9911796707
TMI Blog2011 (1) TMI 1377X X X X Extracts X X X X X X X X Extracts X X X X ..... hort term capital gain arising from sale of shares amounting to Rs. 1,06,25,612/- was offered to tax at lower rate of 10% u/s 111-A whereas long term capital gain arising from sale of shares amounting to Rs. 1,23,52,566/- was claimed to be exempt. The dividend income of Rs. 2,00,819/- was also claimed to be exempt. In the audit report filed along with the return of income, the nature of business of the assessee was shown as of trading in shares, mutual funds, options and derivative products and commodity trading. It was noted by the A.O. that the assessee firm was carrying on the share transactions in the year under consideration as well as in the immediately preceding two years and substantial profit arising from the said transactions was classified and declared as speculation profit, business profit, short term capital gain and long term capital gain. He also noted that the assessee was very actively involved in the futures and options transactions right from the introduction of such transactions to the Indian markets. He also noted that the activities of speculation trading in futures and options and purchase and sale of delivery based shares were being carried on by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts are credited against which the various establishment expenses are claimed. This signifies an organized and systematic activity. g) There is a clear profit motive in the transactions resulting in substantial incomes generated as can be seen from the returns filed. h) The dividend income credited to the P & L A/c. is only from few of the companies. It is seen that the assessee had exited from several counters even before the dividend is disclosed. From the details filed of the SHORT TERM CAPITAL GAIN and the dividend details, it is seen that no dividend is received from Alstom Ltd., Bajaj Hindustan, Flextronics, Grieves Cotton, Lupin Chemicals, Mphasis BFL Ltd., Rajratan Gas, Ratnamani Metals, Sesa Industries Ltd., Shaw Wallace, Shiv Vani Universal Ltd. and Yes Bank Ltd. As against this, the assessee disclosed dividend only from six scrips. Therefore, it is evident that the assessee is more interested in profit maximization than retaining the shares over a period of time for deriving the benefits of investment. It is noteworthy that the assessee has not received a single bonus issue or a rights issue on any of the shares, reflecting his attitude of a short time holding and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business income whereas the profits from investment activity have been continued to be offered as STCG and LTCG. 3. There are no borrowings by the assessee for its investment activity. 4. All the transactions are through the broker and proper delivery. The transactions are not merely by a book entry. 5. The assessee has surplus own funds which it deploys in securities / shares to have appreciation and dividend over a period of time. The partners apply their mind for proper investment in securities. 6. The investment in shares is made for capital appreciation and also for earning dividend income. 7. The average holding period in most of the cases is more than 2 months which clearly falls under the definition of short term capital assets. Whenever the holding period exceeds 12 months, its investments are eligible to be treated as LTCG. 8. The assessee also derives capital gains from investments in units of mutual funds. 9. As per section 111A, whenever STT is paid then the amount of income tax calculated on such STCG is at the rate of 10%. 10. The shares are all along and continuously reflected in its accounts as "investments" in the balance-sheet. The share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they should be assessed in the same way. In fact, the case of the Revenue is that the entire activity itself constitutes business. Therefore, the way he has been offering incomes, has no relevance. (3) The assessee stated that there are no borrowings for the investment activity. This is a matter of facts. Though business activity may generally involve raising of loans etc, it is not hard and fast nor is it compulsory that every business should invariably have borrowed funds. In fact, in the terminology of corporate world, "a zero-debt company" is a term existing from ages. Several companies across the world operate on a "zero-debt philosophy" and they are well appreciated. Therefore, at best, this submission of the assessee speaks of its sources of funding the transactions but it cannot in any way disqualify the transactions to be treated as business in nature. (4) The next submission is that all the transactions are through the broker and by proper delivery. The transactions are stated to be not merely by book entries. This submission also does not help the case of the assessee. As per the SEBI guidelines, every person purchasing or selling shares has to compulsorily take d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the same scheme whose units it sold few days before. That is, it is not an acquisition at one go and disposing of the same but repeated purchases and sales in the same units. The details are provided in the chart form: Name of the Mutual Fund and scheme : Templeton India STIP (Quarterly) Date of purchase Date of Sale 28.03.05 24.08.05 23.08.05 24.08.05 23.08.05 16.11.05 03.10.05 16.11.05 11.10.05 16.11.05 26.10.05 16.11.05 26.10.06 05.12.05 From the above chart, it may be seen that the assessee acquired