TMI Blog2011 (7) TMI 818X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of resale in order to earn profits - Appeal is dismissed - 54, 55 and 137 of 2011 - - - Dated:- 27-7-2011 - RAO V.V.S., RAMESH RANGANATHAN, JJ. JUDGMENT Ramesh Ranganathan J.- 1. These three appeals, under section 260A of the Income-tax Act, 1961 (for short the "Act"), are against the orders of the Income-tax Appellate Tribunal, Hyderabad A Bench, Hyderabad (ITAT), in I. T. A. No. 1101/Hyd/09 and batch dated October 15, 2010. The appellants herein are Sri P. V. S. Raju and his wife. While the appeals filed by Sri P.V.S. Raju relate to the assessment years 2005-06 and 2006-07, the appeal preferred by his wife relates to the assessment year 2006-07. 2. It would suffice for the disposal of these appeals, if the facts in I. T. T. A. No. 54 of 2011 are noted. Both the appellants filed their returns declaring income from investment in shares, interest on income, salary and capital gains. After issuing notices, under sections 143(2) and 142(1) of the Act, the assessing authority passed orders of assessment holding that the appellants were traders in shares ; they had classified their activities, for the assessment year 2005-06, into three categories, i.e., business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; the very fact that the assessee had classified certain shares in his books of account as investment and certain others as stock-in-trade was proof that it was the intention of the appellants to treat certain shares as investment and not as stock-in-trade and the profit which the appellants made on the sale of these shares was liable to be taxed only as short-term capital gains, and not as income from business. 4. Section 2(14) of the Act defines "capital asset" to mean property of any kind held by an assessee, whether or not connected with his business or profession. The definition of capital asset does not, however, include stock-in-trade held for the purpose of business. Section 2(22) of the Act defines "dividend" to include any distribution by a company of accumulated profits, whether capitalised or not. Section 2(42A) defines "short-term capital asset" to mean a capital asset held by an assessee for not more than thirtysix months immediately preceding the date of its transfer. Section 2(42B) defines "short-term capital gain" to mean capital gain arising from the transfer of a short-term capital asset. Under section 28(i) of the Act, the profits and gains of any business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) SCR 375). If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce profits it is relatable to revenue (Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) ; [1955] 1 SCR 972. 7. The meaning of "investment" is not its meaning in the vernacular of the man in the street, but in the vernacular of the businessman. It is a form of income-yielding property (Nawn Estates (P.) Ltd. v. CIT [1977] 106 ITR 45 (SC) ; [1977] 1 SCC 7 ; Commissioners of Inland Revenue v. Tootal Broadhurst Lee Co. Ltd. [1949] 29 TC 352). In determining the question whether, after acquiring the shares, the assessee dealt with it as an investor or carried on business with it treating it as its stock-in-trade or as a trading asset, what is relevant is that, if the case falls within the former category, receipts by way of sale of such shares will be capital receipts but if it falls within the latter the receipts will be trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade, i.e., by carrying on business of dealing in stock and shares (CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86 (SC) ; AIR 1963 SC 477 ; Bengal and Assam Investors Ltd. v. CIT [1966] 59 ITR 547 (SC) ; [1966] 2 SCR 471). The dominant or even the sole intention to resell is a relevant factor and raises a strong presumption but by itself is not conclusive proof of trade. The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction (Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC) ; [1975] 2 SCC 538 ; Venkataswami Naidu and Co. [1959] 35 ITR 594 (SC) ; AIR 1959 SC 359). A profit made by the sale of shares may not amount to capital gain if the shares were part of the trading assets of the assessee. If such be the case, the gains may amount to trading income of such an assessee. This question would depend upon whether the shares are held by the assessee as an investment or as a trading asset and would require examination of facts (Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) ; [2004] 10 SCC 1). 10. Where the purchase of any article or of any capital invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business (Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC) ; [1975] 2 SCC 538 and Thew v. South West Africa Co. Ltd. [1924] 9 TC 141 (CA)). 12. What is the line which separates the two classes of cases may be difficult to define and each case must be considered according to its facts ; the question to be determined being - is the sum of gain that has been made a mere enhancement of value by realising a security or is it a gain made in the operation of business in carrying out a scheme for profit making ? If a transaction is in the assessee's ordinary line of business there can be no difficulty in holding that it is in the nature of trade. If there is repetition and continuity of transactions the assessee would be carrying on a business (Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC) ; [1975] 2 SCC 538). 13. In judging the character of such transactions several factors have been treated as significant. If a transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to carry on trade may readily be inferred. The magnitude, the frequency and the ratio of sales to purchases and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of holding of a majority of the stock was between one to seven days ; (f) in most of the transactions, the assessees did not even hold on to at least some part of the huge purchases and had engaged in the same scrips frequently ; (g) the intention of the assessees in buying shares was not to derive income by way of dividend on such shares but to earn profits on the sale of the shares ; (h) the assessees had indulged in multiple transactions of large quantities with very high periodicity. These periodic transactions selecting the time of entry and exit in each scrip called for regular direction and management which would indicate that it was in the nature of trade ; (i) repeated transactions, coupled with the subsequent conduct of the assessees to re-enter the same scrip or some other scrip, in order to take advantage of market fluctuations lent the flavour of trade to such transactions ; (j) the assessees were purchasing and selling the same scrips repeatedly and were switching from one scrip to another ; (k) the dominant impression left on the mind was that the assessees had not invested in shares ; (l) mere classification of these share transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be microscopically scrutinised only to locate some insignificant errors. When viewed in the light of the several findings recorded by them in coming to the conclusion that the shares were held by the appellants as stock-in-trade and not an investment, the erroneous finding of the Income-tax Appellate Tribunal that the appellants had held all the shares for less than two months pales into insignificance. Even otherwise, it is not even the appellants' case that they had held all the shares for a long duration. It is evident from the order of the Income-tax Appellate Tribunal that the voluminous share transactions were in the ordinary line of the appellants' business ; purchase of shares by them was not for the purpose of earning dividend but with the dominant intention of resale in order to earn profits; the profit made by them is not of mere enhancement of value of the shares, but is a profit made in the carrying on of a business scheme of profit making ; huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of "trade" ; the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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