Emmsons International, New Delhi vs Department Of Income Tax

Appellant by : Smt. Parwinder Kaur, Sr. DR Respondent by : Shri Suresh K Gupta, CA

Date of hearing :19.02.2015

Date of pronouncement : 25.02.2015

ORDER

PER T.S. KAPOOR, AM:

This is Revenue's appeal against the order of Ld. CIT(A) dated 27.03.2012. The only grievance of Revenue is the action of Ld. CIT(A) by which he had deleted an addition of Rs.43,31,685/- which was made by A.O. on account of short term capital gain declared by assessee as business income.

2. The brief facts of the case are that the assessee company is engaged in the business of trading of various commodities and the case of assessee was selected for scrutiny. During assessment proceedings, the A.O. observed that the assessee had declared short term capital gain of Rs.43,31,685/-.

2 ITA No.2642/Del/2012 From the details of sale and purchase of shares filed by assessee, the A.O. held that assessee was holding shares for a very brief period and ultimately the objective of the assessee was not to earn capital gain but to earn business income. Therefore, he treated the short term capital gain declared by assessee as business income. Aggrieved, the assessee filed appeal before Ld. CIT(A) and submitted various submissions. Ld. CIT(A) accepted the claim of assessee and passed a detailed and exhaustive order and allowed releif to the assessee by holding as under:

"6.3 Decision I have considered the submission of the appellant, observation of the assessing officer and various judicial pronouncements relied upon by the appellant in this regard. The appellant is engaged in the business of trading in agricultural commodities like export of Rice, Sugar, acid, resin and cotton and also Import of coal and Iron ore. Its total turnover from the said business IS around Rs. 365 Crores during the year under consideration. It also makes occasional investments in shares and securities. During the year the appellant has made sale and purchase of shares of M/s Sterling Biotech and M/s Sterling International 'Enterprises Ltd., M/s Arihant Foundation, M/s Vishal Exports and M/s Deccan Chronicle. It is seen that it has purchased shares of Sterling Biotech from June-2006 to February-2007 and sold these shares from June-2006 to March 2007. Similarly, appellant purchased shares of M/s Sterling International Enterprises Ltd. in the month of December and same were sold in the month of February-March-2007. The sale and purchase was as under:-

S. Name of the No. of shares No. of Amount involved Holding NO Company purchased Shares Sold Period Purchase Sale

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1 M/s Sterling 286699 286699 38987413 4,38,76,678 8 days to Biotech 126 days 2 M/s Sterling 60590 60590 46,20,749 38,90,383 70 days International 106 days Enterprises Ltd. 3 M/sDCHL 2500 2500 12,32,550 14,41,494 13 days 3 ITA No.2642/Del/2012

4 M/s Arihant 1450 1450 7,46,408 7,56,774 o days Foundation 5 Vishal 100000 100000 3,10,612 2,34,087 14 days Exports

From the above table it is seen that appellant has dealt in the shares of Five Companies during the year. It has purchased shares of M/s Sterling Biotech from June-2006 to February-2007 and sold in the period June-2006 to March 2007. The holding period of the shares ranges from 8 days to 126 days. Similarly the appellant has purchased shares of M/s Sterling International Enterprises Ltd. in the Month of December 2006 and same were sold in month of December-February- March-2007. The holding period of these shares ranges from 70 days to 106 days. The shares of Deccan Chronicle Herald were purchased on s" October and sold on 18th October 2007. The holding period was 13 days. The appellant has also purchased shares of Vishal Exports and holding period was 14 days. In the case of Arihant Foundation the holding period was zero.

The shares purchased during the F.Y. 2006-07 have been shown by the appellant as investment in its books of accounts and balance sheet. It is claimed by the appellant that these shares were purchased for investment purposes and same have been shown under the head 'investment portfolio' separately. It is seen from the investment schedule that these shares have been shown under the head investment. There is no frequent purchase and sales of shares III other companies except the purchase and sales done in the shares of M/s Sterling Biotech and M/s Sterling International Enterprises Ltd. The shares of these companies were purchased and sold in small lots after retaining the same for some time. It is seen that all transactions of purchase and. sales are delivery based transactions. The appellant has also shown investments in shares in its balance sheet as on 31.03.2007 to the tune of Rs. 3,18,83,659/- in the shares of nine companies. These investments have been reflected at cost price in the balance sheet. Had the appellant engaged in the trading of shares, the valuation of the same would have been done lower of the market value or cost which is not the case here.

It is claimed by the appellant that investment in the shares was done occasionally in few scripts just to maximize the wealth and to park the surplus funds available with the appellant. The appellant has claimed that there were no borrowed funds utilized by the appellant in making the investments.

4 ITA No.2642/Del/2012 The appellant has claimed that his assessments for A.Y.'s 2005-06, 2006-07 and A.Y.'s 2008-09, 2009-10 have been done U/S 143(3) of the IT Act and the short term and long term capital gain declared by the appellant have been accepted by the ASSESSING OFFICER in all these years. The appellant has filed the chart of the short term and long term capital gain declared at page 33 of the paper book and has shown that capital gain / loss from sale of investment was as under:-

A.Y. Capital gain Capital gain Investment in Remark declared (Rs.) accepted or shares (Rs.) not (Rs)

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2005-06 15,33,077/- 15,33,077/- 94,25,800/- Assessed U/S 143(3) 2006-07 15,57,425/- 15,57,425/- 8,73,73000/- Assessed U/S 143(3) 2007-08 43,31,685/- not accepted 3,18,83,660/- Capital gain treated as business income 2008-09 (- )30,38,412/- (-)30,38,412/- 2,17,28,740/- Assessed U/S 143(3). Loss on capital gain allowed to be carried forward.

2009-10 (-)14,98,970/- (-) 14,98,970/- 2,95,42,170/- Assessed U/S 143(3). Loss on capital gain allowed to be carried forwards;

The above table clearly established that appellant's investment in shares was accepted as investment and capital gain declared from such investment was accepted by the ASSESSING OFFICER in all these years except A.Y. 2007-

08. The facts of the appellant's case are similar in all these years and there is no material change.

The appellant has claimed that it has paid STT on these sale and purchase of shares.

During the course of appellant proceedings the AR of the appellant has drawn my attention to para 5.4 of the assessment order wherein the ASSESSING OFFICER has mentioned that the appellant's main business is trading in shares. This observation of the ASSESSING OFFICER is factually 5 ITA No.2642/Del/2012

incorrect. As stated above the appellant is engaged in export and import of food grains, sugar, coals and acid etc and it has a turnover of Rs. 365 crore during the year from such export and import. The assessing officer has also mentioned that sale and purchase of shares is connected with the main business of the appellant which is not correct. In para 5.9 of the assessment order the assessing officer has mentioned that during the year appellant has purchased shares of Rs. 4246.26 lacs and sold shares of Rs. 4616.10 lacs. This observation of the assessing officer is factually incorrect. The appellant during the year investe Rs. 4.58 crore and sold shares of Rs. 5.01 crores during the year. This information is 1 e 0 e paper book submitted by the appellant.

During the course of appellate proceedings, the appellant submitted that all transactions have been delivery based and were settled by way of payment. The transaction of investment and sale were done through MIs Integrated Master Securities Pvt. Ltd. a registered broker with SEBI. The statement of the broker is filed at page-63, 64 and 65 of the paper book which proves that all transactions were settled through payment and delivery of the shares were taken. On going through the balance sheets of the Financial year ending of 31st March 2007 the appellant has shown shares of different companies including shares of M/s Sterling Biotech and MIs Sterling International Enterprises Ltd. under the head investments and the same were treated as capital assets in the balance sheet. It is not a case where the shares in earlier years have been shown in stock in trade and in current year they have been converted into investments. No such information has been brought on record by the ASSESSING OFFICER to support his case. The appellant has filed balance sheet and copy of D-MA T account, as per which the shares have been shown in the D-MAT account as on 31st March 2007. The holding of the shares on which short term capital has been claimed ranges from 8 days to 126 days. It is claimed by the appellant that investment was made in the shares with the intentions to hold the same for long term appreciation and for earning dividends. However the investments was offloaded because of appreciation and maximizing the wealth. It is also contended by the appellant that period of holding of shares and non receipt of dividend income is not a decisive factor for treatment of particulars transaction as investment or trading transaction. It is further contended by the appellant that except in few cases the holding period ranges more than one month to three month. I am in full agreement with the submission of the appellant that period of holding of shares and non receipt of dividend income is not a decisive factor for treatment of particular transaction as 6 ITA No.2642/Del/2012

investment or trading transaction. One has to see the intention of the person who is doing sale and purchase of shares. The Circular No.4 of 2007 issued by the CBDT also does not prescribed any time limit of holding of shares where shares are purchased for investment purposes. It is observed from the details filed by the appellant that it has made investment in the shares of Sterling Biotech and Sterling International Enterprises, Deccan Chronicle, Vishal Export and Arihant Foundation during the year. However these shares were offloaded after holding for some time to maximize the wealth.

The sale and purchase were done only in the shares of 5 companies during the year. Had the appellant engaged in the trading of shares, the frequency of sale and purchase would have been very high and it would not have been limited to the shares of five companies. However that element is not evident in the case of appellant.

The circular No.4 of 2007 has clearly mentioned that a person can have two port- folio, one for investment purposes and another for trading purposes. In this circular no time limit has been prescribed for holding a share to determine whether the shares were held for investment or stock in trade. These things have to be determined by intention of the person who is doing investment or purchase of shares.

In the case of appellant, the circumstances clearly suggest that he had purchased shares only for investment purposes and not for trading purposes. In the entire year he has dealt in the shares of five companies and holding period ranges from 8 days to 126 days and the main business of the appellant was export & import of food grams.

In view of the facts stated above, it is clearly established that shares purchased by the appellant were for investment purposes and capital gain received on such sales is liable to be taxed under the head short term capital gain. Hence the action of the ASSESSING OFFICER of treating the short term capital gain as business income was not justified. I therefore direct the ASSESSING OFFICER to treat the surplus received on sale and purchase of shares as short term capital gain as declared by the appellant in its return of income. As a result this ground of appeal of the appellant is allowed. The ASSESSING OFFICER is also directed to delete the business income from the computation of income of the assessment order, as the income of the short term capital gain of Rs. 43,31,685/-is already included in the computation of income and the same is part of the returned income of Rs. 1,35,99,860/-."

7 ITA No.2642/Del/2012 3. Aggrieved, the Revenue is in appeal before us.

4. Ld. D.R. invited our attention to the assessment order page 2 and submitted that the A.O. had observed that the assessee was making huge sale purchase of shares and was selling them at a very short interval; therefore he had rightly made the addition.

5. Ld. A.R. on the other hand submitted that the assessee was classifying the shares in the balance sheet as investment and these were being valued at cost of acquisition and moreover, in earlier years where assessments were completed u/s 143(3), the income from sale purchase of shares were held to be capital gain. He further submitted that even in subsequent years, where the assessment was completed u/s 143(3), the loss incurred by assessee was held to be capital loss and in support of his argument, Ld. A.R. invited our attention to page 26 of Ld. CIT(A)'s order where Ld. CIT(A) has noted down the treatment of such gain as capital gain. Ld. A.R. further submitted that no borrowed funds were used and he heavily relied upon the order of Ld. CIT(A).

6. We have heard rival parties and have gone through the material placed on record. We find that the assessee is engaged in the business of agro products and its total turnover from the said business is around Rs.365 crores. We further find from the facts noted in Ld. CIT(A)'s order that assessee had carried out transaction in 5 scripts and holding period of which ranged from 8 days to 126 days. Moreover, it is observed that the assessee had classified the investment in the balance sheet as investment. We find that in previous years and in succeeding years, the income of assessee from similar activities has been held to be on account of capital gain and not on 8 ITA No.2642/Del/2012

account of business income. Ld. CIT(A) has passed a detailed and exhaustive order in which we do not find any infirmity.

7. In view of above, appeal filed by Revenue is dismissed.

8. Order pronounced in the open court on 25th Feb., 2015.

Sd./- Sd./- ( G. C. GUPTA) (T.S. KAPOOR) VICE PRESIDENT ACCOUNTANT MEMBER th Date: 25 Feb., 2015 Sp Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order

(ITAT, New Delhi).

S.No. Details Date Initials Designation 1 Draft dictated on 20/2 Sr. PS/PS 2 Draft placed before author 23,24/2 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS 25/2 Sr. PS/PS 6 Kept for pronouncement 25/2 Sr. PS/PS 7 File sent to Bench Clerk 25/2 Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order