Ankur bansal (a) (135 Points)
06 December 2009pls tel me whether inc on sale of shares treated as business inc or cap gain???
whether there are case laws where income is treated as cap gain??
pls provide me that case laws....,
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 06 December 2009
Explanation to Section 73 of the Income Tax Act, 1961 states “ Where any part of the business of a company other than a company whose gross total incomeconsists mainly of income which is chargeable under the heads "Interest on Securities", " Income from House Property", "Capital Gains" and "Income from Other Sources" or a company the principal business of which is the business of banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares"
Thus plain reading of the aforesaid provison shows that the Explanation is not applicable : in case of a company whose gross total income consists mainly of income chargeable under one or more of the following heads: Income from House Property, Capital Gains, Income from Other Sources, (including interest on securities) and in case of a company whose principal business is that of banking or granting of loans and advances, the Explanation shall not apply.
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 06 December 2009
You should also note that the Explanation exempts a company whose principal business is that of grant of loans and advance. This term "principal business" has not been defined in the Act.Here also different courts have interpretated in different manners.
In the case of I.T.O vs. Raghav Commercial Ltd. [16 TT] 335 (Cal.); income composition test was applied for determining principal business of the company. In case of Offshore India Ltd. vs. I.T.O. [15 ITD 549] (Cal.). the assessee’s contention of being in business of grant of loans as principal business was rejected as the value of investment was more than value of loans and advances.
Ankur bansal
(a)
(135 Points)
Replied 06 December 2009
incomeconsists mainly of income which is chargeable under the heads "Interest on Securities", " Income from House Property", "Capital Gains" and "Income from Other Sources"
- how cn we define "mainly"????????
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 06 December 2009
Explanation mention the word" consist mainly of .." which has been interpreted by diffrent judicial fora in different ways .
I got this from a site sir...lemme check if i can get more case laws for you..i think a final student or a CA can help you on this as my syllabus is not much into case laws...bt still i ll try my level best
varun sharma
( CA Final , M.Com)
(87 Points)
Replied 07 December 2009
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 08 December 2009
This is a very old debatable topic between revenue authorities and tax payers. Nothing concrete can be said whether you had done business or investment transaction without going into full facts .Following parameters are important to decide this issue 1. What is the general nature of transactions of assessee in last three years ? 2. What is the manner of maintaining books of account ? Whether those shares on which short term capital gains were claimed are shown in books of account at the time of purchase as an investment or stock in trade. 3. What is the magnitude of purchase and sale of shares under short term vis a vis under business head? 4. In case of short term transactions, what is the general period of holding scrip wise vis a vis the business transactions shares holding? What it means is that find out the period of holding of each share in case of ST and business transaction. 5. How much dividend earned on the shares sold as investment (short Term) ?
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 08 December 2009
Case Laws
There are many case laws on this subject and each was given by going into the facts before it . You can get clues for your own case if you read following case laws properly 1. In Raja Bahadur Visheshwara Singh & Others V. Commissioner of Income Tax, Bihar & Orissa, (41 ITR 685), the assessee purchased shares during a period of 10 years from his own funds. He then borrowed substantial amounts for making further purchases of shares and securities. He made profits on selling some shares in the subsequent years. The Income Tax Appellate Tribunal, taking note of the magnitude and frequency of the transactions and the ratio of sales to purchases and total holdings, held that the appellant must be regarded as a dealer in shares and securities and that the profits of those years were assessable to income tax. On reference, the Patna High Court held that there was sufficient material to support the findings of the Appellate Tribunal. On further appeal to the Hon'ble Supreme Court it was, inter alia, held :
• that if on the evidence which was before the Tribunal, i.e. the substantial nature of the transactions, the manner in which the books had been maintained, the magnitude of the shares purchased and sold and the ratio between the purchases and sales and the holdings, the Tribunal came to the conclusion that there was material to support the finding that the appellant was dealing in shares as a business, it could not be interfered with by the High Court;
• that the High Court was right in holding that there was sufficient material to support the finding of the Appellate Tribunal.” It may be noticed that in one of the earlier year of assessment the appellant was not treated as a dealer in shares and this fact was not considered by the High Court but the Hon'ble Supreme Court rejected the contention observing that when an owner of an ordinary investment chooses to realize it and obtain a higher price for it than he originally acquired it at, the enhanced price is not a profit assessable to income tax but where what is done is not merely a realization or a change of investment but an act done in what is truly the carrying on of a business the amount recovered as appreciation will be assessable.
