TMI Blog2010 (3) TMI 1193X X X X Extracts X X X X X X X X Extracts X X X X ..... found that the assessee is engaged in the business of investments in units of mutual funds and shares. It was deriving income by way of interest, dividend and surplus realized on sale of the shares and units. In regard to the units, the assessee was required to state whether surplus realized on sale/redemption thereof constituted business income or capital gains. After considering the explanation of the assessee, it was held that the surplus realized on sale etc. of the units constituted its business income. 2.1 The matter was agitated in appeal. The case of the assessee before the ld. CIT(A) was that such surplus constituted income under the head capital gains . In this connection, the ld. CIT(A) described nine factors on page 5 of the appellate order, which are reproduced below:- (i) Assessee has employed its own funds out share capital and accumulated free reserves and there was no borrowing at any time. (ii) Assessee is lacking proper infrastructure and is only holding ₹ 2.02 lakh (WDV ₹ 1.39 lakh) worth of fixed assets. (iii) Assessee has only one employee to whom an aggregate salary of ₹ 60,000/- has been paid. (iv) Assessee s treatment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in treating the surplus as income under the head capital gains . 3.1 In reply, the ld. counsel for the assessee submitted that the ld. CIT(Appeals) considered a number of factors mentioned on page 5 of his order. Further, he considered the provision contained in section 11(5) of the Act. On the basis of the aforesaid consideration, he rightly came to the conclusion that the surplus was taxable under the head capital gains . 3.2 In order to support his contention, reliance was placed on the decision in the case of CIT Vs. Ess Jay Enterprises Pvt. Ltd. (2008) 173 Taxman 1 (Del); CIT Vs. N.S.S. Investments (P) Ltd. (2005) 277 ITR 149 (Mad.); and Fidelity Northstar Fund Others (2007) 288 ITR 641 (AAR). Reliance was also placed on the Board circular No. 4/2007 dated 15.6.2007 regarding distinction between shares held as stock-in-trade and shares held as investments-test for such a distinction . 4. We have considered the facts of the case and submissions made before us. The facts of the case are that the assessee is an investment company and its main business is to invest in shares and securities etc. The assessee held shares of the value of ₹ 91,64,607/- as on 1.4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo companies. Thus, this factor becomes inconsequential; (iv) the assessee has consistently treated the assets as investments. This fact has also to be seen in the light of the fact that surplus realized on purchase and sale of shares has been accepted to be on business account. Further, the assessee has paid management fees to two companies. Therefore, absence of substantial number of staff members does not advance the case of the assessee; (v) the auditors have identified the units as investments and not as stock-in-trade. Again, even shares have been identified as investments. Therefore, treatment of units in books of account is not conclusive of the matter; (vi) units are not freely transferable or tradable and, therefore, they cannot be treated as stock-in-trade. In the course of hearing before us, it was fairly submitted by the ld. counsel that some of the units were non-transferable while some were transferable. Further, the issue whether an asset is capital asset or stock-in-trade cannot be decided on the fact that there was a limited market. It has to be decided by taking all the factors into account; (vii) the key decision making authority rests with fund mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any evidence that it was dealing in shares on a regular basis. The Hon ble Court observed that in such a circumstance the treatment given to the asset in the books of account becomes of importance. When that is done, it becomes clear that the assets were investments and not stock-in-trade. The facts of this case are clearly distinguishable for the reason that investment in shares and units is the main business of the assessee, pursuance to which such investments were made. Such investments have been made and liquidated frequently, as will be seen from the facts regarding investments at the beginning of the year and at the end of the year. In the case of N.S.S. Investments (P) Ltd. (supra), a finding of fact was given by the Tribunal that the shares were never treated by the assessee as stock-in-trade. It held some shares as investments and some as stock-in-trade. The question before the court was in respect of shares held as investments. It was held that surplus realized will be income under the head capital gains . This decision is based upon the finding of fact that the shares were held as investment although the assessee was also dealing in shares. The finding whether the unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its record as to whether it had maintained any distinction between the shares held as stock-in-trade and the shares held as investments. Further, the decision of the appeal court in the case of CIT Vs. H. Holck Larsen, 160 ITR 67, was referred to in which it was observed that the High Court made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This is a mixed question of law and fact. The ruling of AAR reported in 288 ITR 641 was also referred to, in which after considering various decisions of the apex court, the relevant considerations were culled out, namely, that -(i) where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the matter; (ii) the substantial nature of transaction, the manner of maintaining books of account, the magnitude of purchase and sale and the ratio between purchases and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Reliance and even custodial charges of ₹ 8,642/- have been paid. The assertion of the assessee that the service of portfolio manager was only in respect of shares is not supported by any evidence on record. We have already mentioned that payment of such fee to two companies leads to a conclusion that one company is engaged for managing purchase and sale of shares and the other for subscription and redemption etc. of the units. Therefore, there is a contradiction in the stand of the assessee when it is argued that shares were held as stock-in-trade and units were held as investments on the basis of its accounts. The taxation of share income as business income also demolishes the foundation of the case of the assessee that the units were held as investments for the reason that classification of these assets in the balance-sheet becomes completely inconsequential. This leaves us with other arguments such as lack of infrastructure for carrying on the business, which cannot be relied upon in the face of the fact that professional services were availed of for taking buying and selling decisions both in respect of the shares and the units. It is also argued that some of the units ..... X X X X Extracts X X X X X X X X Extracts X X X X
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