TaxTMI 
TaxTMI 
2012 (5) TMI 310
X X X X Extracts X X X X
X X X X Extracts X X X X
....,59,57,750/- arising out of the sale of shares purchased during the year as Short Term Capital Gain. For the sake of convenience, both these grounds are considered together. 3.1 The brief facts leading to the above grounds are as under:- The assessee is a Private Limited Company engaged in the business of dealing in shares and securities. It filed its return of income on 28.11.2006 declaring total income of Rs. 3,75,31,627/-. During the course of assessment proceedings the AO noted that the assessee has shown Short Term Capital Gain of Rs. 4,04,31,925/- which was adjusted against the brought forward unabsorbed depreciation for the Assessment Year 2001-02 of Rs. 1,07,826/-, for the Assessment Year 2002-03 of Rs. 16,26,261/- and for the Assessment Year 2003-04 of Rs. 11,66,211/-. This resulted into Short Term Capital Gain of Rs. 3,75,31,627/-. Besides this, the assessee treated this Short Term Capital Gain subject to rate of taxation at 10% only. The assessee has also shown Long Term Capital Gain of Rs. 10,14,72,450/- and claimed the same as exempt u/s.10(38) of the I.T. Act. 3.2 The A.O. noted that the assessee was doing trading, speculation, investment and also transaction....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rough whom such investments are arranged. The assessee is having running ledger account in reference to loans and advances to various associates and group concerns which shows huge amount of loan has been taken and repaid for the so called activity of investment without any interest having been paid. These accounts are generally squared up at the end of the year so as to avoid the reflection in the balance sheet as borrowed loans. From the various details furnished by the assessee he noted that the assessee's account with M/s. Subhkam Stocks and shares under the head "advances" shows various entries for such kind of amount being taken and given back totalling to Rs. 8,29,98,509/-, but ultimately showing NIL balance due to squared up of the amount. 4.2 Similarly in the case of M/s. Forties Investment Ltd. The amount involved was Rs. 5,93,76,419/- and in the case of Sweet Solutions Ltd., the amount involved was Rs. 6,69,50,000/-. According to the AO, the frequency and the amount of such borrowing itself shows the intention of the assessee that primarily assessee was doing a business in the trading of shares and securities on day to day basis. 4.3 From the scrip-wise summari....
X X X X Extracts X X X X
X X X X Extracts X X X X
....espect of investment. In respect of trading summary, out of total opening and further purchases of shares in 929133 nos. valued at Rs. 6,70,52,030/-, the shares in 818533 nos. valued at Rs. 8,73,95,478/- were sold resulting into profit of Rs. 2,23,99,855/- and loss of Rs. 13,49,819/- thereby the net profit of trading at Rs. 2,10,50,036/-. The same detail also has speculation income detail which shows that for 606387 nos. of share for the purchase consideration of Rs. 12,90,6l,372/- the assessee squared up and sold the same at Rs. 12,08,84,560/- which has resulted into profit of Rs. 2,63,277/- and loss of Rs. 84,40,090/- ultimately resulting into loss of Rs. 81,76,812/. Two important aspect required consideration here. a. Various scrip in which assessee is trading and also doing speculation activity are featuring in the list of investment also. b. The volume of speculation activity with huge amount clearly shows that assessee is doing trading activity including speculation and whatever residual remains is shifted to investment activity. Any prudent person doing such activity on such a scale with volume can not justify taking a decision after the completion of trans....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e has summarised at para 4.1.9 and which are as under:- "1. The investment activity of the assessee is not an incidental or occasional activity but a simultaneous and continuous activity. 2. The intention of the investment by the assessee is not to hold them for a long term appreciation but to sell them at a profit as evident from the transactions of M/s. Syndicate Bank and M/s. Shoppers Stop Shares shown as investment activity. 3. The assessee is operating on a big scale in the activity of trading, investment, speculation. 4. Assessee's transactions are continuous and regular throughout the previous year. Even Rs. 6,35,715/- the purchases in the same scrip on the same day is divided into speculation and investment. 5. The assessee is making purchases out of borrowing. 6. The assessee's holding period in respect of current investment is not substantial. 7. If the ratio is derived between the sales or purchases, and also to have a percentage number of shares kept as holding then it is evident that the assessee is selling its current investment almost like trading." 5.1 Relying on the decisions of Hon'ble S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sale is carried out on the same day and no delivery is effected. It was submitted that as on 31.03.2006 the unsecured loan at Nil and against the net worth of the company at Rs. 34.24 crores the investment in shares were at Rs. 23.71. This proves beyond doubt that the entire investment was made out of own funds and no borrowing has been done. 8.1 It was claimed that the AO himself was confused about the treatment of delivery based share transaction, as at one place he has accepted the contention of the assessee whereby shares held for more than a year is treated as LTCG and those held for less than a year was taxed as "business". It was further argued that if the same scrip is held for 90 days, it is taxed as "Business" whereas if its is held for 380 days, the same is accepted as Capital Gain. The assessee submitted that in order to decide whether a transaction is Capital Gain or business what is relevant is intention at the time of purchase. It was submitted that the only intention at the time of purchase of shares where delivery has been taken was to hold the same as investment. The intention is proved beyond doubt in the Board resolution dated 25th March, 2005. 8.2 Relying....