Commissioner Of Income Tax-Iv … v. M/S. D&M Components Ltd. ……

* IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on : 21.03.2014 Pronounced on : 21.04.2014 +ITA 561/2012+ITA 566/2012, C.M. NO. 16325/2012 COMMISSIONER OF INCOME TAX-IV…..AppellantThrough:Sh.N.P.Sahni,Sr.StandingCounsel and Sh. Nitin Gulati, Advocate. VersusM/S. D&M COMPONENTS LTD.……..RespondentsThrough: None. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE R.V. EASWAR MR. JUSTICE S. RAVINDRA BHAT % 1.These two appeals by the Revenue question a common order ofthe Income Tax Appellate Tribunal (“ITAT”) by which the assessee’sappeal in respect of its claim for short term capital gain was allowedand the Revenue’s appeal in respect of the claim for long term capitalgainwasdismissed.Thequestionoflawwhicharisesforconsideration is whether the amounts claimed as long term and shortterm capital gains by the assessee could have been treated as such bythe ITAT in its impugned order. 2.During the year under consideration (AY 2006-07) the assesseewas engaged in the business of dealing in the auto spare pails andinvestment in bonds, mutual funds and other securities. On scrutiny of the accounts, the Assessing Officer felt that assessee has disclosedlong term capital gains to the tune of ₹ 31,13,006.51/- and ₹ 26,82,115.35/- claimed as short term capital gain was not permissible.The assessee claimed that the amounts were not business income, buttowards capital gains from sale of investments, as stated in its returns.The AO held that the income or profits gained were, in truth, businessincome, having regard to the normal business activities of the assesseeand given the pattern of sale and purchase transactions, especiallysince no books were separately maintained for the purpose. Theassessee’s appeal was partly accepted to the extent that theCommissioner (Appeals) (“CIT(A)”) held that the claim for long termcapital gains was established. However, the contentions with respectto short term capital gains were rejected. Both the assessee and theRevenue appealed to the ITAT. The assessee’s appeal was allowed bythe ITAT, in its impugned order; the Revenue’s appeal, however, wasrejected. 3.The CIT (A), on being approached, accepted the assessee’s pleawith respect to long term capital gain, but upheld the decision of theAO, in regard to the claim for short term capital gain being reallybusiness income. The Commissioner (Appeals) held that: “…Ongoingthroughasampleofthetotalsharetransactions, which has been reproduced above, it isapparent that the appellant has also been frequently buyingand selling a large variety of shares on which income hasalso been earned in most cases. Apart from the abovesample transactions, the appellant has transacted in a largenumber of Shares involving substantial amount of money 3.The CIT (A), on being approached, accepted the assessee’s pleawith respect to long term capital gain, but upheld the decision of theAO, in regard to the claim for short term capital gain being reallybusiness income. The Commissioner (Appeals) held that: “…Ongoingthroughasampleofthetotalsharetransactions, which has been reproduced above, it isapparent that the appellant has also been frequently buyingand selling a large variety of shares on which income hasalso been earned in most cases. Apart from the abovesample transactions, the appellant has transacted in a largenumber of Shares involving substantial amount of money and the overall circumstances indicate that these shares hadnot been purchased by the appellant with the intention ofinvestment even though they had been shown as investmentin the balance sheet. It is important to keep in mind thatwhenever any share is purchased with the intention ofinvestment, it cannot be sold of within a very short span oftime, since the share market is always fluctuating. Since inthe present case, very frequent purchase and sale of shareshave been done it indicates that the main intention of theappellant was to earn income out of these shares whichhave been claimed to be under the head of short termcapital gains. The argument of the appellant that in theearlier years also such a contention has been accepted bythe department is not sufficient to decide the issue in itsfavour, keeping in view the specific facts and circumstancesand the nature of frequent share transactions of variouscompanies, sample of which have been reproduced above.The most important aspect which needs to be highlighted isthe nature and purpose for which the shareswerepurchased and subsequently sold. Since with regard to theshares claimed under short term capital gain, these indicatethe intention of the appellant to trade in these shares, I amof the firm opinion that in the present circumstances, suchtransactions have rightly been held as income from businessby the AO. Therefore, the claim of the appellant that theseshares transactions were in the nature of investment doesnot appear to be convincing and to that extent this groundof the appellant is dismissed. Accordingly, subject to the above observations, I aminclined to hold that while the claim of long term capitalgains amounting to Rs 31,13,006/- by the appellant is valid,the claim regarding short term capital gain amounting toRs.26,82,115/-doesnotappeartobelogicalandconvincing. As a result, this ground of the appellant ispartly allowed and relief is allowed only to the extent ofamount of long term capital gain of Rs 31,13,006/- while theamount of Rs. 26,82,115/- shown as short term capital gain is held to be business income. As a result, this ground ispartly allowed….” 