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TMI Blog2012 (4) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... eals filed by the Revenue on 12.03.2010 against an order dated 12.11.2009 of the ld. CIT(A)-III, Delhi for the AY 2005-06;and on 05.03.2010 for the AYs 2006-07 and 2007-08,against separate orders dated 24.12.2009 for the AY 2006-07 and dated 29.12.2009 for the AY 2007-08 of the ld. CIT(A)-XVII, New Delhi, raise the following grounds:- I.T.A. No.1118/D/2010 [AY2005-06] 1. "That on the facts and circumstances of the case and in law, the learned CIT(A) erred in treating profit from purchase and sale of shares as short term capital gain as against business income treated by the Assessing Officer. 2. That appellant craves to be allowed to add, delete or amend any other grounds of appeal." I.T.A. No.942 943/D/2010 [AYs 2006-07 2007-08] (1) "That on the facts and circumstances of the case and in law, the learned CIT(A) erred in treating profit from purchase and sale of shares as long term capital gain and short term capital gain as against business income treated by the Assessing Officer by holding that the assessee is an investor in shares and not a trader. (2) That appellant craves to be allowed to add, delete or amend any other grounds of appeal." 2. Advert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO did not accept the submissions of the assessee while observing that apart from shares of 56 companies transferred as on 1.4.2004 from stock in trade as on 31 st March, 2004, the assessee purchased shares of 122 companies. The details of transactions revealed as under:- Total no. of companies whose shares transferred from stock-in-trade to investment account. 56 Total number of companies whose shares purchased on investment account during the year 122 Total number of companies 178 Total number of companies whose shares sold completely including shares transferred to investment account from stock-in-trade 65 Total number of companies whose shares sold partly 45 Total number of companies whose shares sold completely relating to stock-in-trade being transferred to investment account. 49 Total number of companies whose shares sold partly relating to stock-in-trade being transferred to investment to investment account. 4 2.1 In the light of aforesaid position while referring to CBDT Instruction no.4/2007 dated 15. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal holding including various mutual funds held as stock in trade and the consequent trading of few shares, which were converted as investment, the value of which is insignificant to the total value. However, that is contrary to the fact though seeming apparently true. It is seen from the record that the value of stock in trade of Rs. 5.48 crore. The position has undergone a sea change during the year by investment in purchase of shares of voluminous Blue Chip Companies added under the list of investment. ( v ) The assessee has sold various shares holding, purportedly kept in investment during the year. Furthermore as stated in above para, the assessee has added investment in various companies as many as 122 companies. It is a matter of fact that the assessee is purchasing and selling shares at the large scale. It clearly indicates that the purchase and sale of shares at massive level can never be categorized as investment but it is share business of the assessee company. ( vi ) The assessee's plea that value of capital gain earned by the assessee company including short term capital gain amounting to Rs. 9.34 crore in comparison to investment as on 31.3.2005 was Rs. 505.38 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel of the appellant. The appellant company is recognized by the Reserve Bank of India as Non-Banking Financial Corporation. It is observed that the company is having an investment port-folio and also held certain as Stock in Trade. The matter was put before the Board to convert these shares from stock in trade into investments. The resolution was approved by the Board and later on the appellant has followed the same method of valuation at cost price on permanent basis. It is observed from the details submitted before the AO that the shares held in stock in trade have been converted into investments w.e.f. 1st of April, 2004. The value of acquisition has been taken to be the market value as on 31st of March, 2004. It is submitted by the counsel of the appellant that the difference between purchase price of the scrip and the market value as on 31st of March, 2004 have been taken into account while working out the profits for the year ending as on 31st of March, 2004. It is clear from the balance sheet for the financial year 2003-04 that the market value of the shares as on 31st of March, 2004 has been taken into account by working out the closing stock of the shares and this has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the findings of the AO and documents placed at pages 61 to 68 of the paper book submitted that transactions of sale and purchase of shares undertaken by the assessee yielded business income. The intention of the assessee, as in earlier years, was to trade in shares and not for holding these shares as long term investment. While distinguishing the decision relied upon by the ld. CIT(A) in the case of Sarnath Infrastructure (P.) Ltd. ( supra ), the ld. DR submitted that in that case shares were held for 2 to 3 years and none of the share purchased in the same