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Rs. 2,59,57,750/- he noted that the assessee has carried out transactions in 35 scrips. He accepted the claim of the assessee that at the time of purchase, the only intention was to make investment which is evident from the Board resolution dated 25.03.2005. Further, the entire investment has been made out of own funds and no interest bearing fund has been utilized by the assessee. He noted that the A.O. himself has partially agreed with the assessee that profit earned on shares held for more than a year has to be taxed as long term capital gain. According to him, once the intention of the assessee at the time of purchase is accepted as that of investment, it is immaterial whether the assessee holds the same for 90 days or 380 days and it cannot alter the nature of transaction. Relying on various decisions, the ld. CIT(A) directed the A.O. to treat the profit of Rs. 2,59,57,750/- as short term capital gain. 9. Aggrieved with such order of the Ld. CIT(A) the Revenue is in appeal before us. 10. We have considered the rival arguments made by both the sides. At the time of hearing both the sides fairly agreed that the facts of the instant case are identical to the facts of anot....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... asset. 11.2 We find the operative part of the Circular No. 4/2007 dt. 15.6.2007 reads as under: "4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 dated August 31, 1989 had brought to the notice of the assessing officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of assessees as well as for guidance of the assessing officers. 5. In the case of Commissioner of Income Tax (Central), Calcutta vs. Associated Industrial Development Company (P) Ltd (82 ITR 586), the Supreme Court observed that: Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. 11.3 We find the legal principles as laid down by various courts on account of treatment of an income as 'business income' or 'capital gain' can be summarised as under: (a) It is possible for an assessee to be both an investor as well as dealer in shares. (b) Whether a transaction of sale and purchase of shares is a trading or investment transaction is a mixed question of law and fact. (c) Whether a particular holding is by way of investment or of stock in trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares held as investments and those held as stock in trade. (d) The treatment in the books of an assessee is not conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive, then it becomes business profit and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cata do not apply to Income Tax proceedings and every assessment is independent and separate. Further in the preceding A.Y. the assessee was trading in shares and only towards the end of the financial year (25.3.2005) the assessee passed a resolution to treat the delivery based shares as investment. In our opinion, the entire exercise done by the assessee was with a motive to reduce the tax liability which is 10% for STCG and 30% for business income. Therefore not withstanding the fact that the shares were shown as investment in the balance sheet as on 31.3.2005 which were earlier a part of stock in trade, sale of the same, in our opinion, cannot be considered as sale of investment and consequently the profit has to be treated as business income. 11.5 From the various details furnished by the assessee we find it is the computer which decides whether the share is delivery based or non-delivery based and whether it is for trading or investment. Therefore the Board Resolution, in our opinion, looses its significance. The other submission of the ld. counsel for the assessee that no borrowed funds have been utilized and the entire investment is out of own funds is also without ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erefore, the decision in the case of Gopal Purohit (supra) is not applicable to the facts of the present case. The various other decisions relied on by the assessee, in our opinion, are distinguishable and not applicable to the facts of the present case. In this view of the matter we hold that the profit on account of purchase and sale of shares by the assessee in the instant case has to be treated as income from business as held by the A.O. We therefore set aside the order of the ld. CIT(A) and restore the order of A.O. The grounds raised by the Revenue are accordingly allowed." Since the facts in the impugned grounds are identical to the facts in the case of Sweet Solutions Ltd., therefore, following our own order the grounds raised by the Revenue are allowed. 11. Grounds of appeal No. 4(i), (ii) and (iii) by the Revenue are as under:- "4.(i) The CIT(A) erred in deleting the addition of an amount of Rs. 34,08,608/- received as advances from M/s Subhkam Stocks and Shares Ltd. and an amount of Rs. 6,69,50,000/- received as loan from M/s Sweet Solutions Ltd. by way of deemed dividend u/s 2(22)(e) of the I.T. Act, the first amount being the amount of accumulated profit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... compilation). The assessee proposed to acquire Management Control of a listed company in infrastructure sector for which approximate fund requirement is of Rs. 30 crores. Since the assessee was having funds to the extent of Rs. 10 crores, it has entered into an ICD agreement with SSL for an amount of Rs. 15 crores and with that of SSL of Rs. 5 crores. SSSL and SSL has agreed to give ICD of Rs. 5 crores and Rs. 15 crorres respectively for a period of five years on the terms and conditions mentioned therein. On the strength of funds commitment by SSL and SSL, the assessee acquired 9.58% stake in M/s MSK Projects India Ltd. for Rs. 9.80 crores on 29.08.2005. However, the assessee could not acquire Management Control of M/s MSK Projects India Ltd. Since the agreed amount could not be invested and the assessee could not acquire the Management Control, SSL and SSSL has opted to call its ICDs back and the assessee remained with no option but to return the same. It was submitted that transaction with SSL and SSSL is that of Inter Corporate Deposit (ICD) and not the transaction of loans and advances. Since the transaction in question is not that of loans and advances, the provision of deem....