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Shri Bherulal Lalchand Bhandari, Market Yard, Satara Versus Dy. Commissioner of Income Tax, Satara Circle, Satara

2016 (1) TMI 217 - ITAT PUNE

Income from sale of shares - treated as ‘Capital Gain’ OR ‘Income from Business or Profession' Held that:- the assessee is engaged in trading of Bhusar and Rajma from which he is having turnover of more than ₹ 1.68 Crores during the period relevant to assessment year under appeal. The turnover from sale of shares is ₹ 19.86 Lacs, which is less than 12% of the total business turnover of the assessee. Thus, it is apparent that the main business of the assesse is trading in Bhusar and R .....

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in the present case. Therefore, the case law Dy. CIT vs. Sri Surve Shriram Krishnaji (2012 (5) TMI 620 - ITAT PUNE) on which the ld. Counsel has placed reliance has no relevance in the facts of the present case. A perusal of first proviso to section 194A of the Act makes it clear that section 194A shall also apply to individuals, where total sales, gross receipts or turnover from business or profession exceed the monetary limit specified u/s 44AB of the Act. The proviso has been inserted by the .....

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r 2005-06. 2. In appeal, the assessee has raised 8 grounds assailing the findings of Commissioner of Income Tax (Appeals). However at the time of making submissions, the ld. Counsel for the assessee restricted his submissions on the following two issues only: 1) Income from sale of shares ₹ 7,19,166/- treated as Capital Gain by the assessee, whereas the Department has assessed the same under the head Income from Business or Profession . 2) Disallowance of ₹ 30,292/- u/s. 40(a)(ia) of .....

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scrutiny assessment, the Assessing Officer inter alia made additions/disallowances on account of income from sale of shares by treating the same as income from business and disallowance of ₹ 30,292/- u/s. 40(a)(ia) of the Act for non-deduction of tax at source on the payment of interest. Aggrieved by the assessment order dated 12-09-2007, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) vide impugned order upheld the .....

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see has not used borrowed funds for the purchase of shares. The shares were purchased out of idle funds that were not required in the business. The assessee has been recording shares in his books of account as investment and not as stock-in-trade. The assessee has been purchasing and selling shares through authorized stock brokers and through recognized stock exchange. All the share transactions carried out by the assessee were on delivery basis. The short/long term capital gain arising from sal .....

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t of disallowance u/s. 40(a)(ia) of the Act the ld. Counsel submitted that the amendment to section 194C was made w.e.f. 01-06-2007 to include the individuals. Therefore, the provisions of section 40(a)(ia) will not be applicable to the assessee in the assessment year 2005-06 i.e. the assessment year under appeal. In support of his submissions, the ld. Counsel placed reliance on the decision of the Tribunal in the case of Dy. CIT vs. Sri Surve Shriram Krishnaji in ITA No. 1207/PN/2010 for the as .....

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y doubt that the profit from sale of shares has to be assessed under the head income from business and not as Capital Gains. The ld. DR further submitted that on the one hand the assessee has taken loan for running business and on the other the assessee has diverted funds from the business stating it to be idle for trading in shares. The ld. DR contended that the entries in the books of account are not conclusive. Therefore, the contention of the assessee that the shares are held as investment s .....

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late proceedings. The ld. Counsel further submitted that the decisions on which the ld. DR has placed reliance are not applicable in the facts and circumstances of the case. 7. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decisions on which the rival sides have placed reliance. Profit from sale of shares, whether revenue or a capital receipt is a mixed question of law and fact. The quest .....

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as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by holding the same as investment, the gain arising there from is required to be treated as capital gains. On the other hand, if the shares are purchased with the intention to earn profit thereon by trading and are held as stock in trade in the books of account, the profit arising on sale of such shares is liable to be treated as business income. 8. In the presen .....

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sale of shares as income from business by the Department is the large volume and value of share transactions. Another contention of the Revenue for treating the income from sale of shares as business income is that the assessee has diverted business funds for purchase of shares and for business purposes the assessee has taken loan. On the other hand the contention of the ld. Counsel for the assessee is that the shares are purchased by the assessee as investment. The intention of the assessee is .....

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assessee at the time of purchase of the shares. This can be found out from the treatment given to the purchase in the assessee's books of account. 2. Whether the assessee used borrowed money to purchase the shares, and paid interest for it. Money is generally borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. 3. Volume and frequency of the purchases and sale/disposals. If purchase and sales are frequent, or there are substantial transaction .....

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he latter is indicative of the purchases being an investment. 5. Whether the intention behind the purchase was to enjoy dividend, or merely to earn profit on sale of shares. 6. Whether the shares were valued at cost. If so, it would indicate that they were investments. Where they were valued at cost or market value or net realizable value, whichever is less, it will indicate that shares were treated as stock-in-trade. 10. The Mumbai Bench of the Tribunal in the case of DCIT v. SMK Shares and Sto .....

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e or holding the shares by way of investment. In the present case, it is not disputed that the assessee had maintained this distinction in its records. It is true that volume of transaction. is an important indicator of the intention of the assessee whether to deal in shares as trading asset or to hold the shares as investor but certainly not the sale criterion. In our considered opinion, the Assessing Officer's conclusion that since sale and purchase had been determined by the volatility in .....

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e. The conduct of the assessee assumes significance in this regard. It has been laid down in various judicial pronouncements that there is no acid test to decide this issue. In the present case we find that the Assessing Officer while passing assessment order under section 143(3) for assessment years 2001-02 and 2004-05, did not dispute assessee's claim regarding profit on sale of investment. One more important aspect is that the assessee had not borrowed any fund for investment in shares an .....

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cannot be said that funds were borrowed for making investment in shares. There is no doubt that volume and frequency of transaction is one of the guiding factors to find out whether the assessee is engaged in the business of purchase and sale of shares or making investment to have capital gains thereon. But it is not the sole criterion to determine the nature of investment. It is not the case of the Revenue that the shares were valued by the assessee in his books of account at cost or market val .....

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or stock in trade. The Hon ble Supreme Court of India in the case of Commissioner of Income-tax (Central), Calcutta v. Associated Industrial Development Co. (P.) Ltd. reported as 82 ITR 586 has observed: 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 and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has mai .....

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e main business of the assesse is trading in Bhusar and Rajma and not trading in shares. In view of the facts of the case and the judicial decisions discussed above we hold that in the present case the income from sale of shares is capital receipt. Accordingly, this ground of appeal of the assessee is allowed. 13. The second issue raised by the assessee in appeal is with regard to disallowance u/s. 40(a)(ia). The ld. Counsel for the assessee submitted that no disallowance could be made under sec .....

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