9911796707
TMI Blog2014 (2) TMI 1274X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, we do not find any infirmity in the order of CIT(A), which is being upheld. X X X X Extracts X X X X X X X X Extracts X X X X ..... us parameters of the CBDT Circular No.4 of 2007, viz. number of scripts dealt with, volume of transactions, frequency of transactions, their systematic and periodic nature, holding period and quantum of purchases and sales. source of acquisition of shares etc., the AO has held that the entire short-term capital gains are, in fact, in the nature of his income from business. In this regard he has, duly rebutted the submissions of the assessee making elaborate discussion, as per paragraphs 3.2 to 3.6 of the assessment order. The contentions of the assessee in this regard submitted before the AO are mainly on the following lines: i) out of total short-term capital gains of approximately ₹ 1.64 crores approximately ₹ 86.80 lakhs pertain to investment made is immediately preceding assessment year. The shares are shown as his investment in balance sheet prepared as on 31.03.2005, and the assessee's status as investor was accepted for the Assessment year 2005-06, ii) only approximately ₹ 8.52 lakhs of short-term capital gains is in relation to holding period of less than 30 days and the rest of the short-term capital gains are far more than 30 days to one year pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions involving 19 scripts in which holding period is less than 30 days. Number of shares/units of mutual funds purchase and sold are substantially large. The purchase cost incurred is in the vicinity of approximately ₹ 92.36 lakhs and sale proceeds obtained are approximately ₹ 100.88 lakhs. He has further observed that in case of mutual funds units of Phillips Carbon Black Ltd, there are 8 transactions in one month involving approximately 11,313 units the purchase cost of approximately ₹ 9.69. It is further observed that during the year there are about 107 scripts involving 533 transactions which clearly demonstrate the extensive transactions and thereby negating the claim of so-called short term capital gains. It was also observed that for the entire year the number of shares/units dealt in are almost to the tune of 813519, the purchase cost of approx. ₹ 8.18 crores and sale proceeds of approx. ₹ 9.82 crores. The AO has also observed that frequency of transactions are as high as 34 transactions for Dharani Sugars and chemicals Ltd, 25 transactions for Dredging Corporation, 19 transactions for B.O.C India, 13 transactions for Cadila Health care ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basic motive and intent is one of business/adventure for maximization of profit. In view of the above observation, the Assessing Officer held that the assessee has earned business income out of sale of shares and assessee's claim of short term capital gain was declined. 6. Before the CIT(A), it was argued that the assessee was consistently engaged in the activity of share transaction for last number of years and he has consistently disclosed short term capital gain or long term capital gain in respect of his share transaction in which proper delivery was taken, depending upon the period of holding. It was further submitted that the assessee was consistently having two portfolios of the share transaction one for his investment purposes, which is called "Investment Portfolio" and another for his trading purposes, which is called "Trading Portfolio". As per ld. Authorized Representative, the assessee was maintaining separate ledger account and other details in respect of his transactions shown as investment purposes and trading purposes. It was further highlighted that the assessee has entered these transactions in the respective ledger account, right from inception of the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready accepted by the AO, in scrutiny assessment u/s 143 (3) of the Act. for the assessment year 2005-06. A copy of the relevant assessment order produced by the assessee is placed on record. According to the AR, merely based on his volume of transactions', its frequency, holding period and repetitive tractions in certain scripts will not make the assessee a trader of these shares. In this regard it was further submitted that the number of transactions are not high as observed by the AO because, the number of transactions of a particular script on given date but carried on different lots are considered as separate transactions by the A.O. instead of treating the same as a single transaction. It was forcefully submitted that due to market constraints it is not feasible to execute the bigger lots of sale and purchase orders in a single lot on a given date, therefore, such transaction are always undertaken through different lots as per the availability of the stock on a given date of sale or purchase. It was also submitted that separate details and accounts are maintained in case of shares purchased and sold on which the' assessee has shown STCG or LTCG depending upon the peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir sale. It is respectfully submitted that the character of shares would not undergo change depending upon whether the same are sold within 12 months or beyond. If shares are held on investment account, then merely because the same were sold within 12 months cannot by itself