Shri S. Rajaratnam, Accountant Member - (1.) THIS is a departmental appeal arising out of the order of the Commissioner (Appeals)-I, Madras in the case of Seshasayee Enterprises (P.) Ltd., Madras, for the assessment year 1973-74.
(2.) The assessee is a private company belonging to what is known as Seshasayee Group. The shares are held by members of Seshasayee family, their associates and distributors of paper manufactured by Seshasayee Paper & Boards Ltd. The dispute concerns the question of treatment to be accorded to the surplus of Rs. 24,72,802 (sale price Rs. 56,98,927 less cost Rs. 32,26,035) arising out of sale of 4,02,751 equity shares held by the assessee-company in Seshasayee Paper & Boards Ltd. to its wholly owned subsidiary, company. Southern Electronics (P.) Ltd. The ITO treated this transaction as an adventure in the nature of trade and, in that view taxed the surplus as business receipts. The assessee's case was that the shares were capital assets and capital gain arising from sales to a subsidiary company was specifically exempt under section 47(iv), because the scheme of the Act is to postpone the levy of capital gains by taxing the subsidiary company on its sale on the entire profits by treating both the holding and subsidiary company as one entity for the purpose of capital gains tax by virtue of definition of cost of acquisition under section 49(1) (iii) (e). The AAC discounted the ITO's theory of "adventure in the nature of trade" but all the same confirmed the inclusion on the ground that the sale was in the course of the assessee's business. In other words, the shares, according to him were held by the assessee as part of stock-in-trade. When the dispute came up before this Tribunal in IT Appeal No. 616 (Mad.) of 1978-79, this Tribunal, by its order dated 30-12-1978 restored the appeal to the AAC to consider the assessee's objections, which, according to it, were not dealt with in his order. The Commissioner (Appeals) who heard the appeal in pursuance of the Tribunal's order accepted the assessee's case in his detailed order. His conclusion is now disputed in the present appeal. Seshasayee Brother (P.) Ltd., a sister concern of the assessee company, promoted and established Seshasayee Paper & Boards Ltd. in collaboration with Parsons & Whittemore South Asia Co., New York. The foreign company invested Rs. 75 lakhs in the shares of Seshasayee Paper Mills. The promoters Seshasayee Brothers (P.) Ltd., and the collaborators jointly incorporated another company by the name of Seshasayee Parsons & Whittemore (P.) Ltd., to manage the affairs of the Seshasayee Parsons Boards. This new company was appointed as managing agents of Seshasayee Paper Mills. The collaboration agreement between Seshasayee Paper Boards and Parsons & Whittemore (P.) Ltd. was approved by the Government of India in their communication CH (1)-41(97) /59 dated 8-7-1960. The Government while approving the said collaboration insisted on two conditions that (i) the collaborators should subscribe for equity shares of the value of not less than Rs. 75 lakhs in the capital of Seshasayee Paper Boards, and (ii) the said investment should not be repatriated till the expiry of 10 years from the date of investment. In April 1970 the system of managing agency was abolished by the Government of India. The period of 10 years stipulated by the Government of India for the repatriation of the collaborators' investment also coincided with the abolition of the managing agency system. The collaborators, therefore, decided to repatriate their investment in Seshasayee Paper Boards and, accordingly, requested Mr. S. Viswanathan, the Managing Director of Seshasayee Brothers (P.) Ltd., to assist them in finding suitable purchasers for the said shares. It is claimed that the news of the foreign collaborators selling their share in Seshasayee Paper Boards spread in the market and all the leading businessmen approached the collaborators for purchasing the investment in Seshasayee Paper Boards in order to control the management of the concern Seshasayee Paper Boards. This claim is uncontroverted. The shareholding pattern of Seshasayee Papers & Boards Ltd. before the sale was as under : Rs. Per cent (in lakhs) Financial Institutions 140 40 Seshasayee Brothers 7 2 Parsons & Whittemore 75 21 Others 128 37 ------ ------ Total 350 100 ------ ------ As is evident from the above figures the holding by the foreign company amounted to 21 per cent and there was considerable interest in this block so that control of Seshasayee Paper & Boards Ltd. could be achieved. Seshasayee Brothers also in order to retain control over Seshasayee Paper Boards wanted to purchase the holdings of Parsons and Whittemore. Seshasayee Brothers, Seshasayee Paper & Boards Ltd. all come under the Seshasayee Group of concerns and Mr. S. Viswanathan is the director in Seshasayee Brothers and the Managing Director in Seshasayee Paper Boards. It is under these circumstances that the assessee-company by name of Seshasayee