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Ankur Scientific Energy Technlogies P. Ltd. Versus DCIT, Cir. 1 (1) Baroda

Gain from sale of shares - assessed as a business income or short term capital gain/long term capital gain - Held that:- In this case, transactions were more than 150 and in that case it was observed that if delivery based transactions are available, then, profit received from such transaction is to be treated as short term capital gain or long term capital gain. Thus, taking into consideration overall facts, we are of the view that the ld.Revenue authorities below are not justified in treating .....

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ing separate accounts is factually incorrect. As duly pleaded before the ld.CIT(A) that it has been maintaining separate ledger accounts, which was duly certified. This was for the DSIR to consider before grant of approval. DSIR has not disputed it, and therefore, granted approval. - Whether after satisfying itself for grant of approval, DSIR can grant approval for specific period on the strength of some policy formulated by it? - Held that:- The Act nowhere authorizes DSIR to grant approva .....

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DIP KUMAR KEDIA, ACCOUNTANT MEMBER For The Assessee : Shri Surendra Modiani For The Revenue : Shri Prasoon Kabra, Sr.DR ORDER PER RAJPAL YADAV, JUDICIAL MEMBER: Assessee is in appeal before the Tribunal against the order of the ld.CIT(A)-I, Baroda dated 2.9.2013 passed for the Asstt.Year 2010-11. 2. Grounds of taken by the assessee are not in consonance with the Rule 8 of the Income Tax (Appellate Tribunal) Rules, 1963 - they are descriptive and argumentative in nature. In brief grievance of the .....

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ged in manufacturing and selling of biomass gasfier. It has filed its return of income electronically on 29.9.2009 declaring total income at ₹ 3,44,94,749/- . 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 that the assessee has shown gain on sale of shares and mutual fund. According to the AO, the assessee has claimed short term ca .....

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he AO. The assessee has also made other submissions. The ld.AO has gone through the written submissions of the assessee, but did not concur with them, and ultimately assessed short term capital gain disclosed by the assessee as a business income. Appeal to the ld.CIT(A) did not bring any relief to the assessee. 4. Before us, the ld.counsel for the assessee took us through written submissions filed by the assessee before the ld.Revenue authorities below. He specifically drew our attention towards .....

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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 or bring out. It suggests clea .....

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r 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 intention of the assessee at the .....

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s 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 holdings indicate investment). (4) .....

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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 asses .....

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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 .....

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t to come to a definite conclusion but the cumulative effect of several factors has to be seen. 8. 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 analyzing various decisions of the .....

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. (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 fourth test is as to how the assesse .....

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dum 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 the nature of business. 9. In .....

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m capital Gain of ₹ 2,824,217/- from sale of investment (listed equity shares) and Long Term Capital Gain of ₹ 6,22,612/- from sale of MF/listed equity shares and offered the same as Capital Gain as per applicable provisions of the Act. During the assessment proceedings, Assessing Officer has accepted Short Term Capital Gain of ₹ 4,427,978/- from sale of mutual fund and Long Term Capital Gain of ₹ 622,612/- from sale of MF/listed equity shares but considered Short term ca .....

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s evident from Memorandum and Articles of the assessee company. Investment was only in few companies and most of them are Blue Ship/ A category companies where investors want to invest money mainly for investment and not for trading. TOTAL NO. OF SCRIPTS WERE 27 ONL Y AND TOTAL NO. OF TRANSACTIONS WERE 57 ONLY AVERAGE 1 TRANSACTION PER WEEK) All the shares sold during the year were delivery based and delivery was given from the DEMA T account of the assessee. Further, Many of the shares sold dur .....

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in Shares and Mutual Fund AT COST consistently. • Assessee company is consistently investing from its surplus funds in shares and Mutual Fund and is consistently following the same practice since incorporation and the same was accepted. The Assessee further submits that CBDT circular No. 4/2007 dated June 15, 2007 and various judicial pronouncements made it clear that combination of various test/factors are to be applied for determination whether income from sale of shares should be consid .....

