TaxTMI 
TaxTMI 
2020 (1) TMI 290
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....IT(A) ought not to have upheld the impugned disallowance of Rs. 1,53,828 as there is no expenditure incurred in relation to earning the income not forming part of the total income and as such, no disallowance can be made under section 14 A. 2. The CIT(A) erred in upholding the action of the Assessing Officer in treating short-term capital gains of Rs. 53,27,430 as a business income. The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in considering the capital gains arising on sale of short-term capital assets as business income. 3. The Assessing Officer erred in charging interest under sections 234B and 234C of the Act. The appellants contend that the Assessing Officer ought not to have charged interest under sections 234B inasmuch as the appellants, in terms of section 208, were not liable to pay advance tax. The Grounds raised by Revenue read as under: - 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of expenditure made u/s.14A to Rs. 1,53,828/- against ....
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....ncome u/s 10(34) for Rs. 15.38 Lacs which led Ld.AO to compute disallowance u/s 14A. The assessee was asked to file the relevant details and show-caused as to why interest as well as other expenditure should not be disallowed u/s 14A. In defense, the assessee submitted that it had already ignored claim of expenditure of Rs. 4.46 Lacs as against Rs. 3.79 Lacs worked out as per Rule 8D and therefore, further disallowance would not be warranted. However, not satisfied, Ld. AO worked out aggregate disallowance of Rs. 8.72 Lacs in terms of Rule 8D, which comprised-off of interest disallowance u/r 8D(2)(ii) for Rs. 4.92 Lacs and expense disallowance u/r 8D(2)(iii) for Rs. 3.79 Lacs. Since total expenditure debited to Profit & Loss Account was Rs. 7.93 Lacs, the aforesaid disallowance was restricted to Rs. 7.93 Lacs. 3.2 The learned first appellate authority, while confirming the stand of Ld. AO in invoking the provisions of Section 14A, directed Ld. AO to restrict the disallowance to 10% of exempt income and deleted the balance disallowance of Rs. 6.39 Lacs. The same has given rise to one of the grounds of cross-appeals. 3.3 Upon due consideration, we find that as per settled legal....
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....rofit motive. This act of shows that the transactions were entered into with the intention to do business. It cannot be said that these transactions were entered into only for the purpose of Investment and there was no motive to earn profit. Though, the word business has not been defined in the taxing statute, yet it postulates the existence of certain elements in the activity of the assessee which would invest it with the character of the business. According to well-established interpretation of word 'business' as found in taxing statutes it is the sense of an occupation or profession which occupies the time, attention and labour of a person normally with the object of making profit. To record an activity as business there must be of course dealings either actually continued or contemplated to be continued with a profit motive. Whether or not a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and transaction must ordinarily be entered into with a profit motive. Such motive must pervade the whole series of transactions effected by the person in the course o....
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....year 2008-09, copy placed at pages 356 -377 r.w. pages 358 of Paper Book, assessee disclosed capital gain and same was allowed by the department. The Hon'ble Jurisdictional High Court in the case of Smt. Prabhavati S. Shah v. CIT (supra) has held that the Appellate authority should not refuse to make enquiry in the case where facts and circumstances so demand. We observe that documents proposed to be filed by assessee are relevant and necessary to be considered to decide the issue as to whether shares were held by assessee as investment or stock-in-trade. It is relevant to state that Hon'ble Apex Court has held in the case of CIT Vs Prabhu Dayal 82 ITR 804 that question as to whether receipt is a capital receipt of income, has to be judged from the facts of each case and question of law can be drawn such facts. The Hon'ble Apex Court in the case of CIT Vs. H. Holck Larsen 160 ITR 67 also held that whether transaction of sale and purchase of share is a trading transaction or in the nature of investment, is a mixed question of law and facts. Therefore, to decide the question as to whether assessee has to be treated as investor in share or a trader or shares is to be considered, consi....
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....ng such evidences as may be filed before him in accordance with law. Hence, ground No. 3 of the appeal taken by assessee is allowed for statistical purposes It is evident from the aforesaid directions that the matter of assessment of Long-Term Capital Gains as well as Short-Term Capital Gains was setaside for fresh adjudication in the light of additional evidences submitted by the assessee. 4.3 Pursuant to aforesaid directions, Ld. CIT(A) re-examined the claim in the light of additional evidences furnished by the assessee which were already filed before Ld.AO during remand proceedings in the first round of appeal. With respect to Long-term capital gains, the assessee submitted that the shares of two entities under consideration were held since financial year (FY) 2002-03 & 2003-04 with an intention to earn dividend income. There was no regular sale or purchase of shares of these entities and the investment were long term investment which was evident form the fact that the assessee never made provision for diminution in the value of shares in the books of accounts. Further, the shares were reflected as long-term nontrade investments in the Balance Sheet. In support of the said....
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....od in order to reshuffle portfolio when a particular share is not doing well. Merely because the assessee liquidates its investment after a short period of holding, it should not lead to a conclusion that the intention was to trade. Large volume of purchase and sale of shares does not per-se means business activity. The volume and frequency cannot be sole criteria to arrive at the conclusion that the assessee is into trading. A prudent Investor always keeps a watch on the market trends. Thus, the intention can be proved only by way of conduct of the appellant after the purchase. The conduct of the appellant in the present case shows that the intention was to hold the shares for long before disposing off the same which is, discussed in the coming paras. 10.13 The main dispute in this case related to treatment involving 2 scrips viz. M/s.Ruchi Soya and M/s.Ruchi Infra. Page 39 and 40 of the paper book shows the detail of purchase and sale of these 2 scrips Ruchi soya and Ruchi infra during this assessment year. Table containing the details filed by the appellant is enclosed to this order (Enclosure 'A'). A careful analysis of the table reveals the following facts: ....
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....e appellant maintains it's D-Mat account with Axis Bank. When the dealings are through D-mat a/c the natural corollary is that the shares purchased first are sold first and effectively the FIFO method comes in to play/Hence the method adopted by the appellant is found acceptable It is worth to mention here the circular No.786 dtd.24.06.1998 issued by the CBDT in this regard. I find the method followed by the appellant is in consonance with the Board Circular. 10.16 Similar details with regard to purchase and sale of these two scrips during AY 2005-06 are available in page 38 of the paper book. A chart prepared indicating the date wise transaction was also furnished which is available in page 353 of the paper book. The scrutiny reveals the following: Ruchi soya sales month wise during FY 2004-05: July 100 September 35,235 October 171 December 10,656 January 6,630 February 2,400 March 63,700 1,18,882 The appellant had identified the date of purchase of the scrip also. The details are as under: Date Quantity 08/05/2002 3623 13/05/2002 688 31/03/2003 79,246 23/09/2003 35,....
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....ding the true nature of transactions but none of these factors is conclusive. The intention at the time of purchases is the most important factor but such intention has .to be gathered from subsequent conduct of the assessee in dealing with these shares, and not from the entry in the books of accounts. An investor purchases a share with a view to earning income in the form of dividend and for appreciation In value over a long period of time and is not motivated to sell shares on each and every rise in the value of shares which are in fad the attributes of a trader. In the present case the assessee has been frequently purchasing and selling shares and the sales in all cases have been made after holding the shares for less than 3 months and the overall profit earned has also been small clearly suggesting that the assessee had been selling the shares motivated by profit. Even an investor sometimes may sell shares after holding for a short period in order to reshuffle the portfolio when a particular share is not doing well or in case of exceptional appreciation. Such selling after short holding has to be explained. In this case the assessee has not explained why it has been selling the....
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....lant shows that the intention at the time of purchase was to hold it for long as investment and as discussed above the subsequent behavior also did not show any attribute of a trader. 10.21 The appellant had submitted the assessment orders for 2005-06 and 2008-09 as a part of the paper book to show that consistently the claim of Long Term capital gain on sale of shares had been accepted by the Department after a thorough scrutiny u/s143(3).Copies of the order is available in pages 195 to 198 and 356 to 357 of the paper book. I have perused the copy of the order for AY 2005-06, the AO had accepted the claim of LTCG which he had discussed in para 3 of the order. The very same AO had passed the order for the current year. When the same Assessing Officer had accepted these shares as investment in earlier years, he cannot suddenly change the treatment and consider the profit arising out of the transaction as business activity during this year. Thus the appellant had consistently declared the gain arising out of sale of share as Long and short term capital gain which was accepted by the Assessing Officer u/s 143(3). Though the rule res-judicata is not applicable to I.T. proceedi....
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.... assessee that perhaps these particulars were wrongly carried out on behalf of the assessee by the broker that's why assessee got them settled on (he same day and has not contested these two transactions. Assessee has also not borrowed any money and he already occupied full time business for garments through the firm M/s. Zen Clothing. He further finds that in identical circumstances, in the case of sister, the Tribunal had held as under: 11. "We have carefully considered the facts and the rival contentions. It seems to us that on the facts of the case it is difficult to hold that the assessee was carrying on a business in shares, with the shares as her stock-in-trade. As already noted, the assessee's background does not indicate that she was familiar with the share business. She was a working partner in a partnership firm which was engaged in the garment business and was a Director in a company which was also engaged in a similar business. It would appear therefore that she hardly had any knowledge about the nuances of share trading. She also did not borrow any monies for the purpose of acquiring the shares and this fact is not disputed on behalf of the Revenue. T....
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....f shares of several blue chip companies besides 'the aforesaid companies. The assessee has not indulged in any dealings, in futures and options and the instances of share transactions involving no delivery are only two and the loss therein was only Rs. 474/-. The AO appears to have been influenced more by the frequency of the transactions and he has cited the brokers' contract notes which show a number of orders placed for purchase of the shares on the same day at different rates. We have already referred to the argument of the learned representative for the assessee as to how the contract notes are issued by the share broker. He has also referred to pages 74 to 79 of the Paper Book which contains the contract notes issued by Falcon Brokerage Pvt. Ltd. on 1st February 2005. Though there are several orders for purchase of the shares of Man Industries Ltd. on the same day, the assessee appears to have intended to acquire 25000 shades in this company and the contract note merely exhibited the different times on the same day at which the broker acquired the shares in the Stock Exchange at different rates. Ultimately the broker had acquired 25000 shares of the company on behalf ....
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.... as short term capital gains. In addition to the same we find that the attempt of the CIT to assess the long term capital gains for the same year as business profits under section 263 of the Act, on the footing that the assessee is a regular trader in shares and securities was ultimately dropped by order dated 19.03.2010. In the notice issued on 26.11.2009, the CIT expressed the view that if the assessee is to be treated as a regular trader in shares and securities, the holding period of the shares does not alter the character of the income. In our opinion, the approach of the CIT, with respect, reflects the correct approach to be adopted in such cases and it is of fundamental importance to first ascertain whether the assessee is a dealer in shares or investor in shares. The character or the head of income under which the surplus is to be assessed for purposes of the Income Tax Act gets determined by the answer to this fundamental question. As we have already noted there are no strong materials to hold that the assessee traded in shares, whereas there is sufficient material to hold that she invested in shares as investor and never intended to carry on a business in shares. ....
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.... (viii) Shares in opening balance were only sold during the year. (ix) Interest bearing borrowed funds were not utilised by the appellant towards the investment in shares. Thus there are no strong materials to hold that the appellant is in to trading of shares, whereas there are overwhelming materials to hold that it had invested in shares as investor and never intended to carry on a business in shares. In view of the above discussion, I am of the firm view that the gain arising out of these 2 scrips constitute Long Term Capital Gain, and not business income as held by the AC. This ground of appeal is allowed. 4.6 However, the assessee's plea that short-term capital gains were wrongly treated as business income could not find favor with Ld. CIT(A). The factual findings of Ld. CIT(A), with respect to treatment of Short-term capital gains as business income were as follows: - 12. Additional Grounds Raised : The appellant had filed additional grounds vide letter dated 24.11.2009 before the CIT(A). However, he failed to adjudicate the above grounds connected to treating the Short Term Capital Gain on sale of shares as Business Income. The appellan....
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.... adding a column to the details already filed in page 45 and 46 of the paper-book which was filed on 11.07.2013. The perusal clearly shows that the period of holding ranges from 1 to 9 days in respect of the following scrips :- Sr. No. Name of the Scrip Period of holding 1. Bayer Crop 1 day 2. DCM Ltd. 9 days 3. HPCL 3 days 4. IPCL 4 days 5. Kanishk Steel 6 days 6. Polaris 1 day 7. Punjab Chemicals 6 days 8. Sun Pharma 8 days 9. Satavana 4 days 10. Few transactions connected to Ramco System 2 to 3 days With regard to the following scrips, the period of holding was between 10 to 45 days :- Sr. No. Name of the Scrip Period of holding 1. Bank of Rajasthan 13 to 18 days 2. IDBI Ltd. 10 days 3. Kanishk Steel 13 days 4. Bayer Crop 10 days 5. Portion of shares of Morarjee Textile 10 days 6. MPhasis BFL Soft 12 days 7. National Steel 19 days 6. Rain Commod 14 days 9. McdoweII 42 to 45 days 10. Surya Pharma 10 to 14 days 11. Ucal Fuel Systems 11 days 12, Zenith Computers ....