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 08 December 2009
In Dalhousie Investment Trust Co. Ltd. V. Commissioner of Income Tax (Central), Calcutta (68 ITR 486), the appellant was investing its capital in shares and stocks of McLeod & Co. and companies managed by that company. It was changing its investment by sale of its shares from time to time. The appellant purchased bulk of shares of those companies by taking loan at a time when the market price was continuously falling and rate of dividends was very low. Those shares were sold subsequently at a considerable profit. The question was whether the profit derived by the appellant from the sale of those shares was in the nature of revenue receipt or a capital gain. It was held by the Hon'ble Supreme Court that the appellant purchased and sold the shares of the company and the allied companies as stock in trade and that they were in fact purchased even initially not as investments but for the purpose of sale at a profit and therefore the transactions amounted to an adventure in the nature of trade and the profit derived by the appellant from the sale of shares was a revenue receipt and as such liable to income tax. The fact that the department in the earlier years treated the transactions in the nature of investments was not binding in the proceedings for assessment during the subsequent years.
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 08 December 2009
In Commissioner of Income Tax, Nagpur v.. Sutlej Cotton Mills Supply Agency Ltd. ( 100 ITR 706), the respondent assessee subscribed for 3,49,000 shares of a new issue of Gwalior Rayon and paid the application and call moneys. Subsequently, he sold 1,58,200 shares with a profit. The Income Tax Appellate Tribunal found that the transaction constituted business being an adventure in the nature of trade and that the profit was liable to income tax. On reference to the High Court of Madhya Pradesh held that the transaction was held not an adventure in the nature of trade. On appeal to the Hon'ble Supreme Court, the decision of the High Court was reversed holding that the Tribunal had considered the evidence on record and applied the correct test in law, and there was no scope for interference with the finding of the Tribunal.
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 08 December 2009
We may notice here a recent judgement of the Authority in the case of XYZ/ABC Equity Fund (250 ITR at page 194). In that case the applicant company was a resident of Mauritius which mobilized investment from different investors and collected a large pool of money and after identifying investment opportunities invested in three Indian companies and one USA company. It utilized the services of an advisor who was also advising to other companies. The investment in India was through the custodian which was rendering services in the ordinary course of business to about twenty companies. The Authority ruled, inter alia, that the applicant company had been formed with the object of carrying on the business of acquiring and investing in and holding securities of all kinds and ultimately selling at a profit. It is with that purpose it had raised capital and acquired money from other sources with which it acquired large block of shares in Indian companies and that indicated a large systematic activity for making profits. Transactions of this magnitude in furtherance of the object stated in its memorandum could be nothing other than business and the proceeds of sale of shares in India would amount to business receipts and not capital gains.
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 08 December 2009
In A.V.Thomas & Co.Ltd. v . CIT (Supra), the assessee referred to the memorandum of association to show that it was one of the objects of the assessee to include the promotion of the companies and accordingly the amount in question was paid to promote the Rodier Textile Mills Ltd. Repelling that contention the Hon'ble Supreme Court observed that a memorandum of Association is not conclusive as to the real nature of transaction which has to be deduced from the circumstances in which the transaction took place and not from the memorandum. As a fact it was found that different versions given in the books of accounts of the assessee - company, belied the assertion. What this decision lays down is that mere recital in the memorandum of association is not conclusive of the nature of transaction, there must be some material to show that in furtherance of the object clause in the memorandum steps are taken and it is given effect to
Hareesh H Sharma
(Cleared IPCC..now article)
(894 Points)
Replied 08 December 2009
CIT v . Associated Industrial Development Co.(P) Ltd (Supra), was a case of the assessee company being managing agents of various companies. It sold shares held by it in three of its companies and derived substantial profits. The claim of the assessee was that the profits were in the nature of capital gain and not income. The Tribunal found in view of the multiplicity of the transactions over the years the assessee company had ceased to be an investor and had become a dealer and the profits were liable to be taxed as income. The High Court on reference did not interfere with the finding of the Tribunal but held that the shares were held by the assessee as part of its investment and, therefore, profit on the sale of shares did not arise to it in the course of its business as a dealer in shares, which was a capital receipt. On appeal, the Hon'ble Supreme Court reversed the decision of the High Court holding that the question whether the shares had been held by way of investment, was essentially a question of fact and the Tribunal was not called upon to decide it. The assessee did not place any material from which it could be established whether particular holding of shares was by way of investment or formed part of the stock in trade. It was a matter which was within the knowledge of the assessee who held the shares and he should, in normal circumstances, be in a position to produce evidence from his records to show that the shares were held as stock in trade.
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