Income Tax Appellate Tribunal - Ahmedabad
Seer Finlease Pvt.Ltd., Ahmedabad vs Assessee on 17 March, 2016
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ 'B' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH, AHMEDABAD
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
AND
SHRI MANISH BORAD, ACCOUNTANT MEMBER
आयकर अपील सं./ ITA No.3326/Ahd/2009
नधा रण वष / Asstt. Year: 2006-2007
Seer Finlease Pvt.Ltd. ACIT, Cent.Cir.1(3)
1st Floor, H.N. House Vs Ahmedabad.
Nr.Old High Court
Navrangpura
Ahmedabad.
PAN : AADCS 9479 B
आयकर अपील सं./ ITA No.3440/Ahd/2009
नधा रण वष / Asstt. Year: 2006-2007
ACIT, Cent.Cir.1(3) Seer Finlease Pvt.Ltd.
Ahmedabad. Vs 1st Floor, H.N. House
Nr.Old High Court
Navrangpura
Ahmedabad.
आयकर अपील सं./ IT(SS)A No.3/Ahd/2012
With
CO No.70/Ahd/2012
नधा रण वष / Asstt. Year: 2006-2007
ACIT, Cent.Cir.1(3) Seer Finlease Pvt.Ltd.
Ahmedabad. Vs 1st Floor, H.N. House
Nr.Old High Court
Navrangpura
Ahmedabad.
अपीलाथ!/ (Appellant) "#यथ!/ (Respondent)
Assessee by : Shri S.N. Soparkar with
Shri P.M. Mehta and
Shri Parin Shah.
Revenue by : Shri Narendra Singh, Sr.DR
ITA No.3326 and 3440/Ahd/2009
With 2 Others
2
सन
ु वाई क तार ख/ Dateof Hearing : 02/03/2016
घोषणा क तार ख / Date of Pronouncement: /03/2016
आदे श/O R D E R
PER RAJPAL YADAV, JUDICIAL MEMBER:
ITA.No.3326/Ahd/2009 and ITA No.3440/Ahd/2009 are at the end of the assessee and Revenue against the common order of the ld.CIT(A)-III, Ahmedabad dated 15.10.2009 arising from the assessment order dated 29.8.2008 passed under section 143(3) of the Income Tax Act. IT(SS)A.No.3/Ahd/2012 is an appeal filed by the Revenue against the order of the ld.CIT(A) dated 5.10.2011. This appeal has arisen out of penalty order passed under section 271(1)(c) of the Act on 16.3.2011.
2. The assessee on receipt of notice in this appeal has filed CO bearing No.70/Ahd/2012. We have heard all these appeals together and deem it appropriate to dispose of them by this common order.
3. First we take quantum appeals i.e. ITA No.3326/Ahd/2009 and ITA No.3440/Ahd/2009.
4. Common issue involved in both the appeals is whether receipts received by the assessee on sale of shares is to be assessed under the head "Short Term Capital Gain" or "Long Term Capital Gain" or under the head "Business Income".
