P.V. Chandran vs The Assistant Commissioner of Income Tax

K. Raviraja Pandian, J.—This appeal is filed against the order of the Income Tax Appellate Tribunal dated 26.09.2008 made in ITA No.

1374 of 2008. The appeal was admitted on the following substantial question of law:

Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming the assessment of a sum of Rs.

2,74,12,447/- as income?

The appellant Ambika Cotton Mills Private Limited, originally incorporated on 06.10.1988 and later changed to Ambika Cotton Mills Limited on

06.09.1994. There were three group of promoters, viz., P.V. Chandran (the appellant herein), P.K.Ganeshwar, and M.Rathnaswamy. The

appellant had 19% share holding in the company while the group of P.K.Ganeshwar and M.Rathnaswamy had 38% share holding. The business of

the company was that of operating spinning mills. As of 2005, the company had the bank liability to the tune of approximately Rs. 140.00 crores.

In the said circumstances, the company proposed to increase the share capital. After negotiations with Unit Trust of India Investment Advisory

Services, the appellant allotted to them 8,75,000 equity shares of the face value of Rs. 10 each and at a premium of Rs. 175/- per share, as

evidenced by the agreement dated 19.05.2005. On 19.05.2005, the shares were allotted to the Unit Trust of India Investment Advisory Services

Limited at the premium of Rs. 175/- per share. The allotment was at a discount of approximately Rs. 60/- per share against the trading in stock

exchange on that date. At that time, certain differences arose between two groups of promoters, viz., the appellant group and the group comprising

of P.K.Ganeshwar and M.Rathnasamy. Finally, a resolution was arrived at through the intervention of UTI Venture Funds Management Company

Private Limited, the Manager for the Unit Trust of India Investment Advisory Services Ltd. As per the agreement, the UTI Venture Funds

Management Company Private Limited would facilitate the sale of the whole shares held by the two dissenting promoters P.K.Ganeshwar and

M.Rathanasamy comprising approximately 21,99,000 shares at an average price of Rs. 250/- per share. It was accepted that the appellant would

continue with the company and assume the management. Thus, the appellant, with a view to settle the dispute, had assured the dissenting

promoters, to realise the price of Rs. 250/- per share, with the assurance that in the event of the realisation being less than Rs. 250/- per share the

appellant will compensate to the extent of shortfall. The parties agreed that the bank of Nova Scotia, having its branch office at Coimbatore would

act as an Escrow agent in respect of the above transactions. Accordingly, an escrow agreement was entered into on 24.08.2005. As per the

escrow agreement, the appellant would assure the sale realisation at the rate of Rs. 250/- per share to the dissenting promoters and in the event of

a shortfall, such shortfall would be made good by the appellant. If there was any excess realisation over and above Rs. 250/-, that would be taken

by the appellant. The shares were sold at a higher price and thus, the appellant received Rs. 2,74,12,446/- for the assessment year 2006-07.

The appellant filed a return of income on 30.10.2006 admitting income of Rs. 1,18,33,346/-. An intimation u/s 143(1) of the Act was issued on

06.02.2007. The assessment was taken up for scrutiny by issue of notice u/s 143(2) of the Act and the order of assessment u/s 143(3) of the Act

was passed on 02.01.2008 treating the amount received by the appellant as income by rejecting the claim of the appellant that the receipt is capital

in nature. The appellant filed an appeal before the Commissioner of Income Tax contesting the assessment of the said sum and also a sum of Rs.

17,50,000/- which was disallowed rejecting the claim of the appellant that the sum was expended on professional services. The assessment was

confirmed by the Commissioner of Income Tax (Appeals). The appellant carried the matter before the Income Tax Appellate Tribunal, which by

reason of the order impugned held that the income received was liable to be taxed. The correctness of the same is canvassed in this appeal.

Mr. Ramachandran, learned senior counsel for the appellant contended that the Tribunal has committed a serious error in not considering

various judgments placed before it at the time of argument and the written submissions placed before it. The assessing authority, in paragraph 5 of

the assessment order, has observed that the appellant had not undertaken any activity in the course of business and hence, the amount could not be

assessed as income from business, but should be assessed under the head ''other sources''. This finding of the assessing authority clearly accepts

the position that the receipt could not relate to any specific source or any income earning activity, that the receipt did not relate to any regular

activity carried on by the appellant; and that in the absence of any source to which it can be claimed, it cannot be assessed to income. He further

contended that the receipt, if at all, can be treated as casual income or even windfall, such receipt cannot be assessed to tax. He further contended

that the Commissioner of Income Tax (Appeals) in paragraph 4.5.4 of its order, observed that at the time of escrow agreement the price of the

shares was less than Rs. 250/- per share and further observed that because the appellant had agreed to protect the price of the share at Rs. 250/-

per share he had to take steps to prevent a further fall in the share price and to bring in investors at a price of Rs. 250/- per share. The

Commissioner concluded that since the appellant was the Managing Director of the Company, he had entered into the transaction to gain control of

the company and in the process, he had made a gain by virtue of the escrow agreement. Thus, the finding of the Commissioner of Income Tax

(Appeals) is to the effect that the dominant, if not the sole, object of the appellant in entering into the above transaction was to gain control of the

company and to protect his investment in the company and the gain he derived is incidental, and was not in contemplation at the time when the

transaction was entered into.

He further contended that the Tribunal has recorded a finding that during the month of August 2005, even before and after the execution of the

escrow agreement, the market price of the share was much above the guaranteed price and on the basis of the finding, which is quite contrary to

the finding recorded by the Commissioner of Income Tax (Appeals), the Tribunal has come to the conclusion that the income earned was well

planned and well calculated deal with the desire to earn profit, which has no basis. He relied on the following decisions:

Pickford v. Quirke (H.M. Inspector of Taxes) Vol 13, Part 4 TC 251.

Commissioner of Inland Revenue v. Reinhold 1953 34 TC 389;

Kishan Prasad and Co. Ltd. Vs. Commissioner of Income Tax, Punjab, ;

M. S. P. Senthikumara Nadar and Sons Vs. Commissioner of Income Tax, Madras, ;

Sohan Lal Gupta Vs. Commissioner of Income Tax, ;

The Kanpur Tannery Ltd., Kanpur Vs. The Commissioner of Income Tax, U.P. and V.P., Lucknow, ;

Ramnarain Sons (Pr.) Ltd. Vs. Commissioner of Income Tax, Bombay, ;

Nalinikant v. Ambalal Mody v. S.A.L. Narayan Row, Commissioner of Income Tax, Bombay City I (1961) 41 ITR 428;

SETH CHAMPALALji RAMSWARUP, BEAWAR Vs. COMMISSIONER OF Income Tax, U.P. and V.P.,

Commissioner of Income Tax, Mysore Vs. The Canara Bank Ltd., .

Commissioner of Income Tax, Bombay City I Vs. Elphinstone Dye Works (P.) Ltd., .

Dolores Hay McClelland v. Commissioner of Taxation of the Commonwealth of Australia (1971) 1 WLR 191 : 82 ITR 272;

Commissioner of Income Tax, Bombay City I Vs. Elphinstone Dye Works (P.) Ltd., ;

Commissioner of Income Tax, Bombay City-i Vs. Scindia Workshop Ltd., ;

Commissioner of Income Tax Tamil Nadu-I Vs. M. Ramalakshmi Reddy, .

Commissioner of Income Tax Bihar-II Patna Vs. Bokaro Steel Limited, Bokaro, ;

Oberoi Hotel Pvt. Ltd. Vs. The Commissioner of Income Tax, ;

Commissioner of Income Tax Vs. T.I. and M. Sales Ltd., ;

(2005) 92 ITD 11

Commissioner of Income Tax Vs. A.S. Wardekar, ;

Commissioner of Income Tax Vs. Industrial Credit and Development Syndicate Ltd., .

Addl. CIT v. Rama Leasing Co. P. Ltd. (2008) 20 SOT 505.

Relying on these decisions, the senior counsel contended that the transaction of the present nature cannot be regarded as a trade and the receipt

of transaction is not available for taxation.

In the case of Commissioner of Inland Revenue v. Reinhold Vol. 34 Tax Cases 389 the Director of the company carrying on the business of the

warehousemen, bought four houses in January 1945, and sold them at a profit in December, 1947. He also admitted that he had bought the

property with a view to resale and had instructed his agents to sell whenever a suitable opportunity arose. In the circumstances, it was held that the

fact that the property was purchased with a view to resale did not of itself establish that the transaction was an adventure in the nature of trade, and

that the Commissioners were justified in treating the profit in question as not assessable to income tax.

Ramnarain Sons (Pr.) Ltd. Vs. Commissioner of Income Tax, Bombay, was cited and relied on the observations of the Court that by purchasing

the shares far in excess of their market price to facilitate the acquisition of the managing agency a capital asset was acquired by the appellant

company. While considering whether the transaction was or was not an adventure in the nature of trade, the Court observed that the problem must

be approached in the light of the intention of the assessee having regard to the legal requirements which are associated with the concept of trade or

business. The question whether the assessee''s transactions amount to dealing in shares and properties or to investment, is a mixed question of law

and fact.

In Commissioner of Income Tax, Bombay City I (1961) 41 ITR 428 ; and (2005) 92 ITD 11 , it was held that it was not open to the

department to impose tax on capital receipt on the assessee under any other head since income derived fall under specific head has to be

computed under the appropriate section and no other.

In Dolores Hay McClelland v. Commissioner of Taxation of the Commonwealth of Australia (1971) 1 WLR 191 : 82 ITR 272, it was held that

the tax payer, jointly with her brother, inherited land in Western Australia. In order to buy the share of the brother, she intended to sell a part of the

land. The Commissioner estimated that she made a profit from that transaction, that profit was income, and assessed her to income tax on it under

the provision of Section 26(a) of the Income Tax and Social Services Contribution Assessment Act, 1936-1963, contending that the profit arose

from the sale of property acquired for the purpose of profit making by sale or alternatively from the carrying out of a profit making scheme.

Allowing the appeal, the Privy Council held that the tax payer acquired her share in the land through the bounty of the testator and not for the

purpose of profit making by sale; that a single transaction would only produce assessable income rather than a capital accretion if it was an

''undertaking or scheme'' which exhibited features giving it a character of a business deal, but that the sale of part of the land in order buy out her

brother''s share was not such an undertaking or scheme and was therefore not caught by Section 26(a) of the Act; and that the profit was not

income in the realisation of capital.

On the other hand, Mr. J.Nareshkumar, learned standing counsel appearing for the respondent contended that in view of Section 56 of the

Income Tax Act, 1961, income of every kind, which is not to be excluded from the total income under the Income Tax Act shall be chargeable to

income tax under the head, ''income from other sources'' if it is not chargeable to income tax under any of the heads specified in Section 14A to E.

Hence, whatever income received by the appellant which is not to be excluded from the total income under any of the provisions of the Act

and the receipt is not chargeable to income tax under any of the heads specified in items A to E of Section 14 would come within the purview of

''income from other sources'' and it is chargeable to tax.

Heard the learned Counsel on either side and perused the materials available on record.

From the above narration of facts, it is clear that the claim of the assessee that the receipt is not income, but capital receipt and that the receipt

of a casual and non-recurring nature having been rejected uniformly from the assessing officer to the Tribunal, the correctness of the order of the

Tribunal holding that the sum was taxable is put in issue in this appeal.

The meaning of the term income'' has not been exhaustively stated in the Income Tax Act. The definition of ''income'' in Section 2(24) of the

Income Tax Act is an inclusive definition. Section 10 of the Act enumerates incomes which are not to be included in the computation of the total

income of the assessee.

Section 56 provides that income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income

tax under the head of ''income from other sources'', if it is not chargeable to income tax under any head specified in Section 14, items A to E. The

Supreme Court in the case of CIT v. G. R. Karthikeyan (1993) 201 ITR 866 made the following observation with regard to the scope of the term

''income'' for the purposes of the Act:

It is not easy to define income. The definition in the Act is an inclusive one. As said by Lord Wright in Raja Bahadur Kamakshya Narain Singh of

Ramgarh v. CIT (1943) 11 ITR 513 (PC), ''income is a word difficult and perhaps impossible to define in any precise general formula.

It is a word of the broadest connotation''. In Maharajkumar Gopal Saran Narain Singh v. CIT (1935) 3 ITR 237 (PC), the Privy Council pointed

out that ''anything which can properly be described as income, is taxable under the Act unless expressly exempted''.''

The court, in the case of Commissioner of Income Tax, Madras Vs. G.R. Karthikeyan, , reiterated the observations that had been made by the

apex court in the case of Navinchandra Mafatlal Vs. The Commissioner of Income Tax, Bombay City, :

What, then, is the ordinary, natural and grammatical meaning of the word ''income''? According to the dictionary it means ''a thing that comes in.''

(see Oxford Dictionary, Volume V, page 162 ; Stroud, Volume II, pages 14-16 ). In the United States of America and in Australia both of which

also are English speaking countries the word ''income'' is understood in a wide sense so as to include a capital gain. Reference may be made to

Eisner v. Macomber (1919) 252 US 189 ; Merchants'' Loan and Trust Co. v. Smietanka (1920) 255 US 509 and United States of America v.

