I.T.AS. NOS. 3459 TO 3462/LB OF 1980-81, DECIDED ON 2ND SEPTEMBER, 1987. Versus I.T.AS. NOS. 3459 TO 3462/LB OF 1980-81, DECIDED ON 2ND SEPTEMBER, 1987.
ORDER
These four appeals have been filed at the instance of the Department to assail consolidated order, dated 1-10-1980 passed by the learned A.A.C. Range A, Lahore in respect of the assessment years 1975-76through1978-79. The respondent is a limited company and derived income inter alia from 'gains arising from sale of capital assets' i.e. its investments.
2. The D.R. narrated that loss on sale of shares was claimed to which the treatment was meted out as under:-.
Claimed
Gain/Loss deleted by I.T.O. u/s 12-B of I.T. Act
A. A. C
1976-76 (-) Rs.954,460
Rs.270,290 (-)
Rs.954,460
1976-77 (-) Rs.6.118 ??? (-)
Rs. 6,118 ?? (-)
Rs. 6,118
1977-78 (-) Rs.652,492
1977-78 (-) Rs.652,492
Rs.110,387 (-)
1978-79 (-) Rs.302,775 (-)
Rs.297,775 (-)
Rs.302,775
'3. In fact while the respondent claimed the above amount as a loss on change of investment, the assessing officer held them to be 'capital gain'. Adjustment of loss was initially allowed in the first two years, but the assessment was re-opened under section 34 of the repealed Act where, through amendment in section 2(4-A) 'share and stocks' were included in the definition of 'capital asset'. The contention of the respondent at the time of assessment (and re-assessment) was that they were an investment holding company and at times wanted to rotate their investment for which purpose certain shares were sold and others purchased. The assessing officer, however, held that the respondent earned profit on sale, exchange or transfer of capital asset, available to them in the shape of shares, moreso because the amendment in section -2(4-A) by Finance Act, 1971 brought 'stocks and shares' in the definition of Capital Asset, the gain on which is taxable under section 12(B) of the Repealed Act. On appeal the learned A.A.C. placed reliance on this Tribunal's decision reported as 1979 P T D (Trib.) 12 where it was held that section 2(4-A) of the Repealed Act places a bar on treating stocks and shares as stock-in-trade for those assessees who have business dealings in such capital assets because these become stock-in-trade, the profit/loss on which has the character of profits and gains of business. The A.A.C. also referred to a Central Board of Revenue Circular issued subsequent to the above decision of the Tribunal. The learned A.A.C. finally ordered that the adjustment of losses from stocks and shares should be allowed against business income in each year. The Department feels aggrieved by this treatment.
4 It was emphatically pleaded by the D.R. that what was important was to ascertain whether the respondent acted as a dealer in stocks and shares or whether a capital asset was sold. With reference to each year-under-appeal, the D.R.' attempted to demonstrate that only sale were made with no fresh purchases in three out of the four years-under-consideration. The D.R. pointed out that the respondent was earning income from dividends, from insurance agency, from interest and none of those activities could be relevant to a regular dealer in shares and thus the gain/loss from transactions of purchase and sale of shares clearly represented sale of a Capital Asset, hence chargable to tax under the provision of section 12-B of the repealed Act particularly when the Respondent is an investment holding company.
5. The A.R. for the respondent-assessee on his turn heavily relied on Tribunal's decision referred to by the learned A. A. C. An argument was advanced that the respondent was undisputedly an investment holding company, hence it is unavoidable to rotate investment to which end regular dealings were made in shares, the profit/loss on which was to be computed tinder section 10. In this connection attention was drawn to Tribunal's decision in the preceding year of 1971-72 in respondent's own case, where it was observed that they were an investment holding company. The learned counsel drew support for his stand from a Full Bench decision of the Tribunal (= I.T.A. No. 2631/LB/79-80 etc. decided on 16-7-1987) where, according to him in similar circumstances, dealings in shares were held to be normal trading activity.
6. It is common knowledge that a company who invests substantial capital in the purchase of shares of a subsidiary company in order to control the operations of the latter is called an Investment Holding Company. Sometimes the whole share capital of such a Holding Company is employed in this manner and no direct trading operations are undertaken. Control of the subsidiary company is secured by acquiring majority of the shares, carrying investing rights, which empower the investment holding company to control the composition of the Board of Directors of subsidiary company.
7. Judging the affairs of the respondent on the above criteria we have no hesitation to conclude that they are an investment holding company, as their A.R. so vociferously contends. This was so held by this Tribunal in the respondent's case for the assessment year 1971-72.
8. Now, treatment to be meted out to the dealings in shares and stock by any investment holding company came up for consideration before the learned Judges of the Karachi High Court in the case of PICIC = 1980 P T D 322 (Kar.). The learned Judges then held as under:-
"A company may be authorised to deal in shares and securities. If, therefore, the company buys and sells shares it may amount to carrying on the business in shares and securities. But, if the company is also authorised to invest in shares and securities and, therefore, acts as an investment holding company, in addition to investment dealing company, it will have to be shown that its activity amounted to dealing. commercially in shares before profit therefrom is made taxable. If the shares and securities we're purchased as investment it will, notwithstanding the Memorandum that it may deal in shares, will not amount to trading in shares."
9. To our mind the activities of the respondent are very much similar to the activities of PICIC as both of them are investment holding companies, who purchase stocks and shares as investment. Therefore, on the basis of the Karachi High Court decision (ibid) their activity cannot be treated as trading in shares on commercial scale, unless is positively proved that they deal commercially in shares. Thus the learned counsel failed to conclusively establish as much before us as before the two authorities below. The obvious conclusion is that the respondent said Company sold part of its capital assets hence the resultant gain/loss is to be dealt with under the provisions of section 12-B of the repealed Act. We, therefore, QUASH the order passed by the learned A. A. C. and RESTORE the treatment by the assessing officer subject to our finding (in para. 10 hereunder) in respect of the value to be assigned to Bonus Shares. It seems pertinent to mention that the Full Bench decision by this Tribunal on 16-7-1987 referred to by the learned A. R. is relevant only on the facts obtaining in that particular case and may be that the ratio of the Karachi High Court decision (in re: PICIC) was not on all fours. As respects the earlier decision by this Tribunal reported as 1979 P T D (Trib.) 12 the same stand overruled in view of the authoritative pronouncement by the Karachi High Court, which we now follow with respect.
10. The next issue related to the valuation of Bonus Shares. The assessing officer adopted the 'nil' value in each year. On appeal the learned A.A.C. followed this Tribunal's decision vide I. T. A. No. 7281 of 1971-72 (decided on 23-5-72) to hold that the bonus shares are to be taken at their face value. The learned counsel for the appellant referred to Lahore High Court's decision in re: Miss Shirin Ayub Khan 1976 P T D 190 in support of the contention accepted by the learned A.A.C. We need not take long to CONFIRM the decision by the learned A. A. C. especially when the Lahore High Court decision authoritatively settles the controversy and holds the field moreso when leave to appeal against that judgment was rejected by the Supreme Court vide its decision reported as (1980) 42 Tax 141 (SCP) though on point of limitation. The appeals succeed, as above.
M.B.A./450/T ????????????????????????????????????????????????????????????????????????????????????? Appeal succeeded.