TMI Blog2004 (12) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer that the assessee had shown profit on account of sale of investments amounting to Rs. 3,52,04,028 and declared this as business profit in the return of income filed for the year under consideration. It was further noticed by the Assessing Officer that on perusal of the records of the earlier years it was seen that the assessee has shown the profit/loss on sale of investment under the head "Capital gains". The Assessing Officer was, therefore, of the view that the profit on sale of investments was to be shown under the head "Capital gains". The assessee filed its explanation on 31-3-2003 vide its letter dated 28-3-2003. Before the Assessing Officer, it was submitted by the assessee that prime business of the assessee-company was of investment and the assessee-company is a non-banking finance company and has been dealing in shares and in granting loans and advances since incorporation. It was submitted by the assessee that its intention behind the share transactions was to earn profit and, therefore, the profit derived from such transactions could be assessable as business income. The main thrust of the assessee s argument was that in deciding the question whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and if he is wise enough, he would rather sell off his investment in the shares and make a huge profit, rather than wait for the year end to claim his dividend. The Assessing Officer admitted that motive of the person is important, but the Assessing Officer cannot get into the mind of the person to judge his motive especially after almost two years of the act having been committed. He further stated that the only way the Assessing Officer can judge the motive of a person would be by seeing how the records have been filed and the treatment given by the assessee to different transactions in its accounts. He further stated that the way in which the assessee presents its accounts and balance-sheet would throw light on the motive of the assessee as to what he had meant a transaction to be. The Assessing Officer, therefore, having taken into account the fact that the assessee had brought forward investment in shares as on 1-4-1999 and the balance amount of the shares at the end of the year was also taken to the balance-sheet and shown as investment and the balance shares of CMS Infotech Ltd. were taken to the balance-sheet and shown as investment, has held that profit on sale of invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration constituted 54.27 per cent of the gross income. ( v )The company was ventured in the field of Satellite Channel during the year by way of supplying programme software for the channel ATN Bangla and it was only after one year that the company launched its own channel ATN World in June, 2000. ( vi )Following decisions were cited to explain that when a company can be stated to be an investment company : CIT v. Coochbehar Trading Co. (P.) Ltd. [1979] 120 ITR 535 (Cal.); CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377 (SC); Charmugaria Trading Co. Ltd. v. CIT [1977] 110 ITR 715 (Cal.). ( vii )It was further clarified that the assessee-company was carried on a systematic or an organized activity of earning profit from investment in shares and in support thereof, the assessee submitted the details of purchase, sales and stock-in-trade/investment of shares during the financial years 1993-94 to 1999-2000. ( viii )As per RBI norms, the shares comprised in its investment including shares meant for re-sell are to appear as current investments. ( ix )In support of the proposition that description of stock of shares in the balance-sheet as investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as business asset or as capital asset, and in support thereof, a reliance was placed on the decision of Andhra Pradesh High Court in the case of CIT v. Aryan Industries (P.) Ltd. [1982] 138 ITR 718 and as well as the case of CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC). ( xii )The instances of transactions in the shares of CMS Infotech Ltd. in the light of the resolution taken by the assessee-company was also highlighted to say that the motive of the assessee-company was to earn huge profit in short period and not of making investment in such shares. 5. Having gone through the submission and contentions of the assessee, the ld. CIT(A) decided the issue by concluding as under : "I have gone through the submission of ld. A/R as well as the assessment order. I find full force in appellant s submission. It is very well evident from the fact of this case that motive of the appellant was to earn huge profit and not the investment. From the facts it is revealed that the appellant-company was regularly dealing in shares since its incorporation. It was earning huge profit/loss from share transaction. Most of the shares, particularly shares of CMS Infote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reiterated the contentions and reasons given by the Assessing Officer in support of his conclusion that profit on sale of shares is to be assessed under the head Capital gain . 