Income Tax Appellate Tribunal - Ahmedabad
The Dcit, Central Circle-1(3),, ... vs Sujal Leasing & Finance Pvt.Ltd., ... on 22 February, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "B" BENCH
(BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
& SHRI MAHAVIR PRASAD, JUDICIAL MEMBER)
ITA. Nos: 3421 & 3439/AHD/2009
(Assessment Year: 2006-07)
Sujal Leasing & Finance V/S DCIT Central Circle-
st
Pvt. Ltd. 1 Floor, H.N. 1(3),Ahmedabad
House, Nr. Old High
Court, Navrangpura,
Ahmedabad
DCIT Central Circle- Sujal Leasing & Finance
1(3),Ahmedabad Pvt. Ltd. 1st Floor, H.N.
House, Nr. Old High Court,
Navrangpura, Ahmedabad
(Appellant) (Respondent)
PAN: AACCS1273Q
Appellant by : Shri S.N. Soparkar, A.R.
Respondent by : Shri James Kurian, Sr. D.R.
(आदे श)/ORDER
Date of hearing : 16 -02-2017
Date of Pronouncement : 22 -02-2017
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:
2 ITA Nos. 3421 & 3439/Ahd/2009
. A.Y. 2006-07
1. ITA Nos. 3421 & 3439/Ahd/2009 are cross appeals by the Assessee and the Revenue preferred against the very same order of the Ld. CIT(A)-I, Ahmedabad dated 15.10.2009 pertaining to A.Y. 2006-07.
2. As common grievance is involved in these appeals, they were heard together and are disposed of by this common order for the sake of convenience.
3. The common grievance relates to the treatment of Short Term Capital Gain as business income of the assessee. The action of the A.O. has been partly confirmed by the First Appellate Authority against which the assessee is in appeal and the Revenue is in appeal against the part relief given by the First Appellate Authority.
4. Briefly stated the assessee is a limited company in which public are not substantially interested. It is engaged in the business of trading in shares and securities. During the year under consideration, it has shown income from business, dividend and short term capital gain on sale of shares.
5. During the course of the scrutiny assessment proceedings and on going through the details relating to the purchase and sale of shares which have resulted into Short Term Capital Gains, the A.O. issued a show cause notice dated 22.08.2008 by which the assessee was requested to show cause as to why the surplus arising out of sale of shares should not be taxed as 3 ITA Nos. 3421 & 3439/Ahd/2009 . A.Y. 2006-07 business income. The relevant portion of the show cause notice is reproduced hereunder:-
"2. In connection with the above, various details have been filed by you. On going, through the said details, it is noted that during the year under consideration, shares of PCS, Nandan Exim, YES Bank, IDFC Ltd., 1L & FS, etc. have been shown as purchases and sales. In this regard, vide notice dated 10.10.2007 issued u/s 142(1) of the Act along with questionnaire, you were requested to submit complete details of applications made in various names, amount paid on application, details of allotment of shares, details of refunds, if any, details of sale of shares allotted with date - rate - name of the person to whom sold, for each IPOs in which multiple applications have been made by you or through you. You were also requested to show-cause as to why the income as computed under the provisions of I.T. Act arising out of aforesaid activity should not be treated as your income from business or profession instead of short term capital gain as shown by you.
6. In response to the above, the assessee submitted the required details vide letter dated 18.03.2008.
7. On perusal of the reply, the A.O. noted that apart from the above shares, the assessee has traded as well as invested in various scrips during the year under consideration and surplus arising out of the purchase and sale of shares of IPOs and other companies have shown as short term capital gains. This was not acceptable to the A.O. for the following reasons:-
(1) On going through the returns of income for the year under consideration it is noticed that the purchase and sales of securities is allied to your usual trade or business or incidental to it and it was not an occasional independent activity. (2) On most of the occasions where the shares were acquired with the intention to resale at a profit only and there was no intention to hold them for long term appreciation.
(3) The details submitted shows that the activity of subscribing to various IPOs through the companies as referred to above or HNl category was on large scale.4 ITA Nos. 3421 & 3439/Ahd/2009
. A.Y. 2006-07 (4) It is also noted that on receipt of refund/ allotment of a particular IPO, again the surplus funds were invested in another IPO. The said pattern has been followed regularly.
(5) The ratio of sales to purchase is very narrow resulting into holding of shares of a particular company for a shorter period.
(6) On comparison of the details of purchase and sale of shares of various companies of current year with previous years, it appears that the volume increased over the years which shows that the company ceased to be an investor and become trader.
In view of above, you are requested to show cause as to why the surplus amounting to Rs. 3,93,54,700/- arising out of purchase and sale of shares various companies should not be treated as business income in the year of its sale. "
8. In response to the aforementioned queries raised by the A.O., the assessee filed a detailed submissions dated 26.08.2008. It was brought to the notice of the A.O. that all the transactions entered into by the assessee during the year under consideration were made with an intention of investment. It was strongly contended that an investor can be small investors or large investors. Simply because the assessee is having large port folio, it would not take away the real character of shares that have been bought and held as investment. The assessee further stated that every investor makes investment keeping in mind certain return he expects to earn on his investment. The motive of such investment was wealth maximization and the assessee only disposed the investments on proper advice. Therefore, the said transaction should not be treated as being purchased and sold for trading purpose; rather the transaction should be construed in their true sense as made for investment only.
9. The detailed submissions made by the assessee did not find any favour with the A.O. The A.O. was of the firm belief that the subject matter of 5 ITA Nos. 3421 & 3439/Ahd/2009 . A.Y. 2006-07 realization is shares and considering the volume involved, it cannot be treated as investment. The A.O. further observed that the length of the period of ownership was very short. The A.O. was of the opinion that the shares have been acquired from Panchal and Sugandh Group which were involved in an IPO scam of the impugned shares. Drawing support from the CBDT Instruction No. 1827 dated 31.08.1989 and supplementary instruction in the form of Circular No. 4 of 2007 dated 15.06.2007. The A.O. treated the surplus of Rs. 3,93,54,700/- as business income of the assessee.
10.The assessee assailed the assessment order before the First Appellate Authority and reiterated its claim of being an investor.
11.After considering the detailed submission made by the assessee qua the findings of the A.O., the ld. CIT(A) observed that the following facts emerge:-
(a) The appellant company, in the previous year under consideration, has got surplus of Rs.3,93,54,700/- in the share transactions. In the return, the aforesaid surplus amount has been offered to tax as STCG, which is taxed @ 10%.
(b) Out of total surplus amount of Rs.3,93,54,700/-, the surplus amount of Rs.2,31,86,300/- has been generated in the sale / purchase of shares of the companies, the shares of which were acquired through Rupal Naresh Panchal and M/s. Sugandh Estate & Investment Pvt. Ltd. The modus operand! of these groups and amount advanced by the appellant to these parties has also been mentioned in the instant appellate order.
(c) The balance surplus of Rs.1,61,68,400/- (Rs.3,93,54,700 - Rs.2,31,86,300) in share transactions has been generated in dealing with shares, which related to Rupal Panchal and M/s. Sugandh Estate and Investment Pvt. Ltd.6 ITA Nos. 3421 & 3439/Ahd/2009
. A.Y. 2006-07
12.The ld. CIT(A) tested the aforementioned facts in the light of the decision of the Co-ordinate Bench in the case of Hipolin Ltd. In ITA No. 4259/Ahd/2007 wherein a similar issue was decided vide order dated 04.09.2009. The operative part of the judgment reads as under:-
*17. The assessee then referred to the decision of the ITAT Ahmedabad Bench "A " in the case(s) of ACIT Vs. Himanshu J. Shah & Others in ITA Nos. 2875, 2878, 2879 & 2880/Ahd/2008 & Co, Nos. 292, 295, 296 & 297/Ahd72008 and 2881 and 2883/Ahd/2008 & CO. Nos. 299 & 300/Ahd/2008 & Others, pronounced on 17.07.2009, wherein reliance was placed on the decision of ITAT, Lucknow Bench in the case ofSarnath Infrastructure (P) Ltd. Vs.ACIT (122 TTJ 216) (2009) 313 ITR (AT) 13 ITAT Lucknow, wherein it was held that the assessee does not intend to deal in shares. For the sake of convenience, we reproduce paragraph No.ll'from that judgment as under :-
"11.1 Now we consider the relevant authorities on the subject. The issue whether transaction in shares should be treated as investment or treated as business and in what circumstances holdings should be treated as investment or as stock in trade, has been discussed in detail by the Tribunal, Lucknow Bench Sarnath Infrastructure (P) Ltd. Vs. ACIT (122 TTJ 216). In that decision, Tribunal has referred to the following judgement of the Courts.
1. Fidelity Northstar Fund, In re (2007) 288 ITR 641 (AAR).
2. Raja Bahadur Visheshyvar Singh Vs. Commissioner of Income tax (1961) 41 ITR685(SC)
3. Central India Agencies (P) Ltd. Vs. Commissioner of Income Tax (1970) 71ITR 959 (ALL.)
4. Sarojini Rajah (Mrs.) Vs. Commissioner of Income-tax (1969) 71 ITR 504 (MAD).
5. Dalhousie Investment Trust Co. Ltd. Vs. Commissioner of Income-tax (1968) 68 ITR 486 (SC).
6. Commissioner of Income-tax Vs. Associated Industrial Development Co. (P) Ltd. (1971) 82 ITR 586 (SC).
7. Commissioner of Income-tax Vs. Holck Larsen (H.) (1986) 160 ITR 067 (SC).
8. Commissioner of Income-tax Vs. Sutlej Cotton Mills Suplly Agency Ltd. (1975) 100 ITR 706 (SC).
7 ITA Nos. 3421 & 3439/Ahd/2009. A.Y. 2006-07
18. After considering above rulings, we cull out following principles, which can be applied on the facts of a case to find out whether transactions(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 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 as stock-in-trade or investment. Whether shown in opening / closing stock or shown separately as investment or non-trading 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 purchases and disposal in that particular item ?
If purchase and sale are frequent, or there are substantial transactions in that in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of 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, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real.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 in its value? Former will indicate intention of trade and later, 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 8 ITA Nos. 3421 & 3439/Ahd/2009 . A.Y. 2006-07 only for trade, then whether these are separate resolutions of the board of directors to carry out investments in that commodity? And vice versa. (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, stock-in-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 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 2007of 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.
13.In the light of the principles laid down by the Co-ordinate Bench in the case of Hipolin Ltd. (supra), the ld. CIT(A) examined the facts of the case in hand. The ld. CIT(A) observed that the assessee has derived surplus of Rs. 2,31,86,300/- from the purchase and sales of shares of the companies which were acquired through Rupal Naresh Panchal and M/s. Sugandh Estate & Investment Pvt. Ltd. The First Appellate Authority further observed that the assessee company has financed more than Rs. 20 crores, these two concerns with the intention that these groups would make 9 ITA Nos. 3421 & 3439/Ahd/2009 . A.Y. 2006-07 multiple applications in the IPO of certain companies. No security of any kind has been taken by the assessee before advancing such a huge fund to "Panchal" and "Sugandh" Groups. Such an activity has to be termed as an organized and systematic activity, carried on continuously with a view to earn profits and such an organized and systematic activity has to be construed as adventure in the nature of trade. The ld. CIT(A) accordingly directed the A.O. to tax the gain of Rs. 23186300/- at the rates applicable in the case of business.
14. As regards to balance surplus of Rs. 1,61,68,400/-, the ld. CIT(A) observed that this surplus has arisen as the assessee company had invested in share from its own funds. Drawing support from the decision of the Co-ordinate Bench given in the case of Gopal Purohit 29 SOT 117, the ld. CIT(A) came to the conclusion that the surplus of Rs. 1,61,68,400/- is nothing but short term capital gains and directed the A.O. to treat the same as such.
