TMI Blog2011 (8) TMI 1216X X X X Extracts X X X X X X X X Extracts X X X X ..... any is purely an Investment Company without considering the nature of transactions entered into by the company and the objects of the Assessee company. 3. In the facts and circumstances of the case the CIT(A) has erred in not appreciating that the main objects of the assessee company are to carry on business as share and stock brokers and to purchase, sell and otherwise deal in stocks, shares and securities of all kinds. 4. In the facts and circumstances of the case, the CIT(A) failed to consider the magnitude and frequency of transactions in shares while holding that the income arising from sale of shares has to be taxed under the head Income from capital gains . 5. In the facts and in the circumstances of the case, the CIT(A) erred in allowing set off of Capital loss brought forward of ₹ 32,03,479/- being consequential relief arising from his order. 2. The facts in brief are that the assessee a Private Limited Company is engaged in dealing in shares and securities of listed companies. During the year, it had earned from the sale of shares etc., and claimed the income as Long Term and Short Term Capital Gains. The A.O. held that the profit is required to be tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and Chartered Bank as security for loan to third party, probably the directors to route the borrowed funds for the company s business. (Refer Notes on accounts A.Y. 2003-04) 6. Contrary to the claim that as never carried continuous purchasing and selling of stock, and was not involved in purchase and sale of same share, the assessee purchased shares of the same company over a period of time and sold such shares in phased manner. (SC decision in case of Dalhousie Inv. Trust Co. Ltd. (1968) 68 ITR 468 applies). The details in respect of 66399 shares of Supreme Industries Ltd. (purchased from 23.2.1999 to 29.6.2001) when the prices were falling (from ₹ 222.1 to ₹ 47.07/-) and sold from 01.09.2004 to 13.09.2004 is enclosed as Ann. A. 7. During the year A.Y. 2004-05, the assessee sold 45000 bonus shares of Hi-Tech Gears for ₹ 100.22 lakhs, the original shares (45000) of which were sold in previous years. 8. Ld. CIT(A) in the case of M/s Abbott Hotels Pvt. Ltd. (A.Y. 2005-06) engaged primarily in hotel business, held profits from share transactions of the assessee, taxable as business income. (Ann.B). The Ld D.R. also placed reliance on the following decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares as capital asset all along, it is not permissible either for assessee or for A.O to treat the same as stock in trade. In this regard, only the intention of the assessee is relevant and the A.O cannot substitute his information as that of the assessee. He submitted that in the said case of Ramkumar Agarwal and Bros (Supra), the assessee was all along treating the shares held in a company as stock in trade. This position was accepted by assessee as well as revenue. Thus, what was a capital asset will always remain a capital asset unless the person holding the asset himself changes the nature by a specific action like conversion of capital asset into stock in trade or vice versa depending upon his intention at the time of change. 5. The Ld. A.R. submitted further that under the scheduler system of computation of income, particular nature of income falling under a specific head will always be changeable under that specific head only and cannot be brought to tax under any different head. In this regard, he placed reliance on the following decisions : i) United Commercial Bank Ltd. v/s. CIT, 32 ITR 688 (SC) ii) Karanpura Development Co. Ltd. v/s. CIT, 44 ITR 362(SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest on securities , income from house property and income from other sources . He submitted that similar definition of an investment company is available under the Wealth Tax Act. He submitted that it could also be associated with an investment company, having income mainly from capital gains is also well recognized by the Legislature. Thus, investment company deriving income mainly under the head capital gains , as against under the head of business income , is recognized and acceptable to the law. He submitted further that under Schedule VI of the Companies Act, the Companies are required to disclose its operating result in the Profit Loss Account. In the said Profit Loss Account, the Profit/Loss from sale of an asset is required to be credited/debited to the Profit Loss Account. Just because profit on sale of asset is to be credited to the Profit Loss Account, it never means that all such profits credited to the Profit Loss Account assume the nature of business activity. In this regard, he referred decision of Hon ble Bombay High Court in the case of CIT v/s. Veekaylal Investment, 249 ITR 597 (Bom) with this submission that in that case, Company in investment ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atement. Only three shares were bought and sold during the year. No day-t-day activity at all. 11. While concluding his argument the Ld. A.R. submitted that case of the assessee is fully covered by the decision of Hon ble Bombay High Court in the case of CIT v/s. Gopal Purohit, (2010) 34 DTR 52 (Bom), upholding the view of the Bombay Bench of the Tribunal in that case (2009) 122 TTJ (Mum) 87. and following recent decisions of Mumbai and Pune Benches : (i) Shri Mahendra C. Shah v/s. ACIT, and vice versa ITA No. 6289/Mum/2008 (A.Y. 2005-06) and ITA No. 4932/Mum/2009 (A.Y. 2006-07), order dt. 18th May 2011 (ii) Abbot Hotels (P) Ltd. v/s. DCIT, ITA No. 1424/PN/2008 (A.Y. 2005-06) dt. 31st May 2011. 12. The ld. A.R also replied to the written brief dated 7.5.2009 filed by the department, which we will discuss in the succeeding paragraphs. 