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TMI Blog2014 (4) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... t price was achieved in the short run, the shares were to be sold in the market - It was depending on the funds available, that the management of the assessee company decided which shares were to be acquired - The investment was shown as such in the balance sheet of the assessee company, under Schedule Ill of the audited accounts. Relying upon Commissioner of Income Tax, U.P v. Madan Gopal Radhey Lal [1968 (9) TMI 14 - SUPREME Court] - For 2006-07 the total share consideration was ₹ 3.4 crores, as against ₹ 4.58 for the previous year - the assessee had its own funds to the tune of ₹ 7.31 crores, in the form of shareholder’s funds - Further, dividend income to the extent of ₹ 1.12 crore was also earned - The Commissioner found that during the year, there was no transfer from stock in trade to investment account and that the transfers had been accepted during the year 2005-06 - the income derived from sale of shares was, for 2006-07, not business income but capital gains - For AY 2007-08, the Appellate Commissioner’s evaluation of facts was based on an overall consideration of all the circumstances – Relying upon Commissioner Of Income-Tax, Bombay Versus H. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treat the income of Rs. 35,75,908/- as short term capital gain instead of business income, as done by the AO. 3. For 2007-08, it had been contended that the funds invested in MFs were investments, and not stock in trade, and that they were not tradable in the stock exchange but had to be redeemed. Thus, the profits were not business profits. The sum of Rs. 12,70,710/- was LTCG and Rs.34,56,000/- was STCG. It was also contended that the assessee had invested in only 9 scrips during the year and a total purchase/sale of Rs. 3 crore was made. Reliance was placed on the fact that in the preceding year, 2005-06, similar treatment was accepted. The net owned funds of the assessee were Rs. 7.32 crore. It was contended that in Schedule III to the audited accounts, the company had disclosed the investment: of Rs.4.58 crores, Rs. 2.5 crores were kept in investment, in terms of the company's Board resolutions. The AO, however, directed that the amounts be treated as business income in the assessee s hands. The latter, therefore, appealed to the Commissioner (Appeals). That appeal succeeded. 4. Since the revenue lost both appeals for AY 2006-7 and 2007-08 before the Appellate Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer from stock in trade account revealed that the assessee s intention was to trade in the shares. Relying on Commissioner of Income Tax v. NSS Investments Ltd, 2007 (277) ITR 149 (Mad) it was contended that the objects of the assessee company were to trade in shares. Since it held the shares which were sold, in question, as stock in trade, it was but legitimate that profit out of such sale should be treated as business income and not as capital gains. 7. It was contended on behalf of the assessee, that whilst there is no quarrel with the proposition that whether a particular transaction has resulted in business income or sale of capital asset is a question of intention, the fact remains that each transaction has to be analysed by the authority and no generalized conclusion based on stereotypes can be reached. It was argued that the mere circumstance that the amounts used were not specifically sourced from investment account did not absolve the Revenue from the task of unravelling the nature of the transaction. It was submitted that if the Revenue were correct, then investment and share dealing companies would be placed at a disadvantage and discriminated against. There ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he long term and in case the target price was achieved in the short run, the shares were to be sold in the market. It was depending on the funds available, that the management of the assessee company decided which shares were to be acquired. The investment was shown as such in the balance sheet of the assessee company, under Schedule Ill of the audited accounts. The AO had also misconstrued the volume of share transactions. Undisputedly, the assessee dealt in only nine scripts during the entire year. This included 17 transactions of share purchases and 22 transactions of share sales, aggregating to 40 transactions in ten days, which, by no stretch of imagination, can be said to be a high frequency of transactions. Therefore, Fidelity North Star Fund Other In re (supra), also does not act in any manner detrimental to the case of the assessee. Analysis Findings 10. The above discussion brings to the fore the question what factors are to be given weight while examining whether a taxpayer is a dealer in shares or having regard to the nature of investment, it is to be construed that the income bears the character of sale of a capital asset so as to attract capital gains tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the securities was determined with reference to their actual value as well as the interest which had accrued on them till the date of purchase. But the fact is, whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of a capital outlay, and no part of it can be set off as expenditure against income accruing on those securities. Subsequently when these securities yielded income by way of interest, such income was attracted by Section 18. Claim for deduction can be sustained only when the assessee is in a position to show that any reasonable expenditure had been incurred for the purpose of realising the interest on securities. The amounts claimed by the assessee for deduction are not shown to have been expended for the purpose of realising the interest, and are therefore not allowable as deductible expenditure. 11. P.M. Mohammed Meerakhan v. Commissioner of Incometax, Kerala, 73 ITR 735 (SC) another ruling of the Supreme Court reiterated that it was not possible to evolve any single legal test or formula which could be applied in determining whether a transaction was an adventure in the nature of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Here the shares in question were held as the assessee's capital and not as stock-in-trade. Hence, there would be capital gain and not business income. Hence, we answer the question referred in the affirmative i.e., in favour of the assessee and against the Department. 13. In Commissioner of Income Tax v. Gulmohar Finance Ltd., [2008] 170 Taxman 483 (Delhi), this Court observed as follows: It was noted by the Tribunal that in earlier assessment years, the assessee had shown the shares held in BT Tech Net Ltd. as investment right from the date of purchase and this was shown as such in the balance sheet of the assessee, which was filed along with the return of income. No objection was taken to this position in the earlier years. However, the Commissioner has now decided that it was not an investment without there being any change in facts and therefore, the Tribunal held that there was no occasion for the Commissioner to take a contrary view than what was disclosed and accepted on earlier occasions. Even on merits, the Tribunal came to the conclusion that the shares held by the assessee in BT Tech Net Ltd were an investment and therefore, any profit earned on the sale ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange and had to be redeemed by such Fund houses; thus profits thereon could not possibly be treated as business income. Similarly, investments were made in shares. During the whole year the company dealt with in only 11 scrips. The total sale consideration during the year was Rs. 5.56 crore only and there were no frequent transactions. Therefore capital gain on shares of Rs. 1.43 crores was not business profit. The assessee company is had net owned funds of Rs. 9.41 crores as on 31-03-2007 as per details hereunder:- Share Capital Reserves and Surplus 46.25 lakhs 895.09 lakhs TOTAL: 941.34 lacs 16. As on 31-03-2007 the assessee company had made investments of Rs. 4.61 crores in terms of the following details: Investment in . Shares Investment in Mutual Funds 259.53 lacs 201.00 lacs TOTAL: 460.53 lacs The assessee invested its shareholders funds in shares/units of mutual funds in terms of the decision of its management fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such target was not achieved, the assessee had decided to hold the shares. In this particular instance, the target appeared to have been achieved within one or two months. The following chart is extracted from the order of the Commissioner (Appeals):- Before this Court, the assessee pointed out that in all about 27,000 shares were all acquired in January 2006. Even though they were on different dates, the proximity of their acquisition was because one purchase order was given, but the delivery of shares was based on their availability, which was on different dates. All these shares were sold after a month, and in some cases about 45 days. This Court notices that for 2006-07 the total share consideration was Rs. 3.4 crores, as against Rs. 4.58 for the previous year. Furthermore, the assessee had its own funds to the tune of Rs. 7.31 crores, in the form of shareholder s funds. Further, dividend income to the extent of Rs. 1.12 crore was also earned. The Commissioner found that during the year, there was no transfer from stock in trade to investment account and that the transfers had been accepted during the year 2005-06. Keeping all these aspects in mind, it was held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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