DCIT, New Delhi V. M/s. Trent Brands Ltd., New Delhi

ITA 2006/DEL/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86674 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 08-12-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 03-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J P CHANDRAKAR
• Keywords: Capital asset; Business income; Question of law

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : H NEW DELHI BEFORE SHRI J. SUDHAKAR REDDY , A M AND SHRI C.M. GARG, JM ITA NO. 2006 /DEL/201 0 ASSESSMENT YEAR : 200 6 - 07 DCIT, CIRCLE 16(1) VS. TRENT BRANDS LTD. NEW DELHI 306, ANSAL BHAWAN 16 K.G. MARG NEW DELHI 110 001 PAN: AAACL 1047 P AND ITA NO. 3182 /DEL/201 0 ASSESSMENT YEAR 200 7 - 08 D CIT, CIRCLE 16(1) VS. TREND BRANDS LTD. NEW DELHI NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY: - SHRI SALIL AGARWAL, ADV. AND MR.SHAILESH GUPTA, C.A. RESPONDENT BY: - SHRI J.P.CHANDRAKAR, SR. D.R. O R D E R PER J.SUDHAKAR REDDY, AM BOTH THESE APPEALS ARE FILED BY THE REVENUE AND ARE DIRECTED AGAINST SEPARATE ORDERS OF LD.CIT(A) - XIX, NEW DELHI DT.17.2.2010 FOR THE AY 2006 - 07 AND ORDER DT. 19.04.2010 FOR THE AY 2007 - 08 . A S THE ISSUES ARISING IN BOTH THE APPEALS ARE COMMON FOR THE S AKE OF CONVENIENCE , THEY ARE HEARD TOGETHER AND ARE DISPOSED OF BY WAY OF THIS COMMON ORDER. 2. FACTS IN BRIEF: - THE ASSESSEE IS A COMPANY AND IS IN THE BUSINESS OF LICENSING OF TRADE MARKS AND TECHNOLOGIES AS WELL AS RESEARCH AND DEVELOPMENT ACTIVITY. 2.1. THE ISSUE THAT ARISES FOR OUR CONSIDERATION IS WHETHER THAT INCOME ARISING TO THE ASSESSEE COMPANY FROM THE SALE AND PURCHASE OF SHARES IS ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 2 ASSESSABLE UNDER THE HEAD INCOME FROM CAPITAL GAINS OR UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION. THE L D.CIT(A) REPRODUCED THE REASONS GIVEN BY THE AO AT PARA 4 OF HIS ORDER WHICH IS EXTRACTED FOR READY REFERENCE. T H E ASSESSEE'S MAI N CONTENT I ON I N I TS L ETTE R IN SUPP O R T OF IT C L AIM I S T HAT I T H AD R ECE I VED RS . 110.05 CRORES DURING AY 1999 - 2000 FROM TRANSFER OF ITS TR ADE MARK & DESIGNS WAS I NVESTED I N P U RCHASE OF COMMERCIAL PROPERTY, TERM D EPOS I T W I TH B A N K A N D UNI TS O F MUTU A L FUND A N D T HE COM P A N Y' S SU RPLU S F UN D N OT IM ME DI ATE L Y R E QUIR E D FOR I T S BU S IN ESS A N D S UBJ ECT T O F IN A LI ZA TI O N OF N EW L I N E OF R E L A T E D BU S IN ESS AC TIVIT Y/ PL A N TS W H ICH A R E UND E R EX PL ORA TION WE R E P A R KED IN VAR I OUS FIN A N C I A L INSTRUM E NT S W ITH TH E INT E NTION T O EA RN F URTH E R IN CO M E ON ITS D E PLOYM E NT AS A L S O TO SAFEG U A RD IT S CAPIT A L A M O UNT AGA IN S T PR O B A BL E ERO S ION IN V A L U E O C CA S ION E D DU E T O CH A N GE IN M A RKET OUTL OOK. THIS CO N TEN TI O N I S N OT T ENA BL E. THE SSESSEE H AS R ECEIVED RS . 11 0.05 CRO R ES DURI NG THE AY 19 99 - 2 00 0 . SI NCE THEN, IT IS DEALING IN SHARES AND MUTUAL FUNDS. THE FREQUENCY OF TR A N SACTION CAN BE SEEN FROM THE LEDGER ACCOUNT FURNISHED BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. IT CAN BE SEEN THAT THE ASSESSEE HAS MADE PURCHASE/SALE OF SHARES ALMOST ON EVERY WORKING DAY OF STOCK EXCHANGE. SUCH A FREQUENCY OF TRANSACTIONS DOES NOT SUPPORT THE ASSESSEE S CONTENTION THAT IT HA D PARKED ITS SURPLUS FUNDS IN FINANCIAL INSTRUMENT AS INVESTMENT. THE APEX COURT IN THE CASE OF RAJA BHADUR VISHWESWARA SINGH VS. CIT REPORTED IN 41 ITR 685 HELD THAT PURCHASE AND SALE OF SHARES FOR SUBSTANTIAL AMOUNTS AT FREQUENT INTERVALS CANNOT BE TREA TED AS CHANGE