TaxTMI 
TaxTMI 
2014 (4) TMI 682
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....and Rs. 1,43,43,154/- (for 2007-08) as business income. On the other hand he accepted the gain on of Mutual Funds as short term capital gain/long term capital gains. In the proceedings before AO, in respect of 2006-07 the assessee's contentions were rejected, on the basis that that the assessee was doing frequent transactions for sale and purchase of shares; that on six occasions, the assessee had purchased shares of MIs, Monnet Ispat Ltd and on nine occasions, the assessee had made sales of this scrip, which meant that the sale-purchase was spread over the whole year; similarly, the assessee had purchased of shares of ING Vysya Bank Ltd. on four occasions and had transacted sales on two occasions. Thus, these activities, along with other facts of the case showed that its motive was to earn profit from sale and purchase of shares and not to earn dividends. The AO agreed with the assessee that the gain on Mutual Funds was gain on investment as units could not be purchased-sold in the open market. The gains from the purchase-sale of units of Mutual Funds were accepted by the assessee as income from capital gains, over long term or short term. By the CIT(A)'s order, the AO was directe....
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....nd share clearly showed that the assessee's intention was to trade or conduct business and not to hold the scrips for investment. Had the intention been genuinely to invest in such shares, the assessee would have taken the trouble of keeping a separate investment account. 6. It was argued that the AO's finding of fact that there were 40 transactions of sale and purchase of shares and the duration of holding were as short as 10 days clearly proved that the assessee's intention was to engage itself as trader in the normal line of business activity, and not invest these sums. The assessee was transferring shares from stock-in-trade account to investment account according to its sweet will. During the year 2004-05 relevant to Assessing Year 2005-06, the assessee transferred stockin- trade amounting to Rs. 1,77,540 140 to investment account. This indicated the intention of assessee, that they were only classifying these shares as investment only to avoid tax incidence. It was also contended that the decision in Raja Bahadur Visheshwar Singh v. CIT, (1961) 41 ITR 685 (SC) would apply to the facts of this case, to establish that in fact the use of funds without a clear demarcation, and....
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....and concluded that the shares had been subdivided into separate lots of lesser value; they were acquired the previous year and sold later during the assessment year in question. 9. The main reasoning of the ITAT can be found in the following extract of its impugned order, which earlier recorded the contentions of the parties, analyzed the nature of the transactions, and took note of the case law cited: 26. We are unable to see as to how this decision runs counter tó the case of the assessee. First of all, the substantial nature of transactions has been laid bare by the assessee before the Department right from the word "go", as deliberated upon in the preceding paragraphs. The holding of shares was by way of investment. The activity was in accordance with the main objective of the assessee company. It was duly authorized by the Memorandum and Articles of Association of the assessee company. The shares were purchased out of the assessees own funds and not borrowed funds. The decision of investment of the assessee's shareholder's funds ¡n share/units and Mutual Funds was taken by the management of the assessee company from time to time with the objective of capital....
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....prove that a particular item of receipt is taxable. 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 held by way of investment." In Vijaya Bank Ltd. v. Additional Commissioner of Income-tax, Bangalore, AIR 1991 SC 239 the Supreme Court dealt with a situation where the assessee-bank, had received amounts on securities purchased from another bank company as well as in the open market. The two amounts were brought to tax by the AO overruling the assessee's claim that they were deductible. The High Court, on a reference, observed that the amount spent by the assessee for the purchase of securities were in the nature of capital outlay and they could not be set off as expenditure against income accruing on the securities. In that context, the Supreme Court held as follows: - "In the instant case, the assessee purchased securities. It is contended....
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.... the question whether the excess is an enhancement of the value by realising a security or a gain in an operation of profit-making. The assessee might invest his capital in shares with the intention to resell these if in future their sale brings 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. 12. The Madras High Court in N.S.S. Investments (P) Ltd. (supra) had to deal with the question whether on the facts and in the circumstances of the case, the ITAT erred in holding that the profit on sale of shares was to be treated as capital gains instead of business income. The Court referred to paragraph 15 of the ITAT order and then stated as follows: - "The finding of fact recorded in para 15 of the order of the Tribunal is that the shares in question were never treated by the assessee as stock-in-trade and they were held for earning dividend only. A company can hold some shares as stock-in- trade for the purpose of doing business of buying and sale of such shares, while at the same time it can also hold some other shares as its capital for the purpose of earni....
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....ing whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The Assessing Officers are further advised that no single 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." 15. In 2007-08 the assessee company in its P&L Account, for year ending 31.03.2007, showed profit on sale of investment of Rs. 1,57,29400/-. In its return of income, the assessee has shown long term capital gain of Rs. 1,47,2151/- which was claimed as exempt under Section 10 (38) of the Income Tax Act. The assessee claimed short term capital gain of Rs. 1,43,43,154/- on which tax was been paid under Section 111A of the Income Tax Act, 1961. The AO had raised a query why income from STCG/L TCG should not be treated as business income. The assessee claimed that funds invested in Mutual Funds and Equity Shares on which capital gains have been received were investments and could not be treated as Stock in Trade. The units were not tradab....
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....orized by its Memorandum of Articles of Association. As regards the volume of share transactions, the assessee points out that it had dealt in only nine scripts during the entire year, which included 17 share purchase transactions and 22 sale transactions during the year, totaling to 40 transactions in all during the entire year, i.e., one transaction in 10 days. This was not a very high frequency of transactions. The assessee also received dividend on the shares held by it; and its infrastructure was small, whereas the business activity required a much larger infrastructure. 18. The suspect transaction in question, i.e sale and purchase of Monnet Ispat shares, was gone into in some detail by the Commissioner (Appeals) after which it was concluded that the nature of the transaction was essentially as investment, notwithstanding that the purchase and sale took place in a short duration. The rationale for this appeared to be that the assessee kept a "target" price for the shares, before it. As long as such target was not achieved, the assessee had decided to hold the shares. In this particular instance, the target appeared to have been achieved within one or two months. The follow....