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TMI Blog2017 (11) TMI 372X X X X Extracts X X X X X X X X Extracts X X X X ..... ry to the facts and material on record and provisions of law. 2. Because that the ld. Commissioner of lncome Tax (Appeals) was erred in law as well as in facts in holding that there was no merit in the argument of the appellant, and sustaining the addition of Rs. 1,95,94,294/- as business income as against Short-term Capital Gains income, and his such conclusions are based on his surmises and guesses and are contrary to the facts and material on record and provisions of law. 3. Because that the ld. Commissioner of lncome Tax (Appeals) was erred in law as well as in facts in applying the ratio of judgement of the Hon'ble ITAT SMC Bench, Mumbai judgement in the case of Shri Shreyas M. Jhaveri under ITA No. 2437/Mum/2010, dated 2nd January 2013 in sustaining the addition, which is distinguishable on facts and issue of law. 4. Because that the ld. Commissioner of lncome Tax (Appeals), in the given facts of the case, ought to have accepted the argument on facts and the ratio of the judgement as relied upon by the appellant before him and should have reversed the judgement of the ld. A.O. in treating the short-term capital gains income of Rs. 1,95,94,294/- as income under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5/- and short term capital loss of Rs. 6,79,221/- incurred by the assessee on sale of shares of DQ Entertainment (lnternational) Ltd, under the head income from Business. The reasoning given by the assessing officer for treating the short term capital gains of Rs. 1,95,94,294/- as income from business was that the assessee had acquired the shares of these two companies from borrowed funds and the assessee had purchased these shares with an intention to earn short term profits. It is pertinent to mention here that the shares of both the above companies were acquired in the initial public offer made by such companies and the financing arrangement was limited to only the amount required for applying in such initial public offer, which also only till the date of allotment. Once such shares were allotted, the function of the financer was over. This fact is evident from the fact that the assessee had paid interest to the financer only for eight days and eleven days for the financed amount of Coal India Ltd. and DQ Entertainment (lntl) Ltd. respectively. It is a well known fact that whenever there are IPO of reputed companies, the applicants to such IPO are allotted either nil or a fracti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gain of Rs. 1,95,94,294/-, (Rs.2,02,73,515 - Rs. 6,79,221), which includes Rs. 2,02,73,515/- from sale of shares of Coal India Ltd, and loss of Rs. 6,79,221/- on sale of shares of DQ Entertainment (International) Ltd. The AO treated the same as business income, because the assessee had availed huge funding of over Rs. 200 crores, on which huge interest was paid. The shares were purchased by the assessee at steep interest rates. These shares bought from borrowed funds and were purchased with an intention to earn short term profits. The CIT(A) noted that the terms and conditions of the agreement was that the financing company had kept the interest rate floating as well as there was a minimum interest period and had sought mortgage in the form of collateral securities and most importantly it had reserved the right to dispose of the securities both bought from its finance and further collaterals in case of default. Therefore, the AO rightly concluded that the transactions in these shares of the company were in the nature of trade and not capital gain as shown by the assessee. The Ld. CIT(A) observed that the shares were purchased through IPO. The entire shares were purchased out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red loss under the head capital gains and had carried forward the losses under the head capital gains. There has neither been any change in the activities and operations or the assessee, as compared to past years nor any change in the facts and circumstances of the case of the assessee as compared to past year. The Ld. Counsel stated that the shares were purchased by the assessee with an intention to hold the same. However, the vagaries of the stock market are well-known, as it transpired, in some cases the assessee was suddenly faced with the risk of losing its investment. In some cases, the assessee was suddenly faced with the risk of losing its investment. In some cases, the sudden rise in share prices was such that it would have been imprudent to hold on to the shares in the expectation that long term holding may fetch a better return. In such cases, the assessee considered it prudent to sell the shares. The ld. Counsel further submitted that it would be evident from the records that there was no regular, systematic and organized activity of purchase and sale which can indicate that the same were by way of business. Such purchase and sales are investments made in usual course. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment years had been completed u/s 143(3) of the Act, treating the assessee as an investor. The assessee has not change its activities and operations as compared to past years and there was no regular, systematic and organized activity of purchase and sale of shares and securities. An undisputed fact is that the assessee has applied in the shares, acquired through IPO of the company from borrowed capital. Merely because the shares were purchased through borrowed capital cannot be the ground for capital gain, to be assessed as business income. The fact that the assessee paid interest on borrowings cannot be held against him, treating it business income, when there are other predominating natures which give clear impression that the assessee intended only to invest on shares and not to hold them as stock-in-trade. Therefore, we are of the view that assessee has worked as an Investor and not Trader.The IPO funding availed by the assessee was to get more allotment but the fact of the matter is that the assessee was an investor and the sole intention of applying in the shares through IPO was to get higher allotment of shares. There were no repetitive purchase and sale of the same scrip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessing officer as cost of investment and not revenue expenditure in the assessment for the asst. year 2010- 11. During the assessment proceedings, the assessee submitted that amount of Rs. 24,87,354/- is cost of acquisition for the said shares, however, the AO did not accept the claim of the assessee and made addition of Rs. 24,87,354/-. 12. Dissatisfied with the addition made by AO, the assessee carried the matter to CIT(A), who confirmed the addition made by AO.Regarding the interest on borrowed fund of Rs. 24,87,354/- which was capitalized by the assessee, the Ld. CIT(A) held that the shares were purchased through borrowed funds on which interest was paid by the assessee. The assessee purchased shares of Coal India Ltd. and the DQ (Entertainment) International. However, the AO while treating the income as income from business allowed the interest on the transaction of shares of Coal India Ltd. as the interest on the same accrued during the year. However, the interest on the loan for shares of DQ(Entertainment) International was disallowed on the ground that the interest thereon had accrued during the previous year and not during the current year. The Ld. CIT(A) held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -acquisition of such shares. The interest so capitalized was directly attributable to the said shares and therefore were a part of cost of acquisition. In addition to this, the Ld. Counsel for the assessee has relied on the judgment of Hon'ble ITAT Mumbai in the case of Smt. Sunita A. Damani, ITA NO 5770/Mum/2010, A.Y. 2006-07, wherein it was held that the assessee had borrowed the money for IPO application but all the shares were not allotted as applied for and part of the shares was allotted and balance amount was refunded to the assessee in respect of non-allotment of shares. The assessee has to pay the interest on the entire finance which was borrowed for making the payment with the application money. It has been observed by the Tribunal that the entire money has been borrowed by the assessee with the sole purpose of acquiring the shares of Punjab National Bank and NTPC Ltd. Though the applied shares were not allotted in full that will not deprive the assessee from claiming the entire interest paid as part of the cost of acquisition of the shares allotted as the money borrowed has direct nexus with the acquisition of the shares. It was held by the Tribunal that the interest pai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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