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TMI Blog2010 (3) TMI 1150X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer asked the assessee to explain why such incomes should not be treated as business income in view of CBDT Circular No. 4/2007. 2.1 In reply, the assessee submitted before him that he was an investor, his intention at the time of purchase of shares and securities was to hold them for long period and to enjoy the returns in the form of dividend and capital appreciation. He further submitted that the purchase of shares and securities was always shown as investment in books and Balance Sheet, he employed his own funds to acquire the shares, he sold shares of 9 companies and purchased shares of only 6 companies during previous year, he purchased shares only on 12 days and sold shares only on 22 days during the whole previous year, he held the shares for a very long period and he did not claim any tax rebate u/s. 88E of the Income-tax Act. He, therefore, requested the Assessing Officer to treat the income on sale of shares and securities as short term capital gain and long term capital gain as claimed and not as business income as proposed. 3. Although the Assessing Officer observed in para 2 of the assessment order that the submissions of the assessee appeared quite convi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and M/s. Bharat Bijlee. He sold 406 shares of M/s. TCS after 322 days of their purchase. Similarly, the average holding period of the shares of M/s. Bharat Bijlee was 269 days.It was submitted that the assessee derived long-term capital gain on sale of 8 scripts. The average holding periods of the shares of M/s. Dynamedia Tech, M/s.Bharat Bijlee, M/s. Elpro International, M/s. ONGC, M/s. Astrazen IDL, M/s. Mother Sumi Systems, M/s. Vision Ltd. and M/s. Sound Ind. Ltd. were 645, 418,4854, 449, 861, 445, 4122 and 4122 days respectively. It was further submitted that the assessee has not borrowed for the purpose of investment in shares. Further, the Assessing Officer in the order passed u/s. 143(3) for the asst. years 2004-05 and 2005-06 has accepted that the assessee was an investor in shares and accordingly assessed long-term capital gain and short-term capital gain on account of sale of the shares. The decision of the Tribunal in the case of Gopal Purohit was relied upon. The assessee also derived support from CBDT Circular No.4/2007 and various other case laws. It was accordingly submitted that the claim of short-term capital gain and long-term capital gain should be allowed. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of trade. Since in the instant case the assessee has regularly transacted in purchase and sale of shares and since the volume of profit from share trading is more than ₹ 6.5 crores as against the professional income of ₹ 2.39 lakhs, therefore, the motive is to earn profit by buying and selling of shares. He also relied on various decisions which are relied on by the Assessing Officer and appearing in the body of the assessment order. 6.2 The Ld. Counsel for the assessee, on the other hand, while supporting the order of the CIT(A), submitted that the assessee has been holding most of the shares as an investor since the financial year 1992-93. The valuation of shares is always done at cost and no borrowed funds were utilized for purchase of shares. He submitted that all the investments are strictly on delivery basis and therefore there was no intention to trade in them. He submitted that the intention of the assessee has to be seen from the date of purchase. Right from the beginning, the assessee has treated the shares as investment and not as stock in trade. Referring to pages 66 and 67 of the paper book, he submitted that there were only 9 scripts in which share tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Tribunal in the case of Gopal Purohit, which has been upheld by the jurisdictional High Court reported in 228 ITR 582, he submitted that the CIT(A) has correctly applied the law and considered the income as short-term capital gain and longterm capital gain. He accordingly submitted that the grounds raised by the Revenue should be dismissed. 7. We have considered the rival submissions made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute in the impugned appeal is as to whether the income from sale of shares has to be treated as short-term capital gain and longterm capital as declared by the assessee and upheld by the CIT(A) or to be treated as business income as held by the Assessing Officer. 7.1 We find the legal principle as laid down in various decisions and as relied on by the Assessing Officer as well as the assessee can be summarized as under : (1) It is possible for an assessee to be both an investor as well as dealer in shares. (2) Whether a transaction of sale and purchase of shares is a tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Tech. 645 M/s. Bharat Bijlee 418 M/s. Elpro International 4854 M/s. ONGC 449 M/s. Astrazen IDL 861 M/s. Mother Sumi Systems 445 M/s. Vision Ltd. 4122 M/s. Sound Ind. Ltd. 4122 From the above, we find although the sale proceeds of the shares are very high, the volume of transaction is not very high. Even the Assessing Officer in his assessment order at para 2 of the order has mentioned that "It is no doubt that the submissions made appear quite convincing". Similarly, the Assessing Officer in para 5 of his order has observed that "the number of scrips and the total number of trades carried out by the assessee is not very large". Further, there is also no dispute to the fact that the assessee has received dividend income of ₹ 21,47,286/-. 7.4 We find the assessee was consistently showing the shares as investment and valued them at cost. The department, in the past, in orders passed u/s.143(3) for the asst. years 2004-05 and 2005-06 has accepted the short-term and long-term capital gain declared by the assessee thereby treating the assessee as an investor. The submission of the Ld. Counsel for the assessee that all the investments are strictly delivery base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of law and fact. 7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the assessing officers. 8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :- (i) Where a company purchases and sells shares, it must be shown that they were held as 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 transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; (iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; 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 (by sale of shares) will yield capi ..... 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