5. Brief facts of the case are that assessee-company was incorporated on 14.7.1997 and it was registered with the Registrar of Companies. It has filed its return of income for the Asstt.Year 2006-07 on 26.12.2006 declaring total income at Rs.7,68,57,350/- which included profit and gains of business or profession of Rs.4,05,293/- and short term capital gain of Rs.7,64,52,057/-. The case of the assessee ITA No.3326 and 3440/Ahd/2009 With 2 Others 3 was selected for scrutiny assessment and notice under section 143(2) of the Act on 16.11.2007 was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the AO that the assessee has claimed itself as investment in shares and securities, and therefore, on sale of shares it has disclosed short term capital gain. The ld.AO was of the opinion that this claim of the assessee requires to be investigated keeping in view various facts which determine the status of the portfolio i.e. investor or trader. The ld.AO appraised himself with CBDT circular bearing no.4/2007 dated 15.6.2007. He, thereafter, made a detailed analysis of the transactions conducted by the assessee in purchase and sale of shares. According to the AO, the Hon'ble Supreme Court in the case of CIT Vs. H. Holck Larson, 160 ITR 67 has discussed this issue in detail. According to him, the Hon'ble Court has propounded six broader tests under which the transactions of purchase and sale of shares ought to be looked into. Thereafter, the ld.AO has examined the transactions of the assessee under these six tests propounded by the Hon'ble Supreme Court. He further observed that one Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. had indulged in an IPO scam whereby these persons have cornered shares reserved for retail customers for IPOs. by fraudulent method. The assessee- company has financed more than Rs.29 crores in such activity, therefore, this financial activity of the assessee is sufficient to construe that investment in shares, which were purchased from these two concerns was with an intention of business. Accordingly, the ld.AO has held that the assessee was trading in shares. He declined the claim of the assessee for taxing it on the proceeds received from sales of shares under the head "short term capital gain". The ld.CIT(A) while appreciating this controversy, has summarized the reasons assigned by the AO in arriving on the conclusions that the assessee is to be treated as a trader in the shares. These reasons read as under:
ITA No.3326 and 3440/Ahd/2009 With 2 Others 4
"6.1 The appellant had provided submissions dated 26-8-2008 which are produced in para 2.3 of the assessment order. The said submissions are not accepted by the A.O. It is stated by him that the issue about taxing of the surplus arising out of transactions considering it as trading transactions or capital gains was considered in various decisions. He has referred to the decision of the Supreme Court in the case of CIT vs. H. Hoick Larson 160 ITR 67 and stated that the appellants case is to be discussed with reference to the test laid down in the said case. He has thereafter discussed the issue with reference to such tests which are summarized as under:
i) The first test discussed by him is about subject matter of realization and it is stated that the properties such as commodities or manufactured items which are normally subject matter of trading are only exceptionally subject matter of investment. It is stated that in the appellant's case, the matter of realization is shares. Considering the volume involved it cannot be treated as investment. It is stated by him that the shares became commodity for the assessee. He has referred the Gujarat High Court decision in the case of H. Mohamed & Co. vs. CIT 107 ITR 637. It is stated that as observed by the High Court the stock in trade is something in which the trader deals whereas the capital asset is something with which the trader deals. He has also referred to the decision of the Sardar Indrasingh & Sons, 241 ITR 415 and stated that the principle applicable in all such cases was whether sales which produce surplus are so connected with carrying on business of the assessee and in such case it can be said that surplus was profits and gains of business.
ii) The second criteria referred to by the A.O. is length of holding/ownership. He has stated that the assessee had sold shares within short time. He has given details of purchase and sale of shares and stated that period of holding was short..
iii) Next test referred to by the A.O. is that of frequency and number of transactions and it is stated that on the basis of details of transactions the same were frequent and that it was the main source of income which was capital gain on sale of shares. It is stated that similar trend was noticed in earlier year and subsequent year. The shares were acquired from the persons involved in IPO Scam. It is stated that the appellant had advanced funds to the persons involved in ITA No.3326 and 3440/Ahd/2009 With 2 Others 5 IPO Scam and had acquired shares against such advance with a view to get maximum number of shares. On the basis of that he has stated that the appellant was a trader in shares.
iv) It is stated that as per fourth criteria no supplementary work in respect of shares is found to have been carried out by the assessee.
v) It is stated that when the prices of the shares and mutual fund reached targeted price the same were sold. There was no emergency to have ready money.
vi) The next criteria stated by the A.O. is motive to earn maximum profit and not to have investment. The intention of holding the shares for a longer period and ensuring the benefit of ownership are missing.
vii) The assessing officer has referred to the case of H. Mohamed & Co., supra, and stated that the commodity may in the case of one assessee be stock in trade whereas in case of other it may be capital asset. It is stated that in the case of an assessee who carry on business of buying and selling of land the land may be stock in trade and in the case of a person who has invested in land he gets the income therefrom which is from capital asset. Thus according to him the criteria is whether it was stock in trade of the assessee buying or selling commodity or it was a mere investment.
