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TMI Blog2007 (12) TMI 261X X X X Extracts X X X X X X X X Extracts X X X X ..... ile purchasing them, to hold them. They were reflected in the balance sheet as investment. The assessee has enjoyed dividend income and declared the same in return of income. The frequency of such purchase or sale in this portfolio is not large enough to doubt that this portfolio is only a device to pay lesser taxes by parking some stock-in-trade in investment portfolio. We notice that in trading portfolio the assessee had purchased during the year shares worth Rs. 21,38,353 and same shares were sold for Rs. 23,89,805. There was neither opening stock nor closing stock. In investment portfolio, opening stock of shares was Rs. 19,22,203 and closing stock was Rs. 46,23,274, whereas sales out of investment portfolio were Rs. 31,80,423. It shows that turnover to stock ratio in investment portfolio is very low as compared to that in trading portfolio. In our considered view the assessee has discharged its primary onus by showing that it is maintaining separate account for two portfolios and there is no intermingling. The onus now shifted on the Revenue to show that apparent is not real. There is no material brought in by the Revenue to show that separate accounts of two portfolios ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding that the assessee's case is covered by the judgment of the Hon'ble Supreme Court in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). 3. Because the learned first appellate authority ought not to have upheld disallowance of Rs. 23,737 out of interest expenses. 4. Because the learned first appellate authority erred in upholding the disallowance of guard expenses of Rs. 19,200. 5. Because the order appealed against is contrary to law, facts and principles of natural justice. 2. The main contention is whether the sum of Rs. 10,71,003 should be treated as business income or capital gains. 3. The facts of the case are that assessee company is dealing in shares. It is claimed that it has dealt in shares both as stock-in-trade as well as investment. It claimed that while dealing in shares as stock-in-trade. it made purchases of shares of Rs. 31,38,352 and sold shares of Rs. 23,89,804. But while dealing in shares as investment, it had shares worth Rs. 19,22,203 as on 31st March, 2003 which arose to Rs. 46,23,274. In between, it had sold those shares as per details on p. 20 of the paper book and earned capital gains of Rs. 10,71,003. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment purposes board permission is required. Copies of board resolutions for the period August, 1999 to July, 2000 have been obtained and are on record. An examination of these reveals that the contention of Authorised Representative is not one invests anything a proper appreciation of facts and requisite authority is required. I am unable to find any such permission/authority in the board resolutions. Nowhere in any of the board resolutions is there any mention of purchasing any of the securities on which LTCG has been claimed. In fact from 1st July, 1999 to July, 2000 in the full year in three board meetings, decision to purchase specific shares is reflected and in none of the board meetings do any of the securities on which capital gain is shown find mention. Yes, some of the board resolutions did authorize certain directors to purchase on behalf of the company. Thus, a decision which the appellant states is an investment decision has not been taken by the board. - This company is in the business of share dealing, which is substantiated by the memorandum of articles and association which find mention in the order. The Authorised Representative also admits that the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CTO. Even CBDT has clarified that investment company can deal in shares both as stock-in-trade as well as in investment. He referred to Circular No. 4 of 2007, dt. 15th June, 2007 [(2007) 210 CTR (St) 29] wherein vide para 10 thereof issue has been clarified. Therefore, according to the learned counsel for the assessee, there is nothing illegal that assessee is purchasing shares for investment purposes as well as dealing in shares as business. According to the learned counsel for the assessee the intention of the assessee company in the present was to hold shares as investment to earn dividend therefrom and sale of them on appreciation of their value. 8. The learned Departmental Representative, on the other hand, submitted that no distinction can be drawn in the present case as to whether assessee is dealing in shares or holding them as investment. Admittedly, assessee is dealing in shares as business and a part of those which are sold later are claimed as investment which in fact are not, as no separate accounts is kept by the assessee for investment as well as trade. Secondly, the learned Departmental Representative submitted that there should be distinctive folio numbers of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or as stock-in-trade, is arbitrary. 11. We, however, do not agree with the Revenue on this point. The details filed before us clearly show that demarcation line is not hazy but well defined. Only those shares in investment folio were sold during this year, which were held by the assessee for the last 2-3 years as evident from p. 2 of the paper book. For example, in IFCI which finds place at serial No. 9 on p. 2, assessee had 10,000 shares which were sold on 16th June, 2003. They were acquired on 14th and 15th Feb., 2000. Thus, they were held for more than 3 years. Shares in Shipping Corporation find place at serial No. 22 of p. 2 of the paper book. Assessee had 15,000 shares in this company and were acquired on 11th July, 2000 and 31st Dec., 2001, Out of it, assessee sold 8,500 shares from 26th Aug., 2003 to 19th Dec., 2003, Thus, these shares were held for more than two years. Shares in MRPL find place at serial No. 15 of p. 2 of the paper book. Assessee had 2,400 such shares which were acquired on 9th June, 1999 and were disposed of on 16th June, 2003. Thus, these shares were held for more than four years. Similar is the position in respect of other shares as per details avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s records as to whether he has maintained any distinction between those shares which are his stock-in-trade and those which are held by way of investment.' 4. In the case of CIT vs. H. Holck Larsen (1986) 58 CTR (SC) 53 : (1986) 160 ITR 67 (SC), the Supreme Court observed: 'The High Court in our opinion made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This is a mixed question of law and fact.' 5. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the AOs. 6. The Authority for Advance Rulings in Fidelity Northstar Fund Ors., In re (2007) 207 CTR (AAR) 297 : (2007) 288 ITR 641 (AAR), referring to the decisions of the Supreme Court in several cases. has culled out the following principles: '(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; (ii) the substantial nature of transactions, the manner of maintaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Development Co. Ltd. 1972 CTR (SC) 239 : (1971) 82 ITR 586 (SC) and the ruling of the Authority in XYZ/ABC, Equity Fund, In re (2001) 167 CTR (AAR) 533 : (2001) 250 ITR 194 (AAR) the Authority noted the following principles: "(i) where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the payer to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; (ii) the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; (iii) ordinarily, the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt." 12.2.2 In this case it is a common ground that the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how the shares were valued/held in the books of account i.e. whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade; where the object of the investment in shares of companies is to derive income by way of dividends. etc., the transactions of purchases and sales o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a business deal may be another. Intention to make a profit normally inspires trade and commerce but it may not be the essence of trade. Likewise, habitual dealing is ordinarily indicative of trade or commerce but is not necessarily so. There may be other legal requisites which may have to be satisfied with reference to the character of, particular transactions in different kinds of trade or businesses. But, whether these legal requisites are satisfied or are present will themselves be a mixed question of law and fact. The character of the motive or intention with reference to a transaction is a matter of inference from the other facts." 12.7 In Dalhousie Investment Trust Co. Ltd. vs. CIT, it was held as under: "The 6,900 shares of McLeod Co. were purchased by the appellant during the years 1948 to 1952, at a time when their market price was continuously falling. In order to make those purchases the appellant had taken loans amounting to Rs. 8 lakhs and the dividend declared on these shares was at a very low rate. The shares were sold during the previous year ending 31st March, 1953, at a considerable profit. The appellant placed no evidence before the Tribunal as to the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from his records as to whether he has maintained any distinction between those shares which were his stock-in-trade and those which are held by way of investment." 12.9 In CIT vs. H. Holck Larsen, it was held as under: "In order to determine whether one was a dealer in shares or an investor, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step the purchase of the shares was not taken as, or in the course of a trading transaction. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these. If all the relevant factors have been taken into consideration and there has been no misapplication of the principles of law, then the conclusion arrived at by the Tribunal cannot be interfered with because the inference is a question of law, if such an inference was a possible one, subject, however, that all the relevant factors have been duly weighed and considered by the Tribunal, the inference reached by the Tribunal should not be interfered with." 12.10 In CIT vs. Sutlej Cotton Mills Supply Agency Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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 particular 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 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 pr purchases are made for retention and appreciation in its value? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the present case we find that the assessee is dealing in shares both as a trader as well as investor. It has kept separate accounts fm both types of dealings. Valuation of holdings has been done at cost (for investment portfolio). At least there is no allegation or material to come to the conclusion that valuation of investment portfolio has been done on cost or net realizable value whichever is low. The shares which are sold out of investment portfolio, this year, were purchased two to three years ago showing that assessee had intention, while purchasing them, to hold them. They were reflected in the balance sheet as investment. The assessee has enjoyed dividend income and declared the same in return of income. The frequency of such purchase or sale in this portfolio is not large enough to doubt that this portfolio is only a device to pay lesser taxes by parking some stock-in-trade in investment portfolio. We notice that in trading portfolio the assessee had purchased during the year shares worth Rs. 21,38,353 and same shares were sold for Rs. 23,89,805. There was neither opening stock nor closing stock. In investment portfolio, opening stock of shares was Rs. 19,22,203 and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney can always be borrowed for investment in business assets. The assessee had purchased the land for expansion of its business. 18. The learned Departmental Representative on the other hand supported the order of authorities below. 19. We have considered the rival submissions and perused the material on record. In our considered view there is no case for sustaining the addition. Once land has been shown as business asset in the balance sheet then it is for the Revenue to bring material on record to show that land was not a business asset but was acquired for non-business considerations. Once it is not proved that apparent is not real, payment of interest on funds borrowed for investing in the land which is apparently for business purposes, the claim of interest, therefore cannot be disallowed. This ground of the assessee is therefore allowed. 20. Ground No. 4 relates to disallowance of expenses on salary of guard amounting to Rs. 19,200. The disallowance has been made by the AO only on the ground that there is no business connection with the expenditure and further that land as such cannot be stolen. The learned CIT(A) has confirmed the addition without assigning any reason. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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