TaxTMI 
TaxTMI 
2016 (4) TMI 989
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....appropriate to dispose of them by this common order. 3. First we take quantum appeals i.e. ITA No.3326/Ahd/2009 and ITA No.3440/Ahd/2009. 4. Common issue involved in both the appeals is whether receipts received by the assessee on sale of shares is to be assessed under the head "Short Term Capital Gain" or "Long Term Capital Gain" or under the head "Business Income". 5. Brief facts of the case are that assessee-company was incorporated on 14.7.1997 and it was registered with the Registrar of Companies. It has filed its return of income for the Asstt. Year 2006-07 on 26.12.2006 declaring total income at Rs. 7,68,57,350/- which included profit and gains of business or profession of Rs. 4,05,293/- and short term capital gain of Rs. 7,64,52,057/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) of the Act on 16.11.2007 was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the AO that the assessee has claimed itself as investment in shares and securities, and therefore, on sale of shares it has disclosed short term capital gain. The ld.AO was of the opinion that this claim of the assessee requires to b....
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....ealization and it is stated that the properties such as commodities or manufactured items which are normally subject matter of trading are only exceptionally subject matter of investment. It is stated that in the appellant's case, the matter of realization is shares. Considering the volume involved it cannot be treated as investment. It is stated by him that the shares became commodity for the assessee. He has referred the Gujarat High Court decision in the case of H. Mohamed & Co. vs. CIT 107 ITR 637. It is stated that as observed by the High Court the stock in trade is something in which the trader deals whereas the capital asset is something with which the trader deals. He has also referred to the decision of the Sardar Indrasingh & Sons, 241 ITR 415 and stated that the principle applicable in all such cases was whether sales which produce surplus are so connected with carrying on business of the assessee and in such case it can be said that surplus was profits and gains of business. ii) The second criteria referred to by the A.O. is length of holding/ownership. He has stated that the assessee had sold shares within short time. He has given details of purchase and s....
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.... assessee through Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd., the ld.CIT(A) has upheld the conclusions of the AO to treat the assessee as trader. In this way, the ld.CIT(A) has bifurcated the transactions in two parts. The receipts received on sale of shares purchased from Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. amounting to Rs. 4,16,74,781/- was directed to be examined under the head "profit from business". As far as the balance surplus amount of Rs. 3,47,77,276/- shown by the assessee from sale of shares purchased other than from Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd., was allowed to be treated as investment in the shares. The Revenue is aggrieved with regard to this finding of the CIT(A) in its appeal, whereas, the assessee is aggrieved with regard to first part of the order of the CIT(A). The relevant finding recorded by the CIT(A) on this issue is worth to note. It reads as under: "8. In the light of principles laid down by Hon'ble ITAT, Ahmedabad in the judgement in the case of M/s. Hipolin Ltd., supra, the facts in the present case are required to be examined. In the present ....
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.... be construed as adventure in the nature of trade. In such situation, the surplus of Rs. 4,16,74,781/- has to be taxed as gain from the adventure in the nature of trade and same has to be taxed as business income. The Assessing Officer is directed to tax the gain of Rs. 4,16,74,781/- at the rates applicable in the case of business. 8.2 As regards to balance surplus amount of Rs. 3,47,77,276/-, this surplus has arisen as the appellant company had invested in shares it's own funds. The company is not having any object clause as per the memorandum of association which authorizes it trading in shares. However, the appellant is authorized to invest funds in shares and securities and immovable properties as a supplementary object. It is also noticed that investment in shares is shown by the appellant in the account under the head Investment and not stock in trade. Similar investment in share and purchase and sale of shares was shown in the earlier year as capital gain and was accepted by the Assessing Officer while passing the assessment order on 31-12-2007 u/s. 143(3) of the I.T. Act for the assessment year 2005-06. Thus the appellant's intention of making investment wa....
