Case: Accra Investments Private Limited Vs. The Income Tax Officer, Range-3(1)(1)

book value cannot be itself lead to the conclusion that the purchase was not in the nature of investment. It is a well known global phenomena that investors purchase shares of loss making companies because in their perception the company has inherent potential to do well either on account of its business model or on account of the management of the company. The potential perception is unique to each investor and there cannot be any universal yard stick to determine whether such perception was justified or not. In any case the other two subscribers in the shares of M/s. MABL had subscribed at the price of Rs.87.95 per share (S&N) and Rs.35.83 per share (UB) itself evidences the fact that others had also perceived great investment opportunity in the business of M/s. MABL The submission on behalf of the revenue that this particular argument with regard to investment being made by other two subscribers at a higher price was not brought to the notice of the Tribunal during the hearing, though not disputing that the same was part of the record and proceeding before the Tribunal. The analogy drawn on the basis of the explanation under Section 147 of the Act may not be a proper analogy. In any view of the matter, it is not necessary to resolve the above issue as the respondent revenue do not deny/dispute before us that the shares were subscribed to by S&N at Rs.87.95 per share and by UB at Rs.35.83 per share. Therefore, the fact that other share holders have subscribed at higher price is an undisputed position. This would also establish that perception of the potential of the M/s. MABL on the part of the appellant was not solitary and unique. To our mind even if the perception of the appellant was solitary and unique, it would make no difference.17) Be that as it may, even if the price at which the shares were subscribed to were higher than its book value that again by itself would not lead to the conclusion that in such cases purchase has been done not by investor in share but by trader in shares. On the contrary the investor in shares would in the normal course hold shares for a longer period of time even in liquor business (though not affected by business cycle prevailing in most of the industries) as time would be taken to establish a place in the market. Therefore, the scrip may become profitable over a period of time. In contrast a trader in shares normally holds shares for a shorter period of time and looks for quick returns. In such circumstances, he is less likely to purchase share at price higher than the market value and in case of unquoted shares at a price higher than its book value. Therefore, test applied by the Tribunal in the impugned order to hold that subscription of 20% shares in M/s. MABL at a higher price then the book value of the equity shares to conclude that the appellant is a trader, is perverse.18) Similarly the finding in the impugned order that because the shares were subscribed to by the appellant from borrowed funds the subscription/ purchase of shares cannot be said to be an investment, is perverse. In the facts of this case, the appellant had borrowed funds from an outside source ( that is not from group companies) only for a period of 12 days without interest. Thereafter, the appellant had sourced its funds by subscription of its shares by its group company one Feedback Computers Ltd. in which substantial share holder to the extent of 83.93% was one Mr. R.K. Jain who holds 99.99% shares in the appellant company. Moreover, whether or not a particular purchase/subscription to shares was for the purpose of doing business or for purpose of investment cannot be determined on the basis of whether the amount required for the purchase of the same was borrowed or self generated funds. It is well known that capital assets, at times are acquired out of borrowed funds and the distinction between capital assets and stock in trade is not on the basis of source of funds i.e. borrowed funds or self generated funds but on the basis of assets itself and for the period for which it is held before the same is traded/sold. Thus, the finding of the Tribunal that the subscription to the extent to 20% in the equity shares of M/s. MABL was for trading in shares because the payment was not out of its own funds, is perverse.19) Similarly, the impugned order holds that though the appellant had right to appoint its nominee as a Manager of M/s. MABL yet the nominee could not exercise authority as a Manager on his own but had to do so in consultation with others and therefore was not the Manager. Consequently, the conclusion by the Tribunal that no amount was paid while subscribing for the shares to enjoy the rights of Manager of M/s. MABL. Merely because the appellants nominee acts as Managing Director of M/s. MABL and such function of Managing Director as a Manager has to be discharged in consultation with others does not denude the Manager of its authority and function as a Manager. It is axiomatic that no Manager in any field of business activity enjoys on absolute and unfettered rights to manage his business without having to consult others. Therefore, the finding in the impugned order that because the appellant nominee has no absolute right to manage M/s. MABL as it desires, it must follow that the appellant has no right as a Manager of M/s. MABL, is perverse.20) We shall now answer the two substantial questions of law which were admitted for our consideration as under:-Question No.1 – In the negative i. e. in favor of the appellant – assesses and against the revenue.Question No.2 – In the affirmative i. e. in favor of the appellant – assessee and against the revenue.