Sagar Drugs & Pharmaceuticals Pvt. Ltd., Ahmedabad V. The Jt.CIT.,Range-8, Ahmedabad

ITA 914/AHD/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 0312 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 28-07-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 25-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIBHA BHALLA
• Keywords: Capital asset; Gift; Business income; Earning of tax free income; Question of law; Wrong claim; Sham transactions; Revised return
• Section: 143(3); 142(1); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE SHRI S. S. GODARA, JM, & SHRI MANISH BORA D, AM. ITA NO.914/AHD/2012 ASST. YEAR: 2007-08 SAGAR DRUGS & PHARMACEUTICALS P. LTD., SAGAR, OPP. KAMDHENU COMPLEX, NR. SAHAJANAND COLLEGE, AMBAWADI, AHMEDABAD. VS. JT. CIT, RANGE-8, AHMEDABAD. APPELLANT RESPONDENT PAN AADCS 9311E AND ITA NO.2631/AHD/2013 ASST. YEAR: 2006-07 DCIT, CIRCLE-8, AHMEDABAD. VS. SAGAR DRUGS & PHARMACEUTICALS P. LTD., SAGAR, OPP. KAMDHENU COMPLEX, NR. SAHAJANAND COLLEGE, AMBAWADI, AHMEDABAD. APPELLANT RESPONDENT APPELLANT BY SHRI S. N. SOPARKAR, AR RESPONDENT BY SMT. VIBHA BHALLA, CIT, DR & SHRI PRASOON KABRA, SR.DR DATE OF HEARING: 28/7/2016 DATE OF PRONOUNCEMENT: 13/10/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 2 THESE TWO APPEALS BY THE ASSESSEE AND REVENUE FOR ASST.YEAR 2007-08 AND ASST. YEAR 2006-07 ARE DIRECTED AGAINST THE ORDERS OF LD. CIT(A)-XIV, DATED 16.03.2012 AND 19.8.2013 VIDE APP EAL NOS.CIT(A)- XIV/JTCIT.R.8/306/2009-10 AND APPEAL NO.CIT(A)-XIV/ ACIT(OSD) CIR.8/66/2011-12 WHICH WERE PASSED AGAINST THE ORDE RS U/S 143(3) OF THE IT ACT, 1961 (IN SHORT THE ACT) FRAMED ON 15/12 /2009 BY JT.CIT, RANGE-8 AND ORDER U/S 143(3) R.W.S. 147 OF THE ACT FRAMED BY ACIT(OSD), CIR.8, AHMEDABAD RESPECTIVELY. SINCE THE SE APPEALS RELATE TO THE SAME ASSESSEE AND THE ISSUES RAISED A RE COMMON THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY TH IS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE TAKE UP ASSESSEES APPEAL IN.ITA 914/AH D/2012 WHEREIN ASSESSEE HAS RAISED FOLLOWING GROUNDS :- 3. BRIEFLY STATED FACTS OF THE CASE ARE THAT ASSESS EE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF DYES INTERMEDIATES & FINE CHEMICALS. RETURN OF INCOME WA S FILED ON 31.10.2007 DECLARING TOTAL INCOME AT RS.2,91,58,060 /- FOLLOWED BY REVISED RETURN ON 28.09.2008 DECLARING TOTAL INCOME OF RS.2,90,56,185/-. THE CASE WAS SELECTED FOR SCRUTIN Y ASSESSMENT AND NOTICE U/S 143(2) OF THE ACT FOLLOWED BY NOTICE U/S 142(1) OF THE ACT ALONG WITH DETAILED QUESTIONNAIRE AND WAS DULY SERV ED ON THE ASSESSEE. NECESSARY DETAILS WERE FURNISHED AS AND W HEN CALLED FOR. THE LD. AO ASSESSED THE INCOME AT RS.3,12,43,540/- AFTER MAKING ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 3 DISALLOWANCE OF RS.21,86,013/- U/S 14A OF THE ACT, AND DISALLOWANCE OF RS.1342/- U/S 94(7) OF THE ACT. 4. AGGRIEVED ASSESSEE IS NOW IN APPEAL BEFORE THE T RIBUNAL. 5. NOW WE TAKE UP GROUND NO.1 WHICH READS AS UNDER :- (1) THE LEARNED COMMISSIONER (A) ERRED IN CONFIRMIN G THE DISALLOWANCE 1/10 TH OF AVERAGE INVESTMENT OF RS. 17,86,88,108/- AS ADMINIS TRATIVE EXPENDITURE U/S 14A OF THE INCOME TAX ACT, 1961. 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS LD. AO OBSERVED THAT ASSESSEE IS EARNED DIVIDEND INCOME OF RS.38,03 ,741/- AND TOTAL INVESTMENT IN SHARES AND MUTUAL FUND AT THE END OF THE YEAR STOOD AT RS.18,22,81,903/- AND INTEREST EXPENDITURE OF RS.2 6,04,774/- WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT. LD. AO ACCO RDINGLY APPLIED RULE 8D OF THE IT RULES R.W.S. 14A OF THE ACT AND CALCUL ATED THE DISALLOWANCE AT RS.21,86,013/- WHICH COMPRISED OF D IRECT EXPENDITURE DISALLOWED BY ASSESSEE AT RS.5,28,123/-, DISALLOWAN CE OF INTEREST EXPENDITURE OF RS.12,92,573/- AND 0.5% OF AVERAGE I NVESTMENT AT RS.8,93,441/-. 7. ON APPEAL BEFORE THE FIRST APPELLATE AUTHORITY D ISALLOWANCE WAS RESTRICTED TO 0.1% OF THE TOTAL AVERAGE INVESTMENT AT RS.17,86,88,108/-. 8. NOW THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNA L. ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 4 9. LD. AR SUBMITTED THAT ASSESSEE HAS SUFFICIENT IN TEREST FREE RESERVE IN THE FORM OF SHARE CAPITAL, RESERVE SURPL US WHICH WERE SUFFICIENT TO COVER THE TOTAL INVESTMENTS IN SHARES AND MUTUAL FUNDS. THERE ARE NO BORROWED FUNDS USED FOR THE PURPOSE OF INVESTMENT. MAJORITY OF TRANSACTIONS ARE IN RELATION TO PURCHAS E AND SALE OF MUTUAL FUNDS FOR WHICH ASSESSEE SUO MOTO DISALLOWED RS.5,2 8,123/- WHICH WAS SUFFICIENT TO COVER THE COST INCURRED FOR MANAG ING THE INVESTMENTS. LD. AR REFERRED AND RELIED ON THE DECI SION OF THE CO- ORDINATE BENCH IN ASSESSEES OWN CASE FOR ASST. YEA R 2006-07 VIDE ITA NO.3179/AHD/2009. 10. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND ALSO GONE THROUGH THE DECISION OF THE CO-ORDINATE BENCH . THROUGH THIS GROUND THE ASSESSEE HAS CHALLE NGED THE ORDER OF LD. CIT(A) SUSTAINING THE DISALLOWANCE U/S 14A O F THE ACT OF RS.178688/- AS AGAINST RS.2186,013/- DISALLOWED BY LD. ASSESSING OFFICER U/S 14A OF THE ACT. 12. WE FIND THAT LD. CIT(A) HAS SUSTAINED THE DISAL LOWANCE U/S 14A OF THE ACT BY OBSERVING AS BELOW :- 3.3 DECISION ; I HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER AND T HE WRITTEN SUBMISSION FILED BY THE ID.AR OF THE APPELLANT. THE A. O. HAS MADE THE DISALLOWANCE U/S. 14A BY APPLYING THE PROVISIONS OF RULE 8D. THE APPELLANT HAS SUBMITTED THAT THE PROVISIONS OF RULE 8D ARE NOT APPLICABLE FOR TH E CURRENT ASSESSMENT YEAR AND ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 5 ARE APPLICABLE FROM 01/04/2008 I.E. A. Y. 2008-09. THE SUBMISSION OF THE APPELLANT IS* ACCEPTED. IT HAS NOW BEEN JUDICIALLY SETTLED THAT PROVISIONS OF RULE 8 D ARE APPLICABLE FROM A. Y. 2008-09 (GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT) [328 ITR 81] AND ACCORDINGLY THE DISALLOWANCE MADE BY THE A. O. BY IS DIRECTED TO BE DELETED. HOWEVER, IT IS SEEN THAT THE APPELLANT HAS MADE HUG E INVESTMENT IN EQUITIES AND SHARES AND HAS ALSO SHOWN THE CONSIDERABLE INCOME F ROM DIVIDEND. THE APPELLANT HAS NOT MADE ANY DISALLOWANCE U/S. 14A. I T IS ALSO OBSERVED THAT THE A. O. HAS GIVEN A FINDING IN THE ASSESSMENT ORDER THAT NO SEPARATE ACCOUNT HAS BEEN MAINTAINED BY THE APPELLANT FOR EARNING OF EXE MPT INCOME AND THE AVAILABILITY OF FUNDS FOR MAKING THE INVESTMENT IN PURCHASE OF TAX EXEMPT ASSETS IS ALSO NOT CLEAR. ACCORDINGLY, THE APPELLANT WAS G IVEN A SHOW CAUSE AS TO WHY DISALLOWANCE U/S. 14A BE NOT MADE. AFTER TAKING INT O ACCOUNT THE INTEREST EXPENSES INCURRED BY THE APPELLANT AND OTHER ADMINI STRATIVE EXPENSES INCURRED BY THE APPELLANT FOR EARNING THE EXEMPT INCOME. THE APPELLANT HAS SUBMITTED IN THE REPLY THAT THE I NVESTMENT IN TAX EXEMPT ASSETS HAVE BEEN MADE BY TAX FREE FUNDS AND BORROWED FUNDS HAVE NOT BEEN INVESTED FOR INVESTMENT IN SHARES AND UNITS. THE INTEREST EX PENSES THAT HAVE BEEN INCURRED BY THE APPELLANT ARE FOR SPECIFIC PURPOSE AND HAS NOTHING TO DO WITH THE INVESTMENT IN SHARES AND UNITS. THE APPELLANT HAS A LSO SUBMITTED THAT THE POSITION OF RESERVES AND SURPLUS, OWNER FUNDS, INVE STMENT, LOANS TAKEN AND LOANS AND ADVANCES FROM THE YEAR 2003-04 CLEARLY SHOW THA T THE APPELLANT HAD SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH HIM F OR MAKING THE INVESTMENT IN SHARES AND UNITS. THE POSITION OF FUNDS GIVEN BY TH E APPELLANT IS REPRODUCED HEREUNDER: A.Y.2007-08 A. Y. SHARE CAPITAL RESERVE & SURPLUS OWNERS FUND INVESTMENT LOANS TAKEN LOANS & ADVANCES GROSS INTEREST PAID INTEREST RECEIVED 03-04 25 2428.23 2453.23 1033.13 78.67 762.64 2.17 5.06 04-05 25 2740.83 2765.83 1500.71 47.69 1028.95 3.08 15.21 05-06 25 2932.27 2957.27 1790.77 389.92 1034.62 13.94 12.85 06-07 25 3093.74 3118.74 1822.82 432.12 1127.93 25.85 12.76 07-08 25 3371.67 3396.67 1 750.94 254.26 1125.38 26.05 7..45 FROM THE ABOVE DATA, IT IS CLEAR THAT THE APPELLANT HAD SUFFICIENT INTEREST FREE FUNDS FOR MAKING THE INVESTMENT IN THE EQUITIES AND UNITS. IT IS ALSO OBSERVED THAT THE INTEREST PAYMENT THAT HAVE BEEN MADE BY TH E APPELLANT DURING THE YEAR ARE FOR SPECIFIC PURPOSE AND NO GENERAL PURPOS E LOAN HAS BEEN TAKEN BY ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 6 THE APPELLANT. IT IS FURTHER OBSERVED THAT THERE IS A REDUCTION OF BORROWED FUNDS AS COMPARED TO EARLIER YEARS AND THE AVAILABILITY O F RESERVES AND SURPLUS AND OWNERS FUND HAVE INCREASED IN THE PRESENT ASSESSMEN T YEAR. SINCE THE INTEREST FREE FUNDS AVAILABLE TO THE APPELLANT ARE MORE THAN THE INVESTMENT IT CAN BE PRESUMED THAT THE INVESTMENT WERE FROM THE I NTEREST FREE FUNDS AVAILABLE [RELIANCE UTILITIES AND POWER LIMITED [31 3 ITR 340] (MUMBAI)]. IN VIEW OF THESE FACTS, NO DISALLOWANCE OUT OF THE INT EREST PAYMENT MADE BY THE APPELLANT CAN BE MADE U/S. 14A. HOWEVER, IT IS OBSERVED THAT THE APPELLANT HAS SHOW N RECEIPT OF DIVIDEND AMOUNTING TO RS.38,03,741/- DURING THE YEAR. THE AP PELLANT HAS HIMSELF DISALLOWED FUND MANAGEMENT EXPENSES AMOUNTING TO RS .5,28,123/- IN THE RETURN OF INCOME. THE APPELLANT HAS CLAIMED THAT AP ART FROM THE FUND MANAGEMENT EXPENSES, NO OTHER ADMINISTRATIVE EXPENS ES HAVE BEEN INCURRED BY IT FOR EARNING THE EXEMPT INCOME. THE CLAIM OF T HE APPELLANT IS NOT ACCEPTABLE AS IT IS NOT POSSIBLE THAT EARNING OF SU CH HUGE DIVIDEND INCOME IS WITHOUT ANY INTERVENTION BY THE DIRECTORS OF THE CO MPANY OR OTHER EMPLOYEES OF THE COMPANY. THE FUND MANAGERS MUST HAVE BEEN IN TERACTING WITH THE DIRECTORS AND OTHER EMPLOYEES OF THE COMPANY FOR MA KING THE INVESTMENT DECISIONS. IT IS SEEN THAT THE FREQUENCY OF SALE AN D PURCHASE OF SHARES AND UNITS IS VERY HIGH AND THIS MUST HAVE REQUIRED SUFFICIENT ADMINISTRATIVE INPUT FROM THE COMPANY'S ADMINISTRATION. THEREFORE, IT CA NNOT BE SAID THAT NO OTHER ADMINISTRATIVE EXPENDITURE HAS BEEN INCURRED IN EAR NING THE EXEMPT INCOME FROM SHARES AND UNITS. THE APPELLANT HAS MADE AN AVERAGE INVESTMENT OF RS. 17, 86,88,108/- IN SHARES AND UNITS WHICH HAVE GIVEN EX EMPT INCOME DURING THE YEAR, IT WOULD MEET THE ENDS OF JUSTICE, IF THE DISALLOWA NCE U/S. 14A ON ACCOUNT OF ADMINISTRATIVE EXPENDITURE INCURRED BY THE COMPANY IN EARNING EXEMPT INCOME IS TAKEN AS 1/10% OF THE AVERAGE INVESTMENT. THE RATE OF 1/10% HAS BEEN TAKEN AFTER CONSIDERING THE FACT THAT THE APPELLANT HAS T AKEN HELP OF FUND MANAGER FOR SHARE MARKET ACTIVITIES AND, THEREFORE, THE TIME AN D ADMINISTRATIVE REQUIREMENT ON BEHALF OF THE COMPANY WOULD BE CONSIDERABLY LESS. T HE A. O. IS ACCORDINGLY DIRECTED TO WORK OUT THE DISALLOWANCE U/S. 14A OF T HE ACT. THE GROUND OF APPEAL IS ACCORDINGLY PARTLY ALLOWED. 13. WE FURTHER OBSERVE THAT THE CO-ORDINATE BENCH H AS DEALT SIMILAR ISSUE OF DISALLOWANCE U/S 14A OF THE ACT FOR ASST. YEAR 2006-07 VIDE ITA NO.3179/AHD/2009 AND HAS DELETED THE DISALLOWAN CE BY OBSERVING AS UNDER :- ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 7 6. WE HAVE HEARD THE RIVAL PARTIES. IN OUR CONSIDE RED VIEW THE POSITION OF LAW IN RELATION TO DISALLOWANCE OF ADMINISTRATIVE EXPENSES IS NOW CLEAR. SUCH DISALLOWANCE CANNOT BE MADE PRIOR TO ASST. YEAR 2007-08 UNLESS T HERE IS A DIRECT NEXUS ESTABLISHED BY THE AO. IT HAS BEEN HELD THAT RULE 8D. IS NOT R ETROSPECTIVE AND WOULD BE APPLICABLE FOR AND FROM ASST. YEAR 2007-08 AND, THE REFORE, IT CANNOT BE APPLIED IN ASST. YEAR 2006-07 WHICH J IS BEFORE US AND, THERE FORE, CALCULATION AS PER RULE 8D CANNOT BE DONE FOR DISALLOWANCE OF ADMINISTRATIVE E XPENSES, UNLESS OF COURSE A DIRECT NEXUS IS ESTABLISHED WHICH HAS NOT BEEN DONE IN THE PRESENT CASE. ACCORDINGLY, THE ADDITION MADE BY THE AO AND ENHANCED BY THE ID. CIT (A) IS DELETED AND THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 14. WE FURTHER FIND THAT IN THE TOTAL DISALLOWANCE WORKED OUT U/S 14A OF THE ACT BY THE ASSESSING OFFICER WITH THE APPLIC ATION OF RULE 8D OF THE IT RULES AT RS.27,14,136/-, A SUM OF RS.5,28,12 3/- HAS ALREADY BEEN OFFERED TO TAX BY ASSESSEE, INTEREST DISALLOWA NCE OF RS.12,92,573/- HAS BEEN DELETED BY THE FIRST APPELL ATE AUTHORITY AND 0.5% OF AVERAGE INVESTMENT OF RS.17.87 CRORES CALCU LATED AT RS.8,93,441/- HAS BEEN SUSTAINED TO RS.178689/-. 15. WE ARE THEREFORE, OF THE VIEW THAT LOOKING TO T HE QUANTUM OF INVESTMENT AND THE REGULAR TRANSACTION ROUND THE YE AR WHICH INCLUDES SALE OF MUTUAL FUNDS AND SHARES, DIVIDEND AND PROFI T FROM SALE OF SHARES/MUTUAL FUNDS, APART FROM RS.5,28,123/- INCUR RED BY ASSESSEE TOWARDS MANAGING MUTUAL FUNDS, A FURTHER DISALLOWAN CE OF RS.178689/- BY LD. CIT(A) TOWARDS ADMINISTRATIVE CO ST OF MANAGING THE INVESTMENT IN EQUITY SHARES IS JUSTIFIED. WE TH EREFORE, FIND NO REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) AN D UPHOLD THE SAME AND ACCORDINGLY THIS GROUND OF THE ASSESSEE IS DISM ISSED. 