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DCIT, Circle –9 (1) , New Delhi Vesus M/s. Space Power Controls (P) Ltd. and M/s. Space Power Controls (P) Ltd., Versus ACIT, Circle –9 (1) , New Delhi and Vica-Versa

2016 (6) TMI 53 - ITAT DELHI

Income from sale of shares and securities - short-term capital gain OR profit and gains of business - Held that:- Mere not using interest bearing borrowed funds is not sufficient to conclude that transaction of share sales are not business income. Having regard to the volume and frequency of the transactions, no separate books of accounts or demat accounts and other facts and circumstances, we are of the opinion that overall effect of all the factors revealed that the activity of sale and purcha .....

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axing the short-term capital gain under the head ‘profit and gains of business and profession’ - Held that:- As we have already upheld the findings of learned CIT(A) of taxing the transactions claimed under the head ‘short-term capital gain’ under the head ‘profit and gains of business and profession’, the assessee deserves for credit of Security Transaction Tax under the section 88E of the Act. Accordingly, we direct the Assessing Officer to allow that credit in accordance to law after verifica .....

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r profession’ rather than under the head ‘short-term capital gain’. The learned Commissioner of Income Tax(Appeals) relied on the case of Commissioner of Income Tax, Ahmedabad Vs. Reliance Petroproducts Private Limited,, [2010 (3) TMI 80 - SUPREME COURT] wherein held mere making of a claim, which is not sustainable in law, would not, ipso facto, amount to furnishing inaccurate particulars regarding the income of the assessee and would, therefore, not automatically result in a penalty order again .....

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f Income-tax( Appeals) - XII, New Delhi [in short the CIT(A) ] dated 14/05/2010 and 23/05/2013 respectively. In order dated 14/05/2010, the CIT(A) has decided the additions made in the assessment order under section 143(3) of the Income tax Act, 1961 (in short the Act ) and in order dated 23/05/2013, the penalty levied by the Assessing Officer (in short the AO ) under section 271(1)(c) of the Act has been decided by the CIT(A). The third appeal of Revenue is in respect of assessment year 2006-07 .....

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the facts and circumstances of the case and in law the order passed by Commissioner of Income Tax(Appeals)-XII, New Delhi, hereinafter referred as CIT(A) , being perverse of the facts and against the principles of law, is void-abinitio and appellant company is entitled to be assessed at its returned income. ii. That in the facts and circumstances of the case and in law the learned Commissioner of Income Tax(Appeals) erred in upholding taxing of short term capital gain under the head income from .....

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of ₹ 2,09,85,420/-. The case of the assessee was selected for scrutiny under computerized assisted selection of scrutiny (CASS) and notice under section 143(2) of the Act was issued and served within the stipulated period. In the course of scrutiny proceedings, the AO observed that the part of income from activity of purchase and sales of the shares was shown as business income, whereas for balance shares, the income from activity of purchase and sales was shown as short-term capital gain .....

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rm capital gain would be entitled to concessional rate of 10% under section 111A of the Act. Having discussed various judgments on the issue as to whether the purchase and sale of the shares would be falling under the business income or capital gain, the AO held that the character of the assessee was of a trader rather than investor and therefore the short-term capital gain of ₹ 2,07,53,989/- declared by the assessee was held by the AO as business income. On appeal to the learned Commissio .....

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), submitted that the company was incorporated with the main object of carry on the business of manufacturing and trading in all types of power control equipments, power generation equipments etc, however, due to non-availability of the adequate opportunities, the Board of Directors resolved under section 292 of the Companies Act to invest in the capital market during the financial year 2004-05 and, thereafter, the assessee company carried on the investment activity and declared the income under .....

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is based on approval from Board of Directors. The learned AR further submitted that the investment was made out of self generated funds and capital and no money were borrowed for making investments. The learned AR also submitted that no credit of Security Transition Tax (STT) was claimed because of declaring the gain under the head capital gain . It was also submitted that besides disposing of investment made on long-term basis, the assessee also traded in some of the securities which resulted i .....

