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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-4, Mumbai [in short CIT(A)], in appeal No. CIT(A)-4/IT-106/DC-2(1)/2012-13 dated 25.10.2013. The Assessment was framed by the DCIT, Circle-2(1), Mumbai (in short ‘DCIT’) for the A.Y. 2010-11 vide order dated 16.02.2013 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The two interconnected issues raised by assessee in its appeal regarding the head of income. The first issue is as regards to income from surplus arising out of the sale and purchase of shares is to be assessed as capital gains or business income is raised by way of ground No. 1A to E and another inter connected issues regarding the claim of expenses on sale of shares of Hindalco for an amount of ₹ 12.05 lakhs in respect of brokerages by way of ground No. 3A to D, which were noted by the Tribunal in its order dated 19/12/216 but did not adjudicate these two issues. Finally, the Tribunal recalled these two issues to be adjudicated in MA No. 124/M/2017 vide order dated 06.11.2017 and the relevant recalling order Para 3 reads as under: -
“3. We have heard the rival submission on the issue and we find from the order dated 19.12.2016 that ground No. 1 to 3 in the grounds of appeal mentioned in the above para inadvertedly have been left to be adjudicated upon while deciding the appeal which is an apparent mistake in the order. Hence, we recall our order dated 19.12.2016 to that extent and restore the appeal for hearing on these grounds. The registry is directed to re-fix the appeal for hearing for these grounds in regular course. "
3. In view of the above, these two interconnected issues are raised by the assessee by way of ground No. 1a to e reads as under: -
“a) On the facts and circumstances of the case and in law the learned C.I.T. (Appeals) erred in confirming the action of the learned Assessing Officer in holding that the appellant was a dealer in shares and therefore the appellant on sole of Hindalco shares amounting to Rs.4,57,61,550/- was assessable under the head “Profits and gains of business and not under the head Capital gains " as contended by the appellant. b) Without prejudice to the generality of the above ground the learned C.I.T. (Appeals) erred in holding as aforesaid, in view of the alleged high volume. frequency, less period of holding, repetitive transactions, continuity and regularity of the transaction which are being done with a profit motive, a conclusion that is factually and legally incorrect. c) The learned C.I.T. (Appeals) failed to appreciate the appellant's holding period of Hindalco shares ranging from 234 days to 330 days. d) The learned C.I.T. (Appeals) failed to appreciate that Hindalco shares which were sold during the previous year relevant to the assessment year under appeal resulting into aforesaid gain, were accepted as "investment" in the immediately preceding previous year. e) On the facts and circumstances of the case and in law the learned C.I.T. (Appeals) erred in confirming the view of the learned Assessing Officer as aforesaid that the activity of the appellant in buying and selling of t-4indalco shares is a business activity as opposed to the investment activity based on irrelevant and extraneous facts not germane to the issue."
Similarly, interconnected issues regarding claim of expenses on sale of shares on Hindalco by way of No. 3(a) to (d) reads as under: -
“3. a) The learned C.I.T. (Appeals) erred in upholding the action of the Assessing Officer who has failed to appreciate CBDT Circular No. 14 dt.1
1/04/1955 wherein a claim either sup moto or made by way of letter ought to be considered and as such ought to have allowed the claim of expenses of Rs. 12,05.000/- on sale of shares of Hindalco, being expenditure incurred in respect of brokerage. claimed at the time of assessment proceedings. b) On the facts and circumstances of the case and in low the learned C.I.T. (Appeals) erred in confirming the view of the Assessing Officer who has toiled in his duty to correctly compute the income and grant relief even if not claimed by the appellant in the return of income. c) The appellant submits that even assuming that the learned Assessing Officer did not have the power to consider appellant's aforesaid claim, the learned C.I.T.(Appeals) has the necessary powers to consider the some and ought to have disposed off the said ground on merits. d) On the facts and circumstances of the case and in low the learned C.I.T. (Appeals) has failed to appreciate that the provisions of Rule 46A is not applicable as no new evidence was produced before him in respect of the claim of expenses of Rs. 12,05,000/- on sale of shares of Hindalco.
Briefly stated facts are that the assessee company is a non- banking finance company registered with RBI with the main object to make investments in various classes of assets. The assessee company filed its return of income for the relevant assessment year 2010-11. During the course of assessment proceedings the AO noticed that the assessee has disclosed short term capital gain of ₹ 4,57,61,550/- and the breakup of which was provided. The short term capital gain was earned by the assessee on sale and purchase of shares of Hindalco industries Ltd. in the open market. The AO required the assessee to explain as to why this short term capital gain declared by it, be not assessed as business income. The assessee vides letter dated 24.01.2013 filed explanation. The AO was not convinced with the reply and he treated the short term capital gain declared by the assessee as business income by observing in Para 3.10 as under:
“3.10 The principles and ratios laid down in the Rulings of Hon’ble Courts and also as laid out in CBDT circulars squarely apply to the case. All the above facts and circumstances and the arguments given and applicable decisions together and cumulatively lead to the conclusion that the assessee has indulged in trading of shares during the years. In view of the above discussed facts, the entire profits earned on purchase and sale of shares including long term capital gains claimed by the assessee are treated as income from business. Accordingly, an amount of ₹ 4,57,61,550/- is taxed as business income. Penalty proceedings under section 271(1)(c) of the I.T. Act, are separately initiated for furnishing of inaccurate particulars of taxable income.”
Aggrieved, assessee preferred the appeal before CIT(A).
The CIT(A) also confirmed the action of the AO by observing in Para 5.2.18 as under:-
“5.2.18 Respectfully following the aforesaid decisions and after carefully considering the facts of the case it is held that the appellant had not held shares and securities as investments in respect of most of the occasions of sale of shares. These transactions were clearly in the nature of business transactions. Therefore in view of the reasons given in the preceding paragraphs it is clearly proved that the appellant was engaged in the business activity as far as share purchase and sales were concerned. The appellant was involved in trading of shares during the relevant accounting year and that it was not an investor in shares. Issues raised from No. I to V are not allowed.”
Aggrieved, now assessee is in appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. The facts of the case are that the assessee during the year sold about 80,00,000 shares of Hindalco industries Ltd for a total consideration of Rs.81,37,61,550/. The profits arising from the sale of these shares were to the tune of ₹ 4,57,61,550/-. These shares were purchased by the assessee on 22/10/2008 and were sold in the year under consideration on the following dates:
S. No. of shares Date of Date of sale Holding period No. purchase 1 40,00,000 22/10/2008 12/06/2009 234 days 2. 10,00,000 22/10/2008 15.06.2009 237 days 3. 15,00,000 22/10/2008 30/06/2009 252 days 4. 5,00,000 22/10/2008 03/08/2009 282 days 5. 10,00,000 22/10/2008 16/09/2009 330 days There were no other transactions of sale of shares by the assessee during the year. From the above table, it is very much evident that these shares were held by the assessee for a considerable period of time. The profit on the sale of the abovementioned shares were treated by the assessee as short term capital gains, as the same were held by the assessee as "investments" and were treated as Capital asset. However, the AO vide assessment order dated 16/02/2313, treated the same as income under the head profits and gains from business or profession for the reason that the activity of sale of shares carried out by the assessee is an "adventure in the nature of trade".
We find from the above facts that the assessee is an investment Company and has been registered with the Reserve Bank of India as the same and, therefore, is not a dealer in shares. It is also a fact that the assessee had made the investment out of surplus funds available and had not borrowed any money for the purse of making the investment as is clear from the accounts. The assessee has no employed anyone who is only involved in the activity of purchase and sale of the shares. Further, the assessee had disclosed these shares as investments in the books of account. The shares were acquired in the earlier year and the AO had in the earlier year accepted the same as investment, therefore, there is no question of treating the same a business Income. Thus, this clearly shows the intention of the assessee to be an investor and not a trader in shares. The intention of the person acquiring the shares is the most Important to determine whether the shares are held as investment or as stock in trade. Further, the shares were actually purchased in the earlier year and AO has also not disputed the treatment of the said shares as "investments" in the books of account. Thus, the contention of the AO that the said shares should be treated as business income since assessee is regularly dealing in shares is not correct when he had accepted the same as "investments" in earlier years too. To be more specific, the subject matter of sale of shares in the instant case under consideration is the shares of Hindalco Industries Ltd. These shares were treated as 'investments' in the books of account for the earlier Assessment Year, i.e. AY 2009-10. It is a settled law that the intention at the time of purchase should be looked into to determine whether the assets are held as investments or stock in trade. The shares have been valued by the assessee at cost in the books and the AO has accepted the valuation at cost in the earlier assessment year when the shares were acquired. Further, in the relevant year as well, for the balance shares, which were not sold during the year the AO accepted the valuation of the shares at cost.
Further, the shares have been held for considerably a long time by the assessee as these shares of Hindalco Industries Ltd were held for a period of about 234-330 days, which is considerably a long time. By no stretch of imagination can one say this gap of around 7 to 11 months be a few days/few months time as is alleged by the AO. Further, the AO failed to appreciate that there was not even one transaction of purchase of shares from the market during the year. And it had merely sold the shares acquired in the earlier year and that to share of one company only. Further, the shares were sold on five different dates as the quantity of shares was large. This proves the intention to hold the shares for a long time, and therefore, they should be treated as "investments' and not as stock in-trade. Moreover the source of funds for investment is not out of borrowed funds as the assessee had not borrowed any funds to make the investment and had used Its own funds to make Its investments. Even the frequency and volume of the Transaction is another important criterion to determine whether the assessee is an investor or a trader. We find that the assessee claimed that although the volume of Rs. 81,37,61,550/- may appear to be large, but considering that the total Investment of Rs. 4,68,37,14,383/- as per the investment schedule, the volume is 81.38 Crores is not large. The total sale made by the assessee i.e. the volume of the transaction by the assessee is 17.37% of the total capital.
Therefore, we are of the view that the volume of the transaction would also lead to the conclusion that the assessee is an investor and not a trader in shares. Further, we find that there is no repeated purchase and sale of the shares and the assessee had purchased the shares in the earlier year and sold the same in the relevant year. There has been no purchase of Hindalco shares in the relevant year. In the immediate preceding/succeeding assessment year there is no capital gain on sale of shares. Hence, we decide this issue of assessee’s appeal in its favour.
The next issue is as regards to non allowance of brokerage expenditure on the sale of Hindalco shares. We find that the assessee has not claimed before the AO and facts relating to this issue have not been examined. Hence we restore this issue back to the file of the AO and allowed for statistical purposes.
In the result, the appeal of assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 15-06-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 15.06.2018 kao kI ga[- .