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TMI Blog2016 (4) TMI 989X X X X Extracts X X X X X X X X Extracts X X X X ..... e of trade. Such nexus has not been established. The observation of the CIT(A) is only inferential without any concrete material in the possession of the AO. Therefore, in our opinion, the activity of the assessee by virtue of mode of acquisition of shares cannot be segregated into two parts. The ld.CIT(A) has erred in creating an artificial distinction only on the basis of mode of acquisition. We allow the appeal of the assessee and direct the AO to tax the surplus on sale of shares under the head “short term capital/long term capital instead of “business income” treated by him. Penalty u/s 271(1)(c) - Held that:- We have already upheld that surplus on sale of shares is to be assessed as short term capital gain. Therefore, there cannot be any question to visit the assessee with penalty. Apart from above, we are of the view that the assessee has disclosed all the facts fully and completely. There is no change in the ultimate taxable income of the assessee. The AO has only changed the head of income, i.e. the assessee has claimed the surplus on sale of shares to be assessed under the head of capital gain. The AO has assessed it under the head “Business Income”. There cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered with the Registrar of Companies. It has filed its return of income for the Asstt. Year 2006-07 on 26.12.2006 declaring total income at ₹ 7,68,57,350/- which included profit and gains of business or profession of ₹ 4,05,293/- and short term capital gain of ₹ 7,64,52,057/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) of the Act on 16.11.2007 was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the AO that the assessee has claimed itself as investment in shares and securities, and therefore, on sale of shares it has disclosed short term capital gain. The ld.AO was of the opinion that this claim of the assessee requires to be investigated keeping in view various facts which determine the status of the portfolio i.e. investor or trader. The ld.AO appraised himself with CBDT circular bearing no.4/2007 dated 15.6.2007. He, thereafter, made a detailed analysis of the transactions conducted by the assessee in purchase and sale of shares. According to the AO, the Hon ble Supreme Court in the case of CIT Vs. H. Holck Larson, 160 ITR 67 has discussed this issue in detail. According to him, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of H. Mohamed Co. vs. CIT 107 ITR 637. It is stated that as observed by the High Court the stock in trade is something in which the trader deals whereas the capital asset is something with which the trader deals. He has also referred to the decision of the Sardar Indrasingh Sons, 241 ITR 415 and stated that the principle applicable in all such cases was whether sales which produce surplus are so connected with carrying on business of the assessee and in such case it can be said that surplus was profits and gains of business. ii) The second criteria referred to by the A.O. is length of holding/ownership. He has stated that the assessee had sold shares within short time. He has given details of purchase and sale of shares and stated that period of holding was short.. iii) Next test referred to by the A.O. is that of frequency and number of transactions and it is stated that on the basis of details of transactions the same were frequent and that it was the main source of income which was capital gain on sale of shares. It is stated that similar trend was noticed in earlier year and subsequent year. The shares were acquired from the persons involved in IPO Scam. It is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance surplus amount of ₹ 3,47,77,276/- shown by the assessee from sale of shares purchased other than from Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd., was allowed to be treated as investment in the shares. The Revenue is aggrieved with regard to this finding of the CIT(A) in its appeal, whereas, the assessee is aggrieved with regard to first part of the order of the CIT(A). The relevant finding recorded by the CIT(A) on this issue is worth to note. It reads as under: 8. In the light of principles laid down by Hon'ble ITAT, Ahmedabad in the judgement in the case of M/s. Hipolin Ltd., supra, the facts in the present case are required to be examined. In the present case, the appellant has derived surplus of ₹ 4,16,74,781/- in the sales / purchase of shares of the companies, the shares of which were acquired through Rupal Panchal and M/s. Sugandh Estate and Investment Pvt Ltd. During the course of search in the case of persons involved IPO scam, it was found that these persons have cornered the shares reserved for retail category for investors in various IPOs by fraudulent methods. The modus operandi of these groups has already been d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in shares it's own funds. The company is not having any object clause as per the memorandum of association which authorizes it trading in shares. However, the appellant is authorized to invest funds in shares and securities and immovable properties as a supplementary object. It is also noticed that investment in shares is shown by the appellant in the account under the head Investment and not stock in trade. Similar investment in share and purchase and sale of shares was shown in the earlier year as capital gain and was accepted by the Assessing Officer while passing the assessment order on 31-12-2007 u/s. 143(3) of the I.T. Act for the assessment year 2005-06. Thus the appellant's intention of making investment was clear. The appellant has not incurred any interest on borrowings for such investment. Thus borrowed funds are not applied. There is no motive of trading in shares established by the Assessing Officer except referring to the volume and number of transactions. I also appreciate the arguments that the A.O's contention about period of holding are not correct particularly in view of the fact that definition of short term capital asset in respect of shares and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and shares. The ld. counsel for the assessee, while taking us through the clauses from the memorandum of association reproduced in the statement of facts emphasized that the assessee was never allowed to do business in the shares. In the past, it has been treated as investor. As an investor, the shares have been transferred in the name of assessee. It has paid security transaction tax on sale of shares. It has not used borrowed funds. The ld.CIT(A) has accepted the contentions of the assessee, that it was an investor in the past. It has made investment in the present year. Only circumstances, which has been considered by the ld.CIT(A) for creating a distinction between one portfolio of the assessee is that of mode of acquisition of shares from Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. According to the ld.counsel for the assessee, Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. might have involved in an IPO scam. But, how it affects the investment of the assessee ? By this mode, the assessee might have got more shares. But the attempt to get shares should not be construed that it was a business. Test is not mode of acquisition shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 10. Before we embark upon an inquiry on the facts of present case so as to find out, whether assessee is to be termed as involving in the trading of shares or is to be treated as a simplicitor investor. We would like to refer certain broad principle culled out by ITAT Lucknow Bench in the case of Sarnath Infrastructure Pvt. Ltd. reported in 120 TTJ 216. These tests read as under:- 13. After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes: (1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or nontrading asset. (2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purpose of trade and not for investing in an asset for retaining. (3) What is the freque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made? 10. It is permissible as per CBDT s Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. 11. Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. 11. The Hon ble Gujarat High Court had also an occasion to consider this issue in the case of Commissioner of Income Tax vs. Riva Sharkar A Kothari reported in 283 ITR 338. Hon ble court has made reference to the test laid by it in its earlier decision rendered in the case of Pari Mangaldas Girdhardas vs. CIT reported in 1977 CTR 647. These tests read as under: After analyzing various decisions of the apex court, this court has formulated certain tests t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present year also, the CIT(A) has accepted the contentions of the assessee with regard to the investment, which were not made through Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. In the accounts, the assessee has accounted investment in shares under the head investment and not stock-in-trade . Similarly, at the end of the year, it has not valued the shares in the manner stock is being valued i.e. at the cost or market price whichever is lower. It has valued at cost. For the Asstt. Year 2005-06, the AO has accepted the assessee as investor and assessed the surplus on sale of shares as capital gain. The assessee had paid security transaction tax. In the case of Sarnath Infrastructure Pvt. Ltd., 120 TTJ 216 as well as in the case of Gopal Purohit, 35 DTR 52 (Bom), the Tribunal has observed that if on purchase of shares they are transferred in the name of assessee, then it would indicate that the assessee has no intention to deal in shares. In the present case also, shares have been registered in the name of assessee before sale. If the transactions are settled without delivery, it can be presumed that it was a business activity of trading in shares. That i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) is only inferential without any concrete material in the possession of the AO. Therefore, in our opinion, the activity of the assessee by virtue of mode of acquisition of shares cannot be segregated into two parts. The ld.CIT(A) has erred in creating an artificial distinction only on the basis of mode of acquisition. We allow the appeal of the assessee and direct the AO to tax the surplus on sale of shares under the head short term capital/long term capital instead of business income treated by him. Consequently, the appeal of the Revenue is dismissed. IT(SS)A.No.3/Ahd/2012 13. The facts have been discussed in the quantum appeal. The ld.AO has initiated penalty proceedings under section 271(1)(c) of the Act. He issued a show cause notice under section 274 r.w.s. section 271(1)(c) of the Act on 29.8.2008. The AO has observed that there were three additions made to the income of the assessee, viz. short term capital gain of ₹ 7,64,52,057/- on sale of shares shown by the assessee has been assessed as business income; (b) the assessee did not add a sum of ₹ 85,500/- which represented dividend stripping amount, and (c) an addition of ₹ 39,974/- was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levied, I therefore direct the AO to delete the penalty on the treatment of the income from the purchase and sale of shares. 15. As far as first issue is concerned, we have already upheld that surplus on sale of shares is to be assessed as short term capital gain. Therefore, there cannot be any question to visit the assessee with penalty. Apart from above, we are of the view that the assessee has disclosed all the facts fully and completely. There is no change in the ultimate taxable income of the assessee. The AO has only changed the head of income, i.e. the assessee has claimed the surplus on sale of shares to be assessed under the head of capital gain. The AO has assessed it under the head Business Income . There cannot be any allegation against the assessee for concealment of income or furnishing inaccurate particulars to this extent. Thus, otherwise also no penalty on the first is issue is imposable. 16. As far as rests of two amounts are concerned, we find that ld.CIT(A) has assigned a plausible reasoning for deleting the penalty. The assessee had made huge investment in shares. Some of the shares might have been sold, and it failed to keep track that dividend might ..... X X X X Extracts X X X X X X X X Extracts X X X X
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