IN INVESTMENTS BUT HAVE TO BE TREATED AS DEALING IN SHARES. REST OTHE R CONTENT I ON OF THE ASSESSEE A L SO DOES NOT H O LD GOOD TO S U BSTANTIATE I N I TS CLA I M THAT THE T R ANSACTION MADE BY THE ASSESSEE ARE IN THE NATU R E OF I NVESTMENT . FROM THE NATU R E AND FREQUENCY OF TRANSACTION IT CAN SAFE L Y B E IN FER R ED THAT THE ASSESSEE I S DEALING I N SHARES AND MUTUAL FUND WITH A MOTIVE TO EARN PROFIT . THE HON'B L E SUPREME COURT IN THE CA S E OF R AJ PU TA N A TEXTILES (AGENCIES) LTD. VS. C I T R EPORTED I N 42 ITR 743 OBSE R VE D TH AT WHERE , HOWEVER , FROM THE VERY BEGI NN I N G, PUR C HASE OF SHA R ES I S M ADE WIT H THE I NTENTION OF SEL LIN G T HE M AT A P R OF IT , I T IS AN A D VE N T UR E I N NAT UR E OF T R A D E. F R O M TH E L E D GE R A CCO UN T F U R NI S H E D B Y TH E AS S ESS E E , IT I S C L EA R T H AT T H E A S SESSEE W A S M A KIN G PURCH ASE/SA L E W ITH A V E RY RE G UL A R IN TE R VA L AS A D EA L ER IN SHAR ES DO E S . A ND M OT I VE OF TH E ASS E SSEE I S AL SO CLEAR TH A T I T WA NT S T O EA RN PR OF IT BY SELLIN G S H A R ES A ND N O T T O E A RN INCOM E FRO M DIV ID E ND . THE D IV ID E ND R EC EI V ED B Y TH E ASSESSEE I S IN CI D E NT A L T O ITS BU S IN ESS . S IMIL A RL Y, IN T RANSACT I ON OF M UT UA L FU N DS, T H E ASSESSEE I S C HAN G IN G PL A N S I N O RD E R T O EA R N PROFIT VERY FREQUENTLY. ALL THESE S H OWS T H AT T H E ASSESSEE IS D EA LIN G I N SHARES AND MU T U A L FUND S AND SHARES OR MUTUAL FUNDS HELD BY IT ARE NOT CAPITA L ASSETS WITH THE MEANING OF S EC. 2 ( I4 )( I ) BU T THEY ARE STOCK IN TR A DE AND ANY PR OF IT ARISES F R OM SHARE WILL BE T AXABLE AS BUSI N ES S I NCOME A N D N O T A S CAPITAL GAIN AS CLAIMED B T HE ASSESSEE. THIS VIEW I S FU R THE R SUP P O RTED B Y THE HON'B L E SUPREME COURT'S DECISION IN THE CASE OF CIT VS. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD. REPORTED IN 100 ITR 706. ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 3 AS DISCU S S E D A B OVE, PR OF I T ON S A L E OF L O N G T ER M IN VEST MENT O F RS . 4, 40 , 10 , 683 / - I S TR EA T E D A S BUSIN ESS INCOME AND BEIN G S A TI SF I E D TH AT TH E A SSE S S E E H A S CON C EALED IT S IN CO ME . PENALT Y PROCEEDIN G S U/S 271(1) ( C) I S BEIN G INITIATED SEP A RATELY ON THIS ISSUE. 2.2. ON APPEAL THE FIRST APPELLATE AUTHORITY HELD THAT THE INCOME IN QUESTION IS ASSESSABLE UNDER THE HEAD CAPITAL GAINS FOR THE REASON THAT , (A) THE INTENTION OF THE ASSESSEE WAS NOT TRADING IN SHARES, (B) THE ASSESSEE HAD NO BORROWED FUNDS, ( C) NATURE AND NUMBER OF TRANSACTIONS IPSO FACTO IS NOT CONCLUSIVE PROOF THAT THE ASSESSEE IS DEALING IN TRADING OF SHARES. HE GRANTED RELIEF. AGG RIEVED THE RE VENUE IS IN APPEAL BEFORE US. 3. WE HAVE HEARD SHRI SALIL AGARWAL, THE LD.COUNSEL FOR THE ASSESSEE AND SHRI JP CHANDRAKAR, LD.SR.D.R. ON BEHALF OF THE REVENUE. 4. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, PERUSAL OF ORDERS OF LOWER AUTHORITIES, MATERIAL PLACED ON RECORD AND CASE LAWS CITED, WE HOLD AS FOLLOWS. 5. THE REASONS FOR THE AO IN COMING TO A CONCLUSION THAT INCOME FROM SALE AND PURCHASE OF SHARES IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS AND NOT UNDER THE HEAD INCO ME FROM CAPITAL GAINS IS AS FOLLOWS. * THE ASSESSEE HAS SHOWN PURCHASE AND SALE OF SHARES ON EVERY WORKING DAY OF STOCK EXCHANGE; * FROM THE FREQUENCY OF TRANSACTIONS IT CAN BE INFERRED THAT THE ASSESSEE IS DEALING IN SHARES AND MUTUAL FUNDS WITH A MOTIVE TO EARN PROFIT. * THE ASSESSEE WAS MAKING PURCHASE AND SALE OF SHARES IN REGULAR INTERVALS LIKE A DEALER IN SHARES. 5.1. THE SUBMISSIONS OF THE ASSESSEE AS SUMMARISED BY THE LD.CIT(A) IS AS FOLLOWS. (A) S URPLUS FUNDS NOT REQUIRED FOR ITS MAIN BUSINESS ACT IVITY WERE INVESTED IN VARIOUS FINANCIAL INSTRUMENTS AS PER C LAUSE III B( 13) OF MEMORANDUM OF ASSOCIATION OF THE COMPANY . (B) SURPLUS RECEIVED ON SALE OF SHARES WAS OFFERED FOR TAXATION UNDER THE HEAD 'CAPITAL GAIN' FROM THE BEGINNING. (C) DIVIDEND INCOME WAS OFFERED UNDER THE HEAD ' INCOME FROM OTHER ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 4 SOURCES' . (D) THERE IS NO CHANGE OF ACTIVITY IN THE IMPUGNED YEAR FROM WHAT WAS CARRIED ON IN THE EARLIER YEARS. HENCE THE AO IS PRECLUDED FROM TAK I NG A DIFFERENT STAND , WITHOUT BRINGING OUT NEW FACTS AND P OS ITION OF L A W. (E) THE SHARES/UNITS OF MUTUAL FUND S WERE SHOWN IN BOOKS OF ACCOUNT AS INVESTMENT . (F) THE AO CANNOT TREAT THE INVESTMENT AS STOCK IN TRADE IGNORING LEGAL PRINCIPLES. (G) MERELY T HAT THE SALE OF A CAPITAL ASSET RESULTS INTO REALISATION OF A SUBSTANTIAL PROFIT WOULD NOT CHANGE THE NATURE OF ASSET FROM CAPITAL TO STOCK - IN - TRADE. (H) THE APP E LL A NT AL W AYS ' TAK ES D E LIVER Y' OF A LL SH ARE S ON M A KIN G ACTUAL P A YM E NT , G E TS IT TRAN S F E RR E D ' IN IT S O W N NA M E', THE RE B Y INDICATING THE APPELLANT ' S INTENTION OF ST AY IN G INV E ST E D; A ND EFFECTS SAL E OF ITS INVESTMENTS ' ON DELIVERY' OF SH A R E S IN RESP E CT OF ' ALL' THE SHARES IN ITS INV E STMENT PORTFOLIO : TH E R E I S NO M E R E ' BOOK ENTRIES' BUT 'ACTUAL D E LIVERY BASED INV E S T M E N T S AGAINST PAYMENT . (I) DOMINANT INTENTION WAS TO INVEST IN SHARES. (J) PERIOD OF HOLDING : THE COMPANY; AS AN INVESTOR, H A S HELD ITS SECURITIES OVER A PERIOD OF TIME RANGING FROM 4 MONTHS TO OVER 4 YEARS ON AN AVER A G E DEPENDING UP O N TH E INV E STMENT OBJECTIVE SET AT TH E TIM E OF PURCHASE AND SINC E TH E N P E RIODIC A LLY REVIEWED BASED ON THE PR E VAILING MARK E T COND ITIO N AND OTHER BUSINESS FACTORS. THE COMPANY HAS HELD C E R TA IN SHARES OF COMPANIES AND UNITS OF MU T U A L FUNDS (S A Y , OF FUNDAMENT A LLY STRONG ENTITIES) FOR A SUB STA NTI A L LONG PERIOD OF TIM E, THEREBY I NDICATING THE COMPANY'S INTENTION OF STAYING INVESTMENT FOR EARNING DIVIDENDS AND L ONG - T E RM APPR E CIATI ON. 6. THE LD.CIT(A) RECORDS THAT THE ASSESSEE HAS RECEIVED RS.110.05 CRORES DURING THE AY 1999 - 2000 , FOR THE TRANSFER OF ITS TRADEMARKS AND DESIGNS AND A PORTION OF THESE FUNDS WERE UTILISED FOR MAKING INVESTMENT IN THE FORM OF SHARES AND MUTUAL FUNDS. THE AGE WISE ANALYSIS OF THE INVESTMENTS ARE BROUGHT OUT AT PARA 13, PAGE 7 OF THE LD.CIT(A) S ORDER WHICH IS EXTRACTED FOR READY REFERENCE. PARTICULARS PERIOD OF HOLDING AS AT 31.3.2006 0 - 3 MONTHS AMT. 0 - 3 MONTHS % 3 - 12 MONTHS AMOUNT 3 - 12 MONTHS % 12 - 18 MONTHS AMOUNT 12 - 18 MONTHS % MORE THAN 18 MONTHS AMOUNT MORE THAN 18 MONTHS % TOTAL AMOUNT TOTAL % INVESTMENT IN SHARES 829.03 32.56 1086.82 42.69 241.20 9.47 389.12 15.28 2546.17 100.00 INVESTMENT IN MF UNITS 111.88 21.62 136.64 26.40 26.80 5.18 242.17 47.80 517.49 100.00 TOTAL 940.91 30.71 1223.46 39.93 268.00 8.75 631.29 20.61 3063.66 100.00 ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 5 6.1. STOCK TURNOVER RATIO HAS BEEN BROUGHT OUT AT PARA 17 WHICH IS EXTRACTED FOR READY REFERENCE. PARTICULARS AMOUNT (RS. IN LAKHS) VALUE OF INVESTMENTS AS AT 1.4.2005 2842.93 VALUE OF INVESTMENTS AS AT 31.3.2006 3063.66 VALUE OF AVERAGE YEAR END INVESTMENTS HELD DURING FY 2005 - 06 2953.29 COST OF INVESTMENTS SOLD DURING FY 2005 - 06 6028.06 STOCK TURNOVER RATION (I.E. THE NUMBER OF TIMES INVESTMENT HAS TURNED OVER, VIZ ., TWICE IN A YEAR) 2.04 6.2. IN THE EARLIER YEARS THE ASSESSEE HAD DECLARED INCOME FROM PURCHASE AND SALE OF SHARES UNDER THE HEAD CAPITAL GAINS AND THE SAME HAS BEEN ACCEPTED BY THE REVENUE AND THIS DETAILS ARE FOUND AT PARA 16 OF THE LD.CIT(A) S ORDER WHICH IS EXTRACTED FOR READY REFERENCE. ASSESSMENT YEAR 'LONG - TERM' 'SHORT - TERM ' TOTAL CAPITAL GAINS CAPITAL GAINS CAPITAL GAINS 2001 - 02 200.68 21 . 