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Pradeep Parikh, Vice President

1. This appeal by the assessee is directed against the order of the learned CIT(A) dt. 28th Feb., 2002 for asst. yr. 1998-99. First ground in the appeal is against treating the amount of Rs. 42,50,000 as business income.

2. The assessee-company was a holder of 55,480 equity shares of Ghaghara Sugar Ltd. (GSL) which is a group concern of DGM Shree Ram Consolidated Ltd. (DCMSC). This holding constituted 21 per cent of the total share capital of GSL. These shares were acquired way back on 6th Dec., 1994 when GSL was in the process of setting up a sugar factory. Purportedly, the intention to acquire these shares was to participate in the management and control of GSL as the assessee was one of the promoters of GSL. On 15th April, 1997 i.e. during the year under consideration, the assessee entered into an agreement with GSL whereby the assessee agreed to transfer its entire shareholding in favour of DCMSC and their associates. The agreement, inter alia, provided that the assessee will not, for a period of five years, directly or indirectly promote or set up sugar business/factory or purchase/invest in sugar business/factory within a radius of 100 k.m. from the factory of GSL. In consideration of this undertaking, GSL paid to the assessee a sum of Rs. 42,50,000 as non-compete fees. The assessee claimed this as a capital receipt not chargeable to tax. The AO referred to the agreement wherein the assessee was described as having adequate technical and managerial expertise in promoting and setting up sugar factory. According to the AO this was completely divorced from reality. According to him, there was no evidence to show that the assessee possessed either all or any of the four essentials of entrepreneurship viz. land, labour, capital and organization. He also observed that the transaction was not at arm's length insofar as that GSL and Hind Industrial Resources Ltd. (HIR) were companies of the same group. Therefore, he held that the sum of Rs. 42,50,000 received by the assessee was an income in the line of the assessee's business and hence added it to the total income of the assessee.

3. The CIT(A) observed that the non-compete agreement was a part of a broader design whereby a compensatory payment had been made to the assessee to sell its shareholding in GSL. He also observed that no source of income of the assessee had been extinguished or sterilized. Thus, he concurred with the view of the AO holding the agreement to be a sham one.

4. After apprising us of the facts as narrated above, the learned Counsel took us to the various clauses of the agreement as per which the assessee was not to compete with GSL, directly or indirectly, for a period of five years and was also restricted to draw key personnel from GSL. His main stress was on the point that for setting up a sugar industry, one did not require actual technical skill relating to the said industry. If one had enough capital, then the industry could be set up by hiring skilled people. It was contended that the assessee was financially capable of setting up such an industry and hence GSL had to enter into a non-compete agreement with the assessee. It was also pointed out that the assessee-company had no connection whatsoever with the DCMSC group of companies and hence it was not proper on the part of the CIT(A) to hold the agreement to be sham, that too without bringing any material on record to support such an allegation. It was submitted that Clause (va) inserted in Section 28 w.e.f. 1st April, 2003 was prospective in operation and hence did not apply. For his various contentions, the learned Counsel relied on various decisions of the Tribunal and in particular in the case of Shri Sunil Lamba [sic-Ashok Behari Lal (HUF)] v. Asstt. CIT (2006) 99 TTJ (Del) 513 where the aforesaid amendment was also considered.

7. In the present case, the main reason for treating the compensation as revenue receipts by the Department is that there was no potential threat to GSL from the assessee. This is contrary to the facts on record. The main objects for which the assessee-company was incorporated as averred by the AO himself in his order are to carry on the business of financiers, trading, hire charges, leasing, moneylending etc. Here, the object to act as financiers has to be construed in a wide term. If the term financiers has to be construed in a narrow sense, then, there was no need to mention the object of moneylending. Moneylending is certainly a narrower term than, financiers. Moneylending would constitute merely giving money as a loan with or without interest. On the other hand, financier would be including not only moneylending but would also include an activity like financing a project. Financing a project may be in any of the modes like giving money as loan or subscribing to the capital or providing capital in kind. Thus, it cannot be said that by being one of the promoters of GSL, the assessee had acted beyond the objects permitted by its memorandum of association. In fact, providing capital is one of the ingredients of entrepreneurship as mentioned by the AO in his order. The assessee does possess this ingredient which is evident from the fact that as on 31st March, 1998, total funds available with it were to the tune of Rs. 5.33 crores. With the help of these funds only, the assessee had acguired 21 per cent shareholding in GSL by a meagre investment of Rs. 3,28,450. If this financial muscle is not a threat to GSL, what else can it be. Just as the assessee was a co-promoter of GSL, likewise it can promote any other sugar industry also. It is with this perception of a potential threat that GSL restrained the assessee by entering into an agreement with it not to be involved, directly or indirectly in any sugar industry/business within a radius of 100 kms. for a period of five years. It is a covenant restricting the assessee to enter into any sort of competition with GSL. The compensation received by the assessee is not in the course of its ordinary business operations. Therefore, as observed by the Supreme Court in the case of Gillanders Arbuthnot (supra), the compensation received by the assessee has to be treated as a capital receipt and not a revenue receipt as held by the Revenue authorities.

12. While dealing with the first ground of this appeal, we have observed that the assessee, inter alia, acts as financier as mentioned in the main objects of its memorandum of association. We have also observed that acting as financiers may assume different shapes, one of them being to participate as promoters in new ventures. As a part of this activity, the assessee had participated in the promotion of GSL by subscribing to 55,480 shares of GSL and to 8,74,533 shares of KTI. The shares in GSL were acquired in December, 1994 and those of KTI during the financial years 1992-93 and 1995-96. Along with this activity, the assessee also carried on the activity of dealing in shares. This is evident from the balance sheet of the company as on 31st March, 1998. The assessee has trading activity only in shares. The shares in which it. trades are separately shown in the balance sheet as stock-in-trade. The shares in which it does not trade or in other words, the shares which are held as long-term investments are shown under the head "investments". We are conscious of the proposition that entries in the books are not determinative of the issue. It is the intention with which the shares were purchased can determine the issue. However, the intention cannot be what the assessee says. It has to be gathered from other attendant circumstances. Thus, the fact that the shares have been classified into investments and stock-in-trade is an indication about the intention of the assessee. The shares in question have been classified as investments. Further, since the shares were acquired by the assessee in its capacity as one of the promoters, subsequently there was no occasion for the assessee to buy further shares. By this, we do not mean that had the assessee purchased further shares of the same companies, it would have been its stock-in-trade, Again, everything would depend on the facts of each case. But the fact that in the instant case, since the assessee did not purchase further shares, strengthens the contentions of the assessee that they were held as investments. Moving further, the shares have been sold after holding them for about four to six years. If the intention of the assessee was to deal in these shares, then perhaps, it would not have waited for this long a period to dispose off the shares. Moving still further, it is seen that the assessee has sold its entire holding in GSL and KTI. Again, had there been any intention of trading in these shares, then perhaps, it would have parted with only a part of the holding. The last stage of the entire operations is the disposal of the entire shareholding of the assessee in GSL and KTI at one go. Thus, applying the principle laid down in the case of H. Hock Larsen (supra), this last stage in the entire operations clearly determines the issue and that is that the assessee was holding the impugned shares as investment and not as stock-in-trade. Accordingly, we hold that the profit earned by the assessee on the sale of the shares of GSL and KTI are to be assessed as capital gains giving due benefit of indexed cost of acquisition to the assessee.