Enterprises (P.) Ltd., was incorporated. The assessee-company purchased the holdings of Parsons and Whittemore with the permission of the Reserve Bank of India. Its Memorandum and Articles were framed in wide terms and enabled the company not only to hold the shares but also to deal in them. The purchase of these shares is evidenced by an agreement dated 17-9-1969 and according to this, the entire holding of 7,50,000 equity shares of Rs. 10 each was purchased by the assessee for US $7,56,000. The purchase of these shares was treated as acquisition of investment and was exhibited as "Investments (Non-Trade)" in a schedule required for the purposes of the Companies Act. These were continued to be shown as such in later years Mr. S. Viswanathan, the Managing Director of Seshasayee Brothers (P.) Ltd., negotiated with the collaborators and persuaded them to accept the purchase consideration in three annual installments, the first installment being payable in 1970. The following was the arrangement : Dated 1-7-1970 US $2,52,000 1-7-1971 US $2,52,000 1-7-1972 US $2,52,000 The collaborators agreed to receive the payment in installments as mentioned above but they insisted on the appellant opening a confirmed assemble letter of credit in their favour. Since the assessee succeeded in persuading the foreign collaborators to accept the payment in installments, they were confident of mobilising adequate resources by borrowing money for paying the entire amount to the collaborators within the time allowed. The approval of the Reserve Bank of India for the said purchase of shares from the foreign collaborators was obtained on 4-6-1969. The assessee-company approached the United Commercial Bank for issuing a Bank guarantee in favour of the foreign collaborator on 14-6-1969. At that time the United Commercial Bank insisted on the assessee to deposit Rs. 18.90 lakhs as margin money. After persuasion, the assessee obtained six months' time till 31-12-1969 for depositing the said sum of Rs. 18.90 lakhs. The assessee was able to deposit only Rs. 11 lakhs in spite of its best efforts and there was a shortfall of about Rs. 8 lakhs. It is in these circumstances that the assessee was forced to sell 1,46,379 shares of Seshasayee Paper Boards in the first year itself to make up the deficit of Rs. 8 lakhs which was deposited in the United Commercial Bank. In the relevant assessment year, the sales where treated as sale of investments and the surplus was treated as capital gains. In September 1969 the parties who had lent moneys to the assessee requested for the return of the loan. Since the assessee was already collecting further deposits to pay for the purchase of shares it was not possible to return the loans. The assessee-company managed to retain only 50 per cent of the original loan as long-term loans. The balance of 50 per cent was returned to them by way of sale of shares in Seshasayee Paper & Boards Ltd. at the original purchase price of Rs. 7.56 per share. In the next year the assessee-company sold a small quantity of 1,000 shares. This was also treated as sale of investment both in accounts and for income-tax purposes. In the previous year relevant to the assessment year 1973-74, which is now under consideration, the assessee sold 4,02,751 shares. The Reserve Bank of India had meanwhile introduced more restrictions on the deposits received by the Non-banking Financial Companies Directions of 1966. According to these regulations, the deposit received by any reserves. However, in calculating the said 25 per cent, deposits received from the shareholders were excluded. In the case of the assessee as on 30-4-1971, the deposits from the shareholders amounted to Rs. 22.57 lakhs. Vide. Reserve Bank Regulations, 1966, the entire deposits of Rs. 22.57 lakhs were exempted in calculating the said ceiling of 25 per cent. By the end of 1971 the Reserve Bank of India again revised its regulations under which the deposits received from the shareholders were treated as not exempt with effect from 1-1-1972. It also stipulated that the said deposits including those received from the shareholders in excess of 25 per cent of the paid up capital should be returned. The assessee knew about this regulation as early as in September 1971 and, hence, it had to sell the shares to make up their resources for the repayment of the loans from the depositors. It is this sale which has given to the present controversy.
(3.) THE above facts have been extracted from the order of the AAC who passed the order on the earlier occasion on 28-2-1978 and are undisputed by either party before us. THEre had been many arguments raised before the AAC and detailed replies were filed by the assessee thereafter. We do not consider it necessary to discuss all the arguments which have been elaborately dealt with by the Commissioner (Appeals). THE assessee relied upon the order of the Commissioner (Appeals) while the department relied upon the orders of the ITO and case laws cited by both sides.;