Sar Investment Pvt.Ltd., Ahmedabad V. The Dy.CIT., Circle-8, Ahmedabad

ITA 2116/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5560 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 15-07-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 18-05-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D S CHAUDHRYD R
• Keywords: Capital asset; Business income; Advance ruling; Question of law; Capital Gains
• Section: 2(14); 207; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHR I N.S.SAINI, ACCOUNTANT MEMBER DATE OF HEARING : DRAFTED ON: ITA NO.2116 /AHD/2007 ASSESSMENT YEAR :2004-05 SAR INVESTMENT PVT.LTD., SAGAR,OPP. KAMDHENU COMPLEX,NR.SAHJANAND COLLEGE, AMBAWADI, AHMEDABAD. VS. DEPUTY COMMISSIONER OF INCOME TAX,CIRCLE-8, A-WING AJANTA COMMERCIAL CENTRE,ASHRAM ROAD, AHMEDABAD. PAN/GIR NO. : AAFCS 8861 D (APPELLANT) .. (RESPONDENT) APPELLANT BY : MS. URVASHI SHODHAN. RESPONDENT BY: SHRI D.S. CHAUDHRY,D.R. O R D E R PER N.S.SAINI ACCOUNTANT MEMBER:- THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-XIV, A HMEDABAD DATED 22-03-2007. 2. THE SOLE GROUND OF APPEAL RAISED IN THIS APPEAL READS AS UNDER THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ER RED IN JUSTIFYING THE ACTION OF THE ASSESSING OFFICER TREA TING, THE PROFIT ON SALE OF INVESTMENTS IN SHARES THROUGH PORTFOLIO MAN AGEMENT - 2 - SCHEME AS TRADING PROFIT AND ASSESSING THE SAME UND ER THE HEAD BUSINESS AGAINST THE CAPITAL GAIN AS RETURNED BY TH E ASSESSEE. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE THE ASSESS EE CLAIMED IN THE RETURN OF INCOME LONG TERM CAPITAL GAIN OF RS.19,05,537/- AND SHORT TERM CAPITAL GAIN OF RS.11,37,486/- ON SALE OF SHARES W HICH WERE HELD AS INVESTMENT BY IT. THE LEARNED ASSESSING OFFICER OBS ERVED THAT THE ASSESSEE HAS REALIZED THE ABOVE GAIN FROM PORTFOLIO MANAGEMENT SCHEME OF KOTAK MAHENDRA. HE ALSO OBSERVED THAT THE TOTAL TRANSACTIONS UNDER THIS SCHEME RUNS INTO 82 PAGES AND HAS MULTIP LE TRANSACTIONS ON DAILY BASIS IN A LARGE NUMBER OF SCRIPTS AND LARGE NUMBER OF TRANSACTIONS IN SALE AND PURCHASE. FROM THIS OBSERVATION THE LE ARNED ASSESSING OFFICER CONCLUDED THAT THE ASSESSEE WAS ACTUALLY DE ALING IN SHARES AND THEREFORE, HE TREATED THE ENTIRE INCOME DERIVED FRO M TRANSACTIONS UNDER PORTFOLIO MANAGEMENT SCHEME AS BUSINESS INCOME OF T HE ASSESSEE COMPANY. 3. ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TA X (APPEALS) CONFIRMED THE ABOVE ACTION OF THE LEARNED ASSESSING OFFICER. 