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TMI Blog2015 (12) TMI 1816X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in holding Rs. 34,61,63,879 to be long term capital gains instead of treating the same as Business income as held by the A.O. ignoring that the nature of trading activities in shares is trading in shares and securities. 3. On the facts and in the circumstances of the case, the Learned CIT(Appeals) has erred in holding that Rs. 9 lacs is not a real income, ignoring the fact that interest income of Rs. 60 lacs had already accrued and accordingly received by the assessee during the year". 3. The assessee on the other hand has questioned First Appellate Order on the following grounds: "1. Because the action is under challenge on facts and law in declining the claim for the investment activity relating to shares treating the same as business income which is not in accordance with the regularly followed method of accounting substantiated by the Audited Financial statement. 2.(i) Because the action is under challenge on facts and law for having treated the gains accrued on disposal of shares investment amounting to Rs. 6,23,34,129 as business income whereas per the assessee the same is sort term capital gain chargeable to tax u/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the tune of Rs. 1,15,44,84,872.67 and purchase of shares shown as Rs. 1,46,27,37,974.36. It had also shown increase or decrees in stock to the tune of Rs. 30,84,64,940.67 whereas other income was shown at Rs. 53,69,66,060.68. Noting these aspects, the Assessing Officer came to the conclusion that assessee is carrying on business of trading in shares, securities and units. In support, he also noted the frequency of trading in different scripts except Dowar India Ltd.'s shares done on regular basis. The Assessing Officer tried to distinguish the case laws relied upon by the assessee and held that all the alleged long term capital gain of Rs. 34,61,63,879 shown by the assessee in its return of income is business income and taxed the same accordingly. On the submission of the assessee regarding the principles of consistency, the Assessing Officer rejected the same with this finding that each assessment year is a different unit. 7. The Assessing Officer also treated the short term capital gain claimed by the assessee at Rs. 6,71,16,180 as business income adopting the same observation as made by him hereinabove in relation to the claimed long term capital gain.&nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of CIT vs. H. Holck Larsen - 160 ITR 67 (S.C) holding that as to whether transactions of sale and purchase of shares were trading transaction or whether these were in the nature of investment is not a question of law but it is a mixed question of law and facts. The learned CIT(DR) referred page No. 18 of the assessment order to support his submissions that there were lot of frequency and volumes of transaction. The assessee had also not paid security transaction tax on the sale of shares. He submitted that before the Assessing Officer, the assessee had not pointed out that it is promoter of Dawar India. The Learned CIT(DR) submitted that finding of the Learned CIT(Appeals) on the payment of security transaction tax (STT) is misleading. He submitted that the assessee had not maintained two portfolios to support its submission that it was trading in shares as well besides making investment in shares. The assessee is in the business of nonbanking finance, hence the shares transaction was part of its business. The Learned CIT(Appeals) on general findings has given the relief to the assessee by accepting the claimed long term capital gain as such. 11. The Learned AR on the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gain on which STT was paid and benefit under sec. 10(38) of the Income-tax Act, 1961 was claimed, and details of short term capital gain on which STT was paid and benefit under sec. 111A of the Act was claimed, made available in concise form at page Nos. 1 to 11 of the paper book. He submitted that up to assessment year 2004-05, the assessee had been maintaining two portfolios. Since assessment year 2005-06, the assessee is dealing only in investment and major component is shares of Dawar India Ltd. There is no prohibition in law to convert stock in trade to investment account. In this regard, he placed reliance on the decision of Hon'ble High Court of Delhi in the case of CIT vs. Express Security Pvt. Ltd. - 364 ITR 488 (Del.). The Learned AR submitted further that the contents of memorandum cannot be a sole basis but entirety of facts relating to the transaction is to be examined to find out the nature of the transaction as to whether it is investment or trade. The Learned AR submitted that STT was very much paid on the said transaction and referred page No. 236 (Schedule K) of the paper book. The learned AR submitted further that so far shares of Dabur India Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , volume becomes determinative, in others, the duration of times, it is held, at times it can be the manner it is shown in the books, whereas still, the use of borrowed funds could be decisive. 15. The decision relied upon by the Learned AR referred above suggest that the very intention with which the shares have been purchased is the basic test to arrive at a conclusion as to whether the share transaction is investment or trade and this intention can be gathered on the basis of surrounding circumstances including the factors like period of holdings, volume and frequency of transactions in shares. What was the intention of the assessee at the time of purchase of these shares can be found out from the treatment it gives to such purchase in its books of account whether the assessee has borrowed money to purchase and paid interest thereon as normally money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. What is the frequency of such purchases and disposal in that particular item. Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely 170) and offered the gains under the head Short Term Capital Gains (STCG) - since the period of holding is less than one year - and applied special rate of taxation as prescribed u/s. 111A as detailed vide Annexure-B. 10.1 The main contentions of the AO as seen from the assessment order are as under: * One of the main objects of the assessee company is to do business in shares, stocks, debenture stocks, bonds, obligations, units, securities etc as per the Memorandum of the Association of the appellant company. * The assessee carried on the activity of purchase and sale of shares on regular basis. * The volume of purchase and sale of share (volume of business) is huge. * Frequency of transactions is very high except in shares of Dabur India Ltd. * Conduct of the assessee is that of a trader in shares. * No proper records are maintained as per report u/s 142(A) issued by the special auditor. * Certain Shares are held as investment to get tax exemption u/s. 10(38). 10.2 The AO relied on the following case laws: , . * CIT vs. Associated Industrial Development Co. Ltd. 82 ITR 586 (Se)&nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as stock-in-trade or investment? Whether shown in opening/closing stock or shown separately as investment or non-trading asset? 2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. 3) What is the frequency of such purchases and disposal in that particulars item? If purchase and sale are frequent, or there are substantial transactions in that item, it 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 investment (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). 4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and later, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares? A commercial motive is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l/1990 for assessment year 1990-91. 18. The details of number of shares of Dabur India Ltd. held by the assessee over a period of time and the transaction/changes are follows: Date as on No. of shares (in lakhs) Remarks 31.03.1996 37.15 No change in holding 31.03.1997 37.51 No change in holding 31.03.1998 37.41 Sold 1000 shares 31.03.1999 37.41 No change in holding 31.03.2000 37.41 No change in holding 31.03.2001 37.41 No change in holding 31.03.2002 37.41 No change in holding 31.03.2003 37.41 No change in holding 31.03.2004 37.41 No change in holding 31.03.2005 374.30 Paid up value of Rs. 10 per Sh. is reduced to Rs. 1 each and purchased 20000 shares (37.41x10)+20=374.3 31.03.2006 725.78 Bonus of 1 share for 1 share held, allotted and sold 1.41 lacs shares before bonus and sold 20 lacs shares after bonus (374.30-1.41)x2=745.78 745.78-20=725.78 19. Thus, it is very clear from the above detail that shares of Dawar India Ltd. were held as investment. From the details of other shares given above, it is also apparent that those shares were held for considerable long time. Transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Balance sheet showing a closing value of Rs. 30.85 crores on 31 March 2006. The accounting policy for trading of shares is disclosed in Schedule L of the Balance sheet which states that "closing stock of securities is valued at cost of market price which ever is lower. 19.5 Thus, the intention of the assessee is very much clear as to what stocks are to be treated as business stock and what to be treated as investment stock. The Policy and treatment of stock transaction are clearly reflected in the Balance sheet of the assessee. 19.6 We thus fully concur with the finding of the Learned CIT(Appeals) that the profit of Rs. 34,61,63,879 in respect of shares sold during the year (including gain of Rs. 29,05,58,750 realized on sale of shares of Dawar India Ltd. ) has been rightly treated by the assessee as long term capital gain and thus the Learned CIT(Appeals) has rightly held that the assessee is eligible for exemption under sec. 10(38) of the Act on the said long term capital gain. The First Appellate Order in this regard is thus upheld. The ground Nos. 1 and 2 are accordingly rejected. 19.7 From perusal of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard. The same is upheld. The ground No. 3 is accordingly rejected. 23. In result, the appeal preferred by the Revenue is dismissed. 24. The assessee ( ITA No. 2240/Del/2010) on the other hand has basically questioned the First Appellate Order mainly on two grounds. Firstly, upholding of Rs. 6,23,34,129 claimed by the assessee as short term capital gain as business income (Ground Nos. 1 and 2) and secondly disallowance of expenses amounting to Rs. 5,33,768 under sec. 14A of the Act against exempted income (Ground No.3). 25. Ground Nos. 1 and 2: Similar arguments have been adopted by the parties as advanced by them hereinabove on the issue of long term capital gain raised in the appeal preferred by the Revenue. The authorities below have treated the claimed short term capital gain of Rs. 6,23,34,129 accrued on disposal of shares invested for a short term period as business income. The assessee had also claimed benefit under sec. 111A of the Act on the said short term capital gain. 26. The assessee had furnished list of shares and the number of scripts involved as 170. It had claimed short term capital gain of Rs. 6,71,16,180 and lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong term in view as 84% of shares are held for more than one year, transacting in some shares in short term to alter its investment vision and goal cannot be considered as an action borne out to do trade. It happens when the vision is long term, some shares thought purchased are dropped out from portfolio either because sufficient funds are not available to make them reach to a level to accumulate capital or because of some other allied reasons. 26.2 It is not the finding of the Assessing Officer or the Learned CIT(Appeals) that these shares were shown as stock in trade or the assessee was not correct in showing these shares as investment. We thus do not find infirmity in the claim of the assessee that the profit accrued on sale of these shares was short term capital gain and the assessee was eligible for claiming charging of the gain under the provisions laid down under sec. 111A of the Act. We thus while setting aside the orders of the authorities below in this regard direct the Assessing Officer to accept the claim of the assessee and allow the benefit of charging of the gain under sec. 111A of the Act. The ground Nos. 1 and 2 are accordingly allowed. 27. The gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 in terms of which the gain arising on account of disposal of shares held as investment are liable to be taxed under the head capital gain and the decisions of the CIT(A) in the likely placed other cases. 4) Because the action is under challenge on facts and law having followed the Hon'ble Delhi High Court overlooking the facts of the said case. 5. Because the action is under challenge on facts and law in making proportionate disallowance of Rs. 24,57,661 u/s. 14A. 6. Because the action is under challenge on facts and law in making disallowance of s.1,09,525 u/s. 94(7) and 94(8)." 31. Besides, the assessee has also moved application under Rule 27 of the ITAT Rules requesting therein to a new plea in order to support the First Appellate Order that the investment in Punjab Tractors Ltd. was made by the assessee in order to enjoy the controlling stakes in the said company and not to trade in shares. The Learned AR submitted that though the Learned CIT(Appeals) has allowed the appeal of the assessee, thereby holding the sale of shares of Punjab Tractors Ltd. as long term capital gain on the basis of period of holding, but the assessee wants to support the First A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35. During the year in the assessments framed under sec. 143(3) of the Income-tax Act, 196, following additions/disallowances were made by the Assessing Officer, some of which were contested before the Learned CIT(Appeals) mentioned therein: S.No. Nature of addition/issue Amount in (Rs.) Grounds of appeal raised 1. Long Term Capital Gain treated as business income. 25,59,09,101 Ground No.2 2. Short Term Capital Gain treated as business income 5,83,72,758 Ground Nos. 2 and 5 3. Interest Expense disallowed. 3,89,53,657 Ground No. 7 4. Disallowance u/s. 14A 24,57,661 Not contested 5. Disallowance u/s. 94(7) 1,09,525 Not contested 36. The main issue involved in the appeals is regarding taxing the profits realized on sale of shares as business income against capital gain offered by the assessee either under long term capital gain or short term capital gain depending upon the period of holding of shares. 