It is stated that applying the above tests to the case of the appellant the surplus arising on sale of shares is nothing but business income. He has also referred to the CBDT instruction No.1827 dated 31-8-1989 and circular No.4 of 2007. With this discussion the profit of Rs.7,64,52,057/- on sale of shares is taxed as business income."
6. The ld.CIT(A) has re-appreciated the contentions of the assessee, and partly accepted that the assessee has made investment in the shares. However, to the extent of shares were purchased by the assessee through Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd., the ld.CIT(A) has upheld the conclusions of the AO to treat the assessee as trader. In this way, the ld.CIT(A) has ITA No.3326 and 3440/Ahd/2009 With 2 Others 6 bifurcated the transactions in two parts. The receipts received on sale of shares purchased from Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. amounting to Rs.4,16,74,781/- was directed to be examined under the head "profit from business". As far as the balance surplus amount of Rs.3,47,77,276/- shown by the assessee from sale of shares purchased other than from Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd., was allowed to be treated as investment in the shares. The Revenue is aggrieved with regard to this finding of the CIT(A) in its appeal, whereas, the assessee is aggrieved with regard to first part of the order of the CIT(A). The relevant finding recorded by the CIT(A) on this issue is worth to note. It reads as under:
"8. In the light of principles laid down by Hon'ble ITAT, Ahmedabad in the judgement in the case of M/s. Hipolin Ltd., supra, the facts in the present case are required to be examined. In the present case, the appellant has derived surplus of Rs.4,16,74,781/- in the sales / purchase of shares of the companies, the shares of which were acquired through Rupal Panchal and M/s. Sugandh Estate and Investment Pvt Ltd. During the course of search in the case of persons involved IPO scam, it was found that these persons have cornered the shares reserved for retail category for investors in various IPOs by fraudulent methods. The modus operandi of these groups has already been discussed in the instant appellate order. The appellant company has financed more than Rs.29.00 Crores in such activities. Therefore, the point for determination is whether such a systematic actively of financing, making multiple applications in the IPO and thereby cornering large number of shares reserved for retail investors in the IPO, could be .'termed as business or adventure in the nature of trade. Incidentally, the business, as defined in section 2(13), "includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture."' The word "adventure" is defined in the shorter oxford dictionary as a pecuniary venture .................. and the word pecuniary venture, in its turn, is defined as "a commercial enterprise in which there is considerable risk of loss as well as chance of gain."
ITA No.3326 and 3440/Ahd/2009 With 2 Others 7 8.1 In the present case, the appellant company has financed more than Rs.29.00 Crores to Rupal Panchal and "Sugandh" group with the intention that these groups would make multiple applications in the IPOs of certain companies. No security of any kind has been taken by the appellant before advancing such a huge funds to "Panchal" and "Sugandh" Groups. In other words, the appellant company was aware that Rupal Panchal and "Sugandh" group are engaged in making large number of applications in the IPO of different companies in fictitious names with the intention to corner large number of shares reserved for retail investors. The appellant was also aware that a part of shares so allotted, shall also be shared by these "groups" with the appellant. Such an activity has to be termed as an organized and systematic activity, carried on continuously with a view to earn profits. The sole intention at the time of acquisition of shares through such mode was to immediately sell these shares at a profit. Such an organized and systematic activity has to be construed as adventure in the nature of trade. In such situation, the surplus of Rs.4,16,74,781/- has to be taxed as gain from the adventure in the nature of trade and same has to be taxed as business income. The Assessing Officer is directed to tax the gain of Rs.4,16,74,781/- at the rates applicable in the case of business.