15.Both sides are in appeal against the above findings of the ld. CIT(A). The ld. Senior Counsel vehemently stated that the ld. CIT(A) grossly erred in taking diversified views for the same set of transactions. It is the say of the ld. counsel that the assessee was indulged in similar kind of transactions in the earlier assessment year where the surplus arisen out of purchase and sale of shares have been accepted under the head "capital gains. The ld. counsel further pointed out that the lower authorities have heavily relied upon the findings given in the case of Seer Finlease Pvt. Ltd. for A.Y. 2006-07. The ld. counsel pointed that the order passed by the ld. CIT(A) in the case of Seer 10 ITA Nos. 3421 & 3439/Ahd/2009 . A.Y. 2006-07 Finlease Pvt. Ltd. insofar as it was against the assessee has been reversed by the Tribunal in ITA No. 3336 & 3440/Ahd/2009 and IT(SS)A No. 3/Ahd/20012 with C.O. No. 70/Ahd/2012 vide order dated 17.03.2016. The ld. counsel further pointed out that in A.Y. 2005-06, the Tribunal has decided the issues in favour of the assessee in assessee's own case in ITA No. 1524/Ahd/2010 vide order dated 21.08.2015.
16.Per contra, the ld. D.R. strongly supported the findings of the A.O.
17.The ld. D.R. 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 numbers which have given rise to a surplus of Rs. 3,93,54,700/- . It is say of the ld. D.R. that this activity was carried out simply keeping in view the profit motive in an organized manner.
18.ITAT Lucknow Bench in the case of Sarnath Infrastructure Pvt. Ltd. reported in 120 TTJ 216 has laid down certain tests which read as under:-
"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.
11 ITA Nos. 3421 & 3439/Ahd/2009. A.Y. 2006-07 (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. (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, stock-in-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.
12 ITA Nos. 3421 & 3439/Ahd/2009. A.Y. 2006-07
(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.
(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 stock-in- 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.
19.In the light of above guidelines/decisions, no doubt, there is a frequency of transactions during the year but such frequency was there in the past also 13 ITA Nos. 3421 & 3439/Ahd/2009 . A.Y. 2006-07 when the assessee was treated as investor by the order of the Co-ordinate Bench (supra). We find that the ld. CIT(A) has accepted the contentions of the assessee with regard to the investment, which were not made through Smt. Rupal Naresh Panchal and Sudgandh Estate & Investment Pvt. Ltd. We find that in the accounts, the assessee has shown the shares under the head "investment" and not "stock-in-trade". We also find that at the end of the year, the assessee has not valued the shares in the manner stock is being valued. The assessee has paid security transaction tax. The finding of the ld. CIT(A) are based on the facts that the assessee has financed more than 20 crores to Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. group with the intention that this group would make multiple application in the IPOs of certain companies. The second reason assigned by the ld. CIT(A) is that the assessee did not take any kind of security from these persons.
20.However, we do not find any material brought on record by the revenue which could substantiate the apprehensions made by the First Appellate Authority. There is no evidence with the revenue to establish the nexus between the assessee and the group of two persons namely Rual Naresh Panchal and Suandh Estate & Investment Pvt. Ltd. There is nothing on record to suggest that the assessee has colluded with Smt. Rupal Naresh Panchal and Sugandh Estate & 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 First Appellate Authority are 14 ITA Nos. 3421 & 3439/Ahd/2009 . A.Y. 2006-07 only inferential without any concrete material in the possession of the A.O./CIT(A).
21.Considering the facts in totality in the light of the judicial decisions referred to hereinabove, we are of the opinion that the revenue has grossly failed to establish that the assessee was trading in shares. On the contrary, the ld. Senior Counsel has successively proved the assessee is an investor. Therefore, the surplus of Rs. 3,93,54,700/- has to be taxed as Short Term Capital Gain.
22.In our considered opinion, the First Appellate Authority has erred in creating the artificial distinction only on the basis of mode of acquisition, we do not find any logic nor any merit in such segregation made by the First Appellate Authority. We, accordingly, allow the appeal of the assessee and direct the A.O. to tax the surplus on sale of shares under the head "Short Term Capital Gain" instead of "business income". Consequently, the appeal of the Revenue is dismissed and the appeal of the Assessee is allowed.
Order pronounced in Open Court on 22 - 02- 2017
Sd/- Sd/-
(MAHAVIR PRASAD) (N. K. BILLAIYA)
JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER
Ahmedabad: Dated 22 /02/2017
Rajesh
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.