DCIT, NEW DELHI vs. M/S. MALVIKA INVESTMENTS & SERVICES PVT. LTD., NEW DELHI

PER J.SUDHAKAR REDDY, A.M.

This is an appeal filed by the Revenue directed against the order of the Ld. Commissioner of Income Tax (Appeals)-IX, New Delhi dated 24.10.2013 pertaining to the Assessment Year (A.Y.) 2010-11.

company earned dividend income of Rs.1,24,616/-, Short term capital gain of Rs.70,20,731/-, and Long term capital gains of Rs.4,46,857/- on sale of units of mutual funds. The A.O. held that appellant company has traded in mutual funds and shares as the other item of income shown in the P&L account is interest, interest on FDR and dividend income and share trading future profits, and thus taxed the income declared from short term capital gain and long term capital gain as business income.”

appellant company. Your good self would also kindly appreciate that there were not hundreds or thousands of transactions which are there in case of a trader assessee but in the instant case, there were in all mere fifty transactions of purchase of units involving twelve schemes and forty eight transactions of sale of units involving fourteen schemes of various mutual funds. Numbers of transactions for purchase of shares were only three and sale of share were just two. It means that per week transaction comes to one which by no stretch can be said to be a business. Also, there are no borrowed fund which also proves that the investments were simply investment and there was no element of business."

mutual funds as capital gains instead of business income to avoid a higher rate of taxation. It is observed that the AO has not applied the principles laid down by the Hon'ble Supreme Court, and in the Circular referred, in the right perspectives. It is observed from the details placed in the paper book that the appellant company has made investments in the mutual funds and shares which has been shown by the said company under the head "Investments" in their balance sheet. There is also no change in the year under consideration as well, as compared to the preceding years, where also the income has been assessed as Short term capital gain and not as business income of the assessee. It is an accepted fact that the assessee had shown the stocks in his books of accounts as investments and not as stock-in-trade and this important treatment from the accounting angle has a bearing on the issue. There is no stock in trade of shares or mutual funds in the Balance sheet of the assessee, rather these are consistently shown by the assessee under the head investments. The assessee company had shown the gains in earlier years also under the head capital gain, which has been accepted as such. Another related issue from the accounting point of view is how the shares have been valued by the assessee in books of accounts. It is seen that the assessee has always valued the shares at cost in the balance sheet, which clearly indicates that same have been treated as investment only. During the year under consideration, assessee had an investments in shares and mutual funds amounting to Rs.6,34,16,144/- and in the immediate preceding years these investments were for Rs.6,28,97,192/-. The details of purchase and sale and period of

holding of Mutual Fund and Shares are analysed. The total purchase transactions done by the assessee in units, during the year are about 50 in twelve schemes and sales transactions are 48 in fourteen schemes of various mutual funds, which comes to one transaction in a week only and cannot be considered to have done with the intention of any trading in shares or units of mutual funds. Although, there is no specific number of days mentioned in the CBDT circular to be qualified as investment, in a very general approach, it can be seen that out of total 88 transactions, only in 8 cases, period of holding is less than 10 days. The fact that the short term capital gain declared of Rs.70,20,731/- is 95% of the total capital gains of Rs. 74,67,587/- cannot be a ground to assess the capital gain as business income, when there is no regular trading of these shares and mutual funds, and more so when these are part of the investments sold by the appellant during the year under consideration. Appellant has shown these investments at cost price as capital assets. The transactions done are also not regular and sUbstantia0"he judgment and the Board circular relied upon by the AO rather supports the case of the appellant. Hon'ble High Court of Bombay, in the case of CIT Vs. Gopal Purohit (2011) 336 ITR 287 held that "Assessee is engaged in two different types of transactions namely, investment in shares and dealing in shares for the purposes of business and held that the delivery based transactions are to be treated as investment transactions and the profit received therefrom is to be treated as short term or long term capital gain depending on the period of holding of shares and that there ought to bee uniformity in treatment and consistency in various years when the facts and circumstances are

identical. n Hon'ble ITAT,Mumbai in the case of Management Structure & Systems (P) Limited vs. Income Tax Officer, 41 DTR (Mumbai) (Trib) 426 held 'Assessee treated the entire investment in shares as an investment only and not as stock in-trade, did not borrow money for investment and transactions were completed with delivery and therefore, entire income from the sale and purchase of the shares of assessee is to be assessed under the head 'capital gain' especially when same position was accepted in past several years." Appellant's case is squarely covered by the judgment of Hon'ble ITAT held in Bombay Gymkhana Ltd. Vs. ITO (2009) 27 SOT 58 (Mum) URO., wherein also assessee sold certain units of mutual funds and offered a part of income arising therefrom as long-term capital gain and balance as short-term capital gain. Assessee also claimed set-off of brought forward capital loss against long-term capital gain. AO on the basis of magnitude and number of transactions of sale and purchase of units, held that assessee was in business of buying and selling units and, thus, income arising, therefrom was taxed as business income. Ld. Commissioner (Appeals) upheld the order of AO. However, Hon'ble ITAT held that purchase of units was shown by assessee in its books of account as investment and said stand of assessee was accepted by department. It was held that when purchase of units was accepted as purchase in course of investment, at the time of sale thereof, income arising on sale had to be assessed as capital gain and it could not be assessed as business income merely for reason that quantum was high or number of transactions were high.

The judicial pronouncements discussed above clearly indicates that, (i) Whether particular trading is from 'investment on capital asset' or from 'stock in trade' is a question of fact. (ii) The fact depends on how it is recorded in the books of accounts of the assessee and what is the accounting treatment given to it. (iii) Magnitude of transaction is not relevant to the issue. (iv) Principle of consistency is to be followed on this issue. Respectfully following the above judgments of the higher courts, and after considering the facts of the case as discussed above, I do not find any reason to hold that the short term capital gain or long term capital gain as declared by the appellant should not be assessed under these heads of income. Therefore, the AO is directed to assess the same as declared by appellant. These grounds of appeal are decided in favour of the appellant.” 6. The ld.Sr.D.R. could not dispute these factual findings. Thus we apply the following judgements of the Hon’ble Delhi High Court to the facts of this case. (1) CIT vs. Amit Jain Delhi High Court judgement dt. 03.03.2015 in ITA no.517/2012 (374 ITR 550), wherein it was held as follows.

“8. The factors which Courts and Tribunals have to take into consideration whilst deciding whether income gained during a particular period is business income through purchase and sale of shares or other tradable capital assets, or capital gains on account of sale of such assets, has been spelt out and reiterated in a number of decisions. These include Raja Bahadur Visheshwar Singh v. CIT, (1961) 41 ITR 685 (SC); Commissioner of Income Tax, U.P v. Madan Gopal Radhey Lal, [1969] 73 ITR 652 (SC); Commissioner of Income Tax v Associated Industrial Development Company 82 ITR 586 (SC); P.M. Mohammed Meerakhan v. Commissioner of Income- tax, Kerala, 73 ITR 735 (S.C.) and Commissioner of Income Tax

v NSS Investments Ltd 2007 (277) ITR 149 (Mad). It was in the light of these decisions that the CBDT Circular No. 4/2007, was issued, indicating the principles applicable in this regard. These criteria are: ITA517-12 Page 6 (1) Intention of the assessee at the time of purchase of the shares. This can be found out from the treatment given to the purchase in the assessee's books of account. (2) Did the assessee borrow money to purchase the shares, and paid interest for it. Money is generally borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. (3) Volume and frequency of the purchases and sale/disposals. If purchase and sales are frequent, or there are substantial transactions in an item, that can indicate trade. Habitual dealing in a particular item is indicative of intention of trade. Likewise, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). Another related factor is the duration for which the shares are held. (4) Was the purchase and sale made for realizing profit, or for retention and appreciation in its value. The former indicates the purchases being part of trade; and the latter is indicative of the purchases being an investment. Furthermore, it would be relevant to ask whether the intention behind the purchase was to enjoy dividend, or merely to earn profit on sale of shares. Importantly, a commercial motive is an essential ingredient of trade in this context. (5) Whether the items in question were valued at cost. If so, it would indicate that they were investments. Where they were ITA517-12 Page 7 valued at cost or market value or net realizable value, whichever is less, it will indicate that items were treated as stock-in-trade. (6) Finally, it would be relevant to consider how the assessee is authorized in its Memorandum / Articles. In the present case, there is no dispute that the opening investment cost for the relevant year AY 2006-07 was Rs.2.60 crores; the corresponding closing value was Rs.4.70 crores. Furthermore, the Court notices that the assessee derived, in addition to the short term capital gains, dividend income to the tune of nearly Rs.10 lakhs. The authorities have all emphasised that even while seeing the cumulative effect of the tests, in the given facts of a case, one test might be determinative or conclusive. At the same time, no single test having regard to the facts of a case and a cumulative effect thereof, need be determinative or conclusive. In the present instance what is apparent is that the assessee, an individual, did not borrow any funds; the share scripts traded were only from amongst

what were held by him. Significantly, dividend income amounting to about 4% of the value of the investment was earned by the assessee. What appears to have weighed almost conclusively with the tax authorities in the first and second instance is the value and frequency of the transactions. As underlined by us, that factor alone cannot be conclusive and would have to be weighed along with the totality of facts. An important detail which cannot be overlooked by the Court is that in all past periods and even subsequent periods, similar income reported by the assessee was accepted by the Revenue as short term capital gain. In ITA517-12 Page 8 fact for AY 2005-06, the scrutiny assessment under Section 143 (3) accepted the sum of Rs.1.02 crores as short term capital gain. In the circumstances, it was all the more necessary for the Revenue to point to some unique feature or distinctive material to differentiate the assessee's activities for the subject assessment year, since they fundamentally remained the same and unchanged. 9. On an appropriate application of the authorities, this Court is of the opinion that the ITAT's findings and view cannot be faulted in the circumstances of the case. The question of law is, therefore, answered in favour of the assessee and against the Revenue. The appeal is accordingly rejected.” (2) We also place reliance on the judgement of Honbél Delhi High Court in the case of CIT vs. Rohit Anand, 327 ITR 445 (Del.). 7. Respectfully following the judgement we uphold the order of the First Appellate Authority and dismiss this appeal of the Revenue. 8. In the result the appeal by the Revenue is dismissed.

Order pronounced in the Open Court on 29th September, 2016.

Sd/- Sd/- (SUDHANSHU SRIVASTAVA) (J. SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: the 29th September, 2016 • Manga