8.2 As regards to balance surplus amount of Rs.3,47,77,276/-, this surplus has arisen as the appellant company had invested in shares it's own funds. The company is not having any object clause as per the memorandum of association which authorizes it trading in shares. However, the appellant is authorized to invest funds in shares and securities and immovable properties as a supplementary object. It is also noticed that investment in shares is shown by the appellant in the account under the head Investment and not stock in trade. Similar investment in share and purchase and sale of shares was shown in the earlier year as capital gain and was accepted by the Assessing Officer while passing the assessment order on 31-12-2007 u/s. 143(3) of the I.T. Act for the assessment year 2005-06. Thus the appellant's intention of making investment was clear. The appellant has not incurred any interest on borrowings for such investment. Thus borrowed funds are not applied. There is no motive of trading in shares established by the Assessing Officer except referring to the volume and number of transactions. I also appreciate the arguments that the A.O's contention about period of holding are not correct particularly in view of the fact that definition of short term capital asset in respect of shares and securities itself specifically provides that the period of holding would be less than one year. This itself suggest that the short period of holding is not ITA No.3326 and 3440/Ahd/2009 With 2 Others 8 the criteria to be considered as trading transactions. Apart from this, the section 111A also provides for specific treatment of tax in respect of short term capital asset, particularly when STT has been paid. In appellant's case, the transactions are subjected to STT and such STT has not been claimed or allowed in the computation of income. I also appreciate the reference made to the Bombay decision in the case of Gopal Purohit 29 SOT 117, which supports the appellant's explanation. The other judicial decisions relied upon by the A.R. are also supporting its explanation. In the circumstances, merely because the appellant has sold the shares which were purchased in the booming period and it earned surplus by way of capital gain, the A.O. was not justified in holding it as a business profit. He is directed to tax such surplus of Rs.3,47,77,276/- as short term capital gains as per provisions of section 111A."
6. While impugning the orders of the Revenue authorities below, the ld.counsel for the assessee took us through the record and contended that in the memorandum of association, main objects to be pursued by the assessee-company on its incorporation is; to carry on and undertake as its principal business the business of finance and to finance lease operations of all kinds, purchasing, selling, hiring or letting on hire all kind of plants and machinery and equipment that the company may think fit and to assist in financing of all and every kind and description of hire purchase or deferred payment of similar transactions and to subsidies, finance or assists in subsiding or financing the sale and maintenance of any goods, articles or commodities of all and every kind and description upon any terms whatsoever and to purchase all forms of immovable and moveable property including lands and buildings, plant and machinery, equipments, ships, aircraft, automobiles, computers and all consumer, commercial and industrial items and to lease them in any manner whatsoever including release thereof, regardless of whether the property purchase and leased be new and or used and from India or from any part of the world.
ITA No.3326 and 3440/Ahd/2009 With 2 Others 9
8. In its incidental or ancillary objects, the assessee was to invest in securities and shares. The ld. counsel for the assessee, while taking us through the clauses from the memorandum of association reproduced in the statement of facts emphasized that the assessee was never allowed to do business in the shares. In the past, it has been treated as investor. As an investor, the shares have been transferred in the name of assessee. It has paid security transaction tax on sale of shares. It has not used borrowed funds. The ld.CIT(A) has accepted the contentions of the assessee, that it was an investor in the past. It has made investment in the present year. Only circumstances, which has been considered by the ld.CIT(A) for creating a distinction between one portfolio of the assessee is that of mode of acquisition of shares from Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. According to the ld.counsel for the assessee, Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. might have involved in an IPO scam. But, how it affects the investment of the assessee ? By this mode, the assessee might have got more shares. But the attempt to get shares should not be construed that it was a business. Test is not mode of acquisition shares, but the object of investment is the test. Mode of acquisition will not change the nature of asset acquired by the assessee. In his next fold of submission, he submitted that Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. had involved in the IPO scam. The assessee has purchased five scrip viz. FCS Software Ltd., Nandan Exim, Shoppers Stop and Yes Bank. If the size of shares purchased by the assessee through these two concerns, of these companies is taken into consideration with the size of public issue, then it would reveal that the total acquisition of shares by the assessee is less than 1%. He pointed out that IDFC has issued 40.36 crores shares. The assessee has purchased only 6,64,500 shares, which in terms of percentage comes to 0.16% of the total shares issued in the public. Similar is the positions with regard to other scrips. He ITA No.3326 and 3440/Ahd/2009 With 2 Others 10 further contended that the ld.CIT(A) ought to have adopted principle of consistency. There are no specific changes in the facts from earlier years to this year. For buttressing this contention, he relied upon the judgment of Hon'ble Delhi High Court in the case of, Director of Income Tax (Exemptions) vs. Escorts Cardiac Diseases Hospital Society, 300 ITR 75, Radhasoami Satsang Vs C.I.T, 193 ITR 321(SC), Taraben Ramanbhai Patel Vs. ITO, 215 ITR 323 (Guj).
9. On the other hand, the ld.DR relied upon the order of the AO. He took us through page no.15 of the assessment order and pointed out that there was frequency in transactions by the assessee. He also pointed out that the assessee has purchased shares from the persons who are involved in IPO scam. Such purchases were large in number which has given rise a surplus of Rs.4,16,74,781/-. This activity was carried out simply keeping in view the profit motive in an organized manner. The SEBI has debarred Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. from conducting the share trading business at National Stock Exchange. He placed on record copy of a letter dated 13.1.2006 written by National Stock Exchange of India Ltd. It is a letter to the members whereby the members were informed that SEBI has debarred Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. to buy and sell or deal in the security market directly or indirect till further directions. The assessee has been prohibited to deal in shares of IDFC Ltd.
10. Before we embark upon an inquiry on the facts of present case so as to find out, whether assessee is to be termed as involving in the trading of shares or is to be treated as a simplicitor investor. We would like to refer certain broad principle culled out by ITAT Lucknow Bench in the case of Sarnath Infrastructure Pvt. Ltd. reported in 120 TTJ 216. These tests read as under:-
ITA No.3326 and 3440/Ahd/2009 With 2 Others 11 "13. After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes:
(1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account.
Whether it is treated stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or nontrading asset.
(2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purpose of trade and not for investing in an asset for retaining.
(3) What is the frequency of such purchase and disposal in that particular item? If purchase and sale are frequent, or there are substantial transaction in that item, if would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, 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).
(4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation its value? Former will indicate intention of trades and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade.
(5) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade.
(6) How the company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice verse.
ITA No.3326 and 3440/Ahd/2009 With 2 Others 12
7. It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stockin-trade) then onus would shift to Revenue to prove that apparent is not real.
8. The mere fact of credit of sale proceeds of shares ( or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment.
9. One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made?
10. It is permissible as per CBDT's Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios.
11. Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen."
11. The Hon'ble Gujarat High Court had also an occasion to consider this issue in the case of Commissioner of Income Tax vs. Riva Sharkar A Kothari reported in 283 ITR 338. Hon'ble court has made reference to the test laid by it in its earlier decision rendered in the case of Pari Mangaldas Girdhardas vs. CIT reported in 1977 CTR 647. These tests read as under:
"After analyzing various decisions of the apex court, this court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business.
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(a) The first test is whether the initial acquisition of the subject-
matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline.
(b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently.
(c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was the assessee. Has it been treated as stockin- trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive.
(d) The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of the transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation.
(e) The fifth test, normally applied in case of partnership firms and companies, is whether the deed of partnership or the memorandum of association, as the case may be, authorizes such an activity.
(f) The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transaction of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proposition to the strength of holding then an inference can readily be drawn that the activity is in the nature of business.
