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TMI Blog2011 (6) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 days in respect of secondary market purchase and sales as business income/loss. 3. The solitary common issue arises in all the revenue appeal is as under: "On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in treating the business income on account of trading in shares as short term capital gain by applying the share holding period for short term capital gain as more than 30 days but less than 1 year." 4. Thus, the first issue raised in the assessee's appeal as well as in the revenue's appeal is connected and related to the assessment of income from sale and purchase of shares claimed by assessee as short term capital gain. 5. The brief facts regarding the issue are emerged as under: 5.1 The assessee are individual and engaged in the business of share trading and investments. The assessee Mr. Hitesh S Doshi declared his income in the return of income filed for all the assessment years under consideration are as under: For assessment year 2003-04: (i) Business income Rs.42,71,139 (ii) Short Term Capital Gain Rs.51,59,160 (iii) Long Term Capital Gain (Loss) Rs.3,74,297 For assessment year 2004-05: (i) Business income Rs.2,11,62,24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of holding less than 30 days and more than 30 days. 6.1 The CIT(A) in para Nos 4.3.1 (a) and (b) held that as per CBDT's circular, the assessee can be an investor as well as trader and can have both portfolios. Various factors, which make the assessee an investor, are that; the assessee has made investment in listed shares and also in IPOs. The shares are shown in the balance sheet as investment and valued at cost. The assessee did not have any office and/or administrative set up and there are no commercial fixed assets. The source of acquisition are out of own funds and family funds. The ratio of investment to sale and purchase is very high and there is not a single instance where the assessee had squared off the transactions on the same date without taking delivery of the shares. These facts makes it clear that the assessee is mainly an investor but the factors like; turnover of shares in less than 30 days in respect of secondary market transactions points the assessee as a trader. He accordingly, held that the surplus/loss on sale of shares held for less than 30 days be treated as business income and from those shares held for more than 30 days as short term capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction. This contention is judicially accepted by the Tribunal in the case of Gopal Purohit v. Jt. CIT [2009] 29 SOT 117 (Mum.). There is no provision to refund the securities transaction tax, and having accepted such tax, the law makers cannot take a 'U-turn and ask the assessee to pay tax doubly. (vii) The intention of the assessee as investor is manifested by following: (a) Long holding period as per chart of investment (b) In spite of manifold increase in market value, the assessee preferred to hold the shares then to sell the shares. This clearly shows that assessee is an investor. This contention has been accepted by the Tribunal in the case of Nehal V Shah 8.1 The ld AR further submitted that the assessee has been consistently and continuously showing the income/loss from shares under the head 'capital gains. He has referred the details of various years regarding the income placed at page 86 of the paper book and submitted that except three years under consideration for all other years the stand of the assessee has been accepted by the revenue. Therefore, the ld AR of the assessee has pleaded that the issue is covered by the decision of the Hon'ble jurisdictional High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e. capital gains as well as business income. Since the CBDT circular is binding on the Assessing Officer but not binding on the assessee; therefore, the guidelines of the CBDT circular so far as it is beneficial to the assessee has to be strictly followed by the revenue authorities. 8.5 The Assessing Officer observed that the activity of the assessee is continuously carried out since long in an organized and systematic way with the intention to make profits and subsequently treated the same as trading activity. The ld AR of the assessee has submitted that the investment is always be with the intention to make profit. No prudent person will ever invest if such investment is likely to result into loses. Therefore, the investment with an intention to make profits is a normal human tendency and cannot change the nature of transaction of investment as a business. He further submitted that the nature of transaction is determined as per the intention on the date of acquiring the asset and not on the basis of subsequent even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en accepted through under section 143(1). The amount of investment is booked through number of scrips to avoid the risk because it is not advisable to invest huge amounts in few scrips. The assessee is using his own funds. The transactions of purchase and sale are Rs.4.57 per cent of the funds available and therefore, portfolio churning was not so high for a prudent investor. The long term capital gain has been accepted by the revenue; therefore, the revenue has accepted the status but being trader as well as investor. He has referred the following decisions: (i) Gopal Purohit case (supra) (ii) Gopal Purohit case (supra) (iii) Janak S Rangwala v. Asstt. CIT [2007] 11 SOT 627 (Mum.) (iv) ACIT v. Sundar Iyer (IT Appeal No. 295/Mum/2001 dated 15-10-2002) (v) ACIT v. Motilal Oswal (IT Appeal No. 3861/Mum/2001 dated 28-8-2006) (vi) Management Structure and Systems (P.) Ltd v. ITO (IT Appeal No. 6966/Mum/2007 dated 30-4-2010) (vii) Walfort Financial Services Ltd. v. ACIT (IT Appeal No. 847/Mum/2009 dated 30-6-2010) (viii) JM Share and Stock Brokers Ltd. v. Jt. CIT (IT Appeal No. 28010/Mum/2000 dated 30-11-2007) 8.7 The ld DR has relied on the order of the Assessing Officer and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions in shares. The motive of the assessee to purchase and sale is to earn profit in short period. He has relied on the order of the Tribunal in the case of M/s Synthetic Fibres Trading Co. in IT Appeal No. 3022/Mum/2009, dated 29-9-2009; in the case of Smt Rekha Khandelwal in IT Appeal No. 785/Mum/2009, dated 17-3-2010 and in the case of Rakesh J Sanghvi in IT Appeal No. 4607/Mum/2008, dated 31-8-2010. 9. We have considered the rival contentions and perused the relevant records. The Assessing Officer took the ratio of purchase and sale to the opening and closing balance to support his view of treatment of the transaction including the transaction resulting long term capital gains as trading activity and consequently assessed income has business income. The CIT(A), though, admitted long term capital gains and the transaction of purchase and sale resulting long term capital gains as investment; however, he has bifurcated the transactions of sale and purchase resulting short term capital gains on the basis of holding period on the criteria of more than 30 days and less than 30 days. It is pertinent to note that there is a criteria provided under section 2(42A) which defines the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to purchase and sale of shares and securities. The issue can be determined only by taking into account all the relevant facts and principles as laid down by the Hon'ble Supreme Court and other High Courts. Thus, principles are taken as guidelines to be applied in the facts of each case and cannot be taken as strict jacket/formula. Therefore, the bifurcation of the short term capital gain and treating the transaction as investment in the cases where the holding period of more than 30 days and as business transaction in the case where the holding period is less than 30 days, in our considered opinion, is not justified on the part of the CIT(A). Since there cannot be a single criteria for judging the transaction as capital asset or trading asset; the CIT(A) adopted only holding period as a sole criteria for bifurcating the transactions relating to the short term capital gain, which is neither proper and nor justified. 10.1 Moreover, when the assessee has treated the investment transaction in the books of account, which includes the long term capital gains as well as short term capital gains, then after accepting the long term capital gains, the transaction representing short term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment of Rs.3.91 crores, which clearly shows that the assessee was having its own funds to the extent of 95 per cent of the investment. Therefore, we do not find any substance in the contention of the ld. DR that the assessee has used borrowed funds for the purpose of investment. The position is almost the same in the subsequent years. Moreover, the CIT(A) in para 4.3.1(a) has recorded the finding that the source of acquisition are out of own funds and family funds. Frequency of purchase and sale of shares 13.1 As regards the frequency of purchase and sale of shares, the assessee has transacted all transactions of sales and purchases; through D-mat account in the electronic system of Stock Exchange. A single order placed by the purchaser may be completed by way of various small quantities of shares available for sale to meet out the demand of the purchaser. Therefore, a single order is not necessary be completed by a single transaction of the entire quantity of shares. 13.2 Similarly in the case of sale, the same may be divided as per the requirement of the purchaser and in this way; single transaction is reflected as number of transactions. For instance, the shares of Jin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the distinction between the shares, which are held as investment from the shares, which are held as stock-in-trade then, keeping in view of the other facts and applying the principles as discussed above, we have no hesitation to say that the assessee has been maintaining two separate distinct portfolios right from the beginning and the revenue has failed to brought out any material to show that any change in the practice of accounting method of the assessee as well as in the activity of the assessee in purchase and shares of sharers under two separate and distinct portfolio. It is an accepted fact and practice that in order to reduce the risk of loss of capital or income, the investor may try to diversify the investment; therefore, there may be a case of reshuffling portfolios by selling of some scrips and buying of some other scrips to mitigate the scope of loss of capital or income. Therefore, the reshuffling in a short period is not necessary be taken as an activity of trading when the intention was to reduce the risk of loss of capital. 15.2 There are various decisions of the Tribunal on this point and each has been decided on the facts of each case. Some of the decisions ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, 391 31-3-2006 131 541377 3,32,72, 973 One aspect which is thrown up by the above table is that though the investment value increased substantially from year to year, the number of companies whose shares were held by the assessee remained more or less constant and in fact as on 31-3-2006 it actually fell to 131 from the earlier high of 159. It appears to us that basically the number of shares of a particular company purchased by the assessee had increased which substantially contributed to the increase in the value of the investment. The above analysis prima facie shows that the assessee is basically an investor more than a share dealer. The stand of the assessee has been accepted by the revenue authorities in the assessment years 2001-02 and 2004-05 in assessment orders passed under section 143(3) of the Act. The assessment order for the assessment year 2001-02 is at pages 34-35 of the paper book. It is seen therefrom that the Assessing Officer has accepted the short term capital loss and the long term capital gains shown by the assessee on sale of shares. The assessment order for the assessment year 2004-05 is at pages 61 and 62 of the paper book. In this year also the sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been considered as business. 18. It would thus appear that prima facie there is enough evidence to show that the assessee is an investor in shares and therefore the surplus arising on the sale of shares should be assessed as short term or long term capital gains, depending on the period of holding and not as business income. 19. But then the contention of the department is that the assessee is also carrying on F and O transactions as speculation business in shares and that the investment in F and O transaction as per the balance sheet as on 31-3-2005 is Rs.1,03,01,657 as against the investment in the shares of Rs.3,24,59,391. The point made is that almost 1/4th of the total investment of the assessee is in speculation and F and O business and with this kind of background it would be difficult to believe that the assessee can also be treated as investor in shares. We find it difficult to accept the contention because the circular issued by the CBDT referred to supra has itself recognized that a person can have two portfolios, one for investment and the other as stock-in-trade. The Hon'ble Bombay High Court has also accepted this position in its judgment in the case of CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) in his order for the assessment year 2006-07. Reference may be made in this connection to para 2.3(i) of the order of the CIT(A) for the assessment year 2006-07. In that year the assessee had paid interest of Rs.15.73 lakhs and that was put as one of the points against the assessee's contention that he was an investor in the shares. The CIT(A) held that the assessee's own capital was Rs.5.15 crores in that year out of which the investment of Rs.3.32 crores in shares could have come and thus it cannot be said that the assessee was depending totally on borrowed funds. In the light of this finding also it cannot be said that the fact that the assessee paid interest on borrowings should be held against him, particularly when there are other predominating features in the case which give clear impression that the assessee intended only to invest in shares and not hold them as stock-in-trade. 20. It thus appears to us that the CIT(A) took an incorrect view of the matter in the assessment year 2005-06 and that the CIT(A) who dealt with the appeal for the assessment year 2006-07 has taken the correct view of the matter and applied the appropriate principles correctly in holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when there is consistency in fact and circumstances relating to the transaction. The principle of res judicata is not attracted since each assessment year is separate unit in itself; however, when the facts and circumstances are identical then uniformity in treatment and consistency has to be maintained. 15.4 Similar view was taken by the Tribunal in the case of Gopal Purohit (supra) which is in conformity with the decision of the Hon'ble Bombay High Court reported in Gopal Purohit case (supra) wherein the Hon'ble High Court has observed in paras 2 and 3 as under: "2. The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in para 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 25-1-2006 when the notification was issued for allowing transactions in the recognised stock exchange. Whereas, once the approval is granted in the relevant previous year, the same has to be taken as effective from the beginning of the relevant year. Thus, the ld. AR of the assessee has submitted that the transaction in the derivative cannot be treated as speculative in nature for the assessment year 2006-07. The ld. AR has pointed out that this issue is covered by the order of the Tribunal in the case of Prem Associates Advertising and Marketing [IT Appeal No. 6547/Mum./2009, dated 17-9-2010] as well as in the case of Nipra Financial Services (P.) Ltd. [IT Appeal No. 4605/M/2009, dated 30-9-2010. 18.1 The ld. DR on the other hand, supported the orders of the authorities below. 19. We have considered the rival contentions and relevant material available on record. The Assessing Officer held that the derivative transaction prior to 25-1-2006 are speculative in nature and from 25-1-2006 to 31-3-2006 are as business income. The Assessing Officer's view is based on the notification issued by the CBDT on recognizing stock exchange with effect from 25-1-2006 for carryout the deriva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stocks and shares is periodical or ultimately settled otherwise than by the actual delivery or the transfer of commodity or scrips. Proviso below section 43(5) carves out exceptions to section 43(5). As per clause (d) of the said proviso 'an eligible transaction in respect of trading in derivatives referred to in the Securities Contracts (Regulation) Act, 1956 carried out in a recognized stock exchange shall not be deemed to be a speculative transaction'. Clause (d) in the proviso was inserted by the Finance Act, 2005 with effect from 1-4-2006. Therefore, if a transaction falls within clause (d) of the proviso, a transaction it will not be deemed to be a speculative transaction in respect of transaction pertaining to assessment year 2006-07. Under clause (d) of the proviso, a transaction is not a speculative transaction provided it is an eligible transaction within the meaning of clause (1) of the Explanation and it is carried on at the recognized stock exchange as explained in clause (ii) of the said Explanation below proviso to section 43(5)(d). The recognized stock exchange means a recognized stock exchange as notified by the Central Government for this purpose. Therefore, even ..... X X X X Extracts X X X X X X X X Extracts X X X X
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