certain units on 28.03.05 and 23.08.05 which were sold on 24.08.05. Thereafter, the assessee again purchased the same units from 03.10.05 onwards till 26.10.05 which were all sold in the month of November. Therefore, the assessee is repeatedly entering the same units which it has already disposed off. This again speaks of profit maximization and not an investment temper. (9) The next submission is that as per the provision of section 111A, whenever STT is paid, then the amount of income tax calculated on the STCG is at the rate of 10%. The assessee's submission is totally misplaced. The provision of section 111A(1) are reproduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat whenever tax is paid at 10% then it should be invariable treated as capital gains. Hence the assessee's submission is not acceptable. (10) The next point of the assessee is that the shares are all along reflected under investments in the balance-sheet and the shares in trading are regularly shown as stock-in-trade. The assessee's mention of the shares as investment in its balance-sheet does not in any way deter the way the asset has to be treated. Since the assessee is of the opinion that the transactions yield capital receipts, it classified the assets as investments. However, when the transactions are proposed to be assessed as business incomes (revenue receipts), then the assets will be classified as business assets. (11) The next submission is that one of the investments are in sister or related concerns and all investments are in independent companies. This submission is a matter of records. It does not help the case of the assessee. On the contrary, it strengthens the case of the Revenue. In various judgments, it has been held that whenever the shares are purchased of the sister companies with dominant purpose for retaining the control and not to earn income, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of an assessee having incomes from both the heads i.e. business as well as capital gains. This clarification is not being challenged; on the contrary, it is being fully followed. However, to give effect to this clarification, it must first be established that the incomes are definitely classifiable under two different heads. In the instant case, the entire transactions are being put to test for arriving at the conclusion as to whether they can be treated as business or not" therefore, the CBDT circular cited by the assessee is being fully complied with and not controverted. 5. The A.O. also referred to the CBDT Instruction No. 1827 dtd. 31.8.89 wherein various factors were given for deciding the issue as to whether the shares are held by the assessee as "stock-in-trade or as "investment". He, therefore, considered the facts of the assessee's case on the touchtone of these relevant factors and arrived at the following conclusions:- (i) Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or an occasional independent activity. The purchase & sale of shares for the year under consideration is allied to his business of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipts from sale of shares is at Rs. 2.29 crores, the receipts from F&O transactions in shares is at Rs. 43.5 lakhs and the receipts from F&O transaction sin commodity items is at Rs. 13.18 lakhs. Therefore, it is evident that the receipts and income from purchase and sale of shares is substantial as compared to the F & O transactions. However, since the substantial part of F & O transaction is again in shares, the assessee's major activity can be held to the share transactions. Therefore, it squarely qualifies to be business in nature. (viii) Whether the securities purchased and sold are listed or unlisted. All the trading is in listed shares. Purchase of unlisted shares (generally done with investment motive) would have given a benefit of doubt to the assessee. (ix) Whether investment is in sister/related companies. Assessee being individual, investment is in public listed companies. (x) Whether money has been paid or received or whether these are only book entries. The assessee had paid and received the amounts. However, the payments and receipts are not bill-wise rather they are settled periodically. The assessee vide his submission mentioned as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), an appeal was filed by the assessee before the ld. CIT(A) and the following facts were highlighted on its behalf at the time of hearing before the ld. CIT(A) stating the same to be relevant to decide the issue in dispute:- (i) The Appellant is a partnership firm in existence since 01.01.1976 and it was reconstituted vide deed of partnership dated 1st December, 2003. (ii) The object of the partnership firm as per clause 4 of Deed of partnership is as under:- Clause 4 : NATURE OF BUSINESS That the partnership firm shall continue to carry on the business of dealing in rayon, yarn, nylon-yarn, cotton-yarn, synthetic fibre, cement, paper, iron and steel, paper chemicals, investment in shares and securities (emphasis supplied) and to act as commission agent or agents or to do any other business or businesses as the parties hereto may from time to time. (iii) From the above object clause it is absolutely clear that "Investment in shares and securities" is one of the object of the Appellant. (iv) The appellant had been carrying Investment and share trading activity from its incorporation. It has also commenced business in derivative segment of shares and commodities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a book entry. (xi) In the short term capital gain list, the volume of transactions are few. But because of splitting the purchases corresponding to sale seems to be more because the software picks up each trade wise date instead of bill wise. (xii) (a) The appellant has its own surplus fund which it deploys in securities/ shares to have appreciation and dividend over a period of time. The intention at the time of acquisition of shares is always to make investments. (b) The decision to acquire a particular stock for investment is taken by appellant based on fundamental analysis of the company / sector. (xiii) The average holding period in most of the cases is more than two months. (xiv) The appellant also derives capital gains from investments in units of mutual funds. (xv) The shares are all along and continuously reflected in its accounts as "Investments" in the balance sheet. The shares in trading are regularly shown as "Stock in trade." (xvi) The appellant firm also satisfies the provisions of Section 111A inserted by Finance (No.2) Act, 2004 and has paid STT on all the transactions that took place on the Stock Exchanges. (xvii) In the past, all the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear in tax audit report and break up of income of earlier year. Appellant's submissions It does not have any effect on nature of income since it was specified on computation of income. In the table of year-wise income given by the A.O., the Assessing Officer has for reasons best known to him totally ignored to state that business income mentioned in the last column also includes income from purchase and sales of shares not acquired with the intention of investment in addition to trading in derivatives in shares. However, the incomes in the table reiterates that the assessee continuously have the LTCG and STCG resulting from its investment activity. Therefore, it is submitted that it is a matter of fact that the Appellant is engaged in trading in shares and securities, F & O transactions in shares, derivatives in commodities. Further, acquisition of shares with the intention of investment is treated as investment. Also, none of the derivative position in shares is taken to hedge acquisition of shares as investment. Hence, it is submitted that the appellant's active engagement in F & O transactions, derivatives in commodities etc. doesn't in any way prohibit or bar it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l requirement if account are to be audited than automatically full profit and loss account shall be audited. Because of this, investment activities does not become business activity. Further in todays context when everything is very fast changing and vibrant, even investment activities need to be carried in an organized and systematic manner. The appellant's motive in business activities like share trading, derivatives in shares and commodities was definitely profit. In case of acquisition of shares with the intention of investment, the motive was capital appreciation / dividend. Further, substantial income generation is not a sin. Neither it is in the hands or control of the appellant. Reverse could also happen. The appellant has received dividend in case of 8 companies. Further AO's remark that the appellant has not received a single bonus share or right issue is totally wrong and incorrect. The appellant has received following bonus shares during the year :- Name of company Ratio No. of bonus shares allotted Mphasis BFL Ltd 1:1 15200 Further it is not in the hands of the appellant to receive bonus or right shares. It is for the management of the company to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the provisions of section 14 in computation. I am of the considered opinion that the Assessing Officer has taken an extreme view. The Assessing Officer has treated the appellant as a trader and has treated all the transactions of the appellant inclusive of long term also as Business Income. In my considered opinion this view of Assessing Officer does not seems to be a correct view. The Assessing Officer should have given due consideration to the facts of the year under consideration as well as it is necessary to consider the facts of the past years to ascertain the true nature of activities of appellant. From the analysis of the period-wise break up of capital gains, it is clear that capital gains resulting from transactions on the basis of period of holding of less than 30 days is mere Rs. 15.72 lacs. Out of this there are 2 transactions of less than 20 days resulting in gain of Rs. 4.87 Lacs. By the appellant's own admission also he has engaged himself in the business of trading in shares and securities. Thus, though the claim of the appellant that he is an investor is absolutely correct, it cannot be denied that at times he also tires his hands at trading in shares. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee on this issue by his appellate order dated 26.3.09 and aggrieved by the same, the Revenue and assessee both are in appeal before the Tribunal. 11. The grounds raised by the Revenue and assessee in their respective appeals read as under:- Grounds raised by the assessee: "1. The learned Commissioner of income Tax Act (Appeals) has grossly erred in holding that the appellant is both an Investor and Partially Trader in shares. 2. The learned Commissioner of Income Tax (Appeal) has further grossly erred in confirming the treatment of Short Term Capital Gains of Rs. 15,72,331/- being shares held for less than 30 days "as transaction of business nature" and the reasons assigned by him are wrong and are contrary to the facts and provisions of Income Tax Act 1961 and Rules made there under. 