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TMI Blog2010 (10) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer noted from the statement of total income that the total income of Rs. 1,45,49,690 consists of short-term capital gain on sale of shares amounting to Rs. 1,39,29,733 and profits of the business (from sale of shares) of Rs. 6,19,960. He noted that this is effectively the first year of business of the assessee company. The profit and loss account reveals that what is claimed to be short-term capital gain is the same amount which is credited as 'profit on sale of shares' therein, while an amount of Rs. 25,41,080 is separately credited as 'share trading income' in the P&L account. As per the Balance Sheet the total equity share capital is only Rs. 1 lakh and there are only two shareholders of the company namely Shri Nafeez N. Hakeem and Mrs. Zora M. Hakeem each holding 50 per cent of the shares. 2.2 The Assessing Officer further noted that the reserves and surplus as on 1st day of the previous year was a meagre amount of Rs. 8,25,694 and as on 31-3-2007 it was Rs. 1,32,60,439, the increase being attributable to the current year's profits. Therefore, the business has been carried on mainly with loan funds which stood at Rs. 1,10,04,145 as on 1-4-2006 and rose to R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med on account of diminution in value of the shares. (vi) The sprit of the law at the time of introduction of STT clearly proves that any transaction on which STT is paid shall be treated as capital gain. (vii) The company acted as a product investor by selling the shares when the prices rose to earn profit. The company has not acted beyond its objections. The assessee also relied on the decision of the Tribunal in the case of M/s. J. M. Share and Stock Brokers Ltd., and Janak S. Rangawala. 3. However, the Assessing Officer was not convinced with the explanations given by the assessee. He referred to the CBDT circular No. 4 of 2007, dated 15-6-2007 which lays down a number of tests and features to distinguish between shares held as investments and shares held as stock-in-trade. He also noted that the short-term capital gain on sale of shares which has been subjected to Security Transactions Tax, suffers a lower rate of tax under section 111A of the I T Act whereas profit from trading in shares suffers tax at the normal rate. Applying the above, he analysed the case of the assessee. 3.1 He noted that the assessee has utilized part of borrowed funds for its share trading ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the uncertain price fluctuation, the sale decision had been taken by the assessee to avoid further loss of investment. It was submitted that the volumes and frequency has no bearing to the issue of determination of capital gains but its periodicity, delivery and subsequent payments are related factors. It was submitted that the transactions were neither speculative nor of arbitrage nor of forward contracts. The assessee, as a prudent investor, has acted purely as an alert person since the prices greatly vary on the strength of news of particular company. It was further submitted that magnitude does not change the nature of transactions. The shares invested are all delivery based and earning of dividend is incidental accretion and volume of transactions should not be the basis of considering the income earned by way of capital gains as the business income. It was submitted that buying and selling of shares had been done from investment account only. The investments made are not out of borrowed funds and all by internal accruals without any interest payments. 4.1 It was further submitted that at no time, the purchase and sale of shares had been effected/squared off on the same day. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial borrowings made in the year under consideration as also in the past. However, merely for the fact that no interest was payable on the said borrowings does not mean that the said funds which have been exclusively utilized for purchase of shares, can be treated as internal accruals. However, the fact that there is virtually no dividend income earned as also any long-term capital gains clearly shows the intention of the assessee as of a trader and not an investor with an eye on capital appreciation and earning of dividend. From the details of transactions furnished by the assessee, he came to the conclusion that there is absolutely no basis for segregating the shares as business and investment transactions. He pickup certain instances where though purchases were made on the same date or within a period of few days in certain scrips, a part of the same has been treated as investment for the purpose of short-term capital gains while a part of the purchases have been treated as business income. 5.3 He further noted that almost in all cases, purchases and sales have been completed within a period of 1 to 30 days which again shows the intention of the assessee of share trade and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the authorities below. No borrowed funds have been taken and utilized for buying of shares and only interest-free funds generated out of internal sources have been utilized for investment purposes. 