ORDER
Per D.C. Agrawal, Accountant Member. - This is an appeal filed by the assessee raising following grounds :—
1.
Because the ld. first appellate authority has erred in upholding that the income of Rs. 11,06,044 on sale of shares and securities, offered for taxation by the appellant under the head 'Long-term capital gain' is liable, to be assessed as business income.
2.
Because the learned first appellate authority has erred in upholding that the assessee adopted a colourable device to pay less tax by treating income from share dealing as long-term capital gain instead of business income and erred in holding that the assessee's case is covered by the judgment of the Hon'ble Supreme Court in the case of
McDowell & Co. Ltd. v.
CTO [1985] 154 ITR 148.
3.
Because the learned first appellate authority ought not to have upheld disallowance of Rs. 23,737 out of interest expenses.
4.
Because the learned first appellate authority erred in upholding the disallowance of Guard expenses of Rs. 19,200.
5.
Because the order appealed against is contrary to law, facts and principles of natural justice.
2. The main contention is whether the sum of Rs. 10,71,003 should be treated as business income or capital gains.
3. The facts of the case are that assessee-company is dealing in shares. It is claimed that it has dealt in shares both as stock-in-trade as well as investment. It claimed that while dealing in shares as stock-in-trade, it made purchases of shares of Rs. 31,38,352 and sold shares of Rs. 23,89,804. But while dealing in shares as investment, it had shares worth Rs. 19,22,203 as on 31-3-2003 which arose to Rs. 46,23,274. In between, it had sold those shares as per details on page 20 of the paper book and earned capital gains of Rs. 10,71,003. The Assessing Officer considered the claim of the assessee. He held that main business of the assessee is to purchase and sale in shares. It is neither a share dealer nor a share broker. The details for purchase and sales affected by the assessee-company reveal that sale and purchase are quite substantial and will not be made by a person who invests in shares. Further, assessee did not have sufficient funds to make such investments and assessee is claiming to have made investment out of borrowed capital. The total activities of the assessee are in fact sale and purchase of shares and receiving dividend income. There is no other business activity. The intention of the assessee is to resale for earning profit. The assessee-company is not waiting for long-term appreciation or earn dividend or interest income on the said shareholdings. According to him what the assessee has shown as long-term capital gains is actually income from share dealing and, accordingly, it is his business income. The assessee has, according to the Assessing Officer, adopted a colourable device to pay less tax. From this point of view the case of the assessee is covered by the judgment of the Hon'ble Supreme Court of India in the case of McDowell & Co. Ltd. (supra). The Assessing Officer also pointed out that against interest income of Rs. 5,24,936, it is claiming expenditure of Rs. 9,94,704 by way of salary to Managing Directors, interest, paid to people from whom unsecured loans are borrowed, depreciation and other administration expenses. Accordingly, the Assessing Officer treated long-term capital gains as business income.
4. The Assessing Officer also disallowed certain expenses out of interest and guard expenses who was employed by the assessee as chowkidar on his vacant plot. Total disallowances under two heads amounted to Rs. 23,737 and Rs. 19,200 respectively.
5. The ld. CIT (A) confirmed the treatment of profit as business income by holding as under :—
"I have considered the issue, gone through the order and submission of the authorized representative. The basic issue to be decided is whether this assessee is in the business in dealing in shares and whether the gain shown as LTCG is actually business income. After considering the issue in totality I am of the view that the Assessing Officer's action in treating this alleged LTCG as business income is in order. My reasons for so holding are as under :—
The AR himself submits that for investment purposes Board permission is required. Copies of Board resolutions for the period, August 1999 to July 2000 have been obtained and are on record. An examination of these reveals that the contention of AR is not one invests anything a proper appreciation of facts and requisite authority is required, I am unable to find any such permission/authority in the Board resolutions. Nowhere in any of the Board resolutions is there any mention of purchasing any of the securities on which LTCG has been claimed? In fact from 1-7-1999 to July 2000 in the full year in 3 Board meeting decision to purchase specific shares is reflected and in none of the Board meetings do any of the securities on which capital gain is shown find mention. Yes, some of the Board resolution did authorize certain directors to purchase on behalf of the company. Thus, a decision which the appellant states is an investment decision has not been taken by the Board.
This company is in the business of share dealing, which is substantiated by the memorandum of article and association which find mention in the order. The AR also admits that the company is dealing in shares.
Separate account for business dealing and supposed investment has not been kept.
It is not in doubt that borrowed funds have been used to purchase share.
In view of the above cumulative reasons, I agree with the findings of the Assessing Officer that this clear a case hit by the decision of Apex Court in the case reported in 154 ITR 148 . Here by claim-ing capital gain, the only intention appears to be is to avoid paying taxes at the correct rate. The ground of appeal fails and is dismissed."
6. The ld. CIT (A) also confirmed disallowance of two expenses of Rs. 23,737 out of interest and of Rs. 19,200 incurred for chowkidar. The ld. CIT (A) was of the view that assessee has not produced any evidence for the work done by the chowkidar and also proportionate disallowance out of interest can be made as investment in land has been made out of borrowed funds.
7. Before us, the ld. counsel for the assessee submitted that the question whether transaction of sale and purchase in shares is trading transaction or investment transaction depends upon the intention of the party and is decided by taking into consideration all the surrounding circumstances and the most important of which is frequency of transactions. The frequency of transactions can be proved only when assessee is purchasing and selling shares regularly. The assessee had sold shares during the year but these shares were purchased in earlier years and were disclosed as investment in balance sheet for assessment years 2001-02, 2002-03 and 2003-04. Further, the amount was invested through resolution passed by Board of Directors from time-to-time. Such resolutions by the Board is not required if the shares are dealt as stock-in-trade. Whereas if investment is made, then Board's permission is required. The ld. counsel for the assessee submitted that assessee has held shares for 3-4 years. They are reflected in balance sheet and dividend income from such investments aggregating to Rs. 29,610; Rs. 29,185; Rs. 45,600; Rs. 49,833 and Rs. 78,045 has been declared by the assessee during the relevant financial years. The ld. counsel for the assessee further submitted that a legitimate transaction does not amount to a device and is not hit by the decision of the Hon'ble Supreme Court of India in the case of McDowell & Co. Ltd. (supra). Even CBDT has clarified that investment company can deal in shares both as stock-in-trade as well as in investment. He referred to Circular No. 4/2007, dated 15-6-2007 wherein vide para 10 thereof issue has been clarified. Therefore, according to the ld. counsel for the assessee, there is nothing illegal that assessee is purchasing shares for investment purposes as well as dealing in shares as business. According to the ld. counsel for the assessee, the intention of the assessee-company in the present case was to hold shares as investment to earn dividend therefrom and sale of them on appreciation of their value.
8. The ld. D.R., on the other hand, submitted that no distinction can be drawn in the present case as to whether assessee is dealing in shares or holding them as investment. Admittedly, assessee is dealing in shares as business and a part of those which are sold later are claimed as investment which in fact are not, as no separate accounts is kept by the assessee for investment as well as trade. Secondly, the ld. D.R. submitted that there should be distinctive folio numbers of the shares dealt with as investment, which should be clearly segregated and separated from those dealt with in trade. There is no dividing line in the present case, therefore, the Assessing Officer and the ld. CIT (A) have correctly treated alleged capital gains as business income.
9. In rejoinder, the ld. counsel for the assessee submitted that assessee has in fact maintained separate accounts for shares held in trade and shares held as investment. He drew our attention to page 14 of his paper book which, according to him, is a ledger account showing investment in shares. He also drew our attention to page 2 of the paper book which showed investment in shares at Rs. 30,82,923.63 as on 31-3-2001 out of which shares were sold during this year, the details of which are on page 20 of his paper book, had showed that shares in 16 companies were held as investment and were sold during this financial year on which a profit of Rs. 10,71,003 was earned which was declared as capital gains. He submitted that assessee has maintained separate account in its books in respect of investment portfolio and they have been separately reflected in the balance sheet. He drew our attention to balance sheet as on 31-3-2004 which showed that investment portfolio as on 31-3-2003 was of Rs. 19,22,203 whereas that as on 31-3-2004 was of Rs. 46,23,274. Thus, assessee, according to him, maintained separate accounts of investment shares and, therefore, there is no case with the revenue to treat them as stock-in-trade or income therefrom as business income.
10. We have considered the rival submissions and perused the material on record. The undisputed fact is that assessee is dealing in shares both as business as well as investment. It has kept separate accounts in respect of two portfolios. The relevant pages to which our attention was drawn in the paper book showed that assessee had clear independent portfolios for investment in shares as well as for trade. The shares which were sold during this year were out of such investment portfolio. It is clear from study of the paper book that shares which were sold during this year out of investment portfolio were held by the assessee for 2-3 years. The case of the revenue is that the demarcation line between business and investment is hazy and does not call for a separate treatment. Choice of the assessee to hold shares as investment or as stock-in-trade, is arbitrary.