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activity in the nature of investment. Further, learned AR submitted that the Assessing Officer has accepted the long-term capital gain on sale of securities held under the investment category, but not accepted short-term capital gain which arose on sale of securities held under the same category of investment. The learned AR submitted that the authorities below did not accept the resolution of Board of Directors as evidence whereas as per section 194 of the Companies Act, the minutes of meeting .....

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king an order of assessment and the administrative and quasijudicial authorities can take official notice of wider variety of the facts which need not be proved before them. The learned AR further referred to the recent circular dated 29th February 2016 issued by the Central Board of Direct Taxes (CBDT) and submitted that the CBDT has directed the Assessing Officer not to put in dispute the transfer of listed shares and securities resulting into capital gain. The learned AR also drawn our attent .....

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R relying on the orders of the authorities below submitted that in accordance to circular No. 4/2000 of the CBDT, the assessee was required to maintain two separate accounts, one for trading, another for investment, whereas the assessee was having only one Demat Account for all the transactions of the activity of purchase and sale of securities. She further submitted that whether particular transaction is in the nature of business or capital gain is decided on cumulative appreciation of all the .....

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lso submitted that bifurcations of the securities in the investment in trading has been done by the assessee only artificially to have the benefit of the lower tax rates without being eligible for the same. The Ld. DR supported her contention with the judgment of the Hon ble Jurisdictional High Court in the case of CIT Vs. D & M Components Ltd. in ITA 561/2012, pronounced on 21/04/ 2014. 8. We have heard the rival submissions and perused the material on record including the paper books submi .....

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s assessed by the AO under the head business income . The Tribunal in the aforesaid case held as under: 4. We have heard the rival submissions and perused the relevant material on record. Before proceeding further, we want to mat it clear that any decision to hold shares as Investment or Stock-in-trade depends on a host of factors. There can be no single criteria to decide the nature of shares purchases. In fact, it is the cumulative effect of all the relevant factors, which is taken into consid .....

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aking into consideration a number of decisions on the issue, held as under: 8. The factors which Courts and Tribunals have to take into consideration whilst deciding whether income gained during a particular period is business income through purchase and sale of shares or other tradable capital assets, or capital gains on account of sale of such assets, has been spelt out and reiterated in a number of decisions. These include Raja Bahadur Visheshwar Singh v. CIT, (1961) 41 ITR 685 (SC); Commissi .....

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the 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) Did the assessee borrow 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 transactions in a .....

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ion in its value. The former indicates the purchases being part of trade; and the latter is indicative of the purchases being an investment. Furthermore, it would be relevant to ask whether the intention behind the purchase was to enjoy dividend, or merely to earn profit on sale of shares. Importantly, a commercial motive is an essential ingredient of trade in this context. (5) Whether the items in question were valued at cost. If so, it would indicate that they were investments. Where they were .....

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n to the short term capital gains, dividend income to the tune of nearly ₹ 10 lakhs. The authorities have all emphasised that even while seeing the cumulative effect of the tests, in the given facts of a case, one test might be determinative or conclusive. At the same time, no single test having regard to the facts of a case and a cumulative effect thereof, need be determinative or conclusive. In the present instance what is apparent is that the assessee, an individual, did not borrow any .....

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be overlooked by the Court is that in all past periods and even subsequent periods, similar income reported by the assessee was accepted by the Revenue as short term capital gain. In fact for AY 2005-06, the scrutiny assessment under Section 143 (3) accepted the sum of ₹ 1.02 crores as short term capital gain. In the circumstances, it was all the more necessary for the Revenue to point to some unique feature or distinctive material to differentiate the assessee's activities for the su .....

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n as well as short-term capital gain as business income of the assessee. The ld. CIT(A) accepted the contention of the assessee with regard to long-term capital gain, however agreed with the Assessing Officer in taxing the income shown under the head short-term capital gain as business income . When the matter travelled to the Tribunal, both the income from shortterm and long-term capital gain shown by the assessee were accepted. On appeal, the Hon ble Delhi High Court allowed the claim of the a .....

