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TMI Blog2011 (8) TMI 1216X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 Rs. 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 taxed as business income as against shown by the assessee under the Capital Gain head. The Ld CIT(A) has, however, accepted the claimed capital gains, hence the Revenue is in appeal. 3. In support of the grounds, the Ld. D.R. has basically placed reliance on the assessment order. Ld. D.R. submitted that Ld CIT(A) has failed to consider the magnitude and frequency of tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od 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 Rs. 222.1 to Rs. 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 Rs. 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 decisions : i) Raja Bahadur Visheshwara Singh (deceased) and other Vs CIT 41 ITR 685. ii) CIT Vs Motilal Hirabhai Spinning and Weaving Co. Limited 113 ITR 173 iii) Bharat Development (P) Ltd. Vs CIT 4 Taxman 58 (Del). iv) Punjab Co-operative Bank Ltd. Vs CIT (1940) 8 ITR 635(PC) v) Sardar Indra Singh & Sons Ltd. Vs CIT, 24 ITR 415(SC) 4. The Ld. A.R., on the other hand, tried to justify the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck 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) iii) East India Housing & Land Development Trust Ltd. v/s. CIT, 42 ITR 49(SC) iv) Sultan Bros. Pvt. Ltd., v/s. CIT, 53 ITR 353 (SC) 6. The Ld. A.R. submitted further that the decision of Hon'ble Bombay High Court in the case of Holck Larsen v/s. CIT, 85 ITR 285 (Bom) squarely applies in favour of the assessee holding that the assessee acquired the Right Shares and sold them at profit is not sufficient to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ", 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 had contended that the capital gains earned by it are not eligible for MAT. The Hon'ble High Court observed that such profits though taxed as Capital Gains, are required to be taxed under the MAT Provisions u/s. 115J of the I.T. Act. He also placed reliance on the following decisions : i) East India Housing and Land Development Trust Ltd., 42 ITR 49(SC) ii) Sultan Brothers Pvt. Ltd., 51 ITR 353 (SC) iii) Karanpur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 for application 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. These principles have been summarized in para No. 13 of the said decision of Lucknow Bench. For a ready reference the said para No. 13 of the decision is being reproduced hereunder : "(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 as stock-intrade or investment. Whether shown in opening/closing stock or shown separately as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. (11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen." 14 We will deal with facts of the present case to verify as to whether those facts are fulfilling the above principles to decide the very nature of the transaction in question in the present case in succeeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 87,601/- as capital gain. The ITO, however, assessed as business profit a sum of Rs. 2,50,375/- holding that the same was realized on sale of shares as a trading profit. The Tribunal considering the facts of the case came to the conclusion that the surplus in the hands of the assessee by reason of the transactions in shares was a capital gain and not a business profit. In this regard, the Tribunal noted following 3 material facts to arrive at the aforesaid conclusion : (a) The assessee was carrying on business as an investment company in consonance with its Memorandum of Association; (b) Transactions entered into by the assessee were less than 10% of the total holding of its shares; (c) Prior to their sale, the shares had been held for fairly a long period. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company. We thus come to the conclusion that setting up of a company even solely for making investment in shares or property and to earn income there-from is validly possible and is well accepted. Now the question before us is to decide the very intention of the company behind the dealings in share to examine the nature of the transaction i.e. investment or business. The other conducts of the assessee as well as surrounding facts and circumstances of the case are equally important to examine the nature of the transaction. For this, we will take assistance of the principles laid down by the Lucknow Bench of the Tribunal in the case of Sarnath Infrastructure (P) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring 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 security for third party loans, probably for directors to route borrowed funds for the company's business. The submission of Ld. A.R. to this proposition remained that no any business outside the books of the company has been located by the A.O. Alleged business use by directors is a mere conjuncture and without any substance. We agree that in absence of evidence in support, the alleged business use by directors cannot be taken note of. The next proposition of the Department is that the company has also kept shares for security for third party loans probably for the directors to route borrowed funds for the company's business. The submission of Ld. A.R. to this proposition remaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is for realizing profit or for retraining appreciation Large blue chip investments exist with the appellant. Same are not sold through appreciation in value has taken place since, the said companies pay good dividends. How values, whether at Cost or at Cost /Market Value whichever is lower At Cost always. Lowering to market value is a practice for Stock-in-Trade and the same is not relevant in present context. What is the authority in object clause? Object clause authorizes Investment activity. It also permits business activity. However, the business activity is not undertaken by the assessee. Whether statutory records indicate Investments? Accounts are approved by the Board and by Members who have approved the treatment as Investments. Whether any legal norms are violated for doing a trade of shares? No any norm is applicable as such for Investment activity. In any case, no norms of business activity are applicable. No one / two factors should decide but the cumulative effect should decide the matter. All tests lead to the same conclusion that that the shares are Investments for the appellant and not a Stock-In-Trade. 20. We thus find that the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is trite law that an assessee might invest his capital in shares with the intention to resale them, if in future, their sale brings in a higher price. Such an investment, though motivated by a possibility of enhanced value, does not necessarily render the investment a transaction in the nature of trade. In the premises, the totality of all the facts will have to be borne in mind and the correct legal principle applied to this. If this is done in the present case, it is clear that the sale of shares of three companies acquired by the appellant in earlier assessment year(s) represented realization of the investment and income arising there from has got to be taxed under the head 'Capital Gains'. The conclusion of the Assessing officer that the appellant is engaged in trade/business activity is contrary to the facts on record and is not based on correct appreciation of relevant law on the subject. 2.7 In view of the foregoing discussion and taking into account the appellant's submission mentioned hereinabove, I am of the considered view that income from sale of the shares of the three companies requires to be taxed as income under the head 'capital gains'. Accordingly, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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