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TMI Blog2018 (1) TMI 714X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue : Shri SS Rana, CIT DR For The Assessee : None ORDER PER PRASHANT MAHARISHI, A. M. 1. These are the appeals filed by the Revenue against the order of the ld CIT(A)-XXVI, New Delhi dated 11.08.2014 for the Assessment Year 2010-11 and 2011-12. 2. The Revenue has raised the following grounds of appeal for Assessment Year 2010-11: i. The Ld. CIT(A) has erred in directing the AO to assess profit of ₹ 11,98,02,135/- from sale of shares under the head Capital Gain instead of Business Income despite the fact that the assessee was engaged in the business of trading in shares and it was the sole activity of the assessee which is also an admitted object of assessee firm as per Partnership Deed. ii. The CIT (A) has erred in not correctly appreciating the facts of the case that the statement of purchase and sale and also activity of the assessee proved that he was engaged in the business of purchase and sale of securities in an organized and regular manner and showing income therefrom under a different head is just a strategy to avoid tax. iii. The CIT(A) has not appreciated that the turnover of the assessee was ₹ 72.74 crores a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of the assessee holding the profits derived on sale of shares as long term or short term capital gain. As the facts and circumstances of the case for both the years are identical, We dispose of these appeals by this common order by recording the facts for assessment year 2010 11. 5. Brief facts of the case shows that assessee is a partnership firm constituted on 14/3/2006 and it was reconstituted on 13/12/2006, wherein some of the partners retired and new partners were taken in. The assessee firm was formed mainly with the object of investment for long-term appreciation into all kinds of sales and securities, stocks, debentures, bonds, mutual funds, real estate and units of venture capital funds. It was also entitled to carry on the business of dealing in shares and securities. 6. For assessment year 2010 11 partnership carried out investment activities. From the balance sheet and profit and loss account of the firm, It was seen that at the beginning of the year relevant to a Y 2010 11 assessee had investment in shares and securities of ₹ 6 3558 3427 and at the close of the year it has investment of ₹ 885609456. During the year the assessee acquired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir hands. Therefore, he stated that there is no explanation by the assessee that if the Firm is not doing are engaged in the business, then the question arises as to why and what for the Firm was constituted. According to him in the present case 8 partners have come together to put their fund in a collective manner for its better utilisation which is nothing else but business or adventure. He further held that the transactions mentioned by the assessee shows that the assessee has sold securities for value of ₹ 7 1744 2884/as cost of which were ₹ 5 976407 for 8/ and the number of shares alone sold during the year are 243 8663. Therefore according to him the volume of the transaction made by the its assessee during the year itself shows that it is engaged in the business of securities. He further held that if the partners in the form of a company show the profits, then they are liable to pay minimum alternate tax under section 115 JB of the income tax act and therefore the assessee has used the colourable device and avoided the payment of tax to the tune of ₹ 3.40 crores. He further stated that as all the 8 partners are the private limited companies and based on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of the act was passed on 6/2/2013 determining the total taxable income of the assessee at ₹ 119967308/ . 9. Assessee aggrieved with the order of the Ld. assessing officer preferred an appeal before the Commissioner of income tax (appeals), New Delhi. The Ld. CIT (A) passed an order on 11/8/2014 wherein he allowed the appeal of the assessee based on the discussion made by him in the order, finding and reasons given by the CIT (A) in the appellant s own case for assessment year 2008 09 and following the decision of the Hon ble Delhi High Court in case of CIT versus Avinash Jain 30 Taxmann.com 133, CIT versus vinay Mittal 22 Taxmann.com 151 and CIT versus Asok Wadia 45 Taxmann.com 182. Therefore, revenue, aggrieved by the order of the Ld. CIT (A) has preferred appeal before us. 10. The Ld. DR vehemently y contested the order of the Ld assessing officer and submitted that the Ld. CIT appeal has incorrectly allowed the claim of the assessee. He submitted a written note wherein he submitted the several decisions. 11. Despite notice, none appeared on behalf of the assessee. Therefore we proceed to decide this appeal on merits of the case, as per information available on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the firm and its partner companies is to invest in equity and mutual funds. 3.4 The profit and loss a/c drawn by the assessee shows the Income from sale of securities and profit on sale of investments. The assessee has also furnished his tax audit report wherein it has been mentioned During the year assessee has also traded in shares and securities . 3.5 Further, it is seen that last year the assessee has shown purchase and sale of shares as his business but this year he has changed the trading activity and shown the sale/purchase as profit on sale of investment on which lower rate of tax as capital gains has been shown. 3.6 The assessee's volume of transactions during the year runs into crores of rupees whereas no expenditure on account of any employee, rent, telephone and other daily expenses have been incurred to run the firm which goes to show that the firm has been used as a vehicle to avoid paying tax by the corporate partners. 3.7 The assessee was asked to submit as to why its income be not treated as income from business instead of capital gains declared by the assessee. In response to the same the assessee submitted vide his letter dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and hence one of the partner companies namely M/s Raghu Investments is operating the D-mat account. 3.10 All these companies have contributed shares as capital instead of cash. All the companies could have traded in these shares by themselves as they are regularly doing during the course of their day- to-day business. It is important to understand the motive of infusion of the shares as capital in the firm. It appears that the firm has been created for the express purpose of avoiding tax liabilities in respect of the promoters partner companies by taking advantage of lower rate of tax in respect of capital gains instead of business income which the transactions actually are. Further, there is no parity in the capital contribution of shares with the profit sharing ratios. 3.11 Further, the Finance Act, 2006 amended the provisions of section 14A w.e.f. 01-04- 2007 with which the AO was empowered to disallow expenses relating to earning of tax free income. All the partner companies have huge expenses, whereas in the firm no expense has been claimed to earn the dividend income. This appears to be one of the main motive for creation of this firm on 13-12-20006. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase has not been disclosed in the profit loss account. It is also important to highlight that the audit was conducted by M/s M. L. Dujari Co. who is also the authorized representative of the assessee. Further, in the tax audit report the auditor has certified that cash book is being maintained by the assessee as per column 9(b) whereas no cash book is being maintained by the assessee rather, journal is maintained as the assessee has nil cash balance. This was clarified verified during the proceedings while verifying the books of account on 24/12/2010. The same counsel who has conducted the tax audit of this business is now agitating the taxability of the same as business income. If the auditor did not consider the assessee's activity to be in the nature of business, then why the tax audit was conducted cannot be fathomed. 4. The Apex Hon'ble Supreme Court in the case of M/s Mc. Dowell Co. Ltd Vs. CTO (1985 ) 154 ITR 148 has observed that tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be a part of tax planning and it is the obligation of every citizen to pay the taxes honestly. In the case of Mc. Dowell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the income of the assessee treating the same under capital gain instead of business income. However he did not adjudicate on the other addition of ₹ 12 lacs. The relevant findings of Ld. CIT(A) are reproduced below: 6.7 The AR of the appellant vehemently argued that merely because in the tax audit report the activities contemplated by the appellant was stated, it does not mean that the nature of the transactions relating to capital gains would change into business. Since the appellant did not carry on the business activity where the turnover exceeds the limit specified by the Income-tax Act, I find that there was no need for the audit. However, since the partners of the firm are all companies, the audit is mandatory in their cases. Therefore, it is seen that audit is not the criteria that can decide whether the nature of transactions pertaining to sale purchase of shares are investment or meant for business. 6.8 I find force a merit in the arguments put forth by the appellant for the reasons given below: a) The balance sheet filed before the Assessing Officer in the course of assessment proceedings as well as the undersigned in the course of the appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed thereafter it has to be treated on Investment account resulting in capital gains rather than business income. This position has since been reiterated by the Supreme Court in CIT vs. Wallfort Share Stock Brokers (P) Ltd. (2010) 326ITR 1 (SC). 6.9 After analyzing the issue and considering the judgments of various courts, and also on the basis of evidence filed by the appellant I find the intention of the appellant is to hold the investment for a certain period and to reap the profits at an appropriate time. It is also seen that the Assessing Officer has not brought sufficient evidence to prove that the activity of the appellant should be treated as business income. A prudent investor always keeps a watch on the market trends and there is no bar under law from liquidating the investment in shares. The law itself has recognized this fact by taxing these transactions under the head capital gains. Section 111A stipulates that scripts and mutual funds that suffer securities transactions tax and held for 12 months are to be treated as short term capital gains. An intention is an anticipated outcome that is guided through a process and a purpose to obtain an end result. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgued that Ld. CIT(A) had correctly arrived at the conclusion and, therefore, ld. CIT(A)'s order needs to be upheld. 7. Ld. D.R. in his rejoinder invited our attention to paper book page 24 onwards and submitted that long term capital gain claimed by assessee consists of only 8 scripts which can be classified as investment but the rest of shares cannot be classified as investment. Arguing upon assessee's appeal, Ld. A.R. submitted that the A.O. has made addition of ₹ 12 lacs on account of estimated expenses which has been made on the basis of assumptions and surmises only. He submitted that the assessee consisted of corporate partnership and corporates might have contributed towards expenses. Ld. D.R. on the other hand heavily relied upon the orders of authorities below. 8. We have heard rival parties and have gone through the material placed on record. We find that Ld. CIT(A) has exhaustively and extensively dealt with the issue and after verification of facts and circumstances, has arrived at the conclusion about the head of income under which the income needed to be assessed. From the facts, we find that assessee had classified the shares in its balance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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