9911796707
TMI Blog2013 (7) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year under dispute, the assessee filed his return of income on 27-6-2006 declaring income of 41,08,560/- comprising of income from salaries, income from capital gain and income from other sources. Initially, the return was processed u/s 143(1) of the Act. Subsequently, assessee's case was selected for scrutiny assessment. In course of scrutiny assessment proceedings, the Assessing Officer noted that during the year under dispute, the assessee has offered short term capital gain of Rs.38,97,155/- and shown long term capital gain of Rs.53,76,968/- as exempt u/s 10(38) of the Act out of sale of shares. The Assessing Officer on verifying the information called for noticed that all the shares were sold or purchased by Movva Securities Limited in its name. The Assessing Officer further noted that the assessee does not have any demat account and there are no contract notes also to indicate that the shares are purchased or sold in the name of the assessee. 4. The assessee stated before the Assessing Officer that Movva Securities Ltd., in which the assessee is a director, is selling and purchasing share on his behalf and the company maintains separate account in its books in the name o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there was some software problem in HSE Securities in transferring the shares to the clients' accounts; therefore they continued to transfer the shares to Movva Securities Limited which continued upto 31-3-2006. Thereafter the shares were transferred directly through demat account of the assessee. It was contended that as the assessee has invested his own fund in purchase of shares and did not borrow any fund and since the shares were held by the assessee as investment and not stock in trade, the income from sale of shares should be treated as income from capital gain. The assessee further contended that he was holding the shares from the year 1999 onwards and was deriving income from dividends. 7. The CIT (A) considering the contention of the assessee in the light of various judicial precedents as referred to by him in his order was of the view that for any transaction where delivery has not taken place, the transactions shall be a speculative one u/s 43(5) of the Act. The delivery of shares must be actual and not notional. He further opined that though the delivery of shares does not have to be in the demat account of the assessee and can be in the demat account of his agent bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown as investment only and not as stock in trade. At no point of time, the assessee borrowed funds for investing in shares. He utilised his own funds for the purpose of investment and any surplus generated he reinvested in the share portfolio. It was submitted that that in all the preceding assessment years the assessee has admitted the income only under the capital gain and the shares were shown at cost price and not cost at market value. It was submitted that the assessee did not maintain separate books of accounts for the purpose of the share transactions and no expenditure for carrying out the activity of purchase and sale of shares was ever claimed by the assessee. It is further submitted that all along the IT Department has accepted the statement given to the income derived from the sale of shares in the assessment year 2005-06. Only in the assessment year 2006-07, the department was of the view that the purchase and sales were affected without delivery of shares and without maintenance of demats account. 9. The learned AR submitted that the conclusion arrived at by the department is not correct as it was demonstrated before the departmental authorities that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h contention, the learned AR also relied upon various judicial precedents as mentioned in the written submissions. 10. The learned Departmental Representative supporting the orders of the revenue authorities submitted that the assessee carried on activity of purchase and sale of shares only through HSE Securities and during the assessment proceedings, the assessee himself declared as there was some software problems, the shares could not be transferred in the assessee's demat account. He further submitted that the delivery of shares does not have to be in the demat account of the assessee but can be in the demat account of his agent. But, there has to be a clear cut nexus between each delivery of shares and transactions of the assessee. He further submitted that the assessee was not able to take delivery of shares to demat account he could have taken a specific delivery certificate from HSE Securities Ltd., or Movva Securities Ltd. The learned Departmental Representative submitted that in absence of any evidence to that effect it is clear that the delivery of shares was neither taken by the assessee nor by the broker or sub-broker on his behalf. Therefore, in view of the ratio lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that evidence was produced before him by the assessee in support of his claim that who was having demat account with HSE Securities Ltd., the assessee also produced the contract notes entered with HSE Securities Ltd., and Movva Securities Ltd. When the assessee has produced certain evidences, it is incumbent upon the revenue authorities to properly verify the authenticity of evidences before rejecting as not acceptable. As it appears from the orders of revenue authorities no enquiry has been conducted to find out the fact as to whether the assessee has in fact has taken delivery of shares so as to hold it as a speculative transaction u/s 43(5) of the Act. That apart before rejecting the assessee's claim of income declared from sale of shares as short term capital gains and long