TaxTMI 
TaxTMI 
2004 (12) TMI 624
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.... profit on account of sale of investments amounting to Rs. 3,52,04,028 and declared this as business profit in the return of income filed for the year under consideration. It was further noticed by the Assessing Officer that on perusal of the records of the earlier years it was seen that the assessee has shown the profit/loss on sale of investment under the head "Capital gains". The Assessing Officer was, therefore, of the view that the profit on sale of investments was to be shown under the head "Capital gains". The assessee filed its explanation on 31-3-2003 vide its letter dated 28-3-2003. Before the Assessing Officer, it was submitted by the assessee that prime business of the assessee-company was of investment and the assessee-company is a non-banking finance company and has been dealing in shares and in granting loans and advances since incorporation. It was submitted by the assessee that its intention behind the share transactions was to earn profit and, therefore, the profit derived from such transactions could be assessable as business income. The main thrust of the assessee's argument was that in deciding the question whether the profits on sale of investments are to be t....
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....ll off his investment in the shares and make a huge profit, rather than wait for the year end to claim his dividend. The Assessing Officer admitted that motive of the person is important, but the Assessing Officer cannot get into the mind of the person to judge his motive especially after almost two years of the act having been committed. He further stated that the only way the Assessing Officer can judge the motive of a person would be by seeing how the records have been filed and the treatment given by the assessee to different transactions in its accounts. He further stated that the way in which the assessee presents its accounts and balance-sheet would throw light on the motive of the assessee as to what he had meant a transaction to be. The Assessing Officer, therefore, having taken into account the fact that the assessee had brought forward investment in shares as on 1-4-1999 and the balance amount of the shares at the end of the year was also taken to the balance-sheet and shown as investment and the balance shares of CMS Infotech Ltd. were taken to the balance-sheet and shown as investment, has held that profit on sale of investment is to be treated as capital investment an....
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....v)The company was ventured in the field of Satellite Channel during the year by way of supplying programme software for the channel ATN Bangla and it was only after one year that the company launched its own channel ATN World in June, 2000. (vi)Following decisions were cited to explain that when a company can be stated to be an investment company :- CIT v. Coochbehar Trading Co. (P.) Ltd. [1979] 120 ITR 535 (Cal.); CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377 (SC); Charmugaria Trading Co. Ltd. v. CIT [1977] 110 ITR 715 (Cal.). (vii)It was further clarified that the assessee-company was carried on a systematic or an organized activity of earning profit from investment in shares and in support thereof, the assessee submitted the details of purchase, sales and stock-in-trade/investment of shares during the financial years 1993-94 to 1999-2000. (viii)As per RBI norms, the shares comprised in its investment including shares meant for re-sell are to appear as current investments. (ix)In support of the proposition that description of stock of shares in the balance-sheet as investment is not decisive and conclusive to decide the motive of the assessee, the assessee relied....
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....ourt in the case of CIT v. Aryan Industries (P.) Ltd. [1982] 138 ITR 718 and as well as the case of CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC). (xii)The instances of transactions in the shares of CMS Infotech Ltd. in the light of the resolution taken by the assessee-company was also highlighted to say that the motive of the assessee-company was to earn huge profit in short period and not of making investment in such shares. 5. Having gone through the submission and contentions of the assessee, the ld. CIT(A) decided the issue by concluding as under :- "I have gone through the submission of ld. A/R as well as the assessment order. I find full force in appellant's submission. It is very well evident from the fact of this case that motive of the appellant was to earn huge profit and not the investment. From the facts it is revealed that the appellant-company was regularly dealing in shares since its incorporation. It was earning huge profit/loss from share transaction. Most of the shares, particularly shares of CMS Infotech Ltd., were not bought with an intention to earn dividend but to earn high profit in share transaction. The appellant-company under the co....
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....der the head 'Capital gain'. 8. The ld. counsel for the assessee, on the other hand, has referred to his submissions made before the Assessing Officer as well as before the ld. CIT(A). He has reiterated the contentions and submissions that were made before the Assessing Officer by the assessee in the written submission dated 28-3-2003 as well as made in the written submission filed before the ld. CIT(A). The written submission filed before the Assessing Officer is placed at pages 19 to 23 of the paper book filed by the assessee. The written submission filed by the assessee before the ld. CIT(A) is placed at pages 1 to 18 of the paper book. The assessee has also referred to various decisions that were also referred to by the assessee before the Assessing Officer as well as before the ld. CIT(A). We have taken note of all those contentions and submissions made before the Assessing Officer as well as before the ld. CIT(A). The various contentions and submissions put forward by the assessee before us are on the same line as were made before the Assessing Officer as well as before the ld. CIT(A), and, thus, are not reproduced here, for the sake of brevity, inasmuch as, these are elabor....
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....sis on the nature of the entries appearing in the books of account or in the profit & loss account and balance-sheet submitted by the assessee as the Assessing Officer has been guided by the factor that the shares which were purchased during the year and sold during the year were not routed through profit & loss account but clubbed with investment as at the end of the year, the shares of left with the assessee were taken to the balance-sheet and shown as investment, and none of the shares were shown as business stock in the balance-sheet. It is also stated by the Assessing Officer that the motive of the assessee can only be judged by seeing how the records have been filed and how the treatment has been given by the assessee to different transactions in its accounts. In other words, the motive of the assessee was determined by the Assessing Officer on the basis of the way and manner in which the assessee presented its accounts and balance-sheets before him. To appreciate this aspect of the matter, we may refer to certain decisions as below :- (i)In the case of Investment Ltd. v. CIT [1970] 77 ITR 533 , the Hon'ble Supreme Court has held that no firm conclusion can be drawn from the....
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....aving regard to the ratio laid down in the aforesaid decisions, we are of the considered view that merely because the shares were described in the balance-sheet as investment is not a conclusive and decisive factor to treat the transaction of sale and purchase of shares as an investment as such. Mere describing the shares as investment in the accounts and the balance-sheet is not a decisive and conclusive to determine the nature of the transaction as well as the motive of the assessee as to what he had meant a transaction to be. The dominant or even sole intention to re-sell is a relevant factor and raise a strong presumption, but by itself is no conclusive proof, on the point. Therefore, to find out the real and true motive of the assessee and the nature of the transaction, it is necessary to consider all other aspects of the case instead of merely relying on the way in which the accounts were prepared and presented by the assessee. 13. The word 'business', as defined in section 2(13), includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. These words are of wide import, the underlying idea being of continuous exer....
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.... series of transactions and even a single or isolated transaction may constitute business. 14. In Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC), it was held that "whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment depends on the question whether the excess is an enhancement of the value by realizing a security or a gain in an operation of profit-making. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these". When an owner of an ordinary investment chooses to realise it and obtains a higher price for it than when the originally acquired it, the enhanced price is not a profit assessable to income-tax, but where what is done is not merely a realisation or a change of investment but an act done in what is truly the carrying on of a business, the amount recovered as appreciation will be assessable. In that case, the assessee purchased shares during a period of 10 years from his own funds. He then borrowed substantial amounts for making further purchases of shares and securities. He made profits on selling some shares in the subsequent years....
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....t that the original purchase was made with the intention to resell if an enhanced price could be obtained by itself is not enough, but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. 16. In the case of Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486, the Hon'ble Supreme Court observed that "it is no doubt correct to say that the principal consideration in determining whether income from sale of shares is revenue income or capital gain is to find out what was the purpose of purchase of those shares and, if the purpose was investment, the fact that in varying the investment, the sale of those shares resulted in a profit will not make that profit revenue income. However, this principle is not applicable to cases where it is found that even the initial purchase of shares, by the assessee was not for the purpose of investment; for earning income from dividends, but was with a view to earn profit by resale of those shares". In that case, the appellant was investing its capital in shares and stocks of McLeod & Co., and companies managed by that company. It was changing its investment by sale of....
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....so that the return on this investment, after taking into account the interest paid and super-tax to be paid, came to every small percentage, being less than 1 per cent. This circumstance that the shares were purchased at a time when their prices were falling and the return on investment was not at all substantial while loans had been taken to purchase these shares strongly points to a conclusion that the shares could not have been purchased as an investment to earn income from dividends and that the purchases of these shares were with the object of selling them subsequently at a profit. The shares were, in fact, sold at considerable profit subsequently and that is how the question of charging that profit to tax as revenue receipt has arisen. On these facts, it is not possible to hold that the Tribunal was incorrect in recording its conclusion that the sale of these shares by the assessee was not the result of control of the McLeod & Co. Ltd. passing from the hands of Kanoria Group to the Bajoria Group. In fact, the Kanoria Group was holding a majority of 21,046 shares out of 40,000 shares in McLeod & Co. Ltd. even at the time when these shares were sold on 27th May, 1952. The asse....
