AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (3) TMI 1310
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....ances of the case, CIT(A) was justified in treating Rs. 5,27,93,412/- as income from capital gain as against business income treated by AO when the sole intention of the assessee was to earn profit?" 2. The brief facts of the case are that the assessee firm is engaged in the business of shares, securities and mutual funds and apart from business income, the assessee had also declared income from capital gain in the return of income. The A.O. during assessment proceedings observed that as per tax audit report, the assessee was into the business of trading in shares and securities and, therefore, after relying in a number of case laws, the A.O. held that income declared as capital gain to be as income from business. The A.O. further observed that the assessee had not claimed any expenses for earning of income therefore he estimated an amount of Rs. 12 lacs as estimated expenses and made the addition of such amount u/s69C of the Act. The relevant portion of the assessment order for making these additions is reproduced below: "3.2. During the course of assessment proceedings, it was seen that the partnership firm comprises of eight corporate assessees as partners and they have contr....
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.... 10(38) of the Income Tax Act, 1961 is more than one year. Dates of acquisition of these shares is' from December, 2006 to March, 2007 and the dates of sale is between January to March, 2008. Under the Income Tax Act, 1961, if the shares are held for more than 12 months period they are to be treated as long term assets. As such profit on sale of these shares cannot be treated as business income. Even in respect of short term capital gains the period of holding of the shares ranges from two to six months and sometimes even more. Therefore, profit on realization of these shares else cannot be treated. as business income. It is further submitted that in most of the cases the shares sold have been received as capital contribution from the partners. Accordingly, these shares have to be treated as investment only. Besides, the shares sold out of opening stock were held as investment, which is clear from the balance sheet as on 31-03-2007. Accordingly, profits arising from sale of these shares cannot be treated as business income." 3.8 The assessee firm was created on 13-12-2006 with all its partners being investment companies. The partnership deed was registered on 05-01-2007. H....
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....s which has been changed to profit on sale of investments during the current year which goes to show that the basic activity is in trading of shares and mutual funds. Hence, the shares/mutual funds were not investment as on 01-04-2008 but rather "Stock in Trade" as they have been sold during the year for earning profit. 3.14 The assessee's submission that the shares and mutual funds are reflected as investment does not hold true as they are basically the partners capital in the firm in the shape of shares and mutual funds instead of cash' capital. The partner companies themselves are trading in shares and mutual funds and hence this colourful device has been used to evade tax liability of the partner companies. 3.15 The assessee firm has in its computation of income first declared its profit & loss a/c and has also got completed its tax audit report under section 44AB which is required for every person "carrying on business". The requirement of audit u/s 44AB is only if the total turnover of the business exceeds Rs. 40 lacs and is reflected in the Profit & Loss account. The assessee has apparently got the audit done to avoid the Penal Provisions on the Income Tax Act, 1....
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....tal gain. Accordingly, I hold the capital gains of the assessee firm as income from business and accordingly assess the same at Rs. 5,27,93,412/-. 7. Consequently, I am satisfied that the assessee has willfully furnished inaccurate particulars of its income within the meaning of section 271 (1 )(c) of the Income Tax Act, 1961 and thereby has suppressed its taxable income. Therefore, penalty proceedings u/s 271 (1 )(c) of the Income Tax Act, 1961 have been initiated separately. 8. Further, as discussed above, as the firm has not claimed any expense on earning of this income running into crores and considering the minimum required set up for conducting day-to-day business activity, I estimate an expense of Rs. 12 lacs (estimated of Rs. 1 lac per month) having been incurred for this purpose u/s 69C of the Income Tax Act, 1961 as being a most reasonable estimate considering the facts discussed above in para 3.12." 3. Aggrieved, the assessee field appeal before Ld. CIT(A) and submitted various submissions and placed reliance on various case laws for the proposition that the income earned by assessee was not a business income but was capital gain. Ld. CIT(A) after going through the su....
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....cts and circumstances of the case as narrated hereinabove, viewing the matter in totality no inference other than one that the assessee has earned capital gains in its Investment Portfolio as declared by it in the computation of income can be drawn. 17. Assessing Officer's allegation that the entire activities of the Company is a colourable device, is without any basis as in any case the applicable tax rates to partnership firm and to the partners who are corporate entities is one and the same. 18. Reliance of the Assessing Officer on Me Dowell & Co. vs. CTO (supra) is of no relevance in view of the decision of the Supreme Court in Union of India vs. Azadi Bachao Andolan & Others (2003) 263 ITR 706 (SC), wherein the court held that an act, which is otherwise valid in law, cannot be treated as non-est, merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest as per perception of the revenue. When the principles laid down in this case are applied to the facts of the present case, where capital is contributed by its partners in the form of shares and securities which were held by the firm for a period o....
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.... as remaining income was on account of dividend which is exempt under the provisions of Act. Explaining the facts of the case Ld. A.R. submitted that assessee is a partnership firm consisting of corporate partners and it was formed in March 2006 and was reconstituted in December 2006. It was submitted that partners had contributed towards capital of assessee firm in the form of shares and no cash was introduced. It was submitted that assessee during the year had sold investments and had not dealt into trading of shares. Our attention was invited to paper book page 13 where the investment in shares were classified under the head 'investment'. Our attention was also invited to paper book pages 24-36 where a chart showing script wise details of purchases and sales of various shares along with number of days of holding was placed. Ld. A.R. submitted that from item Sl. No.1 to 282, the scripts mentioned were held for a period exceeding 365 days and, therefore, they were claimed as long term capital gain and for Scripts mentioned at Sl. No. 283 onwards, were held for less than 365 days and income from them was claimed to be as short term capital gain. Ld. A.R. invited our attention to re....