T. Venkatappa, Judicial Member - (1.) ONE appeal is preferred by the assessee and the other by the revenue. They are being disposed of together.
(2.) We will first take up the assessee's appeal. The assessee-company purchased 2,700 shares from Smith & Nephew Ltd. in 1974 for Rs. 6,67,500. This company was amalgamated with J.L. Morrison Jones Ltd. on account of which the assessee was allotted 1,29,600 shares in it in exchange for 27,000 shares of Smith & Nephew Ltd. The assessee had also purchased 12,500 shares in J.L. Morrison & Jones Ltd. in 1974. Out of the above shares 74,000 shares were sold in 1975 at a profit of Rs. 60,672 which was taxed as capital gain in the assessment year 1976-77 and 12,500 shares were sold for a loss of Rs. 69,174, which was treated as capital loss in the assessment year 1977-78. During the accounting year 1977 relevant to the assessment year 1978-79, now under appeal, the assessee sold the balance of 55,600 shares for Rs. 5,56,000 and made a profit of Rs. 2,69,634. The assessee-company claimed that the above profit on the sale of shares was derived in the course of the business and so, it should be treated as income from business. The case of the assessee was that the shares were purchased to promote the interest of the business as the company in which the shares were purchased was the consumer of the products manufactured by the assessee-company. The ITO did not accept the assessee's submissions. He held that the assessee has not done anything more than an investor. The shares have been shown in the balance sheet under 'investments'. In the two previous years, the profit or loss on the sale of shares were shown by the assessee as capital gain/capital loss and treated as such. Clause 17 of the Memorandum & Articles of Association authorises the company only to invest the money in shares and purchase and sale of shares as business is not authorised. The draft assessment order was forwarded to the IAC with the assessee's objection for his directions under Section 144B of the Income-tax Act, 1961 ('the Act'). In the directions the IAC agreed with the ITO that the profit on sale of shares constitutes short-term capital gain. Accordingly, in the assessment order dated 18-8-1981, the ITO held that the profit on sale of shares constituted short-term capital gain. Accordingly, he assessed the same. The assessee appealed to the Commissioner (Appeals). He held that the purchase of shares was only in the nature of investment by the company. Even the contention that the purchase was with a view to get more business from these companies as they were consumers of the products manufactured by the assessee only goes to show that the purchase was in fact made as an investment. In a purchase with such an intention the idea will be to hold the same as an investment and not to deal in shares. Consequently, the motive of trading in shares is absent. Thus, he upheld the action of the ITO in taxing the profit on sale of shares as short-term capital gain.
(3.) THE learned counsel for the assessee strongly urged that the shares were purchased for improving the business of the company as the company in which the shares were purchased was the consumer of the products of the assessee-company. Thus, the purchase was for the purpose of business and the profits made on sale of shares is business income. He also submitted that the Memorandum & Articles of Association authorises the purchase and sale of shares. THE learned departmental representative strongly urged that the assessee is not a dealer in shares. THE purchase of shares was by way of investment and so, the profit on sale of shares is rightly taxed as short-term capital gain.;