Mas Chemical Industries Pvt.Ltd., Navsari V. The Income tax Officer Officer,Ward-2, Navsari

ITA 1699/AHD/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1060 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 20-06-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 24-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DINESH SINGH
• Keywords: Deduction for capital gain; Business income

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER ./ ITA.NO.1699/AHD/2011 / ASSTT. YEAR: 2007-2008 AND ./ ITA.NO.1918/AHD/2013 / ASSTT. YEAR: 2009-2010 M/S.MAS CHEMICAL INDUSTRIES P.LTD. C/O. PEASS INDUSTRIES P.LTD. MANEKLAL ROAD NAVSARI PAN : AABCM 6329 A VS ITO, WARD-2 NAVSARI. ! / (APPELLANT) '# ! / (RESPONDENT) ASSESSEE BY : SHRI TUSHAR H E MANI REVENUE BY : SHRI DINESH SINGH, SR.DR / DATE OF HEARING : 20 TH AND 24 TH JUNE, 2016 / DATE OF PRONOUNCEMENT: 26/07/2016 $%/ O R D E R PRESENT TWO APPEALS ARE DIRECTED AT THE INSTANCE OF THE ASSESSEE AGAINST ORDERS OF THE LD.CIT(A), VALSAD DATED 26.3.2011 AND 25.3.2013 PASSED IN THE ASSTT.YEAR 2007-08 AND 2009-10. 2. THOUGH BOTH THESE APPEALS WERE HEARD ON DIFFEREN T DATES, BUT ARE BEING DISPOSED OF BY THIS COMMON ORDER, BECAUSE, IN THE A PPEAL FOR THE ASSTT.YEAR 2009-10, THE LD.CIT(A) HAS NOT PASSED ANY SPEAKING ORDER, RATHER RELIED UPON THE ORDER OF THE CIT(A) PASSED IN EARLIER YEARS. 3. SOLE CONTROVERSY IN BOTH THE APPEALS IS WHETHER THE ASSESSEE IS TO BE TERMED AS INVOLVING IN TRADING OF SHARES OR IS TO B E TREATED AS SIMPLICITOR ITA NO.1918/AHD/2013AND 1699/AHD/2011 2 INVESTOR. IN OTHER WORDS, GAIN ON PURCHASE AND SAL ES OF SHARES IS TO BE ASSESSED AS A SHORT TERM CAPITAL GAIN/LONG TERM CAP ITAL GAIN, AS THE CASE MAY BE OR BUSINESS INCOME. 4. BRIEF FACTS OF THE CASE IN THE ASSTT.YEAR 2007-0 8 ARE THAT THE ASSESSEE HAS FILED ITS RETURN OF INCOME ON 30.10.2007 ELECTR ONICALLY AND DECLARED TOTAL INCOME OF RS.33,28,990/- ON SCRUTINY OF THE ACCOUN TS, IT REVEALED TO THE AO THAT THE ASSESSEE HAS SHOWN NET PROFIT AT RS.39,43, 520/- IN THE COMPUTATION OF INCOME. IT HAS CLAIMED DIVIDEND EXEMPTION UNDER SE CTION 10(33) AND ALSO CLAIMED LONG TERM CAPITAL GAIN EXEMPTION UNDER SECT ION 10(38) OF THE INCOME TAX ACT. THE ASSESSEE HAS SHOWN SHORT TERM CAPITAL GAIN OF RS.33,28,991/- AND PAID TAXES AT THE RATE OF 10%. 5. THE FACTS IN THE ASSTT.YEAR 2009-10 ARE THAT THE ASSESSEE HAS FILED RETURN OF INCOME ELECTRONICALLY ON 26.9.2009 DECLAR ING TOTAL INCOME AT NIL. THE ASSESSEE HAS CLAIMED LONG TERM CAPITAL GAIN OF RS.27,83,688/- AND SHORT TERM CAPITAL GAIN OF RS.4,08,897/-. IT HAS ALSO SH OWN LONG TERM CAPITAL LOSS OF RS.6,99,749/- AND SHORT CAPITAL LOSS OF RS.26,10,28 1/-. THE LD.AO HAS TREATED THE ACTIVITY OF THE ASSESSEE AS TRADING IN SHARES A ND ASSESSED BUSINESS LOSS WHILE ASSESSING TOTAL INCOME OF THE ASSESSEE. 6. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, I HAVE GONE THROUGH THE RECORD CAREFULLY. BEFORE I EMBARK UPON AN INQUIRY ON THE FACTS OF THE PRESENT CASE, SO AS TO FIND OUT WHETHER THE ASSESSEE IS TO BE TERMED AS INVOLVED IN TRADING IN SHARES OR TO BE TREATED AS SIMPLICITOR INVESTOR, IT WOULD BE IMPERATIVE UPON ME TO BEAR IN MIND CERTAIN BASIC BR OAD PRINCIPLE CULLED OUT FROM VARIOUS JUDGMENTS OF THE HONBLE HIGH COURTS A S WELL AS THE ORDERS OF THE ITAT TO TEST SUCH TRANSACTIONS. IN THIS CONNEC TION, I WOULD LIKE TO REFER THE ORDER OF THE LUCKNOW BENCH OF THE ITAT IN THE C ASE OF SARNATH ITA NO.1918/AHD/2013AND 1699/AHD/2011 3 INFRASTRUCTURE PVT. LTD, 120 TTJ 216. THE TESTS LA ID DOWN IN THIS CASE ARE AS UNDER: 13. AFTER CONSIDERING ABOVE RULINGS WE CULL OUT FO LLOWING PRINCIPLES, WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTION(S) IN QUESTION ARE IN THE NATURE OF TRA DE OR ARE MERELY FOR INVESTMENT PURPOSES: (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE TI ME 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 STOCK-IN-TRADE OR INVESTMENT. WHETHE R SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVEST MENT OR NON- TRADING ASSET. (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREON? NORMALLY, MONEY IS BORROWED TO P URCHASE GOODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN AS SET FOR RETAINING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASE AND DISP OSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND SALE ARE FREQUENT , OR THERE ARE SUBSTANTIAL TRANSACTION IN THAT ITEM, IF WOULD INDI CATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF IN TENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AN D THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADING OR INVESTI NG (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREA S 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 ITS VALUE? FORMER WILL INDICATE INTENTION OF TRADES AND LATTER, AN INVESTM ENT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIA L MOTIVE IS AN ESSENTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN TH E BALANCE SHEET? IF THE ITEMS IN QUESTION ARE VALUED AT COST , IT WOULD INDICATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NET REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL INDICATE 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 TR ADE OR FOR ITA NO.1918/AHD/2013AND 1699/AHD/2011 4 INVESTMENT? IF AUTHORIZED ONLY FOR TRADE, THEN WHE THER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO C ARRY OUT INVESTMENTS IN THAT COMMODITY? AND VICE VERSE. 7. IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHO W THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT D ISTINCTION HE HAS 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 SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPA RENT IS NOT REAL. 8. THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHAR ES ( 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 SUFFICIENT TO SAY THAT ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR INVESTMENT. 9. ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITE S FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE A SSESSEE IS 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 AS A TRADER IN THAT ITEM? WHETHER IT HAD SUCH AN I NTENTION (TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM) SINCE BEGINNING OR W HEN 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 PORTFOLIO S, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR B OTH AND THERE IS NO INTERMINGLING 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 EF FECT OF SEVERAL FACTORS HAS TO BE SEEN. 7 . THE HONBLE GUJARAT HIGH COURT HAD ALSO AN OCCASI ON TO CONSIDER THIS ISSUE IN THE CASE OF COMMISSIONER OF INCOME TAX VS. RIVA SHARKAR A KOTHARI REPORTED IN 283 ITR 338. HONBLE COURT HAS MADE RE FERENCE 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: ITA NO.1918/AHD/2013AND 1699/AHD/2011 5 AFTER ANALYZING VARIOUS DECISIONS OF THE APEX COUR T, 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 O F 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 CHARACT ER 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 TREATED AS STOCK-IN- TRADE, OR HAS IT BEEN SHOWN IN THE BOOKS OF ACCOUNT AND BALANCE SHEE T AS AN INVESTMENT. THIS INQUIRY, THOUGH RELEVANT, IS NOT CONCLUSIVE. (D) THE FOURTH TEST IS AS TO HOW THE ASSESSEE HIMSELF HAS RETURNED THE INCOME FROM SUCH ACTIVITIES AND HOW THE DEPARTMENT HAS DEALT WITH THE SAME IN THE COURSE OF PRECEDING AND SUCCEEDING ASSESSMENTS. THIS FACTOR, THOUGH NOT CONCLUSIVE, CAN AFFORD GOOD AND COGENT EVIDENCE TO JUDGE THE NATURE OF THE TRANSACTION AND WOULD BE A RELEVANT CIRCUMSTANCE TO BE CONSIDERED IN THE ABSEN CE OF ANY SATISFACTORY EXPLANATION. (E) THE FIFTH TEST, NORMALLY APPLIED IN CASE OF PARTNER SHIP FIRMS AND COMPANIES, IS WHETHER THE DEED OF PARTNERSHIP OR TH E MEMORANDUM OF ASSOCIATION, AS THE CASE MAY BE, AUTHORIZES SUCH AN ACTIVITY. ITA NO.1918/AHD/2013AND 1699/AHD/2011 6 (F) THE LAST BUT NOT THE LEAST, RATHER THE MOST IMPORTA NT TEST, IS AS TO THE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRA NSACTION OF PURCHASE AND SALE OF THE GOODS CONCERNED. IN A CAS E WHERE THERE IS REPETITION AND CONTINUITY, COUPLED WITH THE MAGNITU DE OF THE TRANSACTION, BEARING REASONABLE PROPOSITION TO THE STRENGTH OF HOLDING THEN AN INFERENCE CAN READILY BE DRAWN THAT THE ACTIVITY IS IN THE NATURE OF BUSINESS. 8. IN THE LIGHT OF THE ABOVE, LET ME EXAMINE THE FA CTS OF THE PRESENT CASE. IT WAS POINTED OUT BY THE LD.COUNSEL FOR THE ASSESS EE THAT IT HAD MADE INVESTMENT IN SHARES THROUGH PORTFOLIO MANAGEMENT S ERVICES, BY WHICH INVESTMENT IS MADE ON BEHALF OF THE ASSESSEE. VAR IOUS DECISIONS PERTAINING TO INVESTMENT IN SHARES, SUCH AS INVESTMENT STRATEGY, PERIOD OF SHARE HOLDING, ETC. ARE TO BE TAKEN BY THE CONCERNED PMS COMPANIES. DU RING THE COURSE OF HEARING, THE LD.COUNSEL FOR THE ASSESSEE DREW MY AT TENTION TOWARDS THE ORDER OF THE ITAT IN THE CASE OF UDAYAN FINSTOCK PVT. LTD. V S. ACIT, ITA NO.849/AHD/2012. ON THE STRENGTH OF THIS, IT WAS C ONTENDED THAT INVESTMENT THROUGH PMS IS NOT TO BE TERMED AS BUSINESS OF THE ASSESSEE. HE FURTHER POINTED THAT ITAT IN THE CASE OF UAYAN FINSTOCK PVT . LTD. (SUPRA) HAS RELIED UPON THE DECISION OF THE HONBLE DELHI HIGH COURT I N THE CASE OF RADIALS INTERNATIONAL VS. ACIT, 367 ITR 1 AND THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. KAPUR INVESTMENTS P. L TD. 61 TAXMANN.COM 91. THE ITAT HAD MADE REFERENCE TO THE PARA 10 OF THE H