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The Tax Publishers Seer Finlease Pvt. Ltd. v. ACIT [ITA No. 3326, 3440/Ahd/2009 and IT (SS) A No. 3/Ahd/2012 with CO No. 70/Ahd/2012, dt. 17-3-2016] : 2016 TaxPub(DT) 1577 (Ahd-Trib) Income whether business or capital gains *Facts:* Assessee in the business of investment in shares and securities was called upon in a scrutiny assessment to establish why their income in sale of shares should not be treated as business income vis a vis short/long term capital gains. It was noticed that the assessee had financed one Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. by which the two of them cornered IPO shares meant for retail investors in an IPO scam. Such financing was out of borrowed funds. Thus the assessee was held to be in the business of selling and buying of shares. The memorandum of association of assessee had ancillary objects as investing and trading in securities. In the earlier years of the assessee they were treated as investment holding and were treated as capital gains. The 6 sacred tests propounded by CBDT Circular 4/2007 dtd. 15-6-2007 read with CIT v. H. Holck Larson 160 ITR 67 (SC) was applied by the assessing officer as under: Substantial volume of trading Length of ownership/holding - short term in nature Transaction frequency no. of transactions - innumerable and frequent in nature No supplementary work was carried by assessee on such held securities - funding method Targeted sale upon price reaching specific levels, thus no intent to have emergency money Intent to hold to maturity or longer periods but was with profit maximization objective was stock in trade more than investment Basing above it was treated as business income. On appeal the Commissioner (Appeals) upheld the views of the assessing officer partly holding that the financed portion of the IPO was business income rest of it was capital gains as investment. Since the modus operandi of cornering the retail investors shares tantamounted to an intent with a pecuniary motive it was business income. Since the non-scam tainted shares were out of own funds the same was investment thus capital gains. Consequential penalty under section 271(1)(c) was imposed by the assessing officer. Thus the cross appeals for the business income treatment/penalty by assessee and on the capital gains part by the department reached the ITAT: Held in favour of the assessee that the IPO- scam financed shares were also capital gains as more than the manner of financing it was not found to impact the investment method especially the way the assessee made his investments. Merely because there was a scam where the assessees funds were involved does not mean it was business income. Acquisition mode is not the test but the objective of the investment is the test. The way the assessee treated the securities indicated it to be investment. Penalty stood quashed accordingly. The ITAT applied the following principles in coming to its conclusions: Intent of assessee was it stock in trade or investment Funding from own sources or borrowed sources Frequency of transactions Holding intent as investment v. trading to make gains Treatment in books of accounts MoA/AoA objects clause of the company Distinction if any to keep two portfolios in the books separately Legal requisites of the assessee and not its end use Permissibility of CBDT circular 4/2007 confirming holding of two separate portfolios viz. investment/trading Combination of all of the above as a test than individually

The Tax Publishers

Seer Finlease Pvt. Ltd. v. ACIT [ITA No. 3326, 3440/Ahd/2009 and IT (SS) A No. 3/Ahd/2012 with CO No. 70/Ahd/2012, dt. 17-3-2016] : 2016 TaxPub(DT) 1577 (Ahd-Trib)

Income whether business or capital gains

Facts:

Assessee in the business of investment in shares and securities was called upon in a scrutiny assessment to establish why their income in sale of shares should not be treated as business income vis a vis short/long term capital gains. It was noticed that the assessee had financed one Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. by which the two of them cornered IPO shares meant for retail investors in an IPO scam. Such financing was out of borrowed funds. Thus the assessee was held to be in the business of selling and buying of shares. The memorandum of association of assessee had ancillary objects as investing and trading in securities. In the earlier years of the assessee they were treated as investment holding and were treated as capital gains. The 6 sacred tests propounded by CBDT Circular 4/2007 dtd. 15-6-2007 read with CIT v. H. Holck Larson 160 ITR 67 (SC) was applied by the assessing officer as under:

Substantial volume of trading

Length of ownership/holding - short term in nature

Transaction frequency no. of transactions - innumerable and frequent in nature

No supplementary work was carried by assessee on such held securities - funding method

Targeted sale upon price reaching specific levels, thus no intent to have emergency money

Intent to hold to maturity or longer periods but was with profit maximization objective was stock in trade more than investment

Basing above it was treated as business income.

On appeal the Commissioner (Appeals) upheld the views of the assessing officer partly holding that the financed portion of the IPO was business income rest of it was capital gains as investment. Since the modus operandi of cornering the retail investors shares tantamounted to an intent with a pecuniary motive it was business income. Since the non-scam tainted shares were out of own funds the same was investment thus capital gains. Consequential penalty under section 271(1)(c) was imposed by the assessing officer. Thus the cross appeals for the business income treatment/penalty by assessee and on the capital gains part by the department reached the ITAT:

Held in favour of the assessee that the IPO- scam financed shares were also capital gains as more than the manner of financing it was not found to impact the investment method especially the way the assessee made his investments. Merely because there was a scam where the assessees funds were involved does not mean it was business income. Acquisition mode is not the test but the objective of the investment is the test. The way the assessee treated the securities indicated it to be investment. Penalty stood quashed accordingly.

The ITAT applied the following principles in coming to its conclusions:

Intent of assessee was it stock in trade or investment

Funding from own sources or borrowed sources

Frequency of transactions

Holding intent as investment v. trading to make gains

Treatment in books of accounts

MoA/AoA objects clause of the company

Distinction if any to keep two portfolios in the books separately

Legal requisites of the assessee and not its end use

Permissibility of CBDT circular 4/2007 confirming holding of two separate portfolios viz. investment/trading

Combination of all of the above as a test than individually