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2015 (5) TMI 355 - ITAT DELHI

2015 (5) TMI 355 - ITAT DELHI - TMI - Treatment of income - transaction of shares - short term capital gains or business income - Held that:- The mutual funds/shares have been shown as investment and not closing stock that the closing balance have been valued at cost and not at "cost or market value whichever is lower", that no borrowed funds have been used etc. the income from investment may be treated as income from capital gains and not as income from business. Ld. CIT(A) has observed that th .....

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has earned incentive income and this incentive income has to be assessed as business income and the other income shall also become business income. We concur with the ld CIT(A) that this interpretation of the assessing officer is incorrect. The assesse having made investments and consequent to such investments some incentive is received. Treatment of that incentive income will not change the nature of the investments. On the contrary, this receipt of incentive itself confirms the fact that this .....

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only ₹ 14,38,626/- out of the total capital gain of Rs.l,76,03,580/-. The investment in portfolio management is a common feature and cannot be held to be a business. Another reason of the Assessing Officer is that assessee has prepared books of account, Profit and Loss Account and Balance Sheet and has got the same audited. There is nothing wrong in this. The assessee being a legal entity is required to maintain its books of account and get the same audited. This cannot be a ground for the .....

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sessing Officer was not justified in changing the treatment of income of appellant from Short term' capital gains to Income from business. The Assessing Officer was accordingly, directed to treat the income of ₹ 1,76,03,581/- declared by the assessee as Short term capital gains only and not as Business income. No infirmity in the order of the Ld. CIT(A)-Decided against revenue.

Portfolio Management Fees surrendered and offered for taxation on account of being not allowable u .....

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acts and circumstances of the case - Decided against revenue.

Loss on trading of derivatives - whether be considered as business loss only and allowed to be set off against other income - Held that:- As per section 43(5)(d) of the Act, the profit/ loss on trading of derivatives will have to be considered as business income/ loss only. So in the instant case the loss is business income and the ld. CIT(A) has rightly held that the loss of ₹ 8,26,229/- on trading of derivatives is .....

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. T. Varkey, Judicial Member This appeal filed by the Revenue is directed against the Order dated 06.6.2011 passed by the Ld. CIT(A)-XXVI, New Delhi pertaining to assessment year 2007-08. 2. The Revenue has raised the following grounds in its Appeal:- 1. The order of the CIT(A) is not correct in law and facts. 2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in law as well as in facts in directing the AO to treat the income of ₹ 1,76,03,581/- declared by the assessee .....

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claimed and offered the Portfolio Management Fees (PMS) for taxation meaning thereby that the assessee has himself impliedly admitted that his income from the sale and purchase of shares/mutual funds is business income though in the return of income the same has been shown income from Short Term Capital Gains. 4. On the facts and circumstances of the case, the Id. CIT(A) has erred in law as well as in facts in holding that the loss of ₹ 8,26,229/- on trading of derivatives is to be consid .....

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ct, 1961 (herein after the Act ). The case was selected for scrutiny. The assessee is a partnership firm which is engaged in the business of Investment in shares and mutual fund under the name and style of M/s Ascot Investments. This is the first year of business. During the year under consideration the assessee has declared income from business and profession, income from capital gains and dividend income and interest income. After perusal of the details filed along with the return of income fi .....

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accordingly, completed the assessment u/s. 143(3) of the Act on 24.12.2009 and made various additions. 4. Against the aforesaid order of the Assessing Officer, assessee appealed before the Ld. CIT(A), who vide his order dated 6.6.2011 has partly allowed the appeal of the assessee. 5. Aggrieved by the order of the Ld. CIT(A), now the Revenue is in appeal before the Tribunal. . 6. Ld. DR relied upon the order of the AO and reiterated the contention raised in the grounds of appeal raised by the Rev .....

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e ld. CIT(A) appreciated the facts of the case by taking into account the details of sale, purchase and investment in shares, the intention of the assessee, various case laws and circulars of CBDT in this regard. The CBDT circular No.4/2007 has referred to various principles laid down by judicial authorities in order to enable making distinction between shares held for trading and shares held as investments and have clarified that total effect of all the principles should be considered in determ .....

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whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. Ld. Counsel of the assessee has submitted that the assessee is a partnership firm through which the partners have invested their funds in various shares, securities, mutual fund schemes. During the year, the assessee firm invested its own fund (not borrowed fund) in various mutual funds, shares, securities & other investments and earned a net capital gain .....

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ith such an intention. According to him, the firm consists of family members i.e. father, Sh. Satish Gupta, and two sons, Sameer Gupta and Sundeep Gupta, who are all equal partners of the assessee firm. And it was started with an intention to manage various investments held by the partners in their individual capacity and to pool their resources together for the purpose of investment. According to him, prior to the same, the investments were held by the partners in their individual capacity and .....

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s of various companies. The ld AR pointed our attention to a list of various companies along with summary of transactions done and capital gained on the same were shown to us. According to the ld AR, all shares purchased were duly transferred to the DMAT account of the assessee firm and all the transactions were done by investment in mutual funds or through Portfolio Management Scheme (PMS). The ld AR pointed out that a huge amount of dividend has been earned during the year under consideration .....

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e volume of independent purchases and sale of shares and mutual funds and the assessee has also claimed expenses on account of interest and administrative expenses which are not allowable in case of capital gain. The assessing officer is also of the opinion that there is no long term capital gain in any of the cases which indicate that the assessee is not an investor but a trader. A perusal of the balance-sheet of the assessee firm reflects that it has a 'capital base of more than ₹ 52 .....

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is no other adverse feature to come to the conclusion that the assessee is not an investor but a trader. The Board circular referred is very clear whereby certain parameters have been fixed. On analysis of this Board Circular and the facts of the case of the assessee, it is quite clear that assessee cannot be held to be a trader. In the Board circular, in para 8.2, it has been quite clearly stated that the manner of maintaining books of account furnishes a good guide to determine the nature of .....

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has made purchases amounting to ₹ 31.78 Crore and sale amounting to ₹ 25.57 Crore does not mean that it has become business. These figures have to be understood in the context that the capital of the assesse firm is ₹ 52.13 Crore and it is holding investments in shares of ₹ 34.48 Crore. These figures itself substantiate the case of the assessee that assessee is an investor whereby a major part of the capital has been invested in the investments. 10. We find that the Asse .....

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he Income Tax Act. The assessment of income has to be made under the various heads of income as per the scheme of the Income Tax Act. If the AO s view has to be taken then it was, interest income for purposes of sec 80HHC, 80lA, 80lB etc. be taken to be business income entitled to deduction and not treated as income from other sources. Further it would mean that no income of the firm would be assessed under the head capital gains, rental income or income from other sources, which would create ab .....

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g made any income from long term capital gains because minimum qualification to treat an income as capital gain is that it should be held by the assessee for more than an year. Further, the assessee when it sees the value of Investments going down in shares or mutual funds would normally get out/sell/switch to other options. Similar is the case where he finds that investment in other portfolios would yield better dividends or returns. Therefore, no adverse inference ought to have been drawn from .....

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s expenditure has not been claimed against capital gain income shown by the assessee. We also concur with the ld CIT(A) that a perusal of Schedule IX attached to the Profit and Loss Account shows income on account of short term capital gain of ₹ 1,76,03,545/- and the same has been shown as net income in the computation of income filed by the assessee. It is also further noticed that the assessee has shown interest income in respect of ₹ 57,56,497/- which also confirms the fact that t .....

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rom business/ trade is not correct. 11. Further we find force in the submission of the ld AR that the income from the sale have been shown as income from capital gains because the intention of the assessee was to make investments in mutual funds and securities and earn income from capital gains, dividends etc. The intention of the partners for deriving income from investments is borne out by the following facts (as noted by the ld CIT(A) in Page 31 of the impugned order: The partners are carryin .....

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lio Management Schemes (PMS). The trading in derivatives was done by PMS Managers and not by partners. The amount has been shown as 'Investments' in the books of accounts and in the Balance Sheet. Income under the head short term capital gains/loss, dividend and other income has been shown. The closing value of shares and mutual funds, shown as investments, has been valued at cost and not at "cost price or market price whichever is lower" as applicable to valuation of stocks. T .....

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g significant accounting policies, the auditors have inter alia stated as under: - Investments are valued at cost. - Investment transactions are accounted for on trade date basis. - Accounting of Investments made through PMS and income earned thereon has been made as per audited statement received from the concerned Assets Management Company. 13. So, according to the ld AR thus, the Tax Audit report also reinforces the intention of the assessee that the object of the assessee was investment and .....

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eported in 82 ITR 586 and in the case of H. Hoick Larsen as reported in 160 ITR 67 (SC) afforded adequate guidance to the Assessing Officer while determining whether a transaction is in the nature of investment or trade. The ld CIT(A) observes in Page 32 of the impugned order that the ratio of these decisions when applied to the facts of the present case, then it would' be found that assessee satisfied the requirements because as a rule, the assessee had taken delivery at the time of purchas .....

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od of holding of such shares. The ld DR could not assail the said finding of the ld CIT(A) by bringing any evidence to the contrary from the assessment order of the AO or other evidence in this behalf. 15. The ld CIT(A) has rightly held that the tests of badges of trade evolved by Royal Commission of England and approved by the Hon'ble Supreme Court are also met by the assessee. In order to buttress its contention, the ld AR contended that (1) An equity share of Indian Companies is not essen .....

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es have become a popular mode of investment. There is huge variety to choose from. Due to globalization and various uncertainties of modern times, there is increasing volatility in the share market. This has affected the length of period of holding in the cases of investors also. Having regard to these various issues under the provisions of the Act where shares are held for one year and more, the same qualify to be assessed as long term capital assets. The period of less than one year results in .....

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g, the same would not be held for weeks or months. In the case of the present assessee, all the shares have been sold after the delivery of same were taken by it in its bank account. The expression "similar transactions by the same person" and "same sort of property" needs to be emphasized. An investor may buy or sell everyday but that may not be considered such frequency as to lead to the inference of trading. It is only when particular scrip is bought and sold a number of t .....

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hat investment is made through, mutual funds and PMS service for shares purchased by assessee. If it becomes necessary, they are sold promptly on the basis of market condition. Therefore, it cannot be said that the assessee has dressed up in such way so as to wear the badge of trading. Whenever there is premature sale, i.e., the sale within a few days or weeks from purchase, there is always some specific reason such as downtrend in market sentiments over a' particular scrip or industry. Such .....

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es are always transferred in the name of the assessee. Generally, the shares are not sold until it becomes necessary to exit or otherwise due to long holding, the shares have become ripe for realization of profit. In all cases, deliveries are invariably taken and given; full price is paid and collected. There is hardly any involvement of borrowed capital. To sum up, there is no presumption that a transaction in shares was for a trade and the correct position was that ordinarily equity shares wer .....

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that the assessee has shown the transactions of shares in its books of account under the head investment , which as per the above mentioned circular and other case laws, further strengthens the plea of the assessee that it is not shown as no stock in trade in the balance sheet which supports the fact that the same were held by the assessee in the nature of investment. 17. The ld CIT(A) has relied on the various relevant case laws which are found to be well in support of her decision. 18. We fin .....

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as Kesardev Morarka as reported in 44 ITR 625 (SC), (iii) CIT vs. Madan Gopal Radheylal as reported in 73 ITR 652 (SCe) (iv) CIT v. Associated Development Co. Ltd. as reported in 82 ITR 586 (SC). 20. The above judgments clearly state that the same person can be a trader as well as investor in shares. 21. In a recent decision of Lucknow Bench of the Tribunal in the case of Sarmath Infrastructure (P) Ltd. as reported in 16 DTR (Lucknow) (Trib) 97, a view had been taken in favour of the assessee af .....

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is lower", that no borrowed funds have been used etc. the income from investment may be treated as income from capital gains and not as income from business. 23. Ld. CIT(A) has observed that the AO has wrongly stated that the assessee has traded in derivatives which cannot be treated as investment. On perusal of the records, it is noticed that the transactions in respect of derivatives are not part of the short term capital gain. These have been separately quantified as business transactio .....

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nts some incentive is received. Treatment of that incentive income will not change the nature of the investments. On the contrary, this receipt of incentive itself confirms the fact that this assessee has earned incentive consequent to investments being made, which is normally given to the investor. 25. As regards the portfolio management, it is observed on examination of the facts and records and as explained above, that the assessee has made investments through portfolio management in five cas .....

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ccount, Profit and Loss Account and Balance Sheet and has got the same audited. There is nothing wrong in this. The assessee being a legal entity is required to maintain its books of account and get the same audited. This cannot be a ground for the assessing officer to hold that the assessee is carrying on business. The ld CIT(A) has rightly observed that if the contention of the assessing officer is accepted then probably in each and every case will be covered under the business income and ther .....

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' capital gains to Income from business. The Assessing Officer was accordingly, directed to treat the income of ₹ 1,76,03,581/- declared by the assessee as Short term capital gains only and not as Business income. In the background of the aforesaid discussions, we do not find any infirmity in the order of the Ld. CIT(A), hence, we uphold the same and dismiss the issue in dispute raised by the Revenue. 28. With regard to issue involved in ground no. 3 is concerned, we find that Ld. CIT( .....

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nditure incurred by the assessee on PMS becomes allowable once the income on sale of shares, mutual funds, units was held to be business income as against capital gain claimed by the assessee. Therefore, the sum of ₹ 41,88,451/- was allowable as deduction against business profits as already claimed by the assessee in return of income and was, therefore, not added back to the income from business even though surrendered by the assessee before the AO. In view of the aforesaid facts and circu .....

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and circumstances of the case, which does not need any interference on our part, hence, we uphold the same. Therefore, the issue in dispute raised by the Revenue is rejected. 30. With regard to issue involved in ground no. 4 is concerned regarding holding that the loss of ₹ 8,26,229/- on trading of derivatives is to be considered as business loss only and allowed to be set off against other income as per the provisions of the Act is concerned. During the course of the appellate proceeding .....

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