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s. Moreover, the purchases were shown as investments in the balance sheets for several years before their sale and claim for long term capital gains. There is nothing on the record to show that these were purchased with borrowed funds. In these circumstances, the findings of the ITAT with respect to the amount claimed as long term capital gains are sound and do not call for interference. 8. The position with regard to short term capital gains, however, is different. The AO and CIT(A) held that s .....

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07.04.2005 07.04.2005 Infotech Ltd. 22.04.2005 22.04.2005 Zee Tele 02.05.2005 16.05.2005 Zee Tele 02.05.2005 17.05.2005 Sam Ele Development 23.05.2005 23.05.2005 Mahabir Spinning Mills 25.05.2005 08.06.2005 Mahabir Spinning Mills 25.05.2005 09.06.2005 Mahabir Spinning Mills 26.05.2005 09.06.2005 Mahabir Spinning Mills 26.05.2005 10.06.2005 Mahabir Spinning Mills 26.05.2005 13.06.2005 Mahabir Spinning Mills 27.05.2005 13.06.2005 Krishan Engineering 25.08.2005 30.08.2005 Krishan Engineering 26.08 .....

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ld that the transactions involved large or substantial sums of money. The CIT (A) pertinently made the following observations: "...it is important to keep in mind that whenever any share is purchased with the intention of investment, it cannot be sold off within a very short span of time, since the share market is always fluctuating. Since in the present case, very frequent purchase and sale of shares have been done it indicates that the main intention of the appellant was to earn income ou .....

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en treated by it as an investment. It can hardly be disputed that there was no bar to a dealer investing in shares. But then the matter does not rest purely on the technical question of onus which undoubtedly is initially on the revenue to prove that a particular item of receipt is taxable. 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 circ .....

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re of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. 11. Having regard to the short duration of holding of the shares, and the lack of clarity in the account books, this Court holds that the overall effect would be to reveal that the sale and purchase of shares in respect of ₹26,82,115/- as short term capital ga .....

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amine existence of various factors, which on considering in holistic manner determine whether the nature of transactions of purchase and sale of securities falls in the category of profit and gains of business or capital gain. 13. As regards to the argument of the learned AR that long-term capital gain transactions have been accepted by the AO, whereas short-term capital gain transactions have not been accepted, we find from page 102 of the assessee s paper book that in case of long term capital .....

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e transactions by the AO as long-term capital gain. In the case of M/s. D & M Components Ltd. (supra), the Hon ble High Court has accepted the transaction of long-term capital gain, however the transactions claimed by the assessee as short-term capital gain are held to be in the nature of business income, thus, respectfully following the judgment of the Hon ble High Court, we don t find any error in accepting the transactions of long-term capital gain & simultaneously not accepting the t .....

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rom business activity have been invested in the purchase and sale of shares. 15. Another factor to be observed is the maintenance of books of accounts and other records. We find that the assessee has maintained separate ledger accounts for shares in the category of investment and in the category of stock in trade but no separate books of accounts have been maintained and the amounts were transferred from investment to stock in trade, which is evident from the note 9 of Schedule 14 of financial s .....

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t decide whether the sale transactions are in the category of investment. 16. One of the another important factor is the volume, frequency and consistency of transactions. The assessee has provided details of shares transactions on pages 100 to 101 of the paper book under the head short-term capital gain, which are reproduced as under: 17. We find from the above that the assessee has transacted in single scrip in multiple times during the year but sometimes even more than once in a day itself. F .....

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r of volume, frequency and consistency of transactions. 18. We find that whenever any shares is purchased with the intention of investment, it cannot be sold within a short period as the market fluctuate because of many national and international events. In the present case, the frequent purchase and sales of the shares indicates that the intention of the assessee was to earn profit over a short period on the money means for manufacturing of power equipments, parked temporarily in the share mark .....

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ed therein which determine the character of the transaction. 20. In the facts of the case, we find that mere not using interest bearing borrowed funds is not sufficient to conclude that transaction of share sales are not business income. Having regard to the volume and frequency of the transactions, no separate books of accounts or demat accounts and other facts and circumstances, we are of the opinion that overall effect of all the factors revealed that the activity of sale and purchase of shar .....