4.The ITAT, in its impugned order, differed with the AppellateCommissioner’s conclusions and found that the assessee’s claim that ithad derived short term capital gain of ₹26,82,115/- was justified. It was held that: Accordingly, subject to the above observations, I aminclined to hold that while the claim of long term capitalgains amounting to Rs 31,13,006/- by the appellant is valid,the claim regarding short term capital gain amounting toRs.26,82,115/-doesnotappeartobelogicalandconvincing. As a result, this ground of the appellant ispartly allowed and relief is allowed only to the extent ofamount of long term capital gain of Rs 31,13,006/- while theamount of Rs. 26,82,115/- shown as short term capital gain is held to be business income. As a result, this ground ispartly allowed….” 4.The ITAT, in its impugned order, differed with the AppellateCommissioner’s conclusions and found that the assessee’s claim that ithad derived short term capital gain of ₹26,82,115/- was justified. It was held that: “9. Let us examine the facts of present case in the light ofthese tests. In the books of account, assessee has shownits purchases of shares as investment. The copies of thebalance sheet ending as on 31.3.2005 as well as on31.3.2006 are available. Assessee has not used borrowedfunds for the purchase of shares. Assessing Officer haspointed out that assessee is not maintaining separatebank account and it has used the business funds. Theassessee pointed out that share capital of more thanRs.304 crores is available with the assessee. The non-maintenance of separate bank account, would not be avery material fact. The next test is about the frequency ofpurchases and disposal of particular item. Yes, there arefrequent transactions and this test goes against theassessee. The value of the shares at the close of the yearhas been taken at cost and not at market price costwhichever is lower. It indicates that the shares availablewith the assessee were not treated as stock in trade. TheMemorandum of Association; investment in shares is oneof the line of activity assessee has to take. Thus, on anexamination of the facts on record in the light of thesetests, we find one test i.e. frequency of the transactions allare in favour of the assessee. In the tests, it has beenobserved that explanation of an assessee based onnumber of facts supported by evidence and circumstanceswheneverrequiredconsideration,whethertheexplanation is sound or not must be determined not byconsidering the weight to be attached to each single factsin isolation but by assessing the cumulative effect of all the facts in the setting as a whole. In assessment year2005-06 the purchases of the shares by the assessee havebeen treated as investment. Some of the shares whichwere treated as investment is the opening balance of thisyear. The assessment order has been posted underSection 143(3) and it is available at pages 5 and 6 of thepaperbook.No doubt,AssessingOfficerhasnotdiscussed this issue in that year but that does notobliterate the concept that books of account were beforehim and he must have considered all the aspects. Thefrequency of front is one factor which may goad to theadjudicating authority to construe the transaction as abusiness transaction but i.e. not be absolute criteria. Thishas been considered by the ITAT in a number of ordersreferred by us in the foregoing paragraphs. Thus takinginto consideration all the facts and circumstances, we areof the view that the learned CIT(Appeals) has erred intreating part of the transactions as of investment andpartly as a trading in the shares. We set aside the orderof the learned CIT (Appeals) and direct the AssessingOfficer to accept the claim of the assessee of long termscapital gain as well as short term capital gain…” 5.The Revenue argues that the impugned judgment is in error oflaw as it fails to give any weightage or importance to at least two testsparticularly since the assessee in this case is also engaged in theinvestment business. It is emphasized that the failure of the assessee tomaintain separate books of account in respect of its investments, andfor regular business, placed a heavy burden upon it to establish thatthe claim made was indeed profit by way of capital gains, and notthrough business or trading. The failure to maintain separate booksmade it impossible to bifurcate the income generated between sale ofshares and funds invested in business. The ITAT also overlooked the fact that the assessee was utilizing the funds of business for purchaseof investment, which casts doubt on its claim that the amounts wereused for investment. Most importantly, it was submitted that thefrequency and volume of purchase and sale of shares, particularly ofsome scrips showed that the intention of the assessee was to generateincome through trade, rather than invest in them. This aspect,submitted the Revenue’s counsel, was gone into in great detail by theCIT (Appeals) but was entirely overlooked by the ITAT. 6.The assessee urges that the ITAT’s impugned order does notcall for interference. It is submitted in this regard that whether it is thevolume, frequency test, or the duration of holding