Ajax Investment Pvt.Ltd.,, Ahmedabad vs Department Of Income Tax

DCIT(OSD), M/s. Ajax Investment Pvt. Range-1, A' W ing, Room Ltd, A-1002, Murlidhar No. 309, 3 r d Floor, Vs Apartment, Ajit Park Pratyakha Kar Bhavan Society, Opp. Krushi Ambawadi, Farm, Ghoddod Road, Ahmedabad-380015 Surat-395007 (Appellant) PAN: AADCA4725G (Respondent)

Revenue by: Shri R.N. Vepari, Sr. D.R. Assessee by: Shri Roopchand, A.R.

Date of heari ng : 23-04-2015 Date of pronouncement : 29-05-2015

आदेश /ORDER

PER : RAJPAL YADAV, JUDICIAL MEMBER:-

Revenue is in appeal before us against the order of Ld. Commissioner of Income Tax(A)-6, Ahmedabad dated 8th January, 2013 passed for Assessment Year 2008-09.

I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 2 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

2. In the first ground of appeal, revenue has pleaded that Ld. Commissioner of Income Tax (Appeals) has erred in directing the Assessing Officer to consider profit from sale of shares held for more than 30 days as short term capital gain instead of business income assessed by the Assessing Officer in the assessment order.

3. The brief facts of the case are that assesse has filed his return of income on 17-02-2009 declaring total income at Rs. 29,87,040/-. The case of the assessee was selected for scrutiny assessment and a notice u/s. 143(2) was issued on 25th September, 2009.

4. On scrutiny of the accounts, it revealed to the Assessing Officer that assessee is engaged in trading of shares and securities. It has shown capital gain of Rs. 12,23,719/- which include Rs. 11,47,175/- as short term capital gain and Rs. 76,544/- as profit from speculation business. The assessee has shown long term capital gain at Rs. 87,30,010/- out of gross total receipt of Rs. 1,43,27,085/-. The assessee has receipt from sale of shares at Rs. 99,53,691/- which constitutes 69.47% of the total income. The Assessing Officer harbaroured a belief that assessee has earned substantial part of its income from transactions in shares. Therefore, its activity appears to have been carried in systematic, organized manner which would demonstrate that assessee was in the normal business of earning income from trading in shares. He issued a show cause notice to the assessee, as to why income from sale of shares should not be treated as "business income". The assesse has filed reply before the Assessing Officer. After considering the reply of the assessee, Ld. Assessing Officer has held that shares were purchased and sold by the assesse with a motive for earning profit and not with object of investing in the shares in I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 3 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

order to earn income from the investment. According to the Assessing Officer, the transaction entered into by the assessee are in the nature of commercial transaction entered into with a view to earn profits. The transactions were carried out in a planned, systematic and organized manner by using borrowed funds and taking risk. Accordingly, the income shown under the head short term capital gain has been assessed by the Assessing Officer as a business income. The discussion made by the Assessing Officer on page 4 and 5 of the assessment order along with the computation in the last page is worth to note. It read as under:-

"The assessee has also utilized services of trained staff, office and machineries as can be seen from P&L A/c. of the company. For this purpose the assessee has claimed expenses of Rs. 64,57,479/- as administrative and other expenses and Rs. 1,50,872/- as financial charges. Such infrastructure and expenses are not required to be made for earning dividend, rental income or making investments. On the one hand the assessee is claiming such expenses in the P&L A/c. as business expenses and on the other hand the income earned from share transactions is claimed as capital gain and not business income which is not at all acceptable. This fact proves that the intention of the assessee is not investment but to earn profit by sale and purchase. The assessee is taking services of office infrastructure and staff for earning profit from share transactions.

During the year under consideration, the assessee has taken loans of Rs. 7,20,42,540/- which has been used for purchase of shares and equities. It can be seen from Balance sheet of the company that all these capital and reserves of the company have been invested in fix assets and current assets in the form of loan and advances and cash and bank balance. Therefore, the entire purchase of shares has been made from the borrowed funds only. It becomes clear that the assessee has under taken risk to the extent of borrowed funds for share transactions. This is business risk taken with an intention to earn profits. The motive of the assessee is to earn profit by way of purchase and sale of shares. In view of these facts and applying the ratio of decisions of ITAT Mumbai Bench in the case of Neerja Birla vs. ACIT [66 ITD 148] and decision of ITAT Ahmedabad in the case of Purnima K. Shah (ITA No. 315/Ahd/02 I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 4 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

dated 05/10/2007) and also keeping in view Circular No. 4/07 issued by CBDT, the capital gain is required to be taxed as Business Income.

