TMI Blog2009 (9) TMI 950X X X X Extracts X X X X X X X X Extracts X X X X ..... re, no disallowance is called for. It is an undisputed fact that the assessee has substantiate share capital and reserves. Therefore, it cannot be said that investments in shares were made out of interest-bearing funds. After hearing the parties, we decline to interfere with the order of the Learned CIT(Appeals), which is confirmed. Hence, this ground of Revenue is dismissed. Taxability of Income - purchasing and selling shares - Long term capital gains or business income - issued a show-cause notice - AO treated a sum of ₹ 15,80,202 (Rs.7,85,405 + 7,94,796) as business income and taxed it accordingly. the Ld CIT(A) deleted the addition by holding that the scale of activities is not substantial and the assessee has shown the shares as investments in this balance-sheet. Dealing in shares is not a principal object of the appellant as can be seen from Memorandum of Association. HELD THAT:- The assessee then referred to the decision of the ITAT Ahmedabad Bench A in the case(s) of ACIT vs. Himanshu J.Shah Others in ITA wherein reliance was placed on the decision of ITAT Lucknow Bench in the case of Sarnath Infrastructure (P) Ltd. Vs. ACIT[ 2007 (12) TMI 261 - ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to when profits earned from transactions in share should be held as business or should be treated as investment. Thus, the perception of the Department is that the nature of transactions in shares is trading in the case of the assessee on the ground of re-shuffling its portfolio is misplaced because once the assessee got the shares registered in its name, it has discharged the primary onus and it is now with the Revenue to show that in spite of shares being transferred/registered in the name of the assessee, the assessee could still be dealing in shares. This could be done by showing that frequency transaction is quite high or it is complying with the legal requirements of being a trader in shares. Having not collected adequate material, we are of the view that the assessee cannot be treated as trader in shares particularly when its main business is in manufacturing and trading of detergent. It is also not correct to say that Memorandum and Articles of Association has not authorized the assessee to make investment in shares and securities. Accordingly, we hold that the Learned CIT(Appeals) was justified in treating the gain in shares as capital gain and not as business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer sought to disallow proportionate interest out of the interest claimed. It was explained to the Assessing Officer that the assessee has made investment in shares out of the huge interest-free funds available in the form of paid up share capital and accumulated reserves. The total investment in shares is less than 1% of the said interest-free funds. The Assessing Officer, however, did not agree with the assessee and disallowed proportionate expenses which amounted to ₹ 53,027/- which included interest of ₹ 9,403/- and administrative expenses of ₹ 43,624/-. 4. In appeal, the Learned CIT(Appeals) deleted the addition by observing as under:- 3.2. The counsel s submissions have been considered. I find that the appellant has given details regarding the investments in shares and mutual funds. The appellant has contended that the investments in acquiring the above equity shares and mutual funds have been out of company s huge interest free funds in the form of paid up share capital and accumulated reserves and nothing has been utilized out of borrowed funds. The investments in shares of Arvind Mills Ltd. Of ₹ 7.25 lakhs were made from the current account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion, the Assessing Officer found that the assessee has been purchasing and selling shares which has given rise to short term capital gain as above. He issued a show-cause notice to the assessee to treat the gain as business income. In response to this, the assessee furnished following reply:- (i) The assessing officer has asked the assessee to show-cause as to why profit from the purchase and sale of shares/mutual funds should not be taxed as business income. In this regard, it is the humble submission of the assessee that as stated in item B as above, the assessee has made investments in shares and mutual funds as investor out of its surplus funds/ reserves available in the regular books of account. The investments are out of such available funds in the past and the assessee has been showing capital gains as and when sale of such shares take place. Primarily, the assessee company is manufacturing unit and has nothing to do with trading in shares. The assessing officer has not brought on record anything contrary to establish that the assessee is a trader in shares. The assessee is regularly assessed to tax since decades and in almost every year the case of the assessee has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmad Co. vs. CIT (1977) 107 ITR 637 (Guj.) (3) In the case of Sardar Indra Singh Sons Ltd. Vs. CIT (1953) 24 ITR 415 (SC) (4) In the case of Karam Chand Thapar and Brothers (P) Ltd. Vs. CIT (1971) 83 ITR 899(SC) (5) In the case of CIT vs. Associated Industrial Development Co. (1971) 82 ITR 586 (SC) (6) In the case of A.N.Ramaswami Chettiar vs. CIT (1963) 48 ITR 771 (Madras) 12. He accordingly treated a sum of ₹ 15,80,202 (Rs.7,85,405 + 7,94,796) as business income and taxed it accordingly. 