DCIT, New Delhi V. Yama Finnace Ltd., New Delhi

ITA 312/DEL/2010

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5815 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 25-03-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 21-01-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ANUSHA KHURANA
• Assessee Lawyers: SUBODH GUPTA
• Keywords: Capital asset; Gift; Business income; Charitable institution; Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I DELHI BEFORE SHRI I.P. BANSAL AND SHRI K.G. BANSAL I.T.A.NO. 312(DEL)/2010 ASSESSMENT YEAR: 2006-07 ASSTT. COMMISSIONER OF INCOME M/S YAMA FINANCE LTD., TAX, CIRCLE 18(1), NEW DELHI. VS. B6/5, LOCAL SHOPPING CENTRE, SAFDARJUNG ENCLAVE, NEAR HDFC BANK, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. ANUSHA KHURANA, SR. DR RESPONDENT BY: SHRI SUBODH GUPTA, A.R. ORDER PER K.G. BANSAL ; AM THIS APPEAL OF THE REVENUE EMANATES FROM THE OR DER OF THE CIT(APPEALS)-XXI, NEW DELHI, PERTAINING TO ASS ESSMENT YEAR 2006-07. THE CORRESPONDING ORDER OF ASSESSMENT WAS FRAM ED BY THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 18(1), NEW DELH I, ON 26.12.2008, UNDER THE PROVISION OF SECTION 143(3) OF THE I NCOME-TAX ACT. THE ONLY GROUND TAKEN BY THE REVENUE IS THAT ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN TREATING THE SURPLUS OF RS. 58,71,144/- ARISING ON ACCOUNT OF SALE OF UNITS OF MUTUAL FUNDS AS CAPITAL GAINS INSTEAD OF BUSINESS INCOME. ITA NO. 312(DEL)/2010 2 2. THE FACTS AS MENTIONED IN THE ASSESSMENT ORD ER ARE THAT THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 83,78,279 /- WAS FILED ON 7.10.2006. THE CASE WAS TAKEN UP FOR SCRUTIN Y BY ISSUING A NOTICE U/S 143(2). IN THE COURSE OF HEARING, IT WAS FOUND TH AT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF INVESTMENTS IN UNITS OF MUTUA L FUNDS AND SHARES. IT WAS DERIVING INCOME BY WAY OF INTEREST, DIVIDEND AND SURPLUS REALIZED ON SALE OF THE SHARES AND UNITS. IN REGARD TO THE U NITS, THE ASSESSEE WAS REQUIRED TO STATE WHETHER SURPLUS REALIZED ON SALE/REDEMPTION THEREOF CONSTITUTED BUSINESS INCOME OR CAPITAL GAINS. AFT ER CONSIDERING THE EXPLANATION OF THE ASSESSEE, IT WAS HELD THAT TH E SURPLUS REALIZED ON SALE ETC. OF THE UNITS CONSTITUTED ITS BUSINESS INCOME. 2.1 THE MATTER WAS AGITATED IN APPEAL. THE CA SE OF THE ASSESSEE BEFORE THE LD. CIT(A) WAS THAT SUCH SURPLUS CONSTIT UTED INCOME UNDER THE HEAD CAPITAL GAINS. IN THIS CONNECTION, THE LD. CI T(A) DESCRIBED NINE FACTORS ON PAGE 5 OF THE APPELLATE ORDER, WHICH ARE REPROD UCED BELOW:- (I) ASSESSEE HAS EMPLOYED ITS OWN FUNDS OUT SH ARE CAPITAL AND ACCUMULATED FREE RESERVES AND THERE WAS NO BORROWING AT ANY TIME. (II) ASSESSEE IS LACKING PROPER INFRASTRUCTURE AND IS ONLY HOLDING RS. 2.02 LAKH (WDV RS. 1.39 LAKH) WORTH OF FIXED ASSETS. ITA NO. 312(DEL)/2010 3 (III) ASSESSEE HAS ONLY ONE EMPLOYEE TO WHOM A N AGGREGATE SALARY OF RS. 60,000/- HAS BEEN PAID. (IV) ASSESSEES TREATMENT OF MUTUAL FUND AS INV