Ankur Scientific Energy Technlogies (P) Ltd. Vs Dy. CIT (ITAT Ahmedabad)
Frequency of a transaction is one of the reasons amongst others for forming a belief whether an assessee was engaged in the business of share transactions or it was only making investment. This one factor cannot be sufficient to decide controversy conclusively. It is pertinent to observe that the assessee has always valued investment at cost. Had it been engaged in trading of shares, then at the close of the year, the valuation would have been made either at cost or at market price whichever is lower. The assessee has not used any interest bearing funds. Its transactions are delivery based. Its main business is of manufacturing and selling of bio-mass gasfier. Cumulative setting of all these factors would indicate that the assessee was not dealing in shares as trader. Even if frequency is considered, that also not on higher side. It has dealt 27 scrips and 57 transactions in the year. The learned Commissioner (Appeals) while rejecting contentions of the assessee had made an observation that opening balance in the equity shares as on 1-4-2009 was Rs. 526.30 lacs which increased to Rs. 791.35 lacs in 31-3-2010. We failed to understand that how increase in the value of investment would be a factor to doubt activity of the assessee as an investor. How this fact could goad any adjudicating authority to arrive at a conclusion that transaction was of a business in nature. If the assessee did not make any sale in a particular year and keep on investment, the value in investment would increase. As observed earlier that large number of decisions at the end of Hon’ble High Court and Tribunal are available on this point. Similarly, assessee has also made reference to large number of cases in its submission before learned Revenue authorities. We do not deem it necessary to recite and recapitulate all these decisions because most of the decisions have been considered in the case ofSarnath Infrastructure (P) Ltd. (supra). One of the cases referred by the assessee is Gopal Purohit v. Jt. CIT (2009) 122 TTJ (Mumbai) 87 by Tribunal, Mumbai. It is observed that this order has been upheld by Hon’ble Bombay High Court in CIT v. Gopal Purohit (2010) 228 CTR (Bom) 582. In this case, transactions were more than 150 and in that case it was observed that if delivery based transactions are available, then, profit received from such transactions is to be treated as short-term capital gain or long-term capital gain. Thus, taking into consideration overall facts, we are of the view that the learned Revenue authorities below are not justified in treating the assessee as trader in the shares, therefore, we allow the first fold of grievance and set aside assessment of Rs. 28,24,217 as a business income. We direct the assessing officer to accept the claim of the assessee, and assess tills amount as a short-term capital gain.
Once the facility is approved, then entire expenditure incurred on research and development facility has to be allowed for weighted deduction
The second question is whether after satisfying itself for grant of approval, DSIR can grant approval for specific period on the strength of some policy formulated by it. In this area, judgment of Hon’ble Gujarat High Court is relevant, wherein it has been held that this cut-off period would not be of any relevance, because once the facility is approved, then entire expenditure incurred on research and development facility has to be allowed for weighted deduction. The Act nowhere authorizes DSIR to grant approval for specific period. The job of DSIR was not find out whether R&D activity was carried out by the assessee or not, and the expenditure was incurred or not.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
Assessee is in appeal before the Tribunal against the order of the learned Commissioner (Appeals)-I, Baroda, dated 2-9-2013 passed for the assessment year 2010-11.
2. Grounds of appeal taken by the assessee are not in consonance with the rule 8 of the Income Tax (Tribunal) Rules, 1963 – they are descriptive and argumentative in nature. In brief grievance of the assessee is of two-folds viz. (a) the learned Commissioner (Appeals) has erred in confirming action of the assessing officer for treating gain on sale of shares at Rs. 28,24,217 as a business income instead of short-term capital gain shown by the assessee, and (b) the learned Commissioner (Appeals) has erred in upholding disallowance of weighted deduction of Rs. 13,48,732 made under section 35(2AB) of the Income Tax Act claimed for R&D expenses.
3. Facts in brief are that the assessee is a private limited corporation engaged in manufacturing and selling of bio-mass gasfier. It has filed its return of income electronically on 29-9-2009 declaring total income at Rs. 3,44,94,749. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) of the Income Tax Act was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the assessing officer that the assessee has shown gain on sale of shares and mutual fund. According to the assessing officer, the assessee has claimed short-term capital gain of Rs. 28,24,217 from sale of investment (limited equity shares). The learned assessing officer has confronted the assessee to show as to why the above gain should not be treated as a business income. In other words, he disputed activity of the assessee as an investor and confronted to the assessee as to why it should not be treated as a trader in the shares. In response to the query of the assessing officer, the assessee has filed detailed written submission on 3-12-2012. This submission has been reproduced by the assessing officer. The assessee has also made other submissions. The learned assessing officer has gone through the written submissions of the assessee, but did not concur with them, and ultimately assessed short-term capital gain disclosed by the assessee as a business income. Appeal to the learned Commissioner (Appeals) did not bring any relief to the assessee.
4. Before us, the learned counsel for the assessee took us through written submissions filed by the assessee before the learned Revenue authorities below. He specifically drew our attention towards submissions noticed by the learned Commissioner (Appeals) on pp. 8 to 13 of the impugned order.
5. On the other hand, learned Departmental Representative relied upon the order of the assessing officer. He contended that learned assessing officer has rejected contentions because there was large number of transactions which have been undertaken by the assessee.
6. We have duly considered rival contentions and gone through the record carefully. The issue, whether gain from sale of shares is to be 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. 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.
7. 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 to be treated as a simplicitor investors, we would like to refer certain broad principle culled out by Tribunal, Lucknow Bench in the case ofSarnath Infrastructure (P) Ltd. (2009) 120 TTJ (Lucknow) 216. These tests read as under :–
“13. After considering above rulings we cull out following principles, which can be applied on the farts 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 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 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 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 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 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 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.”
8. The Hon’ble Gujarat High Court had also an occasion to consider this issue in the case ofCIT v. Rewashanker A. Kothari (2006) 283 ITR 338 (Gig). Hon’ble Court has made reference to the test laid by it in its earlier decision rendered in the case of Pari Mangaldas Girdhardas v. CIT 1977 CTR (Gig) 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.
(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, authorized 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.”
9. In the light of the above, let us examine facts of the present case. In order to appreciate the facts and circumstances of the case, we would like to take note of written submissions made by the assessee before the learned Commissioner (Appeals). Relevant part of the submission reads as under :–
“2. Our submissions on considering gain from sale of shares as business income rather than capital gain
The assessee humbly submits that it earned short-term capital gain of Rs. 44,27,978 from sale of mutual fund, short-term capital gain of Rs. 28,24,217 from sale of investment (listed equity shares) and long-term capital gain of Rs. 6,22,612 from sale of mutual fund/listed equity shares and offered the same as capital gain as per applicable provisions of the Act. During the assessment proceedings, assessing officer has accepted short-term capital gain of Rs. 44,27,978 from sale of mutual fund and long-term capital gain of Rs. 6,22,612 from sale of mutual fund/listed equity shares but considered short-term capital gain of Rs. 28,24,217 from sale of investment (listed equity shares) as business income.
The assessee humbly submitted that gain of Rs. 28,24,217 earned from listed equity shares was rightly offered as capital gain and made following submissions to assessing officer vide letter dated 3-12-2012 in support of same :–
Company is a manufacturing company and its main object is to make business profit from manufacturing of bio-mass gasefiers and not from shares and mutual fund. It is evident from memorandum and articles of the assessee-company.
Investment was only in few companies and most of them are blue ship/A category companies where investors want to invest money mainly for investment and not for trading. Total number of scripts were 27 only and total number of transactions were 57 only average 1 transaction per week.
All the shares sold during the year were delivery based and delivery was given from the demat account of the assessee. Further, many of the shares sold during the previous year, were from opening stock and shown as part of investment as clear from the balance sheet of the assessee.
–All the investment was from own funds and no borrowed money for used for the investment.
–Opening balance of Investment in equity shares as on 1-4-2009 was Rs. 526.30 Lacs which increased to Rs. 791.35 Lacs as on 31-3-2010. This also shows that money was put purely for investment purpose.
–Assessee-company was valuing such investments in shares and mutual fund at cost consistently.
–Assessee-company is consistently investing from its surplus funds in shares and mutual fund and is consistently following the same practice since incorporation and the same was accepted.
The assessee further submits that CBDT Circular No. 4 of 2007, dt. 15-6-2007 and various judicial pronouncements made it clear that combinations of various tests/factors are to be applied for determination whether income from sale of shares should be considered as capital gain or business income and not on any particular or single criterion. Relevant extract from CBDT Circular No. 4 of 2007 is reproduced here.
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.’
The assessee further submits that in spite of providing all the details and fact that the assessing officer did not dispute any of our submission, relevant judicial pronouncements and meeting various criterions mentioned above, the assessing officer arbitrarily decided to treat the income from sale of listed equity shares as business income rather than short-term capital gain.
We have provided complete details of short-term capital gain of Rs. 2,824,217 vide our submission dated 21-11-2012 and it can be summarised as under :–
