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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 ..... ng 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 Rs. 11,29,870 as against that the assessment was made on assessed income of Rs. 14,28,796. It was noted by the Assessing Officer that the assessee had declared an income of Rs. 15,53,886 on account of short-term capital gains and of Rs. 2,88,757 as income from long-term capital gains from the activities of purchase and sale of equities. The assessee has filed the details of shares purchased and sold in respect of the short-term capital gains disclosed. As per the Assessing Officer, considering the number of transactions, it was to decide whether income from purchase and sale to be treated as business income or capital gains. The Assessing Officer has referred to a Central Board of Direct Taxes Circular No. 4 of 2007, dated June 15, 2007 ([2007] 291 ITR (St.) 384), wherein certain guidelines have been issued to resolve whether the activity of shares of sale and purchase constitute a business activity or not. After considering the nature of the transactions, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcular 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 activity to constitute business, (ii) the substantial nature of the transactions, the manner of maintaining of books of account, the magnitude of purchase and sale and the ratio between purchase and sale of shares needs to be looked into, (iii) whether the motive behind purchase and sale of shares was earning profit or income by way of dividend, etc. He has vehemently contested that in these type of cases where there are frequent transaction of shares, the Revenue Department has constantly taken a view that the assessee has traded the shares as business, therefore, the Assessing Officer was right in computing the share trading income as business income. From the side of the respondent-assessee, the learned authorised representative Mr. Pritesh Shah appeared and in support of the decision of the learned Commissioner of Income-tax (Appeals) narrated on the following points:- 1. The assessee has divided in share act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 P. Ltd. 799/Mum/2009 dated 24-11-2010 4. Deputy CIT v. M/s. SMK Shares and Stock Broking P. Ltd. 4591/Mum/2009 dated 30-11-2010 5. Nagindas P. Sheth (HUF) v. Asst. CIT and Asst. CIT v. Nagindas P. Sheth (HUF) 961/Mum/2010 and 1836/Mum/2010 dated 5-04-2011 6. Asst. CIT v. Naishadh V. Vachharajani 6429/Mum/2009 dated 25-2-2011 7. ITO v. Radha Birju Patel [2011] 46 SOT 23 (Mumbai) (URO) The learned authorised representative has also referred to few reported precedents as follows:- Sl. Nos. Decision in the case of Reported in 1. CIT v. Niraj Amidhar Surti [2011] 238 CTR (Guj) 294 ; 48 DTR 33 2. CIT vs Gopal Purohit [2011] 336 ITR 387 (Bombay) ; 228 CTR 582 3. Sugamchand C. Shah v. Asst. CIT 37 DTR 345 (Ahmedabad-ITAT) 4. Janak S. Rangwalla v. Asst. CIT [2007] 11 SOT 627 (Mumbai) 5. Bharat Kunverji Kenia v. Addl. CIT [2010] 130 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 be covered by security transaction tax. As far as the present case is concerned, therefore, there is no dispute that the assessee has claimed exemption under section 10(38) of the Income-tax Act and thereupon paid tax under section 111A at concessional rate. From several rulings, certain principles have been culled-out, in brief, are that the intention of the assessee at the time of purchase of shares has to be examined. In this regard, few courts have held that the books of account of the assessee are one of the deciding factor. It has been informed that the assessee has always recorded the amount as investment in shares and, therefore, stock of shares has always been valued at cost price. It is also relevant to place on record that the disclosure of long-term capital gain was the regular feature in the assessee's case. Intention of the assessee can also be judged by the fact that the shares have delivered dividend incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 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 Income-tax (Appeals) following his own order for the preceding year treated only short-term capital gains as business income. However, the Income-tax Appellate Tribunal in their aforesaid order dated May 13, 2011 in the assessee's own case in I. T. A. No. 127/Ahd/2009 for the assessment year 2005-06 treated the short-term capital gains as business income. The learned authorised representative relied upon this order of the Income-tax Appellate Tribunal, facts and circumstances being same in the year under consideration as were obtaining in the preceding year while the learned Departmental representative pointed out that the decisions relied upon by the Income-tax Appellate Tribunal in the preceding year were distinguishable. To determine as to whether sale of shares is to be assessed as business income or as income from capital gain, the most important test is whether the initial acquisition of the shares was with the intention of dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 treated as stock-in-trade. (6) How the company (assessee) is authorised in memorandum of association/articles of association? Whether for trade or for investment? If authorised only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? and vice versa. (7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept to the records or otherwise, between two types of holdings : if the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to the Revenue to prove that apparent is not real. (8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or much frequency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 under:- 'The more volume of transaction transacted by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not after the nature of transaction. Though the principle of res judicata does not apply to the income-tax proceedings as each year is an independent year of the assessment but in order to maintain consistency, it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts. (paragraph 6) In the facts of the instant case, the assessee was holding the shares as investment from year to year. It was an intention of the assessee which was to be seen to determine t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 decision of the Income-tax Appellate Tribunal in the case of Gopal Purohit [2009] 29 SOT 117 (Mumbai) and a specific question was raised against the rule of consistency applied by the Income-tax Appellate Tribunal. The hon'ble High Court vide order dated January 6, 2010, CIT v. Gopal Purohit [2011] 336 ITR 287 (Mumbai); 228 CTR 582 upheld the order of the Income-tax Appellate Tribunal and held as under (page 289 of 336 ITR):- '3. In so far as question (b) is concerned, the Tribunal has observed in paragraph 8.1 of its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The Revenue submitted that a different view should be taken for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee especially when in the preceding years all along the assessee has been treated as investor. The plea of the learned Departmental representative that in the assessment year 2003-04 there was no difference in tax rates on short-term capital gains and business income and therefore, the issue did not assume significance, is not relevant, especially when the Assessing Officer accepted the claim that the assessee had made only investment in shares and was not a trader. Even in the subsequent years until the assessment year 2005-06, the claim of the assessee has been accepted. 5.5 We find that in the case of CIT v. Associated Industrial Development Co. P. Ltd. [1971] 82 ITR 586 (SC), the hon'ble Supreme Court held as under (headnote):- 'Whether a particular holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 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 assessees as well as for guidance of the Assessing Officers. 5. In the case of CIT v. Associated Industrial Development Co. P. Ltd. [1971] 82 ITR 586 (SC), the Supreme Court observed that (headnote):- "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." 6. In the case of CIT v. H. Hoick Larsen [1986] 160 ITR 67 (SC), the Supreme Court observed (pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining 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 of remittance to India for investment in India and realising capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realising profit would lead to inference of trade/adventure in the nature of trade ; where the object of the investment in shares of companies is to derive income by way of dividends etc., the transactions of purchases and sales of shares would yield capital gains and not business profits." 10. The Central Board of Direct Taxes also wishes to emphasise that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous 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 guideline. (b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. (c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was with the assessee. Has it been treated as stock-in-trade, or has it been shown in the books of account and the balance-sheet as an investment. This inquiry, though relevant, is not conclusive. (d) The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the mere volume of transactions transacted by the assessee would not alter the nature of transaction. Though the principles of res judicata do not apply to the income-tax proceedings as each year is an independent year of the assessment but in order to maintain consistency, it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts. In the facts of the instant case, the assessee was holding the shares as investment from year to year. It was the intention of the assessee which was to be seen to determine the nature of transaction conducted by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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