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TMI Blog2010 (6) TMI 510X X X X Extracts X X X X X X X X Extracts X X X X ..... year - The dividend is an incidental income even in trading transaction because the assessee will receive dividend in case of purchases made before the record date even if the purchases are held for a short period - In this case considering the assessee had made purchases worth about Rs.3500 crores the dividend is negligible and is only an incidental income relating to the trading activity It is true but in order to hold that the assessee remained an investor it has to be shown from the circumstances of the case that the assessee was not purchasing and selling as a trader to make profit - It was held that the dominant object for acquiring right shares and renouncing of some shares and selling of some new shares was to prevent eroding the value of capital as after the right issue the value of original shares was bound to depreciate - Accordingly decided in the favour of the assessee as a trader Regarding depreciation on membership card of BSE - the issue raised is covered against the assessee by the judgment of Hon'ble High Court of Mumbai in case of Techno shares and Stock Ltd. (2009 -TMI - 34562 - BOMBAY HIGH COURT). The assessee in that case had claimed that BSE card was an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons in shares i.e. income from intra day trading and future and option trading. The income from sale of shares appearing in the opening stock as on 1.4.2004 which were on trading account in the earlier year, was however shown as business income and the shares in the opening stock which remained unsold as on 1.10.2004, amounting to Rs.31,99,018/-, were converted into investment in stock from that date. 2.2 The AO observed that the assessee had treated the delivery based transactions from 1.4.2004 as investment activity only to take advantage of change in legal position introduced by section 111A as per which short term capital gain arising from sale of shares or units of equity oriented funds after 1.10.2004, on which share transaction tax (STT) was chargeable to tax, was to be charged at lower rate of 10%. In the earlier year when the short term capital gain was chargeable @ 30% the assessee was showing the income as business income. The AO further observed that there was no change in the nature of activity in the shares during the year which continued with the same frequency and in the same manner. The nature of activity thus remained the same. The AO observed that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions. Reliance for this proposition was placed on the judgment of Hon'ble Supreme Court in case of P.K.N. Co Ltd. (60 ITR 65). Similarly the nomenclature given to a particular transaction or the entry in the books of accounts were also not a decisive factor to know the true nature of transactions as held by Hon'ble Supreme Court in case of Canara Bank (63 ITR 728). AO further observed that, ordinarily, the purchase and sale of shares with a motive of earning profit results in the transaction being in the nature of trade/ adventure in the nature of trade but where the object behind purchase of shares is to derive income by way of dividend etc., the profit accruing by appreciation in such investments will be capital gain and not revenue receipt. The AO also observed that generally the magnitude and frequency of transaction the manner of maintaining the books of accounts and holding period would be a good guide to determine the true nature of transaction. But no single factor can be considered as conclusive. 2.5. The AO noted that the assessee company had only one main object which was to carry on the business as share and stock broker and dealing in shares and securities. Though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which there was no movement in prices, the assessee was likely to hold for longer period to reap trading profit and therefore this alone will not prove that the activity was investment. The substantial increase in the dividend income received by the assessee also did not establish that the assessee was investor as the dividend would depend upon the number of scrip being bought before the record date. The quantum of dividend is therefore likely fluctuate in trading transaction. Moreover the dividend yield was too low on the turnover of Rs.3500 crores. As regards the treatment of transactions in case of FIIs, the AO observed that FIIs were not permitted by SEBI to trade in shares as per the terms and conditions of their registrations. Therefore the same will not apply in case of other individuals and entities. The AO further observed that no doubt it was true that the assessee could convert the stock-in-trade into investment but mere change of nomenclature would not make the transaction as investment activity when the nature of transactions remained the same. 2.7. The AO referred to auditor's note 8(a) in Form No.3CA in which the auditor had mentioned the nature of business as stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d submitted before CIT(A) that frequency and magnitude was not decisive factor in understanding the true nature of transactions and that the fact that assessee was a trader