TMI Blog2011 (11) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company- Revenue deeming such loan as dividend in hands of assessee company-Held that:- Special Bench of the Tribunal in the case of Bhaumik Colour Pvt. Ltd.(2008 - TMI - 59371 - ITAT Bombay-E) has held that the deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. Above view of the Tribunal has been approved in the case of CIT vs. Universal Medicare Pvt Ltd. (2010 - TMI - 76961 - Bombay High Court) . Merely because the Revenue has not accepted the decision of the Special Bench of the Tribunal cannot be a ground to take a contrary view. Decided against the Revenue. - ITA No.6019/Mum/2009 - - - Dated:- 30-11-2011 - Shri N.V. Vasudevan, And R.K. Panda, JJ. Represented by: Shri B. Jaya Kumar for Appellant Shri Murlidhar and Shri R.C. Jain for Respondents Per: R.K. Panda: This appeal filed by the Revenue is directed against the order dated 28.08.2009 of the Commissioner of Income Tax (A)- XXX, Mumbai relating to Assessment Year 2006-07. 2. The grounds of appeal No. 1 and 5 by the Revenue are general in nature and hence dismissed. 3. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails the A.O. noted that the assessee has not made any purchases during the previous year in respect of trading. He noted that during the previous year relevant to A.Y. 2005-06, the scripwise list showing stock in trade had shares of the various listed companies which is also there in a huge list shown as investment. The detail of such investment through computer itself shows that assessee smartly but intentionally switched over its trading business to the investment business to have undue advantage of lower tax rate provided for short term capital gain. 4. From the various details furnished by the assessee, the AO noted that the assessee has utilised borrowed money for the huge investments made during the year. He noted that the assessee has made an application in the Initial Public Offer of M/s. Shopper Shop Ltd. amounting to Rs. 20 crore by a single application utilizing the financial facilities from L T Ltd. and paid interest of Rs.10,36,120/-. Similarly, the assessee made an application for YES Bank IPO for Rs. 19.99 crores by obtaining finance from Kotak Mahindra Investment Ltd. and paid interest of Rs.10,35,594/-. Whatever shares acquired by the assessee through these two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any share on day to day basis shows that only in few cases the assessee has squared up the contract of purchase and sale for more than one month. This inter-alia indicates the frequency by which the assessee is entering in the purchase and sale of security. This also indicates that assessee has no other basis to support its genuine intention for investment other than trading. Normal trading operations are being carried out on day to day basis and it is at the end of the day as per the software so utilized by the assessee that bifurcation is made between speculation activity and investment activity. These summaries also show the quantitative and amount wise detail about purchase and sale of the shares and security which the A.O. summarised in the assessment order at para 4.1.7. which is as under:- During the previous year the assessee purchased 65321873 Nos. of shares and sold 60779958 number of shares with a price consideration under investment at Rs. 232,55,21,447/- and sale of Rs. 218,19,50,537/- resulting into profit of Rs. 16,28,67,205/- and loss of Rs. 3,52,79,295/- thereby the net profit is of Rs. 12,70,35,548/-. After taking into consideration the miscellaneous expenses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation and to vary the investments so as to obtain maximum surplus on account of appreciation in the share prices as investor. It was submitted that the assessee can always be an investor as well as a trader since being operating in the field of shares and securities, making sound investment decisions will be easy and would be comfortable to make investments also in the areas of its competence. In the books of account also the assessee has treated the transactions as investment . Referring to various tests laid down by the Apex Court and other High Courts and Tribunal it was submitted that the assessee fulfils all the conditions so as to be treated as an investor. 