12. In the light of the above tests, let us examine the facts of the present case. It is not disputed that the assessee has borrowed funds for making investment in shares. In other words, the assessee has its own fund for purchase of shares. No doubt, there is a frequency of transactions during the year, but, such frequency was there in the past ITA No.3326 and 3440/Ahd/2009 With 2 Others 14 also when the assessee was treated as investor by the AO himself. In the present year also, the CIT(A) has accepted the contentions of the assessee with regard to the investment, which were not made through Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. In the accounts, the assessee has accounted investment in shares under the head "investment" and not "stock-in-trade". Similarly, at the end of the year, it has not valued the shares in the manner stock is being valued i.e. at the cost or market price whichever is lower. It has valued at cost. For the Asstt.Year 2005-06, the AO has accepted the assessee as investor and assessed the surplus on sale of shares as capital gain. The assessee had paid security transaction tax. In the case of Sarnath Infrastructure Pvt.Ltd., 120 TTJ 216 as well as in the case of Gopal Purohit, 35 DTR 52 (Bom), the Tribunal has observed that if on purchase of shares they are transferred in the name of assessee, then it would indicate that the assessee has no intention to deal in shares. In the present case also, shares have been registered in the name of assessee before sale. If the transactions are settled without delivery, it can be presumed that it was a business activity of trading in shares. That is not factum in the present case. Therefore, it emerges out that there is no major variation in the facts and circumstances, except, one considered by the ld.CIT(A) in para 8 and 8.1 of the impugned order extracted supra. The ld.CIT(A) has recorded a finding that the assessee-company has financed more than Rs.29 crores to Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. group with intention that this group would make multiple application in the IPOs. of certain companies. The second reason assigned by the CIT(A) is that the assessee did not take any kind of security from these persons. We confronted the ld.DR to show any material possessed by the AO for buttressing this reasoning. We failed to find out the basis of recording this finding. If during the investigation carried out by the SEBI or the Income Tax Department it emerges out that there is a ITA No.3326 and 3440/Ahd/2009 With 2 Others 15 conspiracy between the assessee and Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. for acquiring the shares in this manner, then one can say that modus operandi was of a business nature. During the course of hearing, we have confronted the ld.DR to show us any evidence which can establish nexus between the assessee and Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. for acquiring the shares of five companies with this modus operandi. The ld.counsel for the assessee has emphasized that mode of acquisition would not be a factor to decide the nature of transaction. Under this alleged modus operandi, at the most, the assessee could procure large number of shares, but can that would change the character of transaction from investment to trader. There is no evidence with the Revenue to establish the nexus. The moment a cartel is being formed by number of persons to carry out an activity in an organized manner with profit motive and the activity is akin to business or trade as defined in section 2(13) of the Income Tax Act, then the arguments raised by the ld.counsel for the assessee would not stand. But the AO has neither recorded statement of the assessee nor collected any material which can demonstrate that the assessee has colluded with Smt.Rupal Naresh Panchal and Sugandh Estate and Investment Pvt.Ltd. in a manner that would indicate that shares were acquired for the purpose of trade. Such nexus has not been established. The observation of the CIT(A) is only inferential without any concrete material in the possession of the AO. Therefore, in our opinion, the activity of the assessee by virtue of mode of acquisition of shares cannot be segregated into two parts. The ld.CIT(A) has erred in creating an artificial distinction only on the basis of mode of acquisition. We allow the appeal of the assessee and direct the AO to tax the surplus on sale of shares under the head "short term capital/long term capital instead of "business income" treated by him. Consequently, the appeal of the Revenue is dismissed.
ITA No.3326 and 3440/Ahd/2009 With 2 Others 16 IT(SS)A.No.3/Ahd/2012
13. The facts have been discussed in the quantum appeal. The ld.AO has initiated penalty proceedings under section 271(1)(c) of the Act. He issued a show cause notice under section 274 r.w.s. section 271(1)(c) of the Act on 29.8.2008. The AO has observed that there were three additions made to the income of the assessee, viz. short term capital gain of Rs.7,64,52,057/- on sale of shares shown by the assessee has been assessed as business income; (b) the assessee did not add a sum of Rs.85,500/- which represented dividend stripping amount, and (c) an addition of Rs.39,974/- was being made by the AO on the ground that penalty on this amount was imposed by the National Stock Exchange on the appellant and it was confirmed by the first appellate authority.
14. The ld.CIT(A) has deleted the penalty by observing as under:
"3. I have considered the submissions of the appellant. In short, the AO has levied the penalty in respect of the following three additions:
A. Treatment of income to the extent of Rs.416,74,781 out of Rs.764, 52,057 on purchase and sale of shares as business income as against the capital gains claimed by the appellant in the return of income.
B. Dividend stripping of Rs. 85,500 under section 94(7) of the Income-tax Act.
C. Penalty of Rs. 39,974 levied by the National Stock Exchange.
4. As regards the penalty on the treatment of income of Rs.416,74,781 on purchase and sale of shares as business income as against the capital gains shown, by the appellant, I agree with the contention of the appellant that whether the income is assessable under the head of capital gains or income from business and profession is a debatable issue. Many high courts and tribunals have held different views in respect of the treatment ITA No.3326 and 3440/Ahd/2009 With 2 Others 17 of the income arising from, sale of shares. In fact, in the present case, the appellant has shown short term capital gain of Rs.
764,52,057. This income was assessed by the AO under the head of business income. The CIT (Appeal) after following the decision of ITAT, Ahmedabad in the Case of Sugamchand, held that if the shares are sold within 30 days from the date of its purchase, then the same should be taxed under the head of business income and if the shares are sold beyond 30 days from the date of its purchase, then it is to be taxed under the head of capital gains. The CIT (Appeal) also held that the shares purchased and sold to Rupal Panchal would also amount to business income. While giving the effect to the order of CIT(A) the AO computed the income under the Business head at Rs.416,74,781/-. In my considered view, the issue regarding the treatment of income from sale of shares is a highly debatable issue. In some cases, the income is held to be-assessable under the head of business, income whereas in some other cases it is assessable under the head of capital gains. Therefore, on such debatable issues, penalty under section 271(l)(c) cannot be levied, I therefore direct the AO to delete the penalty on the treatment of the income from the purchase and sale of shares."
15. As far as first issue is concerned, we have already upheld that surplus on sale of shares is to be assessed as short term capital gain. Therefore, there cannot be any question to visit the assessee with penalty. Apart from above, we are of the view that the assessee has disclosed all the facts fully and completely. There is no change in the ultimate taxable income of the assessee. The AO has only changed the head of income, i.e. the assessee has claimed the surplus on sale of shares to be assessed under the head of capital gain. The AO has assessed it under the head "Business Income". There cannot be any allegation against the assessee for concealment of income or furnishing inaccurate particulars to this extent. Thus, otherwise also no penalty on the first is issue is imposable.
16. As far as rests of two amounts are concerned, we find that ld.CIT(A) has assigned a plausible reasoning for deleting the penalty. The assessee had made huge investment in shares. Some of the shares might have been sold, and it failed to keep track that dividend might ITA No.3326 and 3440/Ahd/2009 With 2 Others 18 have been declared. The CIT(A) has rightly observed that there was a bona fide human error in non-inclusion of dividend stripping amounts. As far as other ground is concerned, it is always a debatable issue whether levy imposed by the National Stock Exchange was penalty in nature or compensatory in nature. It was disallowed and not disputed by the assessee, but that would not goad the AO to visit the assessee with penalty. We do not find any merit in this appeal of the Revenue. It is rejected.
17. As far as CO is concerned, the assessee did not press the CO, hence, dismissed.
18. In the result, appeal of the assessee i.e. ITA No.3326/Ahd/2009 is allowed. Rest of the appeals and CO are dismissed.
Order pronounced in the Court on 17th March, 2015 at Ahmedabad.
Sd/- Sd/- (MANISH BORAD) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER