TASH INVESTMENTS PVT. LTD.,,VADODARA vs. THE ACIT, CIRCLE-2(1)(1),, BARODA

आदेश/O R D E R

PER PRADIP KUMAR KEDIA - AM:

The captioned cross appeals have been filed at the instance of the assessee and Revenue against the orders of the Commissioner of Income Tax (Appeals)-2, Vadodara (‘CIT(A)’ in short), dated 02.02.2016 & 02.03.2016 arising in the assessment orders dated 02.02.2015 & 03.03.2013 passed by the Assessing Officer (AO) under S. 143(3) of the Income Tax Act, 1961 (the Act) respectively concerning AYs. 2012-13 & 2011-12.

“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in law as well as facts and circumstances of the case by treating long term/Short capital gain/loss as business income, the assessee company is an Investment Company and income arising from the activities carried out by the company is not business income but income from capital gain.”

2.1 Briefly stated, the assessee company is stated to be Investment Company registered with RBI as Non-Banking Finance Company (NBFC) inter alia engaged in investment and money advancing activities for the assessment years in question. The assessee filed return of income for AY 2012-13 in question declaring loss of Rs.1,81,90,320/-. The return filed by the assessee company was subjected to scrutiny assessment. In the course of scrutiny proceedings, the AO observed that the record of the assessee shows that principal activity of the assessee is dealing in shares. The AO accordingly disputed long term capital gain/loss and short term capital gain/loss offered by the assessee on purchase and sale of shares

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 3 –

offered by the assessee under the head ‘Capital Gains’. The AO noted that the assessee has incorrectly declared the gains/losses arising on purchase and sale of shares to be taxable under the head ‘capital gains’ whereas in reality the profit and gains are liable to be taxed under the head ‘business income’ being adventure in the nature of trade as defined under s.2(13) of the Act. The AO thus sought to deny the concessional tax treatment available to capital gain transactions on purchase and sale of shares. The AO inter alia summarized the factual position emerging from the facts and material placed on behalf of the assessee which is reproduced as under:

“(1) Assessee's Principal source of Income is from purchase and sale of shares. (2) Assessee is involved in this share business activities for several years. (3) Assessee is not engaged in any business activities other than purchase and sale of shares/ mutual fund units. (4) Assessee was also engaged in speculation activity for several s including the year under consideration. (5) During the current assessment year, the assessee has dealt in over 65 scrips and 216 purchase/sale transactions. Similar frequencies of transactions are made in the earlier years and also in subsequent years. (6) Assessee has purchased 50843 shares and sold 289825 shares during the previous year relating to this assessment year. It is important to mention here that similar volumes of purchases and sale are done in last several years and in subsequent years also. (7) In as many as 18 scrips out of the short term capital gains, shares have been purchases, sold & again repurchased 85 resold. (8) The source of fund utilized for acquisition of shares are both borrowed as well as accruals of the business. (9) Though the assessee claims that it is a Non-Banking Financial company, it has advanced certain sum of money, on which no income/interest is generated, which otherwise is the main object of an NBFC.”

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 4 –

2.2 The AO thus noted that there exists a large volume and transactions in shares undertaken by the assessee with considerable frequency. It was further observed that entire time spent was merely on dealing in shares which is the solitary activity of the assessee company. The AO further noted that the assessee has been doing this activity through Portfolio Management Services (PMS) and professional services of three of such PMS were taken. The AO further noted that such transactions in shares were carrying out by the assessee for several years which proves the continuity and regularity. The earning from sale of shares were systematically re-invested in acquisition of new shares on a regular basis coupled with huge profits generated would indicate a clear profit motive of the assessee. The AO took note of some judicial pronouncements as well as the CBDT Circular No. 4/2007 issued by the CBDT in this regard and found that having regard to the substantial nature of value of transactions, the magnitude of purchase and sale, the assessee was found to be engaged in a systematic, regular and periodic activity with numerous and continuous transaction which is akin to adventure in the nature of trade in distinction to an investment activity only as claimed by assessee. The AO accordingly held that income/loss arising from purchase and sale of shares give rise to business income and cannot be taxed at concessional rate applicable for income assessable under the head ‘capital gains’. The AO, in short, denied the benefits of concessional tax treatment on gains/loss arising from sale of shares.

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 5 –

investment activity. It was further noted that there were only 216 transactions of purchase/sale in merely 65 scrips which was not considered very high. It was further observed that many shares were carried forward from earlier years where its declaration as investment was not disputed in earlier years. The CIT(A) also noted that major investment of Rs.24.04 Crores was made through fund managers and therefore, the assessee was not engaged in any organized or systematic activity of purchase or sale of shares by itself. It was further noted that investment in bonds stand at Rs.15.24 Crores and remaining amount of Rs.8.24 Crores are invested in unquoted shares of five companies. In the light of the aforesaid broad facts, the CIT(A) concluded the issue in favour of the assessee and directed the AO to treat the transactions of purchase and sale of shares as arising from investment activity which is susceptible to tax under the head ‘capital gains’. The operative para of the order of CIT(A) is reproduced hereunder for ready reference:

“4.1 Ground No.2 pertains to action of AO in treating Long term / Short term Capital Gain or Loss as income from business. It is noticed that appellant is an investment company and during the year under consideration the total investments as on 31.03.2012 are shown at Rs. 47.55 crores. The Investment in the immediate preceding year was Rs. 60.81 crores. These investments are in the form of shares held with Fund managers, Mutual fund held with Fund managers, fully paid up bonds and investments in unquoted shares. Undisputedly, none of the investments have been shown as Stock- in-Trade in the books of accounts and Balance Sheet. This fact has also not been disputed by the AO. 4.1.1 On perusal of the Balance Sheet, it is also ^noticed that the appellant has not utilized any borrowed funds for the purposes of investments in shares / mutual fund. This is clearly established from the fact that the AO has not disallowed any part of the interest u/s 14A. The findings recorded by the AO herself in the assessment order reveals that there were only 216 transactions of Purchase / Sale in 65 scrips. Looking to the number of transactions as well as scrips dealt with, in my considered view, the volume as well as frequency of the transactions were not very high. It may also be noted that the investments are carried forward from the earlier years also and there is no finding of A.O. that the activity of the appellant was

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 6 –

treated as business in any of the earlier years, it is also very relevant to mention that the major investment of Rs. 24.04 crores was made through the Fund Managers and hence the appellant was not engaged in any organized and systematic activity of purchase and sales of the shares by itself. Another substantial part of Rs. 15.24 crores was investments in the bonds. Balance amount of Rs. 8.24 croes was invested in unquoted shares of 5 companies and jewellery. Therefore, keeping in view of the above mentioned facts and circumstances of the case, thus it emerges that appellant company was not engaged in any business activity of purchase and sale of the shares. This view gets support from the decision of Hon'ble Supreme Court in the case of CIT Vs Associated Industrial Development Co.(P) Ltd (1971) 82 ITR 586. Even the CBDT Circular No. 4/2007 also supports the case of the appellant because the shares / mutual funds were shown as investment in the books of account and the investment was made out of own funds. Accordingly, the AO is directed to treat the transactions of purchase and sale of the shares / mutual funds / bonds as investments only. Thus appellant succeeds in respect of Ground No.2.”

4.1 The learned DR for the Revenue strongly contested the process of reasoning adopted by the CIT(A) while granting relief to the assessee. The learned DR for the Revenue relied upon the order of the AO and in furtherance submitted that the assessee is a registered NBFC company and the main object of the assessee is to deploy funds in shares and securities and to lend advances as can be seen from the balance sheet itself. The major source of revenue is from these activities. It was pointed out that assessee has incurred investment and consultancy fees to the tune of Rs.36.93 Lakhs in this year and Rs.45.41 lakhs in the preceding year to seek professional help to enhance its profitability. A very amount of security transaction tax paid (Rs.2.38 Lakhs for AY 2012-13; Rs.5.39 Lakhs AY 2011-12) would also indicate frequent churning of the portfolio. It was further stated that custody charges incurred of Rs.54,831/- (AY 2011-12 Rs.1,36,277/-) would further indicate that the share portfolio was in

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 7 –

the control and command of the professionals who are disposed to maximize the profits and encash every movement and possibility in the stock market. Such mindset underlines the implicit intention of the assessee to maximize profit at the shortest possible period and thus comparable with business activity. The learned DR next submitted that the number of transactions and number of scrips involved as well as resultant profits / loss actually show an activity undertaken in regular course. The learned DR accordingly submitted that the CIT(A) has incorrectly ignored the apparent commercial motive in the transactions of purchase and sale and has wrongly concluded the issue in a summary manner unmindful of the frequency and magnitude and also the tests evolved by the judicial precedents and the caution administered by the CBDT Circular. The learned DR thus vehemently submitted that in view of the objects of assessee, financial structure, regularity and continuity in the transactions, the declared intention of the assessee cannot be readily accepted and accordingly urged for setting aside the order of the CIT(A) and restoration of the order of the AO in this regard.

4.2 The learned AR for the assessee, on the other hand, relied upon the order of the CIT(A). The learned AR for the assessee pointed out that the intention of the assessee is required to be gauged at the time of purchase as recorded in the books of accounts. The learned AR submitted that no borrowed funds have been utilized and therefore, the assessee was in no hurry to resale the shares and take business risks. The learned AR thereafter submitted that the frequency, magnitude and regularity of transactions are to be seen in the context of a given case. The assessee in the instant case has entered into meager value of transactions of low magnitude and frequency. The learned AR also pointed out that the assessee has engaged deployed its surplus funds with the help of the professionals (PMS) to assist the assessee in

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 8 –

wealth creation. The learned AR next submitted that the Revenue itself has accepted the transactions in shares under the head ‘capital gains’ as declared without any interference in the earlier AY 2010-11 and therefore, doctrine of consistency should apply while adjudicating the issue. On being asked by the bench, the leaned AR for the assessee referred to main objects of the company as recorded in its memorandum of Association (MOA) whereby the assessee is permitted to carry on the business of investment company which is capable of making investment in shares, bonds etc. The learned AR thus submitted that as per MOA also, the assessee is only an investor. On being further asked by the bench, the learned AR for the assessee clarified that shares are held in the demat account of the assessee company and the portfolio was not surrendered in custody of PMS professionals and continued to remain with assessee. Referring to CBDT Circular No.4/2007 dated 15.06.2007, the learned AR for the assessee submitted that the assessee is also entitled to hold two types of port folios simultaneously i.e. both by way of investment (capital asset) as well as stock-in-trade (trading asset). The assessee in the instant case was therefore entitled to hold the shares as capital investment. The learned AR accordingly submitted that the AO has wrongly construed the facts and circumstances of the case which was set right by the CIT(A) in the first appeal. The learned AR thus submitted that no interference with the order of the CIT(A) is called for.

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 9 –

under s. 45 of the Act. The AO, on the other hand, has altered the character of income declared under the head ‘Capital Gains’ and treated the gains/loss arising from such activity of purchase and sale as ‘adventure in the nature of trade’ taxable under the head ‘business income’ under s.28 r.w.s. 2(13) of the Act. The aforesaid attempt to change in the character of income by the AO was challenged in the first appeal by the assessee. The CIT(A) adjudicated the issue in favour of the assessee and set aside the action of the AO. The Revenue has challenged the action of the CIT(A) on the premise that acquisition of shares are essentially trading activity with an object to resale at profit at shortest possible time akin to a business venture. It is the case of the Revenue that the transactions of purchase and sale in shares etc. are trading in nature and thus chargeable to tax at normal rate under the head ‘business income’. It is further case of the Revenue that the frequency, magnitude and regularity in carrying out the purchase and sale involving large number of transactions and scrips lends credence to the impression of an adventure in the nature of trade referred to in Section 2(13) of the Act and therefore it is akin to the business giving rise to its taxability under s.28 of the Act.

6.1 Before we proceed further, it would be pertinent to note in the context that there is a qualitative difference between profits arising from sale of capital assets and that of trading assets under the Act. Section 2(13) of the Act defining ‘business’ and Section 2(14) defining ‘capital assets’ operate in mutual exclusion. To put it differently, capital assets (non-current investment) and trading assets (stock-in-trade or current investment) are treated differently under the scheme of the Act. They cannot be compared on par with which other as similar class of asset. Noticeably, Section 2(13) of the Act defines the expression ‘business’ in an inclusive manner and even embraces

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 10 –

any adventure in the nature of trade or commerce etc. within its sweep. Section 2(13) reads as under:

“Business, includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”

6.2 We now proceed to deal with the objective facts of the present case in appeal to determine whether the impugned transaction of purchase and sale in shares bear the trappings of adventure in the nature of trade or commerce etc. or not. In this context, we note at the beginning that assessee is engaged in investment in shares/stocks and other marketable securities as per its MOA and is registered as NBFC. A perusal of the main objects of the company does not indicate anything which may prevent the assessee to purchase and sale shares in terms of frequency or regularity. Therefore, the objects of the assessee company do not indicate intentions towards investment or trading per se for the purposes of Income Tax Act. It simply enables the assessee to engage itself in ‘investment’ activity which term is general connotation in business parlance. Secondly, when the main object of the company is to acquire shares and earn income therefrom, the income received thereon is liable to be taxed as ‘business income’ in the light of the decision of the Hon’ble Supreme Court in the case of Chennai Properties & Investment Ltd. vs. CIT (2015) 373 ITR 673 (SC). Therefore, where the pre-dominant object of the assessee is to buy, invest or acquire and hold shares etc. intention of the assessee would ordinarily be to enjoy profits in the course of business from this activity. Moving further, it is the case of the assessee that in order to attain its pre-dominant objects, the assessee company has entrusted this task to the PMS who are stated to be organizations run by the professionally competent persons who understand the science of ever- fluctuating stock market. Contextually, it is claimed by the assessee before the CIT(A) [page no.21 of the order of the CIT(A)] that high

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 11 –

frequency in transaction is nothing but outcome of prudent investment decision taken by the PMS on behalf of the assessee with a view to seize favourable market movement. The engagement of the professionals keeping continuous watch on the portfolio of an investor also unfolds the intention that such investor seeks to obliterate the influence of short term fluctuations too which ordinarily a trader does, who is guided by these short term considerations. This peculiar aspect in the case of the assessee gives a clue that assessee is engaged in the business activity or something akin thereto particularly when read alongside the object clause. The intention of investment qua trading is ordinarily differentiated by time horizon. The repeated churning of portfolio by a professional naturally erodes the element of longevity in such act. The investment as a capital asset is an act of faith in distinction to risk based approach adopted by a trader. The assessee has regularly booked losses at short intervals which underscores a risk based approach.

6.3 We require to note here that definition of business under s.2(13) of the Act is quite elastic and even includes an adventure which is in the nature of trade though strictly such transaction may not bear all the trappings of a trade or commerce. In appropriate circumstances even a solitary transaction may fall within the sweep of ‘adventure in the nature of trade’ as held in the case of Dalmia Cement Ltd. vs. CIT 4 SCC 614 and many other judgments. As admitted on behalf of the assessee as per its submission before the CIT(A), object of PMS was to minimize the market risk. It is manifest that purchase and sales are not occasioned in the case of the assessee by any special necessity of time but to maximize the profits.

6.4 As noted by the AO, a large number of scrips were traded which are about 65 across the PMS engaged. It is further noted by the AO

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 12 –

that period of holding at times as short as few days in certain transactions. The assessee has reported nearly 216 transactions over 65 scrips during the year and similar transactions in the earlier year. Therefore, the frequency and the regularity also lean against the assessee. The treatment in the books of accounts in a particular manner may be an important indication of the intention but is not necessarily conclusive. The intention of the assessee is required to be gauged from the facts seen holistically. Agreeably, the involvement of borrowed funds is one of the important tests to determine the intention but is not indefeasible in all circumstances. The presence or absence of borrowed funds per se would not define the character of transaction in a particular manner.

6.5 The continuity in the nature of transactions is required to be seen over a period of time. A similar pattern year after year may compel one to think the behavior of an investor in a logical and rational manner, while the transactions might have been accepted as investment in the preceding year in a summary manner. There could be no res judicata in such cases in the light of continuity of the same behavior in the subsequent assessment year. The continuity in the purchase and sale of shares being an important test to determine the character of transaction, the peculiar facts do not permit us to accept the plea of doctrine of consistency in the present case. The CIT(A) in our view has seen facts of regularity in purchase and sale of shares for several years in a light hearted manner and has ignored the clear commercial motive subsisting in the facts of the case. The assessee has paid substantial professional fees in its endeavor to corner gains from market fluctuations which fact also has not been envisioned in perspective while reversing the action of the AO. The CIT(A) while making reference to the circular of the CBDT has shunned the caution administered by the circular i.e. there cannot be any straight jacket

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 13 –

formula and there should not be a sweeping conclusion but a case to case test or approach should be adopted.

6.6 The issue is essentially factual and is governed by facts of each case. Judicial utterances made in the setting of the facts of a case would not thus apply unless it is shown that the facts are identical. We are thus not required to delineate the nicety of law de hors the facts in such a case. The CIT(A) in our view has applied the legal principles in an abstract manner de hors the peculiar facts of the case and therefore, cannot be approved. We accordingly set aside the order of the CIT(A) and restore the action of the AO.

6.7 In the result, appeal of the Revenue for AY 2012-13 is allowed.

“1. The order passed by the Ld. CIT(A) is bad in law, contrary to legal pronouncements and same be quashed. The addition is unwarranted and same be deleted now.

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 14 –

“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in law as well as facts and circumstances of the case by treating income earned from the transactions of shares and securities as long term/short capital gain instead of business income by ignoring the facts that there cannot be any fixed or rigid principle in respect of shares and securities that if it was held as investment in preceding year, it must always be investment in the following years. In other words the assessee can make investment in a year and can enter into trading in subsequent year.”

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 15 –

from sale of shares to be attributable under the head ‘capital gains’ as against the stand of the Revenue that it is chargeable under the head ‘business income’.

“1. The order passed by the Ld. CIT(A) is bad in law, contrary to legal pronouncements and same be quashed. The addition is unwarranted and same be deleted now. 2. The Ld. CIT(A) has erred in upholding the disallowance of Rs.81,91,488/- made by the AO U/s 14A of the Act r.w.r 8D. The Ld. CIT(A) has erred in law in upholding the disallowances u/s 14A which is in excess of the expenses debited to profit & loss account. Mechanical application of Section 14A being higher amount than expenditure attributable for earning tax free income is unjust. It is pray that disallowance u/s 14A should be restricted to the extent of Rs.52,17,679/- being claimed as expense and excess Disallowance of Rs.29,73,809 ought to be deleted.”

ITA Nos. 1158/Ahd/16 & 3 Ors.[Tash Investment Pvt. Ltd.] - 16 –

This Order pronounced in Open Court on 30/04/2019

Sd/- Sd/- (MAHAVIR PRASAD) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: Dated 30/04/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।