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DCIT, Cir. 3 Surat Versus Smt. Shailyben Sureshbhai Bapna

2016 (10) TMI 987 - ITAT AHMEDABAD

Share transactions - nature of income - LTCG or business income - Held that:- There might be various reasons for all of sudden increase in the price of the shares. One possible reason could be permission to construct a tower on the land owned by PMCB. Even a single transaction can be treated as a venture into a trade, but the AO failed to point out those peculiar circumstances. Reasons given by the ld.CIT(A) in the finding extracted supra would indicate that the assessee has not borrowed funds .....

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W-B ] then it would reveal that theld.CIT(A) has taken a correct view of treating the transaction 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 .....

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n 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 assessee.he ld.CIT(A) has examined both these issues elaborately, and after going through the finding of the ld.CIT(A), we do not see any reason to interfere in it. - ITA.No.1138/Ahd/2012 - Dated:- 1-9-2016 .....

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ed by the AO by treating alleged claim of long term capital gain as a business income and by estimating the sale price of shares sold by the assessee. 3. Brief facts of the case are that the assessee has filed her return of income on 31.7.2008 declaring total income at ₹ 3,13,89,121/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) of the Income Tax Act was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the AO .....

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the assessee, she has paid long term capital gain tax at ₹ 70 lakhs. The AO has made an inquiry about these transactions. He rejected the claim of the assessee and observed that the assessee did not submit copies of share certificate, share transfer form for purchase and sale of shares. The assessee did not file balance sheet or cash account or details of investments along with return of the Asstt.year 2007-08. She has shown holding of the shares as on 31.3.2007. Thus, according to the AO .....

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able 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 .....

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ares of this company, and with this estimation of the value, he worked out the sale consideration at ₹ 6,47,40,00,000/-. 5. On appeal, the assessee has explained that as far as allegation with regard to non-submission of share certificate, share transfer forms for purchase and sale are concerned, this aspect factually is incorrect. The assessee pointed out that the AO had sent a commission to Addl.DIT(Inv.), Unit-1, New Delhi to inquire into the following issues: "A commission u/s. 13 .....

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led that M/s. Shaily Suresh Bapna is closely related with the share holder of M/s. PMC Buildwell P. Ltd and M/s. Spaze Towers P. Ltd. 4) Date of registration of M/s. Spaze Towers P. Ltd. and its share holding from the date of incorporation till date. 5) What is the nexus between the M/s. PMC Buildwell P. Ltd and M/s. Spaze Towers P. Ltd." 6. The ld.ADIT had conducted an inquiry and submitted his report. Copy of the report is available at page nos.35 to 45 of the paper book. The assessee, th .....

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re would be around ₹ 9,798/-. The assessee also pointed out she was holding 2500 shares only. There were other two persons who held remaining 7500 shares. In their case, Addl.DIT has accepted sale price at 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 .....

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l 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, what one intends to accomplish or attain, it implies little more than what one has in mind to do .....

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lving in the trading of shares or to be treated as a simplicitor investors. We would like to refer certain broad principle culled out by ITAT Lucknow Bench in the case of Sarnath Infrastructure Pvt. 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 .....

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asset for retaining. (3) What is the frequency of such purchase and disposal in that particular item? If purchase and sale are frequent, or there are substantial transaction in that item, if would 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 hol .....

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ost, 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 vi .....

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ny 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 .....

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of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. 11. The Hon ble Gujarat High Court had also an occasion to consider this 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 an .....

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ould furnish a valuable guideline. (b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. (c) The third test, which is frequently applied, 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 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 fou .....

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eed 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 .....

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he year under consideration; shares have been purchased from the own savings not from the borrowed funds; shares were held for the period more than twelve months; these shares reflect in the balance sheet as investment not the stock in trade and the intention of assessee has been that of making investment in shares and not dealing in shares as reflected from the details filed in the return of income. In view of these facts, sale on shares of PMC Buildwell P. Ltd transactions has to be treated Lo .....

