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TMI Blog2011 (3) TMI 1659X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the AO that the funds invested in Mutual Funds, on which, capital gains had been received, were investments only and they could not be treated as stock-in-trade; that the units were not tradable on stock exchange and had to be redeemed by such Mutual Funds and thus, profits thereon could not be treated as business income as against ₹ 12,70,710/-, declared as long term capital gain and ₹ 34,56,003/- declared as short term capital gain; that similarly, investment was made in shares and during the whole year, the company dealt in only 9 scripts and total purchase/sale was of ₹ 3 crores only; that there were no frequent transactions; that as such, the capital gain on the shares of ₹ 35.75 lakhs was not a business profit; that a similar treatment had been accepted by the AO in assessment year 2005-06 vide order dated 31.12.2007, passed u/s 143(3) of the I.T. Act; that the AO had accepted the stand of the assessee company for assessment year 2005-06, since similar activities had been carried on by the assessee company in that year and the capital gain was accepted by the AO under scrutiny after a detailed examination; that that being so, there was no occasio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment was as per the decision of the Management from time to time and that the decision of the Board of Directors of the assessee company stood duly recorded in the Minutes Books of the meetings of the Board of Directors. 4. The AO, however, disagreeing with the stand taken by the assessee, treated the amount of ₹ 35,75,908/- as the assessee company s business income. The AO observed that though the assessee had mentioned the purchases and sales as investment in its books of account, the nature of the transactions of shares showed that the assessee was doing frequent transactions for sale and purchase of shares; that on six occasions, the assessee had purchased shares of M/s. Monnut Ispat Ltd. and on nine occasions, the assessee had made sales of this script, which meant that the sale purchase was spread over the whole year; that similarly, the assessee had made purchases of shares of ING Vysya Bank Ltd. on four occasions and had transacted sales on two occasions; that these activities, along with other facts of the case showed that the motive of the assessee was to earn profit from sale and purchase of these shares and not to earn dividend; and that though, he (the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to hold the shares as investment was duly authorized in the object clauses of the Memorandum of Articles of Association of the assessee company; that it is well settled that once the shares are held as investments and not as stock-in-trade, the profit on sales thereof would be capital gain and not business income; that the AO had erred in considering the shares as trading assets as against investment, as declared by the assessee in its audited balance sheet; that the investments were made out of share capital and Reserves and Surplus of ₹ 736.0 lakhs, as against which, the investments were of ₹ 448.2 lakhs; that as such, no business funds were utilized for making the investments; that in the face of these facts, the AO had erroneously concluded that business funds were utilized by the assessee company for making investments; and that the ld. CIT(A), on the other hand, has correctly appreciated the position and no fault can be found with the orders under appeal. 10. Reliance has been placed by the learned counsel for the assessee on the following case laws:- 1. CIT v. NSS Investments Pvt. Ltd. 277 ITR 149(Mad); 2. CIT v. Ess Jay Enterprises (P)Ltd. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a very high frequency of transactions; that the assessee company had also received dividend on the shares held by it; and that the infrastructure of the assessee company was also very small, whereas the business activity require a much bigger infrastructure. 14. It is undisputed that the shares have been sold as investment by the assessee company. This is available from page 5 of the assessee s paper book ( APB , for short), which is a copy of the assessee s balance sheet as on 31.3.2006. For assessment year 2006-07, the assessee had declared short term capital gains from shares at ₹ 35,75,908/-, short term capital gain from Mutual Funds at ₹ 34,56,003/- and long term capital gains at ₹ 12,70,710/-. 15. It is also patent on record that the investment was made by the assessee out of its own funds. The assessee company was having net owned funds of ₹ 7.32 crores as on 31.3.2006, as follows:- Share capital 46.25 lakhs Reserves and Surplus 685.35 lakhs Total: 731.60 lakhs 16. As on 31.3.2006, the assessee had made investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration. They were shown in the balance sheet as investment under Schedule III of the audited accounts. The profit on the sale thereof was duly offered for taxation, as capital gain. 19. Apropos the volume of the transaction, it remains unchallenged that the assessee had dealt in only nine scripts during the whole year, including 17 share purchases and 22 share sales. There was, thus, an aggregate of 40 transactions in the whole year, or one transaction in every 10 days. This cannot at all be said to be a high frequency of transactions. 20. Then, again undisputedly, the assessee had received dividend on the shares held by it. In the facts of the case, it cannot be held, as was wrongly done by the AO, that there was no intention of the assessee to earn dividend. 21. Not only this, it has again gone unrebutted that the infrastructure of the assessee company is not one as would be required for a business activity. The assessee company has a very small infrastructure. 22. It was all the above facts which weighed with the ld. CIT(A) in directing the AO to assess the income as short term capital gain instead of income from business and we do not find any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had made no attempt whatsoever to make out a case that the shares which had been sold were a part of its capital investment, nor did it place any material from which it could be established that those shares had been treated in its books differently from other shares held by it; that the mere fact that the sale proceeds were paid into the overdraft account in which admittedly proceeds of sale of all the shares held by the assessee were being credited as and when the sales were made and that these shares had not been sold with any amount of frequency could not be regarded as sufficient to establish that these shares had been held by way of investment. It was also held that whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and he should, in normal circumstances, be in a position to produce evidence from his 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. 24. Associated Industrial Development Co.(P)Ltd. (supra). it is seen, is a decision which turns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 III 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 the whole year. This meant that there was only one transaction in ten days, which, by no stretch of imagination, can be said to be a high frequency of transactions. Therefore, Fidelity North Star Fund Others In re (supra), also does not act in any manner detrimental to the case of the assessee. 27. Further, the Department has also placed reliance on CIT/WT v. P. Manonmani (supra). Therein, the Hon ble Madras High Court held that while ascertaining the true scope of a provision in a statute, attention must necessarily be paid not only to the text, viz., the words employed in the relevant provisions, but also to the context. Referring to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was allowed as a business loss by the Tribunal. These, evidently, are not the facts here. CIT Another v. Malabar Industrial Co. Ltd. (supra). as such, is not applicable. 30. In CIT v. Rohit Anand 327 ITR 445(Del), the Hon ble Delhi High Court approved the decision of the Tribunal, reported as ITO v. Rohit Anand , 34 SOT 42(Del), where the Tribunal had held that the assessee did not intend to treat the shares as business asset and invested in shares out of its own fund, took delivery after payment and held the shares for a period, the transaction gave rise to a capital gain and not business income. The facts herein are akin to those in Rohit Anand (supra). 31. In CIT vs. Gopal Purohit 228 CTR(Bom)582, the Hon ble Bombay High Court upheld the Tribunal s findings that the assessee was engaged in two different types of transactions, i.e., investment in shares and dealing in shares for the purpose of business and that the delivery based transactions were to be treated as investment transactions and the profit therefrom was to be treated as short term or long term capital gain, depending on the period of holding the shares and that there ought to be uniformity in treatmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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