DCIT, New Delhi V. M/s. M.G. Shares & Stock Pvt. Ltd., New Delhi

ITA 2185/DEL/2010

• Counselvise Citation: 218520114 RSA 2010
• Duration Of Justice: 3 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 23-07-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 07-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAMEER SHARMA
• Keywords: Capital asset; Business income; Earning of tax free income; Source of fund; Advance ruling

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. NO. 2185/DEL/2010 ASSESSMENT YEAR: 2006-07 DCIT VS. M/S M. G. SHARES & STOCK PVT. CIRCLE 6 (1), LTD. 502, NIRMAL TOWER, ROOM NO. 413, 26, BARAKHAMBA ROAD, C.R. BUILDING NEW DELHI-110001 NEW DELHI. PAN: AAACM0834B C.O. NO. 200/DEL/2012 (IN I.T.A. NO. 2185/DEL/2010) ASSESSMENT YEAR: 2006-07 M/S M. G. SHARES & STOCK PVT. VS. DCIT LTD. 502, NIRMAL TOWER, CIRCLE-6(1), 26, BARAKHAMBA ROAD, C.R. BUILDING NEW DELHI. NEW DELHI. PAN: AAACM0834B (APPELLANT) (RESPONDENT) REVENUE BY : SHRI SAMEER SHARMA, SR. DR. ASSESSEE BY : SHRI. R.K. GUPTA, CA. ORDER PER RAJPAL YADAV, JM : THE REVENUE IS IN APPEAL BEFORE US AGAINST THE ORDE R OF LD. CIT(A), DATED 03.03.2010, PASSED FOR A.Y. 2006-07. ON RECEI PT OF NOTICE, ASSESSEE HAS FILED CROSS-OBJECTION BEARING NO. 200/DEL/2010. I.T.A. NO. 2185/DEL/2010 2 2. FIRST WE TAKE APPEAL OF REVENUE, THE REVENUE HAS RAISED FOUR GROUNDS OF APPEAL BUT ITS GRIEVANCE REVOLVES AROUND A SINGL E ISSUE WHEREBY IT HAS PLEADED THAT LD. CIT (A) HAS ERRED IN DIRECTING THE AO TO TREAT INCOME OF RS.68,06,698/- EARNED ON SALE OF SHARES AS SHORT TE RM CAPITAL GAIN AS AGAINST BUSINESS INCOME, TREATED BY THE AO. THE REVENUE FUR THER PLEADED THAT SINCE INCOME FROM SALE OF SHARE HAS BEEN DIRECTED TO BE A SSESSED AS A SHORT TERM CAPITAL GAIN, THE LD.CIT (A), CONSEQUENTLY SHOULD N OT ALLOWED PAYMENT OF SECURITY TRANSACTION, TAX AMOUNTING TO RS.75,346/-. 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE CO MPANY IS A REGISTERED SUB-BROKER WITH SEBI AND ENGAGED IN SHARE BROKING B USINESS. IT ALSO MADE INVESTMENTS IN SHARES AND TRADED IN SHARES. IT HAS FILED ITS RETURN OF INCOME FOR A.Y. 2006-07 ON 21.10.2006, DECLARING TOTAL INC OME OF RS.89,47,150/-. THE RETURN WAS PROCESSED U/S 143(1) OF THE IT ACT, 1961 ON 29.03.2008, HOWEVER, THE CASE OF ASSESSEE WAS SELECTED FOR SCRU TINY ASSESSMENT AND A NOTICE U/S 143(2) WAS ISSUED ON 11.10.2007, DIRECTI NG THE ASSESSEE TO APPEAR ON 24.10.2007. ACCORDING TO THE AO, IN RESPONSE TO THE NOTICE THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED AND SUBMITT ED THE REQUISITE DETAILS. 4. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE AO THAT ASSESSEE HAS SHOWN SHORT TERM CAPITAL GAINS OF RS.68,06,698/- AN D LONG TERM CAPITAL GAINS OF RS.65,29,245/-. THE AO FORMED AN OPINION THAT AS SESSEE HAS NOT MADE I.T.A. NO. 2185/DEL/2010 3 INVESTMENT FOR EARNING SHORT TERM CAPITAL GAINS, RA THER IT WAS ENGAGED IN TRADING OF SHARES. THEREFORE, HE DIRECT THE ASSESSE E TO EXPLAIN, AS TO WHY SHORT TERM CAPITAL GAIN SHOULD NOT BE ASSESSED AS A BUSINESS INCOME OF THE YEAR. THE ASSESSEE HAS SUBMITTED ITS REPLY VIDE LET TER DATED 10.10.2008, THE RELEVANT PART OF THE REPLY HAS BEEN REPRODUCED BY T HE AO, WHICH READ AS UNDER: FIRSTLY, AS PER CBDT CIRCULAR NO. 4/2007 DATED 15. 06.2007, AN ASSESSEE CAN DO TRADING TRANSACTIONS AS WELL AS TRA NSACTION OF THE INVESTMENT NATURE IN SHARES WHERE FOR TRADING TRANS ACTIONS, THE RESULTS SHALL BE ASSESSABLE UNDER THE HEAD BUSINESS AND FOR INVESTMENT TRANSACTIONS IT WILL BE ASSESSED UNDER THE HEAD CAP ITAL GAIN. SECONDLY, AS PER THE SAME CIRCULAR, THE MOST IMPORT ANT CRITERIA DEFINED IS TO EXAMINE AND ASCERTAIN THE INTENTION O F THE ASSESSEE WHILE DOING THESE TRANSACTIONS. IN THE PRESENT CASE, FOR THE TRANSACTIONS CLAIMED I N THE NATURE OF INVESTMENTS, THE INTENTION OF THE ASSESSEE IS MANIF EST AND APPARENT FROM THE FOLLOWING FACTS:- A) ONE OF THE OBJECTS LISTED IN THE MEMORANDUM ALLO WS COMPANY TO MAKE INVESTMENTS. B) THE ASSESSEE HAS AT THE TIME OF PURCHASE OF SHAR ES HAVE DULY RECORDED / CLASSIFIED THE SAME UNDER THE HEAD INVES TMENT / STOCK IN TRADER. THE DECISION IS DULY SUPPORTED BY BOARD RESOLUTION AUTHORIZING ONE OF THE DIRECTORS TO BUY / SELL THE SHARE(S) AND ENTRIES IN THE BOOKS OF ACCOUNTS ARE MADE ACCORDING LY I.E. INVESTMENT ACCOUNT DR/CR. THE ENTRIES IN RESPECT OF ALL I.T.A. NO. 2185/DEL/2010 4 INVESTMENT PURCHASE / SELL HAVE BEEN MADE IN THE IN VESTMENT REGISTER IN ACCORDANCE WITH COMPANIES ACT, 1956. C) FURTHER, IT IS TO NOTE THAT THE TAX BENEFITS ON LONG TERM CAPITAL GAIN ON SHARES AND LOWER RATE OF TAX ON SHORT TERM CAPITAL GAIN OF SHARES HAS BECOME EFFECTIVE W.E.F. 01.10.2004. H OWEVER, THE ASSESSEE HAS BEEN CLASSIFYING PURCHASES INTO INVEST MENTS / STOCK IN TRADE FOR LAST MANY YEARS. THIS ASPECT PROVES TH E BONAFIDE AND THE GENUINENESS OF THE CONTENTION OF THE ASSESS EE. D) THE SHARES PURCHASED AS INVESTMENT ARE SHOWN AS INVESTMENTS UNDER THE HEAD INVESTMENT IN THE BALA NCE SHEET. IN CONTRAST TO THIS, STOCKS PURCHASED AS STOCK IN T RADE ARE SHOWN IN THE BALANCE SHEET UNDER THE HEAD CURRENT ASSETS AS STOCK IN TRADE. E) THE ASSESSEE HAS BEEN MAINTAINING SAME SYSTEM CO NSISTENTLY SINCE PAST AS WELL AS IN THE FUTURE. THE FACTS OF T HIS YEAR ARE SIMILAR TO EARLIER YEARS. IN THE FOLLOWING CASES WHERE THE FACTS AND CIRCUMS TANCES WERE IDENTICAL THE MATTER HAS BEEN EXAMINED BY HIGHER AU THORITIES AND MATTER HAS BEEN DECIDED IN ASSESSEES FAVOUR; * RAJA BAHADUR KAMAKHYA NARAIN SINGH 77 ITR 253 (SC ) * RAMNARAIN SONS P. LTD. VS. CIT (1961) 41 ITR534 ( SC) * CIT VS. RAUNAQ SINGH SWARN SING (1972) 85 ITR 220 (SC) * ASHOKA VINIYOGA LTD. VS. CIT (1972) 84 ITR 264 (S C) I.T.A. NO. 2185/DEL/2010 5 5. THE LD. AO HAS REJECTED THE CONTENTION OF ASSESS EE ON THE GROUND THAT HE HAS CALLED FOR THE INVESTMENT PORTFOLIO OF THE A SSESSEE FOR THREE YEARS I.E. F.Y. 2003-04 TO F.Y. 2005-06. 6. ON PERUSAL OF THESE DETAILS, IT REVEALED THAT IN F.Y. 2003-04 ASSESSEE MADE INVESTMENT ONLY IN TWO COMPANIES, IN F.Y. 2004 -05. THE INVESTMENT WAS IN FIVE COMPANIES AND IN F.Y. 2005-06 INVESTMEN T WAS IN EIGHT COMPANIES, WHICH WERE NOT SOLD DURING THE YEAR. AS AGAINST THIS, IN THE TRADING ACCOUNT ASSESSEE HAS TRADED THOUSANDS OF SH ARES PERTAINING TO 199 COMPANIES. THUS ACCORDING TO THE AO, THE CLAIM OF C ONSISTENCY MADE BY THE ASSESSEE IS NOT AVAILABLE ON RECORD. HE FURTHER POI NTED OUT THE DEFECTS IN THE RESOLUTIONS PASSED BY THE BOARD WITH REGARD TO SHAR E OF INDIA GLYCOLES LTD. REFERRING TO CIRCULAR NO. 4/2007 DATED 15.06.2007 A ND JUDGMENT OF AUTHORITY FOR ADVANCE RULING REPORTED IN 288 ITR 64 1, LD. AO HAS OBSERVED THAT THE CLAIM OF ASSESSEE FOR EARNING SHORT TERM C APITAL GAIN IS NOT TENABLE, HE ACCORDINGLY ASSESSED THE SHORT TERM CAPITAL GAIN OF RS.68,06,698/- AS BUSINESS INCOME. 7. DISSATISFIED WITH THE ORDER OF AO, ASSESSEE CARR IED THE MATTER IN APPEAL BEFORE THE CIT (A). IT REITERATED ITS CONTEN TION AND RELIED UPON FOLLOWING DECISIONS: * JM SHARE & STOCK BROKERS LTD. VS. JT CIT ITA NO. 2801/MUM/2000 (BCAJ) I.T.A. NO. 2185/DEL/2010 6 * CIT VS. NSS INVESTMENTS PVT. LTD. 277 ITR 149 (MA D) * JANAK S RANGWALLA (ITA NO. 1163/MUMBAI/2004 DATED 29.12.2006) * ADDL CIT VS. SUNDER LYER (ITA NO. 295/MUM/2001 DATED 15.10.2002) * ADDL CIT VS. MOTILE OSWAL (ITA NO.3861/MUM/2001 DATED 28.08.2006) * ARJUN KAPUR VS. DCIT (1999) 70 ITD 161 * BOMBAY GYMKHANA VS. ITO 2008/115 TTJ 639 (MUMBAI ) * CIT VS. ESS JAY ENTERPRISES (P) LTD. 173 TAXMAN 1 (DEL.) 8. THE LD. CIT (A) HAS ALLOWED THE APPEAL OF ASSESS EE AND DIRECTED THE AO TO TREAT THE SHORT TERM CAPITAL GAIN CLAIMED BY THE ASSESSEE AS SHORT TERM CAPITAL GAIN. THE FINDING OF LD. CIT (A) READ AS UN DER: 4.7 I HAVE CONSIDERED THE ARGUMENTS OF THE APPELLA NT AND THE ASSESSMENT ORDER CAREFULLY. THE CBDT CIRCULAR CLEAR LY RECOGNIZES THE TWO KINDS OF TRANSACTIONS AND THE POSSIBILITY OF A TAXPAYER TO HAVE TWO PORTFOLIOS, I.E. AN INVESTMENT PORTFOLIO COMPRISING SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRADING PORTF OLIO COMPRISING STOCK-IN-TRADE WHICH ARE TO BE TREATED AS TRADING A SSETS AND WHERE AN ASSESSEE HAS BOTH, HE MAY HAVE INCOME UNDER BOTH HE ADS. THE CIRCULAR ALSO LISTS THE THREE PRINCIPLES TO DETERMI NE THE NATURE OF THE TRANSACTION ON THE BASIS OF A DECISION OF THE AUTHO RITY FOR ADVANCE RULINGS (288 ITR 641) WHICH ARE AS UNDER: (I) WHERE A COMPANY PURCHASES AND SELLS SHARES, IT 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 MEM ORANDUM OF ASSOCIATION IS NOT DECISIVE OF THE NATURE OF TRANSA CTION; I.T.A. NO. 2185/DEL/2010 7 (II) THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MA NNER OF MAINTAINING BOOKS OF ACCOUNT, THE MAGNITUDE OF PURC HASES AND SALES AND THE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS; (III) ORDINARILY THE PURCHASE AND SALE OF SHARES WI TH THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRA NSACTION BEING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF T RADE; BUT WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF A C OMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE PROF ITS ACCRUING BY CHANGE IN SUCH INVESTMENT (BY SALE OF SHARES) WI LL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT . 4.8 THE FACTS OF THE APPELLANTS CASE SATISFY THE A BOVE CONDITIONS. THE COMPANY HAS DEMONSTRATED THAT IT WAS HOLDING SH ARES BOTH AS STOCK IN TRADE AND AS INVESTMENT REGULARLY. THE BOO KS OF ACCOUNTS REGULARLY MAINTAINED ALSO CONFIRM THE FACT OF SHARE HOLDING IN BOTH PORTFOLIOS. THE SHARES HELD AS INVESTMENT ARE SHOWN IN SCHEDULE 4 OF THE BALANCE SHEET AND THE P & L ACCOUNT SHOWS DIVID END INCOME ON INVESTMENT AND OTHER SEPARATELY. IN THE EARLIER YEA R ALSO A SIMILAR SITUATION WAS REFLECTED IN THE BOOKS OF ACCOUNTS AN D BALANCE SHEET AND IT WAS ACCEPTED AS SUCH. THE PURCHASE OF SHARES FOR INVESTMENT PURPOSE WAS DULY AUTHORIZED BY BOARD RESOLUTIONS. T HE SHARES HELD AS INVESTMENTS WERE DULY REFLECTED IN THE INVESTMEN T REGISTER MAINTAIN AS PER THE PROVISIONS OF COMPANIES ACT. IT IS ALSO OBSERVED FROM THE BALANCE SHEET THAT THE APPELLANT COMPANY HAS NOT MA DE THE INVESTMENTS OUT OF LOANS OR ADVANCES. THE SOURCE OF FUNDS FOR INVESTMENT CAN REASONABLY BE ASSUMED TO BE RESERVES AND SURPLUS I.T.A. NO. 2185/DEL/2010 8 ACCUMULATED OVER A PERIOD OF YEARS. IN VIEW OF THES E FACTS, THE RATIO OF THE DECISION OF THE HONBLE ITAT IN M/S JINDAL PHOT O INVESTMENTS LTD. (SUPRA) IS SQUARELY APPLICABLE TO THE APPELLANTS C ASE. HENCE THIS GROUND OF APPEAL IS ALLOWED. 9. BEFORE US LD. DR SUBMITTED THAT WHETHER ASSESSEE HAD MADE INVESTMENT OR TRADED IN THE SHARE, IS TO BE DECIDED ONLY ON LOOKING INTO THE FACTS AND CIRCUMSTANCES OF A PARTICULAR CASE. THERE CANNOT BE ANY UNIFORM RULE WHICH CAN BE APPLIED ON THE CLASS OF ASSESSEE OR PARTICULAR ASSESSEE. HE POINTED OUT THAT IN THE PRESENT CASE, THE AO HAS DO UBTED THE CLAIM OF THE ASSESSEE, BECAUSE W.E.F. 1 ST OCTOBER 2004, THE RATE OF TAX ON STG HAS BEEN REDUCED SUBSTANTIALLY, THEREFORE, EVERY ASSESSEE HA D MADE AN ENDEAVOUR TO CLAIM AS MUCH AS POSSIBLE SHORT TERM CAPITAL GAIN I NSTEAD OF SHOWING BUSINESS INCOME ON SALE OF SHARES. HE POINTED OUT T HAT AO HAS MADE REFERENCE TOWARDS THE PATTERN OF LAST THREE YEARS INVESTMENT, AND OBSERVED THAT IT WAS ON THE LOWER SIDE. THUS ON AN ANALYSIS THESE FACTORS, AO HAS TREATED THE SHORT TERM CAPITAL GAIN CLAIMED BY THE ASSESSEE AS BUSINESS INCOME. 10. ON THE OTHER HAND LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT NO DOUBT, THE QUESTION WHETHER ASSESSEE HAD MADE AN INVESTMEN T IN SHARES OR TRADING IN SHARES?, IS A FACTUAL ISSUE WHICH IS TO BE ANSWERE D AFTER CONSIDERING THE FACTS OF THAT CASE. IN ORDER TO DEMONSTRATE THAT ASSESSEE HAD MADE INVESTMENT, IT I.T.A. NO. 2185/DEL/2010 9 HAD PRODUCED NUMBER OF DETAILS BEFORE THE AO. HE PO INTED OUT THAT THE BOARD VIDE ITS CIRCULAR NO. 4/2007 AS SPECIFICALLY LAID DOWN THAT AN ASSESSEE CAN MAINTAIN TWO PORTFOLIOS I.E. ONE FOR TRADING AN D THE OTHER FOR INVESTMENT. IT IS NOT THE 1 ST YEAR WHEN ASSESSEE HAS MADE INVESTMENT. IT HAS BEE N MAINTAINING INVESTMENT ACCOUNT FROM THE LAST MANY Y EARS, THE ASSESSEE HAS PRODUCED THE INVESTMENT REGISTERED. HE DREW OUR ATT ENTION TOWARDS PAGES NO. 26 TO 32 OF THE PAPER BOOK AND TOOK US THROUGH INVE STMENT REGISTERED. HE FURTHER CONTENDED THAT THE CHANGES IN THE TAX RATE ON SHORT TERM CAPITAL GAIN HAS BECOME EFFECTIVE FROM 1 ST OCTOBER 2004, THE BOARD OF DIRECTORS HAD PASSED RESOLUTION IN THE MONTH OF JANUARY & FEBRUAR Y FOR AUTHORISING THE MANAGING DIRECTOR TO MAKE INVESTMENT IN SHARES. HE DREW OUR ATTENTION TOWARDS THE COPIES OF RESOLUTION AVAILABLE ON PAGES NOS. 19 TO 25. THE ASSESSEE HAS SPECIFICALLY SHOWN INVESTMENT IN SHARE S IN THE BALANCE SHEET UNDER THE HEAD INVESTMENT, WHEREAS STOCK PURCHASES FOR TRADING WAS SHOWN UNDER THE HEAD CURRENT ASSET. THE STOCK-IN-TRADE IS VALUED AT COST PRICE OR MARKET PRICE WHICHEVER IS LOWER. ON THE OTHER HAND THE INVESTMENTS ARE VALUED AT COST IN THE BALANCE SHEET. THE ASSESSEE S HOWN DIVIDEND INCOME IN THIS YEAR. HE TOOK US PAGE 97 OF THE PAPER BOOK FOR BUTTRESSING HIS CONTENTION. HE FURTHER CONTENDED THAT AS FAR AS THE CLAIM OF ASSESSEE WITH REGARD TO LONG TERM CAPITAL GAIN, AO DID NOT DISPUT E, THUS IT SUGGESTS THAT I.T.A. NO. 2185/DEL/2010 10 ASSESSEE IS HOLDING INVESTMENT PORTFOLIO. THE SHARE TRANSACTIONS FOR INVESTMENT ARE DELIVERY BASED. HE ALSO TOOK US THRO UGH PAGE NO. 35 OF THE PAPER BOOK WHERE INVESTMENT IN THE LAST THREE YEARS HAVE BEEN SHOWN IN TERMS OF PERCENTAGE; IN F.Y. 2003-04 ASSESSEE HAS S HOWN INVESTMENT AT 7.03% AND TRADING AT 92.97%, IN F.Y. 2004-05 INVEST MENT IS ON 2.23% AND TRADING IS AT 97.77% OF THE TURNOVER. IN F.Y. 2005- 06 TRADING IS AT 95.12% AND INVESTMENT IS AT 4.88%, THUS ACCORDING TO THE A SSESSEE THERE IS NO SUBSTANTIAL CHANGES IN THE PATTERN OF INVESTMENT SH OWN BY THE ASSESSEE. ON THE STRENGTH OF THESE DETAILS LD. COUNSEL FOR THE A SSESSEE CLAIMED THAT LD. CIT (A) HAS RIGHTLY TREATED THE INCOME SHOWN ON SALE OF SHARES AS A SHORT TERM CAPITAL GAIN. FOR BUTTRESSING HIS CONTENTION, HE RE LIED UPON FOLLOWING JUDGMENTS: CIT VS. ROHIT ANAND 327 ITR 445 (DEL) CIT VS. GOPAL PUROHIT 188 TAXMAN 140 (BOM). H.C.) CIT VS. JINDAL PHOTO INVESTMENT LTD. REPORTED IN IT A NO. 127/2009. 11. THE LD. COUNSEL PLACED ON RECORD COPY OF THE TR IBUNALS ORDER ALSO IN THE CASE OF JINDAL PHOTO INVESTMENT LTD. THE LD. CO UNSEL FOR THE ASSESSEE FURTHER RELIED UPON THE JUDGMENT OF THE HONBLE DEL HI HIGH COURT IN THE CASE OF CIT VS. AVINASH JAIN REPORTED IN 214 TAXMAN 260. 12. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AN D GONE THROUGH THE RECORD CAREFULLY. THERE IS NO DISPUTE WITH REGARD T O THE FACTS THAT ASSESSEE IS I.T.A. NO. 2185/DEL/2010 11 A COMPANY, IT HAS PROVIDED IN ITS MEMORANDUM OF UND ERSTANDING TO CARRY OUT TRADING AS WELL AS INVESTMENT ACTIVITY IN SHARES. T HE ASSESSEE HAS BEEN MAINTAINING AN INVESTMENT REGISTERED SEPARATELY. TH E BOARD OF DIRECTORS HAS RESOLVED TO MAKE INVESTMENT IN SHARES, THE RESOLUTI ONS ARE PLACED ON PAGES NO. 17 TO 18 OF THE PAPER BOOK. THUS THE PERTINENT QUESTION BEFORE US IS, HOW TO DISCERN THE INTENTION OF THE ASSESSEE, WHETHER I T HAS MADE INVESTMENT OR JUST ON ACCOUNT OF CHANGE OF LAW, IT IS TRYING TO C ONVERT ITS STOCK-IN-TRADE AS INVESTMENT. THERE WAS A LOT OF DEBATE. ON THE ISSUE ; WHETHER AN ASSESSEE HAS MADE INVESTMENT IN SHARES OR IT WAS AN ADVENTURE IN THE NATURE OF TRADE. THE DISPUTE TRAVELED UP TO THE HONBLE SUPREME COURT ON A NUMBER OF OCCASION, HONBLE DELHI HIGH COURT IN THE CASE OF CIT VINAY M ITTAL RENDERED IN ITA NO. 1172/2011, HAS REFERRED THE TESTS LAID DOWN BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF PARI MANGAL DAS VS. CIT REPORT ED IN 6 CTR PAGE 647. THESE TESTS HAVE BEEN REPRODUCED BY THE HONBLE GUJ ARAT HIGH COURT IN THE CASE OF CIT VS. REWASHANKER A KOTHARI REPORTED IN 2 83 ITR 338. THESE TESTS CAN BE APPLIED ON THE FACTS OF A GIVEN CASE, IN ORDER TO ASCERTAIN THE INTENTION. THE TESTS READ AS UNDER: (A)THE FIRST TEST IS WHETHER THE INITIAL ACQUISITI ON OF THE SUBJECT-MATTER OF TRANSACTION WAS WITH THE INTENTIO N OF DEALING IN THE ITEM, OR WITH A VIEW TO FINDING AN INVESTMEN T. IF THE TRANSACTION, SINCE THE INCEPTION, APPEARS TO BE IMP RESSED WITH I.T.A. NO. 2185/DEL/2010 12 THE CHARACTER OF A COMMERCIAL TRANSACTION ENTERED I NTO WITH A VIEW TO EARN PROFIT, IT WOULD FURNISH A VALUABLE GU IDELINE. (B)THE SECOND TEST THAT IS OFTEN APPLIED IS AS TO W HY AND HOW AND FOR WHAT PURPOSE THE SALE WAS EFFECTED SUBSEQUE NTLY. (C)THE THIRD TEST, WHICH IS FREQUENTLY APPLIED, IS AS TO HOW THE ASSESSEE DEALT WITH THE SUBJECT-MATTER OF TRANSACTI ON DURING THE TIME THE ASSET WAS WITH THE ASSESSEE. HAS IT BEEN T REATED AS STOCK-IN-TRADE, OR HAS IT BEEN SHOWN IN THE BOOKS O F ACCOUNT AND BALANCE SHEET AS AN INVESTMENT. THIS INQUIRY, THOUG H RELEVANT, IS NOT CONCLUSIVE. (D)THE FOURTH TEST IS AS TO HOW THE ASSESSEE HIMSEL F HAS RETURNED THE INCOME FROM SUCH ACTIVITIES AND HOW THE DEPARTM ENT HAS DEALT WITH THE SAME IN THE COURSE OF PRECEDING AND SUCCEEDING ASSESSMENTS. THIS FACTOR, THOUGH NOT CONCLUSIVE, CA N AFFORD GOOD AND COGENT EVIDENCE TO JUDGE THE NATURE OF TRA NSACTION AND WOULD BE A RELEVANT CIRCUMSTANCE TO BE CONSIDER ED IN THE ABSENCE OF ANY SATISFACTORY EXPLANATION. (E)THE FIFTH TEST, NORMALLY APPLIED IN CASES OF PAR TNERSHIP FIRMS AND COMPANIES, IS WHETHER THE DEED OF PARTNERSHIP O R THE MEMORANDUM OF ASSOCIATION, AS THE CASE MAY BE, AUTH ORIZES SUCH AN ACTIVITY. (F)THE LAST BUT NOT THE LEAST, RATHER THE MOST IMPO RTANT TEST, IS AS TO THE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTIONS OF PURCHASE AND SALE OF THE GOODS CONC ERNED. IN A CASE WHERE THERE IS REPETITION AND CONTINUITY, COUP LED WITH THE MAGNITUDE OF THE TRANSACTION, BEARING REASONABLE PR OPORTION TO I.T.A. NO. 2185/DEL/2010 13 THE STRENGTH OF HOLDING, THEN AN INFERENCE CAN READ ILY BE DRAWN THAT THE ACTIVITY IS IN THE NATURE OF BUSINESS 13. SIMILARLY, THE ITAT, LUCKNOW BENCH IN THE CASE OF SARNATH INFRA- STRUCTURE PVT. LTD. VS. ACIT REPORTED IN 124 ITD 71 HAS MADE ANALYSIS OF LARGE NUMBER OF CASES AND THEREAFTER CULLED OUT THE FOLLOWING BROAD TESTS: 1)WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIM E OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM). THIS CAN HE FOUN D OUT FROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOK S OF ACCOUNT. WHETHER IT IS TREATED AS STOCK-IN-TRADE OR INVESTME NT. WHETHER SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET. (2)WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREON. NORMALLY MONEY IS BORROWED TO PUR - CHASE GOODS FOR THE PURPOSES OF TRADE AND NOT FOR INVESTI NG IN AN ASSET FOR RETAINING. (3)WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISP OSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND SALE IS FREQUENT, OR THERE ARE SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD IND ICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICAT IVE OF INTENTION OF TRADE. SIMILARLY RATIO BETWEEN THE PUR CHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSE E IS TRADING OR INVESTING. (HIGH TRANSACTIONS AND LOW HO LDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HO LDINGS INDICATE INVESTMENT). (4)WHETHER PURCHASE AND SALE IS FOR REALIZING PROFI T OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION I N ITS VALUE. I.T.A. NO. 2185/DEL/2010 14 FORMER WILL INDICATE AN INTENTION OF TRADE AND LATT ER, AN INVESTMENT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PUR CHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDI ENT OF TRADE. (5)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 INVESTMENT OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NET REALIZABLE VALUE (WHICH EVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN- TRADE. (6)HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEMO RANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION. WHETHER FOR TRADE OR FOR INVESTMENT. IF AUTHORIZED ONLY FOR TRADE, THEN WHET HER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO C ARRY OUT INVESTMENTS IN THAT COMMODITY AND VICE VERSA. (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 T YPES 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 APPARENT 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 ALO NE WILL NOT I.T.A. NO. 2185/DEL/2010 15 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 TH E ASSESSEE IS COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF I T 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 ITE M) SINCE BEGINNING OR WHEN PURCHASES WERE MADE. 10.IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4/2 007 OF 15- 6-2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, O NE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAI NTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTI VE FEATURES FOR BOTH AND THERE IS NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. 11.NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL B E SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SEVERAL FACTORS HAS TO BE SEEN. 14. IN THE LIGHT OF ABOVE TESTS, IF WE EXAMINE THE FACTS OF PRESENT CASE THEN, IT WOULD REVEAL THAT ASSESSEE HAS NOT CONVERT ED ITS STOCK-IN-TRADE INTO INVESTMENT, JUST AFTER THE ANNOUNCEMENT OF CHANGE I N THE TAX RATE ON SHORT TERM CAPITAL GAIN. IT HAS BEEN INDEPENDENTLY MAKING PURCHASES, WHICH ARE SHOWN AS INVESTMENT IN THE INVESTMENT REGISTERED. I T HAS TOOK THE DELIVERY OF SHARES, THIS ASPECT WAS SPECIFICALLY PLEADED BEFORE THE CIT (A) AND IT HAS I.T.A. NO. 2185/DEL/2010 16 BEEN ACCEPTED. IT HAS NOT USED BORROWED FUNDS FOR M AKING INVESTMENT. THE AO HAS NOT POINTED OUT THIS ASPECT IN THE ASSESSMEN T ORDER ALSO. THE SHARES HAVE BEEN VALUED AT COST AT THE END OF THE YEAR, WH ILE CLOSING THE ACCOUNTS. THE BOARD HAD PASSED THE RESOLUTION FOR INVESTMENT IN THE MONTH OF JANUARY, SOME OF THE SHARES WERE OLD SHARES ON WHICH SHORT T ERM CAPITAL GAIN HAS BEEN DECLARED, THEY WERE APPEARING IN THE OPENING STOCK AS INVESTMENT. THUS CUMULATIVE SETTING OF ALL THESE FACTORS SUGGEST THA T ASSESSEE HAD MADE INVESTMENT IN THE SHARES. ITS PATTERN OF INVESTMENT DID NOT GO UNDER ANY MAJOR CHANGES IN TERMS OF PERCENTAGE BETWEEN INVEST MENT AND TRADING. 15. IN GROUND NO. 3, REVENUE HAS PLEADED THAT CIT ( A) HAS DELETED AN ADDITION OF RS.75,346/-. WE FIND THAT ASSESSEE DID NOT PRESS THIS ISSUE BEFORE LD. CIT (A). THE LD. CIT (A) HAS NOT DELETED THIS A DDITION, THEREFORE REVENUE HAS WRONGLY TAKEN THIS GROUND. DEDUCTION OF SECURIT Y TRANSACTION TAX IS NOT ADMISSIBLE TO THE ASSESSEE, ONCE ITS CLAIM OF SHORT TERM CAPITAL GAIN IS ACCEPTED. HENCE THIS GROUND IS REJECTED. CROSS- OBJECTION 16. IN THE CROSS-OBJECTION ASSESSEE HAS CHALLENGED DISALLOWANCE OF RS.485543/- WHICH HAS BEEN MADE WITH THE HELP OF SE CTION 14A. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT DISALLOWANC E HAS BEEN COMPUTED BY THE AO WITH THE HELP OF RULE 8D OF THE INCOME TAX R ULES 1962. HE FURTHER I.T.A. NO. 2185/DEL/2010 17 CONTENDED THAT IN THE CASE OF MAXOPP INVESTMENT LTD . VS. CIT REPORTED IN 347 ITR PAGE 272 HONBLE DELHI HIGH COURT HAS HELD THAT RULE 8D HAS BEEN BROUGHT ON STATUTE BOOK W.E.F. 25.03.2008, IT IS AP PLICABLE PROSPECTIVELY I.E. A.Y. 2008-09. THE HONBLE COURT DID NOT APPROVE THE COMPUTATION OF DISALLOWANCE WITH THE HELP OF RULE 8D PRIOR TO A.Y. 2008-09. HE PRAYED THAT DISALLOWANCE BE DELETED. 17. ON THE OTHER HAND LD. DR SUBMITTED THAT HONBLE HIGH COURT HAS HELD THAT IN THE YEARS IN WHICH RULE 8D IS NOT APPLICABL E, IN THOSE YEARS, THE DISALLOWANCE HAS TO BE CONSIDERED ON THE BASIS OF R EASONABLENESS. THEREFORE, THIS ISSUE BE SET ASIDE TO THE FILE OF AO. 18. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AN D GONE THROUGH THE RECORD CAREFULLY, IN THE CASE OF MAXOPP, HONBLE HI GH COURT HAS OBSERVED THAT AO HAS TO EXAMINE THE ACCOUNTS OF ASSESSEE BE WORKING OUT ANY DISALLOWANCE U/S 14A. IF IT IS NOT POSSIBLE FOR THE AO TO PIN POINT ANY SPECIFIC EXPENDITURE FROM THE ACCOUNTS RELATABLE TO EARNING OF EXEMPT INCOME THEN HE WOULD LOOK INTO SURROUNDING CIRCUMST ANCES. THE AO HAS NOT EXAMINED THE ISSUE, WITH THIS ANGLE HE SIMPLY WORKE D OUT THE DISALLOWANCE WITH THE HELP OF RULE 8D WHICH IS NOT APPLICABLE FO R THE PRESENT YEAR. THEREFORE, WE DIRECT THE AO TO RE-ADJUDICATE THIS I SSUE, KEEPING IN VIEW THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP. I.T.A. NO. 2185/DEL/2010 18 19. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSE D AND CROSS-OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURP OSES. ORDER PRONOUNCED IN THE OPEN COURT ON 8/08/2013. SD/- SD/- ( T. S. KAPOOR ) (RAJP AL YADAV) ACCOUNTANT MEMBER JUDICIAL ME MBER DATED: 8/08/2013 *AK VERMA* COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(APPEALS) 5.DR: ITAT ASSISTANT REGISTRAR