AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (12) TMI 1196
X X X X Extracts X X X X
X X X X Extracts X X X X
....(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 proportionate expenses of securities transactions tax as de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iness. 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 of shares. (e) The period of holding was not such which can be said suitable for earning divide....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 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) accepted the contentions of the assessee. On the finding of the Ld.CIT(A) that wherever the holding period of share....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inding 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 valued at cost only. 4. There were no borrowed funds out of which the shares/securities were purchased. The purchases were made out of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 in the nature of trade"." (emphasis supplied) The apex Court in the case of Sutlej Cotton Mills Supply Agency Ltd: 100 ITR 706 (SC) observed as follows: ..... Where t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, 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 ordinary investor realising his holding; but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r 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 company is authorised in MOA/AOA? Whether for trade or for investment? If authorised only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee 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 Income Tax Act itself has provided that when the shares are held for a period of one year or more will be treated as long term capital asset contrary to other assets where the holding period to treat such asset a long term is mo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ority 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 profit/loss is not in dispute. vii. The assessee has earned dividend income of Rs. 10,01,322/-. viii. The assessee has earned capital gain on the basis of period of holding. ix. In view of the unfavourable market conditions, the management of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 income from business.' 8.3. We now consider the findings of the Ld.CIT(Appeals) wherein he has held that the gains received on shares which were held for a period of less than 30 days should be assessed as income from business. The Mumbai H Bench of the Tribunal in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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) failed to appreciate that the AO erred in applying the formula laid down in the said Rule without recording as to why the claim of the assessee that no expenditure was incurred for the dividend income was incorrect. He failed to appreciate that Rule 8D of the Rules was not applicable in the instant case; 4.5. That th....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 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 Haryana High Court in Commissioner of Income Tax, Faridabad vs. M/s Lakhani Marketing Incl,, ITA No. 970/2008, decided on 2.4.2014, made reference to two earlier decisions of the same Court in CIT vs. Hero Cycles Ltd. (2010) 232 ITR 518 and CIT vs. Winsome Textile Industries Ltd.(2009) 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt....