TMI Blog2016 (10) TMI 987X X X X Extracts X X X X X X X X Extracts X X X X ..... n as simplicitor investment. Mode of computation of capital gain - Sale value of the shares taken - Held that:- The assessee has shown full value of the consideration as ₹ 12,500/- per share. The ld.AO intends to change this full value of the consideration. In his efforts, he made reference to the land holding owned by “PMCB”. He considered the value of such land holding, and divided that holding with total number of shares issued by the company. What is the basis of changing this pattern ? There is no evidence with the AO that the assessee has received more value than the one disclosed by her. Unless he possesses some evidences, demonstrating the fact that full value of the consideration disclosed by the assessee was incorrect, he cannot replace that value by estimation or on the basis of his own estimation. It is also pertinent to mention that his estimation is also not based on construction of facts in right perspective. The ld.CIT(A) has recorded that he failed to consider liabilities of “PMCB”. Had these liabilities been deducted against the total value of the land, and the value of the shares were worked out, that value would be lesser than the one shown by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, i.e. the sales have been made 27.11.2007 and 28.1.2008. The ld.AO, thereafter, observed that the claim of the assessee for assessment of long term capital gain cannot be accepted, because, these transactions appears to be a pre-arranged transaction. The assessee failed to disclose as to how she came to know that shares of PMCB were available at the price of ₹ 10/- per share whereas PMCB was holding 10.79 acres of land in Gurgaon which is supposed to be costliest city. The AO further observed that the assessee had sold shares at the rate of ₹ 12,500/- per share in a very short span of time. It itself indicates that the transaction was stage-managed transaction by the assessee. The ld.AO, in this way, treated this transaction as a business transaction and rejected all the claim of the assessee for assessment of gains as long term capital gain. 4. With regard to the quantification of the gain, the ld.AO has observed that the land value in the city of Gurgaon was not less than ₹ 5,000/- per sq.yard. PMCB was having 10.79 acres of land. He has estimated the value of this land at ₹ 25,89,60,000/-. According to the AO, the value of shares of this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of ₹ 12,500/- per share. The ld.CIT(A) has examined all these aspects lucidly and elaborately. The ld.CIT(A) has accepted contentions of the assessee and directed the AO to accept the claim of long term capital gain disclosed by the assessee and also accepted sale price of the shares even for computing capital gain at the rate of ₹ 12,500/- per share. 8. With the assistance of the ld.DR, we have gone through the record carefully. The first question posed before us in the statement facts filed by the Revenue along with appeal is, whether solitary transaction of the assessee in purchase and sale of shares is to be treated as a trading in the shares or not?. The issue, whether gain from sale of shares is to be assessed as a business income or short term capital gain/long term capital gain, is a highly debatable issue. It always puzzled the adjudicator even after availability of large numbers of authoritative pronouncements by the Hon ble Supreme Court/Hon ble High Court. The reason for the puzzle is, one has to gather the intention of an assessee while he entered into the transaction. The expression intention as defined in Meriam Webster Dictionary means, wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as 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 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 credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. Has it been treated as stock-in-trade, 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, though not conclusive, can afford good and cogent evidence to judge the nature of the transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation. (e) The fifth test, normally applied in case of partnership firms and companies, is whether the deed of partnership or the memorandum of association, as the case may be, authorizes such an activity. (f) The last but not the least, rather the most important test, is as to the volume, frequency, continuity 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to earn profit by reselling the same. The arguments of the assessee that due to increase in the value of the assets (land) held by the company and due to leverage effect of borrowed funds, the value of shareholding of assessee increased manifold. In such a situation, merely because the assessee could sell these shares at a very good price it cannot be said that the motive behind this investment was to earn the profits by re-selling. The very fact that there are restrictions on transfer of shares of private limited company and there is no ready market for sale of these shares goes in favor of the assessee. The ratio of purchase sale price is also very high which indicate that this was case of investment. The criterion of magnitude of transaction also goes in favor of assessee. Thus, if the facts of assessee's case are examined on the tests laid down in Circular no. 4 dated 15.06.2007 then it will be clear that these shares were held by the assessee as an investment (capital assets) and not as stock in trade. Therefore, profits and gains arising from transfer of these shares are assessable as 'Capital Gains' not the 'Business Income'. 13. The first reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sarnath Infrastructure Pvt. Ltd., 10 TTJ 216, then it would reveal that theld.CIT(A) has taken a correct view of treating the transaction as simplicitor investment. 14. The next fold of dispute is whether the AO was justified in taking sale value of shares at ₹ 25,896/- per share. The AO has observed that PMCB was owner of a land admeasuring 10.79 acres. He took the value of this land at ₹ 25,89,60,000/- and divided this value by the total number of shares issued by the company. In this way, he worked out the value per share at ₹ 25,896/-. On the other hand, the ld.CIT(A) has observed that the AO has committed an apparent error by estimating the value of shares at ₹ 25,89,60,000/-. The ld.CIT(A) has observed that the AO has not taken into consideration the liabilities of PMCB , and if these liabilities are taken into consideration, then the value per share would be worked out at the rate of ₹ 9798/-. The assessee has shown sale value of the shares at ₹ 12,500/-. The finding recorded on this issue is worth to note. It reads as under: 5.5 The next issue involve in this ground is the estimation of market value of shares. The AO has work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, owned by M/s. PMC Buildwell P. Ltd, from the sale value. As the appellant has also submitted during appellate proceedings that the AO has made apparent mistake in calculating the value of these shares at ₹ 25,896/- per share. The appellant has given a chart to prove that even if value of land held by M/s. PMC Buildwell P. Ltd is taken as per prevailing market rate, the correct value of shares works out to be ₹ 9,798/- per share, not ₹ 25,896/- as estimated by AO. The working given by appellant is as under: Assets Liabilities of PMC Buildwell Pvt. Ltd. as per Balance Sheet as on 31st March, 2008 Value of Share taking Land Value as adopted by Id.A.O. Book Value as on 31st March, 2008 Assets:- 1. Cash Bank Balances 3,80,29,742 3,80,29,742 2. Loans Advances 1,09,47,185 1,09,47,185 3. Inventories (Land)* 25,89,60,000 16,16,24,278 4. Preliminary pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managed transactions. In his remand report dated 10.02.2012, AO also has repeated the facts of assessment order but failed to give any specific reason to hold that these transactions are prearranged or stage managed. On the other hand, appellant has shown Long Term Capital Gain of ₹ 3,12,25,000/- in the return of income and paid taxes on that and AO himself has assessed this income under the head Business Income. Treating the transactions as sham and assessing the same as a taxable business income, both are contradictory. Investigation conducted by ITO (Inv.) also does not support the theory of AO. In view of these facts, it is held that transactions entered in to by appellant are genuine in nature. 5.7 In the assessment order, AO has proposed to assess the income on account of aforesaid share transactions, either as Business Income or as Short Term Capital Gain. So far as the issue of capital gains vis-avis business income is concerned, it has already been discussed in the above paragraphs. On the issue of assessing as Long Term Capital Gain or Short Term Capital Gain on the profit accruing on sale of shares, facts stated by appellant in the submissions and the report ..... X X X X Extracts X X X X X X X X Extracts X X X X
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