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....ns of the company authorising a director of the assessee to purchase and sell these shares; the assessee had included the profit of Rs. 2,13,150 in the profit and loss account without taking it to any reserve account or specifically set it apart for any other purpose, the assessee had purchased the shares from borrowed funds and not with money readily available to it, the assessee did not make the sales on account of any pressing necessity to meet existing liabilities but had in fact kept a part of the sale proceeds as liquid cash in the United Commercial Bank Ltd., the assessee had, in the past, dealt in shares as business transaction and had claimed for the assessment year 1951-52, Rs. 1,29,214 as loss on account of its dealing in shares of M/s. Titaghur Paper Mills Ltd., it also claimed Rs. 6,30,000 as loss on account of devaluation of the shares of M/s. Pilani Investment Corpn. though that was not allowed, there had recently grown a business practice of investing large sums of money in shares in new ventures with an eye on their appreciation for obtaining by sale substantial profits in future". With regard to the line drawn between capital sales and sales producing income as d....
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....issioners of Inland Revenue v. Reinhold [1953] 34 Tax Case 389. The principles underlying the distinction between a capital sale and an adventure in the nature of trade were examined by the Court in G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC), where this Court said that the character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. Ultimately, it is a matter of first impression with the Court whether a particular transaction is in the nature of trade or not. It has been said that a single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of the trade; but mere purchase/sale of shares - if that is all that is involved in the plunge - may fall short of anything in the nature of trade. Whether it is in the nature of trade will depend on the facts and circumstances. Where the purchase of any article or of any capital investment, for instance, shares, is made without the intention to resell at a profit, a resale under changed circumstances would only be a realisation of capital and would no....
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....eads to no conclusion whatever :- 'The Court laid down in G. Venkataswami Naidu & Co. v. Commissioner of Income-tax that the dominant or even sole intention to resell is a relevant factor and raises a strong presumption, but by itself is not conclusive proof, of an adventure in the nature of trade'." The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction. In the light of the principles discussed by the Hon'ble Supreme Court in that case, it was further observed as under :- "The Tribunal relied on the following circumstances for coming to the conclusion. The assessee had been dealing in shares from 1951 to 1953. For the assessment year 1951-52, the assessee claimed a sum of Rs. 1,29,214 which was shown in the profit and loss account and the balance-sheet of the company for the year ending March 31, 1951, as a loss in the dealing of shares of M/s. Titaghur Paper Mills Ltd. This claim was allowed by the Income-tax Officer. According to the Tribunal, this would show that the assessee had been buying and selling shares even though as an isolated adventure in the nature of business. Th....
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....on that the transaction was an adventure in the nature of business. Looking into all the circumstances, the Tribunal negatived the case of the assessee that it had invested its funds with a view to earn dividend." 19. A recent judgment of the Authority for Advanced Rulings in the case of XYZ/ABC, Equity Fund, In re [2001] 250 ITR 194 may be referred to. In that case, the applicant-company was a resident of Mauritius which mobilized investment from different investors and collected a large pool of money and after identifying investment opportunities invested in three Indian companies and one USA company. It utilised the services of an advisor who was also advising other companies. The investment in India was through the custodian which was rendering services in the ordinary course of business to about twenty companies. The Authority ruled, inter alia, that the applicant-company had been formed with the object of carrying on the business of acquiring and investing in and holding securities of all kinds and ultimately selling at a profit. It is with that purpose it had raised capital and acquired money from other sources with which it acquired a large block of shares in Indian ....