ESTMENT IS CONSISTENT SINCE 2002-03, EVEN WHEN NO SPEC IAL PRIVILEGES OF ANY TAX CONCESSION WAS AVAILABLE . MERELY BECAUSE SUBSEQUENTLY ASSESSEE IS ENTITLED TO SOME BENEFITS/TAX CONCESSIONS, THE WHOLE TRANSACTION CANNOT BE NOW PULLED UNDER THE UMBRELLA OF BUSINESS. (V) AUDITORS REPORT AND BALANCE-SHEET AS PER SCHE DULE VI TO THE COMPANIES HAS IDENTIFIED UNITS OF MUTUAL FUN D AS INVESTMENTS, CATEGORICALLY STATING THAT COMPAN Y IS NOT HOLDING ANY STOCK-IN-TRADE. (VI) UNITS OF MUTUAL FUNDS ARE NOT FREELY TRANS FERABLE NOR TRADABLE AND THUS CANNOT BE CATEGORIZED AS B USINESS. THESE UNITS CAN BE BOUGHT OR REDEEMED WITH MUTUAL FUND ITSELF. IT CANNOT BE GIFTED OR TRANSFERR ED IN ANY OTHER MANNER. (VII) THE KEY DECISION MAKING AUTHORITY REST W ITH THE FUND MANAGER OF THE RESPECTIVE MUTUAL FUND AND ASSE SSEE DO NOT HAVE ANY SAY AS TO WHEN TO BUY, WHAT TO BUY, WHEN TO SELL AND WHAT TO SELL. (VIII) ASSESSEES CASE OF TRANSACTIONS IN MUTUAL FUNDS RESULTING IN CAPITAL GAINS HAS ALREADY BEEN HELD IN ITS F AVOUR IN A.Y. 2004-05 IN APPEAL NO. 112/2006-07 BY MY PREDECESSO R. (IX) MOST OF THE INVESTMENTS IN MUTUAL FUND SCHEM ES HAVE BEEN HELD FOR A CONSIDERABLE TIME AND AS FAR AS 2 7 MONTHS, THUS, FREQUENCY IS RESTRICTED. 2.2 HE ALSO NOTED THAT UNITS OF MUTUAL FUNDS H AVE BEEN RECOGNIZED AS APPROVED INVESTMENT U/S 11(5) OF THE ACT, APPLI CABLE IN CASE OF CHARITABLE TRUSTS. FINALLY, IT WAS HELD THAT THE SURPLUS R EALIZED WAS TAXABLE UNDER ITA NO. 312(DEL)/2010 4 THE HEAD CAPITAL GAINS. AGGRIEVED BY THIS OR DER, THE REVENUE IS IN APPEAL BEFORE US. 3. BEFORE US, THE LD. DR SUBMITTED THAT THE AS SESSEE IS AN INVESTMENT COMPANY AND ITS MAIN BUSINESS IS TO INVEST IN SHARES AND SECURITIES. IN SO FAR AS PURCHASE AND SALE IN SHARES IS CONCE RNED, THE ASSESSEE AGREED TO TAXATION OF THE SURPLUS AS BUSINESS INCOME. HOWEVER, IT IS CHALLENGING THE FINDING OF THE AO THAT SURPLUS REALIZED ON SALE/REDEMPTION OF UNITS ALSO CONSTITUTED BUSINESS INCOME. SHE REFERRED TO THE FINDINGS OF THE AO THAT -(I) THE ASSESSEE IS ENGAGED IN THE BUSI NESS OF INVESTMENT IN UNITS OF MUTUAL FUND AND PORTFOLIO INVESTMENTS; (II) R IGHT FROM INCEPTION, THE INTENTION OF THE ASSESSEE IS TO EARN PROFIT AS INVESTMENT IN UNITS WAS MADE FOR A LIMITED PERIOD OF TIME; AND (III) THERE IS A REGULAR AND CONTINUOUS ACTIVITY IN THE INVESTMENT OF THE UNITS. ON THE BASIS OF THESE FACTS, IT WAS ARGUED THAT THE LD. CIT(APPEALS) ERRED IN TREATI NG THE SURPLUS AS INCOME UNDER THE HEAD CAPITAL GAINS. 3.1 IN REPLY, THE LD. COUNSEL FOR THE ASSESSE E SUBMITTED THAT THE LD. CIT(APPEALS) CONSIDERED A NUMBER OF FACTORS ME NTIONED ON PAGE 5 OF HIS ORDER. FURTHER, HE CONSIDERED THE PROVISION CONTAINED IN SECTION 11(5) ITA NO. 312(DEL)/2010 5 OF THE ACT. ON THE BASIS OF THE AFORESAID CONSI DERATION, HE RIGHTLY CAME TO THE CONCLUSION THAT THE SURPLUS WAS TAXABLE UN DER THE HEAD CAPITAL GAINS. 