99 222.67 2002 - 03 (13.39) 15.15 1 . 76 2003 - 04 0 31.34 31 . 3 4 2004 - 05 0 . 18 5.35 5 . 53 2005 - 06 (15.65)] (8 . 43)] ( 2 4 . 08)] 3 . 48*] 0] 3 . 48] 2006 - 07 (26.02)} 194 . 25 } 1 6 8 . 2 3 } 2 41 . 10*} O } 24 1 . 10 } 6.3. AT PARA 18 AN ANALYSIS OF THE STOCK SOLD ETC. A RE GIVEN WHICH IS EXTRACTED FOR READY REFERENCE. ANALYSIS OF STOCK SOLD OUT AND AS ON HAND OUT OF CURR E NT YEAR P U RCHAS E PARTICULAR MONTH TOTAL % OF SH A RES SHARES 1 MONTH 2 6 ,6 16 , 879 8 . 1 3% 1 TO 3 MONTH S 53, 181 , 431 1 6.24% 3 MONTHS TO 6 MONT HS 55 , 432389 16.93 % 6 MONTHS TO 9 MONTHS 6 , 549 , 071 2 . 00% 9 TO 12 MONTHS 818 , 902 0.25% NOT SOLD 184,789,914 5 6 . 44% SHARES TOTAL 327,388,586 100.00% ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 6 6.4. THEREAFTER THE LD.CIT(A) AT PARA 19 ARRIVED AT THE FOLLOWING FACTUAL FINDING. 19. FROM THE ABOVE DETAILS, THE FOLLOWING FACTS/DETAILS ARE AVAILABLE WHICH ARE TAKEN INTO ACCOUNT FOR DECIDING THE ISSUE ARISING IN THIS APPEAL: NO BORROWED FUNDS IN THE BOOKS OF ACCOUNT THE SHARES/UNITS PURCHASED WERE SHOWN AS INVESTMENTS. SUBSTANTIAL DIVIDEND INCOME IS EARNED OVER A PERIOD OF TIME DOMINANT I NTENTION WAS TO MAKE INVESTMENT AND SELL WHEN THERE IS APPRECIATION 56.44% OF THE SHARES REMAINED UNSOLD. OVER A PERIOD OF TIME THE PROFIT/LOSS ON SALE OF SHARES WAS OFFERED UNDER THE HEAD CAPITAL GAINS. NO CHANGE OF FACTS FROM THOSE OF PREVIOUS YEARS. D ELIVERY OF SHARES WAS TAKEN. THERE WAS NO DAILY PURCHASE AND SALE OF SHARES. 7. THE LD.D.R. FILED VOLUMINOUS PAPERS TO DEMONSTRATE THAT THE NUMBER OF TRANSACTIONS ARE NUMEROUS . HE ARGUED THAT FOR THIS REASON THE INCOME FROM SALE AND PURCHASE OF SHARES SHOULD BE TREATED AS INCOME FROM BUSINESS. AFTER CONSIDERING THE SAME, N OUR VIEW THE FACTUAL FINDINGS OF THE LD.CIT(A) COULD NOT BE CONTROVERTED BY THE LD.D.R. 8. WE NOW DISCUSS THE CASE LAWS ON THE SUBJECT. IN THE CASE OF G.VENKATESWAMI NAIDU AND CO. VS. CIT : 35 ITR 594 (SC), THE SUPREME COURT HELD AS UNDER: IF A PERSON INVESTS MONEY IN LAND INTENDING TO HOLD IT, ENJOYS ITS INCOME FOR SOME TIME, AND THEN SELLS IT AT A PROFIT, IT WOULD BE A CLEAR CASE OF CA PITAL ACCRETION AND NOT PROFIT DERIVED FROM AN ADVENTURE IN THE NATURE OF TRADE. IN DECIDING THE CHARACTER OF SUCH TRANSACTIONS SEVERAL FACTORS ARE RELEVANT. WHETHER THE PURCHASER WAS A TRADER AND THE PURCHASE OF THE COMMODITY AND ITS RESALE WERE ALLIED TO - HIS USUAL TRADE OR BUSINESS OR INCIDENTAL TO IT? .... WHAT IS THE NATURE AND QUANTITY OF THE COMMODITY PURCHASED AND RESOLD? ... . DID THE PURCHASER BY ANY ACT SUBSEQUENT TO THE PURCHASE IMPROVE THE QUALITY OF COMMODITY PURCHASED AND THEREBY MAKE IT MORE READILY RESALEABLE? ... WHERE THEY (ACTS OF PURCHASE OR SALE) SIMILAR OPERATIONS USUALLY ASSOCIATED WITH TRADE OR BUSINESS? . . . ARE THE TRANSACTIONS OF PURCHASE AND SALE REPEATED' IN REGARD TO THE PURCHASE OF THE COMMODITY AND ITS SUBSEQUENT POSSESSION BY THE PURCHASERS, DOES NOT ELEMENT OF PRIDE OF POSSESSION COME INTO THE PICTURE. A PERSON MAY PURCHASE A PIECE OF ART, HOLD IT FOR SOME TIME ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 7 AND IF A PROFITABLE OFFER IS RECEIVED SELL IT. DURING THE TIME THAT THE PURCHASER HAD ITS POSSESSION HE MAY BE ABL E TO CLAIM PRIDE OF POSSESSION AND AESTHETIC SATISFACTION; AND IF SUCH A CLAIM IS UPHELD THAT WOULD BE A FACTOR AGAINST THE TRANSACTION BEING IN THE NATURE OF TRADE ..... THE PRESENCE OF ALL THESE RELEVANT FACTORS MAY HELP THE COURT TO DRAW AN INFERENCE TH AT A TRANSACTION IS IN THE NATURE OF TRADE; BUT IT IS NOT A MATTER OF MERELY COUNTING THE NUMBER OF FACTS AND CIRCUMSTANCES PRO AND CON; WHAT IS IMPORTANT TO CONSIDER IS THEIR DISTINCTIVE CHARACTER. IN EACH CASE, IT IS THE TOTAL EFFECT OF ALL RELEVANT FACT ORS AND CIRCUMSTANCES THAT DETERMINES THE CHARACTER OF THE TRANSACTION. . .. . .. WHERE THE PURCHASE HAS BEEN MADE SOLELY AND EXCLUSIVELY WITH THE INTENTION TO RESELL AT A PROFIT AND THE PURCHASER HAS NO INTENTION OF HOLDING THE PROPERTY FOR HIMSELF OR O THERWISE ENJOYING OR USING IT .... THE PRESENCE OF SUCH AN INTENTION IS NO DOUBT, A RELEVANT FACTOR AND UNLESS IT IS OFFSET BY THE PRESENCE OF OTHER FACTORS, IT WOULD RAISE A STRONG PRESUMPTION THAT THE TRANSACTION IS AN ADVENTURE IN THE NATURE OF TRADE. E VEN SO, THE PRESUMPTION IS NOT CONCLUSIVE; AND IT IS CONCEIVABLE THAT, ON CONSIDERING ALL THE FACTS AND CIRCUMSTANCES IN THE CASE, THE COURT MAY, DESPITE THE SAID - INITIAL INTENTION, BE INCLINED TO HOLD THAT THE TRANSACTION WAS NOT AN ADVENTURE IN THE NATU RE OF TRADE'.' (EMPHASIS SUPPLIED) THE APEX COURT IN THE CASE OF SUTLEJ COTTON MILLS SUPPLY AGENCY LTD: 100 ITR 706 (SC) OBSERVED AS FOLLOWS: ..... WHERE THE PURCHASE OF ANY ARTICLE OR OF ANY CAPITAL INVESTMENT, FOR IN STANCE, SHARES, IS MADE WITHOUT THE INTENTION TO RESELL AT A PROFIT, A RESALE UNDER CHANGED CIRCUMSTANCES WOULD ONLY BE A REALISATION OF CAPITAL AND WOULD NOT STAMP THE TRANSACTION WITH A BUSINESS CHARACTER. WHERE A PURCHASE IS MADE WITH THE INTENTION OF RESALE, IT DEPENDS UPON THE CONDU CT OF THE ASSESSEE AND THE CIRCUMSTANCES OF THE CASE WHETHER THE VENTURE IS ON CAPITAL ACCOUNT OR IN THE NATURE OF TRADE. A TRANSACTION I S NOT NECESSARILY IN THE NATURE OF TRADE BECAUSE THE PURCHASE WAS MADE WITH THE INTENTION OF RESALE. A CAPITAL INVESTME NT AND RESALE DO NOT LOSE THEIR CAPITAL NATURE MEREL Y BECAUSE THE RESALE WAS FORESEEN AND CONTEMPLATED WHEN THE INVESTMENT WAS MADE AND THE POSSIBILITY OF ENHANCED VALUES MOTIVATED THE INVESTMENT. (EMPHASIS SUPPLIED) IN COMMISSIONER OF INLAND REVENUE V. FRASER: [1942] 24 TC 498,502 LORD NORMAND SAID: 'THE INDIVIDUAL WHO ENTERS INTO A PURCHASE OF AN ARTICLE OR COMMODITY MAY HAVE IN VIEW THE RESALE OF IT AT A PROFIT, AND YET IT MAY BE THAT THAT IS NOT THE ONLY PURPOSE FOR WHICH HE PURCHASED THE ARTICLE OR THE COMMODITY, NOR THE ONLY PURPOSE TO WHICH HE MIGHT TURN IT IF FAVOURABLE OPPORTUNITY FOR SALE DOES NOT OCCUR ... AN AMATEUR MAY PURCHASE A PICTURE WITH A VIEW TO ITS RESALE AT A PROFIT, AND YET HE MAY RECOGNISE AT THE TIME OR AFTERWARDS THAT THE POS SESSION OF THE PICTURE WILL GIVE HIM AESTHETIC ENJOYMENT IF HE IS UNABLE ULTIMATELY, OR AT HIS CHOSEN TIME, TO REALISE IT AT A PROFIT. ... ' ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 8 AN ACCRETION TO CAPITAL DOES NOT BECOME INCOME MERELY BECAUSE THE ORIGINAL CAPITAL WAS INVESTED IN THE HOPE AND EX PECTATION THAT IT WOULD RI SE IN VALUE; IF IT DOES SO RISE, ITS REALIZATION DOES NOT MAKE IT INCOME. LORD DUNEDIN SAID IN L EEMING V. JONES AT PAGE 360: 'THE FACT THAT A MAN DOES NOT MEAN TO HOLD AN INVESTMENT MAY BE AN ITEM OF EVIDENCE TENDING TO SHOW W HETHER HE IS CARRYING ON A TRADE OR CONCERN