Income Tax Appellate Tribunal - Bangalore
Karnataka State Industrial Investment ... vs Deputy Commissioner Of Income Tax on 3 March, 1996
Equivalent citations: [1996]59ITD643(BANG)
ORDER
S. Bandyopadhyay, A.M.
1. The assessee is an undertaking of the Government of Karnataka. It is an admitted fact that the assessee-company was formed by the Government with the main objective of investing in and developing the industrial undertakings in the State of Karnataka and in the process, in bringing about a steady progress in the industrial environment of the State. For this purpose, the assessee-company gives loans to the different entrepreneurs in starting and carrying on industries in the State, on which it charges interest at certain rates. Besides, the assessee also takes part in promotion of certain industrial companies in joint ventureship or otherwise, by contributing to the share capital of such companies to certain extent. Thereafter, after the company is able to stand on its legs, the assessee disinvests the shares of those companies and starts investing in some other new company.
2. The facts of the case are that during this particular year, the assessee sold its shareholdings in as many as eight companies of the aforesaid type, either fully or partly. This resulted in loss to the assessee-company in the case of five companies, whereas the assessee stood to gain in respect of the sales of the shares of three companies. Even then, the assessee made a profit of Rs. 5 lakhs by selling 80,000 shares of M/s Star Volkman Ltd., and also substantial profit of Rs. 4,16,00,000 in selling its entire holding of 10,40,000 shares in Karnataka Telecables Ltd. The assessee claimed that it was holding all the above mentioned shares under the investment portfolio and hence, the profit or loss arising to it on account of sale of all these shares were of the nature of capital gains or capital losses. Accordingly, the assessee returned a net capital loss of Rs. 21,11,096 after deducting a sum of Rs. 5,19,99,282 on investment of the sale proceeds of the shares in IDBI bonds and UTI capital gains unit and a further amount of Rs. 9,14,785 under s. 48(3) of the IT Act. The AO was, however, of the opinion that the assessee was actually carrying on business in the line of purchases and sales of the shares under consideration. He held that the profits/losses made by the assessee in selling the above shares were incidental to the main purpose of the assessee of promoting investment in the State. Accordingly, the AO treated the entire gains/loss as business gains/loss and computed the business profit of Rs. 3,85,74,131 in place of the capital loss as returned by the assessee. The action of the AO was upheld by the CIT(A).
3. The assessee has come up in further appeal before us against these actions of the lower authorities. It is contended that the assessee never acted as an ordinary dealer in shares inasmuch as the assessee does not purchase and sell shares in the secondary market. It is claimed that, on the other hand, the assessee merely subscribes to shares as a promoter under the directions and guidance of the Government of Karnataka. It is also shown that most of the shares sold away by the assessee in this year were held by it for quite some time. The learned counsel for the assessee has also drawn our attention to the salient features with regard to the shares of Karnataka Telecables Ltd. sold away by the assessee in this year which fetched huge amount of profit to the assessee. He has emphasised that while investing in the shares of the company, the assessee acted merely as a promoter and the original intention was to hold the shares in perpetuity, though later on this decision was changed and with the approval of the Government of India only, the assessee sold away the shares to the other partner in the joint venture only when it was assured of the strong viability of the company. It has also been pointed out that there was no buy-back arrangement in acquiring these shares. The learned counsel for the assessee also brought it to our notice that the shares of the companies have all along been considered as investments in the balance sheet of the assessee-company. It has furthermore been pointed out that in a few cases, the shares were ultimately given away to the Government of Karnataka and not sold in the market. Thereafter, reliance has been placed by him on a number of decisions of different Courts to which we are referring in the paras below.
4. Our attention has been drawn to the judgment of the Supreme Court in the case of Raja Bahadur Visheshwara Singh (Decd.) & Ors. vs. CIT (1961) 41 ITR 685 (SC). The Supreme Court held in the said case that when an owner of an ordinary investment chooses to realise it and obtains a higher price for it then he originally acquired it at the enhanced price is not a profit assessable to income-tax but where what is done is not merely a realization or a change of investment but an act done in what is truly the carrying on of a business, the amount recovered as appreciation will be assessable. The converse of this finding of the Supreme Court is that when an assessee does not carry on a regular business in investments, any profit arising to it out of terminal sale of such investments will not tantamount to business profit.
4(a) Thereafter reliance has been placed on another decision of the Supreme Court in the case of Dalhousie Investment Trust Co. Ltd. vs. CIT (1967) 66 ITR 473 (SC). It was held in this particular case that the mere fact that an investment company periodically varies its investment does not necessarily mean that the profits resulting from such variation is taxable under the IT Act (at the relevant time there was no provision for taxing capital gains). It was furthermore held that variation of its investments must amount to dealing in investments before such profits can be taxed as income under the IT Act.
4(b) A decision of the Calcutta High Court in the case of Dalhousie Holdings Ltd. vs. CIT (1994) 72 Taxman 335 (Cal) was also relied upon by the learned counsel for the assessee. In this case, regarding the claim of the assessee about loss on sale of shares to be considered as business loss, it was held on the basis of the finding of the Tribunal that the assessee was not a dealer in shares and had claimed profits from sale of shares in earlier years as capital gain and that it had acquired shares in various companies with the object of getting directorship in those companies and, therefore, the loss in sale of such shares was merely on the capital account. Another decision of the Supreme Court in the case of CIT vs. Distributors (Baroda) (P) Ltd. (1972) 83 ITR 377 (SC) relating to when a company could be considered as an investment company was also relied upon. In another case of CIT vs. H. Holck Larsen (1986) 160 ITR 67 (SC), the Supreme Court had held that purchase and sale of right shares acquired for nursing investment and avoiding erosion of capital and containing overdraft account would give rise to profit on capital account and not on revenue account.
4(c) Reliance was also placed on another decision of the Calcutta High Court in the case of CIT vs. Calcutta Discount Co. (P) Ltd. (1986) 162 ITR 680 (Cal). On the question of whether sale of shares spread over three years gave rise to income or capital gains, it had been found that the assessee was basically an investment company and not a dealer in shares and furthermore that the shares had been held for a long time before sale and because of the huge magnitude of the shares held, it was necessary for the assessee to effect the sales over a long period. It was ultimately held that the profit on sale of shares was merely a capital gain.
5. On the other hand, the learned Departmental Representative vehemently contended that investment in shares of different companies along with giving loans to them was an integral part of the main activity of the assessee to provide funds to the companies in the process of developing the industrial climate in the State. This was stated to be an on-going process. The learned Departmental Representative brought to our notice to the fact that the assessee had taken up shares in many other companies also and on developing the companies for some time, the assessee was always in the habit of disinvesting the shares. Thus, it is argued that the acquisition and disposal of the shares formed a part of the business process of the assessee and the dealings in this regard should, therefore, be considered as regular business dealings. It is, thus, finally argued that the profits or loss arising out of the sale of the shares should be considered as profits or loss on revenue account.
In support of this contention, the learned Departmental Representative has relied on some decisions. He has pointed out that in the case of Karanpura Development Co. Ltd. vs. CIT (1962) 44 ITR 362 (SC), the Supreme Court found that whereas that assessee was a company formed with the objects, inter alia, of acquiring and disposing of underground coal mining rights in certain coal fields and whereas the memorandum of association of the company enumerated other objects, such as coal raising, but the assessee restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. It was held by the Supreme Court that the transactions of acquiring leases and granting sub-leases were in the nature of trading within the objects of the company and not enjoyment of property as land owner. The Supreme Court furthermore commented in that case that the ownership of property and leasing it out may be done as a part of business or it may be done as a land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. Thereafter, reliance was placed on another decision of the Supreme Court in the case of Karam Chand Thapar & Bros. (P) Ltd. vs. CIT (1969) 74 ITR 26 (SC) at page 31. The facts in this case were also similar to those of the earlier case and the Supreme Court ultimately agreed with the Tribunal that the prospecting for coal being a part of the coal mining business, the profit of the assessee by way of developing colliery and selling the same was taxable as income.
Another decision of the Allahabad High Court in the case of CIT vs. Smt. Indermani Jatia (1970) 77 ITR 133 (All) at page 139 was also relied upon by the learned Departmental Representative. It was held in the said case that the entire income earned by the assessee by exploitation of the assets of the business, profession or vocation should be entitled to the exemption under s. 25(4) of the 1922 Act, although the different items of income derived from the different assets might be assessable under different heads.
6. The sum and substance of all the above mentioned decisions is that it is possible for an assessee to hold shares on the investment portfolio, in which case the profit arising out of the sale of the same would be of the nature of capital gains. At the same time again, the act of holding some asset for some time and thereafter disposing of the same on finding suitable opportunity can partake of the business character, if the object of indulging in such activities be to cater to the business needs of the assessee. It is also an acknowledged fact that an assessee can hold some shares on the investment portfolio and some as stock-in-trade simultaneously. The main point to distinguish between these two types is to find out the actual intention behind the acquiring of these two types of shares.
In the instant case, the assessee is not an ordinary company formed for the purpose of carrying on business in regular manner and earning profits. On the other hand, it is a Government undertaking, specially created by the Karnataka Government with the main purpose of developing industries in the State. Thus, the primary object of the assessee is development of industries and helping entrepreneurs in the process and not to earn profits for itself. Incidentally, it may make some gains which would help it in carrying on its activities. It is a well-acknowledged fact that the assessee does not deal in shares in a regular way and never goes to the secondary market for making purchases or sales of shares. On the other hand, it undertakes promotion of certain companies and invests in the equity of such companies either alone or in participation with others, simply for the purpose of helping that company to grow. Whenever, therefore, the assessee invests in the shares of some company, the principal object behind the same is to nurse the company for the purpose of developing the industries in the State in general. Thereafter, when the assessee feels that the time has arisen for it no longer to back the company and either the company would be able to stand on its legs or the company has permanently become sick, the assessee tends to separate itself from the company by disinvesting the shares thereof. The study of the disposal list of the assessee in this year itself would appraise anyone of this basic aspect. It is found that in case of some of the companies, the assessee had to divest itself of the share holding at very low price inasmuch as the companies had failed to come up. In certain other cases, the assessee, on finding that its hold was no further necessary, disinvested the shares therein. It is also required to be found that the shares of most of these companies were held by the assessee for rather a long time which itself goes to show that the purpose of the assessee in acquiring the shares of such companies was to hold them as investment portfolio. It is also not the case that whenever opportunities for making maximum profits arose to the company it divested itself of the shares. On the other hand, the question of divestiture of shares had to be looked into from the other angle of whether the company had become a mature one or not. The process itself again was a lengthy one inasmuch as it required not only the approval of the Karnataka Government but also that of the Central Government also. Exactly same is the case with regard to the shares of Karnataka Telecables Ltd. No doubt that the assessee has made huge profits in disposing of the shares of this particular company but it cannot at all be said that when the assessee had originally invested in the shares of this company, it had done so, basically with a profit motive. On the other hand, the stipulation was that the assessee should go on holding the shares perpetually. Looking into all these facts, we must come to the finding that the assessee, while acquiring the shares of the eight companies under consideration, had done so from the point of view of its main objective namely developing industry in the State and not at all with a profit motive. The assessee has all along treated the shares as investments only. Although this point alone may not be a binding factor in deciding the issue yet, it goes to show the motive of the assessee even at the time of acquisition of the shares. Simply because of the fact that investing in shares of the companies to be developed by it, is an integral part of its activities, the operations in disinvesting such shares at a later point of time does not become ipso facto a business operation. On the other hand, for the reasons as detailed by us above, we must come to the conclusion that the shares were held by the assessee under investment portfolio and, therefore, the profit/loss arising to it on sale of such shares is nothing but of the nature of capital gain/loss. We, therefore, reverse the decisions of the lower authorities in this regard and direct that the profits/loss in this regard be recomputed as capital gains/loss and after taking into consideration all the provisions relating to allowing deductions and exemptions in computing such capital gains/loss.
7. In the next ground, the assessee challenges the decision of the lower authorities in not allowing depreciation to it on the buildings which were under its possession but of which the assessee could not become full owners. The facts in this regard are that the properties were not acquired by the assessee by executing registered conveyance deeds. Therefore, in accordance with the decisions of the Karnataka High Court in the cases of Ramkumar Mills (P) Ltd. vs. CIT (1989) 180 ITR 464 (Kar) and CIT vs. Bharat Goldmines Ltd. (1991) 192 ITR 639 (Kar), the assessee cannot be considered to be the owner of these properties. The action of the lower authorities in disallowing the claim of depreciation thereon is therefore, being confirmed by us.
8. In other grounds, the assessee contends that the lower authorities should have allowed the claim of the assessee with regard to the computation of profit under the provisions of s. 115J of the IT Act. It is found that the CIT(A) did not entertain this particular claim, on the ground that after deletion of the accrued interest of Rs. 14,05,45,000, the book profits computed under s. 115J would be less than the business profit computed under the normal provisions of the IT Act. Now that we have directed that the profit arising out of sale of the shares be treated as capital gains only, the computation of income under s. 115J may require a thorough change. The CIT(A), is, therefore, being directed to look into this aspect and to pass appropriate order on this issue after recomputation of the income of the assessee.
9. In another ground, the assessee also challenges levy of interests under s. 234B. During the course of the hearing of the proceeding before us, however, the learned counsel for the assessee has admitted that the relief claimed is merely consequential in nature. As consequential relief is required to be allowed automatically, this particular ground does not deserve any consideration at all. Hence, this ground is being dismissed.
10. In the result, the appeal filed by the assessee is partially allowed to the above mentioned extent.