8. The ld. counsel for the assessee, on the other hand, has referred to his submissions made before the Assessing Officer as well as before the ld. CIT(A). He has reiterated the contentions and submissions that were made before the Assessing Officer by the assessee in the written submission dated 28-3-2003 as well as made in the written submission filed before the ld. CIT(A). The written submission filed before the Assessing Officer is placed at pages 19 to 23 of the paper book filed by the assessee. The written submission filed by the assessee before the ld. CIT(A) is placed at pages 1 to 18 of the paper book. The assessee has also referred to various decisions that were also referred to by the assessee before the Assessing Officer as well as before the ld. CIT(A). We have taken note of all those contentions and submissions made before the Assessing Officer as well as before the ld. CIT(A). The various contentions and submissions put forward by the assessee before us are on the same line as were made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a conclusion that the profit arising from transactions in shares is to be assessed under the head "Capital gains", the Assessing Officer has given too much emphasis on the nature of the entries appearing in the books of account or in the profit loss account and balance-sheet submitted by the assessee as the Assessing Officer has been guided by the factor that the shares which were purchased during the year and sold during the year were not routed through profit loss account but clubbed with investment as at the end of the year, the shares of left with the assessee were taken to the balance-sheet and shown as investment, and none of the shares were shown as business stock in the balance-sheet. It is also stated by the Assessing Officer that the motive of the assessee can only be judged by seeing how the records have been filed and how the treatment has been given by the assessee to different transactions in its accounts. In other words, the motive of the assessee was determined by the Assessing Officer on the basis of the way and manner in which the assessee presented its accounts and balance-sheets before him. To appreciate this aspect of the matter, we may refer to certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision of law relating thereto and not on the view, which the assessee might take of his rights, nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter." 12. Having regard to the ratio laid down in the aforesaid decisions, we are of the considered view that merely because the shares were described in the balance-sheet as investment is not a conclusive and decisive factor to treat the transaction of sale and purchase of shares as an investment as such. Mere describing the shares as investment in the accounts and the balance-sheet is not a decisive and conclusive to determine the nature of the transaction as well as the motive of the assessee as to what he had meant a transaction to be. The dominant or even sole intention to re-sell is a relevant factor and raise a strong presumption, but by itself is no conclusive proof, on the point. Therefore, to find out the real and true motive of the assessee and the nature of the transaction, it is necessary to consider all other aspects of the case instead of merely relying on the way in which the accounts were prepared and presented by the assessee. 13. The word business , as defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been carried on by the appellant, what is to be seen is the actual activity carried on by the appellant rather than any presumption. Under the term business as defined in section 2( 13 ), it is not essential that there should be a series of transactions and even a single or isolated transaction may constitute business. 14. In Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC), it was held that "whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment depends on the question whether the excess is an enhancement of the value by realizing a security or a gain in an operation of profit-making. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these". When an owner of an ordinary investment chooses to realise it and obtains a higher price for it than when the originally acquired it, the enhanced price is not a profit assessable to income-tax, but where what is done is not merely a realisation or a change of investment but an act done in what is truly the carrying on of a business, the amount recovered as appreciation will be assessable. In tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is in the ordinary line of the assessee s business, there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not the facts must be properly assessed to discover whether it was in the nature of the trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained by itself is not enough, but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. 16. In the case of Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486, the Hon ble Supreme Court observed that "it is no doubt correct to say that the principal consideration in determining whether income from sale of shares is revenue income or capital gain is to find out what was the purpose of purchase of those shares and, if the purpose was investment, the fact that in varying the investment, the sale of those shares resulted in a profit will not make that profit revenue income. However, this principle is not applicable to cases where it is found that even the initial purchase of shares, by the assessee was not for the purpose of investment; for e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot binding in the proceedings for assessment during subsequent years. In order to make these purchases, the assessee taken loans amounting to about Rs. 8 lakhs at interest varying from 3 1_ 2 per cent to 5 per cent. The dividend being declared was at a very low rate, so that the return on this investment, after taking into account the interest paid and super-tax to be paid, came to every small percentage, being less than 1 per cent. This circumstance that the shares were purchased at a time when their prices were falling and the return on investment was not at all substantial while loans had been taken to purchase these shares strongly points to a conclusion that the shares could not have been purchased as an investment to earn income from dividends and that the purchases of these shares were with the object of selling them subsequently at a profit. The shares were, in fact, sold at considerable profit subsequently and that is how the question of charging that profit to tax as revenue receipt has arisen. On