8.1 Referring to the paper book at pages 88 and 89, he drew the attention of the Bench to the Cash Flow statement and submitted that at no time, the purchase and sales of shares had been effected/squared off on the same day. Referring to the decision of the Tribunal in the case of Janak Rangwala (supra) and the decision of the Tribunal in the case of J.M. Share and Stock Brokers Ltd. 6 SOT 247 (sic), he submitted that frequency, quantum or magnitude has no bearing to issue of determination of short-term capital gain. Referring to the decision in the case of Shah-La Investments &Financial Consultants (P.) Ltd. (supra), he submitted that voluminous transaction is not the determining factor to decide the issue of long-term capital gains as business income. He submitted that the sale or purchase is a capital asset under section 2(14) is not in doubt. 8.2 Referring to the decision of the Tribunal in the case of Gopal Purohit (supra), which has since been upheld by the Hon'ble Bombay High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities below. He submitted that the nature of business of the assessee is that of trading in shares and securities. Referring to the decision of the Tribunal in the case of Smt. Rekha Khandelwal v. ACIT vide IT Appeal No. 785/Mum./2009 order dated 17-3-2010 he submitted that the Tribunal, after considering various decisions has held such type of profits from sale of shares as business income. The various other decisions relied on by the ld. counsel for the assessee are distinguishable and are not applicable to the facts of the present case. He submitted that in the preceding assessment year, the assessment was completed under section 143(1) and the Assessing Officer has no occasion to apply his mind; therefore that cannot be considered as a precedent for treating the business income as short-term capital gains. Further, principles of res judicata don't apply to Income-tax Proceedings. He, accordingly submitted that the order of the CIT(A) should be upheld and the ground raised by the assessee should be dismissed. 10. We have considered the rival submissions made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. 6. In the case of Commissioner of Income-tax, Bombay v. H. Holck Larsen (160 ITR 67), the Supreme Court observed : The High Court, in our opinion, made a mistake in observing whether transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact. 7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers. 8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :- (i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; (ii) the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business profit and not capital gain. (e) Purchase with intention to resell can constitute capital gain or business profit depending on circumstances like quantity of purchase and nature of activity. (f) No single fact has any decisive significance and the question must be answered depending upon selective effect of all relevant materials brought on record. 13. We find that the CIT(A) at page 6 of his order has given a clear cut finding that the assessee has whimsically classified a part of shares as stock-in-trade whereas a part of the shares as investment and in some cases, the shares has been sold on the same day. The relevant highlighted portion of the order of the CIT(A) at page 6 of his order reads as under: "For example, in case of transactions made in shares of Epic Energy, from 25-1-2007 to 31-1-2007, 2500 shares were purchased and sold on 5-2-2007. But the transaction has been treated as Speculation business. On the other hand, on 31-1-2007, 4820 shares of the same company were purchased and sold on 5-2-2007 have been considered as investment for the purposes of working out capital gains. There are numerous such instances for which there is absolutely no b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares is the primary consideration. It is only a trader who would look for short-term gains from purchase and sale of shares. Therefore, the treatment given by the assessee to the said transactions in the books of account, in our opinion, is not the only determinative factor about the nature of the transactions. The submission of the learned counsel for the assessee that the shares were disclosed as investment in the Balance Sheet, in our opinion, is certainly a factor to be reckoned with but when there are other factors or circumstances which throw some doubt on the motive of the assessee in acquiring the shares, as in the instant case, the entries in the books of account or Balance Sheet cannot override them and be taken as decisive of the assessee's intention. The submission of the learned counsel for the assessee that in the preceding year the Assessing Officer has accepted the short-term and long-term capital gain on sale of shares and, therefore, the same should be followed this year is also without much force since principle of res judicata does not apply to income-tax proceedings and every assessment is independent. In this view of the matter, we are of the considered o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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