3.2 IN ORDER TO SUPPORT HIS CONTENTION, RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF CIT VS. ESS JAY ENTE RPRISES PVT. LTD. (2008) 173 TAXMAN 1 (DEL); CIT VS. N.S.S. INVESTMENTS (P) LTD. (2005) 277 ITR 149 (MAD.); AND FIDELITY NORTHSTAR FUND & OTHE RS (2007) 288 ITR 641 (AAR). RELIANCE WAS ALSO PLACED ON THE BOARD CIRCULAR NO. 4/2007 DATED 15.6.2007 REGARDING DISTINCTION B ETWEEN SHARES HELD AS STOCK-IN-TRADE AND SHARES HELD AS INVESTMENTS- TEST FOR SUCH A DISTINCTION. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN INVESTMENT COMPANY AND ITS MAIN BUSINESS IS TO INVEST IN S HARES AND SECURITIES ETC. THE ASSESSEE HELD SHARES OF THE VALUE OF RS. 91,64,607/- AS ON 1.4.2005, WHICH WERE SOLD DURING THE YEAR LEAVING NIL B ALANCE AT THE END OF THE YEAR, AS PER PAGE 23 OF THE PAPER BOOK. FURTHER , THE ASSESSEE HELD UNITS OF VARIOUS MUTUAL FUNDS OF THE VALUE OF RS. 8,02,02, 633/- ON 1.4.2005, WHICH GOT REDUCED TO RS. 2,14,82,044/- AT THE END OF T HE YEAR. IT WAS SUBMITTED ITA NO. 312(DEL)/2010 6 BY THE LD. COUNSEL THAT SURPLUS ARISING ON ACCO UNT OF SALE OF SHARES WAS AGREED TO BE TAXED AS BUSINESS INCOME FOR THE R EASON THAT PURCHASE AND SALE DECISIONS WERE ENTRUSTED TO THE PORTFOLIO MA NAGER. HOWEVER, INVESTMENTS IN THE UNITS AND DECISION TO SELL/R EDEEM THEM WAS TAKEN BY THE COMPANY WITHOUT THE AID OF ANY PROFESSIONAL ADVICE. THE ASSESSEE HAD ONLY ONE EMPLOYEE TO WHOM SALARY OF RS. 60,0 00/- WAS PAID IN THIS YEAR. THUS, THE ASSESSEE DID NOT HAVE INFRAST RUCTURE TO CARRY OUT BUSINESS IN PURCHASE AND SALE/REDEMPTION OF THE UNITS. W E MAY ADD HERE THAT THE SCHEDULE OF ADMINISTRATIVE EXPENSES SHOWS P AYMENT OF MANAGEMENT FEES TO KOTAK AT RS. 47,290/- AND RELIANCE AT R S. 2,70,095/-, APART FROM ADVERTISEMENT EXPENSES OF RS.29,568/-. THE BALAN CE-SHEET OF THE ASSESSEE AS ON 31.3.2006 SHOWS THE HOLDING OF SHARES A ND UNITS AS INVESTMENTS, CUMULATIVELY VALUED AT COST AT RS. 2,14,82,044/ -. THESE ASSETS WERE SHOWN AS INVESTMENTS IN THE EARLIER YEARS ALSO . 4.1 COMING TO THE FINDINGS OF THE LD. CIT(APPEALS ), IT HAS ALREADY BEEN MENTIONED THAT HE HAD TAKEN INTO ACCOUNT 10 FACT ORS. WE MAY CONSIDER THESE FACTORS, WHICH WILL HAVE BEARING ON THE C ONTROVERSY. ITA NO. 312(DEL)/2010 7 (I) IT IS MENTIONED THAT THE ASSESSEE EMPLOYE D HIS OWN FUNDS AND NO BORROWING WAS MADE FOR THE PURPOSE OF INVEST MENTS. ACCORDING TO US, LACK OF BORROWING ADVANCES THE CASE OF THE ASSESS EE; (II) THE ASSESSEE IS LACKING PROPER INFRASTRUCT URE AND THE ASSETS OF THE VALUE OF RS. 1.3 LAKH ONLY WERE THERE. H OWEVER, THIS FACTOR HAS TO BE SEEN IN THE LIGHT OF THE FACT THAT THE ASSES SEE HAS PAID MANAGEMENT FEES TO KOTAK AND RELIANCE AND THERE IS NO EVID ENCE ON RECORD THAT BOTH THESE PAYMENTS WERE IN RESPECT OF MANAGEMENT S ERVICES RECEIVED FOR PURCHASE AND SALE OF SHARES. PRIMA FACIE, PAYM ENTS TO TWO DIFFERENT COMPANIES SHOW THAT ONE WAS PAID FOR THE PURPOSE OF INVESTMENT IN SHARES AND THE OTHER FOR INVESTMENT IN UNITS. THIS FACT OR GOES AGAINST THE ASSESSEE; (III) THE ASSESSEE HAS ONLY ONE EMPLOYEE. THI S FACT WAS ALSO TO BE SEEN IN CONJUNCTION WITH THE FACT THAT MANAGEM ENT FEES WAS PAID TO TWO COMPANIES. THUS, THIS FACTOR BECOMES INCONSEQU ENTIAL; (IV) THE ASSESSEE HAS CONSISTENTLY TREATED THE ASSETS AS INVESTMENTS. THIS FACT HAS ALSO TO BE SEEN IN T HE LIGHT OF THE FACT THAT ITA NO. 312(DEL)/2010 8 SURPLUS REALIZED ON PURCHASE AND SALE OF SHARES HAS BEEN ACCEPTED TO BE ON BUSINESS ACCOUNT. FURTHER, THE ASSESSEE H AS PAID MANAGEMENT FEES TO TWO COMPANIES. THEREFORE, ABSENCE OF SUBSTANT IAL NUMBER OF STAFF MEMBERS DOES NOT ADVANCE THE CASE OF THE ASSESS EE; (V) THE AUDITORS HAVE IDENTIFIED THE UNITS AS INVESTMENTS AND NOT AS STOCK-IN-TRADE. AGAIN, EVEN SHARES HAVE BE EN IDENTIFIED AS INVESTMENTS. THEREFORE, TREATMENT OF UNITS IN BOOK S OF ACCOUNT IS NOT CONCLUSIVE OF THE MATTER; (VI) UNITS ARE NOT FREELY TRANSFERABLE OR TRAD ABLE AND, THEREFORE, THEY CANNOT BE TREATED AS STOCK-IN-TRADE. IN THE COURSE OF HEARING BEFORE US, IT WAS FAIRLY SUBMITTED BY THE LD. COUNSEL THAT SOME OF THE UNITS WERE NON-TRANSFERABLE WHILE SOME WERE TRANSFERABLE. FURTHER, THE ISSUE WHETHER AN ASSET IS CAPITAL ASSET OR STOCK-IN-TRA DE CANNOT BE DECIDED ON THE FACT THAT THERE WAS A LIMITED MARKET. I T HAS TO BE DECIDED BY TAKING ALL THE FACTORS INTO ACCOUNT; (VII) THE KEY DECISION MAKING AUTHORITY RESTS WITH FUND MANAGER AND THE UNIT HOLDERS HAVE NO SAY IN SUCH DECI SION. THIS FACTOR IS ITA NO. 312(DEL)/2010 9 IMMATERIAL BECAUSE IN CASE OF SHARES ALSO, KEY DECISION MAKING AUTHORITY FOR CONDUCTING THE BUSINESS LIES IN THE HANDS OF THE MANAGEMENT OF THE COMPANY AND NOT WITH THE SHARE HOLDERS; (VIII) THE MATTER HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN ASSESSMENT YEAR 2004-05. IT IS FOUND THAT THI S DECISION WAS CHALLENGED BY THE REVENUE AND THAT APPEAL WAS DECIDED ALO NG WITH THE CROSS APPEAL OF THE ASSESSEE. THE TRIBUNAL DID NOT GO INTO THE MATTER OF THE NATURE OF UNITS AS THE ASSESSMENT ORDER WAS QUASHED ON T HE PRELIMINARY GROUND THAT NOTICE U/S 143(2) WAS NOT SERVED ON THE ASSES SEE. THUS, THERE IS NO AUTHORITATIVE PRONOUNCEMENT IN THE MATTER; (IX) MOST OF THE UNITS WERE HELD FOR CONSIDERA BLE PERIOD OF TIME, AT TIMES BEING AS LONG AS 27 MONTHS, RESTRICTING THE FREQUENCY OF TRANSACTION. WE ARE OF THE VIEW THAT THE PERIOD OF HOLDING OF AN ASSET DOES NOT DECIDE THE CHARACTER OF THE ASSET A S THE RELEVANT CONSIDERATION IS WHETHER THE ASSESSEE WANTED TO DEAL IN THE ASSET OR HOLD IT AS INVESTMENT; (X) INVESTMENT IN UNITS IS SPECIFIED MODE O F INVESTMENT U/S 11(5) FOR CHARITABLE OR RELIGIOUS TRUSTS. THIS ISSUE I S ALSO IMMATERIAL BECAUSE WE ITA NO. 312(DEL)/2010 10 HAVE TO DEAL WITH THE INTENTION AND THE CONDUCT OF THE ASSESSEE. SPECIFICATION OF INVESTMENTS IN SECTION 11(5) IS O NLY WITH A VIEW TO ENSURE THAT MONEY IS NOT MADE AVAILABLE TO SETTLER, T RUSTEES ETC. FOR THEIR BENEFIT. 4.2 ON THE BASIS OF ABOVE DISCUSSION, THE FACTO RS WHICH WEIGH IN FAVOUR OF THE ASSESSEE ARE THAT OWN FUNDS ARE INVESTED; UNITS HAVE BEEN CLASSIFIED AS INVESTMENTS RIGHT FROM THE BEGINNI NG AND UNITS ARE NOT FREELY TRADABLE IN MANY CASES. THE FACTORS WHI CH WEIGH AGAINST THE ASSESSEE ARE THAT THE MANAGEMENT FEE IS PAID TO TWO COMPANIES; SURPLUS REALIZED ON SALE OF SHARES HAS BEEN ACCEPTED AS BUSINESS INCOME AND THERE HAS BEEN SUBSTANTIAL ACTIVITY IN RESPECT OF SA LE/REDEMPTION OF UNITS. 4.3 COMING TO THE CASE LAW, THE FACTS IN THE CASE OF ESS JAY ENTERPRISES PVT. LTD. (SUPRA) ARE THAT ASSESSEE WAS RUNNING A RESTAURANT BUSINESS AND IT HAD ITS SHARE HOLDING IN A COMPA NY AS INVESTMENT AND NOT STOCK-IN-TRADE. THERE WAS NO EVIDENCE OF CONVE RSION OF THE ASSETS INTO STOCK-IN-TRADE. ONE OF THE OBJECTS MENTIONED IN THE MEMORANDUM OF ASSOCIATION WAS REGARDING BUYING AND SELLING OF SHARES, BUT THAT WAS NEITHER THE BUSINESS OF THE ASSESSEE NOR THERE WAS ANY EVIDENCE THAT IT WAS DEALING IN SHARES ON A REGULAR BASIS. THE HONBLE COURT OBSERVED ITA NO. 312(DEL)/2010 11 THAT IN SUCH A CIRCUMSTANCE THE TREATMENT GI VEN TO THE ASSET IN THE BOOKS OF ACCOUNT BECOMES OF IMPORTANCE. WHEN THAT IS DONE, IT BECOMES CLEAR THAT THE ASSETS WERE INVESTMENTS AND NOT ST OCK-IN-TRADE. THE FACTS OF THIS CASE ARE CLEARLY DISTINGUISHABLE FOR THE REASON THAT INVESTMENT IN SHARES AND UNITS IS THE MAIN BUSINESS OF THE A SSESSEE, PURSUANCE TO WHICH SUCH INVESTMENTS WERE MADE. SUCH INVESTMENTS H AVE BEEN MADE AND LIQUIDATED FREQUENTLY, AS WILL BE SEEN FROM THE FACTS REGARDING INVESTMENTS AT THE BEGINNING OF THE YEAR AND AT THE END OF THE YEAR. IN THE CASE OF N.S.S. INVESTMENTS (P) LTD. (SUPRA) , A FINDING OF FACT WAS GIVEN BY THE TRIBUNAL THAT THE SHARES WERE NE VER TREATED BY THE ASSESSEE AS STOCK-IN-TRADE. IT HELD SOME SHARES AS INVESTMENTS AND SOME AS STOCK-IN-TRADE. THE QUESTION BEFORE THE COURT WAS IN RESPECT OF SHARES HELD AS INVESTMENTS. IT WAS HELD THAT SURPLU S REALIZED WILL BE INCOME UNDER THE HEAD CAPITAL GAINS. THIS DECISION IS BASED UPON THE FINDING OF FACT THAT THE SHARES WERE HELD AS INVESTMENT AL THOUGH THE ASSESSEE WAS ALSO DEALING IN SHARES. THE FINDING WHETHER TH E UNITS WERE HELD BY THE ASSESSEE AS STOCK-IN-TRADE IS TO BE GIVEN ON THE BASIS OF FACTORS ANALYSED BY THE LD. CIT(APPEALS). IT IS ONLY THEREAFTE R THAT IT CAN BE HELD WHETHER THE UNITS WERE INVESTMENTS OR STOCK-IN-TRADE. I N THE CASE OF FIDELITY NORTHSTAR FUND & OTHERS (SUPRA), THE FINDING OF I NVESTMENT WAS MADE AS ITA NO. 312(DEL)/2010 12 THE FOREIGN INSTITUTIONAL INVESTORS (FII FOR SHO RT) ARE NOT ALLOWED TO TRADE IN SECURITIES. THE LD. AAR CAME TO THE C ONCLUSION THAT THE WORDS INCOME IN RESPECT OF SHARES WOULD ONLY MEAN DIVIDEND, INTEREST ETC. THAT WILL NOT TAKE WITHIN ITS AMBIT THE SUR PLUS REALIZED ON TRANSFER OF SECURITIES AS THEY COULD BE HELD ONLY AS INV ESTMENTS. HOWEVER, THE HONBLE COURT CULLED OUT RATIO OF VARIOUS CASE S AT PAGE 651, TO WHICH WE SHALL REVERT TO LATER ON. 4.4 THE ASSESSING OFFICERS CASE WAS BASED U PON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF DALHOUSIE INVESTMENT TRUST COMPANY LTD. VS. CIT (1968) 68 ITR 486. THE P RINCIPAL ACTIVITY OF THAT ASSESSEE WAS INVESTMENT IN SHARES AND STOCKS. IN THE YEAR UNDER CONSIDERATION IT SOLD 6900 SHARES OF MCLEOD & CO. LTD. AND OTHER COMPANIES MANAGED BY MCLEOD & CO. LTD. ONE OF THE MAIN OBJECT CLAUSE IN THE MEMORANDUM WAS TO ACQUIRE, HOLD, SELL, TRANSFER ETC. THE SHARES AND SECURITIES. THE SHARES WERE SOLD IN THE RELEVANT YEAR AT CONSIDERABLE PROFIT. THE EXPLANATION OF THE A SSESSEE WAS THAT THE SHARES WERE SOLD BECAUSE THE CONTROL OF MCLEOD & CO. LTD . WENT OUT OF ITS HANDS. HOWEVER, THIS EXPLANATION COULD NOT BE PROVED. IN THE EARLIER YEARS, PURCHASE AND SALE OF SHARES WERE HELD TO BE I NVESTMENTS BY THE REVENUE. ITA NO. 312(DEL)/2010 13 IT WAS HELD THAT THE SHARES OF MCLEOD & CO. LTD. WERE HELD AS STOCK-IN- TRADE AND NOT INVESTMENTS RIGHT FROM THE BEGINNIN G. THEREFORE, THE TRANSACTIONS IN THIS YEAR AMOUNTED TO ADVENTURE IN THE NATURE OF TRADE. IT WAS ALSO HELD THAT THE EARLIER DECISION OF THE DEPARTMENT IN THIS MATTER WAS NOT BINDING ON THE REVENUE. 4.5 AS MENTIONED EARLIER, THE LD. COUNSEL ALSO RELIED ON BOARD CIRCULAR NO. 4/2007 DATED 15.6.2007, A COPY OF WHICH WA S PLACED IN THE PAPER BOOK ON PAGES 36 AND 37. THE CIRCULAR REFERRE D TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. ASS OCIATED INDUSTRIAL DEVELOPMENT CO. (P) LTD., 82 ITR 586. THE HONB LE COURT OBSERVED THAT WHETHER A PARTICULAR HOLDING OF SHARES IS B Y WAY OF INVESTMENT OR IT FORMS PART OF THE STOCK-IN-TRADE IS A MATTER W HICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARE S AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EV IDENCE FROM ITS RECORD AS TO WHETHER IT HAD MAINTAINED ANY DISTINCTION BETWEEN THE SHARES HELD AS STOCK-IN-TRADE AND THE SHARES HELD AS INVEST MENTS. FURTHER, THE DECISION OF THE APPEAL COURT IN THE CASE OF CIT V S. H. HOLCK LARSEN, 160 ITR 67, WAS REFERRED TO IN WHICH IT WAS OBSE RVED THAT THE HIGH COURT MADE A MISTAKE IN OBSERVING WHETHER TRANSACTI ONS OF SALE AND PURCHASE ITA NO. 312(DEL)/2010 14 OF SHARES WERE TRADING TRANSACTIONS OR WHETHER THESE WERE IN THE NATURE OF INVESTMENT WAS A QUESTION OF LAW. THIS IS A MIXED QUESTION OF LAW AND FACT. THE RULING OF AAR REPORTED IN 288 ITR 641 WAS ALSO REFERRED TO, IN WHICH AFTER CONSIDERING VARIOUS DECISIONS OF THE APEX COURT, THE RELEVANT CONSIDERATIONS WERE CULLED OUT, NAMEL Y, THAT -(I) WHERE A COMPANY PURCHASES AND SELLS SHARES, IT MUST B E SHOWN THAT THEY WERE HELD AS STOCK-IN-TRADE AND THAT EXISTENCE OF T HE POWER TO PURCHASE AND SELL SHARES IN THE MEMORANDUM OF ASSOCIATION IS NOT DECISIVE OF THE MATTER; (II) THE SUBSTANTIAL NATURE OF TRANSACT ION, THE MANNER OF MAINTAINING BOOKS OF ACCOUNT, THE MAGNITUDE OF P URCHASE AND SALE AND THE RATIO BETWEEN PURCHASES AND SALES AND THE HOL DING WOULD FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF THE TRA NSACTION; AND (III) ORDINARILY THE PURCHASE AND SALE OF SHARES W ITH THE MOTIVE TO EARN PROFIT WOULD RESULT INTO BUSINESS INCOME; BUT WHERE THE OBJECT OF INVESTMENT IN SHARES IS TO DERIVE INCOME BY WAY OF DIVIDEND ET C., THE PROFITS ACCRUING BY CHANGE IN THE INVESTMENT WILL YIELD CAPITA L GAINS. 4.6 COMING TO THE FACTS OF THE CASE BEFORE US, I T IS SEEN THAT THE AO DID NOT ENQUIRE INTO THE PURPOSE OF INVESTMENT IN TH E UNITS. THE DECISION IN THE CASE OF DALHOUSIE INVESTMENT TRUST CO. LTD. (SUPRA) REVOLVED ITA NO. 312(DEL)/2010 15 SUBSTANTIALLY AROUND THE ASSERTION OF THE ASS ESSEE THAT THE SHARES WERE PURCHASED FOR OBTAINING CONTROLLING INTEREST IN MCLEOD & CO. LTD. THE TRIBUNAL FOUND AS A MATTER OF FACT THAT THERE W AS NO EVIDENCE TO SUPPORT THIS CLAIM. THEREFORE, A FINDING WAS RETURNED T HAT THE INVESTMENTS WERE MADE UNDER CLAUSE 2 OF THE MEMORANDUM OF ASSOCIATI ON REGARDING ACQUIRING, HOLDING, SELLING AND TRANSFERRING SHA RES, STOCKS, DEBENTURES, BONDS ETC. ON THESE FACTS, THE HONBLE COURT MENTIONED THAT THERE COULD BE ONLY ONE CONCLUSION THAT THE SHARES WERE PURCHASED AND SOLD WITH THE MOTIVE OF EARNING PROFIT AND NOT WITH T HE OBJECTIVE OF INVESTING ITS CAPITAL IN SHARES IN ORDER TO DERIVE INCOM E FROM THE INVESTMENTS. IN THE INSTANT CASE, THE AO DID NOT ASCERTAIN TH E MOTIVE OF SUBSCRIPTION TO THE UNITS. THEREFORE, THE ISSUE HAS TO BE DE CIDED ON THE BASIS OF OTHER FACTS AVAILABLE ON RECORD. ALTHOUGH, THE AO H AS GIVEN A FINDING THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF INVESTMENT IN UNITS OF MUTUAL FUNDS ETC., BUT HE HAS NOT REFERRED TO THE MEMORANDUM OF ASSOCIATION WITH A VIEW TO ASCERTAIN WHETHER THE BUSINESS OF THE ASSESSEE WAS ONE OF MAKING INVESTMENTS OR DEALING IN INVESTMENTS OR BOTH. ALTHOUGH PERUSAL OF THE OBJECTS CLAUSE WOULD NOT BE CONC LUSIVE OF THE MATTER, IT WOULD HAVE FURNISHED FAIRLY RELIABLE GUIDANCE F OR DECIDING WHETHER SUBSCRIPTION TO THE UNITS WAS IN THE NATURE OF MAKING INVESTMENTS OR ITA NO. 312(DEL)/2010 16 PURCHASE OF STOCK-IN-TRADE. THIS BRINGS US TO T HE TREATMENT OF THE UNITS IN THE BOOKS OF ACCOUNT. THE UNITS AS WELL AS S HARES WERE SHOWN AS INVESTMENTS RIGHT FROM THE BEGINNING. THE CAS E OF THE ASSESSEE HEAVILY DEPENDS UPON THIS FACT. AS AGAINST THAT, WE FIND THAT THE SURPLUS REALIZED ON SHARES HAS BEEN ACCEPTED TO BE BU SINESS PROFIT. WE ALSO FIND THAT THE ASSESSEE HAS PAID MANAGEMENT FEES TO K OTAK AND RELIANCE AND EVEN CUSTODIAL CHARGES OF RS. 8,642/- HAVE BEEN PAID. THE ASSERTION OF THE ASSESSEE THAT THE SERVICE OF PORTFOLIO MAN AGER WAS ONLY IN RESPECT OF SHARES IS NOT SUPPORTED BY ANY EVIDENCE ON RECO RD. WE HAVE ALREADY MENTIONED THAT PAYMENT OF SUCH FEE TO TWO COMP ANIES LEADS TO A CONCLUSION THAT ONE COMPANY IS ENGAGED FOR MANAGI NG PURCHASE AND SALE OF SHARES AND THE OTHER FOR SUBSCRIPTION AND R EDEMPTION ETC. OF THE UNITS. THEREFORE, THERE IS A CONTRADICTION IN THE STAN D OF THE ASSESSEE WHEN IT IS ARGUED THAT SHARES WERE HELD AS STOCK-IN-TRA DE AND UNITS WERE HELD AS INVESTMENTS ON THE BASIS OF ITS ACCOUNTS. THE T AXATION OF SHARE INCOME AS BUSINESS INCOME