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TMI Blog2012 (7) TMI 400X X X X Extracts X X X X X X X X Extracts X X X X ..... see would not alter the nature of transaction - thus 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 - against revenue. - ITA No. 83/Del/2012 - - - Dated:- 20-6-2012 - U. B. S. Bedi And A. N. Pahuja , JJ. Assessee by None Revenue by Alok Singh,DR ORDER A. N. Pahuja This appeal filed on 5.01.2012 by the Revenue against an order dated 19.10.2011 of the ld. CIT(A)-VIII, New Delhi, raises the following grounds:- 1. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in treating the surplus of shares transactions as long term capital gains as against business profits assessed by the assessing officer, inspite of the fact that the assesee has clear intentions to earn profits by pledging his own shares for taking margin money from the broker. 2. The appellant craves leaves to amend or alter or any of the aforesaid ground of and amed, alter or add any other ground of appeal. 2. At the outset, none appeared on behalf of the assessee nor submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r business purposes besides taking loan for purchase of shares. 4. On in appeal, the ld. CIT(A) accepted the contentions of the assessee, holding as under: 4 I have carefully considered the submissions made on behalf of the appellant company and findings recorded by the Ld. AO and have also carefully perused the documents placed in the course of appellate proceedings. On consideration, I find that the appellant has been maintaining two separate portfolios, one, in the name of his proprietorship concern, M/s. Bajaj Insurance Management, where the shares and securities are held as trading assets and second, his own account where the investments are made on long term basis and the shares and securities are held as long term investment. The appellant has been returning profit and loss in the trading account as business income and the surplus arising on account of purchase and sale of shares in his own account is being shown as short term/long term capital gain/loss. This practice has been regularly followed by the appellant for many years and the same has been accepted by the department. Further, the appellant is maintaining two separate codes with the stock brokers, M/s. Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the resolution of issues relating to purchase and sale of shares and treatment thereof. Some of the important parameters laid down by the CBDT may be summarized as below:- (i) Where a company purchases and sells shares, it must be shown that they were held in stock in trade and that existence of the power to purchase and sell shares in the Memorandum of Association is not decisive of the nature of transaction; (ii) The substantial nature of transaction, the manner of maintaining books of accounts, the magnitude of purchases and sells and the ratio of purchase and sales and the holding would furnish a good guide to determine the nature of transaction; and (iii) Ordinarily, the purchase and sale of shares with the motive of earning profit would result in the transaction being in the nature of trade/adventure in the nature of trading 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 will yield capital gain and not revenue receipt. 4.2 A perusal of the details of purchase and sales of shares noted by the AO in the impugned asstt order clearly reveals that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n his personal capacity in the code allotted in his personal name, Security Transactions Tax had been paid by the assessee and was taken into consideration while working out the short term/long term capital gain/loss. 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 dealing in the shares or it was made as an investment. The intention of the assessee is best known to him and the dispute comes to the appellate authorities only when the Revenue authorities do not accept the claim of the assessee. The appellate authorities have laid down certain guidelines on the basis of which the intention of the assessee can be inferred. In CIT (Central), Calcutta vs Associated Industrial Development Company (P) Ltd.,82ITR586, 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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 realizing 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 realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorized in memorandum of association/articles of association ? Whether for trade or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins 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 that 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 Company (P) Ltd. [1971] 82 ITR 586, 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 stockin- trade and those which are held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide 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 realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as Question (b) is concerned, the Tribunal has observed in pare 8. 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 year The Revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question. Question (b), therefore, does not also raise any substantial question. 6.51. On merit also, Their Lordships upheld the findings of the ITAT holding the same to be pure finding of the fact. The Hon ble Supreme Court vide their order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade, or has it been shown in the books of account and 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 succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of the transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation. (e) The fifth test, normally applied in cases of partnership firms and companies, is whether the deed of partnership or the memorandum of association, as the case may be, authorises such an activity. (f) The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can readily be drawn that the activity is in the nature of business. 6.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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