11. We, however, do not agree with the revenue on this point. The details filed before us clearly show that demarcation line is not hazy but well-defined. Only those shares in investment portfolio were sold during this year, which were held by the assessee for the last 2-3 years as evident from page 2 of the paper book. For example, in IFCI which find place at serial number 9 on page 2, assessee had 10,000 shares which were sold on 16-6-2003. They were acquired on 14th and 15th February, 2000. Thus, they were held for more than 3 years. Shares in Shipping Corporation find place at Sl. No. 22 of page 2 of the paper book. Assessee had 15,000 shares in this company and were acquired on 11-7-2000 and 31-12-2001. Out of it, assessee sold 8,500 shares from 26-8-2003 to 19-12-2003. Thus, these shares were held for more than two years. Shares in MRPL find place at Sl. No. 15 of page 2 of the paper book. Assessee had 2,400 such shares which were acquired on 9-6-1999 and were disposed off on 16-6-2003. Thus, these shares were held for more than four years. Similar is the position in respect of other shares as per details available at page 2 of his paper book. Thus, one thing is clear that the shares which were sold out of investment portfolio during this year and on which capital gains have been offered by the assessee were held by it for more than two years and in some cases more than three years. The revenue could not point out any instance where shares sold by the assessee during this year from investment portfolio were acquired during this year itself or during immediately preceding year. No material is brought on record to show that demarcation line between business and investment is hazy or that assessee has not maintained an investment portfolio and it was dealing in shares only like a trader.
12. After having discussed the factual position, we now deal with legal issue so as to find out when dealing in shares would come within the domain of trading and when it could come within the domain of investment. We refer to Circular No. 4/2007, dated 15-6-2007 as referred to by the ld. counsel for the assessee :—
12.1 Circular No. 4/2007, dated June 15, 2007
Sub. : Distinction between shares held as stock-in-trade and shares held as investment—Tests for such a distinction.
1.
The Income-tax Act, 1961 makes a distinction between a capital asset and a trading asset. Capital asset is defined in section 2 (
14) of the Act. Long-term capital assets and gains are dealt with under section 2 (
29A) and section 2 (
29B). Short-term capital assets and gains are dealt with under section 2 (
42A) and section 2 (
42B).
2.
Trading asset is dealt with under section 28 of the Act. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827, dated 31-8-1989, had brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of the assessees as well as for guidance of the Assessing Officer.
3.
In the case of
CIT v.
Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 , the Supreme Court observed that (headnote) :—
'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 he should in normal circumstances, be in a position to produce evidence from his records as to whether he has maintained any distinction between those shares which are his stock-in-trade and those which are held by way of investment.'
4.
In the case of
Commissioner Of Income Tax, Bombay v. H. Holck Larsen [1986] 160 ITR 67, the Supreme Court observed (page 87) :—
'High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This is a mixed question of law and fact.'
5.
The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers.
6.
The
Fidelity Northstar Fund, In re [2007] 288 ITR 641 (AAR - New Delhi) referring to the decisions of the Supreme Court in several cases, has culled out the following principles (page 651) :—
'(i)
Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that exis-tence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;
(ii)
the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;
(iii)
ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt.'
7.
******
8.
The Central Board of Direct Taxes also wishes to emphasize that it is possible for a taxpayer to have two portfolios,
i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads,
i.e., 'Capital gains' as well as 'Business income'.
9.
The Assessing Officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and, therefore, giving rise to capital gains) or as stock-in-trade (and, therefore, giving rise to business profits). The Assessing Officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade.
10.
******
12.2-1 In Fidelity Advisor Series VIII, In re [2004] 271 ITR 1 (AAR - New Delhi) , the Authority pointed out that whether a company was an investment company or a trading company or whether any amount received by a person was a revenue receipt or capital receipt was a mixed question of law and facts which had to be decided on the facts and circumstances of each case. After discussing the decisions of the Hon'ble Supreme Court in Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 , Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486 , Cit, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 , A.V. Thomas & Co. Ltd. v. CIT [1963] 48 ITR 67 (SC) , Commissioner Of Income Tax, Madras v. P.K.N Company Ltd.. [1966] 60 ITR 65 and Associated Industrial Development Co. (P.) Ltd.'s case (supra) and the ruling of the Authority in XYZ/ABC Equity Fund, In re [2001] 250 ITR 194 (AAR - New Delhi) , the Authority noted the following principles (page 12) :—
"(i)
where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;
(ii)
the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;
(iii)
ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment (by sale of shares) will yield capital vain and not revenue receipt."
12.2-2 In this case, it is common ground that the intention of the investors is an important factor in determining the above question. In applying the aforementioned principles, it will be useful to bear in mind the following extracts from the decision of the Hon'ble Supreme Court in H. Holck Larsen's case (supra) (page 75) :—
"The second question is what are the legal principles applicable to the facts of these types of cases to determine whether the conduct was that of a dealer in shares or of an investor in shares. . ."
12.2-3 How in the case of sale of shares, the object or the purpose of selling the shares, in order to determine whether one was a dealer in shares or an investor in shares, should be viewed, may be looked at from the angle of Lord Reid in J.P. Harrison (Watford) Ltd. v. Griffiths (H.M. Inspector of Taxes) [1962] 40 TC 281 (HL), when he observed (page 295) :—
'The question has been asked in a number of cases : "If this was not trading, what was it? With all deference to those who have used that argument, I do not think that it is very useful in most cases. Human affairs - and business affairs - are of infinite variety. They do not fit neatly into categories or classes. Innominate contracts and transactions are of frequent occurrence, and I would not expect to find appropriate names to denote new kinds of operations devised for the sole purpose of gaining tax advantages. In the present case, the question is not what the transaction of buying and selling the shares lacks to be trading, but whether the later stages of the whole operation show that the first step—the purchase of the shares was not taken as, or in the course of a trading transaction." The real question as Lord Reid said was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step the purchase of the shares was not taken as, of in the course of a trading transaction.'
12.3 The principles laid down in above ruling are, to quote :—
"We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed was as stock-in-trade as the mere existence of the power in purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/ held in the books of account, i.e., whether they were valued as stock- in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade; where the object of the investment in shares of companies is to derive income by way of dividends, etc., the transactions of purchases and sales of shares would yield capital gains and not business profits."
12.4 In Raja Bahadur Visheshwar Singh's case (supra), it was held as under :—
"(i)
that if on the evidence which was before the Tribunal,
i.e., the substantial nature of the transactions, the manner in which the books had been maintained, the magnitude of the shares purchased and sold and the ratio between the purchases and sales and the holdings, the Tribunal came to the conclusion that there was material to support the finding that the appellant was dealing in shares as a business, it could not be interfered with by the High Court. When an owner of an ordinary investment chooses to realize it and obtains a higher price for it than he originally acquired it at the enhanced price is not a profit assessable to income-tax but where what is done is not merely a realisation or a change of investment but an act done in what is truly the carrying on of a business the amount recovered as appreciation will be assessable."
12.5 In Central India Agencies (P.) Ltd. v. CIT [1970] 77 ITR 959 (All.) , it was held as under :—
"The surplus resulting from the sale of shares could be assessable to tax only if such sales were effected in the usual course of carrying on the business of the assessee or if such sales were a normal step in the realization of securities in the process of carrying on of the assessee's business, even in the case of a dealer in shares. The circumstance as to whether a transaction is or is not within the company's powers has no bearing on the nature of the transaction or on the question whether the profit arising therefrom is capital acquisition or revenue income. The Tribunal also referred to the fact that the assessee-company had itself shown the acquisition of the shares as investments in its balance-sheet and not as its stock-in-trade and, on these facts, the Tribunal came to the conclusion that the loss sustained by the assessee on the sale of the shares was in the nature of a capital loss not allowable as a deduction from the business profits."
12.6 In Mrs. Sarojini Rajah v. Commissioner Of Income-Tax, Madras.* [1969] 71 ITR 504 (Mad.) , it was held as under :—
"The question whether a given transaction is an investment or a trading activity is not a pure question of fact but a mixed question of law and fact. The presence of commercial motive is a primary legal requisite of trade and purchase and sale as a business deal may he another. Intention to make a profit normally inspires trade and commerce but it may not be the essence of trade. Likewise, habitual dealing is ordinarily indicative of trade or commerce but is not necessarily so. There may be other legal requisites which may have to be satisfied with reference to the character of particular transactions in different kinds of trade or businesses. But, whether these legal requisites are satisfied or are present will themselves be a mixed question of law and fact. The character of the motive or intention with reference to a transaction is a matter of inference from the other facts."
12.7 In Dalhousie Investment Trust Co. Ltd.'s case (supra), it was held as under :—
"The 6,900 shares of McLeod and Co. were purchased by the appellant during the years 1948 to 1952, at a time when their market price was continuously falling. In order to make those purchases, the appellant had taken loans amounting to Rs. 8 lakhs and the dividend declared on these shares was at a very low rate. The shares were sold during the previous year ending 31-3-1953, at a considerable profit. The appellant placed no evidence before the Tribunal as to the object behind the acquisition of the shares of McLeod and Co. or as to why it confined its activities mostly to shares of McLeod and Co., and companies managed by that company. The explanation sought to be given by the appellant that the shares of McLeod and Co. were held as investments and were sold simply because the control of that company went out of the hands of its directors was not proved. In years prior to the relevant assessment years, the appellant's case that the acquisitions and sales of shares were in the nature of investments had been accepted by the department. The question was whether the profit made by the appellant from the sale of the 6,900 shares of McLeod and Co. in the previous year ending 31-3-1953, and shares in companies managed in McLeod and Co., and in other companies in the previous years ending 31-3-1954, 31-3-1955 and 31-3-1956, was income from business :—
'Held, on the facts that the appellant dealt with the shares of McLeod and Co. and the allied companies as stock-in-trade, that they were in fact purchased even initially not as investments but for the purpose of sale at a profit and, therefore, the transactions amounted to an adventure in the nature of trade. The profit derived by the appellant from the sale of shares was, therefore, a revenue receipt and as such liable to income-tax.'"
12.8 In Associated Industrial Development Co. (P.) Ltd.'s case (supra), it was held as under :—
"The assessee had made no attempt whatsoever to make out a case that the shares which had been sold were a part of its capital investment. Nor did it place any material from which it could be established that those shares had been treated in its book differently from other shares held by it. The mere fact that the sale proceeds were paid into the overdraft account in which admittedly proceeds of sale of all the shares held by the assessee were being credited as and when the sales were made and that these shares had not been sold with any amount of frequency could not be regarded as sufficient to establish that these shares had been held by way of investment. 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 he should, in normal circumstances, be in a position to produce evidence from his records as to whether he has maintained any distinction between those shares which were his stock-in-trade and those are held by way of investment."
12.9 in H. Holck Larsen's case (supra), it was held as under :—
"In order to determine whether one was a dealer in shares or an investor, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step the purchase of the shares was not taken as, or in the course of, a trading transaction. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these. If all the relevant factors have been taken into consideration and there has been no misapplication of the principles of law, then the conclusion arrived at by the Tribunal cannot he interfered with because the inference is a question of law, if such an inference was a possible one, subject, however, that all the relevant factors have been duly weighed and considered by the Tribunal, the inference reached by the Tribunal should not be interfered with."
12.10 In Sutlej Cotton Mills Supply Agency Ltd.'s case (supra), it was held as under :—
"During the accounting period ending 31-3-1956, the respondent sold 1,58,200 out of these shares at a profit of Rs. 2,13,150. The Appellate Tribunal held that the transaction was in the nature of a business adventure and that the profit was liable to income-tax. In coming to this conclusion, the Tribunal found that: (a) the respondent was authorised by certain clauses of its memorandum to buy and sell shares; (b) the respondent had dealt in shares during the years 1951 to 1953; (c) for the assessment year 1951-52 it had claimed a loss of Rs. 1,29,214 in the dealing of shares in Titaghur Paper Mills Ltd. and the loss had been allowed; and though in the same year it had claimed Rs. 6,30,000 as fall in value of shares in another company, the claim had been disallowed on the ground that the fall in value was not proved; (d) there were specific resolutions of the company authorising a director to purchase and sell these shares; (e) the respondent had included the profit of Rs. 2,13,150 directly in the profit and loss account; (f) from 1947 to 1956, no dividend had been declared by Gwalior Rayon; (g) the shares were purchased with borrowed funds on which interest was being paid; (h) the shares were not sold to liquidate the debts of the respondent, as claimed by it, since its balance-sheet showed that the proceeds of the sale were kept as cash in a bank. The High Court, on a reference, held that the transaction was not an adventure in the nature of trade, the main reason being that the dominant intention of the respondent in acquiring the shares was to boost the shares of a sister concern. The respondent had not at any stage set up such a case. On appeal to the Supreme Court :—
'Held, reversing the decision of the High Court, that the Tribunal had considered the evidence on record and applied the correct test in law, and there was no scope for interference with the finding of the Tribunal. The question whether the profit from the sale of the shares in question was a revenue or a capital receipt is a mixed question of law and fact.'"
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 he 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 pur- chase goods for the purposes 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 is frequent, or there are substantial transactions in that item, it 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 in its value. Former will indicate an intention of trade 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 investment 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 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 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. 4/2007 of 15-6-2007 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.
14. When we examine the facts of the present case, we find that the assessee is dealing in shares both as a trader as well as investor. It has kept separate accounts for both types of dealings. Valuation of holdings has been done at cost (for investment portfolio). At least there is no allegation or material to come to the conclusion that valuation of investment portfolio has been done on cost or net realizable value whichever is low. The shares which are sold out of investment portfolio, this year, were purchased two to three years ago showing that assessee had intention, while purchasing them, to hold them. They were reflected in the Balance Sheet as investment. The assessee has enjoyed dividend income and declared the same in return of income. The frequency of such purchase or sale in this portfolio is not large enough to doubt that this portfolio is only a device to pay lesser taxes by parking some stock-in-trade in investment portfolio. We notice that in trading portfolio the assessee had purchased during the year shares worth Rs. 21,38,353 and same shares were sold for Rs. 23,89,805. There was neither opening stock nor closing stock. In investment portfolio, opening stock of shares was Rs. 19,22,203 and closing stock was Rs. 46,23,274. Whereas sales out of investment portfolio was Rs. 31,80,423. It shows that turnover to stock ratio in investment portfolio is very low as compared to that in trading portfolio.
15. Further there is no material to show that these shares in the investment portfolio were also traded in the same and like manner as those which were in stock-in-trade portfolio. The Board of directors had passed resolutions for making investment whereas Memorandum of Association has only authorized to carry out trade in shares. It clearly shows intention of the assessee to maintain separate investment portfolio. All the sales out of this portfolio are identifiable to purchases made in this portfolio. In our considered view, the assessee has discharged its primary onus by showing that it is maintaining separate account for two portfolios and there is no intermingling. The onus now shifted on the revenue to show that apparent is not real. There is no material brought in by the revenue to show that separate accounts of two portfolios are only a smokescreen and there is no real distinction between two types of holdings. This could have been done by showing that there is intermingling of shares and transactions and the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present (as culled out above on the basis of authorities described) we hold that the surplus is chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolio. As a result, this ground of the assessee is allowed.
16. Ground No. 3 relates to disallowance of Rs. 23,737 out of interest expenses. Ld. Assessing Officer discussed the issue on page 10 of his order. He disallowed the claim only on the ground that the assessee has paid interest on money which was invested in purchase of land. It was explained before learned CIT (Appeals) that no amount has been borrowed for purchase of land. The learned CIT (Appeals) confirmed the order of the Assessing Officer without assigning any reason.
17. Before us it was submitted by the learned AR for the assessee that the land is a business asset and has been so declared in the fixed assets in the balance sheet. Money can always be borrowed for investment in business assets. The assessee had purchased the land for expansion of its business.
18. The learned DR, on the other hand, supported the order of authorities below.
19. We have considered the rival submissions and perused the material on record. In our considered view, there is no case for sustaining the addition. Once land has been shown as business asset in the balance sheet then it is for the revenue to bring material on record to show that land was not a business asset but was acquired for non-business considerations. Once it is not proved that apparent is not real, payment of interest, on funds borrowed for investing in the land which is apparently for business purposes, the claim of interest, therefore, cannot be disallowed. This ground of the assessee is, therefore, allowed.
20. Ground No. 4 relates to disallowance of expenses on salary of guard amounting to Rs. 19,200. The disallowance has been made by the Assessing Officer only on the ground that there is no business connection with the expenditure and further that land as such cannot be stolen. The learned CIT (Appeals) has confirmed the addition without assigning any reason.
21. Before learned AR for the assessee submitted that the assessee had to keep a guard to protect the land from encroachment. On the other hand, learned DR supported the order of authorities below.
22. After hearing the parties, we do not find any reason to sustain the addition. It is the discretion of the assessee to employ chowkidar to safeguard its assets against encroachment. The business discretion of the assessee cannot be substituted for that of Assessing Officer. The expenditure is clearly for business necessity. The addition is, therefore, deleted. As a result, this ground is allowed.
23. As a result, appeal filed by the assessee is allowed.