these facts, it is not possible to hold that the Tribunal was incorrect in recording its conclusion that the sale of these shares by the assessee was not the result of contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness adventure and that profits were liable to be taxed. The reasons which induced the Tribunal to come to this conclusion were : The assessee was authorized by clauses 12, 13, 28 and 29 of paragraph 3 of its memorandum of association to buy and sell shares, there were specific resolutions of the company authorising a director of the assessee to purchase and sell these shares; the assessee had included the profit of Rs. 2,13,150 in the profit and loss account without taking it to any reserve account or specifically set it apart for any other purpose, the assessee had purchased the shares from borrowed funds and not with money readily available to it, the assessee did not make the sales on account of any pressing necessity to meet existing liabilities but had in fact kept a part of the sale proceeds as liquid cash in the United Commercial Bank Ltd., the assessee had, in the past, dealt in shares as business transaction and had claimed for the assessment year 1951-52, Rs. 1,29,214 as loss on account of its dealing in shares of M/s. Titaghur Paper Mills Ltd., it also claimed Rs. 6,30,000 as loss on account of devaluation of the shares of M/s. Pilani Investment Corpn. though that was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is repetition and continuity, the assessee would be carrying on a business and the question whether the activity is an adventure in the nature of trade can hardly arise. A transaction may be regarded an isolated although a similar transaction may have taken place a fairly long time before - Commissioners of Inland Revenue v. Reinhold [1953] 34 Tax Case 389. The principles underlying the distinction between a capital sale and an adventure in the nature of trade were examined by the Court in G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 (SC), where this Court said that the character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. Ultimately, it is a matter of first impression with the Court whether a particular transaction is in the nature of trade or not. It has been said that a single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of the trade; but mere purchase/sale of shares - if that is all that is involved in the plunge - may fall short of anything in the nature of trade. Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in value, if it does so rise, its realization does not make it income. Lord Dunedin said in Leeming v. Jones [1930] 15 Tax Case 333 at page 360 : "The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments but per se it leads to no conclusion whatever : The Court laid down in G. Venkataswami Naidu Co. v. Commissioner of Income-tax that the dominant or even sole intention to resell is a relevant factor and raises a strong presumption, but by itself is not conclusive proof, of an adventure in the nature of trade ." The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction. In the light of the principles discussed by the Hon ble Supreme Court in that case, it was further observed as under : "The Tribunal relied on the following circumstances for coming to the conclusion. The assessee had been dealing in shares from 1951 to 1953. For the assessment year 1951-52, the assessee claimed a sum of Rs. 1,29,214 which was shown in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paying interest, was a finding supported by evidence. The reasoning of the Tribunal that it is most improbable that the assessee would be investing borrowed money on which interest would have to be paid in shares which yielded no dividend was correct. We cannot say that this was not a relevant circumstance for the Tribunal to take into consideration for coming to the conclusion that the transaction was an adventure in the nature of business. Looking into all the circumstances, the Tribunal negatived the case of the assessee that it had invested its funds with a view to earn dividend." 19. A recent judgment of the Authority for Advanced Rulings in the case of XYZ/ABC, Equity Fund, In re [2001] 250 ITR 194 may be referred to. In that case, the applicant-company was a resident of Mauritius which mobilized investment from different investors and collected a large pool of money and after identifying investment opportunities invested in three Indian companies and one USA company. It utilised the services of an advisor who was also advising other companies. The investment in India was through the custodian which was rendering services in the ordinary course of business to about twe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; ( iii )ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade, but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. 23. Keeping in view the above decisions, we may now refer to the facts of the present case to decide the question as to whether the profit on sale of shares is to be assessed under the head Profits and gains of business or otherwise capital gains. 