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]15) Therefore, taking all the cumulative factors including the decision of the Supreme Court in Ramnarain Sons (P) Ltd. (supra) the impugned order was incorrect in holding that 20% shares of M/s. MABL subscribed to by the appellant was stock in trade of the appellant and not its capital asset, as contended by the revenue.16) So far as question No.2 is concerned, the impugned order proceeds on the basis that 20% of the equity shares, which were subscribed to by the appellant in M/s. MABL at a price much higher than its book value which was Nil and out of borrowed funds would by itself indicate that the subscription made by the appellant was not as an investment but as a trader in shares. This finding of the Tribunal is perverse for the reason that purchase of shares at a price higher than book value cannot be itself lead to the conclusion that the purchase was not in the nature of investment. It is a well known global phenomena that investors purchase shares of loss making companies because in their perception the company has inherent potential to do well either on account of its business model or on account of the management of the company. The potential perception is unique to each investor and there cannot be any universal yard stick to determine whether such perception was justified or not. In any case the other two subscribers in the shares of M/s. MABL had subscribed at the price of Rs.87.95 per share (S&N) and Rs.35.83 per share (UB) itself evidences the fact that others had also perceived great investment opportunity in the business of M/s. MABL The submission on behalf of the revenue that this particular argument with regard to investment being made by other two subscribers at a higher price was not brought to the notice of the Tribunal during the hearing, though not disputing that the same was part of the record and proceeding before the Tribunal. The analogy drawn on the basis of the explanation under Section 147 of the Act may not be a proper analogy. In any view of the matter, it is not necessary to resolve the above issue as the respondent revenue do not deny/dispute before us that the shares were subscribed to by S&N at Rs.87.95 per share and by UB at Rs.35.83 per share. Therefore, the fact that other share holders have subscribed at higher price is an undisputed position. This would also establish that perception of the potential of the M/s. MABL on the part of the appellant was not solitary and unique. To our mind even if the perception of the appellant was solitary and unique, it would make no difference.17) Be that as it may, even if the price at which the shares were subscribed to were higher than its book value that again by itself would not lead to the conclusion that in such cases purchase has been done not by investor in share but by trader in shares. On the contrary the investor in shares would in the normal course hold shares for a longer period of time even in liquor business (though not affected by business cycle prevailing in most of the industries) as time would be taken to establish a place in the market. Therefore, the scrip may become profitable over a period of time. In contrast a trader in shares normally holds shares for a shorter period of time and looks for quick returns. In such circumstances, he is less likely to purchase share at price higher than the market value and in case of unquoted shares at a price higher than its book value. Therefore, test applied by the Tribunal in the impugned order to hold that subscription of 20% shares in M/s. MABL at a higher price then the book value of the equity shares to conclude that the appellant is a trader, is perverse.18) Similarly the finding in the impugned order that because the shares were subscribed to by the appellant from borrowed funds the subscription/ purchase of shares cannot be said to be an investment, is perverse. In the facts of this case, the appellant had borrowed funds from an outside source ( that is not from group companies) only for a period of 12 days without interest. Thereafter, the appellant had sourced its funds by subscription of its shares by its group company one Feedback Computers Ltd. in which substantial share holder to the extent of 83.93% was one Mr. R.K. Jain who holds 99.99% shares in the appellant company. Moreover, whether or not a particular purchase/subscription to shares was for the purpose of doing business or for purpose of investment cannot be determined on the basis of whether the amount required for the purchase of the same was borrowed or self generated funds. It is well known that capital assets, at times are acquired out of borrowed funds and the distinction between capital assets and stock in trade is not on the basis of source of funds i.e. borrowed funds or self generated funds but on the basis of assets itself and for the period for which it is held before the same is traded/sold. Thus, the finding of the Tribunal that the subscription to the extent to 20% in the equity shares of M/s. MABL was for trading in shares because the payment was not out of its own funds, is perverse.19) Similarly, the impugned order holds that though the appellant had right to appoint its nominee as a Manager of M/s. MABL yet the nominee could not exercise authority as a Manager on his own but had to do so in consultation with others and therefore was not the Manager. Consequently, the conclusion by the Tribunal that no amount was paid while subscribing for the shares to enjoy the rights of Manager of M/s. MABL. Merely because the appellants nominee acts as Managing Director of M/s. MABL and such function of Managing Director as a Manager has to be discharged in consultation with others does not denude the Manager of its authority and function as a Manager. It is axiomatic that no Manager in any field of business activity enjoys on absolute and unfettered rights to manage his business without having to consult others. Therefore, the finding in the impugned order that because the appellant nominee has no absolute right to manage M/s. MABL as it desires, it must follow that the appellant has no right as a Manager of M/s. MABL, is perverse.20) We shall now answer the two substantial questions of law which were admitted for our consideration asNo.1 – In the negative i. e. in favor of the appellant – assesses and against the revenue.Question No.2 – In the affirmative i. e. in favor of the appellant – assessee and against the revenue.