4. BEFORE US THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE STRONGLY OBJECTED AGAINST THE ABOVE ACTION OF THE L EARNED COMMISSIONER OF INCOME TAX (APPEALS). HE CONTENDED THAT THE ASSE SSEE HAD ACQUIRED THE SHARES IN RESPECT OF WHICH SHORT TERM CAPITAL G AIN AND LONG TERM CAPITAL GAIN WERE CLAIMED AS INVESTMENT. IN SUPPOR T OF THIS HE SUBMITTED THAT NO BORROWED MONEY WAS UTILISED IN ACQUIRING OF THE SHARES. HE FURTHER SUBMITTED THAT THE SHARES IN RESPECT OF WHI CH CAPITAL GAIN WERE - 3 - CLAIMED WERE ACTUALLY RECEIVED AS DELIVERY IN THE D EMAT ACCOUNT OF THE ASSESSEE AND THE ASSESSEE AFTER ACQUIRING SHARES AN D HOLDING THEM FOR CERTAIN PERIOD AND THEN SOLD THE SHARES. THE ABOVE FACTS CLEARLY DEMONSTRATE THAT THE ASSESSEE ACQUIRED THE SHARES A S INVESTOR AND NOT AS A TRADER. THEREFORE, HE CONTENDED THAT THE LOWER A UTHORITIES WERE NOT JUSTIFIED IN TREATING THE SHORT TERM CAPITAL GAIN A ND LONG TERM CAPITAL GAIN DERIVED BY THE ASSESSEE AS BUSINESS INCOME MERELY O N THE GROUND THAT THERE WERE LARGE NUMBER OF TRANSACTIONS. HE ALSO R ELIED UPON THE DECISION OF THIS TRIBUNAL IN THE CASE OF SHRI SUGAM CHAND C. SHAH VS. ACIT CIR.3, SURAT, (ITA NO.3554/AHD/2008), ACIT CIRCLE-3 , SURAT VS. SHRI SUGAMCHAND C. SHAH, (ITA.NO.4024/AHD/2008), ACIT CI RCLE-3, SURAT VS. SHRI SUGAMCHAND C. SHAH, (ITA NO.2219/AHD/2009) AND SHRI SUGAMCHAND C.SHAH VS. ACIT, SURAT (ITA NO.1932/AHD/09) DATED 2 9-01-2010. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES. 5. IN THE INSTANT CASE, THE ISSUE WHICH REQUIRES OU R ADJUDICATION IS THAT WHETHER THE INCOME EARNED BY THE ASSESSEE ON S ALE OF SHARES IS TO BE ASSESSED UNDER THE HEAD CAPITAL GAINS AS CLAIMED BY THE ASSESSEE OR UNDER THE HEAD BUSINESS INCOME AS HELD BY THE LOWER AUTHORITIES. IT IS AN UNDISPUTED PROPOSITION THAT PROFIT ON SALE OF AN AS SET WHICH IS ACQUIRED BY THE ASSESSEE AS INVESTMENT IS TO BE ASSESSED UND ER THE HEAD CAPITAL GAIN AND THE ASSET WHICH HAS BEEN ACQUIRED AS TRADI NG ASSET OR STOCK-IN- TRADE IS TO BE ASSESSED AS BUSINESS INCOME. THE SET TLED POSITION OF LAW IN THIS REGARD IS THAT WHETHER THE ASSET ACQUIRED IS I NVESTMENT OR STOCK-IN- TRADE IN THE HANDS OF THE ASSESSEE DEPENDS UPON THE INTENTION OF THE ASSESSEE AT THE TIME OF THE ACQUISITION OF THE SAID ASSET I.E. WHETHER IT - 4 - WAS INTENDED TO BE ACQUIRED AS INVESTMENT OR AS A T RADING ASSET. IN OUR CONSIDERED OPINION THIS INTENTION OF THE ASSESSEE I S TO BE INFERRED FROM THE ATTENDING CIRCUMSTANCES OF THE CASE AND AFTER P ROPERLY EVALUATING ALL THE ATTENDING CIRCUMSTANCES. 6. FURTHER, IT IS ALSO IMPORTANT TO UNDERSTAND THAT AN ASSESSEE MAY BE INVESTOR AS WELL AS ALSO A TRADER IN SHARES. IN OT HER WORDS, THE ASSESSEE MAY ACQUIRE CERTAIN SHARES FOR THE PURPOSE OF INVES TMENT, PROFIT ON SALE OF WHICH WILL BE CAPITAL GAIN AND SIMULTANEOUSLY, I T MAY ACQUIRE CERTAIN SHARES FOR THE PURPOSE OF TRADING AND PROFIT ON SAL E OF SUCH SHARES ARE TO BE ASSESSED AS BUSINESS INCOME. 7. IN THIS REGARD IT WILL BE USEFUL TO TAKE NOTE OF C.B.D.TS CIRCULAR NO.4 OF 2007 DATED 15-06-2007 WHICH LAYS DOWN AS UN DER:- CIRCULAR NO. 4 OF 2007, DT. 15TH JUNE, 2007 SUB. : DISTINCTION BETWEEN SHARES HELD AS STOCK-IN- TRADE AND SHARES HELD AS INVESTMENT - TESTS FOR SUCH A DISTINCTION. 