3. The Learned Commissioner of Income Tax (Appeal) having treated the Short Term Capital Gain as business partially, has further erred in not directing the Assessing Officer to:- (i) Allow deduction u/s 80G of Rs. . 88,725/- as against Rs. 44,362/- allowed in assessment order. (ii) Allow rebate for STT paid on the gain of Rs. 15,72,331/-. Instead treating the Ground No. 4 of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not correct and the A.O's order on this issue which has been passed after taking into consideration all the relevant facts and circumstances of the assessee's case deserves to be upheld. In support of this contention, the ld. D.R. relied on the following decisions of the Tribunal:- 1. ITA 5410/Mum/08 2. ITA 4667/Mum/08 3. ITA 785/Mum/09 4. 2586/Mum/09 13. The learned counsel for the assessee, on the other hand, submitted that the relevant facts of the case are sufficient to show that the share transactions were entered into by the assessee mainly as 'investor' and not as 'trader'. He highlighted the fact that investment in shares was made by the assessee out of its own funds and there were no funds borrowed by it for purchase of shares. He also submitted that all the transactions in shares were done by the assessee on delivery basis executed through a registered broker and it was not a case where only entries were made. He submitted that most of the shares were held by the assessee for fairly long duration of more than one month and there were some shares which were held for even more than twelve months before they were finally sold giving rise to long term capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration, we find it difficult to accept the same in view of the decision of Hon'ble Supreme Court in the case of New Jehangir Vakil Mills Ltd. vs. CIT 49 ITR 137. The Hon'ble Apex Court has held in the said judgment that the circumstances that in the earlier assessment year the assessee was treated as an investor would not stop the assessing authority from considering for the purpose of computation of profits for the succeeding year as to when the trading activities of the assessee began. As regards the merits of the case, the learned counsel for the assessee has, inter alia, relied on the decision of co-ordinate Bench of this Tribunal in the case of Gopal Purohit vs. JCIT (supra) stating that the said decision rendered by the Tribunal in favour of the assessee on a similar issue has been upheld by the Hon'ble Bombay High Court. A perusal of the order of the Tribunal passed in the said case shows that a similar issue involved in the said case was decided in favour of the assessee by the Tribunal on merits relying mainly on the decision of Lucknow Bench of the Tribunal in the case of Sarnath Infrastructure P. Ltd. vs. ACIT 120 TTJ 216 observing that the facts involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the assessee, the total purchases and sale of shares during the year under consideration were to the tune of Rs. 7.91 crores and 10.21 crores as against the value of balance shares at the end of the year amounting to Rs. 47.19 lakhs giving a very high turnover to stock ratio. The relevant facts involved in the present case thus are materially different from the facts involved in the case of Sarnath Infrastructure Ltd. (supra) relied upon by the Tribunal in the case of Gopal Purohit (supra) and the decision of the Tribunal in the case of Gopal Purohit, in our opinion, cannot support the assessee's case being distinguishable on facts. 16. As rightly contended by the learned D.R., the issue as to whether the assessee has carried out the transactions in shares as 'trader' or 'investor' mainly depends on the intention of the assessee to purchase and hold the shares and such intention has to be gathered from the facts and circumstances involved in its case. There are several aspects which need to be taken into consideration collectively and the issue cannot be decided merely on the basis of some factual aspects of the case which may be in favour of the assessee as sought to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to hold the activity of purchase and sale of shares as business of the assessee. As rightly observed by the A.O. in this regard, there is a concept of 'zero-debt company' which is well known in the corporate world. The assessee was also found to have entered repeatedly in the same scrips which it had already disposed of which again goes to show that the motive of the assessee was to maximize the profit from the share transactions and not to remain invested for longer period which generally happens in the case of an investor. The involvement of the assessee in share transactions was not an occasional one but it was the only activity of the assessee which was carried on regularly in a systematic and organized manner. The short period of holding of shares clearly revealed that there was no intention of the assessee to hold the same for long term for earning dividend income. As already noted, the ratio of turnover to stock in the case of share transaction was very high. Having regard to all these facts of the case which have been clearly brought out on record by the A.O., we are of the view that if the principles laid down by the Tribunal in the case of Sarnath Infrastructure Ltd. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