earlier was no bar on assessee to become an investor. It was pointed out that the very fact that delivery of the shares was taken showed the intention of the assessee at the time of purchase to hold the shares as investments. The decision to make investment was a conscious decision of the board for which a resolution had been passed. The assessee further submitted that the AO had not brought any material on record to prove the nexus between the borrowed funds and the investments. In case the borrowed funds were spread proportionately, only 37.56% of the investments could be attributed to borrowings. CIT(A) however was not convinced by the explanation given. It was observed by him that the AO had examined the matter in great detail. The assessee did not hold the shares purchased and in majority of the cases had sold them within short time and in all cases obviously within 12 months as the income had been shown only as short term capital gain. The assessee had made transactions in more than 300 scrip during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns were investments. The assessee had also received huge dividend income from the investments which increased to Rs.94,31,290/- in the relevant year compared to Rs.44,51,213/- in the immediate preceding year. It was pointed out that the assessee had held the shares for a considerable period of time and in a significant number of cases holding period exceeded four months. It was pointed out that only 22.44 % of capital gain came from shares held for less than a month and balance from the shares held for longer period and 36% of the capital gain came from shares sold after four months. The details in the regard were given as mentioned in the table below: Period of holding Short-term capital gain Rs. Percentage of total short term capital gain (%) Less than 30 days 3,66,44,882 22.44 30 days to 60 days 2,56,33,796 15.70 61 days to 90 days 1,69,86,614 10.40 91 days to 120 days 2,51,72,620 15.41 121 days to 180 days 3,87,19,764 23.71 181 days to 240 days 1,73,27,890 10.61 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the transactions were shown as investments. These factors also showed the genuine intention of the assessee to make investments in shares. 2.14. In relation to the audit note regarding nature of business being same as earlier year as highlighted by the AO, it was submitted that there was no discrepancy in the audit report. It was argued that the assessee continued its business of stock broking, trading and investments in shares and securities even after it started investments in delivery based segments. The Learned AR also submitted that the change in accounting policy of the assessee had been duly highlighted by the auditors. He referred to point 1(d) of Schedule IN which clearly mentioned the change in accounting policy as per which out of stock of shares of Rs.18.72 crores, the certain scrip with value of Rs. 0.32 crores had been converted into investments. Thus the investment activity was properly reported. As regards the observation of the AO that all the transactions were reported as business transactions in the Form No.lODB, it was submitted that STT was chargeable in respect of all transactions and accordingly all the transactions were shown therein. However, no rebate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, share transactions had been undertaken as an investment activity and therefore the income had to be computed under the heard 'capital gain' specifically provided for assessment of such income. 2.17. The Learned counsel also referred to the decision of Tribunal in case of Gopal Purohit (29 SOT 117) in which income from share transactions has been held assessable as capital gain. It was pointed out that the said decision of the Tribunal has been upheld by the Hon'ble High Court of Mumbai as reported in (228 CTR 582). He placed reliance on the said judgment in support of the case. 2.18. The Learned DR on the other hand strongly supported the orders of authorities below. It was submitted that all the aspects of the issue had been discussed in detail in the orders of AO and CIT(A) on which he placed reliance. It was pointed out that nature of share transactions was the same as in the earlier year and therefore it could not be classified as investment only to take advantage of concessional rate of tax. He placed reliance on the following decisions of the Tribunal in support of the case of the revenue. (i) ITA No.3991 3992/M/2008 in case of Shailesh 1_. Shah HUF Vs D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that objects of the company authorized investment in shares or the entry in the books as investment or the board resolution are not conclusive in ascertaining the true nature of transactions. It has been held that nature of transaction in delivery based shares in this year is the same as in the earlier year and therefore the assessee could not declare the income as short term capital gain. This has been done only to take advantage of the change in law from 1.10.2004 as per which tax in respect of short term capital gain is leviable at concessional rate of 10%. 