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2016 (4) TMI 989 - ITAT AHMEDABAD

2016 (4) TMI 989 - ITAT AHMEDABAD - TMI - Assessment of sale of shares - “Short Term Capital Gain” or “Long Term Capital Gain” or under the head “Business Income” - Held that:- The assessee has emphasized that mode of acquisition would not be a factor to decide the nature of transaction. Under this alleged modus operandi, at the most, the assessee could procure large number of shares, but can that would change the character of transaction from investment to trader. There is no evidence with the .....

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and Sugandh Estate and Investment Pvt. Ltd. in a manner that would indicate that shares were acquired for the purpose of trade. Such nexus has not been established. The observation of the CIT(A) is only inferential without any concrete material in the possession of the AO. Therefore, in our opinion, the activity of the assessee by virtue of mode of acquisition of shares cannot be segregated into two parts. The ld.CIT(A) has erred in creating an artificial distinction only on the basis of mode of .....

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he facts fully and completely. There is no change in the ultimate taxable income of the assessee. The AO has only changed the head of income, i.e. the assessee has claimed the surplus on sale of shares to be assessed under the head of capital gain. The AO has assessed it under the head “Business Income”. There cannot be any allegation against the assessee for concealment of income or furnishing inaccurate particulars to this extent. Thus, otherwise also no penalty on the first is issue is imposa .....

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her levy imposed by the National Stock Exchange was penalty in nature or compensatory in nature. It was disallowed and not disputed by the assessee, but that would not goad the AO to visit the assessee with penalty. - Decided in favour of assessee - ITA No.3326/Ahd/2009, ITA No.3440/Ahd/2009, IT(SS)A No.3/Ahd/2012 With CO No.70/Ahd/2012 - Dated:- 17-3-2016 - SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER For The Assessee : Shri S.N. Soparkar with Shri P.M. Mehta and .....

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t of penalty order passed under section 271(1)(c) of the Act on 16.3.2011. 2. The assessee on receipt of notice in this appeal has filed CO bearing No.70/Ahd/2012. We have heard all these appeals together and deem it appropriate to dispose of them by this common order. 3. First we take quantum appeals i.e. ITA No.3326/Ahd/2009 and ITA No.3440/Ahd/2009. 4. Common issue involved in both the appeals is whether receipts received by the assessee on sale of shares is to be assessed under the head Shor .....

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ee was selected for scrutiny assessment and notice under section 143(2) of the Act on 16.11.2007 was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the AO that the assessee has claimed itself as investment in shares and securities, and therefore, on sale of shares it has disclosed short term capital gain. The ld.AO was of the opinion that this claim of the assessee requires to be investigated keeping in view various facts which determine the status of the portfo .....

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o be looked into. Thereafter, the ld.AO has examined the transactions of the assessee under these six tests propounded by the Hon ble Supreme Court. He further observed that one Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. had indulged in an IPO scam whereby these persons have cornered shares reserved for retail customers for IPOs. by fraudulent method. The assessee-company has financed more than ₹ 29 crores in such activity, therefore, this financial activity of t .....

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ee is to be treated as a trader in the shares. These reasons read as under: 6.1 The appellant had provided submissions dated 26-8-2008 which are produced in para 2.3 of the assessment order. The said submissions are not accepted by the A.O. It is stated by him that the issue about taxing of the surplus arising out of transactions considering it as trading transactions or capital gains was considered in various decisions. He has referred to the decision of the Supreme Court in the case of CIT vs. .....

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that in the appellant's case, the matter of realization is shares. Considering the volume involved it cannot be treated as investment. It is stated by him that the shares became commodity for the assessee. He has referred the Gujarat High Court decision in the case of H. Mohamed & Co. vs. CIT 107 ITR 637. It is stated that as observed by the High Court the stock in trade is something in which the trader deals whereas the capital asset is something with which the trader deals. He has also .....

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e of shares and stated that period of holding was short.. iii) Next test referred to by the A.O. is that of frequency and number of transactions and it is stated that on the basis of details of transactions the same were frequent and that it was the main source of income which was capital gain on sale of shares. It is stated that similar trend was noticed in earlier year and subsequent year. The shares were acquired from the persons involved in IPO Scam. It is stated that the appellant had advan .....

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money. vi) The next criteria stated by the A.O. is motive to earn maximum profit and not to have investment. The intention of holding the shares for a longer period and ensuring the benefit of ownership are missing. vii) The assessing officer has referred to the case of H. Mohamed & Co., supra, and stated that the commodity may in the case of one assessee be stock in trade whereas in case of other it may be capital asset. It is stated that in the case of an assessee who carry on business of .....