year or previous year was sold. As regards the decision in Bright Star Investment (P.) Ltd. ( supra ), the ld. DR submitted that the issue in that case was conversion of shares in stock in trade into investment and the AO accepted the calculation made by the assessee. Thus, reliance by the ld. CIT(A) on the said decisions is misplaced. The ld. DR vehemently argued that subsequent circumstances have to be seen in ascertaining the intention of the assessee. Inter alia , the ld. DR relied upon decision in CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC); Wallfort Financial Services Ltd. v. Addl. CIT [2010] 41 SOT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated on 3.3.1979.One of the main objects of the company is to carry on the business of dealer in shares, stocks, debentures, bonds, obligations, units, securities etc. as also to acquire and hold by way of stock in trade, shares, stocks, securities etc. As explained before us, until the AY 2004-05, the assessee has been treating all the quoted shares securities listed in stock exchange as 'stock-in-trade' and reflecting income from trading in shares under the head profits and gains of business or profession. It is only in the AY 2005-06 that the quoted shares/securities of 56 companies of the value of Rs. 2,08,03,217.30 held as stock in trade until 31.3.2004 were converted in to investment at book value on 1.4.2004 in terms of resolution dated 22.4.2004 of the Board of Directors of the Company. The reasons for converting the shares hitherto held as stock in trade in to investments are not evident from the said resolution nor are evident from the impugned order and nor even have been submitted before us. There is nothing in the said resolution that the assessee shall hold further purchase of shares during the years under consideration as investments and not stock in trade. In fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and gains of any business carried on by the assessee, at any time during the previous year, is chargeable to income tax under the head " profits and gains of business or profession" . Under Section 45(1) of the Act any profits or gains, arising from the transfer of a capital asset effected in the previous year, is deemed to be income of the previous year in which the transfer took place. Section 111-A, inserted by Finance Act, 2004, relates to tax on short term capital gains in certain cases and, under sub-section (1) thereof, where the total income of an assessee includes any income chargeable under the head " capital gains ", arising from the transfer of a short term capital asset being an equity share in a company and such transaction is chargeable to securities transaction tax, the tax payable by the assessee shall be the aggregate of the amount of income tax calculated, on such short term capital gains, at the rate of fifteen per cent. 7.2. If the shares purchased by the assessee are held to be capital assets, short term capital gain on sale of such shares could fall within the ambit of Section 111A of the Act, and such capital gains would be subject to tax at a lower r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealising a security or a gain in an operation of profit making. If the transaction is in the ordinary line of the assessee's business there would hardly be any difficulty in concluding that it was a trading transaction but, where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue if he deals with them as a trader. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business?, as was observed in Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC). In the instant case, indisputably the assessee has been trading in shares and securities and reflected income from such trading under the head profits and gains from business ". There is no material before us except a resolution dated 22.4.2004 of BOD of the company that the assessee converted its stock in trade of share and securities worth 2,08,03,217.30 in to investments. There is no material before us that shares and securities purchased in the years under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee can be inferred. In the case of Sarnath Infrastructure (P.) Ltd. ( supra ) the ITAT culled out various parameters, as mentioned in the impugned order, which may be applied to determine whether the transaction of purchase and sale of share is in the nature of trade or investment. The relevant observations of the ITAT read as under: "The following principles can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes: (1) What is the intention of the assessee at the time of purchase of the shares. This can be found out from the treatment it gives to such purchase in its books of account whether it is treated as stock-in-trade or investment; whether shown in opening/closing stock or shown separately as investment or non-trading asset. (2) Whether assessee has borrowed money to purchase and paid interest thereon. Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. (3) What is the frequency of such purchases and disposal in that particular item ? If purchases and sales are frequent, or there are substant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had such an intention (to carry on illegal business in that item) since beginning or when purchases were made ? (10) It is permissible as per CBDT's Circular No. 4 of 2007 of 15-6-2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. (11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. 