2.21The assessee on the other hand has argued that it is perfectly legal to show the transactions as investment activity and that the assessee has really changed the approach towards delivery based shares from this year. The various arguments advanced by the Learned counsel of the assessee in support of the claim can be summarized as under : (i) There is no legal bar on a trader in shares to convert into an investor in shares in the subsequent period. The assessee can be both a trader and investor at the same time and the only requirement is that separate account should be maintained which had been done by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and sell shares on large scale the transactions are being treated as investment activity and therefore the assessee should not be denied this benefit. In large number of cases shares have been sold after four months and 36% of the capital gain came from such transactions. Only 22.44% of capital gain was from shares held for less than a month. 2.22 We have carefully considered the various aspects of the issue raised before us. Whether a particular transaction is a trading activity or an investment activity will depend upon facts and circumstances of each case. There are several judgments of the courts and tribunal some of which have been quoted before us each turning on its own facts. Though trading and investment transactions have their own distinctive features difficulty arises in borderline cases in understanding the true nature of transaction. A trader in a commodity is basically motivated by profit in selling the commodity on each and every rise in value. He aims to earn profit by generating volume by frequently turning over the stocks in which he is dealing. High frequency, high volume and regularity of transactions are therefore the basic features of a trading transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from nature of entry in the books of accounts. It has been submitted that from 1.4.2004 the assessee had entered into the delivery based transaction as an investment transaction and therefore such transactions have automatically to be treated as an investment activity. We are unable to agree with such a proposition. It is a settled legal position that entries in the books of account or object in the memorandum of association are not conclusive in understanding the intention or the true nature of transaction. No doubt, these are relevant factors but the same are not conclusive. The intention at the time of purchase has to be gathered from the conduct of the assessee in his dealings with the commodity subsequently as held by Hon'ble Supreme Court in case of CIT Vs Madangopal Radheylal (73 ITR 642). Even in case of H.Hoick Larsen on which the Learned AR for the assessee relied. The Hon'ble Supreme Court held as under : "In order to determine whether one was the deafer in shares or an investor, the reai question was not whether the transaction of buying and selling the shares lacks the element of trading but whether the later stages of the whole operation shows that the first step - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar from section 2(42A) as per which shares sold with holding period of less than a year has to be treated as short term capital gain. Therefore even if the shares are held for a few months or even for less than a. month, the income has to be assessed as capital gain. We are unable to accept such arguments. The holding period for the purposes of computation of capital gain is relevant only in relation to the shares as held as investment. Therefore only in respect of shares held as investment income from sale of shares with holding period of less than one year has to be treated as short term capital gain and not in respect of any purchase and sale of shares. Therefore what is required to be ascertained first is whether the assessee is a trader or investor and this has to be gathered from the intention of the assessee which in turn has to be found from the conduct in dealing with the shares. The conduct of the assessee as pointed out earlier makes it quite clear that he was trading in shares. 2.27 It has also been argued that the assessee had received increased dividend of Rs.94,31,290/- compared to Rs.44,51,213/- in the immediate preceding year which shows that the assessee was mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as trading stock in the earlier year and there was nothing in the books to show that the assessee had treated the shares of E-Mills as investment. Merely because the assessee had not sold shares for few years did not change the character of the shares from trading into investment. The case would be relevant when the shares have been held as trading investment in earlier year and the same shares are shown as investment without converting them into investment stock. Therefore even when the shares had characteristics of investment in subsequent period, it was not accepted as the assessee continued to hold them in the books as trading assets. The Supreme Court did not hold that even if the shares did not have the characteristics of investment, these can be accepted as investment based only on the entry in the books. In the present case, the assessee has shown the fresh delivery based purchases during the year as investment purchases but such purchases cannot be accepted as investment activity only by making entry in the books when dealing in shares during the year clearly shows that these were trading activities. There is no law that the assessee can declare transactions in the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een purchased during the year or in the immediate preceding year. In the present case no shares had been held by the assessee for more than one year. Shares have been sold mostly within four months and in several cases within a month. The case of the assessee is thus totally distinguishable. The Learned AR also argued that, in that case, it was held that transactions in delivery based shares have to be treated as investment and since the decision has been upheld by High Court, all delivery based transactions have to be treated as investment activity. But we find that there is no universal finding in the said case that transactions in delivery based shares in all circumstances have to be treated as investment. The transactions in delivery based shares have been treated as investment activity on facts of that case which are radically different from facts of this case. Even before the High Court, there was no question raised that all delivery based transactions have always to be treated as investment activity. The High Court has upheld the view taken by the Tribunal on the facts of that case holding that no substantial question of law was involved. 2.30 It has been argued that even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the relevant year had claimed depreciation @ 25% amounting to Rs. 15,33,087/- on BSE card. The AO following the decision in the earlier year held that BSE card was not a capital asset and therefore depreciation was not allowable. The AO also observed that though ITAT, Mumbai in case of Technoshares and Stock Ltd. (101 TTJ 349) had held that BSE card was a capital asset entitled for depreciation, the department had not accepted the said decision of the Tribunal. The AO accordingly disallowed the claim of depreciation. In appeal CIT(A) however following the decision of Tribunal in assessee's own case in assessment year 2002-03 allowed the claim of the assessee aggrieved by which the revenue is in appeal before the Tribunal. 3.1.1 After hearing both the parties, we find that the issue raised is covered against the assessee by the judgment of Hon'ble High Court of Mumbai in case of Technoshares and Stock Ltd. (184 Taxman 103). The assessee in that case had claimed that BSE card was an intangible asset and therefore depreciation was allowable in view of the provision of section 32(l)(ii) as per which depreciation was allowable in respect of intangible assets from 1.4.1998. The H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier year it could not be allowed in the current year. Accordingly he disallowed the claim. In appeal CIT(A), following the judgment of Hon'ble Supreme Court in case of Mahalaxmi Sugar Mills Co. (123 ITR 429) held that interest on SEBI turnover fees was of the same character as SEBI fees itself and therefore it was covered under section 43B. Accordingly he deleted the addition made by the AO aggrieved by which the revenue is in appeal before the Tribunal. 3.2.1 Before us the Learned AR for the assessee submitted that the issue was covered by the decision of Tribunal in case of Wallfort Shares and Stock Brokers Pvt. Ltd. in ITA No.5984/M/2008 in which interest on SEBI turnover fees has been allowed as deduction under section 43B.The Learned DR placed reliance on the order of AO. 3.2.2 We have perused the records and considered the matter carefully. The issue is regarding allowability of interest on turnover fees levied by the SEBI, under section 43B of the Income-Tax Act. We find the same issue had been considered by the Tribunal in case of Wallfort Shares and Stock Brokers Pvt. Ltd. (supra). The Tribunal in the said case referred to the decision of Tribunal in case of Sureshcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Before us the Learned AR for the assessee submitted that the issue was covered in favour of the assessee by the decision of Tribunal in case of Kotak Securities Ltd. (24 DTR 214). The Learned DR on the other hand placed reliance on the order of AO. 3.3.2 We have perused the records and considered the matter carefully. The same issue regarding allowability of transaction charges has been considered by the Tribunal in case of Kotak Securities Ltd. (supra) in which the Tribunal held that stock exchanges do not render any managerial services nor any technical consultancy services. The transaction charges paid by the brokers to the stock exchange were not for any services provided by the stock exchange. The payment was for use of the facilities provided by the stock exchange to the members. The Tribunal accordingly held that the provisions of section 40(a)(ia) were not attracted as no tax was required to be deducted. We therefore following the said decision of the Tribunal see no infirmity in the order of CIT(A) deleting the addition and the same is upheld. 4. In the result the appeal of the assessee is dismissed and that of the revenue is partly allowed. The order was pronounced ..... X X X X Extracts X X X X X X X X Extracts X X X X
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