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that the Assessing Officer did not dispute any of our submission, relevant judicial pronouncements and meeting various criterions mentioned above, the assessing order arbitratorily decided to treat the income from sale of listed equity shares as business income rather than Short Term Capital Gain. We have provided complete details of Short Term Capital Gain of ₹ 2,824,217/- vide our submission dated Nov. 21, 2102 and it can be summarised as under:- No. of Scripts (A) No. of sales transacti .....

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Officer Our submission 1. The Assessing Officer heavily relied on the case of Commissioner of Income. Tax v/s. Rewashanker A.Kothari 2006(283) ITR 338 (Guj.)&Pari MangaldasGi rdhardas v/s CIT (1977)CTR 647 (Guj.) to justify his stand that the most important test suggested is regarding volume, frequency, continuity and regularity for transaction of purchase and sale , of goods concerned. Based on this, the Assessing officer decided that gain from 27 scripts and 57 transactions are to be asses .....

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urther advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade". Even Gujarat High Court (jurisdictional High court) while accepting in the matter of COMMISSIONER OF INCOME TAX-HI - Vs VAIBHAVJ SHAH (HUF) -Tax appeal no. 77 & 78 of 2010 that Gain from sale of shares is Capital Gain and it was base on its own case law of Com .....

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ronouncements which support our view that considering the facts of our case, gain from sale of listed equity shares of ₹ 2,824,217/-can be assessed only as Short Term Capital Gain and not as income from business. Same are also attached with letter as named as complete text on case laws: 10. Apart from the above submission, the assessee has explained that even in the Asstt.Year 2010-11, there were transactions of sale and purchases of mutual funds and short term capital had arisen. They wer .....

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as an investor. All of a sudden what happened to the status of the assessee in subsequent year has not been specifically pointed out. Frequency of a transaction is one of the reasons amongst others for forming a belief whether an assessee was engaged in the business of share transactions or it was only making investment. This one factor cannot be sufficient to decide controversy conclusively. It is pertinent to observe that the assessee has always valued investment at cost. Had it been engaged i .....

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57 transactions in the year. The ld.CIT(A) while rejecting contentions of the assessee had made an observation that opening balance in the equity shares as on 1.4.2009 was ₹ 526.30 lacs which increased to ₹ 791.35 lacs in 31.3.2010. We failed to understand that how increase in the value of investment would be a factor to doubt activity of the assessee as a investor. How this fact could goad any adjudicating authority to arrive at a conclusion that transaction was of a business in na .....

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e case of Sarnath Infrastructure Pvt. Ltd. One of the cases referred by the assessee is Gopal Purohit by ITAT, Mumbai. It is observed that this order has been upheld by Hon ble Bombay High Court in 35 DTR 52. In this case, transactions were more than 150 and in that case it was observed that if delivery based transactions are available, then, profit received from such transaction is to be treated as short term capital gain or long term capital gain. Thus, taking into consideration overall facts, .....

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e Income Tax Act, 1961. 12. The ld.AO has rejected the contentions of the assessee for two reasons viz. (a) Department of Science & Industrial Research (DSIR) which is a competent authority to grant approval, has approved R&D facility for the purpose of section 35(2AB) of the Income Tax Act for the period 1st April, 2010 to 31.3.3012, and (b) the assessee was required to maintain separate accounts for each approved facility as per clause (c) of Rule 6(7A) of the Income Tax Rules, 1962. T .....

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explanation given by the assessee is worth to note. It reads as under: 3. " Our submissions on disallowances of Weighted deduction of R & D expenses u/s 35(2AB) of the Income Tax Act, 1961 - amount of weiqhtage deduction ₹ 1,348.732/- added to returned income of the assessee. The Assessee has a Research & Development unit situated at near village Gothda, Savli road, Dist. Vadodara, 391773, which has been recognised by Department of Scientific & industrial Research (DSIR) .....

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sed by the Assessing Officer was clearly decided by the Jurisdictional ( Gujarat) High court in our favour and same has been upheld by the Honb'le Supreme Court. We also cited few other judicial pronouncements which though cited in the assessment order but not considered appropriately by the Assessing officer. Sr. No. Observation of Assessing Officer Our Submission 1. DSIR (approving authority) has given approval in form 3 CM from April 1, 2010 and same is applicable only from A.Y. 2011-12 a .....

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DSIR and the cut-off date mentioned in the certificate issued by the DSIR would be of no relevance. What is to be seen is that the assessee was indulging in R&D activity and had incurred the expenditure thereupon. Once a certificate by DSIR is issued, that would be sufficient to hold that the assessee fulfils the conditions and eligible for weighted deduction. In our case, we have been approved & recognised by DSIR and therefore, eligible for weighted deduction u/s 35(2AB). Extracts and .....

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-11. The assessee further submits that Assessing Officer conveniently ignored the Auditor's Certificate dated 20th September 2010 issued in accordance with Income Tax Rules, 1962 and mentioned that separate ledger accounts were maintained and further certified that the expenditure certified were also in consonance with DSIR guidelines. Requirement of Income Tax Rules is to have separate accounts (and not to have separate books of accounts) for R & D so that R & D expenses can be easi .....

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as been maintained for R & D expenses & submitted during assessment proceedings. Without admitting but assuming that even if the condition of Income Tax Rules is not met, than at best it can be considered as procedural/ technical deficiency/difference in interpretation and benefit cannot be denied merely on procedural or technical lapses when substantial conditions have been complied and genuineness of R & D expenses have not been doubted. Our view us supported by various judicial pr .....

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unting norms. This has not been claimed as R & D expenses and easily verifiable from table given on page 5 of the assessment order and therefore, totally irrelevant for making a ground for disallowance of weightage deduction of other eligible R & D expenses. In addition to the facts mentioned above, we draw support from the following judicial pronouncements which states that what is important and relevant is that In-House R & D lab is approved and recognised by DSIR and the cut-off d .....

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see by the decision of the Hon ble jurisdictional High Court in the case of CIT Vs. Claris Lifesciences Ltd., 326 ITR 251 (Guj). According to the ld.counsel for the assessee, the Hon ble High Court has upheld the order of the ITAT wherein it has been held that the Income Tax Act nowhere provides that such weighted deduction would be allowed from a particular date. In other words, either the assessee has been carrying out research and development activity, which can authorize it to claim weighted .....

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010 to 31.12.2012 therefore the assessee is not entitled for the deduction. He took us through paragraph 7 of the ld.CIT(A) s order. 15. On due consideration of the above facts and circumstances, we are of the view that the assessee has specifically pleaded before the ld.CIT(A) that it has been maintaining separate accounts, and it has been produced before the DSIR. According to the assessee, nowhere in the Section 35(2AB) of the Income Tax Act or Rule 6(7A) of the Income Tax Rules has provided .....

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the assessee s activity falls within the ambit of research and development activity or not. This aspect of grant of approval for cut off period has been considered by the Hon ble High Court in the case of Claris Life Sciences Ltd. (supra) and the finding of the Hon ble High Court in this regard read as under: We have considered the submissions made by the learned Standing Counsel appearing for the revenue and we have also perused the orders passed by the authorities below. The Tribunal has disc .....

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facility approved by the prescribed authorities has to be allowed by deduction of expenditure so incurred. Meaning of these words is plain and clear that the facility is to be established first and on approval of the facility all the expenditure so incurred by the assessee for development of in-house facility is to be held as eligible for weighted deduction. Form No. 3CM, which is order of approval as provided by the rules in this behalf also does not have any mention of date of approval rather .....

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of the facility by the prescribed authority, which is "DSIR"; and (iv) allowance of weighted deduction on the expenditure so incurred by the assessee. The provisions nowhere suggest or imply that "R & D" facility is to be approved from a particular date and in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the .....

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nt of facility. The Tribunal has also considered rule 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of "R & D" facility has to be allowed for weighted deduction as provided by section 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up R & D facility in Ind .....

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