transform them into stock-in-trade. Such an inference would clearly run contrary to the very concept of the short term capital gain, which is enshrined in the Act. 3.3 While rejecting the assessee's contention qua the shares held as on 31/03/2005, the learned, A0 has argued that principles of 'estoppel' or "res judicata" do not apply to tax proceedings. There can be no quarrel with this basic proposition of law, but at the same time it is well settled that the Rule of consistency cannot he ignored in tax proceedings. This rule is an exception to the above rule, and has been well recognized in various judicial rulings cited below: Radhasoami Satsang vs. CIT /1991/ 193 ITR 321 (SC) Sardar Kehar Singh CIT /1991/ 195 ITR 769 (Raj.) CIT vs. Neo Poly Pack (P) Ltd. [2000/245 ITR 492 (Delhi) CIT vs. Belpahar Refractrories Ltd., [1981/128/ITR 610(Ori) M.A. Namazie Endowment vs. CIT /198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al year 2005-06, the assessee submits that all those transactions were made in the capacity of investor and not as a trader. Therefore, the resultant profit on sale of those shares ought to be assessed as short term capital gain and not as business income. 3.8 The learned A.O. has given various reasons for holding these transactions as trading transactions, and the assessee submits that if all the facts and circumstances of the case are looked in proper perspective, them it would be clear that there was no trading activity. The question whether a particular activity is in the nature of investment or trading would depend upon a number of factors, and there is no precise universal formula to determine the same. Therefore, it is a mixed question of law and fact to be decided on the factual matrix of each case. Various parameters like volume, frequency, regularity, motive/intention, period of holding, accounting treatment, surrounding circumstances, etc. are considered in this regard though no one factor is decisive. The facts of the case are necessarily to be considered in the background of these parameters. However, in the present day scenario if must also be appreciated that havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered u/s. 111A of the Act and accordingly the assessee has taken the delivery after paying necessary security transaction tax. According to the AR, although loan is taken but no interest is paid on borrowed funds utilized for his share trading activity. It was explained that most of the loan is taken from his own associate concerns i.e. M/s Indoplast, a firm in which assessee is partner and Mohan K. Jain, an HUF in which assessee is the Karta. Therefore, according to the AR, assessee's case cannot be compared to a case where a person borrows loan on interest and invests it in shares. It is also observed that the volume of transaction for the relevant assessment year is substantially higher, with frequent, repetitive and consistent transactions undertaken on various scripts purchased and sold, on which STCG is shown by the assessee. 2,3.2 From these specific facts brought on record as discussed above, I find that the case of the assessee is more or less identical to the facts reported in the case of Shri. Gopal Purohit (supra) relied on by the AR, except that in the case of the assessee for the relevant assessment year, he has entered into share transactions in certain scripts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistently keeps on purchasing and selling the same share for realizing profits more than four times in a year in an organized manner, using his borrowed funds. In the case of the assessee as per Annexure-A enclosed to this order, he has dealt in four such shares and in both these shares the repetitive transactions are carried out for more than 4 times during the relevant assessment year. This fact proves his intention of earning profit beyond doubt as held by the Hon'ble Apex Court in the case of Holock and Larsen (supra), even if he has taken delivery in those shares, and therefore, to my considered opinion the assessee is a trader in all those shares in which he has made repetitive purchase and sale for more than four times during the relevant assessment year i.e. precisely more than one transaction in a quarter of the relevant assessment year. It is also noticed that in certain instances the assessee has sold these shares incurring loss, only to minimize his further loss, when he visualized the market is going down and again purchased the same script later on, when he expected that the market is improving or going up. This unique feature or the factual aspect noticed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infrastructure Pvt. Ltd. Vs. ACIT (2008) 16 DTR 97(Lucknow), and held that as per the facts of the case, the assessee's claim of STCG and LTCG on share transaction, where the delivery has been taken or given and the security transaction tax has been paid is to be accepted. The Hon'ble ITAT has held that considering the nature of activities, modus operandi of the assessee, past history, manner of keeping records and presentation of shares as investment at the year end is same in all the earlier years as shown in the relevant assessment year, therefore, apparently, there appears no reason as to why the claim of the assessee is rejected by the departmental authorities. The ITAT has further observed that the AO has taken a different view in the relevant assessment year holding that the principle of res-judicata is not applicable to the income-tax proceedings. According to the ITAT, there cannot be any dispute on this aspect, but at the same time, there is also another judicial thought, that there should be uniformity in treatment and consistency under the same facts and circumstances and accordingly since the same facts and circumstances are found to be identical In the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery), which puts the assessee's case on a more strong footing. Hence, in our view, the ratio of this decision is squarely applies to the facts of the present case. Accordingly, we hold that the delivery based transaction should be treated as of the nature of investment transaction and profit therefrom should be treated as short term capital gain or long term capital gain depending upon the period of holding. 8.4. The Revenue has also held that presentation in the books of account was not conclusive which may be true to some extent, but it is the most crucial source of gathering intention of the assessee as regard to the nature of transaction and in law, it is also so i.e. such presentation reflects, prima facie, a view of the assessee on a particular subject and this principle is effectively applicable in a situation like this as compared to as situation where nature of expenditure or income is different in the books of account and in the return of income filed by the assessee wherein the specific provisions of I.T. Act have to be considered over such presentation and if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above reasons, hence, we refrain ourselves from deliberating on those contentions. 9. To conclude, we hold that, in the facts and circumstances of the present case, the assessee's claim of short term capital and long term capital gain on share transactions where the delivery has been taken or given and securities transactions tax has been paid is liable to be accepted. Accordingly we reverse the orders of Revenue authorities. 2.3.4.Similarly, in the case of Addl. CIT vs. Shri. Sunder Iyer in ITA No. 295(Mum.) of 2001, the Hon'ble Jurisdictional ITAT has held under similar facts and circumstances as under:- "The assessee might have good knowledge of the share market as a broker but, in our opinion, this does not lead to the conclusion that the assessee would only be purchasing shares as stock-in-trade for the purpose of carrying on business. There is no law which prevents the share broker from making investments in shares. We hold that no material has been brought on record by the Assessing Officer to substantiate his finding that the assessee had been trading in shares in his individual capacity. The Assessing Officer has also failed to specifically point out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares was taken as in the case of a trading transaction. If that be so, the profit there from would be of the nature of business profit and if not so, the profit there from would not be treated as earned by the trader. Therefore, according to the Hon'ble Supreme Court, the basic intention of the assessee at the time of purchase of the share is the guiding factor for deciding whether the transaction undertaken is in the nature of a trading transaction or an investment transaction. 2.3.8 It is further noted that the scheme of taxation of capital gains related to shares has undergone substantial changes by Finance Act 2004. From the Assessment year 2005-06 (w.e.f. 01.10.2004), security transaction tax (STT) is imposed on sale and purchase of shares and other derivative transactions but at the same time, long term capital gains on sale of shares is exempted from tax u/s. 10(38) of the Income-tax Act, 1961, and short term capital gain on sale of shares is subjected to a concessional rate of tax i.e.@10%. The payment of security transaction tax is made mandatory irrespective of the profit of the assessee or loss suffered by the assessee. To appreciate the new concept of STT an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains' was not of much relevance because there was no concessional taxation in case of short term capital gains. The Hon'bleJurisdictional ITAT in the case of Sh.Gopal Purohit (supra), has further observed that as per the identical facts reported in the said case it is apparent that the AO has taken a different stand merely because there was a change in the scheme of taxation relating to STCG and LTCG made effective through the finance Act, 2004, the legislature has imposed security transaction tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the legislature exempted LTCG under section 10(38) of the Act from the levy of taxation and on STCG, a concessional rate of tax at the rate of 10% was introduced subject to the condition that the transactions resulting into these type of gain must have suffered the burden of securities transactions tax. This according to the Hon'ble ITAT has prompted the AO to take a different view on the same set of facts and types of transactions entered into by the assessee in the relevant assessment year and as found in the its earlier assessment years Therefore on account of these facts, the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is nothing in an investor frequently churning his portfolio to protect his investment and realize appreciation. The Hon'bleMumbai Bench of I.T.A.T. in the case of Gopal Purohit Vs . .J.C.I.T (Supra) as discussed above has held that the delivery based transactions should be treated as of the nature of investment and profit there from should be treated as short-term capital gain or long-term capital gains depending upon the period of holding. The deployment of infrastructure or frequent churning of investment cannot turn gains from investment into business income. In the assessee's case, as per the past history, it is evident that the assessee had been engaged in share trading as well as share investment. The profits from trading operation were assessed as business income and the gains from investment were brought to tax as capital gains. 