4.6 It was submitted that during the year the assessee has totally been an investor having investment of Rs. 6218.12 lakhs and there is not even a single transaction of trading entered into. The trading profit has arisen during the year only out of sale made from the opening stock of earlier year. From these it can be inferred that the assessee had a conscious decision to be an investor. Referring to various decisions it was submitted that on identical facts and circumstances the profit from purchase and sale of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain and long term capital gain declared by the assessee has been accepted. It was submitted that the net worth of the company as on 31.03.2005 was Rs. 39.91 crores as against investment in shares at Rs.18.41 crores. The net worth of the company as on 31.03.2004 was Rs. 33.90 crores and the investment in shares were Rs. 14.29 crores. Similarly as against net worth of Rs. 80.81 crores as on 31.03.2006, the investments made in shares were Rs. 62.18 crores. All these facts emanate from the Balance Sheets which were on the records of the Income Tax Department. It was accordingly submitted that the assessee company had sufficient funds in all the years and investments in shares have been made out of own funds. 7. The assessee submitted complete details of STCG which according to it is out of three categories and the details of which are as under : 1. STCG on shares allotted in IPO Rs.50,59,857/- 2. STCG out of shares held as investment as on 31.03.05 Rs.2,09,86,204/- 3. STCG on shares purchased sold during the year Rs.10,10,29,762/- Total STCG Rs.12,70,35,823/- 8. Attention of the Ld. CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed under section 143(3) as per order dated 05.12.07. In the balance Sheet as on 31.03.2005 the investment made in shares has been disclosed as Investment and accepted as such and there is no contrary finding in the assessment. 8.5 He noted that the shares were acquired by the assessee out of its own funds as no loan was outstanding as on 31 .03.06. Further the net worth of the assessee is also substantial enough to cover investment. The Board of Directors in the resolution passed on 25.03.2005 has decided that all the transactions relating to delivery based shares shall be carried out only on investment account. 8.6 The ld. CIT(A) was of the opinion that in view of CBDT Circular No. 4 of 2007 dated 15.06.07 there can be two portfolios i.e. one as investment portfolio and the other as trading portfolio. Therefore, there can two types of income, i.e. investment income which is to be taxed as capital gain and the other one is trading income which is to be taxed as business income . Since in the present case, the Balance Sheet of the assessee company as on 31.03.05 was accepted in the scrutiny assessment and there was no adverse finding, he held that the STCG earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it from purchase and sale of shares should be considered as business income. He accordingly submitted that the order of the ld. CIT(A) should be set aside and that of the A.O. be restored. 9.2 The ld. counsel for the assesee referring to the computation of income placed at paper book page 1 submitted that the long term capital gain of Rs. 27.80 crores has been accepted by the A.O. The only dispute is regarding the treatment of short term capital gain of Rs. 12.70 crores . He submitted that the Security Transaction Tax of Rs. 73,47,980/- paid by the assessee has been disallowed by the assessee itself. Referring to copy of the Balance Sheet (paper book page 9) he drew the attention of the Bench to the own funds and free reserves at Rs. 80.80 crorres which is much more than the investments. He submitted that no borrowed funds have been utilized. Referring to page 11 of the paper book he submitted that the investments are shown in the balance sheet under the head investment and are shown at cost. He submitted that the assesse has received dividend of Rs. 29,93,084/- during the year as against Rs. 93,49,761/- during the preceding year. Referring to the computation statement for A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the various decisions cited should be upheld. Referring to the decision of the Tribunal in the case of Immortal Financial Services (P.) Ltd. relied on by the ld. D.R., he submitted that the same is distinguishable and not applicable to the facts of the present case and the case has to be decided on the basis of its own merits. He further relied on the following decisions:- 1. Shantilal M. Jain v. ACIT Cir 12(3) ITAT, Mumbai) 2. ACIT v. Vinod K. Nevatia, ITAT, Mumbai) 3. ACIT 25(3) v. Naishadh V. Vachhariajani, ITAT, Mumbai) 4. ACIT Cir. 4(1) v. J.M. Shares and Stock Brokers Lt, ITAT Mumbai) 5. CIT v. Escorts Ltd. (High Court New Delhi) 6. Management Structures Systems P. Ltd. v. ITO (ITAT Mumbai) 7. DCIT 13(3) v. Shri Ravindrakumar Aggarwal,(ITAT Mumbai) 8. ACIT 25(3) v. Chetan K. Mehta (ITAT Mumbai) 9. Shri Ramesh babu Rao v. ACIT -17, (ITAT Mumbai) 10. Nagindas P. Sheth (HUF) v. ACIT 21(3) (ITAT Mumbai) 11. ITO 19(2) v. Radha Birju Patel (ITAT Mumbai) 12. Hitesh Satishchandra Doshi v. JCIT (ITAT Mumbai) 10. The ld. D.R. in his rejoinder submitted that during A.Y. 2004-05 there was short term capital loss which was accepted u/s 143(1). In A.Y. 2005- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cases of CIT (Central), Calcutta v/s. Associated Industrial Development Co. (P.) Ltd., 82 ITR 586 as well as in CIT v/s. H Holsck Larzen, 160 ITR 67 (SC). In the above referred circular, the Board has issued certain guidelines to the A.O. The Board has accepted that the assessee can have two portfolios simultaneously- (1) an Investment Portfolio comprising of securities which are to be treated as capital asset and (2) Trading portfolio comprising of stock and trade which are to be treated as trading asset. 11.2 We find the operative part of the Circular No. 4/2007 dt. 15.6.2007 reads as under : 4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 dated August 31, 1989 had brought to the notice of the assessing officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of assessees as well as for guidance of the assessing officers. 5. In the case of Commissioner of Income Tax (Central), Calcutta Vs. Associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s i.e., capital gains as well as business income. 11. Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. 11.3 We find the legal principles as laid down by various courts on account of treatment of an income as business income or capital gain can be summarised as under: (a) It is possible for an assessee to be both an investor as well as dealer in shares. (b) Whether a transaction of sale and purchase of shares is a trading or investment transaction is a mixed question of law and fact. (c) Whether a particular holding is by way of investment or of stock in trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the assessee that in the preceding two assessment years the short term capital gain has been accepted by the Revenue in scrutiny/summary assessment and therefore the same should be followed in this year, in our opinion, is without much force since it is the settled proposition of law that principles of res judicata do not apply to Income Tax proceedings and every assessment is independent and separate. Further in the preceding A.Y. the assessee was trading in shares and only towards the end of the financial year (25.3.2005) the assessee passed a resolution to treat the delivery based shares as investment. In our opinion, the entire exercise done by the assessee was with a motive to reduce the tax liability which is 10% for STCG and 30% for business income. Therefore notwithstanding the fact that the shares were shown as investment in the balance sheet as on 31.3.2005 which were earlier a part of stock in trade, sale of the same, in our opinion, cannot be considered as sale of investment and consequently the profit has to be treated as business income. 11.5 From the various details furnished by the assessee we find it is the computer which decides whether the share is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esting for a long period and offering the long term capital gain which is more than short term capital gain and the period of holding of the shares varied from one year to five years. However, no such facts exist in the present case. The holdings of shares vary between one day to few weeks only. Therefore, the decision in the case of Gopal Purohit (supra) is not applicable to the facts of the present case. The various other decisions relied on by the assessee, in our opinion, are distinguishable and not applicable to the facts of the present case. In this view of the matter we hold that the profit on account of purchase and sale of shares by the assessee in the instant case has to be treated as income from business as held by the A.O. We therefore set aside the order of the ld. CIT(A) and restore the order of A.O. The grounds raised by the Revenue are accordingly allowed. 12. In grounds of appeal No. 4(1)(i), the Revenue has challenged the order of the ld. CIT(A) in deleting the addition of Rs. 34,08,608/- added by the A.O. by way of deemed dividend u/s 22(2) of the I.T. Act. 12.1 Facts of the case in brief are that during the course of assessment proceedings the A.O. noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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