IN THE NATURE OF TRADE IN RESPECT OF HIS INVESTMENTS BUT PER SE IT LEADS TO NO CONCLUSION WHATEVER.' IN THE CASE OF RAJA BAHADUR KAMAKHYA NARAIN SINGH VS. CIT: 77 ITR 253 (SC) THE SUPREME COURT OBSERVED AS UNDER: 'SINCE THE EXPRESSION 'ADVENTURE IN THE NATURE OF TRADE' IMPLIE S THE EXISTENCE OF CERTAIN ELEMENTS IN THE TRA NSACTIONS WHICH IN LAW WOULD INVES T THEM WITH THE CHARACTER OF TRADE OR BUSINESS AND THE QUESTION ON THAT ACCOUNT BECOMES A MIXED QUESTION OF LAW AND FACT, THE COURT CAN REVIEW THE TRIBUNAL'S FINDING IF IT HAS MISDIRECTED ITSELF IN LAW. IT IS FAIRLY CLEAR THAT WHERE A PERSON IN SELLING HI S INVESTMENT REALISES AN ENHANCED PRICE, THE EXCESS OVER HIS PURCHASE PRICE IS NOT PROFIT ASSESSABLE TO TAX. BUT IT WOULD BE SO, IF WHAT IS DONE IS NOT A MERE REALISATION OF THE INVESTMENT BUT AN ACT DONE FOR MAKING PROFITS. THE DISTINCTION BETWEEN THE TWO TYPES OF TRANSACTIONS IS NOT ALWAYS EASY TO MAKE. WHETHER THE TRANSACTION IS OF ONE KIND OR THE OTHER DEPENDS ON THE QUESTION WHETHER THE EXCESS WAS AN ENHANCEMENT OF THE VALUE BY REALISING A SECURITY OR GAIN IN AN OPERATION OF PROFIT - MAKING. IF THE TRAN SACTION IS IN THE ORDINARY LINE OF THE ASSESSEE'S BUSINESS, THERE WOULD HARDLY BE ANY DIFFICULTY IN CONCLUDING THAT IT WAS A TRADING TRANSACTION, BUT WHERE IT IS NOT, THE FACTS MUST BE PROPERLY ASSSESSED TO DISCOVER WHETHER IT WAS IN THE NATURE OF TRADE. THE SURPLUS REALISED ON THE SALE OF SHARES, FOR INSTANCE, WOULD BE CAPITAL IF THE ASSESSEE IS AN ORDINARY INVESTOR REALISING HIS HOLDING; BUT IT WOULD BE REVENUE IF HE DEALS WITH THEM AS AN ADVENTURE IN THE NATURE OF TRADE. THE FACT THAT THE ORIGINAL PURC HASE WAS MADE WITH THE INTENTION OF RESELL IF AN ENHANCED PRICE COULD BE OBTAINED IS BY ITSELF NOT ENOUGH BUT IN CONJUNCTION WITH THE CONDUCT OF THE ASSESSEE AND OTHER CIRCUMSTANCES IT MAY POINT TO THE TRADING CHARACTER OF THE TRANSACTION. FOR INSTANCE, AN ASSESSEE MAY INVEST HIS CAPITAL IN SHARES WITH THE INTENTION TO RESELL THEM IF IN FUTURE THEIR SALE MAY BRING IN A HIGHER PRICE. SUCH AN INVESTMENT, THOUGH MOTIVATED BY A POSSIBILITY OF ENHANCED VALUE, DOES NOT RENDER THE INVESTMENT A TRANSACTION IN THE N ATURE OF TRADE. THE TEST OFTEN APPLIED IS, HAS THE ASSESSEE MADE HIS SHARES AND SECURITIES THE STOCK - IN - TRADE OF A BUSINESS ..... ' (EMPHASIS SUPPLIED) IN THE CASE OF KARAM CHAND THAPAR & BROS. (P) LTD. REPORTED IN 82 ITR 899 THE HON BLE SUPREME COURT HELD AS FOLLOWS. ..................... THE TRIBUNAL ALSO RELIED ON THE CIRCUMSTANCE THAT THE ASSESSEE WAS SHOWING THESE SHARES AS INVESTMENT SHARES IN ITS BOOKS AS WELL AS IN THE BALANCE SHEET. IT IS TRUE THAT CIRCUM STANCE BY ITSELF IS NOT A CONCLUSIVE ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 9 CIRCUMSTANCE. IT CANNOT BE DENIED THAT THAT IS A RELEVANT CIRCUMSTANCE ON WHICH THE TRIBUNAL COULD HAVE RELIED FOR DRAWING THE INFERENCE IT DID. THE EXPLANATION THAT IT HAD TO DO SO BECAUSE OF THE PROVISIONS OF THE CO MPANY LAW IS UNFOUNDED. (EMPHASIS SUPPLIED). THE LUCKNOW BENCH OF THE ITAT IN THE CASE OF SARNATH INFRASTRUCTURE P.LTD. VS. ACIT, 313 ITR (AT) 13 (LUCKNOW) HELD AS FOLLOWS. 13. AFTER CONSIDERING THE ABOVE RULINGS, WE CULL OUT THE FOLLOWING PRINCIPLE WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTIONS IN QUESTION ARE IN THE NATURE OF TRADE OR ARE MERELY FOR INVESTMENT PURPOSES: ( I ) WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF SHARES (OR ANY OTHER ITEM). THIS CA N 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. ( II ) WHETHER THE ASSESS EE HAS BORROWED MONEY TO PURCHASE AND PAY INTEREST THEREON? NORMALLY, MONEY IS BORROWED TO PURCHASE GOODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINING. ( III ) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISPOSAL IN THAT PARTICULAR ITE M? 