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ion 88E of the Act in consequence of taxing the short-term capital gain under the head profit and gains of business and profession . 22. As we have already upheld the findings of learned CIT(A) of taxing the transactions claimed under the head short-term capital gain under the head profit and gains of business and profession , the assessee deserves for credit of Security Transaction Tax under the section 88E of the Act. Accordingly, we direct the Assessing Officer to allow that credit in accorda .....

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4. The facts in brief are that in the assessment was completed under section 143(3) of the Act on 10/12/2009. The Assessing Officer held the income of ₹ 2,07,53,989/- shown under the head short-term capital gain as income under the head profit and gains of business or profession . 25. In respect of the above additions, the Assessing Officer after allowing opportunity of hearing, levied penalty under section 271(1)(C) of the Act of ₹ 46,57,200/-. On appeal, the CIT(A) allowed the appe .....

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ncome and the additions have been made merely on the change of opinion. 27. We have heard the rival submissions and perused the material on record. The learned Commissioner of Income-tax(Appeals) has allowed the appeal of the assessee with following observations: FINDING Ground No. 1 & 4 are general in nature therefore needs no adjudication. Ground No. 2 to 3 are together: I have perused the facts stated in the assessment order as well as the facts stated by the assessee in his submissions. .....

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section 139(1) of Act. Appellant crave leave to refer computation of income and acknowledgment of return of income filed, at the time of arguments. In the profit & loss account the appellant has clearly shown profit / loss on sale of investment of ₹ 3,36,63,317/- which predominantly establishes that there was neither any concealment of income nor furnishing of any inaccurate particulars of income. The penalty u/s 271(l)(c) is not imposable in this case as Assessing Officer changed the .....

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that no information given in the Return was found to be incorrect or inaccurate. It is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. The learned Counsel argued that "submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income We do not think that such can be the interpretation .....

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7 " ...The assessment order is not a final word in the penalty proceedings upon the pleas which can be taken as the penalty stage and howsoever relevant and good the findings in the assessment proceedings may be they are not conclusive so far as penalty proceedings are concerned. The matter has to be examined afresh and the AO cannot be solely guided with the findings given on the quantum side. The assessee even though does not give any additional evidence or produce any new material, he st .....

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en of the proof even under the Explanation is on the revenue to establish that the explanation of the assessee is false and mala fide, which here in this case has not been discharged by the AO. One has to see, what were the circumstances and the belief entertained by the assessee at the t ime of filing the return, because that is the starting point from where it can be seen whether the assessee has furnished any inaccurate particulars or has concealed any particulars of income. When the assessee .....

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ly for the purpose of investment. The profit on such sale of shares cannot be held to be in any manner treated as "speculation business". Thus the assessee cannot be held to be quality of furnishing of any inaccurate particulars or concealment of particulars of income or the explanation furnished by him can be considered to be false or mala fide. Thus even on merits, the assessee cannot be held to be quality of either furnishing of inaccurate particulars of income or has concealed part .....

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ave been passed in the books of account in a bonafide manner and as per the guidelines of the auditors and there no case for penalty. Further, Reliance is placed on the following casse CIT Vs. Amit Jain ( 2013 ) 351 ITR 0074 (DEL): "...It was held by the Hon ble Delhi High Court that amount in question which found the basis for the A.O. to levy penalty was in fact truthfully reported in the returns. In view of the circumstances that the A.O. chose to treat the income under some other head c .....

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rovided to the AO and no part of income was concealed, nor furnished any inaccurate particulars of income by the assessee. We find that in same set of information the income assessed under the head profit and gains of business or profession rather than under the head short-term capital gain . The learned Commissioner of Income Tax(Appeals) relied on the case of Commissioner of Income Tax, Ahmedabad Vs. Reliance Petroproducts Private Limited, (2010) 189 taxmann 322 (SC). In our opinion, the findi .....

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