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....movable and moveable property including lands and buildings, plant and machinery, equipments, ships, aircraft, automobiles, computers and all consumer, commercial and industrial items and to lease them in any manner whatsoever including release thereof, regardless of whether the property purchase and leased be new and or used and from India or from any part of the world. 8. In its incidental or ancillary objects, the assessee was to invest in securities and shares. The ld. counsel for the assessee, while taking us through the clauses from the memorandum of association reproduced in the statement of facts emphasized that the assessee was never allowed to do business in the shares. In the past, it has been treated as investor. As an investor, the shares have been transferred in the name of assessee. It has paid security transaction tax on sale of shares. It has not used borrowed funds. The ld.CIT(A) has accepted the contentions of the assessee, that it was an investor in the past. It has made investment in the present year. Only circumstances, which has been considered by the ld.CIT(A) for creating a distinction between one portfolio of the assessee is that of mode of acquisition ....
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....ding business at National Stock Exchange. He placed on record copy of a letter dated 13.1.2006 written by National Stock Exchange of India Ltd. It is a letter to the members whereby the members were informed that SEBI has debarred Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. to buy and sell or deal in the security market directly or indirect till further directions. The assessee has been prohibited to deal in shares of IDFC Ltd. 10. Before we embark upon an inquiry on the facts of present case so as to find out, whether assessee is to be termed as involving in the trading of shares or is to be treated as a simplicitor investor. We would like to refer certain broad principle culled out by ITAT Lucknow Bench in the case of Sarnath Infrastructure Pvt. Ltd. reported in 120 TTJ 216. These tests read as under:- "13. 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....
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....mere fact of credit of sale proceeds of shares ( or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment. 9. One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made? 10. It is permissible as per CBDT's 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 ....
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....g then an inference can readily be drawn that the activity is in the nature of business. 12. In the light of the above tests, let us examine the facts of the present case. It is not disputed that the assessee has borrowed funds for making investment in shares. In other words, the assessee has its own fund for purchase of shares. No doubt, there is a frequency of transactions during the year, but, such frequency was there in the past also when the assessee was treated as investor by the AO himself. In the present year also, the CIT(A) has accepted the contentions of the assessee with regard to the investment, which were not made through Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. In the accounts, the assessee has accounted investment in shares under the head "investment" and not "stock-in-trade". Similarly, at the end of the year, it has not valued the shares in the manner stock is being valued i.e. at the cost or market price whichever is lower. It has valued at cost. For the Asstt. Year 2005-06, the AO has accepted the assessee as investor and assessed the surplus on sale of shares as capital gain. The assessee had paid security transaction tax. In the....
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.... to business or trade as defined in section 2(13) of the Income Tax Act, then the arguments raised by the ld.counsel for the assessee would not stand. But the AO has neither recorded statement of the assessee nor collected any material which can demonstrate that the assessee has colluded with Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. in a manner that would indicate that shares were acquired for the purpose of trade. Such nexus has not been established. The observation of the CIT(A) is only inferential without any concrete material in the possession of the AO. Therefore, in our opinion, the activity of the assessee by virtue of mode of acquisition of shares cannot be segregated into two parts. The ld.CIT(A) has erred in creating an artificial distinction only on the basis of mode of acquisition. We allow the appeal of the assessee and direct the AO to tax the surplus on sale of shares under the head "short term capital/long term capital instead of "business income" treated by him. Consequently, the appeal of the Revenue is dismissed. IT(SS)A.No.3/Ahd/2012 13. The facts have been discussed in the quantum appeal. The ld.AO has initiated penalty procee....
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..... While giving the effect to the order of CIT(A) the AO computed the income under the Business head at Rs. 416,74,781/-. In my considered view, the issue regarding the treatment of income from sale of shares is a highly debatable issue. In some cases, the income is held to be-assessable under the head of business, income whereas in some other cases it is assessable under the head of capital gains. Therefore, on such debatable issues, penalty under section 271(l)(c) cannot be levied, I therefore direct the AO to delete the penalty on the treatment of the income from the purchase and sale of shares." 15. As far as first issue is concerned, we have already upheld that surplus on sale of shares is to be assessed as short term capital gain. Therefore, there cannot be any question to visit the assessee with penalty. Apart from above, we are of the view that the assessee has disclosed all the facts fully and completely. There is no change in the ultimate taxable income of the assessee. The AO has only changed the head of income, i.e. the assessee has claimed the surplus on sale of shares to be assessed under the head of capital gain. The AO has assessed it under the head "Business Inco....