of shares, orwhether the intention to derive dividend, or the existence of separateinvestment accounts, or even use of own as opposed to borrowedfunds, no single test can prevail, ordinarily in any case. It is thecumulative effect of application of these tests which is determinativeof the assessee’s intention. In this case, the decision of the CIT(A) atleast in respect of the long term capital gains claim of the assessee wasa concurrent finding at the stage of the ITAT, which cannot be said tobe in error of law. So far as the short term capital gain goes, theasseessee’s contention is that the ITAT has not committed any error oflaw; its application of law has led to a plausible, and not anunreasonable view. So long as there is no perversity in such findings,this Court should not interfere with its order. 7.As far as the Revenue’s appeal with respect to long term capitalgains is concerned, this Court is inclined to affirm the findings of theCIT (A) and those contained in the impugned order. Here, the record disclosedthatthetransactionswerefewinnumber–10sale/purchases. Moreover, the purchases were shown as investments inthe balance sheets for several years before their sale and claim for longterm capital gains. There is nothing on the record to show that thesewere purchased with borrowed funds. In these circumstances, thefindings of the ITAT with respect to the amount claimed as long termcapital gains are sound and do not call for interference. 8.The position with regard to short term capital gains, however, isdifferent. The AO and CIT(A) held that separate books were not used.Amounts were freely transferred from the profits gained to businessand vice-versa. However, perhaps the single-most telling circumstanceis the kind of transactions which the CIT (A) noticed in paragraph 5(c) of his order. A chart reflecting the volume, frequency, duration (ofholding) criteria was prepared and reproduced in the Commissioner’sorder. That chart was only illustrative, and is extracted below: 9.Apart from the above significant aspect, the AO and the CIT(A) observed that the assessee had been purchasing and selling a largenumber of shares of a few companies. It was also held that thetransactions involved large or substantial sums of money. The CIT (A)pertinently made the following observations: 9.Apart from the above significant aspect, the AO and the CIT(A) observed that the assessee had been purchasing and selling a largenumber of shares of a few companies. It was also held that thetransactions involved large or substantial sums of money. The CIT (A)pertinently made the following observations: “…it is important to keep in mind that whenever any shareis purchased with the intention of investment, it cannot besold off within a very short span of time, since the sharemarket is always fluctuating. Since in the present case, veryfrequent purchase and sale of shares have been done itindicates that the main intention of the appellant was toearn income out of these shares which have been claimed tobe under the head of short term capital gains….” 10.In Commissioner of Income Tax v Associated IndustrialDevelopment Company (P) Ltd. 82 ITR 586 (SC) the Supreme Courtheld that: “3…it was open to the assessee to contend that even on theassumption that it had become a dealer and was no longeran investor in shares the particular holdings which hadbeen cleared and the sales of which had resulted in theprofit in question had always been treated by it as aninvestment. It can hardly be disputed that there was no barto a dealer investing in shares. But then the matter does notrest purely on the technical question of onus whichundoubtedly is initially on the revenue to prove that aparticular item of receipt is taxable. Whether a particularholding of shares is by way of investment or forms part ofthe stock-in-trade is a matter which is within the knowledge,of the assessee who holds the shares and it should, innormal circumstances, be in a position to produce evidencefrom its records as to whether it has maintained anydistinction between those shares which are its stock-in-tradeand those which are held by way of investment.” P.M. Mohammed Meerakhan v. Commissioner of Income-tax, Kerala,73 ITR 735 (SC) is another judgment of the Supreme Court holdingthat it was not possible to evolve any single legal test or formulawhich could be applied in determining whether a transaction was anadventure in the nature of trade or not. The answer to the questionmust necessarily depend in each case on the total impression andeffect of all the relevant factors and circumstances proved therein andwhich determine the character of the transaction. 11.Having regard to the short duration of holding of the shares, andthe lack of clarity in the account books, this Court holds that theoverall effect would be to reveal that the sale and purchase of sharesin respect of ₹26,82,115/- as short term capital gain cannot be sustained. Accordingly the order of the ITAT is set aside to the said extent. The said amount shall be treated as business income and notcapital gains. The question of law is accordingly answered in favour ofthe Revenue in ITA No. 561/2012. The said appeal is allowed. ITA566/2012 filed by the Revenue, in respect of the long term capitalgain, has to fail and is accordingly dismissed. S. RAVINDRA BHAT(JUDGE)R.V. EASWAR(JUDGE) APRIL 21, 2014