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....en the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. 23. Keeping in view the above decisions, we may now refer to the facts of the present case to decide the question as to whether the profit on sale of shares is to be assessed under the head 'Profits and gains of business' or otherwise capital gains. 24. Looking to the facts and materials of the present case, we find that the assessee is an investment company and has been dealing in purchase and sale of shares and engaged in the activity of granting loans and advances since its corporation. It had also raised substantial amounts by way of loans and advances from various sources. It accepted substantial public deposits also. It is admitted position that the amount raised by loans, advances and public deposits were utilised in purchase of shares and in granting loans and advances. Total public deposits, inter-corporate loans and application of fund towards shares and loans and advances from year-to-year are extracted below from the details furnished by the assessee :- Year ended Public deposit outstanding Inter- Corporate Loans Total Sources Stock/ In....
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....ued its business activity in sales and purchase of shares in subsequent years in which the profit from these activities has been disclosed as business profit and has been assessed so. The conduct of the assessee and the pattern of investment in shares of different companies also indicate that the purchase or investment in shares was not to derive income by way of dividend. In furtherance to its object set out its Memorandum of Association, the company decided vide its Board's Resolution dated 29-7-1998 to subscribe to the preferential issue of equity share warrants of CMS Infotech Ltd., a dividend non-paying company of the Infotech sector, and earned a profit of Rs. 3,03,95,500 from the sale of 10,92,100 shares within a span of less than one year from the date of purchase. The dividend earned during the year is of very nominal amount of Rs. 2,20,560 as compared to total holding in shares of Rs. 226,162,283 of about 382 Nos. of companies as at the end of the year. The total profit in the activity of sales of shares earned by the assessee is Rs. 3,52,04,028. The year-wise amount of purchase, sale and closing stock of shares is as under : Financial year Purchase of Shares Sale of S....
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....t (i) the assessee has been engaging itself in systematic and continuous activity of purchase and sale of shares in furtherance to the object in its memorandum of association, (ii) raising substantial loans and public deposits and utilising same in its business activity of purchase and sale of shares and granting loans and advances, (iii) object of purchasing shares being not of earning dividends, (iv) having substantial nature of transactions of purchase and sale of shares and having substantial turnover thereof in furtherance to the primary object in its memorandum of association, (v) giving full effect to its object of sale and purchase of shares in all years since its corporation, (vi) the enormity and frequency of purchases and sales, (vii) disclosing profit from shares as business income in subsequent assessment years 2001-02 to 2003-04 which has not been disturbed or disputed by the revenue and considering the totality of the factors we are persuaded to conclude that the assessee held the shares as business assets and the profits from the purchases and sales of shares are in the nature of business income assessable under the head "Profits and gains of business" under the Inc....
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....3-1994 to 31-3-1997 and thereafter these loans and deposits obtained by the assessee were started to be repaid from time to time. The closing balance at the end of each year on account of public deposit outstanding and inter-corporate loans have already been narrated in para 24 of this order. Having regard to the nature of the assessee's business from very inception and its various activities in furtherance to its object contained in the Memorandum of Association, it is clear that the loans were initially obtained for the purpose of assessee's business and interest paid thereon has been claimed as business expenses and were, accordingly, allowed as deduction in all the years prior to the assessment year under consideration. Provision of section 36(1)(iii) of the Act provides the deduction of the amount of interest paid in respect of capital borrowed for the purpose of the business or profession. Interest on monies borrowed for the purposes of the business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under section 36(1)(iii), all that is necessary is that, firstly, the money, that is capital, must have been borrowed by the asse....
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....is an allowable expenditure under section 36(1)(iii) of the Act, and, accordingly, the order of the ld.CIT(A) in allowing the said interest payment as deductible expenses is upheld. 34. Ground No. 3 is as under :- "That on the facts and in the circumstances of the case, the ld. CIT(A) erred in allowing the addition of Rs. 48,368 under section 40A(3) made by the Assessing Officer." 35. The disallowance of Rs. 48,368 was made by the Assessing Officer under section 40A(3) of the Act by saying that the total amount of Rs. 2,44,889 was paid in cash to CESC Ltd. on account of electricity charges. The assessee's explanation stating that the payment of electricity charges were made to CESC Ltd., in emergency and since the CESC is a well-known company, no disallowance is called for under section 40A(3) was rejected by the Assessing Officer by saying that the assessee-company failed to bring any material evidence in record to show that the payment was coming within the ambit of unavoidable or special circumstances. 36. On an appeal, the ld. CIT(A) decided the issue as under : "The fourth ground of appeal is in connection with disallowance of Rs. 48,378 under section 40A(3) as per Item N....