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2017 (3) TMI 382

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..... r the head ‘Capital gain’ by making a specific mention in the body of the assessment order that the ‘Short term capital loss’ of ₹ 8,35,225/- shown by the assessee on sale of shares shall be C/forward to the succeeding years. We thus in the totality of the aforesaid facts, are thus of the considered view that the conduct of the assessee duly goes to fortify and substantiate its claim , and as such the profit/gain on sale of the shares had rightly been reflected by the assessee company in its return of income under the head ‘Capital gain’. The profits/gains arising in the hands of the assessee company from the sale of the scrips had rightly been reflected in the return of income under the head ‘Capital gain’, viz. LTCG and STCG and the view of the A.O. which thereafter had been sustained by the CIT(A) that the assessee had been carrying out systematic purchase and sale transactions in shares, and thus was liable to be assessed as ‘business activity’ cannot be sustained and is thus vacated. We in the backdrop of our aforesaid observations are of the considered view that the assessee had rightly reflected the income arising in its hands from sale of shares under the head ‘Cap .....

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..... declaring total income of ₹ 3,68,85,369/-. The case of the assessee was thereafter taken up for scrutiny proceedings under Sec. 143(2) of the Act . That during the course of the assessment proceedings the A.O. observed that the assessee had claimed to have earned Short term capital gain (STCG) of ₹ 3,51,72,757/- and Long term capital gain (LTCG) of ₹ 7,87,532/- on sale of shares, which was credited as Profit on sale of shares . It was observed by the A.O. that the STCG shown by the assessee in its return of income was in respect of transactions in shares of 13 different scrips, mainly those of M/s. India Bull, Lloyd Electricals, Unichem Laboratories etc., while for the LTCG pertained to purchase and sale of shares of M/s. Prakash Industries. That as per the A.O. the assessee company had during the year under consideration carried out 26 purchase transactions of ₹ 17,17,07,197/- and 71 sale transactions of ₹ 20,76,67,483/-. The A.O. being of the view that the planned purchase and sale transactions of the aforesaid magnitude were in the nature of business transactions , therefore called upon the assessee to explain as to how the same had been sho .....

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..... bleSupreme Court in the case of Karamchand Thapar Bros Pvt. Ltd. (83 ITR 899) that the classification by the assessee of shares as investment or stock in trade is by no means conclusive, Moreover, in the case of State Bank of Hyderabad vs CIT (151 ITR 703) (AP), the income arising from sale of securities, which was found to be closely connected to the banking business of the State Bank of Hyderabad, was held to be taxable as business-income. At the risk of repetition, it may be stressed that when an assessee indulges in any activity which is a part of its main line of business, the natural inference will be to hold that the additional activity is an integral part or mere an extension to the business activities. (c).Regarding the assessee 's claim that the profit on sale of shares cannot be taxed as business income since the Memorandum of Association of the company does not permit trading in shares, it needs to he emphasized that the head under which income is taxable under the Income Tax Act, 1961, has to be decided with regard to the inherent nature of the transaction vis- -vis. the head of income specified in the Act. The income Tax Act also defines what is busine .....

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..... ein raised the following submissions before the CIT(A):- a).That even as the Assessing Officer has attempted to sound as if he had adopted a fair approach by recalling that the CBDT Circular on which he has relied requires him to take an overall and holistic view, all that he has really done is to summarily dismiss the following vital facts of our case by expressly suggesting in respect of each one of them that it was not conclusive or decisive. b) A bare reading of our Memorandum, of Association showed that it did not permit us to carry on any business in securities; that all that it did was to permit us to make investments in securities. c) The investments in question were made from our own funds which,because the main business envisaged by the Memorandum of Association could not be commenced were lying idle and therefore, were surplus. d) The Appellant has not made any borrowings for the purpose of making investments in question. The company incorporated under the Companies Act, 1956, our books of account are audited under the relevant provisions of that Act as also u/s. 44AB of the Income-tax Act, 1961- Audited books have consistently shown the investment .....