16. NOW WE TAKE GROUND NO.2 WHICH READS AS UNDER :- (2) THE LEARNED COMMISSIONER (A) ERRED IN FACT AND IN LAW IN TREATING PROFIT OF RS. 4,30,56,128/-EARNED BY APPELLANT THROUGH PURCHA SE AND SALE OF SHARES AND ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 8 UNITS OF MUTUAL FUNDS AS INCOME FROM BUSINESS AGAIN ST THE CAPITAL GAIN ASSESSED BY THE ASSESSING OFFICER. THE LEARNED CIT (A) HAD NO JURISDICTION TO ENHANCE THE INCOME OF THE ASSESSEE IN THIS MANNER. 17. LD. CIT(A) IN THE COURSE OF ADJUDICATION OF ASS ESSEES APPEAL CAME ACROSS FOLLOWING INCOME DISCLOSED BY ASSESSEE IN ITS INCOME- TAX RETURN RELATING TO PURCHASE AND SALE OF SHARES AND MUTUAL FUNDS AND FUTURE & OPTION :- SI. NO. NATURE SHARES / MUTUAL FUND CAPITAL GAIN (RS.) 1 SHORT TERM SHARES 48,56,402/- 2 LONG TERM SHARES 23,42,897/- 3 SHORT TERM MUTUAL FUND 33,11,806/- 4 SHORT TERM MUTUAL FUND 2,64,91,241/- 5 LONG TERM MUTUAL FUND 60,53,782/- 6 LOSS ON SHARES FUTURES FUTURES & OPTIONS (-) 3,59,409/- TOTAL 4,26,96719/- 18. LD. CIT(A) ON HIS CLOSE EXAMINATION FOUND THAT ASSESSEE IS INCURRING LOSSES IN THE MAIN BUSINESS ACTIVITIES AN D HAS PUT IN MAJORITY OF ITS FUNDS IN INVESTMENT IN SHARES AND MUTUAL FUN DS AND THE TRANSACTIONS ARE IN LARGE NUMBER BEING ENTERED UPON ROUND THE YEAR WHICH SEEMS TO BE CARRIED ON AS REGULAR BUSINESS AC TIVITIES. ACCORDINGLY LD. CIT(A) ENHANCED THE ADDITION BY TRE ATING THE SHORT TERM AND LONG TERM CAPITAL GAIN OF RS.43056128/- AS BUSINESS INCOME AS AGAINST LONG TERM AND SHORT TERM CAPITAL GAIN OF FERED BY THE ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 9 ASSESSEE IN THE RETURN OF INCOME. LD. CIT(A) OBSERV ED FOLLOWING IN ORDER TO ENHANCE THE ADDITION :- IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LTD. VS. ACIT (2010) [124 ITD 71, LUCK], THE HON'BLE BENCH HAS LAID DOWN 11 CRITERIA' S WHICH ARE REPRODUCED AS UNDER: 'L. WHAT IS THE INTENTION OF THE ASSESSES AT THE TI ME OF PURCHASE OF THE SHARES FOR ANY OTHER ITEM)? THIS CAN BE FOUND OUT FROM THE TREATMENT THAT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT I S TREATED AS STOCK-IN-TRADE OR INVESTMENT. WHETHER IT IS SHOWN IN OPENING/CLOSI NG STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET. 2.WHETHER THE ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAI D INTEREST THEREON? NORMALLY MONEY IS BORROWED TO PURCHASE GOO DS FOR THE PURPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINI NG. 3.WHAF IS THE FREQUENCY OF SUCH PURCHASES AND DISPOSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTA NTIAL TRANSACTIONS OF THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT P ARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY RATIO BETWEEN THE PUR CHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADING O R INVESTING, THIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREA S LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). 4. WHETHER PURCHASE AND SALE ARE FOR REALIZING PROF IT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN VALUE? FORMER WILL IN DICATE AN INTENTION OF TRADE AND LATTER 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 INGREDIENT OF TRA DE. 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 REAL IZABLE VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. 6.HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEMOR ANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION? WHETHER FOR TR ADE OR FOR INVESTMENT. IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE S EPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY AND VICE VERSA. 7.LT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDING IS . FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE H AS KEPT IN THE RECORDS OR ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 10 OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE AS SESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PA RTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ONUS WOULD SHIFT TO THE REVENUE TO PROVE THAT THE APPARENT IS NOT REAL. 8JHE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES FOR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE BE NOT SUFFICIENT TO SAY THAT T HE ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR INVESTMENT. 9.ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITES FOR DEALING AS A TRADER IN THE ITEM IN QUESTION AND WHETHER THE ASSESSEE IS COMPLY ING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING T HOSE LEGAL REQUIREMENTS IF IT 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 THE CBDT'S CIRCULAR NO . 4 OF 2007, DATED 15-6-2007, THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCO UNTS FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTER MINGLING 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 SE VERAL FACTORS, HAS TO BE SEEN. [PARA 13]' A PERUSAL OF VARIOUS GUIDELINES LAID DOWN BY THE HO N'BLE TRIBUNAL SHOW THAT OUT OF 10 FACTORS, THE APPELLANT IS COVERED BY MANY FACTORS WHICH SHOW THAT THE APPELLANT HAS NOT MADE AN INVESTMENT BUT THE TR ANSACTIONS WERE FOR REALIZING PROFIT I.E. THE MOTIVE WAS COMMERCIAL. TH E FIRST CONDITION REGARDING TREATMENT IN BOOKS OF ACCOUNTS, THIRD CONDITION REG ARDING FREQUENCY OF SALE AND PURCHASE, HABITUAL DEALING AND ALSO THE DEALING S IN FUTURES AND OPTIONS, FOURTH CONDITION REGARDING PURCHASE AND SALE FOR RE ALIZING PROFIT, FIFTH CONDITION REGARDING THE VALUE OF ITEMS IN THE BALANCE SHEET, SIXTH CONDITION REGARDING AUTHORIZATION IN MEMORANDUM AND ARTICLES OF ASSOCIA TION CLEARLY SHOW THAT THE. APPELLANT IS NOT AN INVESTOR BUT IS A TRADER A ND DOING THE BUSINESS. THE APPELLANT-HAS IN HIS REPLY DATED 30/01/2012 RAI SED THE ISSUE THAT 84% OF THE SHORT TERM CAPITAL GAINS RELATES TO THE MUTUAL FUND AND THE INVESTMENT IN UNITS AND MUTUAL FUND ARE NOT THE SAME AS INVESTMEN T IN SHARES. THE APPELLANT HAS ALSO MENTIONED CERTAIN JUDGMENTS OF I TAT, MUMBAI AND HON'BLE SUPREME COURT AND OTHER COURTS IN WHICH IT HAS BEEN HELD THAT THE TRANSACTIONS IN SHARES AND MUTUAL FUND WERE AS AN INVESTOR AND NOT AS A TRADER . I HAVE CAREFULLY PERUSED THE JUDGMENTS MENTIONED BY THE APPELLANT. HOWEVER, THE FACTS OF THE PRESENT CASE ARE UNIQUE AND ARE DIFFER ENT TO THE FACTS OF THE CASES ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 11 DECIDED BY HON'BLE COURTS. THEREFORE, THE JUDGMENTS MENTIONED BY THE APPELLANT ARE RESPECTFULLY DISTINGUISHED. REGARDING THE ISSUE OF INCOME FROM MUTUAL FUND, THE MUTUAL FUND UNITS ARE SIMILAR TO SHARES IN ALL RESPECTS. THE COMPANIES WH ICH ISSUE UNITS OF MUTUAL FUND PURCHASE AND SALE EQUITY SHARES OF