terms capital gains and treat it as business income, the Assessing Officer has to consider whether the intention to hold the shares as investment for earning dividend or trading purpose to earn profit. The frequency and volume of transaction on shares, the period of holding are also relevant factors required to be considered to find out whether it is trading or investment activity. All these facts have not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sales of shares as a trader. It was further stated that the investment in shares were out of his own funds without utilizing any borrowed amounts. He further stated that he maintains demat account and most of the shares were held for long time. The intention of the assessee at the time of acquiring the shares is to hold them as investment. However, if he finds that holding of the shares for longer period is detrimental to the interest the same was sold whatever be the gain or loss from sale. 15. The Assessing Officer on verifying the details submitted by the assessee found that the purchases were made from substantial at frequent intervals when the value of scrip of various companies is at a lower rate. He further noted that though the shares were held for substantial period to impress upon the character of long term investment however shares of various companies were also sold at quite frequent intervals when the value of scrip is at a higher rate. The Assessing Officer further of the view that the magnitude of purchase and sales of shares clearly indicate that the motive of the assessee is to earn profit. He therefore opined that the shares held by the assessee are trading ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties Ltd., which deals with purchase and sale of shares on behalf of various clients. As a director of the company, assessee is the main adviser to the people on purchase and sale of shares. In this context, the CIT(A) referred to a decision of Hon'ble Supreme Court in case of Raja J. Rameswara Rao (42 ITR 179) wherein it was held that where the person conducts a particular business then even a single transaction made by that person with his own money in that line of business is to be taken as business transaction. ii) The number of transactions entered into by the assessee clearly indicates the intent of the assessee . The number of transactions including both short term and long terms gains disclosed as more than 1200. There are more than 550 transactions of sale in financial year 2007-08 pertaining to the current assessment year. iii) More than 80% of the transactions are purchases and sales of shares in the current year itself. iv) The ratio of holding to purchases is very high i.e., close to 1, indicating that not many shares are held as investment. 17. The CIT (A) further narrated certain instances of sale of shares where on 2-8-2007, 2000 shares of WS Industries were pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ize that money and quickly make profit by purchase of some other shares. The CIT (A) further noted that as the share price of Nagarjuna Construction rose beyond Rs.300 per share, the assessee exited from his holding and kept on selling the shares until the entire holding was disposed of. This according to the CIT (A) is a typical pattern of business in shares. The CIT (A) further held that an individual investor can study or take advice about the few companies and their shares and invest his money so as to obtain return in the form of dividends, bonus shares etc. The investor cannot have knowledge about large number of shares and also cannot quickly keep on changing on portfolios. Whereas the assessee has sold and purchased shares from more than 65 companies. On the basis of aforesaid finding the CIT (A) ultimately concluded that the assessee is carrying on business of purchase and sale of shares giving the entire nature of transaction and his intimate knowledge of share trading as well as main business of his own company. Accordingly, he upheld the view of the Assessing Officer that the income from sale of shares is to be assessed as income under the head 'business'. 19. The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee . He further submitted that the assessee has invested only his own funds and to protect the capital so invested is safeguarding the capital without itself being diminish its value. The learned AR submitted that the investment is not a single share but it is in a share portfolio and any person who invests in asset like shares would not invest in one or two shares but invest in multiple shares known as share portfolio. When certain amount is invested the assessee has to preserve the capital so invested by carefully monitoring such shares. Therefore, a few of transfer of shares should take place. Some times, while preserving the capital there may be certain voluminous transactions, but it is the intention of the assessee to carry out such transactions which is relevant. The intention of the assessee is to keep certain investment in shares as his investment in the shares and while preserving the same there may be certain transactions and those transactions cannot be termed as business transactions as the assessee never had any intention to do so. 21. The learned AR referring to the Board's Circular No.4 of 2007 dated 15-6-2007 submitted that the circular lays down three criteria wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the current year itself and the ratio of holding to purchases is also very high. He submitted that the pattern of investment in shares also indicates that the assessee is not a genuine investor but a trader in shares. The learned Departmental Representative submitted that the fact involved in the case of Spectra Shares and Scrips Pvt. Ltd. V/s. CIT (supra) is not applicable to the assessee firstly because that is a case u/s 263 of the Act and secondly in the present case, the assessee has made several transactions of purchases of sales during the relevant year under consideration and their high volume frequency and the regularity of their activity carried on by the assessee in a systematic manner. The learned Departmental Representative submitted that if the assessee 's case is considered within the parameters laid down by the jurisdictional High Court in case of PVS Raju V/s. Additional CIT (340 ITR 75) then the activity carried on by the assessee in purchase and sale of shares would partake the character of business activity and it cannot be said that the assessee had merely made investments in shares. The learned Departmental Representative also relied upon the decision of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of transaction, the intention with which such activities carried on is a relevant factor. If an owner of an investment realizes it and obtains greater price than the price at which he has originally acquired it , the enhanced value obtained from realization of conversion may be profit from business. If the transaction is in the ordinary line of assessee 's business there would be hardly be any difficulty concluding it to be a trading transaction. But where it is not a fact then it must be properly assessed to determine whether it is in the nature of trade. The surplus realised on the sale of shares could be capital if the assessee has an ordinary investor realizes his holding but it would be revenue if he deals them as a trader. If the assessee is an ordinary investor, the income arising out of sale of shares is a capital gain. On the other hand, if he trades in shares in a regular and systematic manner with an intention to earn profit then it will be income from business. Similarly, if an individual invests in shares for the purpose of earning dividend he is not carrying on business. 25. Whether the transaction in shares carried by an assessee constitutes business activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee never intended to keep these shares as investment; and n) It is only for the purpose of claiming benefit of lower rate of tax, under sec. 111A of the Act, that they had claimed certain shares to be investment, though these transactions were only in the nature of trade." 26. The aforesaid decision of jurisdictional High Court in case of PVS Raju was again considered by the Hon'ble AP High Court in case of Spectra Shares and Scrips Pvt. Ltd. V/s. CIT in ITTA Nos. 512 of 2011 and 177 of 2012. The Hon'ble High Court though agreed with the criterion fixed in the case of PVS Raju (supra) but the Hon'ble High Court held that the parameters laid down would not apply to the case of Spectra Shares and Scrips Pvt. Ltd., (supra) wherein the issue of exercise of jurisdiction u/s 263 was involved to which totally different parameters would apply. The Hon'ble High Court after taking into consideration Board's Circular No.4 of 2007 dated 15-6-2007 and various other decisions held the transaction in shares to be an investment activity due to the reasons set out in para 47 of the judgment which are as follows. "(a) investments are made with own funds and not with borrowed funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the assessee from the inception of the activity the entire portfolio was an investment portfolio in case of PVS Raju different treatments were given to various activities carried on by him. While in case of PVS Raju the Court observed that the profit made by PVS Raju has not enhanced the value of shares but is a profit made carrying on the business in case of the assessee , it is a mere increase in capital and not profit derived in the process of trading. In case of PVS Raju, it was found that the shares were sold even prior to purchase whereas in case of the assessee , no share was sold prior to purchase and majority of shares were held for a long time and all the share were taken delivery and given delivery. It is further contention of the learned AR that the tests laid down by the Hon'ble AP High Court for holding the activity as an investment activity in case of Spectra Shares and Scrips (supra), on the other hand, squarely applies to the facts of the assessee's case as the assessee has invested his own funds and not invested borrowed funds in shares. Closing stock has been consistently valued at cost. Dividend is substantial compared to the investment. Major part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case, in the light of the decisions of Hon'ble jurisdictional High Court in case of PVS Raju (supra) and Spectra Shares and Scrips (supra), we are inclined to remit the matter to the file of the Assessing Officer who shall consider the entire issue of income from sale of shares whether to be treated as capital gain or business income keeping in view the ratio laid down by the Hon'ble Jurisdictional High Court in case of PVS Raju V/s. Additional.CIT (supra) and Spectra Shares and scrips V/s. CIT (supra). The Assessing Officer shall consider all the material and evidences available on record and any further material and evidences which may be produced by the assessee in course of the proceedings. Needless to say the Assessing Officer shall afford a reasonable opportunity of being heard to the assessee in the matter before finalizing the proceedings. Therefore, this appeal is treated as allowed for statistical purposes. ITA Nos. 482/Hyd/10 & 1310/Hyd/2011- Smt. M. Jayasree, asst. years 2006-07 & 2008-9. 30. In view of our decision in Sri M.V. Subba Rao in ITA Nos. 481/Hyd/10 and 1311/Hyd/2011 pertaining to the same assessment years, as the grounds raised in thes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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