ACIT, New Delhi V. M/s. D & M Components Ltd, New Delhi

ITA 3114/DEL/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53270 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-12-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 07-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 06-07-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: Y K KAKKAR
• Keywords: Business income
• Section: 143(3); 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D NEW DELHI) BEFORE G.E. VEERABHADRAPPA, HON'BLE PRESIDENT AND SHRI RAJPAL YADAV: HONBLE JUDICIAL MEMBER ITA NO. 2687/DEL/2009 ASSESSMENT YEAR: 2006-07 M/S. D & M COMPONENTS LTD., VS. ASSISTANT COMMISSI ONER OF IT, 103 PRATAP BHAWAN, CIRCLE 10(1), BAHADUR SHAH ZAFAR MARG, NEW DELHI. NEW DELHI. (PAN: AABCD8920G) (APPELLANT) (RESPONDENT) ITA NO. 3114/DEL/2009 ASSESSMENT YEAR: 2006-07 ASSISTANT COMMISSIONER OF IT, VS. M/S. D & M COMP ONENTS LTD., CIRCLE 10(1), 103 PRATAP BHAWAN, NEW DELHI. BAHADUR SHAH ZAFAR MARG, NEW DELHI. (PAN: AABCD8920G) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI ASHWANI K UMAR, CA RESPONDENT BY: MS. YK KAKKAR, S R. DR ORDER PER RAJPAL YADAV: JUDICIAL MEMBER THE ASSESSEE AND REVENUE ARE IN CROSS-APPEAL BEFORE US AGAINST THE ORDER OF LEARNED CIT(APPEALS) DATED 16.4.2009 PASSE D FOR ASSESSMENT YEAR 2006-07. THE GROUNDS OF APPEAL TAKEN BY THE ASSESSE E AND REVENUE READ AS UNDER : GROUND IN ASSESSEES APPEAL: THAT THE ORDER U/S. 250 PASSED BY THE LEARNED CIT( APPEALS)-XIII, NEW DELHI IS AGAINST LAW AND FACTS ON THE FILE IN A S MUCH AS HE WAS 2 NOT JUSTIFIED TO UPHOLD THE ACTION OF THE LEARNED A CIT, CIRCLE 10(1), NEW DELHI IN TREATING THE SHORT-TERM CAPITAL GAIN A MOUNTING TO RS.26,82,115 AS BUSINESS INCOME BY REJECTING THE AP PELLANTS COMPANYS CLAIM AS TO SPECIAL TAX TREATMENT AS PER SEC. 111(A) OF THE INCOME-TAX ACT, 1961. GROUND IN REVENUES APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE A.O. TO TREAT THE INC OME OF RS.31,11,006 EARNED ON TRADING OF LONG TERM SHARE HOLDING AS IN COME UNDER THE HEAD CAPITAL GAIN INSTEAD OF BUSINESS INCOME, AS HELD BY THE A.O. 2. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF THE HEARING. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E HAS FILED ITS RETURN OF INCOME ELECTRONICALLY ON 30.11.2006 DECLARING A TOT AL INCOME OF RS.3,19,787. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND A NOTICE UNDER SEC. 143(2) OF THE INCOME-TAX AC T, 1961 WAS ISSUED ON 21.11.2007. DURING THE YEAR UNDER CONSIDERATION, TH E ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF DEALING IN THE AUTO SPAR E PARTS AND INVESTMENT IN BONDS, MUTUAL FUNDS AND OTHER SECURITIES. ON SCRUTI NY OF THE ACCOUNTS, IT REVEALED TO THE ASSESSING OFFICER THAT ASSESSEE HAS DISCLOSED LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN AS UNDER: 3 (A) LONG TERM CAPITAL GAIN (STT PAID) (B) LONG TERM CAPITAL GAINS 31,29,971.30 LESS: LONG TERM CAPITAL LOSS 16,964.79 31,13,006.31 (B)SHORT TERM CAPITAL GAIN (STT PAID) NET LONG TERM CAPITAL GAINS 61,16,892.86 EXEMPT U/S 10 (38) 34,34,777.65 NET SHORT TERM CAPITAL GAINS SUBJECT TO 26,82 ,115.21 CONCESSIONAL TAX @ 10% U/S 111(A) 3. ASSESSING OFFICER HAS HARBORED A BELIEF THAT GAI N OF LONG TERM AS WELL AS SHORT TERM SHOWN BY THE ASSESSEE ON SALE OF SHAR ES DESERVES TO BE ASSESSED AS A BUSINESS AND, THEREFORE, HE ISSUED A SHOW-CAUS E NOTICE TO THE ASSESSEE ON 22.12.2008 INVITING ITS EXPLANATION AS TO WHY THIS ACTIVITY OF THE ASSESSEE SHOULD NOT BE TREATED AS A BUSINESS ACTIVITY. IN RE SPONSE TO THE QUERY OF THE ASSESSING OFFICER, ASSESSEE SUBMITTED WRITTEN REPLY ON 23.12.2008. IT WAS SUBMITTED BY THE ASSESSEE THAT THESE TRANSACTIONS H AVE BEEN UNDERTAKEN AS AN INVESTOR AND NOT AS A TRADER. THE PURCHASE OF THE S HARES HAVE BEEN ACCOUNTED IN THE BOOKS OF ACCOUNT AS INVESTMENT. AT THE CLOSE OF THE YEAR, THE VALUE OF THE SHARES WAS NOT TAKEN AT MARKET PRICE OR COST PR ICE WHICHEVER IS LOWER RATHER THEY WERE VALUED AT THE COST. THESE WERE SHO WN IN THE BALANCE SHEET 4 UNDER THE HEAD INVESTMENT AND NOT UNDER THE HEAD CURRENT INVESTMENT. THE SECURITIES HAVE ALSO BEEN TRANSFERRED IN THE NA ME OF THE ASSESSEE AND IT TOOK ACTUAL DELIVERY. THUS, ACCORDING TO THE ASSESS EE, FROM ITS ABOVE CONDUCT, IT CLEARLY REVEALS THAT THESE TRANSACTIONS WERE UNDERTAKEN AS AN INVESTOR AND THE NET RESULT THERE FROM ARE ACCORDIN GLY LIABLE TO BE TAXED UNDER THE HEAD CAPITAL GAIN AND NOT AS PROFIT AND GAIN S OF BUSINESS OR PROFESSION. LEARNED ASSESSING OFFICER DID NOT FIND MERIT IN THE CONTENTION OF THE ASSESSEE. HE MADE A REFERENCE TO THE BOARDS CIRCULAR BEARING NO.4/2007 ISSUED ON 15.6.2007. HE HAD ALSO REFERRED THE GUIDELINES ISSUED VIDE OFFICE MEMORANDUM DATED 13.12.2005 AND ALSO RE FERRED THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. ASSOCI ATED INDUSTRIAL DEV. COMPANY REPORTED IN 82 ITR 586 AND IN THE CASE OF C IT, MUMBAI VS. H.HOLCK LARSEN REPORTED IN 160 ITR 67. ON AN ANALYS IS OF THESE DECISIONS, VIS--VIS, THE DETAILS SUBMITTED BY THE ASSESSEE, H E TREATED THE ACTIVITY OF THE ASSESSEE AS A BUSINESS AND ASSIGNED FOLLOWING REASO NS: 3.7 IN THE CONTEXT OF THE ISSUE INVOLVED, THE ACTI ON OF THE ASSESSEE OF TREATING THE GAIN FROM SALE AND PURCHASE OF SHARES INSTEAD OF BUSINESS INCOME IS NOT ACCEPTABLE FOR THE REASONS GIVEN AS U NDER: A) THE ASSESSEE IS NOT MAINTAINING SEPARATE BOOKS OF ACCOUNT FOR THE ALLEGED INVESTMENTS AND REGULAR BUS INESS. 5 B) NO SEPARATE BANK ACCOUNT IS MAINTAINED FOR DIFFERENTIATING THE ALLEGED INVESTMENT MADE AND FOR BUSINESS ACTIVITY. C) MOREOVER, THE ASSESSEE HAD MADE PAYMENT FOR PURCHAS E OF SHARES ONLY FROM THE INCOME RECEIVED FROM BUSINE SS AND NOT INVESTED THE FUNDS FROM INDEPENDENT SOURCES . D) THE ASSESSEE HAS UTILIZED THE SALE PROCEED OF SHARE S ALLEGED TO BE INVESTMENT FOR THE BUSINESS PURPOSE. MERELY, AN ASSUMPTION BY THE ASSESSEE THAT THEIR PURCHASES ARE INVESTMENT IS NOT SUFFICIENT. IF IT I S ALLOWED THEN EVERY PERSON SHALL OPT FOR INCOME TRADING OF S HARES AS CAPITAL GAIN INCOME, ONLY BECAUSE TAX ON CAPITAL GAIN IS EITHER LEVIED LESSER RATE OR NIL RATE. E) THE ASSESSEE HAD INCOME FROM SPECULATION BUSINESS I N SHARES, THEREFORE, IT IS FOUND THAT THE ASSESSEE WA S IN THE BUSINESS OF SALE-PURCHASE OF SHARES. F) THE ASSESSEE HAD ALSO INCURRED LOSSES FROM PURCHASE -SALE OF ALLEGED INVESTMENTS. IF THE MOTIVE OF ASSESSEE W AS INVESTMENT THEN THEY WOULD NOT HAVE SOLD THOSE SHAR ES FOR LOSS. G) NUMBER OF TRANSACTIONS WERE NUMEROUS. H) QUANTUM OF SALE-PURCHASE WAS HUGE. I) A SINGLE SCRIPT WAS FREQUENTLY PURCHASED AND SOLD. 6 4. DISSATISFIED WITH THE ACTION OF THE ASSESSING OF FICER, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT(APPEALS ). IT REITERATED ITS CONTENTIONS AS WERE RAISED BEFORE THE ASSESSING OFF ICER. LEARNED FIRST APPELLATE AUTHORITY AFTER ANALYZING THE SHARE TRANS ACTIONS, ACCEPTED THE CLAIM OF LONG TERM CAPITAL GAIN AMOUNTING TO RS.31, 13,006. HOWEVER, HE UPHELD THE ORDER OF THE ASSESSING OFFICER TREATING THE SHORT TERM CAPITAL GAIN AS A BUSINESS INCOME. 5. LEARNED DR WHILE IMPUGNING THE ORDER OF THE LEAR NED CIT(APPEALS) SUBMITTED THAT THE LEARNED FIRST APPELLATE AUTHORIT Y HAS NOT ASSIGNED ANY REASON AS TO HOW SHARE TRANSACTIONS OF THE ASSESSEE CAN BE SEGREGATED BY HOLDING THAT TO THE EXTENT OF LONG TERM CAPITAL GAI N AROSE TO THE ASSESSEE ON SALE OF SHARES WOULD BE TREATED AS AN INVESTMENT IN THE SHARES WHEREAS SHORT TERM CAPITAL GAIN SHOWN BY THE ASSESSEE ON SALE OF SHARES, SUCH TRANSACTIONS WOULD BE TREATED AS IN THE NATURE OF BUSINESS. HE P OINTED OUT THAT THE ASSESSEE HAS UNDERTAKEN A LARGE NUMBER OF SHARE TRA NSACTIONS. THE BALANCE AS ON 1.4.2005 WAS OF RS.1,44,74,707. IT HAD MADE PURC HASES OF RS.8,25,63,824. THE SALE DURING THE YEAR HAS BEEN M ADE AT RS.8,57,97,801. IT HAD SUFFERED A LOSS OF RS.34,51,742 AS WELL AS EARN ED PROFIT OF RS.92,46,864. THE CLOSING BALANCE IS OF RS.1,70,35,851. ON THE ST RENGTH OF THESE DETAILS, HE 7 POINTED OUT THAT THERE WERE FREQUENT TRANSACTIONS W HICH INDICATE THAT IT WAS AN ORGANIZED BUSINESS OF THE ASSESSEE. THE SALE