13. In appeal, the Learned CIT(Appeals) deleted the addition by holding that the scale of activities is not substantial and the assessee has shown the shares as investments in this balance-sheet. Dealing in shares is not a principal object of the appellant as can be seen from Memorandum of Association. He referred to the following decisions relied on by the assessee in support of his contentions:- i) Madhya Pradesh High Court in the case of Birla Gwalior Pvt.Ltd. vs. CIT (1962) 44 ITR 847 ii) The Madras High Court in the case of CIT vs. Pudukottai Co. (P) Ltd. (1972) 84 ITR 788 iii) The Madhya Pradesh High Court in the case of D H Secheron Electrodes Pvt.L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons would have been at each day which is not the case of appellant. Apart from above, appellant states that major profit has been arising by way of investments in Mutual funds in which there cannot be any trading activity. 16. The assessee then submitted that holding period for Majority of shares is over two months or more. He also referred to the following chart at page No.88 of the paper-book:- Holding period Capital gain % 1 to 60 days 53,601 3.08 61 to 120 days 3,26,349 41.56 120 days or more 4,05,346 55.36 Total 7,85,296 100 17. The assessee then referred to the decision of the ITAT Ahmedabad Bench A in the case(s) of ACIT vs. Himanshu J.Shah Others in ITA Nos.2875, 2878, 2879 2880/Ahd/2008 Co Nos.292, 295, 296 297/Ahd/2008 and 2881 and 2883/Ahd/2008 CO Nos.299 300/Ahd/2008 Others, pronounced on 17/07/2009, wherein reliance was placed on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em ? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value ? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet ? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorized in memorandum of associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinction between a capital asset and a trading asset. 2. Capital asset is defined in section 2(14) of the Act. Long-term capital assets and gains are dealt with under section 2(29A) and section 2(29B). Short-term capital assets and gains are dealt with under section 2(42A) and section 2(42B). 3. Trading asset is dealt with under section 28 of the Act. 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 the assessees as well as for guidance of the Assessing Officers. 5. In the case of CIT v. Associated Industrial Development Company (P) Ltd. [1971] 82 ITR 586, the Supreme Court observed that (headnote) : Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade ; where the object of the investment in shares of companies is to derive income by way of dividends etc., the transactions of purchases and sales of shares would yield capital gains and not business profits. 10. The Cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in one or two years though which are not frequent if we spread them on monthly basis as observed by us above; (6) assessees have always taken the delivery of shares and made them registered. It has been held in Sarnath Infrastructure (P) Ltd v. ACIT (122 TTJ 216) that once shares are registered in the name of the assessee, intention is clear that it is an investment and not a trade; (7) There is no material on record to suggest that the assessee has fulfilled the legal requirement for dealing as a trader in shares. 22. Thus, the perception of the Department is that the nature of transactions in shares is trading in the case of the assessee on the ground of re-shuffling its portfolio is misplaced because once the assessee got the shares registered in its name, it has discharged the primary onus and it is now with the Revenue to show that in spite of shares being transferred/registered in the name of the assessee, the assessee could still be dealing in shares. This could be done by showing that frequency transaction is quite high or it is complying with the legal requirements of being a trader in shares. Having not collected adequate material, we are of the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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