Sarnath Infrastructure (P) Ltd. v. ACIT
ITA No. 301 (Luck.) of 2006
A.Y. : 2004-05. Dated : 20-12-2007
S. 28(i) and S. 45 of the Income-tax Act, 1961 — Profit
from sale of shares out of investment portfolio was taxable as capital gains
and not as business income.
The assessee-company was dealing in shares both as business
as well as investment and keeping separate accounts in respect of the two
portfolios. Valuation of holdings in investment portfolio was done at cost
only and holdings were reflected in Balance Sheet as investment. For the
relevant assessment year, the profit on sale of shares out of the investment
portfolio was treated by the Assessing Officer as business income and not as
long term capital gain. The CIT(A) upheld the addition.
The Tribunal held that the said profit was to be treated as
long term capital gain and not as business income. The Tribunal’s decision was
arrived at after examining various decisions.
The Tribunal noted as under :
(1) The material on record showed that the assessee had
clear independent portfolios for investment in shares as well for trade and
it has kept separate accounts in respect of the two portfolios.
(2) The shares which were sold out of investment
portfolio during this year and on which capital gains have been offered by
the assessee were held by it for more than two years and in some cases for
more than three years.
(3) No material is brought on record by the Department to
show that demarcation line between business and investment is hazy or that
assessee has not maintained an investment portfolio and it was dealing in
shares only like a trader.
(4) Valuation of holdings has been done at cost for
investment portfolio. They were reflected in the Balance Sheet as
investment.
(5) The frequency of such purchase or sale in this
portfolio is not large enough to doubt that the investment portfolio is only
a device to pay lesser taxes by parking some stock-in-trade in the
investment portfolio.
(6) Turnover to stock ratio in investment portfolio is
very low as compared to that in trading portfolio. Further, there is no
material to show that these shares in the investment portfolio were also
traded in the same and like manner as those which were in stock-in trade
portfolio.
(7) All the sales out of the investment portfolio were
identifiable to purchases made in the same portfolio.
(8) In view of the above facts, the assessee had
discharged its primary onus by showing that it was maintaining separate
accounts for two portfolios and there was no intermingling. The onus then
shifted on the Revenue to show that apparent was not real. There was no
material brought in by the Revenue to show that separate accounts of two
portfolios were only a smoke screen and there was no real distinction
between the two types of holdings. This could have been done by showing that
there was intermingling of shares and transactions and the distinction
sought to be created between two types of portfolios was not real but only
artificial and arbitrary.
Therefore, in absence of any material to the contrary and
on appreciation of cumulative effect of several factors present, it was held
that the surplus was chargeable to capital gains only and the assessee was not
to be treated as trader in respect of sales and purchases of shares in the
investment port-folio.