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 HOL DINGS MAY SHOW WHETHER THE ASSESSEE IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). ( IV ) WHETHER PURCHASE AND SALE IS FOR REALISING PROFIT OR PURCHASES ARE MADE FOR RET ENTION AND APPRECIATION IN ITS VALUE? FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN THE 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 E SSENTIAL INGREDIENT OF TRADE. ( V ) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN THE 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 REALISABLE VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK IN TRADE. ( VI ) HOW THE COMPANY IS AUTHORISED IN MOA/AOA? WHETHER FOR TRADE OR FOR INVESTMENT? IF AUTHORISED ONLY FOR TRADE, THEN WHETHER THERE ARE ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 10 SEPARATE RESOLUTIONS OF THE B OARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY AND VICE VERSA. ( VII ) IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION 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 THE REVENUE TO PROVE THAT APPARENT IS NOT REAL. ( VIII ) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES(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 THE ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUE STION) FOR INVESTMENT. ( IX ) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THESE LEGAL REQUIREM ENTS, IF IT IS CLAIMED THAT IT IS DEALING AS A TRADER IN THAT ITEM? WHETHER IT HAD SUCH AN INTENTION TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM SINCE BEGINNING OR WHEN PURCHASES WERE MADE? ( X ) IT IS PERMISSIBLE AS PER CBDT CIRCULAR NO.4 OF 2007 OF JUNE 15, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. ( XI ) NOR ONE OR TWO FACTORS OUT OF THE ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SEVERAL FACTORS HAS TO BE SEEN. THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ROHIT ANAND, ITA NO. 1135/2010 DT. 16.8. 2010 UPHELD THE FINDING OF THE TRIBUNAL IN THE FOLLOWING WORDS. 3. HOWEVER, UPON A PERUSAL OF THE IMPUGNED ORDER, WE ARE OF THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES IN THE PRESENT PROCEEDINGS INASMUCH AS BOTH THE COMMISSIONER OF INCOME TAX (APPEALS) AND THE TRIBUNAL HAVE GIVEN COGENT REASONS IN ARRIVING AT THE CONCLUSION THAT THE RESPONDENT - ASSESSEE WAS NOT - A - TRADER IN STOCK BUT ONLY A INVESTOR AND FURTHER HIS INCOME ON SALE OF SHARES WAS NOT BUSINESS INCOME. IN FACT, THE TRIBUNAL IN ITS IMPUGNED ORDER HAS OBSERVED AS UNDER. - ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 11 '9. WE HAVE CAREFULLY CONSIDERED THE RELEVANT FACTS AND THE FINDINGS OF BOTH THE AUTHORITIES BELOW. THE ASSESSEE IN HIS INDIVIDUAL CARRIES ON BUSINESS OF JEWELLERY. APA RT FROM SAID BUSINESS, THE ASSESSEE INVESTED IN SHARES AND TREATS SHARES AS INVESTMENT IN HIS BOOKS OF ACCOUNT. THIS ITSELF MANIFEST THE INTENTION OF THE ASSESSEE AS TO WHETHER HE PROPOSED INTO DEALING IN SHARES OR EARN DIVIDEND AND PROFIT OUT OF SUCH IN VESTMENT. THE ASSESSING OFFICER WAS GUIDED MORE BECAUSE OF THE TOTAL AMOUNT INVOLVED RATHER THAN THE ACTUAL INTENTION AND THE WAY OF CARRYING ON SHARE TRANSACTION. THERE IS NO DOUBT THAT EVEN A SINGLE TRANSACTION CAN BE IN THE NATURE OF TRADE BUT THE ASSES SEE HAS DEMONSTRATED THAT HIS. INTENTION WAS NEVER TO TRADE IN SHARES. THE INTENTION IS MANIFESTED BY TREATMENT GIVEN TO SUCH