If there is frequency of transactions and resale at short intervals, the shares so held may be inferred as stock in trade with surplus assessable as business income at normal rate. In this regard, the Supreme Court in the case of G. Venkata Swami Naidu & Co. vs. Commissioner of Income Tax(1959) 35 ITR 594 held that usual trade or business, nature and quality of the commodity purchased and sold and repetition of transaction are relevant for deciding the character of transaction. In the present case, the quantum of business is big and it is regular activity of the assessee. Hence the assesssee's income is to be treated as business income.

Further there has been a continuous activity during a year by making purchase and sale of shares. The assessee has sold shares of Rs. 5,70,12,526/- and purchased shares of Rs. 5,48,89,346/- during the year. The volume of transaction of shares itself speaks about the true nature of the transactions. Hence, on this criterion the transactions done by the assessee are to be treated as Business income only.

Further, Hon'ble Madra High Court has held in the case of Commissioner of Income Tax vs. Amalgamation Pvt. Ltd. (108 ITR

885) that:

"The only requirement is that there must be a real substantial and systematic or organized course of activity of conduct with the set of purpose of earning profit which is the test for a business... Holding of investment in appropriate cases would be a business as dealing in them. The only requirement is that there must be real, substantial and systematic or organized courses of activity or conduct with the set purpose of earning profit which is the test for a business. The assessee was not a mere investor in a single company."

x x x x x x x x x x x x x x x x x x x x

Amt. in Rs. Property Income as per statement of total 22,25,209 income I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 5 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

Business Loss as per statement of total (-)4,61,888 income Add: Addtions/disallowances:- 1. Short Term Capital Gain treated as 11,47,175 business income. Add: Speculation profit as per computation of 76,544 income Total Business Income 7,61,831 Total Assessed Income 29,87,040/-

Total income u/s. 115JB of Rs. 72,29,445/- is increased by disallowance u/s. 14A made by the assessee of Rs. 34,33,303/- as stated in letter dated 11/12/2010 at point no. 10. Therefore, total income u/s. 115JB will be Rs. 1,06,62,748/-. Since, the tax under MAT provisions is more than tax payable on total assessed income, Tax is playable under MAT.

Assessed u/s. 143(3) of the I.T. Act Issue demand notice and chalan. Give credit for prepaid taxes after due verification. Interest under relevant sections charged in ITNS 150 which is part of this assessment order. Issue notice for penalty proceedings u/s. 271 r.w.s. 271(1)(c) of the I.T. Act for furnishing inaccurate particulars of income."

5. On appeal, the assessee has contended that one of objections raised by the Assessing Officer is that assessee has utilized the services of trained staff, office and machineries. According to the assessee, it is a company and the motive of the company is capital appreciation from the investment in shares and securities. In order to achieve the motive of capital appreciation, company has to use some machinery like computer etc and has to take advised or services of technical person. Therefore, Assessing Officer should have not drawn any adverse inference against the assessee. It was also contended that Assessing Officer had made reference towards expenses of Rs. 64,54,479/- incurred by the assessee as administrative expenses and Rs. 1,50,872/- as financial charges. The assessee has not claimed deduction of these expenditures except a sum I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 6 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

of Rs. 39,880/- out of administrative expenses. Financial charges are concerned, the assessee itself disallowed demat charges, stamp charges, the balance amount is for banking charges and interest on car loan. The assessee further pointed that next reason assigned by the Assessing Officer is that assessee has used borrowed funds at Rs. 7,20,42,540/-. This was an old loan, it is unsecured loan in the form of the compulsory convertible debenture of the ALT AIR Investment Pvt. Ltd amounting to Rs. 7,07,50,000/-. The loan was taken in earlier year and it was appearing in the last year. The assessee made reference to the audited account. The other loan was taken for purchase of car. Thus, according to the learned counsel, there is nothing in these objections which can suggest that assessee was doing business in trading of shares. Ld. First Appellate Authority has reproduced the written submission of the assessee from page 2 of the impugned order upto to the page no. 10 and thereafter concur with the written submission without making an analysis. The finding of the Commissioner of Income Tax (Appeals) read as under:-

"2.2 In the assessment order AO observed that appellant admitted Short Term Capital Gain of Rs. 11,47,175/- and that the income was to be assessed as income from business. The contentions of the Ld. AR are that the appellant was showing the shares as investment in the books of accounts; it dealt with only 40 scripts during the year and therefore assessing the income as business income is not in accordance with law. Alternatively it is contended that as held by the Jurisdictional Ahmedabad Tribunal in the case of Sugamchand C. Shah the gain received on the sale of shares held for the period exceeding 30 days may be treated as Short Term Capital Gain.

