Seer Finlease Pvt.Ltd., Ahmedabad V. The ACIT.,Cent.Circle-1(3), Ahmedabad

ITA 3326/AHD/2009

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9199 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 02-03-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 16-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AHD WI; NARENDRA SINGH SR DR ITA NO
• Keywords: Capital asset; Business income; Rule of consistency
• Section: 143(3)

Judgement Text

, B IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ./ ITA NO.3326/AHD/2009 / ASSTT. YEAR: 2006-2007 SEER FINLEASE PVT.LTD. 1 ST FLOOR, H.N. HOUSE NR.OLD HIGH COURT NAVRANGPURA AHMEDABAD. PAN : AADCS 9479 B VS ACIT, CENT.CIR.1(3) AHMEDABAD. ./ ITA NO.3440/AHD/2009 / ASSTT. YEAR: 2006-2007 ACIT, CENT.CIR.1(3) AHMEDABAD. VS SEER FINLEASE PVT.LTD. 1 ST FLOOR, H.N. HOUSE NR.OLD HIGH COURT NAVRANGPURA AHMEDABAD. ./ IT(SS)A NO.3/AHD/2012 WITH CO NO.70/AHD/2012 / ASSTT. YEAR: 2006-2007 ACIT, CENT.CIR.1(3) AHMEDABAD. VS SEER FINLEASE PVT.LTD. 1 ST FLOOR, H.N. HOUSE NR.OLD HIGH COURT NAVRANGPURA AHMEDABAD. ! / (APPELLANT) '# ! / (RESPONDENT) ASSESSEE BY : SHRI S.N. SOPARKAR WITH SHRI P.M. MEHTA AND SHRI PARIN SHAH. REVENUE BY : SHRI NARENDRA SINGH, SR.DR ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 2 / DATE OF HEARING : 02/03/2016 / DATE OF PRONOUNCEMENT: /03/2016 $%/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: ITA.NO.3326/AHD/2009 AND ITA NO.3440/AHD/2009 ARE AT THE END OF THE ASSESSEE AND REVENUE AGAINST THE COMMON ORDE R OF THE LD.CIT(A)-III, AHMEDABAD DATED 15.10.2009 ARISING F ROM THE ASSESSMENT ORDER DATED 29.8.2008 PASSED UNDER SECTI ON 143(3) OF THE INCOME TAX ACT. IT(SS)A.NO.3/AHD/2012 IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE LD.CIT(A) DATED 5. 10.2011. THIS APPEAL HAS ARISEN OUT OF PENALTY ORDER PASSED UNDER SECTION 271(1)(C) OF THE ACT ON 16.3.2011. 2. THE ASSESSEE ON RECEIPT OF NOTICE IN THIS APPEAL HAS FILED CO BEARING NO.70/AHD/2012. WE HAVE HEARD ALL THESE AP PEALS TOGETHER AND DEEM IT APPROPRIATE TO DISPOSE OF THEM BY THIS COMMON ORDER. 3. FIRST WE TAKE QUANTUM APPEALS I.E. ITA NO.3326/A HD/2009 AND ITA NO.3440/AHD/2009. 4. COMMON ISSUE INVOLVED IN BOTH THE APPEALS IS WHE THER RECEIPTS RECEIVED BY THE ASSESSEE ON SALE OF SHARES IS TO BE ASSESSED UNDER THE HEAD SHORT TERM CAPITAL GAIN OR LONG TERM CAPITA L GAIN OR UNDER THE HEAD BUSINESS INCOME. 5. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE-COMPAN Y WAS INCORPORATED ON 14.7.1997 AND IT WAS REGISTERED WIT H THE REGISTRAR OF COMPANIES. IT HAS FILED ITS RETURN OF INCOME FOR T HE ASSTT.YEAR 2006-07 ON 26.12.2006 DECLARING TOTAL INCOME AT RS.7,68,57, 350/- WHICH INCLUDED PROFIT AND GAINS OF BUSINESS OR PROFESSION OF RS.4,05,293/- AND SHORT TERM CAPITAL GAIN OF RS.7,64,52,057/-. THE C ASE OF THE ASSESSEE ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 3 WAS SELECTED FOR SCRUTINY ASSESSMENT AND NOTICE UND ER SECTION 143(2) OF THE ACT ON 16.11.2007 WAS ISSUED AND SERVED UPON TH E ASSESSEE. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE AO THA T THE ASSESSEE HAS CLAIMED ITSELF AS INVESTMENT IN SHARES AND SECURITI ES, AND THEREFORE, ON SALE OF SHARES IT HAS DISCLOSED SHORT TERM CAPITAL GAIN. THE LD.AO WAS OF THE OPINION THAT THIS CLAIM OF THE ASSESSEE REQU IRES TO BE INVESTIGATED KEEPING IN VIEW VARIOUS FACTS WHICH DETERMINE THE S TATUS OF THE PORTFOLIO I.E. INVESTOR OR TRADER. THE LD.AO APPRAISED HIMSE LF WITH CBDT CIRCULAR BEARING NO.4/2007 DATED 15.6.2007. HE, THEREAFTER, MADE A DETAILED ANALYSIS OF THE TRANSACTIONS CONDUCTED BY THE ASSES SEE IN PURCHASE AND SALE OF SHARES. ACCORDING TO THE AO, THE HONBLE S UPREME COURT IN THE CASE OF CIT VS. H. HOLCK LARSON, 160 ITR 67 HAS DIS CUSSED THIS ISSUE IN DETAIL. ACCORDING TO HIM, THE HONBLE COURT HAS PR OPOUNDED SIX BROADER TESTS UNDER WHICH THE TRANSACTIONS OF PURCHASE AND SALE OF SHARES OUGHT TO BE LOOKED INTO. THEREAFTER, THE LD.AO HAS EXAMI NED THE TRANSACTIONS OF THE ASSESSEE UNDER THESE SIX TESTS PROPOUNDED BY THE HONBLE SUPREME COURT. HE FURTHER OBSERVED THAT ONE SMT.RU PAL NARESH PANCHAL AND SUGANDH ESTATE AND INVESTMENT PVT.LTD. HAD INDULGED IN AN IPO SCAM WHEREBY THESE PERSONS HAVE CORNERED SHARES RESERVED FOR RETAIL CUSTOMERS FOR IPOS. BY FRAUDULENT METHOD. T HE ASSESSEE- COMPANY HAS FINANCED MORE THAN RS.29 CRORES IN SUCH ACTIVITY, THEREFORE, THIS FINANCIAL ACTIVITY OF THE ASSESSEE IS SUFFICIENT TO CONSTRUE THAT INVESTMENT IN SHARES, WHICH WERE PURCHASED FRO M THESE TWO