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TMI Blog2011 (8) TMI 631X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. - IT APPEAL NO. 1028 (MAD.) OF 2010 - - - Dated:- 5-8-2011 - HARI OM MARATHA, N.S. SAINI, JJ. K. Meghanath Chowhan for the Appellant. T. Banusekar for the Respondent. ORDER Hari Om Maratha, Judicial Member. This appeal of the assessee-HUF, for assessment year 2005-06, is directed against the order of the ld. CIT(A) dated 31.3.2010. 2. Briefly stated, the facts of the case are that the assessee is a HUF and for assessment year 2005-06 it filed return of income on 30.10.2005 declaring total income of ₹ 10,93,530/-. The assessee has declared a net loss of ₹ 54,536/- under the head 'business and profession'. The credits to the Profit Loss Account are on account of - (i) Dividends on shares of ₹ 2,65,565, claimed as exempt; (ii) Incentives of ₹ 330, offered under other sources; (iii) Interest from banks and Aspiration Communications of ₹ 17,605 and ₹ 13,653, respectively, offered under other sources; (iv) Profit on sale of shares of ₹ 41,07,392, offered as capital gain; and (v) Redemption proceeds of Marico Preference Shares of ₹ 35,860, claimed as exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to what is the object of assessee in purchase and sale of shares in its case in order to determine whether the assessee is dealer in shares or an investor in shares. After discussing various case laws, the Assessing Officer has observed that although in the audit report filed in Form No.3CB and 3CD, obtained u/s 44AB of the Act, the assessee has disclosed investment in shares, but after his own interpretation the Assessing Officer has treated the transactions to be of business of sale and purchase of shares. He has noted the number of bills for purchase and sale of shares between 22.7.2004 and 24.3.2005 and has found 44 contracts of sale and purchase. He has found purchase of 73933 shares and sale of 18750 shares. He further noticed the amount involved for purchase of shares at ₹ 71,18,738/- and sale receipts at ₹ 61,39,281/-. But to further elaborate the facts, the assessee has purchased shares as under: ( a ) M M Forgings 3,624 shares ( b ) Cosmo Films 44,105 shares ( c ) Crew BDS Products 19,804 shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee held shares worth ₹ 1.89 crores as on 01.04.2004 which has increased to ₹ 3.27 crores as on 31.03.2005 despite the sale of Shares worth ₹ 47.83 lakhs. Further, the frequency of such transactions of purchase and sale of shares is also quite substantial. During the yea under consideration, as mentioned above, there were 44 such contracts of sale or purchase of shares involving purchase of 73,933 shares and sale of 18,750 shares, it is further noticed that this is a regular feature of the assessee's case considering the repetition and continuity, coupled with the magnitude of the transactions, it can reasonably be inferred that the activity of purchase and sale of share done by the assessee is in the nature of 'BUSINESS'. 6. On the basis of above observation, the Assessing Officer has finally found that the profit on the share transactions has to be taxed as 'business profits' as against 'capital gains' claimed by the assessee and has thus, arrived at a net business income of ₹ 39,23,781/- and has added the same in the hands of the assessee. Aggrieved, the assessee preferred appeal before the ld. CIT(A), who, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares into investments and then holding them for long periods before their sale clearly establish appellant's intention and conduct as an investor and not as trader in shares. (2) That the appellant have been making frequent purchases and sales in few companies' shares. Answer:- (i) Actually this is a fact favourable to appellant. As a value investor, they identified few companies which are fundamentally sound and went on accumulating their shares gradually. After holding them for reasonable period, they were sold at a profit. This is the basic approach of an investor. (ii) In fact, instances of sales were less than instances of purchase. (iii) Value of shares sold during the year was not even 20% of the total value of shares held while typically in the case of a dealer in shares, the same will be at least 0% to 300% Hence, this fact also proves appellant's status as an investor in shares. (3) That the appellant have got their accounts subjected to tax audit thereby signifying that they are in the business of shares. Answer:- (i) Appellant were in the business of investment in shares and not trading in shares. (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complex. Instead of doing any of these things, if a person buys a land , keeps it vacant for quite some time and subsequently resells it either after plotting it out or even otherwise, then a presumption is raised that even at the inception, he bought the land only for resale at a profit and thereby it is an adventure in the nature of trade. (ii) On the other hand, shares are purchased as investments not only for being held and deriving dividend income, but also for being sold at the appropriate time for realizing the capital appreciation. The very fact, that the Companies Act 1956 permits free transferability of shares in the case of public limited companies highlights the special type of shares as an investment class of asset. Hence, in respect of shares, except those persons who acquired the shares of a particular company as part of the promoter group with a view to exercise control over the company, all other persons who acquire shares definitely buy them with an intension to sell on a future date. (iii) Even under the IT Act 1961 the statute has made a significant distinction between shares and other types of capital assets by providing that for shares, just one ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this point: F.Y Value of shares purchased (Rs.) Value of shares sold (Rs.) No. of companies in which shares purchased No. of companies in which shares sold Dividend received (Rs.) 2001-02 35,69,240 4,09,552 9 1 14,434 2002-03 43,87,815 8,72,672 9 2 1,51,152 2003-04 8,56,880 23,69,503 5 5 1,88,431 2004-05 1,44,70,317 47,83,468 10 3 2,65,565 2005-06 3,21,65,494 89,54,344 8 5 4,11,148 From the above table, it is evident that except in the financial year 2003-04, in all other years, the value of purchases had always been more than the value of sales. So, also regarding the num ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had been holding the shares for a long time, the purchases were more than the sale made during the impugned period and the stock-in-trade was converted into investment during the impugned period, therefore, he found that the cumulative effect of these factors would be construed that the assessee was in possession of the shares to be eligible for the claim of income earned out of the sales of the shares as Long Term Capital Gains. The shares were purchased 3-4 years prior to the year under consideration in respect of certain shares and regarding other shares, they were purchased 14 to 15 years prior to the year under consideration. The ld. CIT(A) has found, the conversion of shares in investment although these were held as stock-in-trade till the assessment year 2004-05, in order, in view of the decision of ITAT Mumbai Bench 'H' rendered in the case of ACIT v. Bright Star Investment (P.) Ltd in I.T.A.No. 9543/Mum/2004, dated 20.7.2008. The ld. CIT(A) has found that this decision is directly applicable to the facts of the given case and therefore, he has held that this is not a business income but it is to be treated as capital gains as has been claimed by the assessee. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to this section, profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to tax as his income from the previous year in which stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. But the position in the given case is other way round that the stock-in-trade has been converted into investment and later on the investment has been sold on profit. In such circumstances, where there is no specific provision available in the Act to deal with such type of situation, a rational formula has to be worked out to determine the profits and gains on transfer of a capital asset. The difference between the sale price of the shares and the cost of acquisition of shares which is the book value on the date of conversion with indexation from the date of conversion, should be computed as a capital gain particularly in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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