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TMI Blog2012 (5) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... s in respect of commodity transactions on delivery basis both are to be held on account of short term capital gain income and short term capital loss respectively – in favour of assessee. Verify whether the interest paid amounting is compensatory or penal in nature which is not in accordance with the provisions of Section 25(1) – Held that:- Since income to be capital in nature, the direction of ld. CIT(Appeals) about verifying the payment of interest to Indiabulls Financial Services Ltd. becomes infructuous - against revenue. - ITA No. 1648/Del/2010 ITA No. 2762/Del/2010 - - - Dated:- 30-4-2012 - SHRI R.P. TOLANI, SHRI K.D. RANJAN, JJ. Assessee by : Shri G.C. Srivastava Adv. Revenue by : Mrs. Renu Jauhri CIT (DR) O R D E R PER R.P. TOLANI, J.M : These are two cross appeals, one by the assessee and the other by Revenue against CIT(A) s order dated 4-2-2009, relating to A.Y. 2006-07. Respective grounds are as under: Assessee s appeal (ITA no. 1648/Del/10): 1. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in upholding the action of learned Assessing Officer in assessing short te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.3. Assessee accordingly offered the income by way of two distinct types of activities: (i) Delivery based held by way of investment, reflected in the books of A/cs. The transactions were in volumes and only few scripts were traded. (ii) Non-delivery based, which were carried out by the assessee distinctly and separately, without delivery. 2.4. STT transaction tax was also paid by the assessee in respect of delivery based transaction of shares. AO, however, proposed that the short term capital gains earned by the assessee amounting to ₹ 7,61,56,446/- should not be treated as short term capiktal gains but as profits and gains from business. 2.5. Assessee, in reply, contended that: (iii) The transactions in commodity and share scrip s that are traded against actual delivery is accounted in the books of accounts as well as in the balance sheet as capital investment whereas the profit made on shares and commodity futures and index futures as well as intraday trading transactions that are traded without actually delivery is accounted as profit in the profit and loss account and also shown as part of business income in the returned computation s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... narain Sons (P) Ltd. (supra) and Hon ble Allahabad High Court in the case of Sohan Lal Gupta (supra) (g) Karam Chand Thaper Bros. (P) Ltd. V. CIT (82 ITR 899) (h) Karnataka State Industrial Investment Development Corpn. Ltd. Vs. Deputy Commissioner of Income-tax (59 ITD 643). (i) M.V. Chandrashekhar V. Dy. CIT 91 ITD 543. (j) Raja Bahadur Kamakhya Narain Singh Vs. Commissioner of Income-tax (77 ITR 253). 2.6. AO, however, held the delivery based transactions of shares and commodities as business income on following reasons: (i) There are no long term capital gains from transactions in shares and the assessee has not derived any income by way of dividends. (ii) The CBDT Circular referred to by the assessee was only in the nature of guidance while determining the fats of each case. (iii) The assessee s main line of business is not that of hiring of machinery and equipment as claimed, but the substantial part of his income was derived out of capital/ commodity market. Therefore, it would be reasonable to hold that the assessee s main line of business pertained to commodity markets. (iv) The total purchase of shares was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck/index/commodity/ intra-day trading activities with his hire charges receipts in the P L A/c of assessee s proprietary concern which also indicated the assessee s intention to combine all the activities as business income. (vi) Circular no. 4 of 2007 issued by the CBDT refers to 2 Supreme Court judgments in the cases of CIT Vs. Associated Industrial Development Co. P. Ltd. 82 ITR 586; and Holck Larsen Vs. CIT 160 ITR 67. The Circular postulates that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. By taking into consideration all the principles enunciated in the Circular, the assessee s activities could have business activity. (vii) This is trite law that entries in books of accounts are not conclusive and the real nature of the transaction depends on the ascertainment of relevant facts. The assessee s frequent sales and purchases in shares ventures indicated that the assessee was carrying on activities of business. Reliance was placed on the Hon ble Supreme Court judgments in the cases of Ramnarain Sons Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of investment and not by trading activity. (ii) Non-delivery based transactions in shares and commodities, which are offered to income as speculative transactions. 3.1. The law and CBDT circular explicitly recognize as a matter of rule that an assessee is eligible to carry out the activities in shares and commodities by way of investment. There is no prohibition or bar of law against carrying out activities in the form of investment along with business activities in shares and commodities. 3.2. This is evident from the CBDT Circular no. 4 of 2007 dated 15-6- 2007 that assessee can undertake both investment and trading activity in shares and commodities. CBDT circular is as under: CIRCULAR NO. 4/2007, DATED 15-6-2007 1. 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. Longterm capital assets and gains are dealt with under section 2(29A) and section 2(29B). Short-term capital assets and gains are dealt with under section 2(42A) and section 2(42B). 3. Trading asset is dealt with under section 28 of the Act. 4. The Central B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt 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 : 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 assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions , their magnitude, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares which are stock in trade and which are held by way of investment. (iii) The reference to authority of Advance Ruling is in case of company who purchases or sells shares and FIIS. The assessee is neither a company nor FII but an individual. Even in case of companies and FIIS both activities can be undertaken. (iv) The CBDT has emphasized that a tax payer can maintain 2 portfolios i.e. (a) investment portfolios comprising of shares as capital asset; and (b) portfolios comprising of stock in trade which are to be treated as trading assets. (v) It has been further emphasized that where the same assessee has both portfolios, assessee can earn income under both heads and they will be taxed under income tax accordingly. 3.4. The Circular clearly emphasizes that AO should not be governed by rigid concepts while dealing such cases. This was so because the Indian economy was opening to share investment and the assessees were intended to be given choice of investment and trading by Govt. 3.5. The circular being very clear and justifying the accounting treatment given by the assessee, has been misconstrued to wrongly hold that assessee was undertaking busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock-in-trade. 8. Under these circumstances, the Commissioner as well as the Tribunal were justified in holding that the claim of the assessee for capital gains was justified and that the Assessing Officer was not correct in taking the income of the assessee from the sale of shares as business income. 3.8. Further reliance is placed on Hon ble Bombay High court judgment in the case of CIT Vs. Gopal Purohit (2011) 336 ITR 287 (Bom.), holding 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 purpose of business (described in paragraph 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 in shares. The Tribunal held that the delivery based transactions in the present case, should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee s case it clearly emerges from record that nothing was shown by the assessee as stock in trade in the books of accounts. The only portfolio maintained in respect of delivery based shares is on account of investment in shares, there is no stock in trade of shares. The assessee has carried out limited share trading activities in limited on which STT tax has been paid. Lower authorities held by stretching the logics and the facts. 3.13 Similarly, in respect of delivery based transactions of commodities also has been accounted by way of investment, which has been declared as short term capital loss. This loss in respect of delivery based commodities, has been wrongly held to be business loss by lower authorities. 4. Ld. DR, on the other hand, supported the order of lower authorities and contends that the assessee s income is from alleged investment is small business income on non delivery shares to a large extent which clearly shows that the assessee s dominant purpose was to earn income by way of trading in shares and commodities 4.1. The fact that assessee borrowed initial purchase money from Indiabulls Financial Services Ltd. itself indicates that he did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities are to be treated as capital assets and profits as capital gains; and (ii) trading portfolio, comprising of stock-in-trade which are to be treated as trading assets and profits as business income. It has been further pleaded that assessee can have separate incomes under the two heads i.e. capital as well as business income. The circular was issued to encourage investment in capital markets due to liberal economy. 5.4. According to assessee the Circular emphasizes and advices the AO that no single specific principle should be applied, implying that the AO should appreciate all the facts in such manner. Assessee has maintained accounts by treating delivery based shares income as capital investment and capital income. Assessee has entered into the transaction with limited number of the companies i.e. 8 throughout the year. Besides the average number of transactions in one month on account of such share dealings is 8. This has been wrongly extrapolated by AO to more number of transactions adopting broker s purchases. 5.5. In the case of 2 portfolios, an eventuality may arise, like an assessee deals in the shares of Telco, some are credited to trading activity and some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he period of holding is more than six months, the transaction will be in the nature of capital gains and where it is less than six months: it will be in the nature of business. Long term capital gain has been defined under section 2(29B) of the Act and means capital gain arising from transfer of a long time asset. Long term capital asset has been defined under section 2(29A) and means a capital asset which is not a short term capital asset. Section 2(42A) defines short term capital asset to mean a capital asset which is held by an assessee for not more than 36 months immediately preceding its date of transfer. However, in respect of shares the short term capital asset would mean that such shares are held by the assessee for not more than 12 months. The Id. CIT (A), however, treated the short term capital gains in relation to shares, which have been held by the assessee more than six months and the shares held for less than six months have been treated as business income. This, in our opinion, is not in accordance with the provisions of law. The assessee had treated the shares in its books of accounts as investments and not stock in trade. The assessee had received delivery of share ..... X X X X Extracts X X X X X X X X Extracts X X X X
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