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TMI Blog2012 (5) TMI 418X X X X Extracts X X X X X X X X Extracts X X X X ..... ja, JJ. G. S. Souryavanshi for the Appellant Pritesh Shah for the Respondent ORDER Mukul Kr. Shrawat, Judicial Member:- This is an appeal at the behest, of the Revenue which has emanated from the order of the learned Commissioner of Income-tax (Appeals)-XI, Ahmedabad, dated March 18, 2009 passed for the assessment year 2006-07. The following grounds were raised by the Revenue in its appeal:- 1. The learned Commissioner of Income-tax (Appeals)-XI, Ahmedabad, has erred in law and on facts in directing the Assessing Officer to treat the income of ₹ 15,53,886 as short-term capital gain instead of business income. 2. The learned Commissioner of Income-tax (Appeals)-XI, Ahmedabad, has erred in law and on facts in directing the Assessing Officer to treat the income of ₹ 2,88,757 as long-term capital gain instead of business income. The assessee is an individual and the sources of income are trading in shares and salary income. Facts in brief as emerged from the corresponding assessment order passed under section 143(3) of the Income-tax Act dated November 10, 2008 were that the return was filed declaring an income of ₹ 11,29,870 as against that the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the appellant had frequent purchase and sale of transactions. The Assessing Officer has treated the entire transactions as business transactions without considering the facts that the appellant had taken the delivery of these shares. Therefore, as it could be seen from the facts of the case, that the appellant had taken the delivery of these shares in the demat account and thereafter only the shares were sold. The sale of these shares, hence, cannot be said to be normal business transactions for treating the same as business income. The shares were bought and sold with a gap of some time after taking the delivery of the shares. Therefore, I am inclined to direct the Assessing Officer to treat the above income as short-term capital gains." From the side of the Revenue, the learned senior Departmental representative Mr. G. S. Souryavanshi appeared and at the outset has referred to the guidelines issued by the Central Board of Direct Taxes Circular No. 4 of 2007, dated June 15, 2007 ([2007] 291 ITR (St.) 384) and highlighted the following points:- (i) where a company purchases and sells shares, it should be shown that they were held as stock in trade, for the activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital gain in the last year, then why the stand is different in the current year. 7. Description of borrowings:- ₹ 50,69,201 Amount of borrowed funds-Bank overdraft and unsecured loans ₹ 1,37,872 Interest on bank overdraft ₹ 2,72,772 Interest on unsecured loan ₹ 4,10,644 Total amount of interest expenses debited to profit and loss account. In the statement of income, the assessee has disallowed interests and added back to the Business Income. Thus, the assessee has not claimed the interest of ₹ 4,10,644 as revenue expenditure, since she has treated shares as investment. 8. The transactions are not 500 but less, since single transaction of sale has been split by computers trading of the stock exchanges into many smaller transactions but that does not mean that the assessee has carried so many transactions. In support of the above arguments, few cases of the Tribunal cited are as under:- Sl. Nos. Decision in the case of In ITA Nos. 1. Ramesh Babu Rao v. Asst. CIT 4084, 5318 and 5319/Mum/2009 dated 13-04-2011 2. Mr. Nehal V. Shah v. Deputy CIT 2733/Mum/2009 dated 15-12-2010 3. Deputy CIT v. M/s. SMK Shares and Stock Broking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year dividend income of ₹ 72,083 and for the assessment year 2007-08, i.e., immediate succeeding assessment year dividend income of ₹ 96,036 was disclosed and accordingly assessed. For the year under consideration, i.e., the assessment year 2006-07 the dividend income was earned at ₹ 88,970. These facts have been taken into consideration by us. The action of the Revenue authorities for the year under consideration had raised a question that why in this particular assessment year the Revenue has altered its stand and why the head of income has been changed from "capital gain" to "business income". Though the change in the income-tax statute had happened through the Finance Act, 2004 but the relevant assessment years were not disturbed by the Revenue authorities in the case of the assessee. We are aware of the legal position that the Legislature had imposed security transaction tax on the sale and purchase of shares. We are also aware that the Legislature had exempted long-term capital gain under section 10(38) of the Income-tax Act. The statute has also imposed a concessional rate of tax, subject to the condition that the transaction should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod of holding of an investment is concerned, the accepted legal position is that a decision has to be taken by the assessee himself so as to reap the maximum benefits. The assessee has adduced several evidence and discharged the onus of showing that the shares were held as an investment and not meant to hold those shares as stock-in-trade for business purposes. In support of our these observations, we hereby place strong reliance on a decision of the respected co-ordinate Bench "B" Income-tax Appellate Tribunal, Ahmedabad, in I. T. A. No. 2076/Ahd/2009 for the assessment year 2006-07 (the assessee's appeal Shri Mulchandbhai S. Amin v. Asst. CIT) and I. T. A. No. 2218/Ahd/2009 (in the Revenue's appeal), dated September 9, 2011, wherein one of us, i.e., the respected learned Accountant Member is the author and held as under:- "5. We have heard both parties and gone through the facts of the case. The issue before us is as to whether sale of shares is to be assessed as business income or as income from capital gain. The Assessing Officer treated both long-term capital gains and short-term capital gains as business income while the learned Commissioner of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale are for realising profit or purchases are made for retention and appreciation in its value ? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realisable value (whichever is less), it will indicate that items in question are tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails for purchases and sales affected by the assessee company revealed that sales and purchases were quite substantial and would not be made by a person who invested in shares. Further, the assessee did not have sufficient funds to make such investments and the assessee was claiming to have made investment out of borrowed capital. He, therefore, held that the profit in question was assessable as business income. Held that the undisputed fact was that the assessee was dealing in shares both as business as well as investment. It had kept separate accounts in respect of two portfolios. No material was brought on record to show that demarcation line between business and investment was hazy or that the assessee had not maintained an investment portfolio and it was dealing in shares only like a trader. Thus, on appreciation of cumulative effect of several factors present it was to be held that the surplus was chargeable to capital gains only and the assessee was not to be treated as trader in respect of sale and purchase of shares in the investment portfolio.' 5.1 The Income-tax Appellate Tribunal, Mumbai Bench in the case of Janak S. Rangwalla [2007] 11 SOT 627 (Mumbai) held as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; In addition to the above, the Income-tax Appellate Tribunal, Mumbai Bench, also accepted the claim of the assessee on the ground that in the preceding year, similar claim was accepted by the Revenue. The relevant findings of the Income-tax Appellate Tribunal are as under:- 'Thus, the nature of activities, modus operandi of the assessee, manner of keeping records and presentation of shares as investment at the year end were same in all the years, and, hence, apparently, there appeared no reason as to why the claims made by the assessee should not be accepted. However, the Revenue authorities had taken a different view in the year under consideration by holding that principle of res judicata was not applicable to the assessment proceedings. There could not be any dispute on this aspect, but there is also another judicial thought that there should be uniformity in treatment and consistency under the same facts and circumstances and it was as already found that facts and circumstances were identical even though a different stand had been taken by the revenue authorities.' 5.2.1 The Revenue filed an appeal before the hon'ble Bombay High Court against the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ips. The learned Commissioner of Income-tax (Appeals) concluded that facts and circumstances in the instant case remained the same as were obtaining in the preceding year. Whether the transactions were 533 or 1,000, the facts remain that there were frequent transactions of purchase and sale of shares. However, except the parameter of frequency in purchase/sale of shares all other parameters indicate that the transactions were in the nature of investment and not the trade transactions. Even for frequency, it was explained by learned counsel that the assessee was mostly making the investment in B-Group scrips and to avoid risk he made investment in several scrips instead of investing in one scrip. He also stated that shares were kept for long period and there is no frequent purchase/sale of same scrips. The learned Departmental representative appearing before us did not controvert these contentions. It is well settled that, to determine whether the assessee is a trader or investor in shares, no single test is conclusive but cumulative effect of all the facts are to be seen. In the case of the assessee, one fact, i.e., frequent purchase/sale of shares cannot be said to be against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s earned from transactions in share should be held as business or should be treated as investment. The relevant circular reads as under (page 384 of 291 ITR (St.):- 'Circular No. 4 of 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 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 Board of Direct Taxes (CBDT) through Instruction No. 1827, dated August 31, 1989, had brought to the notice of the Assessing Officers hat there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7] 288 ITR 641 (AAR) 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 assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realising capital gains on investments and accounts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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] 6 CTR 647 (Guj), after analysing various decisions of the apex court, this court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business:- (a) The first test is whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale and purchase of shares. The facts and circumstances of this year are the same as in the earlier year. Therefore, the ratio of the judgment of the hon'ble Bombay High Court in the case CIT v. Gopal Purohit [2011] 336 ITR 287 (Bom) as well as the hon'ble Gujarat High Court in the case of Niraj Amidhar Surti are squarely applicable to the facts of assessee's case. We, therefore, following the aforesaid decisions, direct the Assessing Officer to accept the short-term capital gain amounting to ₹ 68,87,173 declared by the assessee in the return of income. This ground of appeal taken by the assessee is allowed.' 5.10 In a nutshell, the claim of the assessee regarding income from sale of shares has all along been accepted under the head short-term/long-term capital gains. The learned Commissioner of Income-tax (Appeals) as also the learned Departmental representative appearing before us in his written submissions have observed that the facts of the case pertaining to the claim of short-term capital gain remain the same this year as were obtaining in the immediately preceding year. In the light of view taken in the aforesaid decisions, we are of the opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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