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..... ' has been accepted by the department in the assessment years 2005-06 and 2006-07. The brokerages paid for purchasing the shares were included in the purchases and the brokerages paid on the sales were deducted from the sales. These expenses were not claimed as deductions. The expenditure of ₹ 4,84,048/- by way of Security Transaction Tax incurred for purchasing and selling the shares was not claimed. The Appellant had not claimed any rebate for the same in view of Section 88E of the Act . i) Plain reading of the Circular shows, it has been issued by the CBDT only to update its earlier Instruction No 1827 of 31.08.1989 for information of the assessees as well as for guidance of the Assessing Officers. Thus the Circular seeks merely to update the instruction and does not replace it. The assessment order shows, the Assessing Officer has gone only by the above Circular and paid no heed to the earlier Instruction. In the peculiar facts and circumstances of the appellants case, the emphasized portion of the instruction quoted below ought to have been considered by him. Attention was invited to instruction No. 1827 dated 31.8.1989. Reliance was placed on the followi .....

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..... ce under Sec.14A had himself considered the shares as Investments and not stock in trade , and as such the inconsistent approach adopted by the A.O, and holding to the contrary while assessing the sale transactions of shares as business transactions during the year, thus on the said count too could not be sustained and was liable to be vacated. The CIT(A) however not being persuaded to subscribe to either of the aforesaid contentions of the assessee, therein observed as under :- 2.3. I have considered the assessment order and the submissions of the appellant. Looking into the nature of the transactions relating to the share transactions in question and the concept of business income as mentioned in the ITA, I agree with the Assessing Officer that the short term capital gain (STCG) and long term capital gain (LTCG) is to be treated as business income. In this respect I find that CBDT has issued its Circular No 4 dt. 15.6.2007 in which it has laid down exhaustive guidelines on which the character of share transactions is to be tested to determine whether or not they can be treated as business income. On this I find that the essence of the CBDT Circular is that transactions .....

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..... reference to trading activities with F O and infra-day transactions is misplaced as these are governed by different principles. Further, the appellants argument on the earning of dividend, holding the shares as investment, the shares being delivery based are rendered immaterial in face of the foregoing signature features of the share transactions. The Appellants case is rather tilted towards business in that there was no other business being carried out. Further, the appellant's intention to change the character of income also becomes clear from the fact that, as pointed out by the Assessing Officer, no STCG or LTCG was claimed prior to A.Y 2005-06, when section 111A came into effect. In this respect, on account of the profile of the transactions indicating Appellant's intention to make profits, I agree with Assessing Officer's observations as given on pages 3 to 8 of the assessment order. Further, in view of the peculiar facts of the appellants case, I find the appellant's case distinguishable from the cases relied upon by the appellant. In this respect, it is to be noted that the judicial evolution in the matter makes it clear that each case has to be decided o .....

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..... rein submitted that the authorities below had gravely erred in law and facts of the case in treating the profit/gain arising in the hands of the assessee from the sale of shares which were held as investments, as business profits. The Ld. A.R reiterating the submissions made before the lower authorities, therein tried to drive home and support his contention that the income from the sale of shares had rightly been shown under head LTCG and STCG in the return of income. The Ld. A.R in order to support his contention therein submitted that the nature of the purchase and sale transactions of shares, viz. period of holding of the scrips, no intraday transactions, delivery based purchase/sale transactions etc., therein in itself substantially evidenced the fact that the shares were purchased and thereafter held by the assessee as investments, and not as stock in trade. The Ld. A.R in support of his aforesaid contention therein drew our attention to Page 35-38 of his Paper book (for short APB ), wherein the various purchase/sale transaction of scrips carried out by the assessee during the year stands recorded. The Ld. A.R referring to the aforesaid chart therein averred that in the ca .....

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..... s was liable to be vacated. The ld. A.R further averred that the material fact that the assessee had purchased the aforesaid scrips from its self owned funds and not any borrowed capital, coupled with the fact that the period of holding of the respective scrips in itself glaringly revealed that the same were in the nature of investments, had been brushed aside by the A.O., who as averred by the Ld. A.R had approached the matter with a prejudiced mind and a predetermined approach, and as such cannot be sustained. 9. The Ld. A.R further relied on the Circular No. 6/2016, dated 29.02.2016, issued by the Central Board of Direct Taxes (CBDT), and therein submitted that the CBDT referring to its earlier Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007, dated June 15, 2007, had therein observed that though parameters had been laid down for determination of the character of a particular investment in shares or other securities, i.e whether the same are in the nature of Capital asset or Stock in trade , but despite that the disputes and controversies had continued to exist, and as such difficulties emerged in proving the intention of the assessee at the point o .....

