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TMI Blog2011 (5) TMI 525X X X X Extracts X X X X X X X X Extracts X X X X ..... 19-10-2009 whereby he directed the Assessing Officer to treat the income earned by the assessee from transactions in shares as capital gains. 2. The assessee in the present case is a company which is engaged in the business of Investment Advisory Services and Share Trading. The return of income for the year under consideration was filed by it on 23-11-2006 declaring total income of Rs. 1,99,85,156. During the year under consideration, the assessee had earned a profit of Rs. 7.47 crores on sale of shares and the same was declared as long term capital gains to the extent of Rs. 5.09 crores and short term capital gains to the extent of Rs. 2.38 crores. Keeping in view the volume and frequency of share transactions carried out by the assessee, the Assessing Officer proceeded to examine the issue as regards the head of income under which profit on sale of shares was chargeable to tax in the hands of the assessee. On such examination, he treated, for the following reasons, the profit earned by the assessee on sale of shares as its business income : "(a) That the main activity of the assessee is share trading and the advisory income was earned only from one party namely Indea Capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and investment, its surplus money invested in the shares with listed companies, unlisted companies and mutual funds. (c) That the main activity of the appellant is consultancy services. This fact was mentioned in return of income submitted. All the entries in the books of account support the fact that shares were held as investment. (d) The Assessing Officer has treated that there are 434 transactions resulting in Short Term Capital Gain and 90 transactions resulting in long Term Capital Gain which is incorrect. As per the statement of capital gains there are 164 transactions which resulted in short term capital gain and 55 transactions where resulted in long term capital gain. (e) The average number of days the shares was held in case of short term capital gain was 115 days and in case of long term capital gain was 523 days. (f) The Assessing Officer had stated that dividend earned by the assessee was Rs. 7.80 lakhs out of investment of Rs. 10.30 crores giving yield of 0.78 per cent this is incorrect. The average amount invested in stock was Rs. 3.48 crores of which dividend of Rs. 7.80 lakhs was received which works out to return of 2.24 per cent. All the invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the shares sold by the assessee giving rise to long term capital gains of Rs. 5.09 crores were held by the assessee for an average period of 523 days. He also found that the shares sold by the assessee giving rise to short term capital gains of Rs. 2.38 crores were held by the assessee for an average period of 115 days. He verified the books of account of the assessee and found that the assessee had maintained only one portfolio i.e., investment and all the shares purchased and sold were treated by it as investment. He found that a similar treatment was given by the assessee company right from its incorporation in the year 1994 and the income earned by it from share transactions was always assessed under the head "Capital Gains". He further found that the assessee had never borrowed money for making investments in shares and it was never engaged in intra day trading or trading in futures and options. He also found that substantial investment was made by the assessee in unlisted company and in mutual funds and the ratio between investment and turnover in shares was 1:3. Keeping in view all these findings of fact recorded by him and relying inter alia on the decision of Lucknow Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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 or 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 and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under : "To carry on the business of analysis and research on the financial and other parameters of companies, corporation or undertaking of whatever nature, whether incorporated or otherwise and wheresoever constituted, both listed or unlisted on the stock exchanges of India and abroad, with a view to advise clients as to whether an investment can be made or otherwise in the shares, stocks, units, debentures, debenture-stocks, bonds, mortgages, and securities issued by these companies, corporations or undertakings." The assessee company thus was incorporated to carry on the business of analysis and research on the financial and other parameters of companies, corporations or undertaking with a view to advise clients in taking investment decisions. To carry on the business of trading in shares was not the main object of the assessee company. It was only authorized to make investment in shares as per the incidental or ancilliary objects of the Memorandum of Association. In consonance with these clauses of the Memorandum of Association, only one portfolio i.e., investment was maintained by the assessee in respect of shares in its books of account right from the incorporation in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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