IN THE AUTO PARTS IS OF RS.98,33,862. WITH REGARD TO THE SUBMISSIONS OF THE ASSESSEE THAT IN ASSESSMENT YEAR 2005-06, ITS INVESTMENT HAVE BEEN A CCEPTED BY THE DEPARTMENT AS OF AN INVESTOR IN A SCRUTINY ASSESSME NT. HE POINTED OUT THAT THERE IS NO RES-JUDICATA IN THE INCOME-TAX PROCEEDI NGS. EVERY YEAR IS AN INDEPENDENT YEAR. HE RELIED UPON THE DECISION OF TH E HON'BLE SUPREME COURT IN THE CASE OF RADHA SOAMI SATSANG VS. CIT REPORTED IN 60 TAXMAN 248 (193 ITR 321). HE FURTHER SUBMITTED THAT FORM OF TR ANSACTION IS NOT IMPORTANT RATHER ONE HAS TO EVALUATE THE SUBSTANCE OF THE TRA NSACTION. FOR BUTTRESSING HIS CONTENTIONS, HE RELIED UPON THE DECISION OF HON 'BLE SUPREME COURT IN THE CASE OF CHOURANGHEE SALES BUREAU VS. CIT REPORTED I N 53 ITR 261, KETTLEWELL BULLEN & CO. VS. CIT REPORTED IN 53 ITR 261, CIT VS. DISTRIBUTORS BARODA (P) LTD. REPORTED IN 83 ITR 377 . 6. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE A SSESSEE SUBMITTED THAT ASSESSEE COMPANY WAS INCORPORATED ON 18.12.1984 UND ER THE NAME AND STYLE OF M/S. ANAMIKA LEASING CO. LTD., ITS NAME WAS SUBS EQUENTLY CHANGED TO THE PRESENT NAME AND AN APPROVAL WAS GRANTED BY THE REGISTRAR OF COMPANIES ON 8.10.2002. THE ASSESSEE WAS TO UNDERTA KE NUMBER OF OBJECTS 8 I.E. TO CARRY ON THE BUSINESS OF HIGHER PURCHASE AN D LEASING AND TO ACQUIRE ON HIRE PURCHASE LEASE BASIS ALL TYPE OF INDUSTRIAL OF FICE PLANT ETC. TO FINANCE THE INDUSTRIAL ENTERPRISES, TO LOAN OR ADVANCE MONEY TO BUILDERS, TO CARRY ON THE BUSINESS OF FINANCE, TRUST, LEGAL TRUSTS AND TO FIN ANCE INDUSTRIAL ENTERPRISES, TO CARRY ON THE BUSINESS OF COMMISSION AGENT, BROKER, FACTORIES, CONSULTANTS, REPRESENTATIVE, MIDDLEMAN IN REAL ESTATES, IRON AND STEEL, FOOD GRAINS, IMPORTER AND EXPORTERS, TO MANUFACTURE, ASSEMBLE, B UY, SELL, DISTRIBUTE, IMPORT EXPORTS AND AUTO PARTS ETC. THE ASSESSEE HAS BEEN INVESTING IN THE PAST AND A SCRUTINY ASSESSMENT WAS MADE IN ASSESSMENT YE AR 2005-06 WHEREIN THE INVESTMENT IN THE SHARES HAVE BEEN TREATED AS OF AN INVESTORS. THE CLOSING STOCK OF ASSESSMENT YEAR 2005-06 HAS BECOME THE OP ENING STOCK OF THIS ASSESSMENT YEAR. HOW THAT INVESTMENT COULD TAKE A C OLOUR OF TRADING IN THIS YEAR WHEN ASSESSEE HAS NOT CONVERTED THE INVESTMENT AS STOCK IN TRADE. HE POINTED OUT THAT ASSESSING OFFICER HAS RAISED A NUM BER OF OBJECTIONS AND THE FIRST REASON ASSIGNED BY HIM FOR DOUBTING THE INVES TMENT OF ASSESSEE IS THAT ASSESSEE IS NOT MAINTAINING SEPARATE BOOKS OF ACCOU NT FOR THE ALLEGED INVESTMENT. TO THIS OBJECTION, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS NOT ANY REQUIREMENT OF LAW EITHER DIRECT OR I MPLIED OR SUGGESTIVE, REQUIRING THE ASSESSEE TO MAINTAIN SEPARATE BOOKS O F ACCOUNT IN RESPECT OF VARIOUS ACTIVITIES. THE REQUIREMENT OF LAW IS THAT THE BOOKS OF ACCOUNT SHOULD 9 BE MAINTAINED IN A MANNER WHICH CAN ENABLE THE ASSE SSING OFFICER TO DETERMINE THE TRUE INCOME OF AN ASSESSEE ACCURATELY AND CORRECTLY. THUS, THE ACCOUNTS MAINTAINED BY THE ASSESSEE COMPLETELY MET THE REQUIREMENT OF LAW AND NO DEFECTS HAVE BEEN POINTED OUT BY THE ASSESSI NG OFFICER. THE SECOND OBJECTION POINTED OUT BY THE ASSESSING OFFICER IS T HAT NO SEPARATE BANK ACCOUNT IS MAINTAINED FOR DIFFERENTIATING THE ALLEG ED INVESTMENT MADE AND FOR BUSINESS ACTIVITY. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FUNDS OF THE ASSESSEE COMPANY HAVE BEEN OPERATED FR OM THE CONSOLIDATED BANK ACCOUNT. IT FACILITATE THE OPERATIONAL FEASIBI LITY, FLEXIBILITY AND EFFICIENCY. THE FUNDS HAVE COME OUT FROM A COMMON P OOL AND IT IS NOT A DETRIMENTAL TO THE CASE OF THE ASSESSEE WHICH CAN P ERSUADE THE ASSESSING OFFICER TO TREAT THE SHARE TRANSACTIONS AS A BUSINE SS ACTIVITY. THE IMPORTANT FACTOR IS THAT ASSESSEE HAS NOT USED BORROWED CAPIT AL. THERE IS A SHARE CAPITAL OF MORE THAN RS.3.04 CRORES. THE ASSESSEE HAS NOT R AISED ANY LOAN FOR THE PURPOSE OF INVESTMENT AND THIS HAS NOT BEEN POINTE D OUT BY THE ASSESSING OFFICER. THE UTILIZATION OF ITS SURPLUS BUSINESS FU ND FOR THE PURPOSE OF INVESTMENT CANNOT BE A GUIDING FACTOR THAT ASSESSEE WAS DOING TRADING ACTIVITY IN SHARES. ASSESSING OFFICER FURTHER OBSER VED THAT ASSESSEE ASSUME ITS PURCHASE AND SALE OF SHARES AS AN INVESTMENT. T HE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS OTHER WAY ROUND ASSES SING OFFICER HAS ASSUMED 10 THE INVESTMENT IN SHARES AS A TRADING ACTIVITY THE ASSESSEE HAS BEEN ACCOUNTING ITS INVESTMENT AS AN INVESTMENT. WITH RE GARD TO THE OBJECTION OF THE ASSESSING OFFICER, THAT QUANTUM OF SALE PURCHAS E WAS USED AS WELL AS NUMBER OF TRANSACTIONS WERE INNUMEROUS. HE AGREED T HAT TRANSACTIONS WERE LARGE IN NUMBER BUT THAT ALONE IS NOT SUFFICIENT TO TREAT THE INVESTMENT OF THE ASSESSEE AS A TRADING ACTIVITY. HE FURTHER SUBMITTE D THAT THIS IS ONE FACTOR WHICH MAY GOAD OF AN ADJUDICATING AUTHORITY TO HARB OR A BELIEF THAT A TRANSACTION MAY BE OF A TRADING TRANSACTION BUT SOL ELY ON THE BASIS OF THIS ONE FACTOR, IT CANNOT HELD THAT ASSESSEE WAS INVOLVED I N TRADING OF SHARES. HOW FREQUENCY OF TRANSACTION HAS BEEN LOOKED INTO AT VA RIOUS LEVELS. HE MADE A REFERENCE TO THE ORDER OF THE ITAT IN THE CASE OF S HRI RAMESH BABU RAO RENDERED BY THE ITAT, MUMBAI IN ITA NO.3719/MUM/200 9. IN THIS CASE, THE ASSESSEE HAD DEALT WITH 54 SCRIPTS WHICH WERE PURCH ASED AND SOLD DURING THE YEAR WHICH RESULTS IN SALES OF MORE THAN RS.24 CROR ES BUT AFTER LOOKING INTO OTHER ASPECTS, ITAT HAS UPHELD THE CONCLUSION OF LE ARNED CIT(APPEALS) THAT SHARE TRANSACTIONS OF THE ASSESSEE WERE TO BE TREAT ED AS INVESTMENT AND GIVING RISE TO LONG TERM CAPITAL GAIN. SIMILARLY, I N THE CASE OF SHRI VINOD KUMAR KATARIA, ITAT, MUMBAI IN ITA NO.6556/MUM/09 H AS UPHELD THE CLAIM OF ASSESSEE FOR LONG TERM CAPITAL GAIN, THE A SSESSEE HAS PURCHASED SHARES OF RS.4.21 CRORES AND UNDERTAKEN A NUMBER OF SALES AND PURCHASE 11 TRANSACTIONS. APART FROM THESE DECISIONS, HE RELIED UPON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. CON SOLIDATED FINVEST (SUPRA) AND SUBMITTED THAT IN THIS CASE THE ASSESSE E HAS PURCHASED 1,77,047 SHARES OF ONGC ON MARCH 29, 2004 AND 31,781 SHARES OF ONGC ON MAY 17, 2004, THE ENTIRE HOLDINGS OF SHARES WAS SOLD WI THIN A SHORT SPAN OF 7 TO 10 MONTHS EXCEPT 2000 SHARES. THE ASSESSING OFFICER TREATED THIS TRANSACTION AS A BUSINESS, HOWEVER, IT WAS HELD TO BE AN INVEST MENT BY THE LEARNED CIT(APPEALS) WHICH WAS UPHELD BY THE ITAT AND THE H ON'BLE DELHI HIGH COURT HAS UPHELD THE ORDER OF THE ITAT. THE DECISIO N OF THE HON'BLE DELHI HIGH COURT IS REPORTED IN 337 ITR 264. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER RELIED UPON THE DECISION OF HON'BLE DELHI H IGH COURT IN THE CASE OF JINDAL PHOTO INVESTMENT LTD. HE PLACED ON RECORD CO PY OF THE HIGH COURTS DECISION. HE FURTHER RELIED UPON THE DECISION OF HO N'BLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. GOPAL PUROHIT REPORTED IN 18 8 TAXMAN PAGE 140. HE ALSO RELIED UPON THE DECISION OF HON'BLE PUNJAB & H ARYANA HIGH COURT IN THE CASE OF CIT VS. GIRISH MOHAN GANERIWALA. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND GON E THROUGH THE RECORD CAREFULLY. THE ISSUE FOR OUR ADJUDICATION IS WHETHE R THE ASSESSEE MADE INVESTMENT IN THE SHARES OR IT HAS TRADED IN THE SH ARES. BOTH THE SIDES HAVE 12 REFERRED A LARGE NUMBER OF DECISIONS AS WELL AS THE BOARDS CIRCULAR. THE ITAT, LUCKNOW BENCH IN THE CASE OF SARNATH INFRA-ST RUCTURE (P) LTD. REPORTED IN 120 TTJ 216 HAS CONSIDERED ALL THE DECI SIONS REFERRED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AS WELL A S RELIED UPON BY THE LEARNED COUNSELS. THE ITAT, LUCKNOW BENCH HAS CONSI DERED CIRCULAR NO.4 OF 2007 ISSUED BY THE BOARD. ON AN ANALYSIS OF THE DECISIONS, THE ITAT HAS CULLED OUT FOLLOWING BROAD PRINCIPLES WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTIONS OF AN ASSESSE E CLAIMED TO BE OF AN INVESTMENT IS REALLY AN INVESTMENT OR A BUSINESS TR ANSACTION. IN OUR UNDERSTANDING, INSTEAD OF RESIDING AND DISCUSSING A LL THE CASE LAWS RELIED UPON BEFORE US, IT IS BETTER TO TAKE NOTE THE BROAD TESTS PROPOUNDED BY THE ITAT, LUCKNOW BENCH. 8. AFTER CONSIDERING ABOVE RULINGS WE CULL OUT FOL LOWING PRINCIPLES, WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTION(S) IN QUESTION ARE IN THE NATURE OF TRADE OR ARE MEREL Y FOR INVESTMENT PURPOSES : (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 I S TREATED AS STOCK-IN- 13 TRADE OR INVESTMENT. WHETHER SHOWN IN OPENING/CLOSI NG 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 PURCHASE G OODS FOR THE PURPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINING. (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 DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE . SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS MA Y SHOW WHETHER THE ASSESSEE IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HO LDINGS INDICATE INVESTMENT). (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PRO FIT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE ? FORME R WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN TH E 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 ESSEN TIAL 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 WOULD INDI CATE 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 ME MORANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION ? WHETHER FOR T RADE OR FOR INVESTMENT 14 ? IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE SEPARATE 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 S HOW 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 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 SH ARES (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) F OR INVESTMENT. (9) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISI TES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS C OMPLYING 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 ILLEG AL BUSINESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASES WERE MADE ? (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15TH JUNE, 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 I S NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. 15 (11) NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SE VERAL FACTORS HAS TO BE SEEN. 9. LET US EXAMINE THE FACTS OF PRESENT CASE IN THE LIGHT OF THESE TESTS. IN THE BOOKS OF ACCOUNT, ASSESSEE HAS SHOWN ITS PURCHA SES OF SHARES AS INVESTMENT. THE COPIES OF THE BALANCE SHEET ENDING AS ON 31.3.2005 AS WELL AS ON 31.3.2006 ARE AVAILABLE. ASSESSEE HAS NOT USE D BORROWED FUNDS FOR THE PURCHASE OF SHARES. ASSESSING OFFICER HAS POINTED O UT THAT ASSESSEE IS NOT MAINTAINING SEPARATE BANK ACCOUNT AND IT HAS USED T HE BUSINESS FUNDS. THE ASSESSEE POINTED OUT THAT SHARE CAPITAL OF MORE THA N RS.304 CRORES IS AVAILABLE WITH THE ASSESSEE. THE NON-MAINTENANCE OF SEPARATE BANK ACCOUNT, WOULD NOT BE A VERY MATERIAL FACTS. THE NEXT TEST I S ABOUT THE FREQUENCY OF PURCHASES AND DISPOSAL OF PARTICULAR ITEM. YES, THE RE ARE FREQUENT TRANSACTIONS AND THIS TEST GOES AGAINST THE ASSESSE E. THE VALUE OF THE SHARES AT THE CLOSE OF THE YEAR HAS BEEN TAKEN AT COST AND N OT AT MARKET PRICE OR COST WHICHEVER IS LOWER. IT INDICATES THAT THE SHARES AV AILABLE WITH THE ASSESSEE WERE NOT TREATED AS STOCK-IN-TRADE. IN THE MEMORAND UM OF ASSOCIATION, INVESTMENT IN SHARES IS ONE OF THE LINE OF ACTIVITY ASSESSEE HAS TO TAKE. THUS, ON AN EXAMINATION OF THE FACTS ON RECORD IN THE LIG HT OF THESE TESTS, WE FIND THAT EXCEPT ONE TEST I.E. FREQUENCY OF THE TRANSACT IONS ALL ARE IN FAVOUR OF THE 16 ASSESSEE. IN THE TESTS, IT HAS BEEN OBSERVED THAT E XPLANATION OF AN ASSESSEE BASED ON NUMBER OF FACTS SUPPORTED BY EVIDENCE AND CIRCUMSTANCES WHENEVER REQUIRED CONSIDERATION, WHETHER THE EXPLAN ATION IS SOUND OR NOT MUST BE DETERMINED NOT BY CONSIDERING THE WEIGHT TO BE ATTACHED TO EACH SINGLE FACTS IN ISOLATION BUT BY ASSESSING THE CUMU LATIVE EFFECT OF ALL THE FACTS IN THEIR SETTING AS A WHOLE. IN ASSESSMENT YEAR 200 5-06, THE PURCHASES OF THE SHARES BY THE ASSESSEE HAVE BEEN TREATED AS INVESTM ENT. SOME OF THE SHARES WHICH WERE TREATED AS INVESTMENT IS THE OPENING BAL ANCE OF THIS YEAR. THE ASSESSMENT ORDER HAS BEEN PASSED UNDER SEC. 143(3) AND IT IS AVAILABLE AT PAGES 5 & 6 OF THE PAPER BOOK. NO DOUBT, ASSESSING OFFICER HAS NOT DISCUSSED THIS ISSUE IN THAT YEAR BUT THAT DOES NOT OBLITERATE THE CONCEPT THAT BOOKS OF ACCOUNT WERE BEFORE HIM AND HE MUST HAVE C ONSIDERED ALL THE ASPECTS. THE FREQUENCY OF TRANSACTION IS ONE FACTO R WHICH MAY GOAD TO THE ADJUDICATING AUTHORITY TO CONSTRUE THE TRANSACTION AS A BUSINESS TRANSACTION BUT I.E. NOT THE ABSOLUTE CRITERIA. THIS HAS BEEN C ONSIDERED BY THE ITAT IN A NUMBER OF ORDERS REFERRED BY US IN FOREGOING PARAGR APHS. THUS, TAKING INTO CONSIDERATION ALL THESE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT LEARNED CIT(APPEALS) HAS ERRED IN TREATING PART OF THE TRANSACTIONS AS OF INVESTMENT AND PARTLY AS A TRADING IN THE SHARES. W E SET ASIDE THE ORDER OF THE LEARNED CIT(APPEALS) AND DIRECT THE ASSESSING OFFIC ER TO ACCEPT THE CLAIM 17 OF ASSESSEE OF LONG TERM CAPITAL GAIN AS WELL AS SH ORT TERM CAPITAL GAIN BY TREATING THE ACTIVITY OF PURCHASE AND SALES OF SHAR ES AS OF AN INVESTOR. CONSEQUENTLY, THE APPEAL OF THE ASSESSEE IS ALLOWED AND THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 02.12.2011 SD/- SD/- ( G.E. VEERABHADRAPPA) ( RAJPAL YAD AV ) PRESIDENT JUDICIAL MEMBER DATED: 02/12/2011 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR