TaxTMI 
TaxTMI 
2015 (12) TMI 1816
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....circumstances of the case, the Learned CIT(Appeals) has erred in holding Rs. 34,61,63,879 to be long term capital gains instead of treating the same as Business income as held by the A.O. ignoring that the nature of trading activities in shares is trading in shares and securities. 3. On the facts and in the circumstances of the case, the Learned CIT(Appeals) has erred in holding that Rs. 9 lacs is not a real income, ignoring the fact that interest income of Rs. 60 lacs had already accrued and accordingly received by the assessee during the year". 3. The assessee on the other hand has questioned First Appellate Order on the following grounds: "1. Because the action is under challenge on facts and law in declining the claim for the investment activity relating to shares treating the same as business income which is not in accordance with the regularly followed method of accounting substantiated by the Audited Financial statement. 2.(i) Because the action is under challenge on facts and law for having treated the gains accrued on disposal of shares investment amounting to Rs. 6,23,34,129 as business income whereas per ....
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.... various scripts is self-explanatory. The Assessing Officer noted that the assessee had shown income from business to the tune of Rs. 1,15,44,84,872.67 and purchase of shares shown as Rs. 1,46,27,37,974.36. It had also shown increase or decrees in stock to the tune of Rs. 30,84,64,940.67 whereas other income was shown at Rs. 53,69,66,060.68. Noting these aspects, the Assessing Officer came to the conclusion that assessee is carrying on business of trading in shares, securities and units. In support, he also noted the frequency of trading in different scripts except Dowar India Ltd.'s shares done on regular basis. The Assessing Officer tried to distinguish the case laws relied upon by the assessee and held that all the alleged long term capital gain of Rs. 34,61,63,879 shown by the assessee in its return of income is business income and taxed the same accordingly. On the submission of the assessee regarding the principles of consistency, the Assessing Officer rejected the same with this finding that each assessment year is a different unit. 7. The Assessing Officer also treated the short term capital gain claimed by the assessee at Rs. 6,71,16,180 as business i....
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.... capital gain and not Revenue receipts. The learned CIT(DR) also referred the decision of Hon'ble Supreme Court in the case of CIT vs. H. Holck Larsen - 160 ITR 67 (S.C) holding that as to whether transactions of sale and purchase of shares were trading transaction or whether these were in the nature of investment is not a question of law but it is a mixed question of law and facts. The learned CIT(DR) referred page No. 18 of the assessment order to support his submissions that there were lot of frequency and volumes of transaction. The assessee had also not paid security transaction tax on the sale of shares. He submitted that before the Assessing Officer, the assessee had not pointed out that it is promoter of Dawar India. The Learned CIT(DR) submitted that finding of the Learned CIT(Appeals) on the payment of security transaction tax (STT) is misleading. He submitted that the assessee had not maintained two portfolios to support its submission that it was trading in shares as well besides making investment in shares. The assessee is in the business of nonbanking finance, hence the shares transaction was part of its business. The Learned CIT(Appeals) on general findings has g....
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....s allowed to be taxed under the head "capital gain". The Learned AR referred computation of income, details of long term capital gain on which STT was paid and benefit under sec. 10(38) of the Income-tax Act, 1961 was claimed, and details of short term capital gain on which STT was paid and benefit under sec. 111A of the Act was claimed, made available in concise form at page Nos. 1 to 11 of the paper book. He submitted that up to assessment year 2004-05, the assessee had been maintaining two portfolios. Since assessment year 2005-06, the assessee is dealing only in investment and major component is shares of Dawar India Ltd. There is no prohibition in law to convert stock in trade to investment account. In this regard, he placed reliance on the decision of Hon'ble High Court of Delhi in the case of CIT vs. Express Security Pvt. Ltd. - 364 ITR 488 (Del.). The Learned AR submitted further that the contents of memorandum cannot be a sole basis but entirety of facts relating to the transaction is to be examined to find out the nature of the transaction as to whether it is investment or trade. The Learned AR submitted that STT was very much paid on the said transaction and re....
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....its books of account, dividend earned on the shares, if any. Rarely will any one factor be conclusive, the purpose of the exercise is to ascertain the true intention through a composite test. In some cases, volume becomes determinative, in others, the duration of times, it is held, at times it can be the manner it is shown in the books, whereas still, the use of borrowed funds could be decisive. 15. The decision relied upon by the Learned AR referred above suggest that the very intention with which the shares have been purchased is the basic test to arrive at a conclusion as to whether the share transaction is investment or trade and this intention can be gathered on the basis of surrounding circumstances including the factors like period of holdings, volume and frequency of transactions in shares. What was the intention of the assessee at the time of purchase of these shares can be found out from the treatment it gives to such purchase in its books of account whether the assessee has borrowed money to purchase and paid interest thereon as normally money is borrowed to purchase goods for the purposes of trade and not for investing in an asset....
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....nd the gain realized was offered under the head LTCG (since the period of holding is more than one year) and claimed exemption u/s.10(38) as detailed vide Annexure-A. 9.3 In addition to the above, the assessee sold shares of various other companies (approximately 170) and offered the gains under the head Short Term Capital Gains (STCG) - since the period of holding is less than one year - and applied special rate of taxation as prescribed u/s. 111A as detailed vide Annexure-B. 10.1 The main contentions of the AO as seen from the assessment order are as under: * One of the main objects of the assessee company is to do business in shares, stocks, debenture stocks, bonds, obligations, units, securities etc as per the Memorandum of the Association of the appellant company. * The assessee carried on the activity of purchase and sale of shares on regular basis. * The volume of purchase and sale of share (volume of business) is huge. * Frequency of transactions is very high except in shares of Dabur India Ltd. * Conduct of the assessee is that of a trader in shares. ....
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....ring above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transactions (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 be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment? Whether shown in opening/closing stock or shown separately as investment or non-trading asset? 2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. 3) What is the frequency of such purchases and disposal in that particulars 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 investment (high tra....
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....as offered to tax under the head "capital gain" by Gyan Enterprises Pvt. Ltd., which is one of the co-promoters of Dawar India Ltd. The Assessing Officer taxed the same as business income against which Gyan Enterprises Pvt. Ltd. preferred first appeal and the Learned CIT(Appeals) accepted the contention of the assessee that the gain should be assessed under the head "capital gain". The said First Appellate Order was upheld by the ITAT vide its order dated 12.1.2004 in ITA No. 2160/Del/1990 for assessment year 1990-91. 18. The details of number of shares of Dabur India Ltd. held by the assessee over a period of time and the transaction/changes are follows: Date as on No. of shares (in lakhs) Remarks 31.03.1996 37.15 No change in holding 31.03.1997 37.51 No change in holding 31.03.1998 37.41 Sold 1000 shares 31.03.1999 37.41 No change in holding 31.03.2000 37.41 No change in holding 31.03.2001 37.41 No change in holding 31.03.2002 37.41 No change in holding 31.03.2003 37.41 No change in holding 31.03.2004 37.41 No change in holding 31.03.2005 374.30 ....
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....d in Schedule F of the Balance Sheet. The aforesaid investments are made upon the decision made by Board of Directors and with clear intention to hold the aforesaid Capital Assets as investment. The intention of the assessee is therefore never to make profit from sales as in the case of trading activities. The intention is to have steady and substantial capital appreciation and earn dividends if any from such investment. 19.4 As regards, trading stock where the assessee intends to make profits, such stock has been disclosed in Schedule I of the Balance sheet showing a closing value of Rs. 30.85 crores on 31 March 2006. The accounting policy for trading of shares is disclosed in Schedule L of the Balance sheet which states that "closing stock of securities is valued at cost of market price which ever is lower. 19.5 Thus, the intention of the assessee is very much clear as to what stocks are to be treated as business stock and what to be treated as investment stock. The Policy and treatment of stock transaction are clearly reflected in the Balance sheet of the assessee. 19.6 We....
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....ee remained that assessee had advanced an amount of Rs. 6 crores to Dawar Foods Ltd. initially at the interest rate of 10%, however, during the year on mutual consents the rate was reduced from 10% to 8.5%. The Assessing Officer had not accepted this explanation of the assessee but the Learned CIT(Appeals) has accepted the same with this finding that it is a settled principle of law that only real income is to be taxed. In this regard, he has followed the ratios laid down in the case of CIT vs. Shoorji Ballabdass & Co., 46 ITR 144 (S.C). We thus do not find reason to interfere with the First Appellate Order in this regard. The same is upheld. The ground No. 3 is accordingly rejected. 23. In result, the appeal preferred by the Revenue is dismissed. 24. The assessee ( ITA No. 2240/Del/2010) on the other hand has basically questioned the First Appellate Order mainly on two grounds. Firstly, upholding of Rs. 6,23,34,129 claimed by the assessee as short term capital gain as business income (Ground Nos. 1 and 2) and secondly disallowance of expenses amounting to Rs. 5,33,768 under sec. 14A of the Act against exempted income (Ground No.3). 25....
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....from shares is treated as short term. A look into the holding period of shares Appendix B would reveal that out of 560 scripts, the transactions pertained only to 60- 65 scripts which were sold in at different times. 409 scripts out of 560 total scripts has a holding period of more than 60 days having a short term capital gain of Rs. 5.13 crores out of Rs. 6.23crores, only Rs. 1.09 crores were earned from 151 scripts having a holding period of 15-60 days barring few which are than 10 days. Thus, the Appellant states that when shares are acquired after paying STT and taking complete delivery of shares keeping a long term in view as 84% of shares are held for more than one year, transacting in some shares in short term to alter its investment vision and goal cannot be considered as an action borne out to do trade. It happens when the vision is long term, some shares thought purchased are dropped out from portfolio either because sufficient funds are not available to make them reach to a level to accumulate capital or because of some other allied reasons. 26.2 It is not the finding of the Assessing Officer or the Learned CIT(Appeals) that these ....
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....ds: 1. Because the action is under challenge on facts and law in declining the claim for the investment activity relating to shares treating the same as business income which is not in accordance with the regularly followed method of accounting substantiated by the Audited Financial statement. 2. Because the action is under challenge on facts and law for having treated the gains accrued on disposal of shares amounting to Rs. 5,83,72,758 as business income whereas per the assessee the same is sort term capital gain chargeable to tax u/s. 111A. 3. Because the action is under challenge having overlooked & ignored the CBDT Circular No. 4/2007 dt. 15.06.2007 in terms of which the gain arising on account of disposal of shares held as investment are liable to be taxed under the head capital gain and the decisions of the CIT(A) in the likely placed other cases. 4) Because the action is under challenge on facts and law having followed the Hon'ble Delhi High Court overlooking the facts of the said case. 5. Because the action is under challenge on facts and law in making proportionate disallowance of Rs. 24,57,661 u/s. 14A. 6. Be....
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....he Revenue and ground Nos. 1 to 4 of the appeal preferred by the assessee both on the issue of validity of the claimed long term and short term capital gain by the assessee on the transaction of shares. 34. Ground Nos. 1 to 3 (Revenue) & Ground Nos. 1 to 4 (assessee): The facts in brief are that the assessee a non-banking financial company registered with RBI as such is one of the promoter company holding controlling interest in Dabur India Ltd. We have discussed the facts in detail about the assessee company, hereinabove, in the appeals for the assessment year 2006-07. The parties have also adopted similar arguments as advanced by them on an identical issues hereinabove in the appeals for the assessment year 2006-07. 35. During the year in the assessments framed under sec. 143(3) of the Income-tax Act, 196, following additions/disallowances were made by the Assessing Officer, some of which were contested before the Learned CIT(Appeals) mentioned therein: S.No. Nature of addition/issue Amount in (Rs.) Grounds of appeal raised 1. Long Term Capital Gain treated as business income. 25,59,09,101 Ground No.2 2. Short Te....
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....mount of Rs. 24,64,46,699 arisen on account of sale of shares of Punjab Tractors Ltd. In Punjab Tractors Ltd., the assessee along with other group companies was enjoying management control. The shares of Punjab Tractors Ltd. along with other group companies were sold to Mohendra & Mohindra Ltd. vide agreement dated 8.3.2007. Though the Learned CIT(Appeals) has allowed the appeal of the assessee, thereby, holding the sale of shares of Punjab Tractors Ltd. as long term capital gain on the basis of period of holding, but the assessee wants to support the First Appellate Order in terms of Rule 27 of the ITAT Rules in relation to the long term capital gain arisen on sale of shares of Punjab Tractors Ltd. on another ground also that the investment in Punjab Tractors Ltd. was made by the assessee in order to enjoy the controlling states in the said company and not to trade in shares. He submitted that profit on sale of shares enjoying managing control is always considered as capital gain and not business income. In support, he referred following decisions cited above in the cases of Accra Investment Pvt. Ltd. vs. ITO (supra), Ram Narain & Sons Pvt. Ltd. (supra) and Raja Bahadur Kama....
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.... in shares and frequency of transactions and the objective of the assessee to trade in shares (as per Memorandum of Association of the company) should be taken into consideration while deciding the issue. 16. Long Term Capital Gain of Rs. 25,59,09,100: From the facts brought on record as mentioned in Para 8 above, it is seen that both shares of MTNL and M/s. Punjab Tractors Ltd. have been shown as investment in the balance sheet as on 31.3.2007 and all the shares were sold and not many transactions are there in these scripts. As on 31.03.2008 no shares of MTNL and M/s. Punjab Tractors Ltd. are held. The said shares were held for considerable long time and shares are being sold when there is appreciation in the market. Similarly shares of ABN Amro Securities purchased in 1998-99 were sold on 14.07.2007 after a period of 7/8 years. In these shares the assessee has not carried out the transactions on regular basis as evident from the number of shares and transactions. In the light of the above facts and legal position, the profit of Rs. 25,59,09,100 realized on sale of shares has been rightly treated by the assessee as long term capital gains to be taxed as special rate....
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....e assessee is of paramount significance and frequency of transaction only would not decide the issue ipso facto. The assessee can hold shares either as investment or stock in trade as clarified in CBDT Circular No. 4 of 2007 dated 15.6.2007. He submitted that the entries in the books of account prove that the shares in question are held as investment. In the case of group companies, the profit on sale of shares was allowed to be taxed under the head "capital gain". He pointed out that in the case of group company, Chaudhary Associates, the Hon'ble jurisdiction High Court of Delhi vide order dated 30.1.2015 in CIT vs. Chaudhary Associates - ITA No. 544/2013 has reverted the order of the ITAT under similar facts of the case that a sum of Rs. 1,19,30,037 held by the ITAT in that case was not business income but the claimed short term capital gain. In that case also the assessee is a non-banking finance company and in the course of its finance activity, it has purchased and sold shares for the sum of Rs. 1,19,30,037 and had claimed the income on that count as short term capital gain. The Assessing Officer rejected the contention holding that the said amount was business income and brou....
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....saction as to whether it is investment or trade. Under similar facts in the assessment year 2006-07 in the appeal for the assessee hereinabove, we have adjudicated upon an identical issue in ground Nos. 1 to 3 hereinabove. Following the same, we hold that the authorities below were not justified in treating the claimed short term capital gain at Rs. 5,83,72,758. We thus while setting aside orders of the authorities below in this regard direct the Assessing Officer to accept the claimed short term capital gain. The ground Nos. 1 to 4 of the appeal preferred by the assessee are accordingly allowed. 48. Ground No.4 (Revenue): The Assessing Officer disallowed interest expenditure of Rs. 3,89,53,657 on the basis that there are interest free advances. He noted that assessee is using interest bearing funds by giving advances to various other group concerns and individuals without charging any interest from them. He noted that loans and advances (closing balance of which has been shown at Rs. 1,06,86,15,255 as on 31.3.2008) have been given or used by the assessee for non-business purposes. He accordingly disallowed a proportionate interest expenses. The Assessing Officer not....