37. The assessee claimed Rs. 25,59,09,101 as long term capital gain which has been treated by the assessee as business income. The Learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in order to enjoy the controlling states in the said company and not to trade in shares. He submitted that profit on sale of shares enjoying managing control is always considered as capital gain and not business income. In support, he referred following decisions cited above in the cases of Accra Investment Pvt. Ltd. vs. ITO (supra), Ram Narain & Sons Pvt. Ltd. (supra) and Raja Bahadur Kamakhya Narain Singh vs. CIT (supra). 39. Considering the above submission, we find that both the shares of MTNL and Punjab Tractors Ltd. have been shown as investment in the balance sheet as on 31.3.2007 and all the shares were sold and not many transactions are there in the scripts. As on 31.3.2008, no shares of MTNL and Punjab Tractors Ltd. are held. These shares were held for considerable long time and shares were being sold when there was appreciation in the market. Shares of ABN Amro Securities purchased in 1998-99 were sold on 14.7.2007 after a period of 7/8 years. In these shares, the assessee had not carried out the transactions on regular basis as evident from the numbers of shares and transactions. Besides, the investment in Punjab Tractors Ltd. was made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.07.2007 after a period of 7/8 years. In these shares the assessee has not carried out the transactions on regular basis as evident from the number of shares and transactions. In the light of the above facts and legal position, the profit of Rs. 25,59,09,100 realized on sale of shares has been rightly treated by the assessee as long term capital gains to be taxed as special rates prescribed u/s. 112. The action of the A.O. in treating the gain as business income is not approved. Accordingly, Ground No.2 is allowed." 41. The above material findings of the Learned CIT(Appeals) on facts regarding showing of the shares as investment in the balance sheet, their holding period, and volume and frequencies of their transactions, have not been rebutted by the Revenue. We thus do not find reason to interfere with the First Appellate Order on the issue. The same is upheld. 42. In result, ground Nos.1 to 3 of the appeal of the Revenue are thus rejected. 43. In ground Nos. 1 to 4 of the appeal of the assessee, the assessee has basically questioned treatment given to the gain of Rs. 5,83,72,758 on disposal of shares by the authorities below as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hort term capital gain. In that case also the assessee is a non-banking finance company and in the course of its finance activity, it has purchased and sold shares for the sum of Rs. 1,19,30,037 and had claimed the income on that count as short term capital gain. The Assessing Officer rejected the contention holding that the said amount was business income and brought it to tax on that count. The assessee succeeded in the appellate proceedings. Hon'ble High Court observed that the bulk of shares held by the assessee were for a substantial period and income was derived on account of liquidation of investment. It was held that there cannot be a single factor or criterion to determine whether the income falls under the head of short term capital gain or of business income. He referred page Nos. 13 to 18 of the paper book wherein details of short term capital gains STT paid (benefit claimed under sec. 111A) and without STT(no benefit claimed under sec. 111A) have been furnished. 46. Learned CIT(Appeals) on the other hand tried to justify the orders of the authorities below and he has also adopted similar arguments as advanced by him hereinabove in the appeal for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advances to various other group concerns and individuals without charging any interest from them. He noted that loans and advances (closing balance of which has been shown at Rs. 1,06,86,15,255 as on 31.3.2008) have been given or used by the assessee for non-business purposes. He accordingly disallowed a proportionate interest expenses. The Assessing Officer noted that the total interest on advances given free of interest to various parties worked out to Rs. 7,91,18,129. He noted further that the claim of interest expenses at Rs. 3,89,53,657 was less than the amount of Rs. 7,91,18,129 and accordingly the entire amount of Rs. 3,89,53,657 being interest expense was disallowed. The Learned CIT(Appeals) has, however, deleted the disallowance being satisfied with the submissions of the assessee which has been questioned by the Revenue. 49. In support of the ground, the Learned CIT(DR) has placed reliance on the assessment order. He submitted that assessee had taken interest bearing funds but had given interest free advances or on nominal interest rates, which was prejudicial to business interest of the assessee. The Learned CIT(Appeals) has deleted the disallowance made by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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