TMI Blog2010 (10) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT was justified in law in holding that the income earned by the assessee from sale of shares and securities was liable to be assessed as income from business as against long term capital gain declared by the assessee? (b) Whether if answer to the above question is in favour of Revenue, whether the Tribunal was justified in deleting the addition of Rs.2,65,77,430/- made by the Assessing Officer by disallowing set off of income against long term capital loss of earlier year? (c) Whether in the context of facts of the present case, the Tribunal has correctly interpreted the principle of law laid down by the Hon'ble Apex Court in the judgments relied upon? (d) Whether the order passed by the ITAT is vitiated by perversity on account of non-application of mind to the specific observations made by the Assessing Authority? 2. The basic facts which are requisite to be stated for adjudication of this appeal are that the assessee-respondent is a company engaged in the business of sale and purchase of shares. It filed its return declaring an income of Rs.60,05,375/- in which it included short term capital gain at Rs.38,476/- and long term capital gain at NIL after set-off of lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,805/- and initiated penalty proceedings under Section 271(1)(c)and directed charge of interest under Section 234B/234D accordingly. 3. Being dissatisfied with the aforesaid order, the assessee preferred an appeal before the CIT(A). It was contended before the first appellate authority that the assessee company was incorporated on 19th May, 1894 under the Companies Act and the "Objects Clause" of the Memorandum of Association has a large number of objects and not one of these objects could be said to be the principal object of the company. It was put forth that the company was not trading in shares in the year under consideration but, in fact, the company discontinued purchase and sale of shares in the said instruments many years ago and after 31st March, 1996, there had been no purchase of shares as stock-in-trade of the company. The company invested in the Times Bank Ltd., as a long term investment, a sum of Rs.100.35 lakhs in the year 1996 and Rs.201.15 lakhs in the year 1997 and, therefore, the said investment in the Times Bank Ltd are long term investments as per the resolution of the Board. On 5th May, 2000, the Times Bank Ltd got merged with HDFC Bank and in lieu of 30 lak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of long term investment and hence, the entire profit is capital gain on sale of long term investment and that in the year under consideration, the ratio of long term investment in shares to debentures, bonds, mutual funds and similar other debt instruments is 27.27%, i.e., the majority of the investment is in instruments other than equity instruments and the same would show that the assessee is not a dealer in shares; that the accounts of the company had not been rejected in the assessment year and there is no material to show that the assessee at any point of time indulged in trading of these shares and stocks in the year under consideration; that the order passed by the assessing officer is vulnerable inasmuch as he, at one place, opined that the Memorandum of Association is not the sale indicator while, on the other hand, relied on the same for the purpose of adjudication; that the Memorandum of Association has not been appositely appreciated which has made the order of the assessing officer indefensible; that incorporation of clause relating to investment in shares in the Memorandum of Association does not clothe the company with the characteristics of dealer in shares unles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and not merely one clause which finds mention in the Memorandum of Association; that the entire gamut of facts reveal that the assessee company did not engage in any purchase and sale of shares and, therefore, the very intention of investment in these shares was for long term investment purposes. 6. Being of the aforesaid view, the CIT(A) came to hold that the profit arising on the sale of shares has to be treated as long term capital gains and, accordingly, the addition of Rs.2,65,77,430/- was deleted and the assessing officer was directed to recompute the total income of the assessee company by treating the profit on sale of shares as long term capital gains. 7. Being grieved by the aforesaid order, the revenue preferred an appeal before the tribunal. There were two appeals being ITA No.3640/Del/2007 and ITA 2872. The ITA 3640 dealt with the assessment year 2003-04 where the question arose whether the first appellate authority had acted appropriately in deleting the addition of Rs.2,65,77,430/- made by the assessing officer on account of treatment of capital gains on sale of shares as profits and gains of business. The tribunal, after referring to the submissions of the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Aggarwal, learned counsel for the respondent. 9. The question that emerges for consideration is whether in the obtaining factual matrix, it should be construed that the assessee was a dealer in shares or regard being had to the nature of investment, it is to be construed that the said security constitutes an investment for the purpose of gaining the status of long term capital gain. In this context, we may refer to a passage from the decision in Commissioner of Income Tax, U.P v. Madan Gopal Radhey Lal, [1969] 73 ITR 652 (SC) : "A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business; in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity." [Emphasis supplied] 10. In this regard, it is profitable to refer to the decision in Vijaya Bank Ltd. v. Additional Commissioner of Income-tax, Bangalore, AIR 1991 SC 239 wherein the Apex Court was dealing with the fact situation where the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng dividend only. A company can hold some shares as stock-in-trade for the purpose of doing business of buying and sale of such shares, while at the same time it can also hold some other shares as its capital for the purpose of earning dividend income. Here the shares in question were held as the assessee's capital and not as stock-in-trade. Hence, there would be capital gain and not business income. Hence, we answer the question referred in the affirmative i.e., in favour of the assessee and against the Department." 12. In Commissioner of Income Tax v. Gulmohar Finance Ltd., [2008] 170 Taxman 483 (Delhi), this Court was dealing with the issue whether the shares held as an investment of the assessee and profit earned by the assessee on the sale of the shares should be treated as capital gains or as a business income. In that context, the Bench has held thus: - "It was noted by the Tribunal that in earlier assessment years, the assessee had shown the shares held in BT Tech Net Ltd. as investment right from the date of purchase and this was shown as such in the balance sheet of the assessee, which was filed along with the return of income. No objection was taken to this position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be tested on the anvil of the above principles. In the case at hand, the assessee had purchased the shares on 27th January, 1996 and the same were held for a span of 7 years and were sold during the year under consideration. The assessee had not involved himself in the business of buying and selling shares after 1st April, 1997. The assessee had not engaged himself as a dealer in debt mutual funds. Nothing has been brought on record to show that the assessee was engaged in the selling of shares. The object incorporated in the Memorandum of Association only refers to the fact that the assessee can deal with shares but, there was no regular activity on that score. The nature of activity, intention and conduct has significance. They play a pivotal role in the entire gamut of transaction. As per the circular issued by the CBDT, a tax payer can have two portfolios, that is, an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. The assessee is entitled to have income from both heads, namely, capital gains as well as business income. On a proper scanni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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