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..... 2005-06 and ITA No. 132/Ahd/2010 A.Y. 2006-07; dated 11.03.2016 ) and therein placed on record the copy of the aforesaid order. The Ld. A.R further in support of his aforesaid contention relied on the order of a coordinate bench of the Tribunal, viz. ITAT, Mumbai of H bench, in the case of Mr. Hitesh Satish Chandra Doshi, Mumbai Vs. ACIT 21(3), Mumbai ITA No. 6497/Mumbai/2009. That on the other hand the Ld. Departmental Representative (for short D.R) relied on the order passed by the ITAT, Jaipur bench, in the case of DCIT, Circle 2, Jaipur Vs. Shri Mahindra Kumar Bader, Jaipur (ITA no. 605/JP/2013) A.Y. 2008-09, dated 18.03.2016 . The Ld. D.R further submitted that the CIT(A) duly appreciating the facts of the case in the backdrop of the settled position of law, had rightly concluded that the profit/gain from the transfer of the shares was liable to assessed in the hands of the assessee company as the latters business income . It was thus submitted by the Ld. D.R that the appeal of the assessee was devoid and bereft of any force and was liable to be dismissed. 10. We have heard the Ld. Authorized Representatives for both the parties, perused the orders of the lower .....

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..... cost or market price. We find that no such exercise of revaluation of the shares so done by the assessee fortifies its contention that the same had been purchased and thereafter held by the assessee purely as an Investment . The conduct of the assessee which goes to support his aforesaid contention can also be gathered from the fact that the STT had been added back in the Computation of income , and no rebate was claimed by the assessee under Sec. 88E. 11. We are further of the considered view that independent of the aforesaid facts which would reasonably justify and therein support the contention of the assessee company that the shares were held by it as Investment , and as such the profit/gain from the purchase and sale transactions as regards the same had thus rightly been reflected by the assessee in its return of income under the head Capital gain , are further persuaded to subscribe to the said claim of the assessee, also for the reason that the latter had in the immediately preceding year, viz. A.Y. 2006-07 reflected the loss suffered from the sale of scrips under the head as Short term capital loss , which was accepted by the A.O. in the course of regular ass .....

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..... me arising from transfer of such shares/securities would be treated as its business income. b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as capital gain, the same shall not be put to dispute by the assessing officer. However this stand, once taxed by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment years also and the taxpayer shall not be allowed to adopt a different/ contrary stand in this regard in subsequent years. c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid circulars issued by the CBDT . It was further observed by the CBDT in its aforesaid circular, as under:- 2. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the reinvent .....

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..... of the shares, volume of transactions, treatment of the scrips by the assessee in its books of account, nature of business of the assessee company, source of purchase of shares and last but not the least, the very fact that the A.O. while framing regular assessment under Sec. 143(3) in the hands of the assessee for the immediately preceding year, viz. A.Y. 2006-07, had accepted that the shares as claimed by the assessee were in the nature of Investments , and had assessed the loss on the sale of shares under the head Capital gain by making a specific mention in the body of the assessment order that the Short term capital loss of ₹ 8,35,225/- shown by the assessee on sale of shares shall be C/forward to the succeeding years. We thus in the totality of the aforesaid facts, are thus of the considered view that the conduct of the assessee duly goes to fortify and substantiate its claim , and as such the profit/gain on sale of the shares had rightly been reflected by the assessee company in its return of income under the head Capital gain . We may herein observe that we though find ourselves to be in agreement with the view taken by the CIT(A) that the doctrine of res jud .....

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..... extent of 4.8% of the total investments. The assessee has disclosed the amounts invested in the shares in the category of investments right from beginning. The shares have never been revalued to bring them in line with the market value as would have otherwise been done in the case of stock in trade. The stock in trade is always disclosed at cost or market price which is lower. No such exercise has been done by the assessee in the case of shares since these have been held under the head of investments . It is also noted from the facts brought before us that in the case of short term capital gains average period of holding ranged between from 82 days to 123 days. It is not the case of the A.O. that shares have been purchased and sold on daily basis or without taking delivery and giving delivery. It is further noted by us that Ld. CIT(A) has rightly analysed the facts with proper reasoning to reach on the conclusion that conduct of the assessee and facts and circumstances of the case indicate that the assessee did not carry out the activity of making investment in shares as a systematic and organized activity of carrying out shares trading or business. 13. In addition to the .....

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