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TMI Blog2013 (6) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... f appeal before the appeal is finally heard or disposed off. 2. As regards grounds No.1 2, the brief facts are that the assessee is running three proprietary concerns, which are tabulated in para 3 of AO s order as under: Name of the proprietary concern Nature of Business Turnover for financial year 2006-07 Turnover for financial year 2005-06 M/s. Jay Kay Gas Co. Unit II, New Delhi. Transportation 26402/- 686762/- M/s. Jay Kay Gas Co. UnitII, Kichlu Nagar, Ludhiana. Distribution of LPG Gas Cylinders 3,31,99,961/- 29567153/- M/s. Jay Kay Gas Co. UnitII Kichlu Nagar, Ludhiana. Distribution of LPG Gas Cylinders 18457274/- 16047603/- M/s. Batra Valves New Delhi. Manufacturing of LPG Valves 2,43,45,475/- 1,53,76,529/- The assessee has declared short term capital gains of Rs.56,94,698/- which was revised later at Rs.49,39,023/- and after the claim of security transaction tax amount of short term capital gain from the transaction in share was revised from Rs.56,94,698/- to Rs.49,39,023/-. On the basis of details submitted, the observations of the A.O. with regard to the facts of the case was that the assessee had been dealing in shares on almost regular basis through out the year as evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CTR (AAAR) 297 : (2007) 288 ITR 641 (AAR), referring to the decisions of the Hon ble Supreme Court in several cases. The Hon ble Supreme Court has also laid down guidelines to make distinction between stock in trade and investment in shares in the case of Raja Bahadur Visheshwara Singh (Decd) and Others vs. CIT, Bihar and Orissa 41 ITR 586 and the decision of Hon ble Supreme Court in the case of Income Tax Bombay vs. H.Holck Larsen 160 ITR 67. The assessed short term capital gain claimed by the assessee as business income being net profit earned by the assessee from the transaction in shares through M/s. PNR Securities Pvt. Ltd; and M/s. Karvy Stock Broker and the security transaction tax of Rs.7,62,545/- was also added to the total income of the assessee. 5. The Ld. CIT(A) after considering the arguments made by the assessee confirmed the action of the AO in treating the transaction made by the assessee as business transaction and produced the purchases and sales made during the year, which is available at page 11, which for the sake of clarity is reproduced as under: S. No . Particulars Sale Date Sale consideration Purchase date Purchse cost. Exemption Expenses Gain/loss. 1 Share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of LPG Gas Cylinders. Turnover 5 cr 19% share. g) Batra Car Care Centre Running of Petrol Pump, Delhi Turnover-10 Cr. 17% share. h) Besides that the assessee is Managing Director of Stresscrete P. Ltd. Batra Fin Cap P Ltd. and Batra Associates Ltd. i) Chairman of AB Hotels Ltd. j) The assessee is also on Board of Directors of Mount Shivalik Industries Ltd. Gayson Engineering P. Ltd; Batra Hotels Enterprises P. Ltd; Laxmi Ancillaries P. Ltd; Halohon Radiators P. Ltd. Pye Industries and Domestic Appliances P. Ltd. Exact Developers and Promoters L. Ltd. 7.1. The Ld. counsel for the assessee further stated that the share business require full time attention but as stated above the assessee is actively involved in many other business priorities. He stated that the AO and the ld. CIT(A) has erred in concluding that as the assessee has done trading shares of shares almost on daily basis, the same cannot be termed as investment activity. But in this regard, it is submitted that even if the person is investing on routine basis through its broker, it cannot be the base for concluding that the person has done trading in the same. It is to be considered that intention to resell at a profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent (by sale of shares) will yield capital gain and not revenue receipt. In this regard it is submitted that the assessee has declared dividend income of Rs.1,72,86,993/- and out of the same Rs.38,18,593/- has been earned from investment in shares and mutual funds. Thus, the AO is even factually wrong in stating that no Dividend income has been earned. Thereby, it is wrong to say that the sale and purchase of shares have been made in the nature of business. 7.2. The Ld. counsel for the assessee, Sh. Sudhir Sehgal submitted as per the above facts and circumstances of the case, there cannot be any addition by treating the sale and purchase of shares as business activity. It is also submitted that the case of the assessee for the AY 2005-06 has also been finalized u/s 143(3) of the Act wherein the investments in the shares have been considered as an act of investment and not trading. The dividend income as well as the income from sale of shares is clearly visible in the computation of income which has been accepted by the then AO. The computation of incme for the AY 2006-07 is also placed in the PB at page 7-8 wherein again the assessee has disclosed the dividend income earned and sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gains is concerned the findings recorded by the CIT(Appeals) and the Tribunal are correct and Revenue cannot really contest the same. He however, submits that as far as short term capital gains is concerned, the Revenue is right as the assessee had earned substantial amount of `5,53,32,591/- and he has also drawn our attention to the findings recorded by the Assessing Officer, which are as under : a) The sole and exclusive purpose/motive of the assessee is to earn profit from sale and purchase of securities and not to earn dividend/interest income, as is evident from the fact that the assessee has earned profit of Rs.8,12,84,756/- and dividend of only Rs.36,63,100/- from its activity of sale and purchase of securities. b) The assessee is mainly dealing in shares in which always there is an element of risk or uncertainty is involved, which is a basic prerequisite to consider an activity to be in the nature of trade/adventure in the nature of trade. c) The holding period of most of the securities is usually very short. d) The Ratio of sales to purchases is 1.77 (18,64,07,182/10,51,22,426), again pointing that the assessee is engaged in the business of sale and purchase of securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stockin-trade and those which are held by way of investment. 6. In the case of CIT, Bombay v. H. Holck Larsen [1986] 160 ITR 67, the Supreme Court observed : The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact. 7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers. 8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles : (i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction ; (ii) the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions ; (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads, i.e., capital gains as well as business income. 11. The Assessing Officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stockin-trade (and therefore giving rise to business profits). 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. 12. These instructions shall supplement the earlier Instruction No. 1827 dated August 31, 1989-Circular No.4/2007, dated 15-6-2007. 8. In Commissioner of Income Tax Vs. Rewashanker A. Kothari (2006) 283 ITR 338, the Gujarat High Court, after considering its earlier decision in the case of Pari Mangaldas Girdhardas Vs. CIT (1977) 6 CTR 647 (Guj.), has formulated the following tests to determine whether the assessee can be said to be carrying on business of sale and purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment portfolio and were not part of the trading portfolio. We are not concerned with the trading portfolio in the present case as profits and gains from the trading portfolio have to be treated as business income/loss. As far as seven shares/transactions subject matter of short term capital gains are concerned it is noticeable that in four cases, the shares were held for a period of more than 7 months, 8 months, 8.5 months and 11 months. In three cases shares were held for 2.4 months, 2.5 months and 4 months. Quantum or total number shares is substantial but the transactions in question are only seven in number and the period of holding as mentioned above cannot be treated as insignificant and small. Quantum or total number may not be determinative but in a given case keeping in view period of holding may indicate intention to make investment. The Tribunal applying the aforesaid tests in the present case has accepted the position of the assessee that these shares which are subject matter of short term capital gains were rightly held by the assessee and treated by the assessee an investment portfolio and not a trading portfolio. We also notice that the Tribunal has mentioned that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be material but not decisive consideration to hold that the assessee is carrying on the business in holding shares in the nature of trade. The guidelines in CBDT Circular No.4 of 2007 dated 15.06.2007 are the good guidelines to determine the nature of transactions. In this regard, we are of the view that every person would make an investment not to make loss but to make a profit and certainly investment if disposed of in a short span of time, does not change the intention of the assessee. The amount of investment can also not be the only criteria for calculating the transaction of sale and purchase of shares as trading and not as investment. The reliance was placed in the case of ACIT vs. Sh. S.K. Kaintal in ITA No.846 1063/Chandi/2007 (Chd.Trib.) where it has been held that the intention of an assessee at the time of purchase of an asset is important to consider the nature of transaction. The mere fact that the land has been sold in piecemeal in a period of two years is not sufficient to justify the conclusion that the purchase and sale of land by the assessee was an adventure in the nature of trade. The reliance was also placed on the decision of ITAT, Chandigarh Bench, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment portfolio and not trade portfolio on which the assessee received substantial dividend income during the preceding year as well as during the impugned year. As regards the mention of the AO that the assessee had made substantial transaction and has earned huge profit. This can happen even in the case of investment portfolio. The element of uncertainty is already there when a person deals in security. But this factor cannot be determinant factor whether the assessee is trading in share or is an investor. Some investments do take this. The purchase and sale of shares in the impugned year cannot be establish the objective for acquiring shares as investor or as a trader. The ratio of sales to the purchase may be relevant in a particular case. Repeating our finding that in earlier assessment year when investments in portfolio were accepted by the department and our finding hereinabove are supported by the decision of Hon ble Delhi High Court in the case of CIT vs. Vinay Mittal and others decisions relied upon by the ld. counsel for the assessee in his arguments and the submissions, we are of the view that the assessee has rightly declared the capital gain and the shares are held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 756 wherein it has been held as under: In the instant case, the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has always been held to be a deductible expenditure by courts. In the circumstances, it is difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessee. The expenditure was, therefore, rightly held to be deductible under section 37. We, therefore, reject the contention of the revenue that the amount in question could not be claimed as a deduction under section 37 of the Act. The facts of the case are similar to that of the assessee. The Chairmanship in M/s A.B. Hotels nothing but a profit earning asset of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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