2.3 Having considered the observations of the A.O. and submissions of the appellant, I am inclined to accept the alternate contention of the appellant. As held by the Jurisdictional Ahmedabad Tribunal, A.O. is directed to assessee the gain derived on shares sold after holding period of 30 days as Short Term Capital Gain and the balance amount under the heard income from business. As contented by the Ld. AR before the A.O. and as contended during I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 7 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

the appellate proceedings the gain on sale of shares held for a period upto 30 days amounted to Rs. 5,10,324/-. A.O. is directed to verify this contention and assess the income as business income. Balance amount shall be assessed under the head short term capital gain as returned by the appellant. This ground of appellant is partly allowed."

6. Ld. Departmental Representative had contended that asessee had incurred huge expenditure under the head administrative expenses which indicate that activity in purchase and sale of shares was being carried out in an organized manner. The Assessing Officer has appreciated this aspect, and only thereafter arrived at a conclusion that assessee is in the business of share trading. He relied upon the assessment order. Shr. R. N. Vepari, on the other hand filed written submission, similar to the one reproduced by the Commissioner of Income Tax (Appeals) in the impugned order. He also placed reliance upon a large number of decisions. He placed on the record the copies of these decisions and also compiled the ratio laid down in these decisions in a tabular form, some of the them are being noticed as under.

Sr. No. Citation Name 1 327-ITR-445 (Delhi) Rohit Anand 2 35-DTR-52 (Bom) Gopal Purohit 3 1-ITR-783 (Mumbai) Suresh Kumar Seksaria 4 9-ITR-65 (Ahd) Nidhi Dyeing And Printing Mills P. Ltd 5 72-DTR-255 (Ind) Manish Kumar

7. We have duly considered rival contentions and gone through the record carefully. The issue, whether gain from sale of shares is to be I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 8 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

assessed as a business income or short term capital gain/long term capital gain, is a highly debatable issue. It always puzzled the adjudicator even after availability of large numbers of authoritative pronouncements by the Hon'ble Supreme Court/Hon'ble High Court. Shri R.N. Vepari, Ld. counsel for the assessee, has placed on record a list of 25 decisions which are unanimous in their opinion. The reason for the puzzle is, one has to gather the intention of an assessee while he entered into the transaction. The expression "intention" as defined in Meriam Webster Dictionary means, what one intends to accomplish or attain, it implies little more than what one has in mind to do or bring out. It suggests clear formulation or deliberation. Thus, it is always difficult to enter into the recess of the mind of an assessee to find out the operative forces exhibiting the intention for entering into the transaction. This would give rise a debate. Nevertheless, we have to look into the curious features of this case which will goad us on just conclusion.

8. 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 simplisitor 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:-

"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 I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 9 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

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 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 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 I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 10 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

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 I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 11 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

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."

9. 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.

I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 12 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

(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.

I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 13 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

10. Shri R.N. Vepari, learned counsel for the assessee has placed on record the list of 25 decisions along with their copies, we do not deem it necessary to recite and recaptitule all these decisions because most of the decisions have been considered in the case of Sarnath Infrastructure Pvt. Ltd and after a detailed evaluation of a large number of decisions, the ITAT had culled out the broad test to be applied on facts of any given case. Hon'ble jurisdictional High court has also propounded certain broad test under which the transaction of a assessee to be examined. In the decisions referred by learned counsel of the assessee similar facts and circumstances are available. For example, in the case of Gopal Purohit, it was observed that, if delivery based transaction are available in the case of assessee, then, profit received from such transaction is to be treated as short term capital gain or long term capital gain depending on the period of holding of shares. In other words, the delivery based transactions are to be considered as investment in shares. In the case of Suresh Kr. Sakseria, the principle of consistency has been advocated. Thus, these decisions resolve the controversy involved in them and provide a guidance for drawing the inference in particular fact situation. Interpretation of any specific provision of the I.T. Act, 1961 is not involved. Therefore, all the decisions are not discussed because that will make the order unnecessarily repetitive and bulky.

11. In the light of above, let us examine the facts of the present case, it is pertinent to observe that expression "business" is being defined in sub- section 13 of section 2. It includes any trades, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. This expression has been construed to mean that it is used in the taxing statute in a sense of an occupation or profession which I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 14 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

occupies the time attention and labour of a person with an object of making profit. The ld. Assessing Officer has made reference to the decision of Hon'ble Madra High Court in the case of Commissioner of Income Tax vs. Amalgamation Pvt. Lt and observed that, requirement of business is that there must be real, substantial and systematic, organized course of activity or conduct with the set purpose of earning profit is to be termed business. The emphasis of Shri R. N. Vepari was that assessee had taken up 40 transactions which resulted short term capital gain. Out of 40 transactions, in 8 transactions, the shares were held less than 30 days, for 10 transactions, these were held more than one month but less than 3 months and with regard to 12 scripts the holding period is 3 to 6 months. The average holding period is 127 days. Thus, according to the assessee, these are investment. It is pertinent to mention that whenever an adjudicator is called upon to adjudicate an issue in dispute then there are mainly to methods required to be applied: (a) deductive reasoning, or (b) inductive reasoning. Under the first method, we have to draw conclusion on the basis of material available on record whereas under the second method certain supplements is to be applied from outside which would goad us to reach on the result. The efforts at the end of learned counsel of the assesse is to adopt inductive method of reasoning for arriving at a conclusion i.e. certain principles/inference from the decisions referred by him should be considered as existing in the case of assessee and it should treated as an investor. However, when we look towards facts of the present case, the certain facts prohibits us to concur with the contentions of learned counsel of the assessee. The most important fact which is tilting result in favour of the Assessing Officer is that, if the assesse is a simplisitor investor then, what was the need to incur administrative expenses of Rs. 34.,33,303/-? It is different aspect that assesse has not I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 15 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

claimed the deduction of this amount because it has no business income particularly corresponding to these expenditures. But that will suggest that assessee was carrying out its activity in a well planned, organized manner. It has incurred expenses on salary and bonus of Rs. 6,60,000/-. What is the nature of this expenditure and why it was paid for making simple investment. As far as the borrowed funds are concerned, the contention of the assesse is that amount represent compulsory convertible debenture. According to the assessee, it was taken in earlier years, but one has to find out, how it was used, whether it was used for the purpose of investment in shares or not. The assesee has not carried any other business activities. Therefore, even it was taken in earlier year it is to be considered as a fund available with the assesse for making investment. It is a loan fund not asessee's own surplus fund. Therefore, looking to the fact of the present case, we are of the view that Ld. First Appellate Authority failed to analyse the details in right perspective. The alleged short term capital gain claimed by the assessee has rightly been dealt by the Assessing Officer as a business income. We set aside the order of Commissioner of Income Tax (Appeals) and restore that of Assessing Officer.

12. In the next ground of appeal, the grievance of revenue is that learned Commissioner of Income Tax (Appeals) has erred in deleting the addition of Rs. 34,33,303/- from the book profit computed u/s. 115JB of the income tax act. The contention of the revenue is that explanation 1(f) of section 115JB provides that book profit is to be increased by the amount of expenditure relatable to earning exempt income. Since, we have held the income from purchase and sale of shares is to be assesed as a business income, there may not be any expenditure relatable to earning of exempt. Therefore, this issue is required to be re-looked at the end of Assessing I.T.A No. 862/Ahd/2013 A.Y. 2008-09 Page No 16 DCIT(OSD) vs. M/s. Ajax Investment Pvt. Ltd.

Officer, i.e. it is to be seen whether any adjustment on this issue in book profit u/s. 115JB is to be made or not. We set aside this issue to the file of Assessing Officer for re-adjudication. Ld. Assessing Officer shall decide the issue after providing due opportunity of hearing to the assessee.

13. In the result, appeal of the revenue is partly allowed.

Order pronounced in the open court on 29-05-2015

Sd/- Sd/-

(G.D. AGRAWAL) (RAJPAL YADAV) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 29/05/2015 ak आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.

By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद