ACIT, Cir. 1(1), Pune, Pune V. Blue Moon Securities P.Ltd., Pune

ITA 1019/PUN/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56381 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 29-06-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 02-08-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income
• Section: 143(3); 2(14); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE SHRI I.C. SUDHIR (JM) AND SHRI D. KARUNAKARA RAO (AM) ITA NO. 1019/PN/2007 (ASSTT. YEAR: 2003-04) ASSTT. COMMISSIONER OF INCOME - TAX , ... APPELLANT CIRCLE-1(1), PUNE V. BLUE MOON SECURITIES PVT. LTD, RESPONDENT 224, PATIL PLAZA COMPLEX, PARVATI PUNE PAN: AAACB4778P APPELLANT BY : MS. NEERA MALHOTRA RESPONDENT BY : SHRI KISHORE PHADKE ORDER PER I.C. SUDHIR, JM THE REVENUE HAS QUESTIONED FIRST APPELLATE ORDER ON THE FOLLOWING GROUNDS : 1. IN THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE CIT(A) HAS ERRED IN DIRECTING THE AO TO TREAT INCOME ARISING FROM TR ANSFER OF SHARES AS INCOME FROM CAPITAL GAINS INSTEAD OF AS INCOME FROM BUSI NESS & PROFESSION AS CONSIDERED BY THE ASSESSING OFFICER. 2. IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE COMPANY IS PURELY AN INVE STMENT COMPANY WITHOUT CONSIDERING THE NATURE OF TRANSACTIONS ENTERED INTO BY THE COMPANY AND THE OBJECTS OF THE ASSESSEE COMPANY. 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE C IT(A) HAS ERRED IN NOT APPRECIATING THAT THE MAIN OBJECTS OF THE ASSESSEE COMPANY ARE TO CARRY ON BUSINESS AS SHARE AND STOCK BROKERS AND TO PURCHASE , SELL AND OTHERWISE DEAL IN STOCKS, SHARES AND SECURITIES OF ALL KINDS. 4. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) FAILED TO CONSIDER THE MAGNITUDE AND FREQUENCY OF TRANSACTION S IN SHARES WHILE HOLDING ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 2 THAT THE INCOME ARISING FROM SALE OF SHARES HAS TO BE TAXED UNDER THE HEAD INCOME FROM CAPITAL GAINS. 5. IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE CIT(A) ERRED IN ALLOWING SET OFF OF CAPITAL LOSS BROUGHT FORWARD OF RS. 32,03,479/- BEING CONSEQUENTIAL RELIEF ARISING FROM HIS ORDER. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE A PRIVA TE LIMITED COMPANY IS ENGAGED IN DEALING IN SHARES AND SECURITIES OF LISTED COMPA NIES. DURING THE YEAR, IT HAD EARNED FROM THE SALE OF SHARES ETC., AND CLAIMED TH E INCOME AS LONG TERM AND SHORT TERM CAPITAL GAINS. THE A.O. HELD THAT THE P ROFIT IS REQUIRED TO BE TAXED AS BUSINESS INCOME AS AGAINST SHOWN BY THE ASSESSEE UN DER THE CAPITAL GAIN HEAD. THE LD CIT(A) HAS, HOWEVER, ACCEPTED THE CLAIMED CA PITAL GAINS, HENCE THE REVENUE IS IN APPEAL. 3. IN SUPPORT OF THE GROUNDS, THE LD. D.R. HAS BASI CALLY PLACED RELIANCE ON THE ASSESSMENT ORDER. LD. D.R. SUBMITTED THAT LD CIT(A ) HAS FAILED TO CONSIDER THE MAGNITUDE AND FREQUENCY OF TRANSACTION IN SHARES WH ILE HOLDING THAT THE INCOME ARISING FROM SALE OF SHARES HAS TO BE TAXED UNDER T HE HEAD INCOME FROM CAPITAL GAINS. HE SUBMITTED THAT MAIN OBJECTS OF THE ASS ESSEE COMPANY ARE TO CARRY ON BUSINESS AS SHARE AND STOCKBROKER AND TO PURCHASE S HARE AND OTHERWISE DEAL IN STOCKS - SHARES AND SECURITIES OF ALL KINDS. THE L D. D.R. REFERRED WRITTEN BRIEF DT. 7.5.2009 FURNISHED ON BEHALF OF THE DEPARTMENT IN S UPPORT OF THE GROUND. THE CONTENTS OF SAID BRIEF ARE BEING REPRODUCED HEREUND ER : THE ASSESSEE IN SUPPORT OF THEIR GROUNDS OF APPEAL HAVE STATED CERTAIN FACTS, REPRODUCED IN PARA 2.1 OF THE APPELLATE ORDER. THE FOLLOWING FACTS MAY ALSO BE CONSIDERED, WHICH HAVE NOT BEEN BOUGHT OUT AND C ONSIDERED BY THE A.O/CIT(A), OR ARE AT VARIANCE WITH THE STATED FACT S. 1. THE COMPANY HAS ONLY TWO SHAREHOLDERS NAMELY SHRI R AJESH JHAVERI(59% SHARE) AND HIS WIFE SMT. HARSHA JHAVERI (41% SHARE). THE CLOSELY HELD COMPANY, WAS NOT PROMOTED BY THE T WO SHAREHOLDERS, BUT SUBSEQUENTLY TAKEN OVER AFTER IN CORPORATION IN ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 3 1995. THESE SHAREHOLDERS RESIDE IN AHMEDABAD AND AS SESSED THERE. ONE OR BOTH MAY BE ENGAGED IN THE BUSINESS O F SHARE BROKER OR DEALER. 2. CONTRARY TO THE CLAIM THAT THE COMPANY DID NOT INCU R SUBSTANTIAL EXPENSES FOR THE BUSINESS, THE COMPANY PAID SALARY OF RS. 80,000/- AT LEAST UPTO ASSESSMENT YEAR 2002-03, BY THE TIME SUBSTANTIAL INVESTMENT IN PURCHASE OF SHARES WERE MADE. 3. CONSIDERING THE NATURE OF ACTIVITY, VIZ. NATURE OF GOODS TRANSACTED IN, MODE TRANSACTION ETC. THE SHARE TRADING IS NOT CUSTOMER ORIENTED, REQUIRING INFRASTRUCTURE LIKE STORAGE OR REGULAR CUSTOMER CARE. 4. CONTRARY TO THE CLAIM OF ASSESSEE THAT ONLY OWN FUN DS WERE USED FOR THE INVESTMENT BUSINESS, THE ASSESSEE COMPANY S HOWS OUTSTANDING LOAN OF RS. 65 LAKHS AS ON 31.3.2001. THE ACTUAL AMOUNT DURING THE YEAR OR SUBSEQUENT YEARS ARE NOT KNOW. IT ALSO PURCHASED SHARES ON CREDIT (RS.43,75 LAKHS DURING A .Y. 2003-04) 5. THE COMPANY ALSO PLEDGED SUBSTANTIAL NUMBER OF SHA RES (9.45 LAKHS) WITH STANDARD AND CHARTERED BANK AS SECURITY FOR LOAN TO THIRD PARTY, PROBABLY THE DIRECTORS TO ROUTE THE BO RROWED FUNDS FOR THE COMPANYS BUSINESS. (REFER NOTES ON ACCOUNTS A. Y. 2003-04) 6. CONTRARY TO THE CLAIM THAT AS NEVER CARRIED CONTINU OUS PURCHASING AND SELLING OF STOCK, AND WAS NOT INVOLVED IN PURCH ASE AND SALE OF SAME SHARE, THE ASSESSEE PURCHASED SHARES OF THE SA ME COMPANY OVER A PERIOD OF TIME AND SOLD SUCH SHARES IN PHASE D MANNER. (SC DECISION IN CASE OF DALHOUSIE INV. TRUST CO. LTD. ( 1968) 68 ITR 468 APPLIES). THE DETAILS IN RESPECT OF 66399 SHARES O F SUPREME INDUSTRIES LTD. (PURCHASED FROM 23.2.1999 TO 29.6.2 001) WHEN THE PRICES WERE FALLING (FROM RS. 222.1 TO RS. 47.07/-) AND SOLD FROM 01.09.2004 TO 13.09.2004 IS ENCLOSED AS ANN. A. 7. DURING THE YEAR A.Y. 2004-05, THE ASSESSEE SOLD 450 00 BONUS SHARES OF HI-TECH GEARS FOR RS. 100.22 LAKHS, THE O RIGINAL SHARES (45000) OF WHICH WERE SOLD IN PREVIOUS YEARS. 8. LD. CIT(A) IN THE CASE OF M/S ABBOTT HOTELS PVT. LT D. (A.Y. 2005-06) ENGAGED PRIMARILY IN HOTEL BUSINESS, HELD PROFITS F ROM SHARE TRANSACTIONS OF THE ASSESSEE, TAXABLE AS BUSINESS I NCOME. (ANN.B). THE LD D.R. ALSO PLACED RELIANCE ON THE FOLLOWING D ECISIONS : ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 4 I) RAJA BAHADUR VISHESHWARA SINGH (DECEASED) AND OTHER VS CIT 41 ITR 685. II) CIT VS MOTILAL HIRABHAI SPINNING AND WEAVING C O. LIMITED 113 ITR 173 III) BHARAT DEVELOPMENT (P) LTD. VS CIT 4 TAXMAN 58 (DEL ). IV) PUNJAB CO-OPERATIVE BANK LTD. VS CIT (1940) 8 ITR 6 35(PC) V) SARDAR INDRA SINGH & SONS LTD. VS CIT, 24 ITR 415(S C) 4. THE LD. A.R., ON THE OTHER HAND, TRIED TO JUSTI FY THE FIRST APPELLATE ORDER ON THE ISSUE. HE SUBMITTED THAT THE COMPANY IS AN INV ESTMENT COMPANY HAVING INCOME ONLY FROM CAPITAL AND DIVIDEND INCOME FROM SHARES A ND SECURITIES LISTED ON STOCK EXCHANGES AND MUTUAL FUNDS. THE COMPANY DOES NOT C ARRY ON BUSINESS AT ALL AND THE DEPARTMENT HAS ACCEPTED THE SAME SINCE INCEPTIO N OF THE COMPANY. HE SUBMITTED THAT RETURN FOR A.Y. 2004-05 WAS NOT ACCO MPANIED WITH AUDIT REPORT AS PRESCRIBED IN FORM 3CA AND 3 CD U/S. 44AB OF THE I NCOME TAX ACT, BECAUSE THE SAME IS NOT APPLICABLE TO THE ASSESSEE. HE SUBMIT TED THAT THERE IS NO TURNOVER AND BUSINESS INCOME LIABLE TO BE WORKED OUT U/S. 28 T O SECTION 44, HENCE QUESTION OF SUBMISSION OF TAX AUDIT REPORT DOES NOT ARISE. THE LD. A.R. POINTED OUT THAT THE ASSESSEE STARTED INVESTMENT IN SHARES EVER SINCE 19 99. ALL ALONG THESE, SHARES ARE TREATED AS INVESTMENT IN THE ACCOUNT MAINTAINED BY THE ASSESSEE WHICH HAVE BEEN ACCEPTED BY THE DEPARTMENT. HE REFERRED SECTION 2 (14) OF THE ACT WHEREIN THE WORD CAPITAL ASSET HAS BEEN DEFINED. HE ALSO REF ERRED SECTION 2 (29A) AND SECTION 2 (42A) WHEREIN LONG TERM CAPITAL ASSET AND SHORT TERM CAPITAL ASSET HAS BEEN DEFINED. HE SUBMITTED THAT ONCE THE SHARES HE LD BY THE ASSESSEE ARE TREATED AS CAPITAL ASSET U/S. 2(14) OF THE ACT, AS PER SE CTION 45 OF THE ACT, ANY PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET EFFECTED IN THE PREVIOUS YEAR SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD CAPITAL GAINS AND SHALL BE DEEMED TO BE THE INCOME OF THE PREVIOUS YEAR IN WHICH THE TRA NSFER TOOK PLACE. THE PROVISIONS OF SECTION 45 WILL APPLY MANDATORILY ONCE IT IS HE LD THAT THERE IS A TRANSFER OF A CAPITAL ASSET. HE SUBMITTED THAT THE INCOME CAN BE ASSESSED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION ONLY IN A SITUATION WHERE A PROFIT OR ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 5 GAIN IS ARISEN ON SALE OF STOCK IN TRADE. THE LD. A.R. CITED THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RAMKUMAR AGARWAL AND BROS.. 205 ITR 251 (SC) HOLDING THAT WHEN THE ASSESSEE TREATS THE SHARES A S CAPITAL ASSET ALL ALONG, IT IS NOT PERMISSIBLE EITHER FOR ASSESSEE OR FOR A.O TO TREA T THE SAME AS STOCK IN TRADE. IN THIS REGARD, ONLY THE INTENTION OF THE ASSESSEE IS RELEVANT AND THE A.O CANNOT SUBSTITUTE HIS INFORMATION AS THAT OF THE ASSESSEE. HE SUBMITTED THAT IN THE SAID CASE OF RAMKUMAR AGARWAL AND BROS (SUPRA), THE ASSE SSEE WAS ALL ALONG TREATING THE SHARES HELD IN A COMPANY AS STOCK IN TRADE. THI S POSITION WAS ACCEPTED BY ASSESSEE AS WELL AS REVENUE. THUS, WHAT WAS A CAPI TAL ASSET WILL ALWAYS REMAIN A CAPITAL ASSET UNLESS THE PERSON HOLDING THE ASSET H IMSELF CHANGES THE NATURE BY A SPECIFIC ACTION LIKE CONVERSION OF CAPITAL ASSET I NTO STOCK IN TRADE OR VICE VERSA DEPENDING UPON HIS INTENTION AT THE TIME OF CHANGE . 5. THE LD. A.R. SUBMITTED FURTHER THAT UNDER THE S CHEDULER SYSTEM OF COMPUTATION OF INCOME, PARTICULAR NATURE OF INCOME FALLING UNDER A SPECIFIC HEAD WILL ALWAYS BE CHANGEABLE UNDER THAT SPECIFIC HEAD ONLY AND CANNOT BE BROUGHT TO TAX UNDER ANY DIFFERENT HEAD. IN THIS REGARD, HE PLACE D RELIANCE ON THE FOLLOWING DECISIONS : I) UNITED COMMERCIAL BANK LTD. V/S. CIT, 32 ITR 68 8 (SC) II) KARANPURA DEVELOPMENT CO. LTD. V/S. CIT, 44 IT R 362(SC) III) EAST INDIA HOUSING & LAND DEVELOPMENT TRUST LTD. V/ S. CIT, 42 ITR 49(SC) IV) SULTAN BROS. PVT. LTD., V/S. CIT, 53 ITR 353 ( SC) 6. THE LD. A.R. SUBMITTED FURTHER THAT THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF HOLCK LARSEN V/S. CIT, 85 ITR 285 (BOM) SQUARELY APPLIES IN FAVOUR OF THE ASSESSEE HOLDING THAT THE ASSESSEE AC QUIRED THE RIGHT SHARES AND SOLD THEM AT PROFIT IS NOT SUFFICIENT TO MAKE HIM A DEAL ER IN SHARES, IF OTHERWISE HE WAS AN INVESTOR. THE LD. A.R. SUBMITTED THAT IN THE CA SE OF ASSESSEE OUT OF 3 SCRIPTS ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 6 HELD, ONE OF THE SCRIPT NAMELY HI-TECH GEARS LTD. W ERE ACQUIRED BY WAY OF BONUS SHARES IN RESPECT OF INVESTMENT IN THE SAID SCRIPT IN THE EARLIER YEAR. SINCE THE ACQUISITION AS WELL AS BONUS SHARES WERE TREATED AS INVESTMENT IN EARLIER YEAR, THE GAIN ON SALE OF THE SAME WILL ALWAYS BE CAPITAL GAI N AND NOT BUSINESS INCOME. 7. THE LD. A.R. ALSO REFERRED CBDT CIRCULAR NO. 4 O F 2007 DT. 15.3.2007 MAKING IT CLEAR THAT THE ASSESSEE MAY HAVE INCOME UNDER BO TH HEADS I.E. CAPITAL GAINS AS WELL AS BUSINESS INCOME WHERE IT IS HAVING 2 PORTFO LIOS. 8. THE LD A.R. SUBMITTED THAT THE A.O IN HIS ORDER HAS OBSERVED THAT THE ASSESSEE IS INVOLVED IN ONLY ONE ACTIVITY, WHICH IS CONTINUOUSLY CARRIED OUT SINCE LONG IN A ORGANIZED AND SYSTEMATIC WAY WITH AN INTENTION TO MAKE PROFIT. THE LD. A.R. CONTENDED THAT EVEN IF THE ONLY ONE ACTIVITY IS CAR RIED, THE SAME IS ONLY INVESTMENT IN SHARES AND NOT OTHER. ANY INVESTMENT NOT MADE IN AN ORGANIZED AND SYSTEMATIC WAY WILL RESULT INTO HEAVY LOSSES. THEREFORE, THE SAME CANNOT BE VIEWED ADVERSELY SO AS TO TREAT THE INVESTMENT AS A BUSINESS. ANY I NVESTMENT IS ALWAYS MADE WITH AN INTENTION TO MAKE PROFIT. NO PRUDENT PERSON WILL E VER INVEST IF SUCH INVESTMENT IS LIKELY TO RESULT INTO LOSSES. IN THIS REGARD, HE P LACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V/S. SUTLE J COTTON MILLS SUPPLY AGENCY LTD. 100 ITR 706 (SC). THE LD. A.R. SUBMITTED THAT THE PRESENT INCOME TAX ACT 1961 DOES NOT HAVE A DEFINITION OF AN INVESTMENT CO PE R SE. HOWEVER, THE OLD SECTION 109 CONTENT SUCH A DEFINITION IN THE CONTEXT OF EXT RA TAX ON DISTRIBUTABLE INCOME OF AN INVESTMENT COMPANY. THE SAID DEFINITION, AS WAS AVAILABLE IN EXPLANATION TO SECTION 109 READS AS (II.) INVESTMENT COMPANY ME ANS A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHA RGEABLE UNDER THE HEADS INTEREST ON SECURITIES, INCOME FROM HOUSE PROPER TY AND INCOME FROM OTHER SOURCES. HE SUBMITTED THAT SIMILAR DEFINITION OF AN INVESTMENT COMPANY IS AVAILABLE UNDER THE WEALTH TAX ACT. HE SUBMITTED THAT IT COU LD ALSO BE ASSOCIATED WITH AN INVESTMENT COMPANY, HAVING INCOME MAINLY FROM CAPI TAL GAINS IS ALSO WELL ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 7 RECOGNIZED BY THE LEGISLATURE. THUS, INVESTMENT CO MPANY DERIVING INCOME MAINLY UNDER THE HEAD CAPITAL GAINS, AS AGAINST UNDER TH E HEAD OF BUSINESS INCOME, IS RECOGNIZED AND ACCEPTABLE TO THE LAW. HE SUBMITTE D FURTHER THAT UNDER SCHEDULE VI OF THE COMPANIES ACT, THE COMPANIES ARE REQUIRED T O DISCLOSE ITS OPERATING RESULT IN THE PROFIT & LOSS ACCOUNT. IN THE SAID PROFIT & LO SS ACCOUNT, THE PROFIT/LOSS FROM SALE OF AN ASSET IS REQUIRED TO BE CREDITED/DEBITED TO THE PROFIT & LOSS ACCOUNT. JUST BECAUSE PROFIT ON SALE OF ASSET IS TO BE CREDITED T O THE PROFIT & LOSS ACCOUNT, IT NEVER MEANS THAT ALL SUCH PROFITS CREDITED TO THE PROFIT & LOSS ACCOUNT ASSUME THE NATURE OF BUSINESS ACTIVITY. IN THIS REGARD, HE REFERRED DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V/S. VEEKAYLAL INVESTMENT, 249 ITR 597 (BOM) WITH THIS SUBMISSION THAT IN THAT CASE, COMPANY IN INVESTMENT HAD CONTENDED THAT THE CAPITAL GAINS EARNED BY IT ARE NOT ELIGIBLE FOR MAT. THE H ONBLE HIGH COURT OBSERVED THAT SUCH PROFITS THOUGH TAXED AS CAPITAL GAINS, ARE REQ UIRED TO BE TAXED UNDER THE MAT PROVISIONS U/S. 115J OF THE I.T. ACT. HE ALSO PL ACED RELIANCE ON THE FOLLOWING DECISIONS : I) EAST INDIA HOUSING AND LAND DEVELOPMENT TRUST LTD., 42 ITR 49(SC) II) SULTAN BROTHERS PVT. LTD., 51 ITR 353 (SC) III) KARANPURA DEVELOPMENT CO. LTD., 44 ITR 362 IV) UNITED COMMERCIAL BANK LTD., 32 ITR 688 (SC) V) CHUGANDAS & CO., 55 ITR 17 (SC) VI) S.G. MERCANTILE CORPORATION PVT. LTD., 83 ITR 7 00 (SC) VII) CIT V/S. KARAMCHAND THAPAR SONS LTD. (1978), 1 15 ITR 250 (CAL.) VIII) ASSOCIATED TECHNO PLASTICS (P) LTD. V/S. DCIT (1997), 58 TTJ (DEL.) 673 IX) WALCHAND HINDUSTAN LTD. V/S. ACIT (2006), 102 I TD 331 (MUM) X) ARA TRADING AND INVESTMENT PVT. LTD. V/S. DCIT, ITA NO. 499/PN/2008 (A.Y. 2004-05), ORDER DT. 31 ST AUGUST 2009. ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 8 XI) HRA HOLDING AND TRADING PVT. LTD. V/S. DCIT, ITA NO. 500/PN/2008 (A.Y. 2004-05), ORDER DT. 31 ST AUGUST 2009. 9. THE LD. A.R. ALSO REFERRED DIFFERENT CHARTS REGA RDING PURCHASE AND SALES DURING THE YEAR ; VALUE TEST, QUANTITY TEST AND HAS H COUNT TEST REGARDING THE TRANSACTION; AND COMPARATIVE CHART OF TESTS APPLIED IN VARIOUS CASES. HE ALSO REFERRED PAPER BOOK PAGE NOS. 1 TO 11 I.E. COPIES O F AUDITED ACCOUNTS FOR YEAR ENDED ON 31 ST MARCH 2004, MEMORANDUM OF ASSOCIATION & OBJECT CL AUSE, AND SECTION 143(3) ORDER FOR A.Y. 2006-07. 