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TMI Blog2012 (10) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... ge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of “trade”, the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the assessee had not purchased the shares as an investment, but with the intention to trade in such scrips. Thus the CIT(A) was not justified in accepting the claim of the assessee as investor in shares. Accordingly the findings of the CIT(A) are vacated and restore the order of the AO - against assessee. - ITA No. 1262/Del./2012 - - - Dated:- 5-10-2012 - I. C. Sudhir And A. N. Pahuja , JJ. Assessee by Greenize Jain Jasmeet Kaur Kohli, ARs Revenue by Aroop Kumar Singh, DR ORDER A. N. Pahuja This appeal filed on 14.03.2012 by the Revenue against an order dated 15th December, 2011 of the ld. CIT(A)-XXVI, New Delhi, raises the following grounds:- 1. Whether in the facts and circumstances of the case, CIT(A) was justified in treating the income of ₹ 65,45,321/- from sale purchase of shares as income from short term capital gain as against business income? 2. The appellant craves le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective heads. 5.1 Section 28 is the charging section for the Incomes under the head business or profession. The relevant extract of section 28 is as follows:- the profits and gains of any business or profession which was carried on by the Assessee at any time during the previous year. Section 45 is the charging section for the Income under the head Capital Gains. The relevant extract of section 45 is as follows:- Any profits or gains arising from the transfer of a capital asset effected in the previous year shall. . ... be chargeable to income tax under the head Capital gains . The term capital asset is defined in the Income Tax Act, 1961. The relevant extract of the said definition is mentioned herein as below: In this Act, unless the context otherwise requires, Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not includei) Any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession Thus, it can be concluded that any gain from the transfer of shares other than the shares held as stock in trade is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid findings of learned CIT(A).The ld. DR while carrying us through the assessment order and findings of the ld. CIT(A) supported the order of the AO while relying upon the decision dated 2.11.2011 in the case of Mafatlal Fabrics P. Ltd. Vs. DCIT in I.T.A. no.903/Mum/2010 for assessment year 2006-07 dated 02.11.2011 and decision dated 6th January, 2012 in the case of M/s Diligent Services Pvt. Ltd. in I.T.A. no.3299/Del./09 and 3318/Del./09. On the other hand, the ld. AR on behalf of the assessee supported the order of the ld. CIT(A) while contending that their claim as an investor has been accepted in the preceding year. Inter alia, the ld. AR relied upon decision dated 6-1-2010 in CIT vs. Gopal Purohit, 228 CTR 582 (Bom.), upholding decision of the Tribunal in Gopal Purohit v. JCIT [(2009) 29 SOT 117 (Mum). 5. We have heard both the part ies and gone through the facts of the case as also the aforesaid decisions relied upon by both the sides. The issue before us is as to whether the shares quoted in stock exchange and traded in by the assessee , which were classified as investment in their books of accounts, were their investment or their stock-in-trade ? The AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period is 12 months. Section 2(42-B) defines short term capital gain to mean capital gain arising from the transfer of a short term capital asset. Under Section 28(i) of the Act, the profits 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. 5.2. If the shares purchased by the assessee are he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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, 77 ITR 253(SC). There is no material before us that shares and securities purchased in the year under consideration and classified as investment in books were actually intended to be held as long term investments. Profits realised by the sale of shares may be capital if the seller is an ordinary investor changing his securities, but it may be income if the seller of the shares is trading in shares, as held in Raja Bahadur Visheshwara Singh v. CIT, 41 ITR 685(SC). The substantial nature of the transactions, the magnitude of the shares purchased and sold and the ratio between the purchases and sales and the holdings, reveals the intention of the assessee as a trader in shares and not as an investor.. In the instant case, the assessee had opening investment of ₹ 1 crore in shares while shares worth ₹ 4.10 crore have been sold and shares of the value of ₹ 4.9 crore were purchased. The fact that few shares were held for only a day or two reflects the dominant or even sole intention to res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 for investment ? If authorized 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 sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 way of investment. 6. In the case of CIT v. H. Holck Larsen [1986] 160 ITR 67, the Supreme Court observed (page 87): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buys the commodity not for holding it in contrast to an investor who buys the commodity for holding it so as to earn some income from investment and have decent appreciation. In case of shares, income is in the form of annual dividend and therefore, an investor in shares will normally be holding shares for more than a year and any sale before one year has to be explained from the circumstances of the case. The profit motive is also relevant but this is also not conclusive because even an investor may earn profit by way of appreciation. As is apparent from the aforesaid facts, the transactions of purchase of shares, and thereafter selling it with in few days and most of the time within a month, with a view to earn profit, reflects motive of the assessee as a trader and not an investor. In the instant case, purchases as well as turnover are continually increasing and the assessee has regularly dealt in purchase and sales of shares. Profit motive is also clearly evident in making the transaction. In Gopal Purohit(supra), the assessee has been continually holding the shares as investment from year to year. This is not the situation in the instant case. In the case of CIT (Central), Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares sold out of investment account had been held for 23 years and Revenue could not show any shares sold which had been purchased during the year or in the immediately preceding year. Therefore, only in respect of such cases, the decision in case of Gopal Purohit (supra), could be applied. The Hon'ble High Court of Bombay upheld the decision of the Tribunal in the case of Gopal Purohit (supra), on the ground that there was no substantial question of law involved. Even before Hon'ble High Court, there was no question raised that all delivery based transactions have necessarily to be treated as investment activity. Thus, the decision of the Tribunal as well as the Hon'ble High court in case of Gopal Purohit (supra), cannot be considered as a precedent for the proposition that all delivery based shares have to be treated as investment activity. The assessee can also be a trader in case of delivery based purchases and sales, which is a normal feature of any trading activity. Therefore, reliance placed by the ld. AR on the decision in the case of Gopal Purohit is totally misplaced. 6. In view of the foregoing ,we are of the opinion that the character of a transact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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