THE COMPANIES IN ORDER TO HAVE MAXIMUM PROFITS, QUALIFIED TECHNICAL PERSONS ARE EMPLOYED T O KEEP A CLOSE WATCH ON THE MARKET AND THE PERFORMANCE OF VARIOUS COMPANIES AND ACCORDINGLY THE DECISION TO PURCHASE OR SALE OF THE EQUITY SHARES ARE TAKEN. THE INCOME EARNED BY THEM IS REFLECTED IN THE PRICE OF THE UNIT WHICH IS CALLED NET ASSET VALUE (NAV). THE NAV OF VARIOUS FUNDS ARE DECLARED ON DAILY BASIS AND IS PUBLISHED IN ALL THE NEWSPAPERS ON THE PAGE WHERE EQUITIES ARE MENTIONED . THE UNITS OF VARIOUS MUTUAL FUNDS ARE LISTED IN THE STOCK EXCHANGE AND C AN ALSO BE PURCHASED AND SOLD ON THE FLOOR OF THE STOCK EXCHANGE. THE UNITS CAN ALSO BE DEMATERIALIZED AND ARE HELD IN DEMAT ACCOUNT IN A SIMILAR MANNER AS AN EQUITY SHARE. THEREFORE, THE UNITS HAVE ALL THE INGREDIENTS OF AN EQUITY SHA RE AND THE INCOME FROM SALE AND PURCHASE THEREOF HAVE TO BE TREATED AT PAR WITH THAT OF EQUITY SHARES. FURTHER, THE TRANSACTIONS CARRIED OUT BY THE APPELL ANT IN UNITS ALSO HAVE HIGH VOLUME, LOW HOLDING PERIOD AND ORGANIZED MANNER OF TRADING. THE CHARACTERISTICS OF DEALINGS IN MUTUAL FUNDS ARE SIMILAR TO THE DEAL INGS IN EQUITY SHARES DONE BY THE APPELLANT WHICH HAVE BEEN DISCUSSED IN DETAIL I N PRECEDING PARAGRAPHS. THEREFORE, THE CONTENTION OF THE APPELLANT THAT MUT UAL FUNDS AND EQUITY SHARES SHOULD NOT BE TREATED AT PAR IS NOT ACCEPTED. THE APPELLANT HAS ALSO MENTIONED THE JUDGMENT OF HO N'BLE MUMBAI ITAT IN THE CASE OF GOPAL PUROHIT [122 TTJ 87]. HE HAS MEN TIONED THAT THE CLAIM OF THE APPELLANT OF SHOWING THE INCOME FROM PURCHASE A ND SALE OF SHARES AS SHORT TERM CAPITAL AND LONG TERM CAPITAL GAIN H AVE BEEN ALLOWED ON IDENTICAL FACTS IN EARLIER ASSESSMENT YEARS. I HAVE CAREFULLY PERUSED THE JUDGMENT. FIRST OF ALL, IN THE CASE OF GOPAL PUROHI T, THE ASSESSMENT OF ONLY ONE YEAR WAS MADE BY TREATING THE INCOME AS BUSINES S AND EARLIER YEARS WERE ACCEPTED AS SUCH. HOWEVER, IN THE CASE OF THE APPELLANT, IT IS NOTED THAT THE ASSESSMENT FOR A. YS. 2006-07 & 20 08)9 HAVE BEEN COMPLETED BY REJECTING THE CLAIM OF THE APPELLANT. IT IS ALSO A SETTLED LAW THAT MISTAKE ONCE COMMITTED CANNOT BE ALLOWED TO BE PERPETUATED (DISTRIBUTORS BARODA VS. UNION OF INDIA [155 ITR 120] [SC]). THE APPELLANT CANNOT CLAIM THAT ALL THE ASSESSMENTS HAVE BEEN COM PLETED AFTER ACCEPTING HIS CLAIM AS THE ASSESSMENTS HAVE BEEN DISTURBED IN CERTAIN YEARS. DETAILED ANALYSIS OF FACTS CLEARLY SHOW THAT THE APPELLANT I S IN FACT DOING THE BUSINESS OF PURCHASE AND SALE OF SHARES AND UNITS, AND THEREFOR E, IT IS JUSTIFIED TO TREAT THE INCOME AS THAT FROM BUSINESS. IN VIEW OF THE ABOVE MENTIONED DISCUSSION, THE PROF IT EARNED BY THE APPELLANT BY PURCHASE AND SALE OF SHARES AND UNITS OF MUTUAL FUND IS TREATED AS INCOME ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 12 FROM BUSINESS. AS PER THE STATEMENTS SUBMITTED BY T HE APPELLANT DURING THE COURSE OF APPEAL, IT IS SEEN THAT THE APPELLANT HAS EARNED FOLLOWING CAPITAL GAIN DURING THE YEAR. SI. NO. NATURE SHARES / MUTUAL FUND CAPITAL GAIN (RS.) 1 SHORT TERM SHARES 48,56,4027 /- 2 LONG TERM SHARES 23,42,897/- 3 SHORT TERM MUTUAL FUND 33,11,806/- 4 SHORT TERM MUTUAL FUND 2,64,91,2417- 5 LONG TERM MUTUAL FUND 60,53,782/- 6 LOSS ON SHARES FUTURES FUTURES & OPTIONS (-) 3,59,409/- TOTAL 4,26,96,719/- ACCORDINGLY, THE INCOME OF RS.4,30,56,128/- IS TREATED AS INCOME FROM BUSINESS AND THE INCOME IS ENHANCED. 15. AGGRIEVED, THE ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 16. LD. AR SUBMITTED THAT ASSESSEES MAIN BUSINESS IS MANUFACTURING OF DYES INTERMEDIATES, FINE CHEMICALS AND TURNOVER OF RS.13.82 CRORES WHICH ALSO INCLUDES EXPORT OF RS.9. 5 CRORES. FURTHER ASSESSEE HAS BEEN REGULARLY DECLARING SHORT TERM AN D LONG TERM CAPITAL GAIN FROM SHALE OF SHARES AND MUTUAL FUNDS SINCE ASST. YEAR 2003-04 AND REVENUE HAS ALLOWED THE CLAIM IN ASST. YEAR 2003-04 TO 2005-06 IN ITS ASSESSMENT ORDER PASSED U/S 143(3) O F THE ACT AND SIMILARLY IN THE SUBSEQUENT YEAR ALSO I.E. ASST. YE AR 2008-09 & 2009- 10 CLAIM OF ASSESSEE FOR SHORT TERM AND LONG TERM C APITAL GAIN FROM SALE OF SHARES AND MUTUAL FUNDS HAS BEEN ALLOWED. L D. AR REFERRED TO THE CBDT CIRCULAR NO.6/2016 DATED 29.2.2016 AND SUB MITTED THAT IT IS DIRECTLY APPLICABLE TO THE FACTS OF THE ASSESSEE. L D. AR ALSO REFERRED AND RELIED ON THE FOLLOWING DECISIONS AND THE JUDGM ENTS :- ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 13 1. TRIBUNAL DECISION IN THE CASE OF SMRUTI SHREYANS SHAH IN ITA NO.3214, 3180, 32,95 & 3296/AHD/2009 & CO NO.3/AHD/ 2010 (ASST. YEARS 2004-05 TO 2006-07) 2. TRIBUNALS DECISION IN THE CASE OF SHAH INVESTOR S HOME LTD. IN ITA NO.1424/AHD/2010 (ASST. YEAR 2006-07) 3. JUDGEMENT OF HON. GUJARAT HIGH COURT IN THE CASE OF NITA M. PATEL 42 TAXMANN.COM 125. 4. TRIBUNALS DECISION IN THE CASE OF SMRUTI SHREYA NS SHAH IN ITA NOS. 170 & 2692/AHD/2011 & CO NO.43/AHD/2011 (ASST. YEARS 2007-08 & 2008-09). 5. JUDGMENT OF HON. BOMBAY HIGH COURT IN THE CASE O F SMT. DATTA MAHENDRA SHAH 178 ITR 304. 6. TRIBUNALS DECISION IN THE CASE OF TEJAS SECURIT IES. 7. JUDGMENT OF HON. DELHI HIGH COURT IN THE CASE OF YAMA FINANCE LTD. (2014) 46 TAXMANN.COM 349 (DELHI). 17. ON THE OTHER HAND LD. DR SUPPORTED THE ORDERS O F THE LOWER AUTHORITIES. 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED BEFORE US INCLUDING THE JUDGMENTS/DECISIONS REFERRED BY THE LD. AR. THROUGH THIS GROUND ASSESSEE HAS CHALLENGED THE ORDER OF LD. CIT(A) FOR ENHANCING ADDITION BY WAY OF TREATING TH E LONG TERM AND SHORT TERM CAPITAL GAIN FROM SALE OF SHARES AND MUT UAL FUNDS AS BUSINESS INCOME. WE OBSERVE THAT AT THE ASSESSMENT STAGE THE CLAIM OF ASSESSEE OF TREATING THE GAIN FROM SALE OF SHARE S AND MUTUAL FUNDS ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 14 AS SHORT TERM AND LONG TERM CAPITAL GAIN HAS BEEN A CCEPTED AND ALSO THE LOSS ON SHARES ON ACCOUNT OF FUTURE AND OPTIONS HAS BEEN ACCEPTED AS BUSINESS LOSS. THEREAFTER LD. CIT(A) IN THE COURSE OF HIS ADJUDICATION OF THE APPEAL OF ASSESSEE CAME ACROSS THESE TRANSACTIONS OF PURCHASE/SALE OF SHARES AND MUTUAL FUNDS AND ON THE BASIS OF HIS OBSERVATION ABOUT THE REGULARITY OF TR ANSACTIONS ROUND THE YEAR, DENIED THE CLAIM OF ASSESSEE OF LONG TERM AND SHORT TERM CAPITAL GAIN AND TREATED THE INCOME FROM TRANSACTIONS OF SH ARES AND MUTUAL FUNDS AS BUSINESS INCOME. 18.1 FROM GOING THROUGH THE FACTS NARRATED BEFORE T HE LOWER AUTHORITIES AND THE PAPER BOOK PLACED BEFORE US, WE FIND THAT ASSESSEES MAIN OBJECT AS PER MEMORANDUM OF ASSOCIA TION IS OF BUSINESS OF MANUFACTURING AND PURCHASE AND SALE OF DYES INTERMEDIATES AND FINE CHEMICALS AND THIS BUSINESS IS RUNNING SINCE 26 TH FEBRUARY, 1985. DURING THE YEAR UNDER APPEAL ASSES SEE HAS ACHIEVED THE BUSINESS TURNOVER FOR SALE OF DYES AND CHEMICALS RS.13.82 CRORES (APPROX.) AS PER ANNUAL REPORT AT P AGE 23 OF THE PAPER BOOK. IN THE IMMEDIATELY PRECEDING ASST. YEAR BUSINESS TURNOVER OF THE ASSESSEE WAS RS.7.87 CRORES (APPROX .) WHICH MEANS THAT THERE IS INCREASE IN SALES OF DYES AND CHEMICA LS. 18.2 WE FURTHER OBSERVE THAT ASSESSEE IS HAVING SUF FICIENT INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVE AND SURPLUS, PART OF WHICH HAS BEEN DIVERTED TOWARDS INVESTMENT IN MU TUAL FUNDS AND EQUITY SHARES. FURTHER ASSESSEE HAS BEEN REGULARLY CLAIMING THE PROFIT FROM SALE OF SHARES AND MUTUAL FUNDS AS SHORT TERM AND LONG TERM ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 15 CAPITAL GAIN SINCE ASST. YEAR 2003-04 AND THE POSIT ION OF YEAR WISE ASSESSMENT OF SURPLUS ON SALE OF SHARES AND MUTUAL FUNDS IN ASSESSMENT YEAR PRIOR TO THE YEAR UNDER APPEAL AND IN SUBSEQUENT YEAR IS AS UNDER :- ASSESSMENT NATURE RUPEES ASSESSED REMARK YEAR OF GAIN UNDER THE HEAD 2003-04 SHORT TERM 32,206 CAPITAL ACCEPTED AT LONG TERM 962,508 GAIN ASSESSMENT STAGE U/S. 143(3) 2004-05 SHORT TERM 1,815,704 CAPITAL ACCEPTED AT LONG TERM 5,266,721 GAIN ASSESSMENT STAGE U/S. 143(3) 2005-06 SHORT TERM 9,011,045 CAPITAL ACCEPTED AT LONG TERM 7,998,826 GAIN ASSESSMENT STAGE U/S. 143(3) 2006-07 SHORT TERM 41,951,456 BUSINESS REASSESSMENT MADE LONG TERM INCOME VIDE ON THE BASIS OF AUDIT 13616336 ORDER IT/S. NOTE AND THE 143(3) SUBSEQUENT A.O. HAS R.W.S. 147 CHANGED OPINION ON THE SAME FACTS ON RECORDS. ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 16 REASSESSMENT IS CHALLENGED IN APPEAL BEFORE C1T(A)-XIV, AHMEDABAD 2007-08 SHORT TERM 34,659,437 CAPITAL ACCEPTED AT LONG TERM 8,396,681 GAIN ASSESSMENT STAGE U/S. 143(3) 2008-09 SHORT TERM 361,98,102 LESS THAN ASSESSMENT MADE ON LONG TERM 7463111 30 DAYS THE BASIS OF HOLDING AS HONORABLE A BUSINESS AHMEDABAD ITAT'S INCOME & DECISION IN CASE OF OTHERS SUGAMCHAND C. SHAH. UNDER ASSESSMENT IS CAPITAL CHALLENGED BEFORE GAIN C1T(A)~X1V, A 'BAD 2009-10 SHORT TERM LONG TERM -91,43,491 -18,28,476 CAPITAL GAIN U/S. 143(3) ACCEPTED AT ASSESSMENT STAGE 19. FROM GOING THROUGH THE ABOVE TABLE, WE FIND THA T ASSESSEE HAS BEEN CLAIMING THE GAIN/LOSS FROM TRANSACTIONS OF SA LE/PURCHASE OF SHARES AND MUTUAL FUNDS AS SHORT TERM AND LONG TERM CAPITAL GAIN SINCE LAST MANY YEARS AND REVENUE HAS BEEN REGULARL Y ACCEPTING THE ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 17 SAME. FURTHER WE OBSERVE THAT CBDT CIRCULAR NO.6/20 16 DATED 29.2.1016 HAS BEEN ISSUED IN RELATION TO SUCH TYPE OF CASES WHERE ASSESSEE IS HAVING CAPITAL GAIN FROM SALE OF SHARES & SECURITIES AND IT READS AS UNDER :- CIRCULAR NO.6/2016 GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES NORTH BLOCK, NEW DELHI, THE 29 TF1 OF FEBRUARY, 2016 SUB: ISSUE OF TAXABILITY OF SURPLUS ON SAFE OF SHAR ES AND SECURITIES - CAPITAL GAINS OR BUSINESS INCOM E - INSTRUCTIONS IN ORDER TO REDUCE LITIGATION - REG. - SUB-SECTION {14} OF SECTION 2 OF THE INCOME-TAX ACT , 1961 ('ACT') DEFINES THE TERM 'CAPITAL ASSET' TO INCLUDE PROPERTY OF ANY KIND HELD BY AN ASSESSEE, W HETHER OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION, BUT DOES NOT INCLUDE ANY STOCK-IN-TRADE OR PERSONAL ASSETS SUBJECT TO CERTAIN EXCEPTIONS. AS REGARDS SHARES AND OTHER SECURITIES, THE SAME CAN B E HELD EITHER AS CAPITAL ASSETS OR STOCK-IN-TRADE/ TRADING ASSETS OR BOTH. DETERMINATION OF THE CHARAC TER OF A PARTICULAR INVESTMENT IN SHARES OR OTHER SECURITIES, WHETHER THE SAME IS IN THE NATURE OF A CAPITAL ASSET OR STOCK-IN-TRADE, IS ESSENTIALLY A F ACT- SPECIFIC DETERMINATION AND HAS LED TO A LOT OF UNCE RTAINTY AND LITIGATION IN THE PAST. 2. OVER THE YEARS, THE COURTS HAVE LAID DOWN DIFFER ENT PARAMETERS TO DISTINGUISH THE SHARES HELD AS INVESTMENTS FROM THE SHARES HELD AS STOCK-IN-TRADE. THE CENTRAL BOARD OF DIRECT TAXES ('C8DT') HAS ALSO, THROUGH INSTRUCTION NO. 1827, DATED AUGUST 31 , 1989 AND CIRCULAR NO. 4 OF 2007 DATED JUNE 15, 2007, SUMMARIZED THE SAID PRINCIPLES FOR GUIDANCE O F THE FIELD FORMATIONS. 3. DISPUTES, HOWEVER, CONTINUE TO EXIST ON THE APPL ICATION OF THESE PRINCIPLES TO THE FACTS OF AN INDIVIDUAL CASE SINCE THE TAXPAYERS FIND IT DIFFICU LT TO PROVE THE INTENTION IN ACQUIRING SUCH SHARES/SECURITIES. IN THIS BACKGROUND, WHILE RECOGN IZING THAT NO UNIVERSAL PRINCIPAL IN ABSOLUTE TERMS CAN BE SAID DOWN TO DECIDE THE CHARACTER OF INCOME FROM SALE OF SHARES AND SECURITIES (I.E. WHETHER THE SAME IS IN THE NATURE OF CAPITAL GAIN OR BUSINE SS INCOME), C8DT REALIZING THAT MAJOR PART OF SHARES/SECURITIES TRANSACTIONS TAKES PLACE IN RESPE CT OF THE LISTED ONES AND WITH A VIEW TO REDUCE LITIGATION AND UNCERTAINTY IN THE MATTER, IN PARTIA L MODIFICATION TO THE AFORESAID CIRCULARS, FURTHER INSTRUCTS THAT THE ASSESSING OFFICERS IN HOLDING WHETHER THE SURPLUS GENERATED FROM SALE OF LISTED SHARES OR OTH ER SECURITIES WOULD BE TREATED AS CAPITAL GAIN OR BUSI NESS INCOME, SHALL TAKE INTO ACCOUNT THE FOLLOWING- A) WHERE THE ASSESSEE ITSELF, IRRESPECTIVE OF THE PERIOD OF HOLDING THE LISTED SHARES AND SECURITIES , OPTS TO TREAT THEM AS STOCK-IN-TRADE, THE INCOME AR ISING FROM TRANSFER OF SUCH SHARES/SECURITIES WOULD BE TREATED AS ITS BUSINESS INCOME, B) IN RESPECT OF LISTED SHARES AND SECURITIES HELD FOR A PERIOD OF MORE THAN 12 MONTHS IMMEDIATE LY PRECEDING THE DATE OF ITS TRANSFER, IF THE ASSESSEE DESIRES TO TREAT THE INCOME ARISING FROM THE TRANS FER THEREOF AS CAPITAL GAIN, THE SAME SHALL NOT BE PUT TO DISPUTE BY THE ASSESSING OFFICER, HOWEVER, THIS STAND, ONCE TAKEN BY THE ASSESSEE IN A PARTICULAR A SSESSMENT YEAR, SHALL REMAIN APPLICABLE IN SUBSEQUENT ASSESSMENT YEARS ALSO AND THE TAXPAYERS SHALL NOT BE ALLOWED TO ADOPT A DIFFERENT/CONTRARY STAND IN THIS REGARD IN SUBSEQUE NT YEARS, C} IN ALL OTHER CASES, THE NATURE OF TRANSACTION (I.E. WHETHER THE SAME IS IN THE NATURE OF CAPITAL GAIN OR BUSINESS INCOME) SHALL CONTINUE TO BE DECIDED KEEPI NG IN VIEW THE AFORESAID CIRCULARS ISSUED BY THE CBDT. ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 18 4. IT IS, HOWEVER, CLARIFIED THAT THE ABOVE SHALL N OT APPLY IN RESPECT OF SUCH TRANSACTIONS IN SHARES/SECURITIES WHERE THE GENUINENESS OF THE TRAN SACTION ITSELF IS QUESTIONABLE, SUCH AS BOGUS CLAIM S OF LONG TERM CAPITA! GAIN / SHORT TERM CAPITA! LOSS OR ANY OTHER SHAM TRANSACTIONS. 5. IT IS REITERATED THAT THE ABOVE PRINCIPLES HAVE BEEN FORMULATED WITH THE SOLE OBJECTIVE OF REDUCING LITIGATION AND MAINTAINING CONSISTENCY IN APPROACH ON THE ISSUE OF TREATMENT OF INCOME DERIVED FROM TRANSFER OF SHARES AND SECURITIES. ALL THE RELEVANT PROVISIONS OF THE ACT SHALL CONTINUE TO APPLY ON T HE TRANSACTIONS INVOLVING TRANSFER OF SHARES AND SECUR ITIES. 20. WE OBSERVE THAT CLAUSE 3(B) OF THE ABOVE CIRCUL AR IS APPLICABLE TO THE FACTS OF THE CASE OF ASSESSEE MORE PARTICULA RLY FOR LISTED SHARES AND SECURITIES HELD FOR MORE THAN 12 MONTHS. IT REA DS THAT ASSESSEE IF DESIRES TO TREAT THE INCOME ARISING FROM TRANSFER O F SHARES AND SECURITIES AS CAPITAL GAIN THE SAME SHALL NOT BE PU T TO DISPUTE BY THE ASSESSING OFFICER. 21. FURTHER ON EXAMINATION OF THE FINANCIAL STATEME NTS, WE FIND THAT SHARES AND MUTUAL FUNDS HAVE BEEN SHOWN UNDER THE H EAD INVESTMENT AND HAVE BEEN VALUED AT THE COST PRICE. MAJORITY OF INVESTMENTS IS MUTUAL FUNDS SO MUCH SO THAT OUT OF TOTAL INVESTMENT OF RS.17.51 CRORES GROSS RS.11.30 CRORES IS IN MUTUAL FUND. SUMMARIZING THIS FACT, WE FIND THAT ASSESSEE IS REG ULARLY CARRYING ON BUSINESS ACTIVITIES AS ENUMERATED IN THE MEMORANDUM OF ASSOCIATION AND IS CONSISTENTLY MAKING SALES AND EARNING PROFIT S THERE. ALONG WITH CARRYING ON THE BUSINESS ASSESSEE HAS OCCASION TO U TILIZE ITS INTEREST FREE FUNDS FOR THE PURPOSE OF INVESTMENTS IN SHARES AND MUTUAL FUNDS AS BEING A PRUDENT BUSINESS MAN. ALL THE IN VESTMENTS HAVE BEEN SHOWN IN THE BALANCE SHEET AND ALL NECESSARY DETAILS ARE AVAILABLE. ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 19 22. WE FIND THAT SIMILAR ISSUES CAME UP BEFORE THE CO-ORDINATE BENCH, AHMEDABAD IN THE CASE OF DCIT VS. TEJAS SECU RITIES IN IT(SS)A NOS.531, 532 & CO NO.205/AHD/2011 FOR ASST. YEAR 2008-09 TO 2009-10 WHEREIN IT HAS BEEN HELD THAT SUCH GAIN FROM PURCHASE AND SALE OF SHARES AND MUTUAL FUNDS NOT AS BUSINESS INCOME BUT SHORT TERM AND LONG TERM CAPITAL GAIN BY OBSERVING AS UNDER :- 9. WE HAVE HEARD BOTH THE PARTIES. CASE FILE PERUSE D. THE SOLE ISSUE ON MERITS IS AS TO WHETHER THE ASSESSEE PROFITS OF RS. 2,59,43,4 73/- ARE TO BE TREATED AS SHORT TERM CAPITAL GAINS ARISING FROM INVESTMENTS OR BUSI NESS INCOME. WE HAVE ALREADY NARRATED RELEVANT FACTS IN PRECEDING PARAGRAPHS. TH ERE IS NO DISPUTE THAT THE ASSESSEE HAS NOT USED ANY BORROWED FUNDS IN ITS SHA RE TRANSACTIONS. HON'BLE JURISDICTIONAL HIGH COURT IN TAX APPEAL 77 TO 78 OF 2010 CIT VS. VAIBHAV J. SHAH DECIDED ON 27-06-2012 HOLDS THAT THIS ISSUE HAS TO BE ADJUDICATED IN VIEW OF NO. OF SHARES SALE/PURCHASE TRANSACTIONS, VOLUME, F REQUENCY, CONTINUITY AND REGULARITY FOLLOWED BY NECESSARY INFERENCE TO BE DR AWN FROM MAGNITUDE OF TRANSACTIONS AND HOLDING PERIOD ETC. A PERUSAL OF T HE CASE FILE REVEALS THAT THE ASSESSEE HAS ALWAYS BEEN TREATED AS AN INVESTOR AND NOT A TRADER. CASE RECORDS CONTAINED CIT(A)'S DIFFERENT ORDERS; ALL DATED 07-0 7-2011 IN ASSESSMENT YEARS 2003-04 TO 2007-08 TREATING ASSESSEE'S SHORT TERM C APITAL GAINS/LOSSES OF RS. 2,12,522/-, RS. 1,45,680/-, RS. 3,10,332/-, RS. 9,6 3,528/- AND RS. 17,32,831/- NOT AS BUSINESS LOSSES. THE REVENUE DOES NOT POINT OUT ANY EXCEPTION IN THE IMPUGNED I.T(SS).A NOS.531 TO 532 & CO NO. 201/AHD/ 2011 A.Y. 2008-09 TO 2009-10 PAGE NO 10 DCIT VS. M/S. TEJAS SECURITIES A SSESSMENT YEAR. IT ALSO DOES NOT INDICATE THAT THE SAME HAVE NOT ATTAINED FINALI TY TILL DATE OR ANY LITIGATION THEREFROM IS PENDING IN ANY HIGHER FORUM. IT IS FURTHER TO BE SEEN FROM THE CASE FILE PAGES 5 1-60 THAT THE ASSESSEE'S PARTNERSHIP DEED CONTAINS A NEGATIVE COVENANT THAT ITS BUSINESS SHALL NOT INCLUDE TRADING IN EQUITY SHARES AND MUTUAL FUNDS UNITS AS UNDER:- 'THE BUSINESS OF THE PARTNERSHIP SHALL NOT INCLUDE TRADING IN EQUITY SHARES AND UNITS ISSUED BY MUTUAL FUNDS. THE PARTNERSHIP, CAN HOWEVER, INVEST THE FUNDS OF THE PARTNERSHIP INTO EQUITY SHARES THROUGH THE PRIM ARY OR SECONDARY MARKET OR THROUGH ANY PORTFOLIO MANAGEMENT SCHEMES RECOGNIZED BY THE SECURITIES AND EXCHANGE BOARD OF INDIA AND/OR IN UNITS OF MUTUAL F UNDS AND SUCH EQUITY SHARES/UNITS SHALL CONSTITUTE THE INVESTMENT PORTFO LIO OF THE PARTNERSHIP AND NOT STOCK IN TRADE' 10. WE PROCEED FURTHER AND FIND THAT THE ASSESSEE H AS ALWAYS VALUED ITS INVESTMENTS AT COST PRICE AND NOT MARKET PRICE. ITS SHORT TERM CAPITAL GAINS READ ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 20 THE IMPUGNED SUMS OF RS. 2,59,43,473/- COMPRISING A SUM OF RS. 2,95,48,114/- FROM A SINGLE SCRIP NAMELY M/S. RELIANCE NATURAL RE SOURCES LTD. PURCHASED ON 5TH APRIL, 10TH MAY, 23RD MAY AND 2ND JULY 2007 (TH IS LAST DAY INVOLVES THREE TRANSACTIONS). THIS FOLLOWED SALE OF THE SCRIP INVO LVING ALL SHARES ON 04-03-2008. THE SAME MAKES IT CLEAR THAT THE ASSESSEE'S HOLDING PERIOD OF THESE SHARES RANGING FROM 8 TO 11 MONTHS DURING WHICH NOT EVEN A SINGLE SHARE WAS SOLD. IF WE EXCLUDE THIS SCRIP, WHAT IS LEFT IS NET RESULT OF LOSS OF R S. 36 LACS APPROXIMATELY. WE CONFRONTED THE REVENUE WITH ALL THIS FACTUAL EVIDEN CE. IT FAILS TO CONTROVERT THE LOWER I.T(SS).A NOS.531 TO 532 & CO NO. 201/AHD/201 1 A.Y. 2008-09 TO 2009-10 PAGE NO 11 DCIT VS. M/S. TEJAS SECURITIES APPELLATE AUTHORITIES' FINDINGS THAT THE ASSESSEE HAS ALWAYS BEEN TREATING ITS SHARES AND MU TUAL FUNDS IN QUESTION AS INVESTMENTS BY MAINTAINING A SEPARATE ACCOUNT ACCEP TED FOR THE LAST MANY YEARS. THIS IS NOT THE REVENUE'S CASE THAT ASSESSEE HAS BE EN ENGAGED IN ANY INTRA-DAY SALE/PURCHASE TRANSACTIONS. WE REPEAT THAT ASSESSEE HAS CARRIED OUT 85 PURCHASE TRANSACTIONS AND 67 SALE TRANSACTIONS DURING THE RE LEVANT PREVIOUS YEAR. MEANING THEREBY THAT THERE IS NO TRANSACTION CARRIED OUT IN MORE THAN OF THE RELEVANT PREVIOUS YEAR. WE CONCLUDE IN THESE PECULIAR FACTS AND CIRCUMSTANCES THAT THE CIT(A) HAS RIGHTLY TREATED ASSESSEE'S PROFITS OF RS . 2,59,43,473/- A SHORT TERM CAPITAL GAIN AND NOT BUSINESS INCOME. WE REJECT REV ENUE'S CONTENTIONS SEEKING TO REVIVE ASSESSING OFFICER'S FINDING HEREINABOVE. ITS ITA 531/AHD/2011 FAILS. OUR THESE FINDINGS ON MERITS RENDER ASSESSEE'S CO NO.20 5/AHD/2011 AS TO HAVE BECOME INFRUCTUOUS ACCORDINGLY. 23. FURTHER IN THE CASE OF ACIT VS. SHAH INVESTORS HOME LTD. IN ITA NO.1424/AHD/2010 FOR ASST. YEAR 2006-07, WHILE DECIDING SIMILAR ISSUE, THE TRIBUNAL HAS OBSERVED AS UNDER :- 7. WE HAVE HEARD THE RIVAL SUBMISSIONS .AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WHETHER THE PROFIT EARNED ON SALE OF SHARES IS REQUIRED TO BE TREATING AS 'CAPITAL GAINS' OR 'BUSINESS INCOME'. W E FIND THAT ID. CTT(A) WHILE DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE HAS HE LD THE PROFIT EARNED TO BE AS ''CAPITAL GAINS 1 ' AND HAS NOTED THAT ASSESSEE HAS HISTORY OF BEING AN INVESTOR AND CLAIMING SHORT TERMS CAPITA! GAINS AND THE ACTIVITY OF TRANSACTIONS WERE RELATED TO 5 SCRIPS AND THE TRANSACTIONS WERE DELIVERY BASED. HE HAS FURTHER GIVEN A FINDING THAT IT IS NOT A CASE WHERE THE ASSCSSEE HAS DONE THE TRANS ACTIONS OF SALE AND PURCHASE ON EVERY DAY BASIS. HE HAS FURTHER NOTED THAT THE SHAR ES WERE CONSIDERED BY THE ASSESSEE AS INVESTMENT IN ITS BOOKS OF ACCOUNTS, HAD NOT BOR ROWED ANY FINANCE TO ACQUIRE THE SHARES AND OUT OF THE TOTAL GAINS EARNED BY THE ASS ESSEE, AROUND 2/3 OF THE PROFITS WERE EARNED FROM SHARES WHICH WERE HELD FOR OVER 60 DAYS. HE THEREAFTER RELYING ON THE RATIO OF THE DECISION RENDERED BY THE HON'BLE B OMBAY HIGH COURT IN THE CASE OF GOPAL PUROHIT REPORTED IN 228 CTR 582 (BOM) HELD TH AT ONLY SHORT TERM CAPITAL GAINS TO THE EXTENT OF RS. 27,1937- EARNED ON THE TRANSAC TIONS WHICH WERE NOT TRANSACTED THROUGH DEMAT ACCOUNT IS TO BE ATTRIBUTED TO THE BU SINESS OF SHARE TRADING. BEFORE US, REVENUE HAS NOT PLACED ANY MATERIAL ON RECORD TO CO NTROVERT THE FINDINGS OF ID. ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 21 CIT(A), FURTHER, IT IS ALSO A FACT THAT IN THE EARL IER ASSESSMENT YEARS, ASSESSEE HAD OFFERED THE PROFITS AS SHORT TERMS CAPITAL GAINS AN D THE SAME WAS ALSO ACCEPTED BY THE REVENUE. IN VIEW OF THE AFORESAID FACTS, WE FIND NO REASON TO INTERFERE WITH THE ORDER OF ID. CIT(A) AND THUS THE GROUND OF REVENUE IS DIS MISSED. 24. FURTHER WE OBSERVE THAT SIMILAR ISSUE HAS BEEN ADJUDICATED BY HON. DELHI HIGH COURT I N THE CASE OF YAMA FINANCE LTD. VS. ACIT, (2014) 46 TAXMANN.COM 349 (DELHI) VIDE JUDGMENT DAT ED 1 ST APRIL, 2014 AND HELD SUCH GAIN AS LONG TERM AND SHO RT TERM CAPITAL GAIN AND NOT AS BUSINESS INCOME; RELEVANT PORTION O F THE JUDGMENT IS REPRODUCED BELOW :- 1. THE ASSESSEE/APPELLANT IS AGGRIEVED BY AN ORDER OF THE ITAT DATED 30.03.2010 WHEREBY ITS APPEAL WAS REJECTED. THE QUESTION OF LAW URGED WHICH THIS COURT FORMULATES HEREBY IS- ''DID THE TRIBUNAL FALL INTO ERROR IN HOLDING THAT THE SUM OF RS. 58,71,144/- REPORTED AS LONG TERM CAPITAL GAIN BY THE ASSESSEE WAS TO BE TREATED AS ITS BUSINESS INCOME ?' 2. THE FACTS BRIEFLY FOR THE PURPOSE OF THIS APPEAL A RE THAT THE ASSESSEE DEALS IN SHARES. IT DECLARED A TOTAL INCOME OF RS. 83,78,279/-. DURING SCRUTINY, IT WAS DISCERNED THAT THE ASSESSEE HAD ALSO INVESTED AND SOLD MUTUAL FUNDS AP ART FROM SHARES. THE AO ALSO FOUND THAT THE ASSESSEE DERIVED INCOME FROM INTEREST, DIV IDEND AND SURPLUS REALIZED ON SALE OF SHARES AND MUTUAL FUNDS. AS TO THE PRECISE ISSUE OF THE SALE OF MUTUAL FUNDS, THE FACTS APPEARING ON THE RECORD ARE THAT THE ASSESSEE HAD I NVESTED IN THESE FUNDS AND SHOWN THEM IN ITS INVESTMENT ACCOUNT AND HAD NOT CHARACTERIZED IT AS STOCK-IN-TRADE. THIS POSITION APPARENTLY HAD BEEN REPORTED AND ACCEPTED FOR THE P REVIOUS YEARS. FURTHERMORE, IT APPEARS THAT THE ASSESSEE HELD ITS MUTUAL FUNDS FOR ABOUT T WO YEARS BEFORE EVENTUALLY REDEEMING THEM. THE ASSESSEE HAD CONTENDED THAT THE SURPLUS F ROM THE SALE OF THESE MUTUAL FUNDS HAD TO BE TREATED AS LONG TERM CAPITAL GAIN AND NOT BUSINESS INCOME. THE AO HAD REJECTED THIS. 3. THE CIT (A), HOWEVER, AFTER ANALYZING THE TRANSACT IONS INVOLVED ALLOWED THE APPEAL. 4. THE ITAT, HOWEVER, ALLOWED THE REVENUE'S APPEAL HO LDING THAT THE PROFITS FROM THE SALE OF THESE MUTUAL FUNDS AMOUNTED TO BUSINESS INC OME. 5. LEARNED COUNSEL HIGHLIGHTS THAT APART FROM THE FAC T THAT THE MUTUAL FUNDS WERE HELD FOR ALMOST TWO YEARS, OTHER INDICATORS CLEARLY SHOWED T HAT THE TRANSACTIONS DID NOT RESULT IN BUSINESS INCOME. IT WAS SUBMITTED THAT THE MUTUAL F UNDS UNITS WERE NOT TRADABLE AND HAD TO BE REDEEMED FROM THE ISSUING CONCERN OR THE FUND HOUSE. FURTHERMORE, SUBMITTED LEARNED COUNSEL, THAT NO BORROWED FUNDS HAD BEEN US ED AND RIGHT THROUGH THE ACCOUNTS KEPT IN THESE MUTUAL FUNDS HAVE BEEN CLEARLY DEMARC ATED AS INVESTMENTS. THE TRIBUNAL'S UNDUE EMPHASIS ON THE INFRASTRUCTURE WAS A WHOLLY I RRELEVANT FACTOR. ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 22 6. LEARNED COUNSEL FOR THE REVENUE SUPPORTED THE FIND INGS OF THE TRIBUNAL AND STATED THAT THE MERE CIRCUMSTANCE THAT THE ASSESSEE SHOWED THE MUTUAL FUNDS IN THE INVESTMENT ACCOUNT COULD NOT BE CONCLUSIVE OF THESE ASPECTS. I T WAS ALSO SUBMITTED THAT THERE WAS SOME DOUBT AS TO WHETHER THE ASSESSEE WAS EVEN AUTH ORIZED IN TERMS OF ITS MEMORANDUM OF ASSOCIATION TO DEAL IN MUTUAL FUNDS. HAVING REGA RD TO THESE, THE CONCLUSIONS ARRIVED AT BY THE ITAT WERE JUSTIFIED. 7. THE CIT (A) IN HIS ORDER RECORDED AS FOLLOWS: '( I ) ASSESSEE HAS EMPLOYED ITS OWN FUNDS OUT SHARE CAPIT AL AND ACCUMULATED FREE RESERVES THAT THERE WAS NO BORROWING AT ANY TIME. ( II ) ASSESSEE'S IS LACKING PROPER INFRASTRUCTURE AND IS ONLY HOLDING RS.2.02 LACS (WDV RS.1.39 LACS) WORTH OF FIXED ASSETS. ( III ) ASSESSEE HAS ONLY ONE EMPLOYEE TO WHOM AN AGGREGATE SALARY OF RS.60,000 HAS BEEN PAID. ( IV ) ASSESSEE'S TREATMENT OF MUTUAL FUND AS INVESTMENT I S CONSISTENT SINCE 2002- 03, EVEN WHEN NO SPECIAL PRIVILEGES OF ANY TAX CONCESSI ON WAS AVAILABLE. MERELY BECAUSE SUBSEQUENTLY ASSESSEE IS ENTITLED TO SOME B ENEFITS/TAX CONCESSIONS, THE WHOLE TRANSACTION CANNOT BE NOW PULLED UNDER THE UM BRELLA OF BUSINESS. ( V ) AUDITORS REPORT AND BALANCE SHEET AS PER SCHEDULE V I TO THE COMPANIES HAS IDENTIFIED UNITS OF MUTUAL FUND AS 'INVESTMENTS' CA TEGORICALLY STATING THAT COMPANY IS NOT HOLDING ANY STOCK-IN-TRADE. ( VI ) UNITS OF MUTUAL FUNDS ARE NOT FREELY TRANSFERABLE NOR TRADABLE AND THUS CANNO T BE CATEGORIZED AS BUSINESS. THESE UNITS CAN BE BOUGHT OR REDEEMED WITH MUTUAL FUND ITSELF. IT CANNOT BE GIFTED OR TRANSFERRED IN ANY O THER MANNER. ( VII ) THE KEY DECISION MAKING AUTHORITY REST WITH TH E FUND MANAGER OF THE RESPECTIVE MUTUAL FUND AND ASSESSEE DO NOT HAVE ANY SAY AS TO WHEN TO BUY, WHAT TO BUY, WHEN TO SELL AND WHAT TO SELL. ( VIII ) ASSESSEE'S CASE OF TRANSACTIONS IN MUTUAL FUNDS RES ULTING IN CAPITAL GAINS HAS ALREADY BEEN HELD IN ITS FAVOUR IN AY 2004-05 IN AP PEAL NO.112/2006- 07 BY MY PREDECESSOR. ( IX ) MOST OF THE INVESTMENTS IN MUTUAL FUND SCHEMES HAVE BEEN HELD FOR A CONSIDERABLE TIME AND AS FAR AS 27 MONTHS, THUS FRE QUENCY IS RESTRICTED.' 8. THIS COURT ALSO NOTICES THAT THE CIT (A) NOTED IN THE ORDER THAT THE INCOME TAX ACT ITSELF RECOGNIZED UNITS OF MUTUAL FUNDS AS A SPECIA L CATEGORY OF 'INVESTMENTS' AS FAR AS TRUSTS WERE CONCERNED, U/S. 11 (5) WHICH PLACED THI S IN AN ENTIRELY SEPARATE CLASS. HE, THEREFORE, REASONED THAT INVESTMENTS IN MUTUAL FUND S ARE OF AN ENTIRELY DIFFERENT KIND AND CANNOT BE CLUBBED WITH SALE OF SHARES OR COMMODITIE S. THIS COURT IS INCLINED TO AGREE WITH THIS FINDING AND CONCLUSIONS EXPRESSED ON THE APPLICATION OF THE CLEARLY RECOGNISED TESTS TO DETERMINE WHETHER PROFITS OR AMOUNTS RECEI VED ARE BUSINESS INCOME OR SHORT/LONG TERM CAPITAL GAINS. ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 23 9. ONE OFTEN UNDERLINED AND WIDELY USED TEST IS THE ' VOLUME, FREQUENCY, CONTINUITY AND REGULARITY' OF THE TRANSACTIONS TEST. THIS IS IN AD DITION TO OTHER INDICIA SUCH AS MAINTENANCE OF SEPARATE PORTFOLIOS IN THE SAME SET OF BOOKS OF ACCOUNT FOR ''INVESTMENTS' OR MAINTENANCE OF SEPARATE BOOKS OF ACCOUNT FOR THE TWO ACTIVITIES, AND WHETHER BORROWED CAPITAL WAS USED. 10. HAVING REGARD TO THESE AND THE FURTHER FACT THAT T HE ASSESSEE HAD KEPT THESE AMOUNTS SEPARATELY IN AN INVESTMENT ACCOUNT AND HELD THESE MUTUAL FUNDS FOR ABOUT TWO YEARS, THIS COURT IS OF THE OPINION THAT THE TRIBUNAL CLEARLY F ELL INTO ERROR IN HOLDING THAT THE AMOUNT OF RS. 58,71,144/- WAS BUSINESS INCOME AND NOT LONG TERM CAPITAL GAINS AS WAS RIGHTLY CONCLUDED AND HELD BY THE CIT (A). FOR THESE REASON S, THE QUESTION OF LAW FRAMED IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 11. THE APPEAL IS ACCORDINGLY ALLOWED IN THE ABOVE TER MS. 25. RESPECTFULLY FOLLOWING THE JUDGMENT OF HON. DE LHI HIGH COURT IN THE CASE OF YAMA FINANCE LTD. VS. ACIT(SUPRA) AND T HE DECISION OF THE CO-ORDINATE BENCH, WE FIND THAT THE RATIO OF TH E JUDGMENT/DECISION IS APPLICABLE TO THE CASE OF ASSESSEE. THEREFORE, I N THE GIVEN FACTS AND CIRCUMSTANCES NAMELY (I) INVESTMENTS IN SHARE S AND MUTUAL FUNDS ARE BEING SEPARATELY SHOWN AT COST PRICE IN T HE AUDITED BALANCE SHEET; (II) CLAIM OF ASSESSEE OF SHORT TERM AND LON G TERM CAPITAL GAIN FROM SALE OF SHARES AND MUTUAL FUNDS BEING REGULARL Y ACCEPTED BY THE REVENUE IN PAST AND ALSO IN SUBSEQUENT YEARS; (III) MAIN BUSINESS ACTIVITY OF DEALING IN DYES AND CHEMICALS BEING REG ULARLY CARRIED OUT AND SPECIALLY IN THE YEAR UNDER APPEAL THE BUSINESS TURNOVER HAS INCREASED; AND (IV) APPLICABILITY OF CBDT CIRCULAR NO.6/2016 DATED 29.2.1016, WE ARE OF THE VIEW THAT LD. CIT(A) HAS G ROSSLY ERRED IN TREATING THE INCOME OF RS.4,30,56,128/- EARNED FROM PURCHASE AND SALE OF SHARES AND MUTUAL FUNDS AS BUSINESS INCOME RATHER THAN TREATING THE SAME AS SHORT TERM AND LONG TERM CAPIT AL GAIN AS DISCLOSED BY ASSESSEE. WE ACCORDINGLY SET ASIDE THE ORDER OF LD. CIT(A) AND ALLOW THIS GROUND OF THE ASSESSEE. ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 24 26. NOW WE TAKE UP GROUND NO.3 WHICH READS AS UNDER :- (3) ALTERNATIVELY, WITHOUT PREJUDICE TO THE GROUND NO 2 REGARDING THE ASSESSMENT OF CAPITAL GAIN UNDER THE HEAD BUSINESS INCOME, (A) THE LEARNED COMMISSIONER (A) ERRED IN FACT AND IN LAW IN CONSIDERING UNIT OF MUTUAL FUND AS TRADABLE SECURITY ON STOCK EXCHAN GE AND TREATING PAR WITH THAT OF EQUITY SHARES AND THEREBY DIRECTING TO ASSE SS THE PROFIT OF RS. 3,58,56,829/- ON REDEMPTION OF UNITS OF THE MUTUAL FUNDS AS BUSINESS INCOME AGAINST THE CAPITAL GAIN ASSESSED BY THE ASSESSING OFFICER. (B) THE LEARNED COMMISSIONER (A) ERRED IN FACT AND IN LAW IN CONSIDERING THE PROFIT OF RS. 83,86,679/- ON SHARES AND MUTUAL FUND HELD FOR LONG TERM AS BUSINESS INCOME AGAINST THE LONG TERM CAPITAL GAIN ASSESSED BY THE ASSESSING OFFICER. (C) THE LEARNED COMMISSIONER (A) ERRED IN FACT AND IN LAW IN CONSIDERING THE PROFIT REALIZED ON SALE OF INVESTMENTS IN CURRENT Y EAR AS BUSINESS INCOME THOUGH THE INVESTMENTS HAD BEEN ACCEPTED AS INVESTM ENTS IN EARLIER YEAR. 27. AS WE HAVE ALREADY ALLOWED GROUND NO.2 OF THE A SSESSEE ACCEPTING THE CLAIM OF PURCHASE AND SALE OF SHARES OTHER THAN FUTURE & OPTIONS AS CAPITAL GAIN (SHORT TERM/LONG TERM) IT WOULD BE JUST ACADEMIC TO DEAL WITH GROUND NO.3. WE, THEREFORE, D ISMISS THIS GROUND. 28. GROUND NOS.4 & 5 ARE OF GENERAL NATURE, WHICH N EED NO ADJUDICATION. 29. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. 30. NOW WE TAKE REVENUES APPEAL IN ITA NO.2631/AHD /2013, WHEREIN FOLLOWING GROUNDS OF APPEAL HAVE BEEN RAISE D :- ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 25 1) THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV , AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN HOLDING THE RE-ASESSMENT PRO CEEDINGS AS INVALID. 2) THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN TREATING THE TRANSACTIONS OF SHARES AND MUTUAL FUND AS STCG INSTEAD OF BUSINESS INCOME AS TREATED BY THE A SSESSING OFFICER. 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD OUGHT TO HAVE U PHELD THE ORDER OF THE ASSESSING OFFICER. 4) IT IS THEREFORE, PRAYED THAT THE ORDER OF THE L D. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD MAY BE SET-A-SIDE AND THAT OF THE ORDER OF THE ASSESSING OFFICER BE RESTORED. 31. SOLITARY GRIEVANCE OF THE REVENUE IN THIS APPEA L IS THAT LD. CIT(A) HAS ERRED IN TREATING THE TRANSACTIONS OF SH ARES AND MUTUAL FUND AS STCG INSTEAD OF BUSINESS INCOME AS TREATED BY ASSESSING OFFICER. 32. SINCE WE HAVE DECIDED THE ISSUE IN FAVOUR OF AS SESSEE AFTER DETAILED DISCUSSION FROM PARA 16 TO 25 ABOVE OF THI S ORDER, WE FIND NO MERIT IN THE APPEAL OF REVENUE AND DISMISS THE SAME . 33. OTHER GROUNDS OF THE APPEAL ARE OF GENERAL NATU RE, WHICH NEED NO ADJUDICATION. 34. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED AND REVENUES APPEAL IS DISMISSED. ITA NO. 914 A-12 & 2631 A-13 ASST. YEAR 2007-08 & 2006-07 26 ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH OCTOBER, 2016 SD/- SD/- (S. S. GODARA) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 13/10/2016 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 10/10/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 13/10/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK:1 3/10/160. 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: