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TMI Blog2017 (1) TMI 1046X X X X Extracts X X X X X X X X Extracts X X X X ..... Facts in brief are that the assessee is a private limited company engaged in manufacturing and selling of biomass gasfier. It has filed its return of income electronically on 29.9.2009 declaring total income at Rs. 3,44,94,749/- . The case of the assessee was selected for scrutiny assessment and notice under section 143(2) of the Income Tax Act was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the AO that the assessee has shown gain on sale of shares and mutual fund. According to the AO, the assessee has claimed short term capital gain of Rs. 28,24,217/- from sale of investment (limited equity shares). The ld.AO has confronted the assessee to show as to why the above gain should not be treated as a business income. In other words, he disputed activity of the assessee as an investor and confronted to the assessee as to why it should not be treated as a trader in the shares. In response to the query of the AO, the assessee has filed detailed written submission on 3.12.2012. This submission has been reproduced by the AO. The assessee has also made other submissions. The ld.AO has gone through the written submissions of the assessee, but did not concu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res (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 frequency of such purchase and disposal in that particular item? If purchase and sale are frequent, or there are substantial transaction in that item, if 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 its value? Former will indicate intention of trades and latter, an investment. In the case of shares whether intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'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 to determine as to whether an assessee can be said to be carrying on business. (a) The first test is whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. (b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. (c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was the assessee. Has it been tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Capital Gain and made following submissions to Assessing officer vide letter dated 3d Dec 2012 in support of same :- Company is a manufacturing company and its main object is to make business profit from manufacturing of Biomass Gasifiers and not from shares and Mutual Fund. It is evident from Memorandum and Articles of the assessee company. Investment was only in few companies and most of them are Blue Ship/ A category companies where investors want to invest money mainly for investment and not for trading. TOTAL NO. OF SCRIPTS WERE 27 ONL Y AND TOTAL NO. OF TRANSACTIONS WERE 57 ONLY AVERAGE 1 TRANSACTION PER WEEK) All the shares sold during the year were delivery based and delivery was given from the DEMA T account of the assessee. Further, Many of the shares sold during the previous year, were from opening stock and shown as part of investment as clear from the Balance Sheet of the assessee. * All the investment was from own funds and no borrowed money for used for the investment. * Opening balance of investment in Equity shares as on April 1, 2009 was Rs. 526.30 Lacs which increased to Rs. 791.35 Lacs as on March 31,2010. This also shows that money was put purely fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , frequency, continuity and regularity for transaction of purchase and sale , of goods concerned. Based on this, the Assessing officer decided that gain from 27 scripts and 57 transactions are to be assessed as income from business. It has been on record and undisputed fact that during the whole year, there were only 57sales transactions (Average 1 sale transaction per week) and only in 27 scripts (most of them are Blue Chip scripts). By no stretch of imagination, this can be considered as high frequency or regularity of transactions and it nowhere proves that the assessee is a dealer in shares. Further as mentioned very clearly in CBDT circular No. 4/2007 that "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". Even Gujarat High Court (jurisdictional High court) while accepting in the matter of COMMISSIONER OF INCOME TAX-HI - Vs VAIBHAVJ SHAH (HUF) -Tax appeal no. 77 & 78 of 2010 that Gain from sale of shares is Capital Gain and it was base on its own case law of Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ader. Even if frequency is considered, that also not on higher side. It has dealt 27 scrip and 57 transactions in the year. The ld.CIT(A) while rejecting contentions of the assessee had made an observation that opening balance in the equity shares as on 1.4.2009 was Rs. 526.30 lacs which increased to Rs. 791.35 lacs in 31.3.2010. We failed to understand that how increase in the value of investment would be a factor to doubt activity of the assessee as a investor. How this fact could goad any adjudicating authority to arrive at a conclusion that transaction was of a business in nature. If the assessee did not make any sale in a particular year and keep on investment, the value in investment would increase. As observed earlier that large number of decisions at the end of Hon'ble High Court and ITAT are available on this point. Similarly, assessee has also made reference to large number of cases in its submission before ld.Revenue authorities. We do not deem it necessary to recite and recapitulate all these decisions because most of the decisions have been considered in the case of Sarnath Infrastructure Pvt. Ltd. One of the cases referred by the assessee is Gopal Purohit by ITAT, Mum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne on 09.04.2009 which was valid from 01.04.2009 to 31.03.2012. Based on the provisions of the section 35(2AB) of the Income Tax Act, 1961, we claimed 150% deduction of Research & Development expenses of Rs. 26.97,451 lakh and based on this, additional 50% deduction of Rs. 13,48,726 Lakh was claimed. The Assessing Officer rejected the amount of incremental 50% allowable u/s 35(2AB) on certain grounds in spite of the fact that the issue raised by the Assessing Officer was clearly decided by the Jurisdictional ( Gujarat) High court in our favour and same has been upheld by the Honb'le Supreme Court. We also cited few other judicial pronouncements which though cited in the assessment order but not considered appropriately by the Assessing officer. Sr. No. Observation of Assessing Officer Our Submission 1. DSIR (approving authority) has given approval in form 3 CM from April 1, 2010 and same is applicable only from A.Y. 2011-12 and not from A.Y. 2010-11. We would to bring on record that basic approval for this unit as approved R & D Centre has been since 1990 and renewed for the period from 01.04.2009 to 31.03.2012 vide DSIR letter dated 09.04.2009. Though DSIR (approving a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that even if the condition of Income Tax Rules is not met, than at best it can be considered as procedural/ technical deficiency/difference in interpretation and benefit cannot be denied merely on procedural or technical lapses when substantial conditions have been complied and genuineness of R & D expenses have not been doubted. Our view us supported by various judicial pronouncements enclosed with this letter. Even Assessing Officer himself has accepted at page 6 of the assessment order that separate ledger account has been maintained for R & D expenses The Assessing Officer is referring to the part remuneration of M.D. included in R & D expenses. It is to be noted that since Managing Director of the company is a high End technical person, his part remuneration has been included as part of R & D expenses only in books of accounts as it is as per accounting norms. This has not been claimed as R & D expenses and easily verifiable from table given on page 5 of the assessment order and therefore, totally irrelevant for making a ground for disallowance of weightage deduction of other eligible R & D expenses. In addition to the facts mentioned above, we draw suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 6(7A) of the Income Tax Rules. As far as grant of certificate from 1.4.2010 is concerned, the Act nowhere gives such powers to DSIR. The policy, if contrary to the statutory provisions, then weight to that policy cannot be given. The role of DSIR is to find out whether the assessee's activity falls within the ambit of research and development activity or not. This aspect of grant of approval for cut off period has been considered by the Hon'ble High Court in the case of Claris Life Sciences Ltd. (supra) and the finding of the Hon'ble High Court in this regard read as under: "We have considered the submissions made by the learned Standing Counsel appearing for the revenue and we have also perused the orders passed by the authorities below. The Tribunal has discussed this issue at length in its order. It was contended by the assessee before the Tribunal that nowhere the provisions provide that expenditure from the date of approval only has to be allowed. In the absence of those words, such conditions cannot be imputed in the statute by the lower authorities. Doing so amounts to reading more in the law which is not expressly provided. The words used are any expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered the legislative intention behind above enactment and observed that to boost up R & D facility in India, the Legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the Legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction. We are in full agreement with the reasoning given by the Tribunal and we are of the view that there is no scope for any other interpretation and since the approval is granted during the previous year relevant to the assessment year in question, we are of the view that the assessee is entitled to claim weighted deduction in respect of the entire expenditure incurred under section 35(2AB) of the Act by the assessee." 16. If, in the light of the above, we examine the order of the ld.CIT(A), then it would reveal that the ld.CIT(A) has failed to adhere to conditions contemplated in section 35(2AB) of the Income Tax Act and Rule 6(7A) of the Income Tax Rules. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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