Stewart (1940) 311 US 60 and Resch v. Federal Commissioner of Taxation (1943) 66 CLR 198. In each of these cases a very wide meaning

was ascribed to the word ''income'' as its natural meaning. The relevant observations of the learned judges deciding those cases which have been

quoted in the judgment of Tendolkar J., quite clearly indicate that such wide meaning was put upon the word ''income'' not because of any

particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and

connotation of the ordinary English word ''income''. Its natural meaning embraces any profit or gain which is actually received. This is in

consonance with the observations of Lord Wright to which reference has already been made.... The argument founded on an assumed legislative

practice being thus out of the way, there can be no difficulty in applying its natural and grammatical meaning to the ordinary English word ''income''.

As already observed, the word should be given its widest connotation in view of the fact that it occurs in a legislative head conferring legislative

power.

The apex court, in the case of Commissioner of Income Tax, Madras Vs. G.R. Karthikeyan, went on to hold that, ''Since the definition of

''income'' in Section 2(24) is an inclusive one, its ambit, in our opinion, should be the same as that of the word income occurring in entry 82 of List

I of the Seventh Schedule to the Constitution (corresponding to entry 54 of List I of the Seventh Schedule to the Government of India Act).''

In the case of P. Krishna Menon Vs. The Commissioner of Income Tax, Mysore, Travancore-Cochin and Coorg, Bangalore, , the court held

that the monies received by the assessee, who had been giving lectures on Vedanta, from a foreign disciple, constituted income in the hands of the

assessee, as, though the payment was voluntary and had not been sought by the assessee, the monies were received by the assessee only by

reason of the fact that he had been teaching the donor, and while so teaching he was practising a vocation. The court observed (page 54):

it is plain to us that it was because of the teaching that the gift had been made.

The apex court in the case of Dr K. George Thomas Vs. Commissioner of Income Tax , Kerala, , held that the burden is on the Revenue to

establish that the particular receipt is of a revenue character. In that case, the court held that the monies received by a preacher who was spreading

in India the ideals of the Indian Christian Crusade, U.S.A. constituted income in his hands which were exigible to tax. The court also held that there

was link between the activity of the assessee before it, and payments made to him by those who have views similar to those of the assessee, and

who were very much interested in the propagation and the acceptance of those views by the general public, the connection between the assessee

and the donations being thus intimate, such receipt arose out of the practice of the vocation or the occupation carried on by the assessee and the

amounts received by the assessee were liable to tax.

It is thus clear that the term ''income'' is a word of the widest amplitude connoting as it does that which comes in emphasising thereby the point

at which, or the person by whom the amount is received. If the amount so received is not an amount which is excluded from the ambit of income.

The Act does not provide that the sum received by the assessee pursuant to an agreement to sell the shares does not constitute income. Even

casual and non recurring receipt beyond the specified limit are expressly regarded as income.

In this case the appellant has entered into Escrow agreement for sale of the shares of divesting promoters at an agreed price, which is based on

certain calculation. In order to see that the shares are being sold at the agreed price, the assessee put in certain efforts by way of marketing and

placement of the company shares to the institutional fund through M/s. Polar Securities Growth Fund, Bangalore for which the appellant has paid a

sum of Rs. 30 lakhs as commission. The appellant had contact with M/s.CLSA India Limited, the broker and had arranged for the delivery slips of

the shares to the broker, which is evident from the letter dated 27.08.2005 to the Bank of Nova, Scotia, the escrow agent. Though the action of

the appellant might have been to protect the Company by entering into the Agreement, the appellant ventured to sell the shares of the other

promoters of the Company assuring the agreed price and undertaking to compensate them in case the shares are sold less than the agreed price.

Thus, it is evident that the appellant had played the roll in the overall equity shares diverting activity either directly or through broker for obtaining

best price. Ultimately, the venture proved that the appellant not only gained control of the mill, but also received substantial amount. Therefore, the

profit on the sale of shares was a calculated move and it cannot be regarded as a wind fall. The surplus amount thus realised by the assessee is an

income. If the assessee is not entitled to the surplus amount, the amount certainly would have become taxable in the hands of the divesting

promoters. The case laws relied on are rendered in different factual context, such as stated supra and as such do not further the case of the

appellant.

In view of the above factual scenario, we do not find any error or illegality in the order of the Tribunal so as to warrant interference. We

answer the question of law in favour of the revenue and against the assessee. The Tax Case Appeal is dismissed. No costs.