10. THE LD. A.R. ALSO POINTED OUT THE SUMMARY OF ER RONEOUS OBSERVATIONS OF THE A.O IN A CHART FORM AS UNDER : PAGE NO. & PARA NO. OF THE 143(3) ORDER OBSERVATIONS EXPLANATION PAGE - 1,PARA 2 THE RETURN WAS ACCOMPANIED WITH TAX AUDIT REPORT IN FORM 3CA & 3CD. WRONG STATEMENT. NO ANY TAX AUDIT REPORT WAS PREPARED SINCE NO BUSINESS ACTIVITY. AS SUCH, NO ANY TAX AUDIT REPORT WAS SUBMITTED. PARA - 3, PARA - 8 THAT THE APPELLANT DERIVES PROFITS FROM ONE ACTIVITY, I.E. SALE AND PURCHASE OF SHARES. FACTUALLY WRONG STATEMENT. THE COMPANY EARNS REGULAR DIVIDENDS OF LARGE AMOUNTS FROM VARIOUS COMPANIES. PAGE - 3,PARA - 8 THE ACTIVITY (SHARE TRADING) IS CARRIED ON ALMOST ON DAY TO DAY BASIS. FACTUALLY WRONG STATEMENT. ONLY THREE SHARES WERE BOUGHT AND SOLD DURING THE YEAR. NO DAY-T-DAY ACTIVITY AT ALL. 11. WHILE CONCLUDING HIS ARGUMENT THE LD. A.R. SUBM ITTED THAT CASE OF THE ASSESSEE IS FULLY COVERED BY THE DECISION OF HONB LE BOMBAY HIGH COURT IN THE CASE ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 9 OF CIT V/S. GOPAL PUROHIT, (2010) 34 DTR 52 (BOM), UPHOLDING THE VIEW OF THE BOMBAY BENCH OF THE TRIBUNAL IN THAT CASE (2009) 12 2 TTJ (MUM) 87. AND FOLLOWING RECENT DECISIONS OF MUMBAI AND PUNE BENCHES : (I) SHRI MAHENDRA C. SHAH V/S. ACIT, AND VICE VERSA I TA NO. 6289/MUM/2008 (A.Y. 2005-06) AND ITA NO. 4932/MUM/2 009 (A.Y. 2006-07), ORDER DT. 18 TH MAY 2011 (II) ABBOT HOTELS (P) LTD. V/S. DCIT, ITA NO. 1424/PN/20 08 (A.Y. 2005-06) DT. 31 ST MAY 2011. 12. THE LD. A.R ALSO REPLIED TO THE WRITTEN BRIEF D ATED 7.5.2009 FILED BY THE DEPARTMENT, WHICH WE WILL DISCUSS IN THE SUCCEEDING PARAGRAPHS. 13. CONSIDERING THE ABOVE SUBMISSIONS, FIRSTLY WE H AVE GONE THROUGH THE DECISIONS RELIED UPON BY THE PARTIES, WE FIND THAT THE LUCKNOW BENCH OF THE TRIBUNAL IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LTD. V/S . ACIT, 120 TTJ (LUCK.) 216, AFTER DISCUSSING SEVERAL RULINGS ON THE ISSUE HAS SUMMARI ZED SOME PRINCIPLE FOR APPLICATION ON THE FACTS OF A CASE TO FIND OUT WHET HER TRANSACTION (S) IN QUESTION ARE IN THE NATURE OF TRADE OR ARE MERELY FOR INVESTMENT PURPOSES. THESE PRINCIPLES HAVE BEEN SUMMARIZED IN PARA NO. 13 OF THE SAID DECISIO N OF LUCKNOW BENCH. FOR A READY REFERENCE THE SAID PARA NO. 13 OF THE DECISIO N IS BEING REPRODUCED HEREUNDER : (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE T IME 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/CLOS ING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET. ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 10 (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 RETA INING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DIS POSAL IN THAT PARTICULAR ITEM ? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DE ALING IN THAT PARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSE E IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDIC ATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT) . (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PROF IT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE ? FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN T HE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSE NTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN T HE BALANCE SHEET ? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOUL D INDICATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MAR KET VALUE OR NET REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL INDIC ATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEM ORANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION ? WHETHER FOR T RADE OR FOR INVESTMENT? IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE S EPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY ? AND VICE VERSA. (7) IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SH OW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE H AS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE S HOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ON US WOULD SHIFT TO REVENUE TO PROVE THAT APPARENT IS NOT REAL. ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 11 (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHA RES (OR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICI ENT TO SAY THAT ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR I NVESTMENT. (9) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISIT ES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE I S COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING A S A TRADER IN THAT ITEM ? WHETHER IT HAD SUCH AN INTENTION (TO CARRY ON ILLE GAL BUSINESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASES WERE MADE ? (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15 TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCO UNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO I NTERMINGLING 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. 14 WE WILL DEAL WITH FACTS OF THE PRESENT CASE TO VERIFY AS TO WHETHER THOSE FACTS ARE FULFILLING THE ABOVE PRINCIPLES TO DECIDE THE V ERY NATURE OF THE TRANSACTION IN QUESTION IN THE PRESENT CASE IN SUCCEEDING PARAGRAP H. BESIDES ABOVE, A BASIC QUESTION HAS BEEN RAISED BEFORE THE BENCH AS TO WHE THER THE ASSESSEE COMPANY WHICH HAS GOT NO OTHER ACTIVITY THAN INVESTMENT IN SHARES CAN BE SAID THAT BY FORMING A COMPANY, THE AIM AND OBJECT IS TO DEAL IN SHARES IN A SYSTEMATIC MANNER WITH ASSISTANCE OF A SET UP TO TRADE IN SHARES. IN MOST OF THE RULINGS CITED BY THE PARTIES, THE ASSESSEE COMPANY OR FIRM HAS BEEN MAIN TAINING 2 PORTFOLIOS IN SHARES. ONE MEANT FOR INVESTMENT IN SHARES AND THE OTHER FO R DOING BUSINESS IN SHARE TRANSACTIONS. THE CONTENTION OF THE LD D.R. REMAI NED THAT IN SUCH A SITUATION, THE POSSIBILITY OF AN ASSESSEE COMPANY DOING BUSINESS I N SHARE TRANSACTIONS IS ALSO MAKING INVESTMENT, CANNOT BE RULED OUT AND THERE IS SCOPE OF VERIFYING THEIR ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 12 INTENTION IN MAKING THE INVESTMENT IN SHARES DUE TO THEIR DIFFERENT APPROACH TOWARDS THE 2 PORTFOLIOS. HOWEVER, IN A CASE LIKE ASSESSEE COMPANY, WHERE THE ENTIRE SET UP IS DOING ONLY ONE ACTIVITY, IT IS VERY DIFFICULT TO ACCEPT THE SUBMISSION OF THE ASSESSEE COMPANY THAT ITS ONLY OBJECT IS TO MAKE INVESTME NT IN SHARES. UNDISPUTEDLY, THERE IS NO PROVISIONS IN COMPANIES ACT OR IN THE INCOME TAX ACT WHICH PROHIBITS AN ASSESSEE COMPANY TO DEAL WITH INVESTMENT IN SHAR ES OR PROPERTIES ONLY. NEITHER ANY DECISION HAS BEEN CITED BY THE LD. D.R. HOLDIN G THAT AN ASSESSEE COMPANY CANNOT DEAL WITH SHARES AS ITS SOLE ACTIVITIES AS I NVESTMENT THEREIN TO EARN INCOME THEREFROM. THE PURPOSE OF THE ARGUMENT OF THE LD. D.R. AS WE COULD UNDERSTAND IS TO ADVANCE ITS CASE IN SUPPORT OF THE ASSESSMENT OR DER THAT WHEN AN ASSESSEE COMPANY IN AN ORGANIZED MANNER WITH THE ASSISTANCE OF ITS EMPLOYEES AND INFRASTRUCTURES DEALS IN SHARE AS A TRADER DOES, IT CANNOT BE SAID THAT THE VERY INTENTION OF THE ASSESSEE COMPANY BEHIND THE DEALIN G IN SHARE IS NOTHING BUT INVESTMENT. WE WILL DEAL WITH THIS ASPECT AS TO WHAT WAS THE INTENTION OF THE ASSEE I.E. INVESTMENT OR TRADING WHILE DEALING IN SHARES WITH THE ASSISTANCE OF THE ABOVE SAID PRINCIPLES WHICH ARE EQUALLY APPLICABLE IN THE CASE OF ASSESSEE. THE QUESTION AS TO WHETHER AN ASSESSEE COMPANY CAN BE SET UP ONL Y FOR MAKING INVESTMENT IN SHARES AND EARNING THERE-FROM AND NOT COUPLED WITH TRADING IN SHARES AS A BUSINESS, HAS BEEN ANSWERED BY HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT V/S. KARAMCHAND THAPAR SONS LTD., (SUPRA). IN THAT CASE BEFORE THE HONBLE CALCUTTA HIGH COURT, ASSESSEE COMPANY WAS CARRYING ON BUSINE SS AS AN INVESTMENT COMPANY . THE ASSESSEE COMPANY SINCE 1943-44 HAD BEEN PURC HASING AND SELLING SHARES EVERY YEAR BUT IN ALL THESE PAST YEARS, THE ASSESSE E HAD NOT BEEN TREATED AS A DEALER IN SHARES. IN THE A.Y. 1957-58, TRANSACTION IN SUC H PURCHASE AND SALE OF SHARES RESULTED IN A PROFIT ON SALE OF CERTAIN SHARES AND ALSO A LOSS ON SALE OF OTHER SHARES. THE ASSESSEE DISCLOSED IN ITS RETURN A SUM OF RS.87 ,601/- AS CAPITAL GAIN. THE ITO, HOWEVER, ASSESSED AS BUSINESS PROFIT A SUM OF RS. 2 ,50,375/- HOLDING THAT THE SAME WAS REALIZED ON SALE OF SHARES AS A TRADING PROFIT . THE TRIBUNAL CONSIDERING THE FACTS OF THE CASE CAME TO THE CONCLUSION THAT THE SURPLUS IN THE HANDS OF THE ASSESSEE BY ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 13 REASON OF THE TRANSACTIONS IN SHARES WAS A CAPITAL GAIN AND NOT A BUSINESS PROFIT. IN THIS REGARD, THE TRIBUNAL NOTED FOLLOWING 3 MATERIA L FACTS TO ARRIVE AT THE AFORESAID CONCLUSION : (A) THE ASSESSEE WAS CARRYING ON BUSINESS AS AN INVESTM ENT COMPANY IN CONSONANCE WITH ITS MEMORANDUM OF ASSOCIATION; (B) TRANSACTIONS ENTERED INTO BY THE ASSESSEE WERE LESS THAN 10% OF THE TOTAL HOLDING OF ITS SHARES; (C) PRIOR TO THEIR SALE, THE SHARES HAD BEEN HELD FOR F AIRLY A LONG PERIOD. THE HONBLE HIGH COURT WAS PLEASED TO UPHOLD THE DE CISION OF THE TRIBUNAL. IN RESULT, THE APPEAL PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE TRIBUNAL WAS DISMISSED. THE HONBLE SUPREME COURT IN THE CASE OF S.G. MERCANTILE CORPORATION PVT. LTD., (SUPRA) HAS BEEN PLEASED TO HOLD AS UND ER : SECTION 9 OF THE ACT DEALS WITH INCOME FROM PROPER TY. ACCORDING TO THAT SECTION, TAX SHALL BE PAYABLE BY AN ASSESSEE UNDER THE HEAD INCOME FROM PROPERTY IN RESPECT OF THE BONAFIDE ANNUAL VALUE O F PROPERTY CONSISTING OF ANY BUILDINGS, OR LANDS APPURTENANT THERETO OF WHI CH HE IS THE OWNERS, OTHER THAN SUCH PORTIONS OF PROPERTY AS HE MAY OCCUPY FOR THE PURPOSES OF ANY BUSINESS, PROFESSION OR VOCATION CARRIED ON BY HIM, THE PROFITS OF WHICH ARE ASSESSABLE TO TAX, SUBJECT TO CERTAIN ALLOWANCES WH ICH ARE MENTIONED IN THAT SECTION BUT, WITH WHICH, WE ARE NOT CONCERNED. IT IS NOTEWORTHY THAT THE LIABILITY TO TAX U/S. 9 OF THE ACT IS OF THE OWNER OF THE BUILDINGS OR LAND APPURTENANT THERETO. IN CASE THE ASSESSEE IS THE OWNER OF THE BUILDINGS OR THE LANDS APPURTENANT THERETO, HE WO ULD BE LIABLE TO TAX UNDER THE ABOVE PROVISIONS EVEN IF THE OBJECT O F THE ASSESSEE IN PURCHASING THE LANDED PROPERTY WAS TO PROMOTE AND D EVELOP MARKET THEREON. IT WOULD ALSO MAKE NO DIFFERENCE IF THE A SSESSEE WAS A COMPANY WHICH HAD BEEN INCORPORATED WITH THE OBJECT OF BUYING AND DEVELOPING LANDED PROPERTIES AND PROMOTING AND SETTING UP ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 14 MARKETS THEREON. THE INCOME DERIVED BY SUCH A COMPA NY FROM THE TENANTS OF THE SHOPS AND STALLS CONSTRUCTED ON THE LAND FOR THE PURPOSES OF SETTING UP MARKET COULD NOT BE TAXED AS BUSINESS INCOME U/S. 10 OF THE ACT, WHICH A MORE DETAILED R EFERENCE WOULD BE MADE