uphold the stand of the lower authorities

that the transaction in the shares of HCL Technologies Ltd. is a business

transaction. We hereby set-aside the order of the CIT(A) on this aspect and

direct the Assessing Officer to re-compute the capital gain/loss on the sale of 20 ITA No.764/PN/2012 ITA No.824/PN/2012

shares of HCL Technologies Ltd. considering it to be assessable under the

head capital gains as per law. Thus, on this aspect assessee succeeds.

36. Resultantly, whereas the appeal of the Revenue is dismissed that of the

assessee is allowed.

Order pronounced on 30 th January, 2015.

Sd/- Sd/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 30 th January, 2015. Sujeet

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-III, Pune; 4) The CIT-III, Pune; 5) The DR "B" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy//

Assistant Registrar I.T.A.T., Pune