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TMI Blog2010 (4) TMI 1069X X X X Extracts X X X X X X X X Extracts X X X X ..... as returned by the Appellant. Ground No.2: Disallowance u/s. 14A of the Act. 1.On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO of making disallowance u/s. 14A and thereby disallowing expenditure amounting to Rs. 84,113/- on the alleged ground that the said expenditure is incurred for earning tax-free dividend income. 2.He failed to appreciate and ought to have held that where no expenditure has been actually incurred, no estimation can be made to disallow expenditure for earning the exempt income. Ground No. 3: The Appellant craves leave to add to, alter and/or amend all or any of the foregoing grounds of appeal." 3.The first issue is treating the gains/profits from the sale of the shares of Rs. 1,03,21,714/- as an income from business as against the Long Term Capital Gains of Rs. 96,11,474/- and Short Term Capital Gains of Rs. 19,82,900/- as declared by the assessee. 4.The facts which reveal from the record are as under. The assessee company is engaged in the Management Consultancy, Investment Advisory and Equity Reserve Research Services and also dealing in the Investments. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; C.I.T, 77 ITR 225 (iii)Bengal and Assam Investors Ltd. v/s. CIT, 59 ITR 547 5.1The A.O did not agree with the explanation of the assessee that the activity of the investment in the shares is not in the nature of the business but purely it is an 'investment' and hence, the gains arising out of the sale of the shares/securities is taxable under the head capital gains. The A.O has noted that the main object of the company is a Management Consultancy and incidental object of the assessee company is to make investment. During the current year and as well as in preceding five years, the main activity of the assessee is trading in shares which has resulted in Short Term Capital Gain and Long Term Capital Gain, but in respect of the main activity, that is 'Management Consultancy', the contribution to the gross income is very small. 5.2The A.O has further noted that the assessee was regularly dealing in the shares through out the year and hence, he was dealer in shares in respect of all sales. The assessee was regularly buying and selling the securities/shares and that shows that the profit motive was the main object for purchasing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares/securities. The A.O also noted that some of the shares sold during the year are held for more than seven years and that shows the soundness of the financial position of the assessee and wise application of non-interest bearing own funds in selected stocks. 6.The another view of the A.O, which reveled from assessment order, presuming that assessee's activity was not fully a business activity or trading activity, but it was as adventure in the nature of trade. In respect of accepting the assessee's trade as an investment in prededing years, the A.O has noted that merely because the assessee's plea has been accepted earlier, that would not preclude the A.O from recording the finding different from that of an earlier year. The A.O. referred and relied on plethora of the decisions of the Hon'ble Supreme Court as well as of the different High Courts, as also referred to the Accounting Standards as prescribed by the Institute of Chartered Accountants of India (I.C.A.I) and finally held that the profit/gain earned from dealing in the shares is a business income and he, accordingly, taxed Rs. 1,03,21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Long Term Capital Gains of Rs. 19.11 lakhs was derived from the sale of the shares of 19 Companies, but so far as the 'Infosys Ltd.' is concerned, the capital gain attributable to the said shares is 78% of the total Long Term Capital Gain in which holding period is quite long one. 8.The Ld Counsel argued that the assessee company is not registered as a sub-broker or broker and even it has no Registration with the BSE or Ahmedabad Stock Exchange. The Ld Counsel referred to Page No. 222 of the Paper Book wherein the copies of the D-mat Account are filed and argued that it is clear from the D-mat Account that there is no repetition of any of the script by the assessee. The Ld Counsel also referred to page No. 25 and 26 of the Paper Book which is the copy of the working of the LTCG. The Ld Counsel argued that in the case of Unichem Laboratories, the shares were held for 62 to 64 months and in case of 'Infosys Ltd.', the shares were held from 62 months to 71 months. In respect of Rane Brake Linings Ltd., the shares were held for 89 months. He also referred to page 27 and 28 of P/B which is a summary of Short Term Capital Gain an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgued that it is clear from the conduct of the assessee that even in many cases the shares are held for very short period. It is argued that merely because substantial amount of dividend is received by the assessee that per se is not the test to decide the intention of the assessee. The Ld. D.R., therefore, pleaded that the order of the CIT(A) may be confirmed. The Ld. D.R. relied on the following unreported decisions of the ITAT, Mumbai. In the case of Addl. CIT (S.R. 49), Mumbai V/s. Sri Motilal Oswal, ITA No. 3860, 3861, 3862, 3864/Mum/ 2001 dt. 31.8.2005. 9.We have given our anxious considerations to the rival submissions of the parties. We have also perused the record as well as the paper book containing the different documents filed by the assessee. We have also considered all the precedents and decisions relied on by both the Parties. The core controversy is in respect of the head under which the profit or gain on the sale of the shares/securities should be taxed. In the present case, it is not controverted that the assessee is not registered as a broker or sub-broker wither with the BSE or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Paper Book) which is relied on by the Ld Counsel, the Board has accepted the principles laid down by the Hon'ble Supreme Court in the cases of CIT (Central), Calcutta v/s. Associated Industrial Development Co. (P.) Ltd., 82 ITR 586 as well as in CIT v/s. H Holsck Larzen, 160 ITR 67 (SC). In the above referred circular, the Board has issued certain guidelines to the A.O. The Board has accepted that the assessee can have two portfolios simultaneously- (1) an Investment Portfolio comprising of securities which are to be treated as a capital asset and (2) Trading portfolio comprising of stock and trade which are to be treated as trading asset. 11. The operative part of the Circular No. 4/2007 dt. 15.6.2007 which reads as under : "4.The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 dated August 31, 1989 had brought to the notice of the assessing officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income. 11.Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade." 12.We may also refer here the decision of the co-ordinate Bench in the case of Gopal Purohit (supra), in said case, the A.O examined the frequency of the transactions and also volume thereon. The A.O was of the opinion that as the frequency of the transaction carried out by the assesseee was very high with large volume of shares and as for investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or purchases are made for retention and appreciation in its value ? Former will indicate intention of trade and later, 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 items has been taken in the balance sheet ? If the item 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 rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or making investment whereas memorandum of association has only authorized to carry out trade in shares. It clearly shows intention of the assessee to maintain a separate investment portfolio. All the sales out of this portfolio are identifiable to purchases made in this portfolio. In our considered view, the assessee has discharged its primary onus by showing that it is maintaining separate accounts 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 are only a smoke screen and there is no real distinction between two types of holdings. This could have been done by showing that there is intermingling of shares and transactions and the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present (as culled out above on the basis of authorities described), we hold that the surplus is chargeable to capital gains onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the activity of the assessee buying and selling of the shares amount to Trading Activity. It is well settled principle as has held in the case of H. Holsck Larzen (supra) that whether the activity of buying and selling of the shares is in the nature of trade and investment. It is a mixed question of law and fact. In this case, we have perused the Balance Sheet filed by the assessee and as per the books of account, the assessee has treated the entire investment in the shares as an investment only and not as a stock in trade. Another important aspect to be considered here is the assessee is not a share broker nor he is having a registration with any Stock Exchange. Moreover, some scripts are held for more than five years and it is not a case of the A.O that there were any derivative transactions by the assessee nor is it a case of the A.O that there were transactions without any delivery. In the present case, both the authorities have not disputed that the transactions are completed with the delivery. The intention of the assessee cannot be read from his mind but it reflects in its conduct, the way he tre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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