Does not maintaining separate books with frequent transactions mean that gains from shares has to be accessed as business profits instead of as STCG?

IN THE HIGH COURT OF DELHI AT NEW DELHI

+ ITA 561/2012

+ ITA 566/2012, C.M. NO. 16325/2012

COMMISSIONER OF INCOME TAX-IV

Appellant

Through: Sh. N.P. Sahni, Sr. Standing

Counsel and Sh. NitinGulati, Advocate.

Versus

M/S. D&M COMPONENTS LTD.

Respondents

Through: None.

Before CORAM:

HON'BLE MR. JUSTICE S. RAVINDRA BHAT

HON'BLE MR. JUSTICE R.V. EASWAR

Reserved on: 21.03.2014

Pronounced on: 21.04.2014

Judgement:

MR. JUSTICE S. RAVINDRA BHAT

Facts of the case:

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 capitalgain was dismissed. The question of law which arises forconsideration 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 assesse was engaged in the business of dealing in the auto spare pails andinvestment in bonds, mutual funds and other securities. On scrutiny ofthe accounts, the Assessing Officer felt that assessee has disclosedlong term capital gains to the tune of Rs.31,13,006.51/- and Rs.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 assesse and 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 the

Revenue 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:

“…On going through a sample of the total sharetransactions, 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 above sample transactions, the appellant has transacted in a largenumber of Shares involving substantial amount of moneyand the overall circumstances indicate that these shares had not 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 shares werepurchased 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/- does not appear to be logical andconvincing. 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 gainis 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 Rs.26,82,115/- was justified. Itwas 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 nonmaintenanceof separate bank account, would not be avery material fact…

To read the full judgement, please find the attached file.

 

Attached File:

http://lobis.nic.in/dhc/SRB/judgement/22-04-2014/SRB21042014ITA5612012.pdf