HEREAFTER, BUT U/S. 9 OF THE ACT. THE HONBLE SUPREME COURT IN THE CASE OF CIT V/S. EAST INDIA HOUSING & LAND DEVE LOPMENT CO. LTD. (SUPRA) LAYING DOWN THE RATIO THAT THE CHARACTER OF INCOME (DERIVED FROM SHOPS AND STALLS) IS NOT ALTERED BECAUSE IT IS REC EIVED BY A COMPANY FORMED WITH THE OBJECT OF DEVELOPING AND SETTING UP MARKET S, HAS BEEN PLEASED TO REFER THE DECISION OF THE HONBLE CALCUTTA HIGH COU RT IN THE CASE OF COMMERCIAL PROPERTIES LTD., V/S. CIT, AIR 1928 CAL 456, HOLDING THAT MERELY BECAUSE THE OWNER OF THE PROPERTY WAS A COMPANY INC ORPORATED WITH THE OBJECT OF OWNING PROPERTY, THE INCIDENCE OF INCOME DERIVED FROM THE PROPERTY OWNED COULD NOT BE REGARDED AS ALTERED; THE INCOME CAME MORE DIRECTLY AND SPECIFICALLY UNDER THE HEAD PROPERTY THAN INCOME FROM BUSINESS. 15. THE ABOVE RULINGS CLEARLY SUPPORT THE CASE OF T HE ASSESSEE THAT A COMPANY CAN BE FORMED EVEN WITH ITS SOLE OBJECT TO INVEST I N SHARES TO EARN PROFIT AS CAPITAL GAIN. WE THUS DO NOT FIND SUBSTANCE IN THE CONTEN TION OF THE LD. D.R. THAT ASSESSEE COMPANY SET UP WITH ITS SOLE OBJECT TO MA KE INVESTMENT IN SHARES TO EARN PROFIT CANNOT BE ACCEPTED AS SUCH SINCE THEY ARE D EALING IN SHARES IN AN ORGANIZED MANNER AND WITH ASSISTANCE OF INFRASTRUCTURE OF THE COMPANY. WE THUS COME TO THE CONCLUSION THAT SETTING UP OF A COMPANY EVEN SOLE LY FOR MAKING INVESTMENT IN SHARES OR PROPERTY AND TO EARN INCOME THERE-FROM IS VALIDLY POSSIBLE AND IS WELL ACCEPTED. NOW THE QUESTION BEFORE US IS TO DECIDE THE VERY INTENTION OF THE COMPANY BEHIND THE DEALINGS IN SHARE TO EXAMINE THE NATURE OF THE TRANSACTION I.E. INVESTMENT OR BUSINESS. THE OTHER CONDUCTS OF THE ASSESSEE AS WELL AS SURROUNDING FACTS AND CIRCUMSTANCES OF THE CASE ARE EQUALLY IMP ORTANT TO EXAMINE THE NATURE OF THE TRANSACTION. FOR THIS, WE WILL TAKE ASSISTANCE OF THE PRINCIPLES LAID DOWN BY THE ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 15 LUCKNOW BENCH OF THE TRIBUNAL IN THE CASE OF SARNAT H INFRASTRUCTURE (P) LTD. V/S. ACIT (SUPRA) WHICH HAS BEEN FOLLOWED BY MUMBAI BENC H OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT V/S. JCIT (SUPRA) UPHELD BY THE HO NBLE BOMBAY HIGH COURT IN THE CASE OF CIT V/S. GOPAL PUROHIT (SUPRA). 16. THE LD. D.R. HAS ALSO FILED BRIEF NOTES ON FAC TS OF THE CASE ON 7.5.2009. THE LD. A.R. HAS TRIED TO MEET THE CONTENTION OF THE DEPARTMENT MADE THEREIN. IN POINT NO. 1 OF THE BRIEF NOTE OF THE DEPARTMENT, I T HAS BEEN STATED THAT THE COMPANY HAS ONLY TWO SHAREHOLDERS NAMELY SHRI RAJES H ZAVERI (59%) AND HIS WIFE SMT. HARSHA ZAVERI (41%). SUBSEQUENTLY, THE COMPAN Y WAS TAKEN OVER AFTER INCORPORATION IN 1995. THE SHAREHOLDERS WERE RESID ING AT AHMEDABAD AND ASSESSED THERE. ONE OR BOTH MAY BE ENGAGED IN BUSINESS OF SHARE BROKER OR DEALER. THE REPLY OF THE LD. A.R. TO THIS POINT REMAINED THAT ANY COMPANY IS AN ARTIFICIAL JURISDICIAL. IT IS DIFFERENT AND SEPARATE FROM TH E SHAREHOLDERS. THE POSSIBILITY SHOWN BY THE DEPARTMENT THAT ONE OR BOTH OF THE SHAREHOL DERS MAY BE ENGAGED IN THE BUSINESS OF SHARE BROKER OR DEALER IS NOT BASIS F OR ANY EVIDENCE. WE AGREED WITH THE SUBMISSION OF THE LD. A.R. AS AN ALLEGATION IN ABSENCE OF EVIDENCE IN SUPPORT CANNOT BE TAKEN NOTE OF. THE NEXT POINT RAISED BY THE DEPARTMENT IN THE BRI EF NOTE IS THAT CONTRARY TO THE CLAIM OF THE ASSESSEE THAT THE COMPANY DID NOT INCUR ANY EXPENSES ON SALARY THOUGH THE COMPANY HAS PAID SALARY OF RS. 80,000/- AT LEAST UP-TO A.Y. 2002-03. THE SUBMISSION OF LD. A.R. REMAINED THAT IT IS COMP LETELY IRRELEVANT PROPOSITION SINCE PRESENT A.Y. IS 2004-05. EVEN OTHERWISE, SAL ARY OF RS. 80,000/- IS MINISCULE IN FRONT OF INVESTMENT IN CRORES OF RUPEES. WE FIND S UBSTANCE IN THE SUBMISSION OF LD. A.R. THE FURTHER PROPOSITION OF THE DEPARTMENT IS THAT THE ACTIVITY OF INVESTMENT IN SHARES TRADING DOES NOT REQUIRE INFRASTRUCTURE/S TORAGE SPACE ETC., THE ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 16 SUBMISSION OF THE LD. A.R. TO WHICH, WE FIND SUBSTA NCE REMAINED THAT DEGREE OF ESSENTIALITIES CAN DEFER FROM CASE TO CASE AND DEP ENDING ON NATURE & COMPLEXITIES OF THE ACTIVITY. HE SUBMITTED THAT IN THE PRESENT C ASE, SUCH FACILITIES ARE NOT ENJOYED IN THE MATERIAL PROPORTION. THE NEXT PROPOSITION OF THE DEPARTMENT IS THAT AS SESSEE HAS AVAILED LOANS OF RS. 65,00,000/- WHICH WAS OUTSTANDING AS ON 31 ST MARCH 2001. THE SUBMISSION OF THE LD. A.R. TO THIS PROPOSITION REMAINED THAT A BUSINESS-MAN WILL LIKE TO MULTIPLY THE ACTIVITIES AS MANY TIMES AS POSSIBLE CONSIDERIN G A BUSINESS PURSUIT. IN AN INVESTMENT PURSUED ASSESSEE WOULD CONSIDER LONG TERM OBJECTIVES OF YIELD, SAFETY, WEALTH MAXIMIZATION AS THE PURSUIT. WHEN A LOAN IS TAKEN OVER AN ACTIVITY LEANS TOWARDS RISK, HENCE A BUSINESS ACTIVITY PURSUED EME RGES. HE SUBMITTED FURTHER THAT IN ANY CASE, THE ASSESSEE HAD NO LEAN IN THE A.Y. 2 004-05. WE FIND THAT UNDISPUTEDLY, THERE WAS NO LOAN IN THE A.Y. UNDER CONSIDERATION I.E. A.Y. 2004-05. THE NEXT PROPOSITION OF THE DEPARTMENT IS THAT THE COMPANY ALSO GET SHARES AS SECURITY FOR THIRD PARTY LOANS, PROBABLY FOR D IRECTORS TO ROUTE BORROWED FUNDS FOR THE COMPANYS BUSINESS. THE SUBMISSION OF LD. A.R. TO THIS PROPOSITION REMAINED THAT NO ANY BUSINESS OUTSIDE THE BOOKS OF THE COMPA NY HAS BEEN LOCATED BY THE A.O. ALLEGED BUSINESS USE BY DIRECTORS IS A MERE CONJUNCTURE AND WITHOUT ANY SUBSTANCE. WE AGREE THAT IN ABSENCE OF EVIDENCE I N SUPPORT, THE ALLEGED BUSINESS USE BY DIRECTORS CANNOT BE TAKEN NOTE OF. THE NEXT PROPOSITION OF THE DEPARTMENT IS THAT TH E COMPANY HAS ALSO KEPT SHARES FOR SECURITY FOR THIRD PARTY LOANS PROBABL Y FOR THE DIRECTORS TO ROUTE BORROWED FUNDS FOR THE COMPANYS BUSINESS. THE SUB MISSION OF LD. A.R. TO THIS PROPOSITION REMAINED THAT NO ANY BUSINESS OUTSIDE T HE BOOKS OF THE COMPANY HAS BEEN LOCATED BY THE A.O. ALLEGED BUSINESS USE BY THE DIRECTORS IS A MERE CONJUNCTURES AND WITHOUT ANY SUBSTANCE. THE SAID PR EMISE LACKS THE EVIDENTIARY ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 17 VALUE. THE LD. A.R. REFERRED THE FOLLOWING EVENT MATRIX FOR THE SUPREME INDUSTRIES LTD. SHARES FOR OUR APPRECIATION: PURCHASE QTY PURCHASE RATE DATE SALES QUANTITY SALES RATE 10075 187 15 - 2 - 99 495 222 23 - 2 - 99 48005 209 23 - 2 - 99 7,824 47 29 - 6 - 01 SEP 2004 66,399 208 THE LD. A.R. SUBMITTED THAT IN THE SHARE MARKET, SH ARES BECOME AVAILABLE IN LOTS SINCE THERE IS SOME INVESTOR WHO IS SELLING HIS SHA RES. HENCE, SERIES OF PURCHASES OF SMALL QUANTITIES CANNOT BE EQUATED WITH BUSINESS P URSUIT. FURTHER, ENTIRE LOT WAS SOLD IN SEPTEMBER 2004. HE SUBMITTED THAT THE LONG TIME INTERVAL BETWEEN HOLDING PERIOD IS ALSO APPRECIABLE IN THE CASE OF ASSESSEE AS THE SHARES WERE HELD FOR 4-5 YEARS WHICH LEADS TO INVESTMENT ACTIVITY. 17. THE NEXT PROPOSITION OF THE DEPARTMENT IS THAT IN THE A.Y. 2004-05, THE ASSESSEE HAS SOLD 45000 BONUS SHARES OF HITECH GEAR S. ORIGINAL SHARES OF THE SAID COMPANY WERE SOLD IN THE LAST YEAR. THE SUBMISSION OF THE LD. A.R. TO THIS PROPOSITION REMAINED THAT THERE IS HARDLY ANY ALLEG ATION. SOME OF ORIGINAL AS WELL AS BONUS SHARES WAS ADMITTED. ORIGINAL SHARES WERE SO LD FIRST AND THEN BONUS. THE COMPANY FOLLOWS FIFO METHOD FOR ALLOCATING SALES QU ANTITIES. IN VIEW OF THIS SUBMISSION, WE DO NOT FIND SUBSTANCE IN THE PROPOSI TION. 18. THE NEXT PROPOSITION IS THAT THE LD CIT(A) IN T HE CASE OF ABOTT HOTEL HAS HELD THE SHARES ACTIVITY AS BUSINESS ACTIVITY. WE DO NO T FIND SUBSTANCE IN THIS PROPOSITION ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 18 SINCE THE PUNE BENCH OF THE TRIBUNAL HAS DECIDED TH E ABOTT HOTEL CASE IN FAVOUR OF THE ASSESSEE. 19. WE ALSO EXAMINED THE TESTS LAID DOWN IN SARNATH CASE (SUPRA) AND WE CAME TO THE FOLLOW CONCLUSION : TEST LAID DOWN IN SARNATH CASE POSITION IN APPELLANTS INTENTION AT THE TIME OF PURCHASE CLASS IFIED IN ACCOUNTS AS INVESTMENTS. ACTIVITY WAS ONLY TO REMAIN AS INVESTOR. WHETHER TREATED AS STOCK - IN - TRADE OR AS INVESTMENT IN BOOKS AS INVESTMENT WHETHER MONEY BORROWED NO WHETHER SALES - PURCHASES ARE FREQUENT VERY LESS TRANSACTIONS DURING THE YEAR.(3 OLD INVESTMENTS SOLD AND 3 NEW INVESTMENTS PURCHASED DURING THE YEAR) WHETHER ACTIVITY IS FOR REALIZING PROFIT OR FOR RETRAINING APPRECIATION LARGE BLUE CHIP INVESTMENTS EXIST WITH THE APPELLANT. SAME ARE NOT SOLD THROUGH APPRECIATION IN VALUE HAS TAKEN PLACE SINCE, THE SAID COMPANIES PAY GOOD DIVIDENDS. HOW VALUES, WHETHER AT COST OR AT COST /MARKET VALUE WHICHEVER IS LOWER AT COST ALWAYS. LOWERING TO MARKET VALUE IS A PRACTICE FOR STOCK-IN-TRADE AND THE SAME IS NOT RELEVANT IN PRESENT CONTEXT. WHAT IS THE AUTHORITY IN OBJECT CLAUSE? OBJECT CLAUSE AUTHORIZES INVESTMENT ACTIVITY. IT ALSO PERMITS BUSINESS ACTIVITY. HOWEVER, THE BUSINESS ACTIVITY IS NOT UNDERTAKEN BY THE ASSESSEE. WHETHER STATUTORY RECORDS INDICATE INVESTMENTS? ACCOUNTS ARE APPROVED BY THE BOARD AND BY MEMBERS WHO HAVE APPROVED THE TREATMENT AS INVESTMENTS. WHETHER ANY LEGAL NORMS ARE VIOLATED FOR DOING A TRADE OF SHARES? NO ANY NORM IS APPLICABLE AS SUCH FOR INVESTMENT ACTIVITY. IN ANY CASE, NO NORMS OF BUSINESS ACTIVITY ARE APPLICABLE. NO ONE / TWO FACTORS SHOULD DECIDE BUT THE CUMULATIVE EFFECT SHOULD DECIDE THE MATTER. ALL TESTS LEAD TO THE SAME CONCLUSION THAT THAT THE SHARES ARE INVESTMENTS FOR THE APPELLANT AND NOT A STOCK-IN-TRADE. 20. WE THUS FIND THAT THE TRANSACTIONS IN THE PRESE NT CASE MEET OUT ALL THE ABOVE TESTS PROPOSED IN THE SARNATH CASE TO VERIFY AS TO WHETHER THE SHARE TRANSACTIONS IN QUESTION IS INVESTMENT IN NATURE. BESIDES, THE DEPA RTMENT ITSELF IN THE PAST (A.YS. 2000-01 TO 2003-04) AND SUBSEQUENT A.YS. (A.YS. 2 005-06 TO 2008-09) HAVE ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 19 ACCEPTED THE TRANSACTIONS AS INVESTMENT AND INCOME EARNED THEREFROM AS CAPITAL GAINS. WE ARE THUS OF THE VIEW THAT UNDER THE FAC TS AND CIRCUMSTANCES OF THE PRESENT CASE AS DISCUSSED ABOVE, THE LD CIT(A) HAS RIGHTLY COME TO THE CONCLUSION THAT THE TRANSACTIONS IN QUESTION ARE INVESTMENT IN NATURE AND THEREFORE, INCOME FROM SALE OF THE SHARES OF THE 3 COMPANIES MADE DUR ING THE YEAR REQUIRES TO BE TAXED AS INCOME UNDER THE HEAD CAPITAL GAINS. FO R A READY REFERENCE PARA NOS. 2.6 AND 2.7 OF THE FIRST APPELLATE ORDER ARE BEING REPR ODUCED HEREUNDER : 2.6 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND PERUSED THE MATERIAL ON RECORD. IT IS A FACT THAT AS PER MEMORANDUM AND ARTICLES OF ASSOCIATION, THE MAIN OBJECT OF THE COM PANY IS INVESTMENT. IT IS AGAIN A FACT THAT DURING THE ASSESSMENT YEAR UNDER APPEAL, THE APPELLANT HAS SOLD SHARES OF THREE COMPANIES, NAMELY I) AUTO EXCE LL INDUSTRY, II) HIGH TECH GEARS AND III) LAXMI MACHINE WORKS LTD. THE SHARES OF AUTO EXCELL INDUSTRY WERE PURCHASED ON 26/12/2002 AND SHARES OF HIGHTECH GEARS WERE PURCHASED ON 07/11/2000; THE SHARES OF LAXMI MACHIN E WORKS LTD. WERE PURCHASED ON 28/07/2000. ALL THESE THREE SHARES WH ICH HAVE BEEN SOLD DURING THE ASSESSMENT YEAR UNDER APPEAL ARE OF THE DIVIDEND PAYING COMPANIES. DURING THE ASSESSMENT YEAR UNDER APPEA L, SHARES OF THREE COMPANIES HAVE BEEN PURCHASED, NAMELY KOTAK MAHINDR A, MARUTI UDYOG AND STATE BANK OF INDIA. THE DATES OF PURCHASE OF SHAR ES OF THESE COMPANIES ARE 02/12/2003 FOR SHARES OF KOTAK MAHINDRA, 08/10/2003 FOR SHARES OF MARUTI UDYOG LTD., AND 29/12/2000 FOR SHARES OF STATE BANK OF INDIA. ALL THESE THREE COMPANIES ARE DIVIDEND PAYING COMPANIES. ANO THER NOTABLE FACT IS THAT APPELLANT HAS RECEIVED TOTAL DIVIDEND AT RS. 82,22, 211/- DURING THE ASSESSMENT YEAR UNDER APPEAL. IT IS ALSO NOTABLE THAT THE BALANCE SHEET OF THE COMPANY SHOWS THAT APPELLANT IS HOLDING SHA RES OF 26 COMPANIES WITH INVESTMENT VALUE OF RS. 12,57,35,062/-. IT IS AGAI N A FACT THAT THE PURCHASE OF SHARES IS OUT OF CAPITAL AND INTERNAL ACCRUAL A ND THERE IS NO BORROWING DURING THE YEAR. IT MAY BE MENTIONED THAT IT IS TR ITE LAW THAT AN ASSESSEE MIGHT INVEST HIS CAPITAL IN SHARES WITH THE INTENTI ON TO RESALE THEM, IF IN FUTURE, THEIR SALE BRINGS IN A HIGHER PRICE. SUCH AN INVESTMENT, THOUGH MOTIVATED BY A POSSIBILITY OF ENHANCED VALUE, DOES NOT NECESSARILY RENDER THE INVESTMENT A TRANSACTION IN THE NATURE OF TRADE. IN THE PREMISES, THE TOTALITY OF ALL THE FACTS WILL HAVE TO BE BORNE IN MIND AND THE CORRECT LEGAL PRINCIPLE APPLIED TO THIS. IF THIS IS DONE IN THE PRESENT CA SE, IT IS CLEAR THAT THE SALE OF ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 20 SHARES OF THREE COMPANIES ACQUIRED BY THE APPELLANT IN EARLIER ASSESSMENT YEAR(S) REPRESENTED REALIZATION OF THE INVESTMENT A ND INCOME ARISING THERE FROM HAS GOT TO BE TAXED UNDER THE HEAD CAPITAL GA INS. THE CONCLUSION OF THE ASSESSING OFFICER THAT THE APPELLANT IS ENGAGED IN TRADE/BUSINESS ACTIVITY IS CONTRARY TO THE FACTS ON RECORD AND IS NOT BASE D ON CORRECT APPRECIATION OF RELEVANT LAW ON THE SUBJECT. 2.7 IN VIEW OF THE FOREGOING DISCUSSION AND TAKING INTO ACCOUNT THE APPELLANTS SUBMISSION MENTIONED HEREINABOVE, I AM OF THE CONSIDERED VIEW THAT INCOME FROM SALE OF THE SHARES OF THE THREE CO MPANIES REQUIRES TO BE TAXED AS INCOME UNDER THE HEAD CAPITAL GAINS. AC CORDINGLY, THE LEARNED ASSESSING OFFICER IS DIRECTED TO TAX INCOME ARISING FROM TRANSFER OF SHARES OF THREE COMPANIES AS INCOME UNDER THE HEAD CAPITAL G AINS. THE LEARNED ASSESSING OFFICER IS DIRECTED TO COMPUTE CONSEQUENT IAL RELIEF TO THE APPELLANT. THUS, THIS GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE APPELLANT. 21. WE FIND THAT IN THE FIRST APPELLATE ORDER ON T HE ISSUE, THE LD. CIT(A) HAS DEALT WITH ALL THE MATERIAL ASPECTS OF THE TRANSACT IONS, WHICH WERE NECESSARY TO TEST THE NATURE OF THE TRANSACTION. THE SAME IS UPHELD. THE GROUND NOS. 1 TO 4 OF THE APPEAL ARE ACCORDINGLY REJECTED. GROUND NO. 5 22. THE A.O HELD THAT THE PROFIT IN QUESTION OUT O F THE SALE OF SHARES DURING THE YEAR IS LIABLE TO BE TAXED AS BUSINESS INCOME. HE THUS WHILE WORKING OUT THE BUSINESS PROFIT ALSO ALLOWED CARRIED FORWARD LONG T ERM LOSS (RS.32,03,479/-) AND ALSO DECIDED NOT TO ALLOW EXPENSES DEBITED TO PROFI T & LOSS ACCOUNT OF RS. 96,439/-. THE LD CIT(A) HAS HELD THAT THE PROFIT EARNED FROM THE SALE OF THE SHARES OF THE 3 COMPANIES DURING THE YEAR IS TO BE TAXED UNDER THE HEAD CAPITAL GAINS. HE ACCORDINGLY DIRECTED THE A.O TO TAX INCOME ARISING FROM TRANSFER OF SHARES OF 3 COMPANIES AS INCOME UNDER THE HEAD CAPITAL GAIN A ND DIRECTED THE A.O FURTHER TO COMPUTE CONSEQUENTIAL RELIEF TO THE ASSESSEE. WE THUS FIND THAT THE SETTING OFF OF ITA . NO 1019/PN/2007 BLUE MOON SECURITIES PVT. LTD. A.Y. 2004-05 PAGE OF 21 21 CAPITAL LOSS BROUGHT FORWARD OF RS. 32,03,479/- IS CONSEQUENTIAL TO THE FINDING OF THE LD CIT(A) THAT INCOME FROM SALE OF THE SHARES OF T HE 3 COMPANIES DURING THE YEAR IS TO BE TAXED AS INCOME UNDER THE HEAD CAPITAL GAINS . SINCE THE MAIN FINDING REGARDING TREATING THE INCOME FROM THE SALE OF SHAR ES AS CAPITAL GAIN HAS BEEN UPHELD BY US, WE DO NOT INTERFERE WITH THE CONSEQ UENTIAL FINDING OF THE LD CIT(A) FOR ALLOWING SET OFF OF CAPITAL LOSS BROUGHT FORWAR D OF RS. 32,03,479/-. THE SAME IS UPHELD. THE GROUND NO. 5 IS, ACCORDINGLY, REJECTED . 23. CONSEQUENTLY, APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23RD AUGUS T, 2011 SD/- SD/- ( D. KARUNAKARA RAO ) ACCOUNTANT MEMBER ( I.C. SUDHIR ) JUDICIAL MEMBER PUNE, DATED THE 23RD AUGUST, 2011 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT -I, PUNE 4. THE CIT(A)-I, PUNE 5. THE D.R. B BENCH, PUNE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL PUNE