ALSO DEMOLISHES THE FOUNDATION OF THE CASE OF THE ASSESSEE THAT THE UNITS WERE HELD AS INVES TMENTS FOR THE REASON THAT CLASSIFICATION OF THESE ASSETS IN THE BALANCE-SHE ET BECOMES COMPLETELY INCONSEQUENTIAL. THIS LEAVES US WITH OTHER A RGUMENTS SUCH AS LACK OF INFRASTRUCTURE FOR CARRYING ON THE BUSINESS, WHI CH CANNOT BE RELIED UPON ITA NO. 312(DEL)/2010 17 IN THE FACE OF THE FACT THAT PROFESSIONAL SERV ICES WERE AVAILED OF FOR TAKING BUYING AND SELLING DECISIONS BOTH IN RE SPECT OF THE SHARES AND THE UNITS. IT IS ALSO ARGUED THAT SOME OF THE UNI TS WERE NON-TRANSFERABLE AND THERE WAS NO MARKET TO SELL THE UNITS. THIS ARGUMENT ALSO DOES NOT HOLD GOOD BECAUSE THE EXTENT OF MARKET FOR A PARTICU LAR COMMODITY WILL DEPEND UPON THE NATURE OF THE COMMODITY. THE CRUX OF THE MATTER IS NOT THAT THERE WAS A LIMITED MARKET BUT WHETHER THE INTE NTION WAS TO EARN INCOME BY WAY OF DIVIDENDS ETC. OR TO REALIZE SURPLU S IN FAVOURABLE CONDITIONS. THE DECISION IN THE CASE OF FIDELITY NORTHSTAR FUND & OTHERS, BASED UPON VARIOUS DECISIONS OF APEX COURT, FURNISHES A RU LING THAT THE SUBSTANTIAL NUMBER OF TRANSACTION, AND THE INTENTION OF THE CO MPANY WILL BE DECISIVE FACTOR IN THE MATTER. WE ARE NOT IN A POSITION TO COME TO ANY DEFINITE CONCLUSION IN REGARD TO THE INTENTION AT THE TI ME OF PURCHASE. HOWEVER, IT IS CLEAR THAT THE TRANSACTIONS ARE OF SUBS TANTIAL NATURE VIS--VIS THE HOLDING OF THE ASSESSEE AS ALL THE SHARES WER E LIQUIDATED AND ABOUT 75% OF THE UNITS WERE DISPOSED OFF IN THIS VERY YEAR. ACCORDING TO US, THIS FACT TURNS THE CASE DECISIVELY AGAINST THE ASSESSEE IN ABSENCE OF ANY REASONS FURNISHED FOR SUCH WHOLESOME SALE OF UNITS. ACCORDINGLY, IT IS HELD THAT THE LD. CIT(APPEALS) ERRED IN HOLDING THAT SURPLUS REALIZED ITA NO. 312(DEL)/2010 18 ON SALE OF UNITS WAS TAXABLE AS CAPITAL GAIN S. THEREFORE, HIS ORDER ON THIS ISSUE IS REVERSED AND THAT OF THE AO IS RESTORED. 5. IT IS ALSO THE ARGUMENT OF THE LD. COUNSEL T HAT IN CASE THE SURPLUS IS HELD TO BE TAXED AS BUSINESS PROFITS, THE AS SESSEE MAY BE GRANTED CREDIT FOR SECURITY TRANSACTION TAX (STT FOR SHORT) PA ID BY IT. SUCH A CLAIM WAS RAISED EVEN BEFORE THE LD. CIT(APPEALS). HOWEVER, HE DID NOT DECIDE THIS ISSUE BECAUSE IT WAS HELD THAT THE TRANSACTIONS RESULT INTO CAPITAL GAINS. THIS DECISION HAS NOW BEEN REVE RSED. THEREFORE, THE MATTER OF GRANT OF CREDIT IS RESTORED TO THE FILE OF THE AO TO ALLOW DEDUCTION AS PER LAW. 6. THE RESULT OF THE AFORESAID DISCUSSION IS THAT THE APPEAL OF THE REVENUE IS ALLOWED SUBJECT TO GRANT OF CREDIT F OR THE STT PAID AS PER LAW ON TRANSACTIONS OF THE UNITS. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 31 MARCH, 2010. SD/- SD/- (I.P.BANSAL) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 31.03.2010. SP SATIA ITA NO. 312(DEL)/2010 19 COPY OF THE ORDER FORWARDED TO:- 1. YAMA FINANCE LTD., NEW DELHI. 2. ASSTT. CIT, CIRCLE-18(1), NEW DELHI. 3. CIT(A) 4. CIT, NEW DELHI. 5. DR, ITAT, NEW DELHI. ASSISTANT REGISTRA R.