TaxTMI 
TaxTMI 
2009 (9) TMI 950
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....by the Assessing Officer. 3. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer. 4. It is, therefore, prayed that the order of the Ld.CIT(A)may be cancelled and that of the Assessing Officer may be restored to the above effect. (b) In Assessee's Cross objection No.15/Ahd/1998 for A.Y. 2004-05 1. On the facts and in circumstances of the case, the CIT(A) erred in confirming disallowance of interest of Rs. 27,590 pertaining to the advance given to Wonderwave Enterprises (P) Ltd. 2. The respondent craves leave to add, alter, amend and/or withdraw any ground or grounds of cross objections either before or during the course of hearing of the same. 2. The brief facts of the case are that the assessee is engaged in the business of manufacturing of washing powder, detergent cakes, tooth paste, etc. in the name of 'Hipolin'. During the year under consideration, the Assessing Officer found that the assessee claimed interest of Rs. 16.78 lacs as bank charges. The Assessing Officer, further, found that the assessee has shown investment of Rs. 26,71,053/- as on 31/03/2004 as comp....
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.... in order and the same is deleted." 5. The Departmental Representative submitted that the issue is covered by the decision of Special Bench of the ITAT Mumbai in the case of Daga Capital Management Pvt.Ltd. (2009) 312 ITR (AT) 01 (Mum.) (SB) according to which if the assessee is not able to prove that investment in assets giving rise to exempted income is made out of interest-free funds, then proportionate expenses have to be disallowed. 6. On the other hand, the Learned Authorised Representative of the assessee submitted that the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Ltd. 309 ITR 340 (Bom.) has held that it has to be first presumed that the investment were made out of interest-free funds available with the assessee. Therefore, no disallowance is called for. It is an undisputed fact that the assessee has substantiate share capital and reserves. Therefore, it cannot be said that investments in shares were made out of interest-bearing funds. After hearing the parties, we decline to interfere with the order of the Learned CIT(Appeals), which is confirmed. Hence, this ground of Revenue is dismissed. 7. The next issue is regarding treatin....
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....ay be dropped...." 9. The Assessing Officer, however, thought that following five criteria are not met by the assessee. i) Whether the purchases have been made solely with the intention of resale at a profit or for long term appreciation. ii) Whether the scale of activity is substantial. iii) Whether transactions have been entered into continuously and regularly during the assessment year. iv) Whether the object of trading in share is mentioned in Memorandum and Articles of Association of the company. v) Holding period of the securities brought or sold. 10. According to him, the assessee is regularly engaged in the trading of shares and units of mutual funds. The assessee is holding majority of shares for a period of less than a year. The scale of the activity is also substantial. The main business activity of the assessee is manufacturing of detergent cakes. In addition to this, the assessee has been earning profit on trading of the shares or mutual funds. In view of the above facts, the activity of purchase and sale of shares/mutual funds by the assessee is business activity and profit arising from such activity is business in....
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....page No.85 of his paper-book wherein number of sale transactions of shares and number of scripts sold by the assessee are mentioned. For the sake of convenience, the chart shown by the assessee is referred below:- A.O's Observation The appellant had been regularly engaged in the business of purchase and sale of shares Assessee's submission The appellant submits following chart which will explain the fact that assessee is not regularly engaged in business of shares: Particulars Amount of capital gain No.of sale transaction No.of purchase transaction during the year No.of Scripts Income from Long Term capital gain 7,94,797 7 - 4 Income from short term capital gain (shares) 84,239 14 14 10 Income from short term capital gain (mutual fund) 7,01,166 12 12 11 It can be seen from aforesaid details, she has not carried out transactions on day to day basis which can treat it as trader and had it been trader in shares as envisaged by assessing officer, such transactions would have been at each day which is not the case of appellant. Apart from above, appellant state....
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....Sutlej Cotton Mills Supply Agency Ltd. (1975) 100 ITR 706 (SC)." 18. After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes : (1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated 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 particular 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 hol....
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.... Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. (11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. 19. These decision has been followed by the Mumbai Bench in the case of Gopal Purohit v. JCIT [(2009) 29 SOT 117 (Mum)]. 20. CBDT in Circular No.4/2007 dt.15.6.2007 has laid down the principles for holding as to when profits earned from transactions in share should be held as business or should be treated as investment. Circular No. 4/2007, dated June 15, 2007 Sub : Distinction between shares held as stock-in-trade and shares held as investment-Tests for such a distinction. The Income-tax Act, 1961 makes a distinction between a capital asset and a trading asset. 2. Capital asset is defined in section 2(14) of the Act. Long-term capital assets and gains are dealt with under section 2(29A) and sec....
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....e holding would furnish a good guide to determine the nature of transactions ; (iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade ; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. 9. Dealing with the above three principles, the AAR has observed in the case of Fidelity group as under (page 661) : We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII 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 hel....
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....uld warrant interference that it is trader. (2) in the books of accounts the assessees has never treated the shares as stock in trade. Return of income have been filed prior to the search showing them as investments and profit there from as capital gains; (3) the assessees have retained the shares for enjoying appreciation in value and not for the purpose of realization of profit. There is apparently no commercial motive which is an essential ingredient to be a trader. It is clearly shown by them in the returns of income filed that they are enjoying dividend income from holding shares as investment; (4) It is not shown by the Revenue that stock of shares have been valued at cost or market price whichever is low but they have been valued at cost while computing the capital gains; (5) the assessees have apparently discharged the primary onus by keeping record of investment showing holdings only as investment and not stock in trade. The primary onus has not been rebutted by the Revenue. The case of the Revenue is thus based merely on suspicion and on number of transactions carried in one or two years though which are not frequent if we spread them on monthly basis as obser....