13. Considering the above submissions, firstly we have gone through the decisions relied upon by the parties, we find that the Lucknow Bench of the Tribunal in the case of Sarnath Infrastructure Pvt. Ltd. v/s. ACIT, 120 TTJ (Luck.) 216, after discussing several rulings on the issue has summarized some principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real. (8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company behind the dealing in share is nothing but investment. We will deal with this aspect as to what was the intention of the assee i.e. investment or trading while dealing in shares with the assistance of the above said principles which are equally applicable in the case of assessee. The question as to whether an assessee company can be set up only for making investment in shares and earning there-from and not coupled with trading in shares as a business, has been answered by Hon ble Calcutta High Court in the case of CIT v/s. Karamchand Thapar Sons Ltd., (Supra). In that case before the Hon ble Calcutta High Court, assessee company was carrying on business as an investment company . The assessee company since 1943-44 had been purchasing and selling shares every year but in all these past years, the assessee had not been treated as a dealer in shares. In the A.Y. 1957-58, transaction in such purchase and sale of shares resulted in a profit on sale of certain shares and also a loss on sale of other shares. The assessee disclosed in its return a sum of ₹ 87,601/- as capital gain. The ITO, however, assessed as business profit a sum of ₹ 2,50,375/- holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in the case of CIT v/s. East India Housing Land Development Co. Ltd. (Supra) laying down the ratio that the character of income (derived from shops and stalls) is not altered because it is received by a company formed with the object of developing and setting up markets, has been pleased to refer the decision of the Hon ble Calcutta High Court in the case of Commercial Properties Ltd., v/s. CIT, AIR 1928 Cal 456, holding that merely because the owner of the property was a company incorporated with the object of owning property, the incidence of income derived from the property owned could not be regarded as altered; the income came more directly and specifically under the head property than income from business. 15. The above rulings clearly support the case of the assessee that a company can be formed even with its sole object to invest in shares to earn profit as capital gain. We thus do not find substance in the contention of the Ld. D.R. that assessee company set up with its sole object to make investment in shares to earn profit cannot be accepted as such since they are dealing in shares in an organized manner and with assistance of infrastructure of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is that the activity of investment in shares trading does not require infrastructure/storage space etc., The submission of the Ld. A.R. to which, we find substance remained that degree of essentialities can defer from case to case and depending on nature complexities of the activity. He submitted that in the present case, such facilities are not enjoyed in the material proportion. The next proposition of the Department is that assessee has availed loans of ₹ 65,00,000/- which was outstanding as on 31st March 2001. The submission of the Ld. A.R. to this proposition remained that a business-man will like to multiply the activities as many times as possible considering a business pursuit. In an investment pursued assessee would consider long term objectives of yield, safety, wealth maximization as the pursuit. When a loan is taken over an activity leans towards risk, hence a business activity pursued emerges. He submitted further that in any case, the assessee had no lean in the A.Y. 2004-05. We find that undisputedly, there was no loan in the A.Y. under consideration i.e. A.Y. 2004-05. The next proposition of the Department is that the company also get shares as se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposition remained that there is hardly any allegation. Some of original as well as bonus shares was admitted. Original shares were sold first and then bonus. The company follows FIFO method for allocating sales quantities. In view of this submission, we do not find substance in the proposition. 18. The next proposition is that the Ld CIT(A) in the case of Abott Hotel has held the shares activity as business activity. We do not find substance in this proposition since the Pune Bench of the Tribunal has decided the Abott Hotel case in favour of the assessee. 19. We also examined the tests laid down in Sarnath case (Supra) and we came to the follow conclusion : Test laid down in Sarnath case Position in appellant s Intention at the time of purchase Classified in accounts as Investments. Activity was only to remain as Investor. Whether treated as Stock-In-Trade or as Investment in books As Investment Whether money borrowed No Whether sales-purchases are frequent Very less transactions during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the submission of the appellant and perused the material on record. It is a fact that as per memorandum and articles of association, the main object of the company is investment. It is again a fact that during the assessment year under appeal, the appellant has sold shares of three companies, namely i) Auto Excell Industry, ii) High Tech Gears and iii) Laxmi Machine Works Ltd. The shares of Auto Excell Industry were purchased on 26/12/2002 and shares of Hightech Gears were purchased on 07/11/2000; the shares of Laxmi Machine works Ltd. were purchased on 28/07/2000. All these three shares which have been sold during the assessment year under appeal are of the dividend paying companies. During the assessment year under appeal, shares of three companies have been purchased, namely Kotak Mahindra, Maruti Udyog and State Bank of India. The dates of purchase of shares of these companies are 02/12/2003 for shares of Kotak Mahindra, 08/10/2003 for shares of Maruti Udyog Ltd., and 29/12/2000 for shares of State Bank of India. All these three companies are dividend paying companies. Another notable fact is that appellant has received total dividend at ₹ 82,22,211/- during the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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