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ide to determine the nature of transactions. Ordinarily, the purchase & sales of shares with the motive of earning profit would result in the transactions being in nature of trade / adventure in nature of trade; but where the object of investment in shares of a company is to the derive income by way of dividends etc. then the profits accruing by sale of the shares will yield capital gains and not revenue receipt. If the facts of the assessee's case are tested on these guiding principles .....

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alue 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 o .....

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es are assessable as 'Capital Gains' not the 'Business Income'. 13. The first reason assigned by the AO for harbouring a belief that long term capital gain made by the assessee on sale of shares is not acceptable, is based on the fact that, assessee has not produced copies of share certificate and share transfer forms for purchase and sale. On verification of these evidences, we find that it is factually incorrect. As observed earlier, the AO has issued a commission to ld.Addl.DI .....

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e was hold holding 2500 shares. PMCB was hundred percent subsidiary company of M/s.Spaze Towers Ltd. The ld. ADIT did not doubt on the transaction. He has referred to statement of all concerned persons and also made inquiry with other two share holders. He made reference to the replies given by Shri K.S. Tanwar and Shri Paras Badhwar. He also recorded statement of the assessee. This report is on the record. The ld.CIT(A) has considered this report. Other reasons assigned by the AO are based on s .....

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pra would indicate that the assessee has not borrowed funds for making investment. She has not shown shares as stock-in-trade. She did not take help of experts; she did not incur any expenditure towards selling consultancy or maintaining of any office. She has not purchased shares of any other companies in this period. Thus, facts emerge out from the record, if we examine in the light of various tests propounded by the Hon ble jurisdictional High Court as well as by the ITAT in the case of Sarna .....

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ay, 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 .....

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ldwell P. Ltd at Gurgaon as the company does not have any reserves as on 31.03.2008 to enhance the value of its shares. By taking in to account that Gurgaon is one of the costliest cities so far as prices of real estate are concerned, AO estimated the value of land owned by M/s. PMC Buildwell P. Ltd at ₹ 5,000/- per sq. yard and worked out the aggregate value of total land at ₹ 25,89,60,000/- and, in this process, worked out the value of shares of company at ₹ 25,896/- per shar .....

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ilofer I. Singh (309 ITR 233), following the judgments of Hon ble Surpeme Court in the cases of Gillenders Arbuthnot and Co. (87 ITR 407) and CIT vs. | George Henderson and Co. Ltd (66 ITR 622), has held that in the case of sale price of asset, there would be no question of any market value and all that one has to see that what is the consideration bargained for. Thus, even if presuming that the share transactions are business in nature, market rate cannot be applied in absence of any cogent mat .....

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any, AO has simply forgotten to reduce the cost value / book value of the property, 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 b .....

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30,523 30,523 TOTAL ASSETS (1+2+3) (A) 30,79,67,450 21,06,31,728 Less:- Liabilities & Provisions (B) 20,99,88,741 20,99,88,741 Net Worth of the Company (A-B) (C) 9,79,78,709 6,42,987 No. of Shares (D) 10,000 10,000 Value per Share (C/D) 9797.87 64.30 It can be seen from above working, AO has committed apparent mistake of not deducting the liabilities from the fair market value of the assets of the said company. The value has been arrived at by AO by only considering the value of land without .....

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he shares has also confirmed that these shares were purchased at the rate of ₹ 12,5007- per share. Thus, in view of these facts, even if the share transactions are treated in the nature of trade or business, the valuation per share @ ₹ 25,896/- estimated by AO is on the wrong basis. 5.6 In the assessment order, it has been held by AO that all the transactions of purchase and sale of shares of M/s. PMC Buildwell P. Ltd by appellant were prearranged or stage managed and it was not a me .....

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the prearranged or stage 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 .....

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een 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 of ITO (Inv.), New Delhi are relevant. As per these, shares of M/s. PMC Buildwell P. Ltd were purchased by appellant on 05.10.2006 and sold on two dates i.e. 27.11.2007 and 28.01.2008. Since the appellant has held these shares for more than twelve months, income has to be compute .....

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