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TMI Blog2014 (2) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... only common ground of appeal is that the Ld. CIT(A) erred in upholding the assessment of short term capital gains of Rs 19,98,704/- in the Assessment Year 2006-07 and Rs 2,66,570/- in the Assessment Year 2007-08 as business income. 3. The brief facts of the case are that the Assessing Officer observed that the assessee is dealing in the share business. The assessee admitted that the business of future and segment was started from 14.09.2005 and that the same business is running during later period of year under consideration. This business was of the nature of trading business and it was accepted by the assessee that the shares of the two scripts were purchased in January'2005 and after a small period, those were sold. The Assessing Officer, however, observed that it appears that actual trading of the shares started from June'2005 and that initial purchase were the script Kotak Liquidity Growth Fund and Infrastructure Development Finance Corporation Limited and that action of the assessee to declare the profit on purchase and sale of the above scripts under the head 'short term capital gains' was to avoid tax liability, otherwise the assessee should have declared the nature of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gain arose from sale of mutual funds which cannot be traded in stock exchange, the same cannot be treated as business income of the assessee as it can be concluded that the intention of the assessee was to purchase and hold the same as an investor. 7. On the other hand, the Ld. DR relied on the order of the Assessing Officer. 8. We have heard the rival submissions, perused the orders of lower authorities and the material available on record. In the instant case, the assessee trust has earned Rs 19,98,7047/- on 4 transactions of purchase and sale of unit of mutual funds during the Assessment Year 2006-07 and earned Rs 2,66,570/- in Assessment Year 2007- 08 on 3 transactions of purchase and sale of shares. The assessee claimed both the above income as short term capital gains in the return of income. The Assessing Officer treated the above income as business income on the ground that the period of holding of units and shares was of 1 day or 2 days and that the purchase/sale is frequent. 9. The Ld. AR of the assessee contended before us that the assessee was engaged in the business of dealing in futures and options and was not engaged in the business of dealing in units and sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he has bifurcated the transactions of sale and purchase resulting short term capital gains on the basis of holding period on the criteria of more than 30 days and less than 30 days. It is pertinent to note that there is a criteria provided under section 2(42A) which defines the shorter capital asset as capital asset held by an assessee for not more than 12 months in the case of shares and other securities. Section 2(42B) further defines the short term capital gain means capital gain arising from the transfer of short term capital asset. Thus, statute prescribed criteria for treating the capital asset either as long term capital asset or short term capital asset on the basis of the holding period but no such criteria of treating the short term capital asset and treating the asset has been prescribed under the statute. Even, there is no indication of holding period of 30 days find place either in the statute or in the circular/instructions as well as judicial pronouncements on the issue. Even otherwise, holding period is one of the various criteria and principles to determine the nature of the transaction i.e. trading or investment, no single formula or principle can be the determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or justified. 10.1 Moreover, when the assessee has treated the investment transaction in the books of account, which includes the long term capital gains as well as short term capital gains, then after accepting the long term capital gains, the transaction representing short term capital gains as claimed by the assessee can be neither treated as an investment or trading in nature. There cannot be a sub-division of transaction relating to short term capital gain. Hence, in our considered opinion, in the case in hand, the CIT(A) has committed an error in bifurcating the transactions of purchase and sale of shares on the basis of holding period of 30 days and the income arising from the same claimed by the assessee as short term capital gain has been subdivided as short term capital gains and business income. 11. Now, we will analysis the fact of the present case in the light of the principles laid down by the judicial pronouncements for determining the nature of the transaction of sale and purchase of shares. Intention of the assessee at the time of purchase of shares 12. Undisputedly, the assessee has treated the transaction as investment by recording in the books of account bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een reported as four transactions of purchases, which is otherwise one transaction. Thus, it appears that the numbers of transactions are taken as per the different lots available for execution of the one order and accordingly, it gives unrealistic figure of the number of transactions. Motive of purchase and sale of share 13.3 From the details of the short term capital gains, we find that the total short term capital gains arising from the shares sold within 30 days of purchase is Rs. 15,19,938 and a total amount of short term capital gains from the shares sold after 30 days but before one year is Rs. 37,76,143, which shows that the assessee's intention was to hold the shares for a longer period and to earn income of appreciation of the value of the shares and not earn the profit in the short period change in the price of the shares. Apart from the above, the assessee has been regularly earning dividend income. Profit motive is inherently embedded in the transaction of purchase and sale. The important aspect is the intention to earn profit from appreciation of value of capita asset or by way of transfer of trading asset. 15.1 In the case in hand, the assessee has treated the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss constant and in fact as on 31-3-2006 it actually fell to 131 from the earlier high of 159. It appears to us that basically the number of shares of a particular company purchased by the assessee had increased which substantially contributed to the increase in the value of the investment. The above analysis prima facie shows that the assessee is basically an investor more than a share dealer. The stand of the assessee has been accepted by the revenue authorities in the assessment years 2001-02 and 2004-05 in assessment orders passed under section 143(3) of the Act. The assessment order for the assessment year 2001-02 is at pages 34-35 of the paper book. It is seen therefrom that the Assessing Officer has accepted the short term capital loss and the long term capital gains shown by the assessee on sale of shares. The assessment order for the assessment year 2004-05 is at pages 61 and 62 of the paper book. In this year also the short term capital gains of Rs. 13,94,013 has been accepted by the Assessing Officer. There is also no dispute that the assessee has been declaring the cost of the shares as investment in his balance sheets in all the years. 16. For the assessment year 2005- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding an investment. II the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with 3 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 safe was effected subsequently. [c] The third test, which is frequently applied, is as lo how the assessee dealt with the subject matter of transaction during the lime 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 proceeding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in absence of any satisfactory explanation. [e] The fifth test, normally applied in cases of partnership firms and companies, is whether the Deed of Partnersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee was engaged in the business of trading in shares. Tax Appeal is, therefore, dismissed." 13. In our considered view, the assessee may be a dealer in respect of certain shares and simultaneously can also be investor in respect of other shares. The intention of the assessee at the time of the acquisition of shares and units is of paramount importance to decide whether the units and shares were acquired for dealing in shares resulting in business income or making investment in units and shares, profits on resale of which gives rise to capital gains. The intention of the assessee is to be gathered on consideration of entire facts and circumstances of the case. The several factors like the way in which acquisition of units and shares are reflected in the financial statements, the volume and frequency of transactions, use of borrowed funds, period of holding etc. are to be taken into consideration for evaluating the intention of the assessee. No single factor alone can be conclusive guidance for ascertaining the intention of the assessee. Therefore, in our considered opinion, merely because the period of holding was short, it cannot be concluded that the assessee acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TDS certificate and interest income computed by the assessee was to be added to the income of the assessee and thereby made addition for Rs 2,97,365/- in Assessment Year 2007-08, Rs 1,61,99,267/- in Assessment Year 2008-09 and Rs 39,14,134/- in Assessment Year 2009-10. 19. On appeal, the Ld. CIT(A) deleted the addition by observing that the assessee was following the cash method of accounting and was consistently having the interest income in the year of receipt, and therefore, Ld. CIT(A) was of the considered view that no addition on accrual basis could be made during the years under consideration and therefore, held that addition made on accrual basis is deleted. Simultaneously, he also directed the Assessing officer that in view of the provisions of section 199 as applicable to the Assessment Year under consideration credit for TDS is to be given in the year in which the corresponding income is offered to tax. Accordingly, the Ld. CIT(A) also directed the Assessing Officer that credit for TDS is to be given to the extent of income offered and that credit for balance TDS is to be given as and when the income is offered to tax in the subsequent years. 20. The Ld. DR relied on t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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