7.4 Even CBDT in Circular No.4/2007 dt.15.6.2007 has laid down the principles for holding as to when profits earned from transactions in share should be held as business or should be treated as investment. The relevant circular reads as under: Circular No. 4/2007, dated June 15, 2007 Sub : Distinction between shares held as stock-in-trade and shares held as investment Tests for such a distinction. The Income-tax Act, 1961 makes a distinction between a capital asset and a trading asset. 2. Capital asset is defined in section 2(14) of the Act. Long-term capital assets and gains are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld furnish a good guide to determine the nature of transactions ; ( iii ) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade ; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. 9. Dealing with the above three principles, the AAR has observed in the case of Fidelity group as under (page 661) : "We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed was as stock-in-trade as the mere existence of the power to purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/held in the books of account i.e., whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss income:- "The tests laid down by various decisions of the apex court indicate that, in each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction. Each case has to be determined on the total impression created on the mind of the court by all the facts and circumstances disclosed in a particular case. One of the principal tests is whether the transaction is related to the business normally carried on by an assessee. The nature of the commodity would also be a relevant factor. It is equally well settled that, merely because the original purchase was made with the intention to resell, if an enhanced price could be obtained, that by itself is not enough to infer that an assessee is carrying on business. However, though profit motive in entering into a transaction is not decisive, if the facts and circumstances indicate that the purchase of the asset was made solely and exclusively with an intention to resell the asset at a profit, it would be a strong factor for inferring that the transaction was in the nature of business. In the case of Pari Mangaldas Girdhardas v. CIT [1977] CTR 647 (Guj), after analysing va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in the earlier years also and income from both the types of transactions have been declared as business income. However, from this assessment year, i.e., from 1st April, 2004 purchases of quoted shares had been shown as investment activity and income from the sale of such shares had been shown as short-term capital gain in the period relevant to AY 2005-06 and long term as well short term capital gain in the period relevant to subsequent two assessment years i.e. AYs 2006-07 2007-08. As regards the income from non-delivery based transactions is concerned, the same has been declared as speculative income as in the earlier years. 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 transaction. An investor on the other hand makes purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Out of shares of 178 companies, shares of 110 companies have been sold fully or partly in the period relevant to the AY 2005-06. Profit motive is also clearly evident in making the transaction. 7.7 In Janak S. Rangwalla v. Asstt. CIT [2007] 11 SOT 627 (Mum.) Gopal Purohit ( supra ); Suresh Kumar Seksaria ( supra ); Kunwar Nanji Kenia ( supra ); Nagindas P Sheth , HUF ( supra ); and S. Ramaamirtham ( supra ), relied upon by the ld. AR, the assessee has been continually holding the shares as investment from year to year and the similar transactions of sale and purchase of shares in the preceding several years had been held to be income front capital gains both on long-term and short-term basis. This is not the situation in the instant case. In the case before us, the assessee has been continually trading in shares and reflecting income under the head profits and gains of business. In the instant case, the assessee converted shares of 56 companies from stock in trade in to investment in the period relevant to the AY 2005-06 and purchased shares of 122 companies by way of investment. Out of these shares of 178 companies, shares of 65 companies were completely sold o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gains. As pointed out by the ld. DR, this decision does not assist the assessee at all, wherein regular activity of trading in share for the past so many years is continuing in the years under consideration. 7.8 We find that in the case of Associated Industrial Development Co. (P) Ltd. ( supra ) the Hon'ble Supreme Court held as under: " Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and he should, in normal circumstances, be in a position to produce evidence from his records as to whether he has maintained any distinction between those shares which are his stock-in-trade and those which are held by way of investment." 7.9 In the case of H Holck Larsen ( supra ), the Hon'ble Supreme Court has held as under : "In order to determine whether one was a dealer in shares or an investor, the real 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 show that the first step - the purchase of the shares - was not taken as, or in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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