24. Looking to the facts and materials of the present case, we find that the assessee is an investment company and has been dealing in purchase and sale of shares and engaged in the activity of granting loans and advances since its corporation. It had also raised substantial amounts by way of loans and advances from various sources. It accepted substantial public deposits also. It is admitted position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares by the assessee since its inception indicates a large systematic activity for making profits from dealing in shares. The transactions of the large and substantial magnitude in sales and purchases of shares are found to be in furtherance of the object stated in its memorandum, and, thus, the proceeds thereof is amounted to business receipts and not capital gains. The assessee has given substantial effect to its object clause of dealing in shares. In this case, the assessee-company has engaged itself in systematic and continuous activity of sales and purchases of shares of various companies, having substantial turnover. These aspects of the matter could not be dismissed as an activity not carried as the business of the assessee-company. The assessee has continued its business activity in sales and purchase of shares in subsequent years in which the profit from these activities has been disclosed as business profit and has been assessed so. The conduct of the assessee and the pattern of investment in shares of different companies also indicate that the purchase or investment in shares was not to derive income by way of dividend. In furtherance to its object set out its Memorand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had that it should not show the business activity of sales and purchase of shares in its account as stock-in-trade because of certain restrictions imposed by RBI in accepting public deposits and then in investing the same in the business of sales and purchase of shares, and, consequently, under mistaken view, disclosed the profit under the head Capital gain in immediate two preceding years is of consequences to decide the true and correct nature of the transaction in the present year. The rejection of assessee s certificate as NBFC by RBI is also not relevant to decide the issue in hand inasmuch as there was no change in the business activities of the company save and except that it subsequently stopped accepting fresh fixed deposits from public. 27. In the light of the aforesaid facts and circumstances of case and in view of the discussion made above and the principles enumerated by various decisions cited and discussed above and having regard to the fact that ( i ) the assessee has been engaging itself in systematic and continuous activity of purchase and sale of shares in furtherance to the object in its memorandum of association, ( ii ) raising substantial loans and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses. Hence, I allow the interest payment of Rs. 1,44,94,654 to be deducted as expenses under section 37 against business income of the appellant." 31. Being aggrieved with the ld. CIT(A) s order allowing the deduction of interest as business expenses, the Department has preferred this appeal. 32. We have heard both the parties and have gone through the orders of the authorities below. The decision on this issue is mainly consequential to the decision already given in respect of ground No. 1 raised in this appeal wherein we have hold that the assessee sold the shares as business assets and the profits from the purchase and sale of shares were in the nature of business income assessable under the head "Profit and gains of business" under the Income-tax Act. On perusal of details submitted by the assessee with regard to the loans and deposits on which interest has been paid, we find that these loans and deposits were taken by the assessee in earlier years beginning from the year ended on 31-3-1994 to 31-3-1997 and thereafter these loans and deposits obtained by the assessee were started to be repaid from time to time. The closing balance at the end of each year on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )( iii ) is wider in scope than the expression "for the purpose of making of earning . . . income" occurring in section 57( iii ). Therefore, the scope for allowing a deduction under section 36(1)( iii ) would be much wider than the one available under section 57( iii ). The purpose of borrowing the money for the purpose of business may be to acquire a capital asset or stock-in-trade, as also to pay off a trading debt or loss. In the present case, there is no finding that the borrowed money was not used for the purpose of business. It is also not the case where the business of the assessee had ceased to be carried on so that no deduction can be claimed in respect of interest on borrowings. 33. In this view of the matter and considering our detailed discussion and finding with regard to the ground No. 1 and having regard to the facts and circumstances of the case and the materials and evidences available on record, we are of the view that the interest of Rs. 1,44,94,654 paid by the assessee on borrowed capital is an allowable expenditure under section 36(1)( iii ) of the Act, and, accordingly, the order of the ld.CIT(A) in allowing the said interest payment as deductible expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount which is not on the balance amount which is in excess of Rs. 20,000. The ld. CIT(A) s order is, therefore, not found to be justified. We, therefore, reverse the ld. CIT(A) s order and restore that of the Assessing Officer. This ground is, therefore, decided in favour of the Revenue. 38. Ground No. 4 is as under : "That on the facts and in the circumstances of the case, the ld. CIT(A) erred in allowing Rs. 14,039 and Rs. 16,128 being the amount of employee s and employer s contribution to P.F." 39. We have heard both the parties and have gone through the orders of the authorities below. Having regard to the amendment made in the 1st proviso to section 43B of the Act by the Finance Act, 2003 with effect from 1-4-2004, which is held retrospective in nature by ITAT Benches of Kolkata in various cases, we direct the Assessing Officer to readjudicate this issue by ascertaining as to whether the payment of Rs. 14,039 and Rs. 16,128 being the amount of employees and employer s contribution to P.F. has been paid either within the relevant financial year or within the due date of filing the return of income applicable in the case of the present year and if it is so found, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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