TaxTMI 
TaxTMI 
2014 (12) TMI 1196
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.... on 31.3.2008. The return was processed u/s 143(1) of the Act. Later an order u/s 143(3) was passed for both the AYs making certain additions. One of the main issues that arise in this appeal is the action of the AO of treating the gains that arose from the sale and purchase of shares, as business income and not as short term capital gain as declared by the assessee. There are other issues which we would be addressing in due course. 2.1. The First Appellate Authority for the AY 2006-07 granted part relief. Aggrieved both the assessee as well as the Revenue are in appeal. We first take up ITA no.2596/Del/2010 and 3115/Del/2010 for the AY 2006-07. 2.2. The grounds in the Revenue's appeal read as under. "1. On the facts and circumstances of the case and in law, the order of the CIT(A) is wrong, perverse, illegal and against the provisions of law which is liable to be set aside. 2. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in directing the AO to treat Rs. 1,39,41,555/- as short term capital gain, which was held by the AO. 3. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in directing the AO to allow ....
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....essee is not maintaining separate books of accounts for the alleged investments and regular business. No separate bank account is maintained for differcating the alleged investments made and for business activity. The assessee was utilizing the sale proceed of shares alleged to be investment for the business purpose and inter-alia purchasing shares for alleged investment purpose form funds raised for business activity from alleged investments purpose from fund raised for business activity. Under these circumstances it will not be possible to differentiate in investment from business assets. Merely an assumption by the assessee that a particular purchase in investment is not sufficient. If it is allowed then every person shall opt for treating income from trading of shares as capital gain income, where holding is more than a particular period, only because tax on capital gain is either levied lesser rate or Nil rate. (d) The holding period of shares was 10 days to one month. Even the purchase to sale ratio was substantial. None of the share was held for more than one year. This clearly shows that the intention of assessee was not earn dividend but to earn profit on sale/ purchase....
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....pect of sale of shares made within a short period of 30 days of purchase of shares that these shares had also been purchased by the assessee company by way of investment and gain arising on sale of these shares should also be considered as short term capital gain. In my view it would be quite logical to hold that gain arising on sale of shares purchase within the period of 30 days was in the nature of business income and not capital gain. I accordingly, hold that gain of Rs. 36,09,941/- earned by the company on sale of shares within a period of 30 days was in the nature of business income. Accordingly, I accept the contention of the assessee to the extent of short term capital gain of Rs. 1,39,41,555/- and hold that amount of Rs. 36,09,941/- is in the nature of business income. AO is directed to treat Rs. 1,39,41,555/- as short term capital gain and Rs. 36,09,941/- as business income. This ground of appeal is partly allowed." 3.3. Aggrieved both the assessee as well as the Revenue are before us. 4. The Ld.Counsel for the assessee Mr.Ajay Vohra repeated the arguments raised by the assessee before the Ld.CIT(A). He supported the order of the Ld.CIT(A) to the extent the Ld.CIT(A....
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....speculation losses and that a contrary argument is raised that the entire holding of shares is investment. They relied on the finding of the AO. 6. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and perusal of papers on record and orders of the authorities below, case laws cited, we hold as follows. 7. The issue whether a particular transactions results in business income or a capital gain is a question of intention of the assessee and many other factors have to be analysed before coming to a conclusion. No single factor or aspect can be taken as a determining factor. Before we consider the legal propositions, we record the facts of this case for the AY 2006-07 herein below. 1. The assessee objects is to carry on the business as Real Estate Developers. As the company was not able to start its business, investments were made in various shares and securities. 2. The Board of Directors at its meeting on 26.12.2004 and 25.3.2005 resolved to acquire and hold shares out of surplus funds as part of its investment portfolio. 3. The shares and securities acquired are classified as investments in the balance sheet and were....
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....a claim is upheld that would be a factor against the transaction being in the nature of trade ..... The presence of all these relevant factors may help the court to draw an inference that a transaction is in the nature of trade; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction. . .. . .. where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it .... The presence of such an intention is no doubt, a relevant factor and unless it is offset by the presence of other factors, it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said -initial intention, be inclined to hold that the transaction was not an adventure i....
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....of certain elements in the transactions which in law would invest them with the character of trade or business and the question on that account becomes a mixed question of law and fact, the court can review the Tribunal's finding if it has misdirected itself in law. It is fairly clear that where a person in selling his investment realises an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realisation of the investment but an act done for making profits. The distinction between the two types of transactions is not always easy to make. Whether the transaction is of one kind or the other depends on the question whether the excess was an enhancement of the value by realising a security or gain in an operation of profit-making. If the transaction is in the ordinary line of the assessee's business, there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly asssessed to discover whether it was in the nature of trade. The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinar....
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.... 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 holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (iv) Whether purchase and sale is for realising profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (v) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realisable value (whichever is less), it will indicate that items in question are treated as stock in trade. (vi) How the compan....
