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TMI Blog2015 (12) TMI 1816X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and earn dividends if any from such investment. As regards, trading stock where the assessee intends to make profits, such stock has been disclosed in Schedule I of the Balance sheet showing a closing value of 30.85 crores on 31 March 2006. The accounting policy for trading of shares is disclosed in Schedule L of the Balance sheet which states that closing stock of securities is valued at cost of market price which ever is lower. Thus, the intention of the assessee is very much clear as to what stocks are to be treated as business stock and what to be treated as investment stock. The Policy and treatment of stock transaction are clearly reflected in the Balance sheet of the assessee. We thus fully concur with the finding of the Learned CIT(Appeals) that the profit of 34,61,63,879 in respect of shares sold during the year (including gain of 29,05,58,750 realized on sale of shares of Dawar India Ltd. ) has been rightly treated by the assessee as long term capital gain and thus the Learned CIT(Appeals) has rightly held that the assessee is eligible for exemption under sec. 10(38) of the Act on the said long term capital gain. The First Appellate Order in this regard is thus uphe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer has also not disputed the reserves available with the assessee. We are thus of the view that the Learned CIT(Appeals) has rightly deleted the disallowance. The same is upheld. X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,00,000 Ground No. 19 4. Disallowance u/s. 14A 5,33,768 Ground Nos. 20 to 22 (not pressed) 6. The assessee questioned the above addition before the Learned CIT(Appeals) raising the issue regarding taxing the profits realized on sale of shares as business income against capital gain offered by the assessee either under long term capital gain or short term capital gain depending upon the period of holding of the shares. The view of the Assessing Officer was that the assessee's intention was to do trading in shares, securities and units. The Assessing Officer did not accept the explanation of the assessee and held that the assessee has carried on a regular trading in shares, securities and units. The voluminous transaction carried on by the assessee during the year on various scripts is self-explanatory. The Assessing Officer noted that the assessee had shown income from business to the tune of ₹ 1,15,44,84,872.67 and purchase of shares shown as ₹ 1,46,27,37,974.36. It had also shown increase or decrees in stock to the tune of ₹ 30,84,64,940.67 whereas other income was shown at ₹ 53,69,66,060.68. Noting these aspects, the Assessing Officer came t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tence of the power to purchase and sell shares in the Memorandum of Association is not of decisive of the nature of transaction. He submitted that the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sells and the ratios between purchases and sells and the holding period would furnish a good guide to determine the nature of transaction. He contended that ordinarily the purchase and sale of shares with the motive of earning a profit would result in transaction being in the nature of trade/adventure in the nature of trade but where the objects of investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment "by sale of shares" will yield capital gain and not Revenue receipts. The learned CIT(DR) also referred the decision of Hon'ble Supreme Court in the case of CIT vs. H. Holck Larsen - 160 ITR 67 (S.C) holding that as to whether transactions of sale and purchase of shares were trading transaction or whether these were in the nature of investment is not a question of law but it is a mixed question of law and facts. The learned CIT(DR) referred page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned AR submitted that as submitted above, the shares of Dawar India Ltd. have been held by the assessee as investment as a promoter for controlling interest and this position was accepted by the Department up to the assessment year 2005-06. The intention of the assessee behind the transaction is significant and frequency of transaction alone would not decide the issue ipso facto. He submitted that the assessee can hold shares either as investment or as stock in trade as clarified by the CBDT Circular No. 4 of 2007 dated 15.6.2007. He pointed out that entries in the books of account prove that shares in question were held as investment. He submitted that in the case of group companies, the profit on sale of shares of Dawar India Ltd. was allowed to be taxed under the head "capital gain". The Learned AR referred computation of income, details of long term capital gain on which STT was paid and benefit under sec. 10(38) of the Income-tax Act, 1961 was claimed, and details of short term capital gain on which STT was paid and benefit under sec. 111A of the Act was claimed, made available in concise form at page Nos. 1 to 11 of the paper book. He submitted that up to assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Ashok Wadia (supra) has been pleased to hold that the legal standards concerning whether income is to be treated as business income or short term capital gain have been the subject matter of various decisions of the Hon'ble Supreme Court and Hon'ble Delhi High Court. Suffice it to say that there is no single, universal standard to distinguish the two. The court must instead look into the nature of the shares, the volume and frequency of the transaction, the manner in which the shares have been shown by the assessee in its books of account, dividend earned on the shares, if any. Rarely will any one factor be conclusive, the purpose of the exercise is to ascertain the true intention through a composite test. In some cases, volume becomes determinative, in others, the duration of times, it is held, at times it can be the manner it is shown in the books, whereas still, the use of borrowed funds could be decisive. 15. The decision relied upon by the Learned AR referred above suggest that the very intention with which the shares have been purchased is the basic test to arrive at a conclusion as to whether the share transaction is investment or trade and this intention can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mj s Dabur India Ltd. and realized profit under the head Long Term Capital Gains (LTCG) and claimed exemption ujs 10(38). 9.2 Similarly the assessee sold shares of certain other companies and the gain realized was offered under the head LTCG (since the period of holding is more than one year) and claimed exemption u/s.10(38) as detailed vide Annexure-A. 9.3 In addition to the above, the assessee sold shares of various other companies (approximately 170) and offered the gains under the head Short Term Capital Gains (STCG) - since the period of holding is less than one year - and applied special rate of taxation as prescribed u/s. 111A as detailed vide Annexure-B. 10.1 The main contentions of the AO as seen from the assessment order are as under: • One of the main objects of the assessee company is to do business in shares, stocks, debenture stocks, bonds, obligations, units, securities etc as per the Memorandum of the Association of the appellant company. • The assessee carried on the activity of purchase and sale of shares on regular basis. • The volume of purchase and sale of share (volume of business) is huge. • Frequency of transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciples, which can be applied on the facts of a case to find out whether transactions (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 as stock-in-trade or investment? Whether shown in opening/closing stock or shown separately as investment or non-trading asset? 2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. 3) What is the frequency of such purchases and disposal in that particulars 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 investment (high transactions and low holdings indicate trade whereas low transactions and high ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head "capital gain". The said First Appellate Order was upheld by the ITAT vide its order dated 12.1.2004 in ITA No. 2160/Del/1990 for assessment year 1990-91. 18. The details of number of shares of Dabur India Ltd. held by the assessee over a period of time and the transaction/changes are follows: Date as on No. of shares (in lakhs) Remarks 31.03.1996 37.15 No change in holding 31.03.1997 37.51 No change in holding 31.03.1998 37.41 Sold 1000 shares 31.03.1999 37.41 No change in holding 31.03.2000 37.41 No change in holding 31.03.2001 37.41 No change in holding 31.03.2002 37.41 No change in holding 31.03.2003 37.41 No change in holding 31.03.2004 37.41 No change in holding 31.03.2005 374.30 Paid up value of ₹ 10 per Sh. is reduced to ₹ 1 each and purchased 20000 shares (37.41x10)+20=374.3 31.03.2006 725.78 Bonus of 1 share for 1 share held, allotted and sold 1.41 lacs shares before bonus and sold 20 lacs shares after bonus (374.30-1.41)x2=745.78 745.78-20=725.78 19. Thus, it is very clear from the above detail that shares of Dawar India Ltd. were held as investment. From the details of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been disclosed in Schedule I of the Balance sheet showing a closing value of ₹ 30.85 crores on 31 March 2006. The accounting policy for trading of shares is disclosed in Schedule L of the Balance sheet which states that "closing stock of securities is valued at cost of market price which ever is lower. 19.5 Thus, the intention of the assessee is very much clear as to what stocks are to be treated as business stock and what to be treated as investment stock. The Policy and treatment of stock transaction are clearly reflected in the Balance sheet of the assessee. 19.6 We thus fully concur with the finding of the Learned CIT(Appeals) that the profit of ₹ 34,61,63,879 in respect of shares sold during the year (including gain of ₹ 29,05,58,750 realized on sale of shares of Dawar India Ltd. ) has been rightly treated by the assessee as long term capital gain and thus the Learned CIT(Appeals) has rightly held that the assessee is eligible for exemption under sec. 10(38) of the Act on the said long term capital gain. The First Appellate Order in this regard is thus upheld. The ground Nos. 1 and 2 are accordingly rejected. 19.7 From perusal of the above table ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is accordingly rejected. 23. In result, the appeal preferred by the Revenue is dismissed. 24. The assessee ( ITA No. 2240/Del/2010) on the other hand has basically questioned the First Appellate Order mainly on two grounds. Firstly, upholding of ₹ 6,23,34,129 claimed by the assessee as short term capital gain as business income (Ground Nos. 1 and 2) and secondly disallowance of expenses amounting to ₹ 5,33,768 under sec. 14A of the Act against exempted income (Ground No.3). 25. Ground Nos. 1 and 2: Similar arguments have been adopted by the parties as advanced by them hereinabove on the issue of long term capital gain raised in the appeal preferred by the Revenue. The authorities below have treated the claimed short term capital gain of ₹ 6,23,34,129 accrued on disposal of shares invested for a short term period as business income. The assessee had also claimed benefit under sec. 111A of the Act on the said short term capital gain. 26. The assessee had furnished list of shares and the number of scripts involved as 170. It had claimed short term capital gain of ₹ 6,71,16,180 and loss of ₹ 47,82,051 thus the net gain was claimed at ₹ 6,23,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort term to alter its investment vision and goal cannot be considered as an action borne out to do trade. It happens when the vision is long term, some shares thought purchased are dropped out from portfolio either because sufficient funds are not available to make them reach to a level to accumulate capital or because of some other allied reasons. 26.2 It is not the finding of the Assessing Officer or the Learned CIT(Appeals) that these shares were shown as stock in trade or the assessee was not correct in showing these shares as investment. We thus do not find infirmity in the claim of the assessee that the profit accrued on sale of these shares was short term capital gain and the assessee was eligible for claiming charging of the gain under the provisions laid down under sec. 111A of the Act. We thus while setting aside the orders of the authorities below in this regard direct the Assessing Officer to accept the claim of the assessee and allow the benefit of charging of the gain under sec. 111A of the Act. The ground Nos. 1 and 2 are accordingly allowed. 27. The ground No. 4 has not been pressed by the Learned AR, the same is accordingly rejected. 28. In result, the appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he likely placed other cases. 4) Because the action is under challenge on facts and law having followed the Hon'ble Delhi High Court overlooking the facts of the said case. 5. Because the action is under challenge on facts and law in making proportionate disallowance of ₹ 24,57,661 u/s. 14A. 6. Because the action is under challenge on facts and law in making disallowance of s.1,09,525 u/s. 94(7) and 94(8)." 31. Besides, the assessee has also moved application under Rule 27 of the ITAT Rules requesting therein to a new plea in order to support the First Appellate Order that the investment in Punjab Tractors Ltd. was made by the assessee in order to enjoy the controlling stakes in the said company and not to trade in shares. The Learned AR submitted that though the Learned CIT(Appeals) has allowed the appeal of the assessee, thereby holding the sale of shares of Punjab Tractors Ltd. as long term capital gain on the basis of period of holding, but the assessee wants to support the First Appellate Order in terms of Rule 27 of the ITAT Rules in relation to long term capital gain arisen on the sale of shares of Punjab Tractors Ltd. on the other grounds also i.e. the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue Amount in (Rs.) Grounds of appeal raised 1. Long Term Capital Gain treated as business income. 25,59,09,101 Ground No.2 2. Short Term Capital Gain treated as business income 5,83,72,758 Ground Nos. 2 and 5 3. Interest Expense disallowed. 3,89,53,657 Ground No. 7 4. Disallowance u/s. 14A 24,57,661 Not contested 5. Disallowance u/s. 94(7) 1,09,525 Not contested 36. The main issue involved in the appeals is regarding taxing the profits realized on sale of shares as business income against capital gain offered by the assessee either under long term capital gain or short term capital gain depending upon the period of holding of shares. 37. The assessee claimed ₹ 25,59,09,101 as long term capital gain which has been treated by the assessee as business income. The Learned CIT(Appeals) has, however, accepted the claimed long term capital gain against which the Revenue is in appeal raising ground Nos. 1 to 3 in this regard. 38. In support of the grounds, the Learned CIT(DR) has basically placed reliance on the assessment order. He submitted that the assessee was holding shares mainly of group company including Dabur India Ltd. as invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (supra) and Raja Bahadur Kamakhya Narain Singh vs. CIT (supra). 39. Considering the above submission, we find that both the shares of MTNL and Punjab Tractors Ltd. have been shown as investment in the balance sheet as on 31.3.2007 and all the shares were sold and not many transactions are there in the scripts. As on 31.3.2008, no shares of MTNL and Punjab Tractors Ltd. are held. These shares were held for considerable long time and shares were being sold when there was appreciation in the market. Shares of ABN Amro Securities purchased in 1998-99 were sold on 14.7.2007 after a period of 7/8 years. In these shares, the assessee had not carried out the transactions on regular basis as evident from the numbers of shares and transactions. Besides, the investment in Punjab Tractors Ltd. was made by the assessee in order to enjoy the controlling shares in the said company and the profit on sale of shares enjoying managing control is always considered as capital gain as per the decision cited hereinabove in the cases of Accra Investment Pvt. Ltd. vs. ITO (supra), Ram Narain & Sons (P) Ltd. (supra) and Raja Bahadur Kamakhya Narain Singh vs. CIT (supra). He also referred page Nos. 7 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the A.O. in treating the gain as business income is not approved. Accordingly, Ground No.2 is allowed." 41. The above material findings of the Learned CIT(Appeals) on facts regarding showing of the shares as investment in the balance sheet, their holding period, and volume and frequencies of their transactions, have not been rebutted by the Revenue. We thus do not find reason to interfere with the First Appellate Order on the issue. The same is upheld. 42. In result, ground Nos.1 to 3 of the appeal of the Revenue are thus rejected. 43. In ground Nos. 1 to 4 of the appeal of the assessee, the assessee has basically questioned treatment given to the gain of ₹ 5,83,72,758 on disposal of shares by the authorities below as business income against the claim of the assessee as short term capital gain chargeable to tax under sec. 111 of the Act. 44. The relevant facts are that the Assessing Officer noted that during the assessment year under consideration, the assessee had shown short term capital gain of ₹ 5,83,72,785. In the computation of income furnished during the assessment proceedings, an amount of ₹ 3,53,22,682 was shown as "short term capital los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Hon'ble High Court observed that the bulk of shares held by the assessee were for a substantial period and income was derived on account of liquidation of investment. It was held that there cannot be a single factor or criterion to determine whether the income falls under the head of short term capital gain or of business income. He referred page Nos. 13 to 18 of the paper book wherein details of short term capital gains STT paid (benefit claimed under sec. 111A) and without STT(no benefit claimed under sec. 111A) have been furnished. 46. Learned CIT(Appeals) on the other hand tried to justify the orders of the authorities below and he has also adopted similar arguments as advanced by him hereinabove in the appeal for the assessment year 2006-07 in opposition of ground Nos. 1 to 3 of the appeal preferred by the assessee. 47. Considering the above submission, we find that the authorities below have denied the claimed short term capital gain mainly on the basis that the assessee carried on the activities of purchase and sale of shares on regular basis, volume of purchase and sale of shares was huge, frequency of transaction was very high, conduct of assessee was that of a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,18,129. He noted further that the claim of interest expenses at ₹ 3,89,53,657 was less than the amount of ₹ 7,91,18,129 and accordingly the entire amount of ₹ 3,89,53,657 being interest expense was disallowed. The Learned CIT(Appeals) has, however, deleted the disallowance being satisfied with the submissions of the assessee which has been questioned by the Revenue. 49. In support of the ground, the Learned CIT(DR) has placed reliance on the assessment order. He submitted that assessee had taken interest bearing funds but had given interest free advances or on nominal interest rates, which was prejudicial to business interest of the assessee. The Learned CIT(Appeals) has deleted the disallowance made by the Assessing Officer without any plausible reason. The Learned AR on the other hand submitted that the assessee was having sufficient fund available and discussing the same, the Learned CIT(Appeals) has rightly deleted the disallowance. He placed reliance on the following decision: i) CIT vs. Tin Box Co. - 260 ITR 637 (Del.); ii) CIT vs. Doctor & Co. - 180 ITR 627 (Bom.); iii) Sanghvi Swiss Refills Pvt. Ltd. vs. ITO - 85 ITD 59 (Mum); 50. Having gone ..... X X X X Extracts X X X X X X X X Extracts X X X X
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