Written in : November 1998

Every once in a while I take up one case decided by the courts or the Tribunal for discussion. The purpose is simple: decided cases give us an idea of how law is evolving; and how the judicial authorities are dealing with new situations and new thoughts. Decided cases are a source of great education for us professionals, for you the lay reader, too.

Here then is another one for you. What is interesting is that it comes from one of the foremost families of the country - one which you would expect to have taken great care in planning their tax affairs, what with all the best brains in the land working for them.

When you invest in property and sell it after holding it for a while, the gains are taxable in your hands as capital gains and taxed at lower rates as compared with business income - 20% instead of 30%. This makes it attractive for us to earn capital gains instead of normal income if we could help it. The taxman, obviously will want to uncover all capital gains and see if he could convert it to normal income and tax it at a higher rate. This battle - of the nature of one's income - goes on relentless when cases are on the borderline.

The case deals with Ms Neerja Birla. Born in 1971, she was from the Kasliwal family which owns the S Kumar Group of companies. She got married in 1989 to Kumaramangalam Birla the son of Aditya Birla.

Ms. Birla purchased 2,50,000 shares in Indo Gulf Fertilizers & Chemical Corporation Ltd. and another lot of 7,00,000 shares in the company. Of the various shares sold and purchased by her, this was the only big transaction.

Aditya Birla was the chairman of Indo Gulf from 1986. Ms Birla purchased the shares in 1989 soon after her engagement with Kumaramangalam Birla.

The two lots of shares were purchased for a consideration of about Rs.1.33 crores. Most of these purchases were from out of borrowed funds.

It was evident that Ms Birla had no big portfolio in shares before her engagement to Mr Birla. Only after that did she venture and purchased these shares from the secondary market.

Subsequently, she sold the shares and returned the gains as capital gains. From the sale of 2,50,000 shares she earned capital gains of about Rs.29 lakhs and from the sale of 7 lakh shares she earned gross capital gains of Rs.2.57 crores - over twice her investment.

Ms Birla's tax officer said that the gains she earned were not capital gains but business income and ought to be taxed at the normal rates. The officer held that her purchase and sale of shares was not in the nature of an investor but as a trader in shares. The following factors influenced him:

• she had used borrowed capital to purchase shares;
• bulk of the shares were sold within 16 months of purchase indicating no intention to earn dividend income;
• she had no intention of holding shares for herself which is evident from bulk purchase of the shares in a single company;
• the repetition of the transaction - two purchases - indicated a scheme to deal in the shares and earn income;
• there was no need for her to sell the shares and liquidate her investment;
• she had unloaded the entire shareholding during the period when share prices were continuing to rise which no ordinary investor could do;
• no ordinary person can think of making heavy investments in shares unless there was inside information.

He relied on settled law that even a solitary transaction can be called an 'adventure in the nature of trade' and there need not be a series of transactions for there to be trade.

The Commissioner(Appeals) also confirmed the finding of the officer. The matter then came up to the Tribunal.

The Tribunal found the reasons of the officer to be good and justified. It further said that it was inconceivable that a young lady of 21 years would have taken upon herself an interest bearing liability exceeding Rs.1 crore unless she intended to trade in the shares and clear the liability.

For her it was argued that she could not have traded in shares because she was only a young lady, and an inexperienced one at that. The Tribunal held that no big organsiation was required for an adventure in the nature of trade. The youth and inexperience could not be made much of. Because of her family background, she must have been guided by people well versed in financial matters. At any rate, the Tribunal said, a young girl of her age without her background would not normally even invest in shares on the scale she had done.

The Tribunal held that acquisition of a large block of shares when she had no ostensible means to pay for it indicated that the acquisition was a trading transaction.

The Tribunal also said that the background of the family could not be ignored. Nor could it be ignored that she launched herself into acquiring a large block of shares soon after her engagement into the family.

All in all, the Tribunal found that the entire set of facts indicated that she did not act as an investor and she decidedly took a plunge in the waters of trade. The tax officer's findings were thus upheld by the Tribunal.

Decided cases are not to be read just for what they are. It is the awareness of reality by the courts that one has to understand. It is the process of reasoning adopted by the courts that one has to understand. We should see how similar reasons can be applied to totally diverse situations and can affect you. This is how we professionals use decided cases and how you should learn from them.