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....ncome on sale of shares was not business income. In fact, the Tribunal in its impugned order has observed as under.- "9. We have carefully considered the relevant facts and the findings of both the authorities below. The assessee in his individual carries on business of jewellery. Apart from said business, the assessee invested in shares and treats shares as investment in his books of account. This itself manifest the intention of the assessee as to whether he proposed into dealing in shares or earn dividend and profit out of such investment. The Assessing Officer was guided more because of the total amount involved rather than the actual intention and the way of carrying on share transaction. There is no doubt that even a single transaction can be in the nature of trade but the assessee has demonstrated that his. intention was never to trade in shares. The intention is manifested by treatment given to such investment that the investment is out of own fund and not borrowed that the investment is not rotated frequently, that the total number of transactions are very few, that all the shares purchased are not sold and rather held for quite number of days. It is to be noted the Inc....
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....are neither perverse nor contrary to record. Accordingly, we find that no substantial question of law arises in the present appeal." 8.1. The main arguments of the assessee have been summarised by the First Appellate Authority at pages 33 to 35 of his order which is extracted for ready reference. "i. The assessee has been investing surplus funds in shares since AY 2005- 06 and the fact of investment is supported from audited balance sheet for the year ending 31.3.2005. The details of investment are given in respective schedule to the balance sheet. ii. In the preceding year, there were sales of shares and shares were reflected under the head investment in the respective balance sheet. The same was assessed by the AO u/s 143(3) as capital gain only. iii. The entire investment is out of the funds of assessee and there is no case of any loan or use of borrowed funds. iv. The assessee has not paid any interest on such investment. v. All the share transaction where through demat accounts and subjected to security transaction tax (STT). vi. Separate details were maintained and profit and loss account was worked out on the basis of same and correctness such pro....
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....e assessee prior to sale." 8.2. Applying the propositions laid down in the above referred cases to the facts of the present case we have to necessarily hold that the gains derived from the purchase and sale of shares by the assessee is rightly offered to tax under the head capital gains and not business income. The facts show that out of the total short term capital gain of Rs. 1,75,51,496/- the undisputed fact is that an amount of Rs. 1,39,41,555/- was earned on shares which were held by the assessee for more than 30 days. In fact short term capital gain of Rs. 83,56,196/- was earned on shares which were held for more than 4 months. Similarly the assessee earned capital gains of more than Rs. 40 lakhs for shares which were held for more than 5 months. This is not a characteristic of a trader. There are no borrowed funds. The assessee has always classified the purchases as investments in its books of accounts. In the earlier year the assessee has disclosed capital gains and the AO in the order passed u/s 143(3) accepted the same. On this factual matrix we agree with the contentions of the Ld.Counsel for the assessee that the gains in question cannot be assessed under the head....
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....following grounds. "1. That the order of CIT(A)-VIII, N.Del dt. 1.4.2010 is wrong on facts and bad in law; 2. That the CIT(A) erred in holding that the gain of Rs. 2,53,84,621/- out of the total short term capital gain from sale of shares was business profit; 3. That the CIT(A) erred in holding that the gain on a share sold within the period of 30 days of its acquisition was business profit instead of short term capital gain; 4. That the CIT(A) erred in confirming the disallowance of expenditure of Rs. 2,57,283/- u/s 14A of the Act by applying Rule 8D of the Rules; 4.1. That the CIT(A) failed to appreciate that no expenditure was incurred for the dividend income earned and as such no expenditure was to be deducted under the said provisions; 4.2. That the CIT(A) failed to appreciate that the entire expenditure was incurred by the assessee for the purpose of its business. 4.3. That the CIT(A) erred in holding that Rule 8D of the Rules was applicable with retrospective effect and as such was applicable in the AY under reference. The disallowance u/s 14A of the Act was to be calculated by applying the formula laid down in the said rule; 4.4. That the CIT(A) fail....
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....to the factual position of the P.Y. we allow these grounds of the assessee for the same reasons that were cited by us while disposing of the case for the AY 2006-07. 13. Ground no.4 is on the issue of disallowance u/s 14A. The Ld.CIT(A) applied the decision of the Mumbai ITAT in Daga Capital Management Pvt.Ltd. and confirmed the disallowance. The Ld.Counsel for the assessee submits that the entire expenditure has been disallowed in this year. 13.1. The Jurisdictional High Court in the case of M/s Holcim India P.Ltd. in ITA no.486/2014 and ITA no.299/2014 vide judgement dated 05th September,2014, held that Sec.14A cannot be invoked when there is no income earned by the assessee which is not part of total income. The Hon'ble Jurisdictional Court at para nos. 14, 15 and 16 held as follows. "14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Har....
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....bility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend mayor may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax. 16. What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the AO and has also not been doubted by the CIT(A)." 13.2. Respectfully following the same, we set aside this issue to the file of AO for fresh adjudication in accordance with law as the facts are no....