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TMI Blog2022 (10) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... s a public limited company in the business of granting loans and advances and also dealing in shares and units of mutual funds. The assessee invests in shares with a view to hold them and earn income by way of dividend and receive bonus shares. The investments in shares are out of the own funds of the assessee. The shares which are held as investments are valued at cost and those held as stock-in-trade are valued at cost or market value. Owing to vagaries in the stock market the assessee varies its investment after a relatively short period of holding in order to avoid losing its capital or because of the sudden rise in the share prices making it imprudent to hold on to the shares in the expectation that long term holding may result in better appreciation. 3. During the previous year, relevant to the assessment year under consideration (A.Y. 2005-2006),the assessee earned income from its business of granting loans and also earned income in the purchase and sale of units of mutual funds. The trading transactions in shares resulted in a loss. During the previous year, the assessee received dividend and bonus shares in respect of some of the shares held as investments from the earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment. Further even the holding period of 3 years for long term capital assets was reduced to one year in respect of shares and mutual funds by inserting clause 37 in Section 10 of the Act by Finance No. 2 Act, 2004 with effect from 01.04.2005. Further the tribunal failed to consider that the short term capital gains from shares held as investment could not be assessed as business income merely because the period of holding of the shares in such cases was somewhat short as compared to other investments. Thus, it is submitted that whether the shares were acquired by way of investment or as an adventure in the nature of trade could not be decided only with reference to the period of holding of such shares. Reliance was placed on Circular No. 4 of 2007 dated 15.06.2007 issued by the Central Board of Direct Taxes (CBDT) wherein it was clarified that the question whether shares were capital assets or stock-in-trade could not be decided only with reference to the period of holding and the total effect of several factors had to be considered for the purpose of deciding the question. Further the learned tribunal failed to note that the assessee had maintained separate and distinct acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trade. The learned standing counsel placed reliance on the decision in Commissioner of Income Tax, Bombay Versus H. Holck Larsen (1986) 3 SCC 364 in which various decisions of the Hon'ble Supreme Court including the decision in P.M. Mohammad Meerakhan Versus Commissioner of Income Tax, Kerala, Ernakulam (1969) 2 SCC 25 have been referred. Reliance was also placed on the decision in the case of P.V.S. Raju and P. Rajyalakshmi Versus Additional Commissioner of Income Tax (2012) 340 ITR 75 AP. 7. We have elaborately heard learned counsel for the parties. 8. The CBDT by Circular No. 4 of 2007 dated 15.06.2007 laid down the tests for distinguishing shares held as stock-in-trade and shares held as investment. The CBDT took note of the decision of the Hon'ble Supreme Court in Commissioner of Income Tax, (Central), Calcutta Versus Associated Industrial Development Company Private Limited (1971) 82 ITR 586 (SC), and the decision in H. Holck Larsen and the decision of the Authority for Advance Ruling (AAR), 288 ITR 641-AAR wherein 3 principles have been carved out and dealt with by the AAR. After taking note of the aforementioned decisions, the CBDT emphasized that it is possible for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II in exercise of the power in the memorandum of association/trust deed was as stock-in-trade as the mere existence of the power to purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/held in the books of account, i.e. whether they were valued as stock- in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was from shares dealing etc. In IHP Finvest Limited the court held that where the assessee maintained two separate accounts in respect of its dealings in mutual funds and shares i.e. one in respect of its trading and others in respect of its investment and when there were no allegation of shifting of scrips from trading to investment or vice-versa, the assessee's claim of capital gains on sale of shares held as investment was to be allowed. 10. In Jet Age Securities Private Limited, identical issue arose and this the court after taking note of the decision in Merlin Holding Private Limited, Principal Commissioner of Income Tax, Central - 1, Kolkata Versus Purvanchal Leasing Limited (2022) 287 Taxman 20 (Cal) and the decision in Associated Development Company Private Limited, held that the issue regarding the holding of shares is by way of investment or forming part of stock-in-trade is a matter within the knowledge of the assessee and if he produces proof to show that he had maintained the distinction between the shares which are held as stock-in-trade and which are by way of investment, then the intention of the assessee is a main criteria to be judged. The substantial question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for making profit. It was pointed out that the distinction between the two types of transactions is not always easy to make. Whether the transaction is of one kind or other depends on the question whether the excess is an enhancement of the value by realizing the security or a gain in an operation of profit making. Further it was pointed out that the assessee might invest his capital in shares with the intention to resell these if in future there sale brining in a higher price. Such an investment, though motivated by a possibility of enhanced value, did not necessarily render the investment a transaction in the nature of trade. 11. After noting the above decisions, it was held that the totality of all the facts will have to be borne in mind and the correct legal principles have to be applied. If all the relevant factors have been taken into consideration and there has been no misapplication of the principles of law then the conclusion arrived at by the tribunal cannot be interfered with because the inference is a question of law. 12. The legal principle that is deduceable from the above decisions are that in considering whether a transaction was or was not an adventure in the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l while examining the correctness of the order passed by the CIT(A) grossly erred in not taking note of the entire facts which were placed by the assessee. The facts, in our view was rightly appreciated by the CIT(A) holding that the assessee sold some of its investment and earned long term capital gains and also short term capital gains; the fund deployed in investment of shares was own funds and object of investment was capital appreciation. On going through the details which were segregated by the assessing officer, the CIT(A) held that there was no huge quantities of shares purchased nor there is any repetition of transactions in the same script. Further, the CIT(A) noted that the assessee invested in shares of blue chip companies and no frequent transactions in each scripts took place. Further if in a year, the assessee invested in the scripts of 25 companies it cannot be called frequent trading. Furthermore, the CIT(A) noted that the assessee invested own surplus funds and shares were duly showed as investment in its D-Mat Account and the assessee had also invested in earlier years and received long term investment income which were treated as long term capital gains / short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r from the primary market was immaterial. The assessee acquired the shares with the intention of holding the same as investment and as soon as they found that the shares have appreciated in value, they realized such appreciation by selling such investment. Further the assessee explained that their intention to hold the shares was clearly spelt out by debiting cost of such purchase to the investment account. Further the assessee pointed out that Schedule 11 attached to the profit and loss account and the balance sheet of the relevant years clearly shows the details of profit on sales of investment shares and the assessing officer had failed to take note of the aspect that the Act provides different rate of tax for the capital gains earned by the assessee on the sale of shares held as long term capital asset and short term capital assets. This important factual explanation offered by the assessee was not considered and dealt with by the learned tribunal while reversing the order passed by the CIT(A). 15. Mr. Rai, referred to the decision in P.V.S. Raju and on going through the said decision we find that the same would lend support to the case of the assessee. In any event in the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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