CONCERNS WAS WITH AN INTENTION OF BUSINESS. ACCORD INGLY, THE LD.AO HAS HELD THAT THE ASSESSEE WAS TRADING IN SHARES. HE D ECLINED THE CLAIM OF THE ASSESSEE FOR TAXING IT ON THE PROCEEDS RECEIVED FROM SALES OF SHARES UNDER THE HEAD SHORT TERM CAPITAL GAIN. THE LD.C IT(A) WHILE APPRECIATING THIS CONTROVERSY, HAS SUMMARIZED THE R EASONS ASSIGNED BY THE AO IN ARRIVING ON THE CONCLUSIONS THAT THE ASSE SSEE IS TO BE TREATED AS A TRADER IN THE SHARES. THESE REASONS READ AS U NDER: ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 4 6.1 THE APPELLANT HAD PROVIDED SUBMISSIONS DATED 26-8-2008 WHICH ARE PRODUCED IN PARA 2.3 OF THE ASSESSMENT OR DER. THE SAID SUBMISSIONS ARE NOT ACCEPTED BY THE A.O. IT IS STAT ED BY HIM THAT THE ISSUE ABOUT TAXING OF THE SURPLUS ARISING OUT O F TRANSACTIONS CONSIDERING IT AS TRADING TRANSACTIONS OR CAPITAL G AINS WAS CONSIDERED IN VARIOUS DECISIONS. HE HAS REFERRED TO THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. H. HOICK L ARSON 160 ITR 67 AND STATED THAT THE APPELLANTS CASE IS TO BE DIS CUSSED WITH REFERENCE TO THE TEST LAID DOWN IN THE SAID CASE. H E HAS THEREAFTER DISCUSSED THE ISSUE WITH REFERENCE TO SUCH TESTS WH ICH ARE SUMMARIZED AS UNDER: I) THE FIRST TEST DISCUSSED BY HIM IS ABOUT SUBJE CT MATTER OF REALIZATION AND IT IS STATED THAT THE PROPERTIES SU CH AS COMMODITIES OR MANUFACTURED ITEMS WHICH ARE NORMALL Y SUBJECT MATTER OF TRADING ARE ONLY EXCEPTIONALLY SU BJECT MATTER OF INVESTMENT. IT IS STATED THAT IN THE APPE LLANT'S CASE, THE MATTER OF REALIZATION IS SHARES. CONSIDER ING THE VOLUME INVOLVED IT CANNOT BE TREATED AS INVESTMENT. IT IS STATED BY HIM THAT THE SHARES BECAME COMMODITY FOR THE ASSESSEE. HE HAS REFERRED THE GUJARAT HIGH COURT DE CISION IN THE CASE OF H. MOHAMED & CO. VS. CIT 107 ITR 637. I T IS STATED THAT AS OBSERVED BY THE HIGH COURT THE STOCK IN TRADE IS SOMETHING IN WHICH THE TRADER DEALS WHEREAS THE CAPITAL ASSET IS SOMETHING WITH WHICH THE TRADER DEALS. HE HAS ALSO REFERRED TO THE DECISION OF THE SARDAR INDRASINGH & SONS, 241 ITR 415 AND STATED THAT THE PRINCIPLE APPLICABL E IN ALL SUCH CASES WAS WHETHER SALES WHICH PRODUCE SURPLUS ARE SO CONNECTED WITH CARRYING ON BUSINESS OF THE ASSESSEE AND IN SUCH CASE IT CAN BE SAID THAT SURPLUS WAS PROFITS A ND GAINS OF BUSINESS. II) THE SECOND CRITERIA REFERRED TO BY THE A.O. IS LENGTH OF HOLDING/OWNERSHIP. HE HAS STATED THAT THE ASSESSEE HAD SOLD SHARES WITHIN SHORT TIME. HE HAS GIVEN DETAILS OF PURCHASE AND SALE OF SHARES AND STATED THAT PERIOD OF HOLDING WAS SHORT.. III) NEXT TEST REFERRED TO BY THE A.O. IS THAT OF FREQUENCY AND NUMBER OF TRANSACTIONS AND IT IS STATED THAT ON THE BASIS OF DETAILS OF TRANSACTIONS THE SAME WERE FREQUENT A ND THAT IT WAS THE MAIN SOURCE OF INCOME WHICH WAS CAPITAL GAI N ON SALE OF SHARES. IT IS STATED THAT SIMILAR TREND WAS NOTICED IN EARLIER YEAR AND SUBSEQUENT YEAR. THE SHARES WERE A CQUIRED FROM THE PERSONS INVOLVED IN IPO SCAM. IT IS STATED THAT THE APPELLANT HAD ADVANCED FUNDS TO THE PERSONS INVOLVE D IN ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 5 IPO SCAM AND HAD ACQUIRED SHARES AGAINST SUCH ADVAN CE WITH A VIEW TO GET MAXIMUM NUMBER OF SHARES. ON THE BASIS OF THAT HE HAS STATED THAT THE APPELLANT WAS A TRAD ER IN SHARES. IV) IT IS STATED THAT AS PER FOURTH CRITERIA NO SUP PLEMENTARY WORK IN RESPECT OF SHARES IS FOUND TO HAVE BEEN CAR RIED OUT BY THE ASSESSEE. V) IT IS STATED THAT WHEN THE PRICES OF THE SHARES AND MUTUAL FUND REACHED TARGETED PRICE THE SAME WERE SOLD. THE RE WAS NO EMERGENCY TO HAVE READY MONEY. VI) THE NEXT CRITERIA STATED BY THE A.O. IS MO TIVE TO EARN MAXIMUM PROFIT AND NOT TO HAVE INVESTMENT. THE INTE NTION OF HOLDING THE SHARES FOR A LONGER PERIOD AND ENSUR ING THE BENEFIT OF OWNERSHIP ARE MISSING. VII) THE ASSESSING OFFICER HAS REFERRED TO THE CASE OF H. MOHAMED & CO., SUPRA, AND STATED THAT THE COMMODITY MAY IN THE CASE OF ONE ASSESSEE BE STOCK IN TRADE WHERE AS IN CASE OF OTHER IT MAY BE CAPITAL ASSET. IT IS STATED THAT IN THE CASE OF AN ASSESSEE WHO CARRY ON BUSINESS OF BUYING AND SELLING OF LAND THE LAND MAY BE STOCK IN TRADE AND IN THE CASE OF A PERSON WHO HAS INVESTED IN LAND HE GETS T HE INCOME THEREFROM WHICH IS FROM CAPITAL ASSET. THUS ACCORDING TO HIM THE CRITERIA IS WHETHER IT WAS STO CK IN TRADE OF THE ASSESSEE BUYING OR SELLING COMMODITY OR IT W AS A MERE INVESTMENT. IT IS STATED THAT APPLYING THE ABOVE TESTS TO THE C ASE OF THE APPELLANT THE SURPLUS ARISING ON SALE OF SHARES IS NOTHING BUT BUSINESS INCOME. HE HAS ALSO REFERRED TO THE CBDT I NSTRUCTION NO.1827 DATED 31-8-1989 AND CIRCULAR NO.4 OF 2007. WITH THIS DISCUSSION THE PROFIT OF RS.7,64,52,057/- ON SALE O F SHARES IS TAXED AS BUSINESS INCOME. 6. THE LD.CIT(A) HAS RE-APPRECIATED THE CONTENTIONS OF THE ASSESSEE, AND PARTLY ACCEPTED THAT THE ASSESSEE HAS MADE INVE STMENT IN THE SHARES. HOWEVER, TO THE EXTENT OF SHARES WERE PURC HASED BY THE ASSESSEE THROUGH SMT.RUPAL NARESH PANCHAL AND SUGAN DH ESTATE AND INVESTMENT PVT.LTD., THE LD.CIT(A) HAS UPHELD THE C ONCLUSIONS OF THE AO TO TREAT THE ASSESSEE AS TRADER. IN THIS WAY, THE LD.CIT(A) HAS ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 6 BIFURCATED THE TRANSACTIONS IN TWO PARTS. THE RECE IPTS RECEIVED ON SALE OF SHARES PURCHASED FROM SMT.RUPAL NARESH PANCHAL A ND SUGANDH ESTATE AND INVESTMENT PVT.LTD. AMOUNTING TO RS.4,16 ,74,781/- WAS DIRECTED TO BE EXAMINED UNDER THE HEAD PROFIT FROM BUSINESS. AS FAR AS THE BALANCE SURPLUS AMOUNT OF RS.3,47,77,276/- S HOWN BY THE ASSESSEE FROM SALE OF SHARES PURCHASED OTHER THAN F ROM SMT.RUPAL NARESH PANCHAL AND SUGANDH ESTATE AND INVESTMENT PV T.LTD., WAS ALLOWED TO BE TREATED AS INVESTMENT IN THE SHARES. THE REVENUE IS AGGRIEVED WITH REGARD TO THIS FINDING OF THE CIT(A) IN ITS APPEAL, WHEREAS, THE ASSESSEE IS AGGRIEVED WITH REGARD TO F IRST PART OF THE ORDER OF THE CIT(A). THE RELEVANT FINDING RECORDED BY TH E CIT(A) ON THIS ISSUE IS WORTH TO NOTE. IT READS AS UNDER: 8. IN THE LIGHT OF PRINCIPLES LAID DOWN BY HON'BLE ITAT, AHMEDABAD IN THE JUDGEMENT IN THE CASE OF M/S. HIPO LIN LTD., SUPRA, THE FACTS IN THE PRESENT CASE ARE REQUIRED T O BE EXAMINED. IN THE PRESENT CASE, THE APPELLANT HAS DERIVED SURP LUS OF RS.4,16,74,781/- IN THE SALES / PURCHASE OF SHARES OF THE COMPANIES, THE SHARES OF WHICH WERE ACQUIRED THROUG H RUPAL PANCHAL AND M/S. SUGANDH ESTATE AND INVESTMENT PVT LTD. DURING THE COURSE OF SEARCH IN THE CASE OF PERSONS INVOLVED IPO SCAM, IT WAS FOUND THAT THESE PERSONS HAVE CORNERED THE SHARES RESERVED FOR RETAIL CATEGORY FOR INVESTORS IN VARIO US IPOS BY FRAUDULENT METHODS. THE MODUS OPERANDI OF THESE GRO UPS HAS ALREADY BEEN DISCUSSED IN THE INSTANT APPELLATE ORD ER. THE APPELLANT COMPANY HAS FINANCED MORE THAN RS.29.00 C RORES IN SUCH ACTIVITIES. THEREFORE, THE POINT FOR DETERM INATION IS WHETHER SUCH A SYSTEMATIC ACTIVELY OF FINANCING, MA KING MULTIPLE APPLICATIONS IN THE IPO AND THEREBY CORNERING LARGE NUMBER OF SHARES RESERVED FOR RETAIL INVESTORS IN THE IPO, CO ULD BE .'TERMED AS BUSINESS OR ADVENTURE IN THE NATURE OF TRADE. I NCIDENTALLY, THE BUSINESS, AS DEFINED IN SECTION 2(13), 'INCLUDES AN Y TRADE, COMMERCE OR MANUFACTURE OR ANY ADVENTURE OR CONCERN IN THE NATURE OF TRADE, COMMERCE OR MANUFACTURE.'' THE WOR D 'ADVENTURE' IS DEFINED IN THE SHORTER OXFORD DICTIO NARY AS A PECUNIARY VENTURE .................. AND THE WORD P ECUNIARY VENTURE, IN ITS TURN, IS DEFINED AS 'A COMMERCIAL ENTERPRISE IN WHICH THERE IS CONSIDERABLE RISK OF LOSS AS WELL AS CHANCE OF GAIN .' ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 7 8.1 IN THE PRESENT CASE, THE APPELLANT COMPANY HAS FINANCED MORE THAN RS.29.00 CRORES TO RUPAL PANCHAL AND 'SUGANDH' GROUP WITH THE INTENTION THAT THESE GROUPS WOULD MAKE MULTIPLE APPLICATIONS IN THE IPOS OF CERTAIN COMPANIES. NO SECURITY OF AN Y KIND HAS BEEN TAKEN BY THE APPELLANT BEFORE ADVANCING SUCH A HUGE FUNDS TO 'PANCHAL' AND SUGANDH GROUPS. IN OTHER WORDS, THE APPELLANT COMPANY WAS AWARE THAT RUPAL PANCHAL AND 'SUGANDH' GROUP ARE ENGAGED IN MAKING LARGE NUMBER OF APPLICATIONS IN T HE IPO OF DIFFERENT COMPANIES IN FICTITIOUS NAMES WITH THE IN TENTION TO CORNER LARGE NUMBER OF SHARES RESERVED FOR RETAIL I NVESTORS. THE APPELLANT WAS ALSO AWARE THAT A PART OF SHARES SO A LLOTTED, SHALL ALSO BE SHARED BY THESE 'GROUPS' WITH THE APPELLANT . SUCH AN ACTIVITY HAS TO BE TERMED AS AN ORGANIZED AND SYSTE MATIC ACTIVITY, CARRIED ON CONTINUOUSLY WITH A VIEW TO EARN PROFITS . THE SOLE INTENTION AT THE TIME OF ACQUISITION OF SHARES THRO UGH SUCH MODE WAS TO IMMEDIATELY SELL THESE SHARES AT A PROFIT. S UCH AN ORGANIZED AND SYSTEMATIC ACTIVITY HAS TO BE CONSTRU ED AS ADVENTURE IN THE NATURE OF TRADE. IN SUCH SITUATION , THE SURPLUS OF RS.4,16,74,781/- HAS TO BE TAXED AS GAIN FROM THE A DVENTURE IN THE NATURE OF TRADE AND SAME HAS TO BE TAXED AS BUS INESS INCOME. THE ASSESSING OFFICER IS DIRECTED TO TAX THE GAIN O F RS.4,16,74,781/- AT THE RATES APPLICABLE IN THE CAS E OF BUSINESS. 8.2 AS REGARDS TO BALANCE SURPLUS AMOUNT OF RS.3,47 ,77,276/-, THIS SURPLUS HAS ARISEN AS THE APPELLANT COMPANY HA D INVESTED IN SHARES IT'S OWN FUNDS. THE COMPANY IS NOT HAVING AN Y OBJECT CLAUSE AS PER THE MEMORANDUM OF ASSOCIATION WHICH A UTHORIZES IT TRADING IN SHARES. HOWEVER, THE APPELLANT IS AUTHOR IZED TO INVEST FUNDS IN SHARES AND SECURITIES AND IMMOVABLE PROPER TIES AS A SUPPLEMENTARY OBJECT. IT IS ALSO NOTICED THAT INVES TMENT IN SHARES IS SHOWN BY THE APPELLANT IN THE ACCOUNT UNDER THE HEAD INVESTMENT AND NOT STOCK IN TRADE. SIMILAR INVESTME NT IN SHARE AND PURCHASE AND SALE OF SHARES WAS SHOWN IN THE EA RLIER YEAR AS CAPITAL GAIN AND WAS ACCEPTED BY THE ASSESSING OFFI CER WHILE PASSING THE ASSESSMENT ORDER ON 31-12-2007 U/S. 143 (3) OF THE I.T. ACT FOR THE ASSESSMENT YEAR 2005-06. THUS THE APPELLANT'S INTENTION OF MAKING INVESTMENT WAS CLEAR. THE APPEL LANT HAS NOT INCURRED ANY INTEREST ON BORROWINGS FOR SUCH INVEST MENT. THUS BORROWED FUNDS ARE NOT APPLIED. THERE IS NO MOTIVE OF TRADING IN SHARES ESTABLISHED BY THE ASSESSING OFFICER EXCEPT REFERRING TO THE VOLUME AND NUMBER OF TRANSACTIONS. I ALSO APPRECIAT E THE ARGUMENTS THAT THE A.O'S CONTENTION ABOUT PERIOD OF HOLDING ARE NOT CORRECT PARTICULARLY IN VIEW OF THE FACT THAT D EFINITION OF SHORT TERM CAPITAL ASSET IN RESPECT OF SHARES AND SECURIT IES ITSELF SPECIFICALLY PROVIDES THAT THE PERIOD OF HOLDING WO ULD BE LESS THAN ONE YEAR. THIS ITSELF SUGGEST THAT THE SHORT PERIOD OF HOLDING IS NOT ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 8 THE CRITERIA TO BE CONSIDERED AS TRADING TRANSACTIO NS. APART FROM THIS, THE SECTION 111A ALSO PROVIDES FOR SPECIFIC T REATMENT OF TAX IN RESPECT OF SHORT TERM CAPITAL ASSET, PARTICULARLY W HEN STT HAS BEEN PAID. IN APPELLANT'S CASE, THE TRANSACTIONS AR E SUBJECTED TO STT AND SUCH STT HAS NOT BEEN CLAIMED OR ALLOWED IN THE COMPUTATION OF INCOME. I ALSO APPRECIATE THE REFERE NCE MADE TO THE BOMBAY DECISION IN THE CASE OF GOPAL PUROHIT 29 SOT 117, WHICH SUPPORTS THE APPELLANT'S EXPLANATION. THE OTH ER JUDICIAL DECISIONS RELIED UPON BY THE A.R. ARE ALSO SUPPORTI NG ITS EXPLANATION. IN THE CIRCUMSTANCES, MERELY BECAUSE T HE APPELLANT HAS SOLD THE SHARES WHICH WERE PURCHASED IN THE BOO MING PERIOD AND IT EARNED SURPLUS BY WAY OF CAPITAL GAIN, THE A .O. WAS NOT JUSTIFIED IN HOLDING IT AS A BUSINESS PROFIT. HE IS DIRECTED TO TAX SUCH SURPLUS OF RS.3,47,77,276/- AS SHORT TERM CAPI TAL GAINS AS PER PROVISIONS OF SECTION 111A. 6. WHILE IMPUGNING THE ORDERS OF THE REVENUE AUTHOR ITIES BELOW, THE LD.COUNSEL FOR THE ASSESSEE TOOK US THROUGH THE REC ORD AND CONTENDED THAT IN THE MEMORANDUM OF ASSOCIATION, MAIN OBJECTS TO BE PURSUED BY THE ASSESSEE-COMPANY ON ITS INCORPORATION IS; TO CA RRY ON AND UNDERTAKE AS ITS PRINCIPAL BUSINESS THE BUSINESS OF FINANCE AND TO FINANCE LEASE OPERATIONS OF ALL KINDS, PURCHASING, SELLING, HIRING OR LETTING ON HIRE ALL KIND OF PLANTS AND MACHINERY AND EQUIPM ENT THAT THE COMPANY MAY THINK FIT AND TO ASSIST IN FINANCING OF ALL AND EVERY KIND AND DESCRIPTION OF HIRE PURCHASE OR DEFERRED PAYMEN T OF SIMILAR TRANSACTIONS AND TO SUBSIDIES, FINANCE OR ASSISTS I N SUBSIDING OR FINANCING THE SALE AND MAINTENANCE OF ANY GOODS, AR TICLES OR COMMODITIES OF ALL AND EVERY KIND AND DESCRIPTION U PON ANY TERMS WHATSOEVER AND TO PURCHASE ALL FORMS OF IMMOVABLE A ND MOVEABLE PROPERTY INCLUDING LANDS AND BUILDINGS, PLANT AND M ACHINERY, EQUIPMENTS, SHIPS, AIRCRAFT, AUTOMOBILES, COMPUTERS AND ALL CONSUMER, COMMERCIAL AND INDUSTRIAL ITEMS AND TO LEASE THEM I N ANY MANNER WHATSOEVER INCLUDING RELEASE THEREOF, REGARDLESS OF WHETHER THE PROPERTY PURCHASE AND LEASED BE NEW AND OR USED AND FROM INDIA OR FROM ANY PART OF THE WORLD. ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 9 8. IN ITS INCIDENTAL OR ANCILLARY OBJECTS, THE ASSE SSEE WAS TO INVEST IN SECURITIES AND SHARES. THE LD. COUNSEL FOR THE ASS ESSEE, WHILE TAKING US THROUGH THE CLAUSES FROM THE MEMORANDUM OF ASSOCIAT ION REPRODUCED IN THE STATEMENT OF FACTS EMPHASIZED THAT THE ASSESSEE WAS NEVER ALLOWED TO DO BUSINESS IN THE SHARES. IN THE PAST, IT HAS BEEN TREATED AS INVESTOR. AS AN INVESTOR, THE SHARES HAVE BEEN TRA NSFERRED IN THE NAME OF ASSESSEE. IT HAS PAID SECURITY TRANSACTION TAX ON SALE OF SHARES. IT HAS NOT USED BORROWED FUNDS. THE LD.CIT(A) HAS ACC EPTED THE CONTENTIONS OF THE ASSESSEE, THAT IT WAS AN INVESTO R IN THE PAST. IT HAS MADE INVESTMENT IN THE PRESENT YEAR. ONLY CIRCUMST ANCES, WHICH HAS BEEN CONSIDERED BY THE LD.CIT(A) FOR CREATING A DIS TINCTION BETWEEN ONE PORTFOLIO OF THE ASSESSEE IS THAT OF MODE OF ACQUIS ITION OF SHARES FROM SMT.RUPAL NARESH PANCHAL AND SUGANDH ESTATE AND INV ESTMENT PVT.LTD. ACCORDING TO THE LD.COUNSEL FOR THE ASSESSEE, SMT.R UPAL NARESH PANCHAL AND SUGANDH ESTATE AND INVESTMENT PVT.LTD. MIGHT HA VE INVOLVED IN AN IPO SCAM. BUT, HOW IT AFFECTS THE INVESTMENT OF TH E ASSESSEE ? BY THIS MODE, THE ASSESSEE MIGHT HAVE GOT MORE SHARES. BUT THE ATTEMPT TO GET SHARES SHOULD NOT BE CONSTRUED THAT IT WAS A BU SINESS. TEST IS NOT MODE OF ACQUISITION SHARES, BUT THE OBJECT OF INVES TMENT IS THE TEST. MODE OF ACQUISITION WILL NOT CHANGE THE NATURE OF A SSET ACQUIRED BY THE ASSESSEE. IN HIS NEXT FOLD OF SUBMISSION, HE SUBMI TTED THAT SMT.RUPAL NARESH PANCHAL AND SUGANDH ESTATE AND INVESTMENT PV T.LTD. HAD INVOLVED IN THE IPO SCAM. THE ASSESSEE HAS PURCHAS ED FIVE SCRIP VIZ. FCS SOFTWARE LTD., NANDAN EXIM, SHOPPERS STOP AND Y ES BANK. IF THE SIZE OF SHARES PURCHASED BY THE ASSESSEE THROUGH TH ESE TWO CONCERNS, OF THESE COMPANIES IS TAKEN INTO CONSIDERATION WITH THE SIZE OF PUBLIC ISSUE, THEN IT WOULD REVEAL THAT THE TOTAL ACQUISIT ION OF SHARES BY THE ASSESSEE IS LESS THAN 1%. HE POINTED OUT THAT IDFC HAS ISSUED 40.36 CRORES SHARES. THE ASSESSEE HAS PURCHASED ONLY 6,6 4,500 SHARES, WHICH IN TERMS OF PERCENTAGE COMES TO 0.16% OF THE TOTAL SHARES ISSUED IN THE PUBLIC. SIMILAR IS THE POSITIONS WITH REGAR D TO OTHER SCRIPS. HE ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 10 FURTHER CONTENDED THAT THE LD.CIT(A) OUGHT TO HAVE ADOPTED PRINCIPLE OF CONSISTENCY. THERE ARE NO SPECIFIC CHANGES IN THE FACTS FROM EARLIER YEARS TO THIS YEAR. FOR BUTTRESSING THIS CONTENTIO N, HE RELIED UPON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF , DIRECTOR OF INCOME TAX (EXEMPTIONS) VS. ESCORTS CARDIAC DISEASES HOSPI TAL SOCIETY, 300 ITR 75, RADHASOAMI SATSANG VS C.I.T, 193 ITR 321(SC ), TARABEN RAMANBHAI PATEL VS. ITO, 215 ITR 323 (GUJ). 9. ON THE OTHER HAND, THE LD.DR RELIED UPON THE ORD ER OF THE AO. HE TOOK US THROUGH PAGE NO.15 OF THE ASSESSMENT ORDER AND POINTED OUT THAT THERE WAS FREQUENCY IN TRANSACTIONS BY THE ASS ESSEE. HE ALSO POINTED OUT THAT THE ASSESSEE HAS PURCHASED SHARES FROM THE PERSONS WHO ARE INVOLVED IN IPO SCAM. SUCH PURCHASES WERE LARGE IN NUMBER WHICH HAS GIVEN RISE A SURPLUS OF RS.4,16,74,781/-. THIS ACTIVITY WAS CARRIED OUT SIMPLY KEEPING IN VIEW THE PROFIT MOTIV E IN AN ORGANIZED MANNER. THE SEBI HAS DEBARRED SMT.RUPAL NARESH PAN CHAL AND SUGANDH ESTATE AND INVESTMENT PVT.LTD. FROM CONDUCT ING THE SHARE TRADING BUSINESS AT NATIONAL STOCK EXCHANGE. HE PL ACED ON RECORD COPY OF A LETTER DATED 13.1.2006 WRITTEN BY NATIONAL STO CK EXCHANGE OF INDIA LTD. IT IS A LETTER TO THE MEMBERS WHEREBY THE MEM BERS WERE INFORMED THAT SEBI HAS DEBARRED SMT.RUPAL NARESH PANCHAL AND SUGANDH ESTATE AND INVESTMENT PVT.LTD. TO BUY AND SELL OR DEAL IN THE SECURITY MARKET DIRECTLY OR INDIRECT TILL FURTHER DIRECTIONS. THE ASSESSEE HAS BEEN PROHIBITED TO DEAL IN SHARES OF IDFC LTD. 10. BEFORE WE EMBARK UPON AN INQUIRY ON THE FACTS OF PRESENT CASE SO AS TO FIND OUT, WHETHER ASSESSEE IS TO BE TERMED AS INVOLVING IN THE TRADING OF SHARES OR IS TO BE TREATED AS A SIMPLICI TOR INVESTOR. WE WOULD LIKE TO REFER CERTAIN BROAD PRINCIPLE CULLED OUT BY ITAT LUCKNOW BENCH IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LTD. REPORT ED IN 120 TTJ 216. THESE TESTS READ AS UNDER:- ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 11 13. AFTER CONSIDERING ABOVE RULINGS WE CULL OUT FO LLOWING PRINCIPLES, WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTION(S) IN QUESTION ARE IN THE NATUR E OF TRADE OR ARE MERELY FOR INVESTMENT PURPOSES: (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE TI ME OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM). THIS CAN BE FOUN D OUT FROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TREATED STOCK-IN-TRADE OR INVESTMENT. WHETHER SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NONTRADING ASSET. (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREON? NORMALLY, MONEY IS BORROWED TO PU RCHASE GOODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN A N ASSET FOR RETAINING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASE AND DISP OSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTANTIAL TRANSACTION IN THAT ITEM, IF WOULD INDI CATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICAT IVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND S ALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADING O R INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT) . (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PROF IT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION ITS VALUE? FORMER WILL INDICATE INTENTION OF TRADES AND LATTER, AN INVESTM ENT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND A ND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMME RCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN TH E BALANCE SHEET? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDICATE THAT THEY ARE INVESTMENTS OR WHERE THEY AR E 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 MEM ORANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION? WHETHER FOR TR ADE 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 VERSE. ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 12 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, STOCKIN-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 ALONE W ILL NOT BE SUFFICIENT TO SAY THAT ASSESSEE WAS HOLDING THE SHA RES (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 THE A SSESSEE 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 OF 2007 OF 15TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIO S, ONE 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 T HE TWO PORTFOLIOS. 11. NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EF FECT OF SEVERAL FACTORS HAS TO BE SEEN. 11. THE HONBLE GUJARAT HIGH COURT HAD ALSO AN OCC ASION TO CONSIDER THIS ISSUE IN THE CASE OF COMMISSIONER OF INCOME TA X VS. RIVA SHARKAR A KOTHARI REPORTED IN 283 ITR 338. HONBLE COURT HAS MADE REFERENCE TO THE TEST LAID BY IT IN ITS EARLIER DECISION RENDERE D IN THE CASE OF PARI MANGALDAS GIRDHARDAS VS. CIT REPORTED IN 1977 CTR 6 47. THESE TESTS READ AS UNDER: AFTER ANALYZING VARIOUS DECISIONS OF THE APEX COUR T, THIS COURT HAS FORMULATED CERTAIN TESTS TO DETERMINE AS TO WHETHER AN ASSESSEE CAN BE SAID TO BE CARRYING ON BUSINESS. ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 13 (A) THE FIRST TEST IS WHETHER THE INITIAL ACQUISITI ON OF THE SUBJECT- MATTER OF TRANSACTION WAS WITH THE INTENTION OF DEA LING IN THE ITEM, OR WITH A VIEW TO FINDING AN INVESTMENT. IF T HE TRANSACTION, SINCE THE INCEPTION, APPEARS TO BE IMPRESSED WITH T HE CHARACTER OF A COMMERCIAL TRANSACTION ENTERED INTO WITH A VIEW T O EARN PROFIT, IT WOULD FURNISH A VALUABLE GUIDELINE. (B) THE SECOND TEST THAT IS OFTEN APPLIED IS AS TO WHY AND HOW AND FOR WHAT PURPOSE THE SALE WAS EFFECTED SUBSEQUENTLY . (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 THE ASSESSEE. HAS IT BEEN TREATE D AS STOCKIN- TRADE, OR HAS IT BEEN SHOWN IN THE BOOKS OF ACCOUNT AND BALANCE SHEET AS AN INVESTMENT. THIS INQUIRY, THOUGH RELEVA NT, IS NOT CONCLUSIVE. (D) THE FOURTH TEST IS AS TO HOW THE ASSESSEE HIMSE LF 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 THE TRAN SACTION AND WOULD BE A RELEVANT CIRCUMSTANCE TO BE CONSIDERED I N THE ABSENCE OF ANY SATISFACTORY EXPLANATION. (E) THE FIFTH TEST, NORMALLY APPLIED IN CASE 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 IMP ORTANT TEST, IS AS TO THE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTION OF PURCHASE AND SALE OF THE GOODS CONCERNED. IN A C ASE WHERE THERE IS REPETITION AND CONTINUITY, COUPLED WITH TH E MAGNITUDE OF THE TRANSACTION, BEARING REASONABLE PROPOSITION TO THE STRENGTH OF HOLDING THEN AN INFERENCE CAN READILY BE DRAWN THAT THE ACTIVITY IS IN THE NATURE OF BUSINESS. 12. IN THE LIGHT OF THE ABOVE TESTS, LET US EXAMINE THE FACTS OF THE PRESENT CASE. IT IS NOT DISPUTED THAT THE ASSESSEE HAS BORROWED FUNDS FOR MAKING INVESTMENT IN SHARES. IN OTHER WORDS, T HE ASSESSEE HAS ITS OWN FUND FOR PURCHASE OF SHARES. NO DOUBT, THERE I S A FREQUENCY OF TRANSACTIONS DURING THE YEAR, BUT, SUCH FREQUENCY W AS THERE IN THE PAST ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 14 ALSO WHEN THE ASSESSEE WAS TREATED AS INVESTOR BY T HE AO HIMSELF. IN THE PRESENT YEAR ALSO, THE CIT(A) HAS ACCEPTED THE CONTENTIONS OF THE ASSESSEE WITH REGARD TO THE INVESTMENT, WHICH WERE NOT MADE THROUGH SMT.RUPAL NARESH PANCHAL AND SUGANDH ESTATE AND INV ESTMENT PVT.LTD. IN THE ACCOUNTS, THE ASSESSEE HAS ACCOUNTED INVESTM ENT IN SHARES UNDER THE HEAD INVESTMENT AND NOT STOCK-IN-TRADE . SIMILARLY, AT THE END OF THE YEAR, IT HAS NOT VALUED THE SHARES IN TH E MANNER STOCK IS BEING VALUED I.E. AT THE COST OR MARKET PRICE WHICH EVER IS LOWER. IT HAS VALUED AT COST. FOR THE ASSTT.YEAR 2005-06, THE AO HAS ACCEPTED THE ASSESSEE AS INVESTOR AND ASSESSED THE SURPLUS ON SA LE OF SHARES AS CAPITAL GAIN. THE ASSESSEE HAD PAID SECURITY TRANS ACTION TAX. IN THE CASE OF SARNATH INFRASTRUCTURE PVT.LTD., 120 TTJ 21 6 AS WELL AS IN THE CASE OF GOPAL PUROHIT, 35 DTR 52 (BOM), THE TRIBUNA L HAS OBSERVED THAT IF ON PURCHASE OF SHARES THEY ARE TRANSFERRED IN TH E NAME OF ASSESSEE, THEN IT WOULD INDICATE THAT THE ASSESSEE HAS NO INT ENTION TO DEAL IN SHARES. IN THE PRESENT CASE ALSO, SHARES HAVE BEEN REGISTERED IN THE NAME OF ASSESSEE BEFORE SALE. IF THE TRANSACTIONS ARE SETTLED WITHOUT DELIVERY, IT CAN BE PRESUMED THAT IT WAS A BUSINESS ACTIVITY OF TRADING IN SHARES. THAT IS NOT FACTUM IN THE PRESENT CASE. T HEREFORE, IT EMERGES OUT THAT THERE IS NO MAJOR VARIATION IN THE FACTS A ND CIRCUMSTANCES, EXCEPT, ONE CONSIDERED BY THE LD.CIT(A) IN PARA 8 A ND 8.1 OF THE IMPUGNED ORDER EXTRACTED SUPRA. THE LD.CIT(A) HAS RECORDED A FINDING THAT THE ASSESSEE-COMPANY HAS FINANCED MORE THAN RS .29 CRORES TO SMT.RUPAL NARESH PANCHAL AND SUGANDH ESTATE AND INV ESTMENT PVT.LTD. GROUP WITH INTENTION THAT THIS GROUP WOULD MAKE MUL TIPLE APPLICATION IN THE IPOS. OF CERTAIN COMPANIES. THE SECOND REASON ASSIGNED BY THE CIT(A) IS THAT THE ASSESSEE DID NOT TAKE ANY KIND O F SECURITY FROM THESE PERSONS. WE CONFRONTED THE LD.DR TO SHOW ANY MATER IAL POSSESSED BY THE AO FOR BUTTRESSING THIS REASONING. WE FAILED T O FIND OUT THE BASIS OF RECORDING THIS FINDING. IF DURING THE INVESTIGATIO N CARRIED OUT BY THE SEBI OR THE INCOME TAX DEPARTMENT IT EMERGES OUT TH AT THERE IS A ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 15 CONSPIRACY BETWEEN THE ASSESSEE AND SMT.RUPAL NARES H PANCHAL AND SUGANDH ESTATE AND INVESTMENT PVT.LTD. FOR ACQUIRIN G THE SHARES IN THIS MANNER, THEN ONE CAN SAY THAT MODUS OPERANDI WAS OF A BUSINESS NATURE. DURING THE COURSE OF HEARING, WE HAVE CONF RONTED THE LD.DR TO SHOW US ANY EVIDENCE WHICH CAN ESTABLISH NEXUS BETW EEN THE ASSESSEE AND SMT.RUPAL NARESH PANCHAL AND SUGANDH ESTATE AND INVESTMENT PVT.LTD. FOR ACQUIRING THE SHARES OF FIVE COMPANIES WITH THIS MODUS OPERANDI . THE LD.COUNSEL FOR THE ASSESSEE HAS EMPHASIZED THAT MODE OF ACQUISITION WOULD NOT BE A FACTOR TO DECIDE THE NATURE OF TRANSACTION. UNDER THIS ALLEGED MODUS OPERANDI , AT THE MOST, THE ASSESSEE COULD PROCURE LARGE NUMBER OF SHARES, BUT CAN THAT WOULD CHANGE THE CHARACTER OF TRANSACTION FROM INVESTMENT TO TRADER. THERE IS NO EVIDENCE WITH THE REVENUE TO ESTABLISH THE NEXUS. THE MOMENT A CARTEL IS BEING FORMED BY NUMBER OF PERSONS TO CARRY OUT A N ACTIVITY IN AN ORGANIZED MANNER WITH PROFIT MOTIVE AND THE ACTIVI TY IS AKIN TO BUSINESS OR TRADE AS DEFINED IN SECTION 2(13) OF THE INCOME TAX ACT, THEN THE ARGUMENTS RAISED BY THE LD.COUNSEL FOR THE ASSESSEE WOULD NOT STAND. BUT THE AO HAS NEITHER RECORDED STATEMENT OF THE AS SESSEE NOR COLLECTED ANY MATERIAL WHICH CAN DEMONSTRATE THAT T HE ASSESSEE HAS COLLUDED WITH SMT.RUPAL NARESH PANCHAL AND SUGANDH ESTATE AND INVESTMENT PVT.LTD. IN A MANNER THAT WOULD INDICATE THAT SHARES WERE ACQUIRED FOR THE PURPOSE OF TRADE. SUCH NEXUS HAS NOT BEEN ESTABLISHED. THE OBSERVATION OF THE CIT(A) IS ONLY INFERENTIAL WITHOUT ANY CONCRETE MATERIAL IN THE POSSESSION OF THE AO. THEREFORE, IN OUR OPINION, THE ACTIVITY OF THE ASSESSEE BY VIRTUE OF MODE OF ACQUISITION OF SHARES CANNOT BE SEGREGATED INTO TWO PARTS. THE LD .CIT(A) HAS ERRED IN CREATING AN ARTIFICIAL DISTINCTION ONLY ON THE BASI S OF MODE OF ACQUISITION. WE ALLOW THE APPEAL OF THE ASSESSEE AND DIRECT THE AO TO TAX THE SURPLUS ON SALE OF SHARES UNDER THE HEAD SHORT TER M CAPITAL/LONG TERM CAPITAL INSTEAD OF BUSINESS INCOME TREATED BY HI M. CONSEQUENTLY, THE APPEAL OF THE REVENUE IS DISMISSED. ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 16 IT(SS)A.NO.3/AHD/2012 13. THE FACTS HAVE BEEN DISCUSSED IN THE QUANTUM AP PEAL. THE LD.AO HAS INITIATED PENALTY PROCEEDINGS UNDER SECTION 271 (1)(C) OF THE ACT. HE ISSUED A SHOW CAUSE NOTICE UNDER SECTION 274 R.W .S. SECTION 271(1)(C) OF THE ACT ON 29.8.2008. THE AO HAS OBSE RVED THAT THERE WERE THREE ADDITIONS MADE TO THE INCOME OF THE ASSE SSEE, VIZ. SHORT TERM CAPITAL GAIN OF RS.7,64,52,057/- ON SALE OF SH ARES SHOWN BY THE ASSESSEE HAS BEEN ASSESSED AS BUSINESS INCOME; (B) THE ASSESSEE DID NOT ADD A SUM OF RS.85,500/- WHICH REPRESENTED DIVI DEND STRIPPING AMOUNT, AND (C) AN ADDITION OF RS.39,974/- WAS BEIN G MADE BY THE AO ON THE GROUND THAT PENALTY ON THIS AMOUNT WAS IMPOS ED BY THE NATIONAL STOCK EXCHANGE ON THE APPELLANT AND IT WAS CONFIRME D BY THE FIRST APPELLATE AUTHORITY. 14. THE LD.CIT(A) HAS DELETED THE PENALTY BY OBSERV ING AS UNDER: 3. I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLA NT. IN SHORT, THE AO HAS LEVIED THE PENALTY IN RESPECT OF THE FOL LOWING THREE ADDITIONS: A. TREATMENT OF INCOME TO THE EXTENT OF RS.416 ,74,781 OUT OF RS.764, 52,057 ON PURCHASE AND SALE OF SHARES AS BU SINESS INCOME AS AGAINST THE CAPITAL GAINS CLAIMED BY THE APPELLANT IN THE RETURN OF INCOME. B. DIVIDEND STRIPPING OF RS. 85,500 UNDER SECT ION 94(7) OF THE INCOME-TAX ACT. C. PENALTY OF RS. 39,974 LEVIED BY THE NATIO NAL STOCK EXCHANGE. 4. AS REGARDS THE PENALTY ON THE TREATMENT OF INCO ME OF RS.416,74,781 ON PURCHASE AND SALE OF SHARES AS BUS INESS INCOME AS AGAINST THE CAPITAL GAINS SHOWN, BY THE APPELLAN T, I AGREE WITH THE CONTENTION OF THE APPELLANT THAT WHETHER THE IN COME IS ASSESSABLE UNDER THE HEAD OF CAPITAL GAINS OR INCOM E FROM BUSINESS AND PROFESSION IS A DEBATABLE ISSUE. MANY HIGH COURTS AND TRIBUNALS HAVE HELD DIFFERENT VIEWS IN RESPECT OF THE TREATMENT ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 17 OF THE INCOME ARISING FROM, SALE OF SHARES. IN FACT , IN THE PRESENT CASE, THE APPELLANT HAS SHOWN SHORT TERM CAPITAL GA IN OF RS. 764,52,057. THIS INCOME WAS ASSESSED BY THE AO UNDE R THE HEAD OF BUSINESS INCOME. THE CIT (APPEAL) AFTER FOLLOWIN G THE DECISION OF ITAT, AHMEDABAD IN THE CASE OF SUGAMCHAND, HELD THAT IF THE SHARES ARE SOLD WITHIN 30 DAYS FROM THE DATE OF ITS PURCHASE, THEN THE SAME SHOULD BE TAXED UNDER THE HEAD OF BUSINESS INCOME AND IF THE SHARES ARE SOLD BEYOND 30 DAYS FROM THE DATE OF ITS PURCHASE, THEN IT IS TO BE TAXED UNDER THE HEAD OF CAPITAL GAINS. THE CIT (APPEAL) ALSO HELD THAT THE SHARES PURCHASE D AND SOLD TO RUPAL PANCHAL WOULD ALSO AMOUNT TO BUSINESS INCOME. WHILE GIVING THE EFFECT TO THE ORDER OF CIT(A) THE AO COM PUTED THE INCOME UNDER THE BUSINESS HEAD AT RS.416,74,781/-. IN MY CONSIDERED VIEW, THE ISSUE REGARDING THE TREATMENT OF INCOME FROM SALE OF SHARES IS A HIGHLY DEBATABLE ISSUE. I N SOME CASES, THE INCOME IS HELD TO BE-ASSESSABLE UNDER THE HEAD OF BUSINESS, INCOME WHEREAS IN SOME OTHER CASES IT IS ASSESSABLE UNDER THE HEAD OF CAPITAL GAINS. THEREFORE, ON SUCH DEBATABLE ISSUES, PENALTY UNDER SECTION 271(L)(C) CANNOT BE LEVIED, I THEREFORE DIRECT THE AO TO DELETE THE PENALTY ON THE TREATMEN T OF THE INCOME FROM THE PURCHASE AND SALE OF SHARES. 15. AS FAR AS FIRST ISSUE IS CONCERNED, WE HAVE ALR EADY UPHELD THAT SURPLUS ON SALE OF SHARES IS TO BE ASSESSED AS SHOR T TERM CAPITAL GAIN. THEREFORE, THERE CANNOT BE ANY QUESTION TO VISIT TH E ASSESSEE WITH PENALTY. APART FROM ABOVE, WE ARE OF THE VIEW THAT THE ASSESSEE HAS DISCLOSED ALL THE FACTS FULLY AND COMPLETELY. THER E IS NO CHANGE IN THE ULTIMATE TAXABLE INCOME OF THE ASSESSEE. THE AO HA S ONLY CHANGED THE HEAD OF INCOME, I.E. THE ASSESSEE HAS CLAIMED THE S URPLUS ON SALE OF SHARES TO BE ASSESSED UNDER THE HEAD OF CAPITAL GAI N. THE AO HAS ASSESSED IT UNDER THE HEAD BUSINESS INCOME. THER E CANNOT BE ANY ALLEGATION AGAINST THE ASSESSEE FOR CONCEALMENT OF INCOME OR FURNISHING INACCURATE PARTICULARS TO THIS EXTENT. THUS, OTHER WISE ALSO NO PENALTY ON THE FIRST IS ISSUE IS IMPOSABLE. 16. AS FAR AS RESTS OF TWO AMOUNTS ARE CONCERNED, W E FIND THAT LD.CIT(A) HAS ASSIGNED A PLAUSIBLE REASONING FOR DE LETING THE PENALTY. THE ASSESSEE HAD MADE HUGE INVESTMENT IN SHARES. S OME OF THE SHARES MIGHT HAVE BEEN SOLD, AND IT FAILED TO KEEP TRACK T HAT DIVIDEND MIGHT ITA NO.3326 AND 3440/AHD/2009 WITH 2 OTHERS 18 HAVE BEEN DECLARED. THE CIT(A) HAS RIGHTLY OBSERVE D THAT THERE WAS A BONA FIDE HUMAN ERROR IN NON-INCLUSION OF DIVIDEND STRIPPING AMOUNTS. AS FAR AS OTHER GROUND IS CONCERNED, IT IS ALWAYS A DEBATABLE ISSUE WHETHER LEVY IMPOSED BY THE NATIONAL STOCK EXCHANGE WAS PENALTY IN NATURE OR COMPENSATORY IN NATURE. IT WAS DISALLOWE D AND NOT DISPUTED BY THE ASSESSEE, BUT THAT WOULD NOT GOAD THE AO TO VISIT THE ASSESSEE WITH PENALTY. WE DO NOT FIND ANY MERIT IN THIS APP EAL OF THE REVENUE. IT IS REJECTED. 17. AS FAR AS CO IS CONCERNED, THE ASSESSEE DID NOT PRESS THE CO, HENCE, DISMISSED. 18. IN THE RESULT, APPEAL OF THE ASSESSEE I.E. ITA NO.3326/AHD/2009 IS ALLOWED. REST OF THE APPEALS AND CO ARE DISMISSED. ORDER PRONOUNCED IN THE COURT ON 17 TH MARCH, 2015 AT AHMEDABAD. SD/- SD/- (MANISH BORAD) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER