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TMI Blog2014 (1) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... her assessment years excepting the two impugned assessment year - The Assessing Officer apart from pointing out two instances of sale of share within a period of one month from the date of purchase has not been able to bring any material on record to disprove the assessee's claim with any cogent or valid reasons - The Assessing Officer accepts assessee's claim of exemption u/s 10(38) of the Act so far as long term capital gain further weakens the reasoning of the Assessing Officer to treat share transaction as trading activity - The Assessing Officer certainly cannot decide the nature of share transaction either as trading activity or investments solely on the basis of period of holding of the shares - During the interregnum it has parked its surplus by investing in shares for appreciation cannot be ignored - Decided against Revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... nclude an adventure in the nature of trade ii) the purchases are made solely with the intaention of resale at a profit iii) the sale of activity is substantial iv) the transactions were entered into continuously and regularly during the assessment years v) purchases are made out of own funds and share capital contributed by others. vi) full time is devoted for the activity for purchase and sale of share indicating it is the means of livelihood. 5. In view of the aforesaid reasons, the Assessing Officer held that the profit derived on sale of shares has to be treated as business income. For coming to such conclusion, the Assessing Officer also relied upon a decision of M.P. High Court in case of CIT V/s. Motlay Finasncae (P) Ltd., (290 ITR 719) wherein it was held that any income derived from sale/purchase of shares whether quoted in a stock exchange or unquoted had to be held as business income. The Assessing Officer also relied upon a decision in case of M.R.M. Plantation P. Ltd. V/s. CIT (250 ITR 521). Being aggrieved of the assessment order so passed, the assessee preferred an appeal before the CIT (A). 6. During the course of hearing before the CIT(A), the assessee submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t so as to clearly mark the difference and establish the fact for claiming the benefit of special rate of tax. It was submitted that the Assessing Officer having accepted the long term capital gain shown by the assessee should not have considered short term capital gains as business income for levying tax at 30% instead of 10% u/s 111A. It was submitted by the assessee that in the assessment year 2005-06 also the assessee has earned long term capital gain covered by STT of Rs. 22,82,417/- and shown short term capital gains of Rs.6,81,942/-. The assessee has also shown gains not covered by STT of Rs.6,33,507/- and Rs.3989 under long term capital and short term capital gains respectively besides disclosing dividend of Rs.3,81,042/-. It was submitted that the assessee has also declared short term capital gain and dividend for the assessment year 2004-05 also. The CIT (A) after perusing the materials on record in the light of submissions made by the assessee noted that as per the annual report the basic business of the assessee is insurance broking services. On verifying the details of investment made during the financial year 2003-04 and subsequent assessment years, the CIT(A) noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising from sale of share as long term or short term capital gain in its returns. The CIT (A) was of the view that investments of surplus funds in shares, pending approval from IRDA for its regular business activity of insurance broking cannot be termed as trading activity as no prudent business man would like to allow its funds to lie idle being conscious of the fact that an opportunity exists to gain appreciation in its capital till such time the capital is actually employed for its business. Similarly any prudent business man will also liquidate such investments at the most opportune moment, so as to keep its funds ready for employing in its regular business. The CIT (A) therefore held that, under such circumstances even the sale of investments after a short time cannot be considered as a decisive factor to say whether it had acquired the shares as investment or as a part of its business activities. He therefore was of the view that as it was only a mobilisation of capital by the assessee for the regular business of insurance broking which was temporarily deployed in shares, therefore any appreciation arising there from would be in the nature of capital gain. 9. The CIT (A) was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee in his own prudence would have decided that a reasonable appreciation has been achieved. iv) The fact that the assessee had been earning dividend income consistently shows that the purpose of entering into such transactions was not only for appreciation but also earning of dividend. v) It is not a case of purchase and sale of same shares frequently. vi) The assessee had duly taken delivery of shares and paid the full purchase price for the same. vii) The assessee has been from the very beginning shown it as investments only. The CIT (A) further took note of the fact that the Assessing Officer, for the impugned assessment year also had accepted the assessee's claim of exemption u/s 10(38) of the Act in respect of long term capital gain, thereby indicating that the Assessing Officer himself accepts them as investments. 11. Taking into consideration the cumulative effect of the aforesaid facts and applying the ratio laid down in various judicial precedents referred to by him the CIT (A) finally concluded that transactions in shares made by the assessee is not a trading activity but investments only, hence the profit derived on sale of shares have to be treated as short term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in unquoted shares and in mutual funds as could be seen from the Schedules to the Balance Sheets for the several of the years from 2003- 04 to 2012-13 (Pages 62-221 of the PE). vi. The assessee company in the case before the High Court had earned a dividend of Rs. 8,00,00,000/- for the year under appeal i.e. 2006-07 and two succeeding years 2007-08, 2008-09. That company started 'With an initial capital of Rs. 56.23 Crores (Para 2 of the Judgement). In the case here the dividends earned by the company with initial capital of Rs. 50,00,000/- are as follows: Dividend(Rs.) Assessment Year Page of PB 1,49,485 2006-07 168 3,47,597 2007-08 168 4,84,008 2008-09 148 3,09,057 2009-10 142 3,23,892 2010-11 109 For any period of three years the dividend is above Rs.9 lakhs. Seen against the initial capital, this compares favourably with the dividends earned in the case before the High Court. The Hon'ble High Court held that the fact that the assessee is monitoring the stock markets and buying at dips and selling and highs with an intention to make profit from these transactions is not conclusive of the fact that the assessee is a trader because even an investor would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u vs. Addl. CIT (supra) has held that the character of transaction cannot be determined solely on the application of any abstract rule, principle or test. No single criterion is decisive in determining the question whether a particular receipt is capital or revenue. The intention of the party, nature of transaction, and various other factors have to be considered cumulatively to find out whether it is investment or trading activity. Having said so, we will now examine the facts of the assessee's case. Undisputedly the assessee's business activity is Insurance broking service and not dealing in shares. It is also not denied that the assessee has utilised its own surplus funds in investing in shares and no borrowed fund is utilised. From the very beginning the assessee is treating the shares as investments only and declaring income from sale of shares as long/short term capital gains. The department has also accepted the claim of the assessee in all other assessment years excepting the two impugned assessment year. In fact, in the impugned assessment years also the Assessing Officer has accepted a part of the transaction as investments while allowing exemption of long term capital ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n occasion to consider similar issue in case of Spectra Shares and Scrips Pvt. Ltd. Vs. CIT (supra). The Hon'ble High Court after taking note of its earlier decision in case of PVS Raju vs. Addl. CIT (supra) laid down certain tests which could show that the shares are held as investments. The Hon'ble High Court also taking note of Board's Circular No.4 of 2007 dated 15- 6-2007, in para- 47 of the judgment laid down the parameters as under:- "(a) investments are made with own funds and not with borrowed funds. (b) The closing stock was valued in the books of accounts consistently at cost and not at cost or market price whichever is lower. (c) It had earned substantial dividend income. (d) More than 99% of the total gains are long term capital gains and less than 1% is short term capital gain, 40% of the investments are in mutual fund. (e) The assessee never dealt in futures, derivatives and options. (f) All the transactions of purchases and sales were delivery base excepting one solitary instance of Reliance Industries Ltd. (g) The assessee was registered as NBFC with RBI. (h) The assessee never claimed set off of the losses arising from sale of investments against other inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y showing short/long term capital gain in the returns filed from the asst. Year 2004-05 which were also accepted by the department. 18. As can be seen from the above, the assessee fulfils almost all the criteria to treat the shares held by it as investments. A perusal of the assessment order would reveal that, the Assessing Officer apart from pointing out two instances of sale of share within a period of one month from the date of purchase has not been able to bring any material on record to disprove the assessee's claim with any cogent or valid reasons. The fact that the Assessing Officer accepts assessee's claim of exemption u/s 10(38) of the Act so far as long term capital gain further weakens the reasoning of the Assessing Officer to treat share transaction as trading activity. The Assessing Officer certainly cannot decide the nature of share transaction either as trading activity or investments solely on the basis of period of holding of the shares. It has not been disputed that the assessee company was set up with the object of carrying on insurance broking business. It is also a fact that approval from IRDA is pending, for whatever may be the reason. Therefore, assessee's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting assessee's claim short term capital gain are: (a) scale of activity is substantial (b) Assessee made purchase and sale transactions continuously and regularly during the year. (c) Holding period is less. On two occasions shares were sold on the date of purchase. (d) Dividend income earned of Rs.4,84,008/- is not substantial. (e) The buying and selling of shares cannot be termed as an occasional idependent activity but can be considered as a regular business activity. 22. In the appeal proceeding before him, the CIT (A) however did not agree with the finding of the Assessing Officer. As was the case in asst. Year 2006-07, the CIT (A) on considering the submissions of the assessee in the light of the facts and materials on record found that in the impugned year also the assessee has treated dealings in shares and mutual funds as investments only. He further noted that during this year also the assessee had not received the requisite approval. Hence assessee's contention regarding parking of available funds cannot be brushed aside considering the fact that such argument of the assessee in respect of share transactions resulting in long term capital gains has been accepted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has valued the shares at cost only and not at cost or market value, whichever is less", as is done in case of business. The CIT (A) on considering the aforesaid facts and following the ratio laid down in several decisions allowed the appeal of the assessee by accepting assessee's claim of short term capital gain. 24. We have heard the parties and perused the materials on record. On a perusal of the order passed by the CIT (A), we are of the view that the CIT (A) after thoroughly examining all aspects of the matter has arrived at a most reasonable conclusion. From the elaborate discussion made by the CIT (A) it becomes clear that on applying all the tests as laid down by tahe jurisdictional High Court (supra) and considering their cumulative effect, the dealing in shares by assessee cannot be considered to be a trading activity. As against this, the reasons on which the Assessing Officer has considered it to be a trading activity cannot alone be sufficient enough to treat it as trading activity. It is not disputed that the assessee from the very beginning consistently shown it as investment and the department also accepted it. The assessee also has utilised its own funds and no bo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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