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COMMISSIONER OF INCOME TAX-IV Vs. M/S. D&M COMPONENTS LTD.
May, 28th 2014
* 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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