ONBLE KARNATAKA HIGH COURT DECISION, WHICH READS AS UNDER: 10. AS REGARDS THE FIRST QUESTION THAT MERELY BECA USE OF EMPLOYMENT OF PORTFOLIO MANAGEMENT SERVICE FOR INVESTMENT IN SHAR ES, THE SAME WOULD BECOME BUSINESS INCOME, WE ARE OF THE OPINION THAT THE SAID ISSUE HAS BEEN DEALT WITH AT LENGTH BY THE DELHI HI GH COURT IN THE CASE OF RADIALS INTERNATIONAL (SUPRA), WHEREIN, IN SIMIL AR FACTS, THE QUESTION ITA NO.1918/AHD/2013AND 1699/AHD/2011 7 HAS BEEN ANSWERED IN FAVOUR OF THE ASSESSEE AND AGA INST THE REVENUE. DETAILED REASONS FOR THE SAME HAVE BEEN GIVEN IN TH E SAID JUDGMENT WITH WHICH WE CONCUR. EVEN OTHERWISE, IT IS ADMITTE DLY NOT A CASE WHERE THE ASSESSEE HAD ENGAGED ITS OWN PERSONS OR H AD A SEPARATE BUSINESS INFRASTRUCTURE TO CARRY OUT ITS SHARE TRAN SACTIONS FOR THE PURPOSE OF BUSINESS. IT IS MERELY A CASE WHERE THE ASSESSEE HAS INVESTED FUNDS THROUGH THE PORTFOLIO MANAGEMENT SERVICE. 11. IN OUR OPINION, INVESTMENT THROUGH PORTFOLIO MA NAGEMENT SERVICE, WHICH MAY DEAL WITH THE SHARES OF THE ASSESSEE SO A S TO DERIVE MAXIMUM PROFITS CANNOT BE TERMED AS BUSINESS OF THE ASSESSEE BUT WOULD ONLY BE A CASE OF A MORE CAREFUL AND PRUDENT MODE OF INVESTMENT, WHICH HAS BEEN DONE BY THE ASSESSEE. FU NDS WHICH LIE WITH THE ASSESSEE CAN ALWAYS BE INVESTED (FOR EARNING HI GHER RETURNS) IN THE SHARES EITHER DIRECTLY OR THROUGH PROFESSIONALLY MA NAGED PORTFOLIO MANAGEMENT SCHEME AND BY DOING SO, IT WOULD NOT MEA N THAT THE ASSESSEE IS CARRYING ON THE BUSINESS OF INVESTMENT IN SHARES. PROFITS FROM SUCH INVESTMENT, EITHER DIRECTLY OR THROUGH PR OFESSIONALLY MANAGED FIRM, WOULD STILL REMAIN AS PROFITS TO BE T AXED AS CAPITAL GAINS AS THE SAME WILL NOT CHANGE THE NATURE OF INVESTMEN T, WHICH IS IN SHARES, AND THE LAW PERMITS IT TO BE TAXED AS CAPIT AL GAINS AND NOT AS BUSINESS INCOME. 9. APART FROM THE ABOVE, IT WAS ALSO BROUGHT TO MY NOTICE THAT THE ASSESSEE HAS SHOWN THE SHARES AS INVESTMENT IN THE BALANCE S HEET SINCE VERY INCEPTION. IT DOES NOT HAVE ANY EMPLOYEE AND ANY BUSINESS ESTA BLISHMENT. THE INVESTMENT IN SHARE IS ONE OF THE MAIN OBJECTS AS M ENTIONED IN POINT NO.22 OF THE MEMORANDUM OF ASSOCIATION. IT DOES NOT HAVE EM PLOYEE AND ACTIVITIES ARE CARRIED OUT BY THE PMS PROVIDER. THE INVESTMEN T WAS BEING MADE IN ONLY LISTED SECURITIES. ALL INVESTMENTS HAVE MADE IN IN DEPENDENT COMPANIES AND NO INTEREST BEARING FUNDS WERE USED BY THE ASSESSEE COMPANY. ON DUE CONSIDERATIONS OF THE ABOVE FACTS, IN THE LIGHT OF THE VARIOUS DECISIONS AND TESTS PROPOUNDED BY THE ITAT AS WELL AS BY THE HONBLE GU JARAT HIGH COURT, I AM OF THE VIEW THAT THE ASSESSEE IS TO BE TREATED AS A N INVESTOR AND NOT A TRADER IN THE SHARES. I ALLOW BOTH THE APPEALS AND DIRECT TH E AO TO TREAT THE ASSESSEE AS ITA NO.1918/AHD/2013AND 1699/AHD/2011 8 INVESTOR, AND ACCORDINGLY ASSESS THE INCOME FROM PU RCHASE AND SALE OF SHARES AS LONG TERM CAPITAL GAIN/SHORT TERM CAPITAL AS THE CASE MAY BE. 10. IN THE RESULT, APPEALS OF THE ASSESSEE ARE ALLO WED. ORDER PRONOUNCED IN THE COURT ON 26 TH JULY, 2016 AT AHMEDABAD. SD/- (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD; DATED 26/07/2016