2016 (7) TMI 17
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....4. On perusal of the record, the ld.Commissioenr haboured a belief that action under section 263 of the Income Tax Act deserves to be taken against the assessee. The ld.Commisisoner has observed that besides doing normal business, the assessee was also trading in shares and the AO treated the income arising out of sale of shares as short term capital gain. According to the ld.Commissioner, in view of Explanation below section 73, profit in trading in shares was required to be treated as speculation business, and the profit from such speculation business was required to be assessed at normal rates. Therefore, he issued show cause notice under section 263 of the Act. In response to the notice assessee has contended that the assessee has purchased shares in order to make investment. In the balance sheet these shares were shown as investment and not as stock-in-trade. The shares were purchased from own funds and not from borrowed funds. Number of transaction are very small. In the past and subsequent years, the status of the assessee as investor was never disputed by the AO. The ld.CIT did not accept contention of the assessee. He observed that though the assessee had a turnover of Rs.....
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....holds the shares and it should, in normal circumstance, 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" 3. As is apparent from the Balance Sheet, the assessee company has shown the shares as investments from year to year. The investments are mainly financed from own sources. No borrowing is made for these purposes. The magnitude of transactions are also few. In these circumstances it cannot be said that the assessee was engaged in the business of the share trading or it has ever any intention of share trading. In view of the above facts, it is respectfully submitted that the order passed by the JCIT is neither erroneous nor prejudicial to the interest of revenue and hence the action u/s 263 may kindly be dropped." 6. He further contended that Explanation to section 73 is applicable where there is a loss from share trading. In the case of the assessee there were only profits. It has shown it as long term capital gain and short term capital gain. The short term capital gain shown by the assessee is of Rs. 4,18,596/-, where the long....
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....ther it is treated stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or nontrading asset. (2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purpose of trade and not for investing in an asset for retaining. (3) What is the frequency of such purchase and disposal in that particular item? If purchase and sale are frequent, or there are substantial transaction in that item, if 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). (4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation its value? Former will indicate intention of trades 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 ing....
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.... Sharkar A Kothari reported in 283 ITR 338. Hon'ble court has made reference to the test laid by it in its earlier decision rendered in the case of Pari Mangaldas Girdhardas vs. CIT reported in 1977 CTR 647. These tests read as under: "After analyzing various decisions of the apex court, this court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business. (a) The first test is whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. (b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. (c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was the assessee. Has it been treated as stock-in-trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry,....