INVESTMENT THAT THE INVESTMENT IS OUT OF OWN FUND AND NOT BORROWED THAT THE INVESTMENT IS NOT ROTATED FREQUENTLY, THAT THE TOTAL NUMBER OF TRANSACTIONS ARE VERY FEW, THAT ALL THE SHARES PURCHASED ARE NOT SOLD AND RATHER HELD FOR QUITE NUMBER OF DAYS. IT IS TO BE NOTED THE INCOME TAX ACT ITSELF HAS PROVIDED THAT WHEN THE SHARES ARE HELD FOR A PERIOD OF ONE YEAR OR MORE WILL BE TRE ATED AS LONG TERM CAPITAL ASSET CONTRARY TO OTHER ASSETS WHERE THE HOLDING PERIOD TO TREAT SUCH ASSET A LONG TERM IS MORE THAN 36 MONTHS. THUS EVEN AFTER HOLDING THE SHARES FOR MORE THAN 12 MONTHS AND SHOWING SUCH INTENTION FROM THE CONDUCT, THE ASSESSING OFFICER CANNOT REPLACE HIS OPINION FOR THAT OF THE ASSESSEE IN HOLDING THAT THE SHARES ARE HELD AS STOCK IN TRADE AND PROFIT FROM WHICH IS TO BE ASSESSED AS BUSINESS INCOME. IN ALL SUCH CASES THE INTENTION IS MANIFESTED BY THE ASSESSEE HIMSELF BY HIS COND UCT AND OTHER RELEVANT FACTORS AS CONSIDERED BY THE LEARNED C I T(A). IT IS ALSO SEEN THAT THE SHARES WERE TREATED AS INVESTMENT IN EARLIER YEAR AND WHICH FACT HAS BEEN ACCEPTED BY THE ASSESSING OFFICER. THE ASSESSEE HAS ALSO EARNED HUGE DIVIDEND INCOME FROM SUCH SHARES. THE ASSESSING OFFICER MERELY BECAUSE OF THE TOTAL VOLUME OF TRANSACTION IS SUBSTANTIAL, IS GUIDED TO HOLD THE INCOME AS BUSINESS INCOME. HOWEVER, HE FAILED TO. RECOGNIZE THAT THE VOLUME OF TRANSACTION INCLUDES THE APPRECIATION IN SHARES ALSO AND SUCH APPRECIATION 'HAS BEEN OFFERED FOR TAX. IF VOLUME OF TRANSACTION IS THE CRITERIA, WHAT IS TO BE EXAMINED IS HOW FREQUENTLY THE TRANSACTION IS DONE, WHETHER THE TRANSACTION IS SETTLED IN THE COURSE OF THE DAY OF TRADING ITSELF OR IN THE SETTLEMENT PERIOD ITSELF SO AS TO AVOID PAYMENT OF FULL PURCHASE PRICE. HERE. THE ASSESSEE HAS BEEN HOLDING THE SHARES BY TAKING DELIVERY AND MAKING FULL PAYMENT FOR SUCH INVESTMENT. IN SUCH CIRCUMSTANCES, THE TRANSACTIONS ARE TO BE TREATED AS GIVING RISE TO THE CAP ITAL GAIN AND CANNOT BE BRANDED AS TRADING OF MAKING INVESTMENT SO AS TO DETERMINE WHETHER THE TRANSACTION WAS FOR DEALING IN SHARES OR MAKING INVESTMENT FOR EARNING DIVIDEND AND APPRECIATION FROM SUCH INVESTMENT. THE TOTAL NUMBER OF SHARES DEALT IN RESPE CT OF LONG TERM PORTFOLIO IS ONLY 5. THIS CANNOT BE CONSIDERED AS VOLUME TRANSACTION. THEREFORE, THIS TRANSACTION IN SHARES CANNOT BE SAID TO BE WITH INTENTION TO DEAL IN SUCH SHARES. RATHER THE TRANSACTION WERE WITH INTENTION OF EARNING APPRECIATION FROM SUCH SHARES. THEREFORE, THE SAME ARE ASSESSABLE AS CAPITAL GAIN AND NOT ITA NO.2006/DEL/2010 AY 2006 - 07 ITA NO. 3182/DEL/2010 AY: 2007 - 08 TRENT BRANDS LTD. 12 AS PROFITS AND GAINS OF BUSINESS. WE, THEREFORE, UPHOLD THE ORDERS OF THE LEARNED CIT(A) . 4. IN OUR OPINION, THE FACTUAL FINDINGS OF THE FINAL FACT FINDING AUTHORITY ARE NEITHER PER VERSE NOR CONTRARY TO RECORD. ACCORDINGLY, WE FIND THAT NO SUBSTANTIAL QUESTION OF LAW ARISES IN THE PRESENT APPEAL. 8. APPLYING THE PROPOSITIONS LAID DOWN IN THE ABOVE CASE LAWS TO THE FACTS OF THE PRESENT CASE , WE HAVE TO NECESSARILY UPHOLD THE FINDING OF THE FIRST APPELLATE AUTHORITY THAT THE INCOME IN QUESTION SHOULD BE ASSESSED UNDER THE HEAD INCOME FROM CAPITAL GAINS AND NOT INCOME FROM BUSINESS OR PROFESSION. 9. IN THE RESULT BOTH THE APPEAL S OF THE REVENUE ARE D ISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 30 TH JANUARY, 2015. SD/ - SD/ - ( C.M. GARG ) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30 TH JANUARY, 2015 MANGA COPY FORWARDED TO: - 1. APPELLANT : 2. RESPONDENT : 3. CIT 4. CIT(A) 5. DR, ITAT BY ORDER ASSISTANT REGISTRAR