* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on : 21.03.2014
Pronounced on : 21.04.2014
+ ITA 561/2012
+ ITA 566/2012, C.M. NO. 16325/2012
COMMISSIONER OF INCOME TAX-IV .....Appellant
Through: Sh. N.P. Sahni, Sr. Standing
Counsel and Sh. Nitin Gulati, Advocate.
Versus
M/S. D&M COMPONENTS LTD. ........Respondents
Through: None.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE R.V. EASWAR
MR. JUSTICE S. RAVINDRA BHAT
%
1. These two appeals by the Revenue question a common order of
the Income Tax Appellate Tribunal ("ITAT") by which the assessee's
appeal in respect of its claim for short term capital gain was allowed
and the Revenue's appeal in respect of the claim for long term capital
gain was dismissed. The question of law which arises for
consideration is whether the amounts claimed as long term and short
term capital gains by the assessee could have been treated as such by
the ITAT in its impugned order.
2. During the year under consideration (AY 2006-07) the assessee
was engaged in the business of dealing in the auto spare pails and
investment in bonds, mutual funds and other securities. On scrutiny of
ITA 561/2012 & ITA 566/2012 Page 1
the accounts, the Assessing Officer felt that assessee has disclosed
long term capital gains to the tune of 31,13,006.51/- and
26,82,115.35/- claimed as short term capital gain was not permissible.
The assessee claimed that the amounts were not business income, but
towards capital gains from sale of investments, as stated in its returns.
The AO held that the income or profits gained were, in truth, business
income, having regard to the normal business activities of the assessee
and given the pattern of sale and purchase transactions, especially
since no books were separately maintained for the purpose. The
assessee's appeal was partly accepted to the extent that the
Commissioner (Appeals) ("CIT(A)") held that the claim for long term
capital gains was established. However, the contentions with respect
to short term capital gains were rejected. Both the assessee and the
Revenue appealed to the ITAT. The assessee's appeal was allowed by
the ITAT, in its impugned order; the Revenue's appeal, however, was
rejected.
3. The CIT (A), on being approached, accepted the assessee's plea
with respect to long term capital gain, but upheld the decision of the
AO, in regard to the claim for short term capital gain being really
business income. The Commissioner (Appeals) held that:
"...On going through a sample of the total share
transactions, which has been reproduced above, it is
apparent that the appellant has also been frequently buying
and selling a large variety of shares on which income has
also been earned in most cases. Apart from the above
sample transactions, the appellant has transacted in a large
number of Shares involving substantial amount of money
ITA 561/2012 & ITA 566/2012 Page 2
and the overall circumstances indicate that these shares had
not been purchased by the appellant with the intention of
investment even though they had been shown as investment
in the balance sheet. It is important to keep in mind that
whenever any share is purchased with the intention of
investment, it cannot be sold of within a very short span of
time, since the share market is always fluctuating. Since in
the present case, very frequent purchase and sale of shares
have been done it indicates that the main intention of the
appellant was to earn income out of these shares which
have been claimed to be under the head of short term
capital gains. The argument of the appellant that in the
earlier years also such a contention has been accepted by
the department is not sufficient to decide the issue in its
favour, keeping in view the specific facts and circumstances
and the nature of frequent share transactions of various
companies, sample of which have been reproduced above.
The most important aspect which needs to be highlighted is
the nature and purpose for which the shares were
purchased and subsequently sold. Since with regard to the
shares claimed under short term capital gain, these indicate
the intention of the appellant to trade in these shares, I am
of the firm opinion that in the present circumstances, such
transactions have rightly been held as income from business
by the AO. Therefore, the claim of the appellant that these
shares transactions were in the nature of investment does
not appear to be convincing and to that extent this ground
of the appellant is dismissed.
Accordingly, subject to the above observations, I am
inclined to hold that while the claim of long term capital
gains amounting to Rs 31,13,006/- by the appellant is valid,
the claim regarding short term capital gain amounting to
Rs. 26,82,115/- does not appear to be logical and
convincing. As a result, this ground of the appellant is
partly allowed and relief is allowed only to the extent of
amount of long term capital gain of Rs 31,13,006/- while the
amount of Rs. 26,82,115/- shown as short term capital gain
ITA 561/2012 & ITA 566/2012 Page 3
is held to be business income. As a result, this ground is
partly allowed...."
4. The ITAT, in its impugned order, differed with the Appellate
Commissioner's conclusions and found that the assessee's claim that it
had derived short term capital gain of 26,82,115/- was justified. It
was held that:
"9. Let us examine the facts of present case in the light of
these tests. In the books of account, assessee has shown
its purchases of shares as investment. The copies of the
balance sheet ending as on 31.3.2005 as well as on
31.3.2006 are available. Assessee has not used borrowed
funds for the purchase of shares. Assessing Officer has
pointed out that assessee is not maintaining separate
bank account and it has used the business funds. The
assessee pointed out that share capital of more than
Rs.304 crores is available with the assessee. The non-
maintenance of separate bank account, would not be a
very material fact. The next test is about the frequency of
purchases and disposal of particular item. Yes, there are
frequent transactions and this test goes against the
assessee. The value of the shares at the close of the year
has been taken at cost and not at market price cost
whichever is lower. It indicates that the shares available
with the assessee were not treated as stock in trade. The
Memorandum of Association; investment in shares is one
of the line of activity assessee has to take. Thus, on an
examination of the facts on record in the light of these
tests, we find one test i.e. frequency of the transactions all
are in favour of the assessee. In the tests, it has been
observed that explanation of an assessee based on
number of facts supported by evidence and circumstances
whenever required consideration, whether the
explanation is sound or not must be determined not by
considering the weight to be attached to each single facts
in isolation but by assessing the cumulative effect of all
ITA 561/2012 & ITA 566/2012 Page 4
the facts in the setting as a whole. In assessment year
2005-06 the purchases of the shares by the assessee have
been treated as investment. Some of the shares which
were treated as investment is the opening balance of this
year. The assessment order has been posted under
Section 143(3) and it is available at pages 5 and 6 of the
paper book. No doubt, Assessing Officer has not
discussed this issue in that year but that does not
obliterate the concept that books of account were before
him and he must have considered all the aspects. The
frequency of front is one factor which may goad to the
adjudicating authority to construe the transaction as a
business transaction but i.e. not be absolute criteria. This
has been considered by the ITAT in a number of orders
referred by us in the foregoing paragraphs. Thus taking
into consideration all the facts and circumstances, we are
of the view that the learned CIT(Appeals) has erred in
treating part of the transactions as of investment and
partly as a trading in the shares. We set aside the order
of the learned CIT (Appeals) and direct the Assessing
Officer to accept the claim of the assessee of long terms
capital gain as well as short term capital gain..."
5. The Revenue argues that the impugned judgment is in error of
law as it fails to give any weightage or importance to at least two tests
particularly since the assessee in this case is also engaged in the
investment business. It is emphasized that the failure of the assessee to
maintain separate books of account in respect of its investments, and
for regular business, placed a heavy burden upon it to establish that
the claim made was indeed profit by way of capital gains, and not
through business or trading. The failure to maintain separate books
made it impossible to bifurcate the income generated between sale of
shares and funds invested in business. The ITAT also overlooked the
ITA 561/2012 & ITA 566/2012 Page 5
fact that the assessee was utilizing the funds of business for purchase
of investment, which casts doubt on its claim that the amounts were
used for investment. Most importantly, it was submitted that the
frequency and volume of purchase and sale of shares, particularly of
some scrips showed that the intention of the assessee was to generate
income through trade, rather than invest in them. This aspect,
submitted the Revenue's counsel, was gone into in great detail by the
CIT (Appeals) but was entirely overlooked by the ITAT.
6. The assessee urges that the ITAT's impugned order does not
call for interference. It is submitted in this regard that whether it is the
volume, frequency test, or the duration of holding of shares, or
whether the intention to derive dividend, or the existence of separate
investment accounts, or even use of own as opposed to borrowed
funds, no single test can prevail, ordinarily in any case. It is the
cumulative effect of application of these tests which is determinative
of the assessee's intention. In this case, the decision of the CIT(A) at
least in respect of the long term capital gains claim of the assessee was
a concurrent finding at the stage of the ITAT, which cannot be said to
be in error of law. So far as the short term capital gain goes, the
asseessee's contention is that the ITAT has not committed any error of
law; its application of law has led to a plausible, and not an
unreasonable view. So long as there is no perversity in such findings,
this Court should not interfere with its order.
7. As far as the Revenue's appeal with respect to long term capital
gains is concerned, this Court is inclined to affirm the findings of the
CIT (A) and those contained in the impugned order. Here, the record
ITA 561/2012 & ITA 566/2012 Page 6
disclosed that the transactions were few in number 10
sale/purchases. Moreover, the purchases were shown as investments in
the balance sheets for several years before their sale and claim for long
term capital gains. There is nothing on the record to show that these
were purchased with borrowed funds. In these circumstances, the
findings of the ITAT with respect to the amount claimed as long term
capital gains are sound and do not call for interference.
8. The position with regard to short term capital gains, however, is
different. The AO and CIT(A) held that separate books were not used.
Amounts were freely transferred from the profits gained to business
and vice-versa. However, perhaps the single-most telling circumstance
is the kind of transactions which the CIT (A) noticed in paragraph 5
(c) of his order. A chart reflecting the volume, frequency, duration (of
holding) criteria was prepared and reproduced in the Commissioner's
order. That chart was only illustrative, and is extracted below:
Name of the share Purchase date Sale date
Jindal Photo 07.04.2005 07.04.2005
Infotech Ltd. 22.04.2005 22.04.2005
Zee Tele 02.05.2005 16.05.2005
Zee Tele 02.05.2005 17.05.2005
Sam Ele Development 23.05.2005 23.05.2005
Mahabir Spinning Mills 25.05.2005 08.06.2005
Mahabir Spinning Mills 25.05.2005 09.06.2005
Mahabir Spinning Mills 26.05.2005 09.06.2005
Mahabir Spinning Mills 26.05.2005 10.06.2005
Mahabir Spinning Mills 26.05.2005 13.06.2005
ITA 561/2012 & ITA 566/2012 Page 7
Mahabir Spinning Mills 27.05.2005 13.06.2005
Krishan Engineering 25.08.2005 30.08.2005
Krishan Engineering 26.08.2005` 30.08.2005
Krishan Engineering 26.08.2005 06.09.2005
Krishan Engineering 26.08.2005 09.09.2005
Rajesh Exports 24.08.2005 16.09.2005
Rajesh Exports 24.08.2005 19.09.2005
Rajesh Exports 25.08.2005 19.09.2005
Rajesh Exports 16.09.2005 19.09.2005
P.B. Infra 28.11.2005 28.11.2005
P.B. Infra 28.11.2005 02.12.2005
9. Apart from the above significant aspect, the AO and the CIT
(A) observed that the assessee had been purchasing and selling a large
number of shares of a few companies. It was also held that the
transactions involved large or substantial sums of money. The CIT (A)
pertinently made the following observations:
"...it is important to keep in mind that whenever any share
is purchased with the intention of investment, it cannot be
sold off within a very short span of time, since the share
market is always fluctuating. Since in the present case, very
frequent purchase and sale of shares have been done it
indicates that the main intention of the appellant was to
earn income out of these shares which have been claimed to
be under the head of short term capital gains...."
10. In Commissioner of Income Tax v Associated Industrial
Development Company (P) Ltd. 82 ITR 586 (SC) the Supreme Court
held that:
ITA 561/2012 & ITA 566/2012 Page 8
"3...it was open to the assessee to contend that even on the
assumption that it had become a dealer and was no longer
an investor in shares the particular holdings which had
been cleared and the sales of which had resulted in the
profit in question had always been treated by it as an
investment. It can hardly be disputed that there was no bar
to a dealer investing in shares. But then the matter does not
rest purely on the technical question of onus which
undoubtedly is initially on the revenue to prove that a
particular item of receipt is taxable. Whether a particular
holding of shares is by way of investment or forms part of
the stock-in-trade is a matter which is within the knowledge,
of the assessee who holds the shares and it should, in
normal circumstances, be in a position to produce evidence
from its records as to whether it has maintained any
distinction between those shares which are its stock-in-trade
and those which are held by way of investment."
P.M. Mohammed Meerakhan v. Commissioner of Income-tax, Kerala,
73 ITR 735 (SC) is another judgment of the Supreme Court holding
that it was not possible to evolve any single legal test or formula
which could be applied in determining whether a transaction was an
adventure in the nature of trade or not. The answer to the question
must necessarily depend in each case on the total impression and
effect of all the relevant factors and circumstances proved therein and
which determine the character of the transaction.
11. Having regard to the short duration of holding of the shares, and
the lack of clarity in the account books, this Court holds that the
overall effect would be to reveal that the sale and purchase of shares
in respect of 26,82,115/- as short term capital gain cannot be
sustained. Accordingly the order of the ITAT is set aside to the said
ITA 561/2012 & ITA 566/2012 Page 9
extent. The said amount shall be treated as business income and not
capital gains. The question of law is accordingly answered in favour of
the Revenue in ITA No. 561/2012. The said appeal is allowed. ITA
566/2012 filed by the Revenue, in respect of the long term capital
gain, has to fail and is accordingly dismissed.
S. RAVINDRA BHAT
(JUDGE)
R.V. EASWAR
(JUDGE)
APRIL 21, 2014
ITA 561/2012 & ITA 566/2012 Page 10
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