TMI Blog2015 (7) TMI 679X X X X Extracts X X X X X X X X Extracts X X X X ..... onding to conversion of stock-in- trade into investment is to be treated as ‘business income’ and accordingly to be taxed. In view of the above findings of CIT(A) that the income from investment is to be taken as ‘capital gains’ and conversion of stock-in-trade to investment is to be taken as ‘trading income’, which is based on facts of the case and need no disturbance. Accordingly, we confirm the findings of CIT(A). - Decided against revenue. Disallowance on travelling and conveyance charges - CIT(A) allowed claim - Held that:- As seen from the assessment order except questioning the rationality of the expenditure in the absence of carpet business, the AO has not brought on record any material evidence to dispute the reasonability and purpose of the expenditure incurred. As argued by the assessee, the AO has not disproved expenditure incurred nor proved such expenditure was personal in nature or capital in nature. The books of accounts are audited and auditors have not pointed out any discrepancies in the nature of personal expenses or capital expenditure debited to profit and loss account. During the course of hearing, the Ld. counsel for the assessee clarified that the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing ground No.1:- (1) On the facts and under the circumstances of the case, Ld. CIT(A) has erred in not taking the entire4 income arising out the sale of share/unit as income from business while the main business of the assessee during the year was only purchase and sale of shares. 4. Briefly stated facts are that the assessee-company is deriving the income from business as well as from investments. The assessee is engaged in the business of carpets, garments, shares and stocks etc., The assessee has disclosed its income from sale of shares as LTCG and STCG as the case may be. The AO during the course of assessment proceedings noticed that assessee-company has LTCG and STCG from numerous sale and purchase transactions of units of mutual funds/shares through own investment/off market sale and through Kotak PMS. The AO required the assessee to explain as to why the profit on sale of shares be not treated as business income instead of LTCG/STCG. The assessee explained vide letter dated 28-12-2007 and the relevant portion of the letter submitted before AO reads as under:- 3)a) This is to submit that by Resolution dated 28.02.2004 a certified copy of which is enclo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he prospect of making profit on sale of such investment shares at an opportune moment without making any hurry for sale ignoring dividend. Respectfully following the ratio laid down by the ITAT, Kolkata Bench in the case of Reliance Trading Enterprises Ltd., and the ratios laid down in the cases discussed, I hold the profit on sale of shares/units as capital gains as against business income assessed by the AO. However in the preceding para (point 11 of para 4.4), I have discussed the issue of conversion of investment into stock-in-trade and back again into investment . The profit attributable to such trading activity need to be separated from the regular investment account to arrive at the net surplus under the head capital gains. As directed earlier the profit attributable to the trading activity (conversion of stock-in-trade into investment) is to be taxed under business income. Accordingly I direct the AO to give effect taking into consideration both investment account and trading account separately. The profit attributable to trading activity (conversion of stock-in-trade into investment) shall be taxed under the head business income . The net surplus resulted out of investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icates that the motive and intention of the assessee is to earn returns in the form of capital gain apart from dividend income. 6. As regards the AO s observation that the assessee carried out numerous transactions with larger volumes, the assessee submitted that the volume of transactions carried out in terms of total holding is not large. It is further submitted that out of 113 scrips including mutual funds only 8 scrips were sold. According to assessee most of surplus (capital gain) was on account of sale/redemption of investment held for a long period. It is submitted that out of total net capital gain of ₹ 2,78,47,070/- the major capital gain amounting to ₹ 2,43,14,169/- pertains to sale of shares of J.J. Exports which were held from AY 1992-93 onwards. The relevant details have been produced during the course of appellate proceedings before CIT(A) and even before us now. As regards AO s observation that purchases were effected out of borrowed funds, the assessee argued that the sources for acquisition of shares are from share capital, reserves and surplus funds. In this regard, Ld. counsel for the assessee filed summary of accounts from AYs 1993-94 to 2005-06. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the stock-n-trade into investment, it does not alter the character, nature and intention of that particular transaction especially in the context of capital gain versus business income. By bringing in stock-in-trade under the head investment the assessee could reduce the tax incidence considerably. The activity of trading in shares carried out separately in the AY 2004-05 and again brought forward to be continued in the next AY i.e. 2005-06 under the head investment is to be considered as trading activity only. Subsequent conversion and treatment given in the books of accounts do not alter the character of commercial transaction. Accordingly, the profit that has been attributable to this trading activity corresponding to conversion of stockin- trade into investment is to be treated as business income and accordingly to be taxed. In view of the above findings of CIT(A) that the income from investment is to be taken as capital gains and conversion of stock-in-trade to investment is to be taken as trading income , which is based on facts of the case and need no disturbance. Accordingly, we confirm the findings of CIT(A). 7. Next issue in Rev s appeal in ITA No.783/Kol/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts are audited and auditors have not pointed out any discrepancies in the nature of personal expenses or capital expenditure debited to profit and loss account. During the course of hearing, the Ld. counsel for the assessee clarified that the expenditure incurred on travelling and conveyance was mainly on account of foreign tour to interact with business people and to explore the prospects of export in carpets and garments which is otherwise the main line of business activity of the assessee. Accordingly, we confirm the order of CIT(A). 11. The issue in assessee s CO is as regards to disallowance of expenses relating to total income (in relation to exempt income) by invoking the provision of Section 14A and new Rule 8D (2)(iii) of the IT Rules, 1962. For this, assessee has raised following ground No. 2 and 3:- 2. For that in view of the facts and circumstances of the case Ld. CIT(A) was wholly wrong and unjustified in not deleting the arbitrary, adhoc and estimated disallowance of expense of ₹ 6,37,182/- u/s. 14A of the I.T. Act @ 10% of the exempt dividend income of ₹ 63,71,824/- made in the assessment merely on presumption without pointing out any specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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