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1827 dated 31-8-1989 and circular No.4 of 2007. With this discussion the profit of ₹ 7,64,52,057/- on sale of shares is taxed as business income. 6. The ld.CIT(A) has re-appreciated the contentions of the assessee, and partly accepted that the assessee has made investment in the shares. However, to the extent of shares were purchased by the assessee through Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd., the ld.CIT(A) has upheld the conclusions of the AO to treat the .....

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nvestment Pvt. Ltd., was allowed to be treated as investment in the shares. The Revenue is aggrieved with regard to this finding of the CIT(A) in its appeal, whereas, the assessee is aggrieved with regard to first part of the order of the CIT(A). The relevant finding recorded by the CIT(A) on this issue is worth to note. It reads as under: 8. In the light of principles laid down by Hon'ble ITAT, Ahmedabad in the judgement in the case of M/s. Hipolin Ltd., supra, the facts in the present case .....

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se groups has already been discussed in the instant appellate order. The appellant company has financed more than ₹ 29.00 Crores in such activities. Therefore, the point for determination is whether such a systematic actively of financing, making multiple applications in the IPO and thereby cornering large number of shares reserved for retail investors in the IPO, could be .'termed as business or adventure in the nature of trade. Incidentally, the business, as defined in section 2(13), .....

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29.00 Crores to Rupal Panchal and "Sugandh" group with the intention that these groups would make multiple applications in the IPOs of certain companies. No security of any kind has been taken by the appellant before advancing such a huge funds to "Panchal" and Sugandh Groups. In other words, the appellant company was aware that Rupal Panchal and "Sugandh" group are engaged in making large number of applications in the IPO of different companies in fictitious names .....

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activity has to be construed as adventure in the nature of trade. In such situation, the surplus of ₹ 4,16,74,781/- has to be taxed as gain from the adventure in the nature of trade and same has to be taxed as business income. The Assessing Officer is directed to tax the gain of ₹ 4,16,74,781/- at the rates applicable in the case of business. 8.2 As regards to balance surplus amount of ₹ 3,47,77,276/-, this surplus has arisen as the appellant company had invested in shares it& .....

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tal gain and was accepted by the Assessing Officer while passing the assessment order on 31-12-2007 u/s. 143(3) of the I.T. Act for the assessment year 2005-06. Thus the appellant's intention of making investment was clear. The appellant has not incurred any interest on borrowings for such investment. Thus borrowed funds are not applied. There is no motive of trading in shares established by the Assessing Officer except referring to the volume and number of transactions. I also appreciate th .....

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pital asset, particularly when STT has been paid. In appellant's case, the transactions are subjected to STT and such STT has not been claimed or allowed in the computation of income. I also appreciate the reference made to the Bombay decision in the case of Gopal Purohit 29 SOT 117, which supports the appellant's explanation. The other judicial decisions relied upon by the A.R. are also supporting its explanation. In the circumstances, merely because the appellant has sold the shares wh .....

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on its incorporation is; to carry on and undertake as its principal business the business of finance and to finance lease operations of all kinds, purchasing, selling, hiring or letting on hire all kind of plants and machinery and equipment that the company may think fit and to assist in financing of all and every kind and description of hire purchase or deferred payment of similar transactions and to subsidies, finance or assists in subsiding or financing the sale and maintenance of any goods, .....

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ts incidental or ancillary objects, the assessee was to invest in securities and shares. The ld. counsel for the assessee, while taking us through the clauses from the memorandum of association reproduced in the statement of facts emphasized that the assessee was never allowed to do business in the shares. In the past, it has been treated as investor. As an investor, the shares have been transferred in the name of assessee. It has paid security transaction tax on sale of shares. It has not used .....

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stment Pvt. Ltd. might have involved in an IPO scam. But, how it affects the investment of the assessee ? By this mode, the assessee might have got more shares. But the attempt to get shares should not be construed that it was a business. Test is not mode of acquisition shares, but the object of investment is the test. Mode of acquisition will not change the nature of asset acquired by the assessee. In his next fold of submission, he submitted that Smt. Rupal Naresh Panchal and Sugandh Estate an .....

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hares, which in terms of percentage comes to 0.16% of the total shares issued in the public. Similar is the positions with regard to other scrips. He further contended that the ld.CIT(A) ought to have adopted principle of consistency. There are no specific changes in the facts from earlier years to this year. For buttressing this contention, he relied upon the judgment of Hon ble Delhi High Court in the case of, Director of Income Tax (Exemptions) vs. Escorts Cardiac Diseases Hospital Society, 3 .....

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This activity was carried out simply keeping in view the profit motive in an organized manner. The SEBI has debarred Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. from conducting the share trading business at National Stock Exchange. He placed on record copy of a letter dated 13.1.2006 written by National Stock Exchange of India Ltd. It is a letter to the members whereby the members were informed that SEBI has debarred Smt. Rupal Naresh Panchal and Sugandh Estate and Inv .....

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Ltd. reported in 120 TTJ 216. These tests read as under:- 13. After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes: (1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated .....

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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 its value? Former will indicate intention of trades and latter, .....

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stock-in-trade. (6) How the company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice verse. 7. It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of ho .....

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n) for investment. 9. One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made? 10. It is permissible as per CBDT s Circular No. 4 of 20 .....

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s issue in the case of Commissioner of Income Tax vs. Riva Sharkar A Kothari reported in 283 ITR 338. Hon ble court has made reference to the test laid by it in its earlier decision rendered in the case of Pari Mangaldas Girdhardas vs. CIT reported in 1977 CTR 647. These tests read as under: After analyzing various decisions of the apex court, this court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business. (a) The first test is whether the i .....

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ed, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was the assessee. Has it been treated as stockintrade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive. (d) The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments. This factor, .....

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inuity and regularity of transaction of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proposition to the strength of holding then an inference can readily be drawn that the activity is in the nature of business. 12. In the light of the above tests, let us examine the facts of the present case. It is not disputed that the assessee has borrowed funds for making investment in shares. In .....

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tment in shares under the head investment and not stock-in-trade . Similarly, at the end of the year, it has not valued the shares in the manner stock is being valued i.e. at the cost or market price whichever is lower. It has valued at cost. For the Asstt. Year 2005-06, the AO has accepted the assessee as investor and assessed the surplus on sale of shares as capital gain. The assessee had paid security transaction tax. In the case of Sarnath Infrastructure Pvt. Ltd., 120 TTJ 216 as well as in .....

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ut that there is no major variation in the facts and circumstances, except, one considered by the ld.CIT(A) in para 8 and 8.1 of the impugned order extracted supra. The ld.CIT(A) has recorded a finding that the assessee-company has financed more than ₹ 29 crores to Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. group with intention that this group would make multiple application in the IPOs. of certain companies. The second reason assigned by the CIT(A) is that the a .....

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odus operandi was of a business nature. During the course of hearing, we have confronted the ld.DR to show us any evidence which can establish nexus between the assessee and Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. for acquiring the shares of five companies with this modus operandi. The ld.counsel for the assessee has emphasized that mode of acquisition would not be a factor to decide the nature of transaction. Under this alleged modus operandi, at the most, the asse .....

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neither recorded statement of the assessee nor collected any material which can demonstrate that the assessee has colluded with Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. in a manner that would indicate that shares were acquired for the purpose of trade. Such nexus has not been established. The observation of the CIT(A) is only inferential without any concrete material in the possession of the AO. Therefore, in our opinion, the activity of the assessee by virtue of mo .....

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s initiated penalty proceedings under section 271(1)(c) of the Act. He issued a show cause notice under section 274 r.w.s. section 271(1)(c) of the Act on 29.8.2008. The AO has observed that there were three additions made to the income of the assessee, viz. short term capital gain of ₹ 7,64,52,057/- on sale of shares shown by the assessee has been assessed as business income; (b) the assessee did not add a sum of ₹ 85,500/- which represented dividend stripping amount, and (c) an add .....

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n purchase and sale of shares as business income as against the capital gains claimed by the appellant in the return of income. B. Dividend stripping of ₹ 85,500 under section 94(7) of the Income-tax Act. C. Penalty of ₹ 39,974 levied by the National Stock Exchange. 4. As regards the penalty on the treatment of income of ₹ 416,74,781 on purchase and sale of shares as business income as against the capital gains shown, by the appellant, I agree with the contention of the appella .....

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n the Case of Sugamchand, held that if the shares are sold within 30 days from the date of its purchase, then the same should be taxed under the head of business income and if the shares are sold beyond 30 days from the date of its purchase, then it is to be taxed under the head of capital gains. The CIT (Appeal) also held that the shares purchased and sold to Rupal Panchal would also amount to business income. While giving the effect to the order of CIT(A) the AO computed the income under the B .....

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