1. THE INCOME-TAX ACT, 1961 MAKES A DISTINCTION BET WEEN A CAPITAL ASSET AND A TRADING ASSET. 2. CAPITAL ASSET IS DEFINED IN SECTION 2(14) OF T HE ACT. LONG-TERM CAPITAL ASSETS AND GAINS ARE DEALT WITH UNDER SECTI ON 2(29A) AND SECTION 2(29B). SHORT-TERM CAPITAL ASSETS AND GAINS ARE DEA LT WITH UNDER SECTION 2(42A) AND SECTION 2(42B). 3. TRADING ASSET IS DEALT WITH UNDER SECTION 28 O F THE ACT. 4. THE 4. CENTRAL BOARD OF DIRECT TAXES (CBDT) THROUGH INSTR UCTION NO. 1827 DATED AUGUST 31, 1989 HAD BROUGHT TO THE NOTICE OF THE ASSESSING - 5 - OFFICERS THAT THERE IS A DISTINCTION BETWEEN SHARES HELD AS INVESTMENT (CAPITAL ASSET) AND SHARES HELD AS STOCK-IN-TRADE ( TRADING ASSET). IN THE LIGHT OF A NUMBER OF JUDICIAL DECISIONS PRONOUNCED AFTER THE ISSUE OF THE ABOVE INSTRUCTIONS, IT IS PROPOSED TO UPDATE THE AB OVE INSTRUCTIONS FOR THE INFORMATION OF ASSESSES AS WELL AS FOR GUIDANCE OF THE ASSESSING OFFICERS. 5. IN THE CASE OF CIT VS. ASSOCIATED INDUSTRIAL DE VELOPMENT COMPANY (P) LTD. 1972 CTR (SC) 239 : (1971) 82 ITR 586 (SC) , THE SUPREME COURT OBSERVED THAT : 'WHETHER A PARTICULAR HOLDING OF SH ARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK-IN-TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE E VIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINC TION BETWEEN THOSE SHARES WHICH ARE ITS STOCK-IN-TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT.' 6. IN THE CASE OF CIT VS. H. HOLCK LARSEN (1986) 5 8 CTR (SC) 53 : (1986) 160 ITR 67 (SC), THE SUPREME COURT OBSERVED : 'THE HIGH COURT, IN OUR OPINION, MADE A MISTAKE IN OBSERVING WHETHER TRANSACTIONS OF SALE AND PURCHASE OF SHARES WERE TR ADING 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 I N THE ABOVE TWO CASES AFFORD ADEQUATE GUIDANCE TO THE ASSESSING OFF ICERS. 8. THE AUTHORITY FOR ADVANCE RULINGS (AAR) IN FID ELITY NORTHSTAR FUND & ORS., IN RE (2007) 207 CTR (AAR) 297 : (2007) 288 ITR 641 (AAR), REFERRING TO THE DECISIONS OF THE SUPREME COURT IN SEVERAL CASES, HAS CULLED OUT THE FOLLOWING PRINCIPLES :- - 6 - '(I) WHERE A COMPANY PURCHASES AND SELLS SHARES, I T MUST BE SHOWN THAT THEY WERE HELD AS STOCK-IN-TRADE AND THA T 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 M ANNER OF MAINTAINING BOOKS OF ACCOUNTS, THE MAGNITUDE OF PURCHASES AND S ALES AND THE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD F URNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS; (III) ORD INARILY THE PURCHASE AND SALE OF SHARES WITH THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRANSACTION BEING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE; BUT WHERE THE OBJECT OF THE INVESTMENT IN SH ARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE P ROFITS ACCRUING BY CHANGE IN SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT.' 9. DEALING WITH THE ABOVE THREE PRINCIPLES, THE A AR HAS OBSERVED IN THE CASE OF FIDELITY GROUP AS UNDER:- 'WE SHALL REVERT TO THE AFOREMENTIONED PRINCIPLES. THE FIRST PRINCIPLE REQUIRES US TO ASCERTAIN WHETHER THE PURCHASE OF SH ARES BY A FII IN EXERCISE OF THE POWER IN THE MEMORANDUM OF ASSOCIAT ION/TRUST DEED WAS AS STOCK-IN-TRADE AS THE MERE EXISTENCE OF THE POWE R TO PURCHASE AND SELL SHARES WILL NOT BY ITSELF BE DECISIVE OF THE NATURE OF TRANSACTION. WE HAVE TO VERIFY AS TO HOW THE SHARES WERE VALUED/HELD IN THE BOOKS OF ACCOUNT I.E. WHETHER THEY WERE VALUED AS STOCK-IN-TRADE AT THE END OF THE FINANCIAL YEAR FOR THE PURPOSE OF ARRIVING AT BUSIN ESS INCOME OR HELD AS INVESTMENT IN CAPITAL ASSETS. THE SECOND PRINCIPLE FURNISHES A GUIDE FOR DETERMINING THE NATURE OF TRANSACTION BY VERIFYING WHETHER THERE ARE SUBSTANTIAL TRANSACTIONS, THEIR MAGNITUDE, ETC., MA INTENANCE OF BOOKS OF - 7 - ACCOUNT AND FINDING THE RATIO BETWEEN PURCHASES AND SALES. IT WILL NOT BE OUT OF PLACE TO MENTION THAT REGULATION 18 OF THE S EBI REGULATIONS ENJOINS UPON EVERY FII TO KEEP AND MAINTAIN BOOKS O F ACCOUNT CONTAINING TRUE AND FAIR ACCOUNTS RELATING TO REMITTANCE OF IN ITIAL CORPUS OF BUYING AND SELLING AND REALIZING CAPITAL GAINS ON INVESTME NTS AND ACCOUNTS OF REMITTANCE TO INDIA FOR INVESTMENT IN INDIA AND REA LIZING CAPITAL GAINS ON INVESTMENT FROM SUCH REMITTANCES. THE THIRD PRINCIP LE SUGGESTS THAT ORDINARILY PURCHASES AND SALES OF SHARES WITH THE M OTIVE OF REALIZING PROFIT WOULD LEAD TO INFERENCE OF TRADE/ADVENTURE I N THE NATURE OF TRADE; WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF COM PANIES IS TO DERIVE INCOME BY WAY OF DIVIDENDS ETC., THE TRANSACTIONS O F PURCHASES AND SALES OF SHARES WOULD YIELD CAPITAL GAINS AND NOT BUSINES S PROFITS.' 10. CBDT ALSO WISHES TO EMPHASISE THAT IT IS POSS IBLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS, I.E., AN INVESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRA DING PORTFOLIO COMPRISING OF STOCK-IN-TRADE WHICH ARE TO BE TREATE D AS TRADING ASSETS. WHERE AN ASSESSEE HAS TWO PORTFOLIOS, THE ASSESSEE MAY HAVE INCOME UNDER BOTH HEADS I.E., CAPITAL GAINS AS WELL AS BUS INESS INCOME. 11. 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 STOCK-IN-TRADE (AND THEREFORE GIVING RISE TO BUSINESS PROFITS). THE ASSESSING OFFICERS ARE FURTHER ADVISED THAT NO SING LE 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. - 8 - 12. THESE INSTRUCTIONS SHALL SUPPLEMENT THE EARLI ER INSTRUCTION NO. 1827 DATED AUGUST 31, 1989. [F. NO. 149/28/2005-TPL ] (2007) 210 CTR (ST) 29. 8. IN THE INSTANT CASE, IT IS OBSERVED THAT THE LOW ER AUTHORITIES HAVE TAKEN INTO CONSIDERATION ONLY ONE FACTOR I.E. THE V OLUME OF TRANSACTION AND HAS NOT TAKEN INTO CONSIDERATION THE OTHER RELE VANT FACTOR. IN OUR CONSIDERED OPINION FOR ADJUDICATING THE ISSUE UNDER CONSIDERATION ALL THE RELEVANT FACTORS SHOULD HAVE BEEN TAKEN INTO CONSID ERATION AND AFTER CONSIDERING THEM TOGETHER THE ISSUE SHOULD HAVE BEE N DECIDED. WE FIND THAT BEFORE US BOTH THE PARTIES HAVE NOT BROUGHT RE LEVANT MATERIAL ON THE BASIS OF WHICH WE COULD HAVE EVALUATED ALL THE FACTORS. THE PARTIES HAVE NOT BROUGHT BEFORE US THE COPY OF THE BALANCE SHEET OF THE ASSESSEE COMPANY SO THAT IT COULD HAVE BEEN FOUND B Y US THAT WHETHER ANY BORROWED CAPITAL WAS ACQUIRED FOR ACQUISITION O F SHARES OR NOT, WHETHER THE SHARES WERE CLASSIFIED AS STOCK-IN-TRAD E OR AS INVESTMENT IN THE BALANCE SHEET OF THE ASSESSEE-COMPANY, WHAT WER E THE OTHER ACTIVITIES OF THE ASSESSEE-COMPANY, ETC. IN ABSENC E OF ENTIRE MATERIAL BEFORE US WE ARE NOT IN A POSITION TO ADJUDICATE TH E ISSUE COMPLETELY. IN THE ABOVE CIRCUMSTANCES, IN OUR CONSIDERED OPINION IT SHALL BE IN THE INTEREST OF THE JUSTICE TO RESTORE THIS ISSUE TO TH E FILE OF THE LEARNED ASSESSING OFFICER FOR ADJUDICATION AFRESH AS PER LA W. THE LEARNED ASSESSING OFFICER IS DIRECTED TO RE-ADJUDICATE THE ISSUE AFRESH KEEPING IN VIEW THE OBSERVATIONS MADE HEREINABOVE IN THIS ORDE R. THE LEARNED ASSESSING OFFICER IS DIRECTED TO PASS A SPEAKING O RDER AFTER TAKING INTO CONSIDERATION THE ENTIRE RELEVANT FACTS SPECIALLY I N CASE OF SHARES WHICH WERE HELD BY THE ASSESSEE FOR A PERIOD OF MORE THAN ONE YEAR IF THE - 9 - LEARNED ASSESSING OFFICER CONCLUDES THE SAME AS NOT AN INVESTMENT OF THE ASSESSEE-COMPANY BY GIVING COGENT REASONS FOR T HE SAME NEEDLESS TO MENTION THAT THE LEARNED ASSESSING OFFICER SHALL ALLOW REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE BEFORE ADJUD ICATING THE ISSUE AFRESH. THUS, THE GROUND OF APPEAL IS ALLOWED FOR S TATISTICAL PURPOSES. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSE. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 23RD DAY OF JULY, 2010. SD/- SD/- (BHAVNESH SAINI) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; ON THIS 23RD DAY OF JULY, 2010 PATKI COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)- 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD - 10 - DATE INITIALS 1. DRAFT DICTATED ON --------------- --------- ---------- 2. DRAFT PLACED BEFORE AUTHORITY --------------- ------------------- 3. DRAFT PROPOSED & PLACED --------------- ------ ------------- JM BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED --------------- ----- -------------- JM/AM BY SECOND MEMBER 5. APPROVED DRAFT COMES TO P.S ---------------- -- ------------------ 6. KEPT FOR PRONOUNCEMENT ON ---------------- --- ----------------- 7. FILE SENT TO THE BENCH CLERK ---------------- -------------------- 8. DATE ON WHICH FILE GOES TO THE ---------------- -------------------- 9. DATE OF DISPATCH OF ORDER ---------------- --- ------------------