TMI Blog2014 (1) TMI 341X X X X Extracts X X X X X X X X Extracts X X X X ..... and applying the tests laid down in case of Spectra Shares and Scrips Pvt. Ltd - The finding of the CIT (A) in holding the dealing in shares by the assessee as its investment and directing the Assessing Officer to assess it as income under the head capital gain is most reasonable and appropriate - Decided against assessee. - ITA No. 1001/Hyd/12 - - - Dated:- 17-12-2013 - Shri B. Ramakotaiah And Shri Saktijit Dey,JJ. For the Appellant : Sri T. Diwakar Prasad (DR) For the Respondent : Shri Vijay Mehta ORDER Per Saktijit Dey, Judicial Member: This appeal by the department is directed against the order dated 30-3-2012 of CIT (A) IV, Hyderabad pertaining to the assessment year 2006-07. 2. The only issue in dispute which arises out of the grounds raised by the department is whether the CIT (A) was justified in treating the income of Rs.1,49,14,360/- from share transactions as income under the head of capital gains instead of treating it as business income as held by Assessing Officer. 3. Briefly the facts are, the assessee is a limited company incorporated in August, 1995. It is registered with RBI as a Non Banking Finance Company (NBFC). The main object of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of making profits and use of business conditions as per the prevailing market sentiments. He noted that assessee s basket of shares consisted of various and numerous companies, quoted and unquoted and in many cases shares of the same company had been acquired and sold during the year. He noted that, this shows that the assessee had consistently kept an eye on the market sentiment and conditions with professional acumen, with a clear intent of aggressive business motive of quick profits. On the aforesaid basis, the Assessing Officer held that income derived from share transaction has to be treated as business income and completed the assessment accordingly by treating the amount of Rs.1,49,14,316/- as business income of the assessee. Being aggrieved of the assessment order so passed, the assessee preferred an appeal before the CIT (A). 5. In course of hearing of appeal before the CIT (A) also, the assessee reiterated that the income derived from share transaction has to be treated as income from capital gain as these are investments only. In support of such contention, the assessee also relied upon a number of decisions. The CIT(A) after considering the submissions of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided in favour of the appellant. 6. The learned DR initiating his argument contended that there is lot of complexity relating to the activity in stock market, unlike other investments like gold, real estate etc. Investment in shares require lots of research and investigation. Once investment is made in share, systematic analysis has to be made every day. While in other investments risk of losing is minimal but in case of shares there is a great risk. He submitted that, the nature of activity and nature of behaviour in investing in share is same as in any other business activity as any business activity involves some amount of risk. It was submitted that minimisation of risk is also a business requirement. The learned DR dealing with the facts submitted that in case of 15 scrips both acquisition and sale were during the year. However, the learned DR fairly conceded that investments in mutual fund cannot be considered as business activity. The learned DR submitted that though the assessee claims itself to be a NBFC but its income from NBFC is only 4 lakhs whereas the assessee has shown short term capital gain from sale of shares at Rs.1,35,71,704 which shows that the main activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head capital gain. The learned AR submitted that the department is also accepting it right from the assessment year 2001-02 till 2011-12 accepting the impugned assessment year. That being the case the department cannot for one year say that it is business while accepting it as investment in all other assessment years. In this context, he relied upon a decision of the Hon ble Bombay High Court in case of Gopal Purohit (228 CTR 582). He submitted that SLP filed against the aforesaid judgment of the Hon ble Bombay High Court was dismissed by the Hon ble Supreme Court (334 ITR (St.) 308). The learned AR submitted that in fact though there was loss from share transaction, the assessee has always treated it as capital loss and has never taken advantage of set off of loss from shares held on account of investments against income under the other heads. He further submitted that such loss has been reflected in the computation of income filed along with the returns of income for asst. Years 2002-03, 2003-04 and 2005-06 and accepted by the Assessing Officer even in scrutiny assessments. 9. The learned AR submitted that the main object of the company as per the object clause is to make inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat assessee was holding 2,00,000 unquoted shares of Spectra Shares and Scrips Pvt. Ltd., 90,000 shares of Spectra Agro Chem Ltd., and 20,000 preference shares of Specta Agro Chem Ltd. These are for holding of family concerns and are not held for trading purpose. The learned AR submitted that the decision of the Hon ble A.P. High Court in case of PVS Raju (340 ITR 75) is clearly distinguishable on fact and will not apply to the facts of assessee s case. He submitted that on the other hand, the tests laid down by the jurisdictional High Court in case of Spectra Shares Scrips (P) Ltd. Vs. DCIT (354 ITR 35) if applied to the assessee then there can be only one conclusion that these are investments only. The learned AR also relied upon the following two decisions of the Mumbai Bench of the Tribunal:- 1. M/s Crystal Inpex Ltd. Vs. DCIT (ITA No.237/Mum/2010 dated 15-7-2011). 2. ACIT vs. Sri Manish D. Desai (ITA No. 3661/Mum/2010 dated 27-5-2011.) 11. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other materials on record. We have also applied our mind to the decisions relied upon by the parties before us. The only i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it is observed that assessee did not have any business income or business operations. It is only offering the income for taxation under the heads income from house property, income from other sources and capital gains. Though it was not having any business operations, it is claiming expenses under the business head. With above backdrop, assessee explanation called for as under vide letter dated] 6.07.2007. "State whether shares transactions of the company falls under the activity of business or investment". Further clarification invited on its consistent stand taken by the company over the years. "The transactions of the company in shares fall under the investments activity. This was accepted in the earlier years. The reason is that the company is a Non Banking Finance Company registered with RBI, a copy of the Certificate policy. A copy of the investment schedule enclosed Balance Sheet is filed. The schedule shows that the date purchase cost of the shares and sale details during the year and remaining as investments at the end of the year. At the end of the year the shares remaining with the company are shown at investment price not at the market price or investment pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng all facts and has recorded a finding of fact, which in our view, is unassailable. In the aforesaid factual back drop let us apply the tests laid down by jurisdictional high court in case of Spectra Shares and Scrips Pvt. Ltd. Vs. CIT (supra), though we may hasten to add that whether a particular activity is in the nature of investment or trade is purely a factual issue and would depend upon the particular facts involved in each case. The Hon ble jurisdictional High Court for distinguishing share transactions to be investment as against trading activity laid down the following tests. (a) investments are made with own funds and not with borrowed funds. (b) The closing stock was valued in the books of accounts consistently at cost and not at cost or market price whichever is lower. (c) It had earned substantial dividend income. (d) More than 99% of the total gains are long term capital gains and less than 1% is short term capital gain, 40% of the investments are in mutual fund. (e) The assessee never dealt in futures, derivatives and options. (f) All the transactions of purchases and sales were delivery base excepting one solitary instance of Reliance Industries Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has invested in mutual funds and unquoted shares. In fact, the learned DR has fairly conceded that gain from mutual funds and unquoted equity shares cannot be business income. Most important factor is from the very beginning the assessee has treated the shares as investments and gain from sale of shares and mutual funds have been shown as capital gain. Department has also accepted it for all assessment years except in the impugned year even under scrutiny assessments. It is not disputed that in earlier assessment years the assessee had capital loss of quite substantial amount which was never set off. Had it been a trading activity, the Assessing Officer should have allowed set off as well as carry forward of such loss. On the one hand Assessing Officer is not allowing the loss to be set off and carried forward in the earlier asst. Years by treating it as investment activity. On the other hand when there is gain from sale of shares in impugned assessment year the Assessing Officer is treating it as trading activity. This is unacceptable. The assessee cannot be put to double jeopardy. The inference drawn by the Assessing Officer that because of volume and frequency of transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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