2.3.11. Therefore, in view of the aforesaid discussion, the following points or facts emerge in the case of the assessee: (i) the assessee has maintained two portfolios of share transactions i.e delivery based share transactions and non-delivery based share transactions (F&O and intra-day share transactions), and has shown profit or loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Long term capital gain shown by the assessee is accepted and assessed as such. 2.3.12 With this background and further considering to the facts of the case and the position of law as discussed above, I am of the considered opinion that to a large extent the facts available in the case of the assessee, are identical to the facts reported in the case of Sh. Gopal Purohit (supra) decided by the Hon'ble jurisdictional ITAT. However, due to the unique or distinguishable facts particularly on account or his repetitive transactions of sale and purchase of the same shares as discussed above, which are not in dispute, I find that the rule of consistency as argued by the AR based on the various citations relied on by the AR as mentioned above will not apply in the instant case in hand. The repeated purchase and sale of shares of the same company for more than four times during the relevant year as enclosed as Annexure-A to this order, to my considered opinion proves that the rule of consistency will not apply for the relevant assessment year. Due to large volume and frequency of share transactions undertaken in this year as discussed above resulting into these repetitive share transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is delivery based share transactions, under the head STCG/L TCG and not under the head business income, is partly allowed, as discussed above. Or in other words, the profit/loss incurred by the assessee in respect to his various share transactions undertaken for more than four times during the year as worked out as per Annexure-A, as enclosed to this order is held as his business income. The addition made to the extent of gains or profit realized on account of his repetitive share transactions amounting to ₹ 18,41,027/- is confirmed, and the balance addition made is directed to be deleted. The AO is accordingly, directed to rework out the STCG/business income of the assessee, as discussed above. 2.3.14 During the course of appeal, the AR, as discussed above has raised an alternative ground submitting that in case his main ground of appeal is not fully considered, the assessee may be given the benefit of re-casting of his trading account pertaining to his share transactions on which STCG is disclosed; whereby, he may be allowed to value his closing stock of shares held at the end of the year on the basis of "cost or market value whichever is lower", he may also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness income, and 2.3.15 Therefore, on account of the aforesaid discussion, the action of the AO treating the STCG of the assessee amounting to ₹ 18,41,027/- as his business income is confirmed, and the balance capital gains assessed as business income is directed to be assessed as his STCG instead of business income, for the relevant assessment year. The addition made to this extent on account of business income as against its claim of STCG, is directed to be deleted. At the same time, allowing the alternative ground and the submissions of the assessee, the A.O. is further directed re-workout the business in income and the STCG as discussed in paras 2.3.13 and 2.3.14 above of this order. This ground of appeal, as discussed above is therefore, partly allowed. 8. Against the above order of CIT(A), both the assessee and Revenue are in appeal before us. 9. It was argued by the ld. Authorized Representative that the assessee was consistently disclosing short term capital gains or long term capital gains in respect of his delivery based share transactions, depending upon the period of holding. Similarly, the assessee has disclosed business income in respect of shares acquired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and DR during the course of hearing before us in the context of factual matrix of the case. The question as to whether the assessee has earned capital gain or business profits on the shares sold by him depend on the facts and circumstances of each case. Such decision is to be arrived at by taking into account the intention of the assessee while purchasing the shares, as to whether the same was acquired for holding as investment or for doing business therein. The treatment given by the assessee in its books of account is also one of the decisive factors to find out whether the shares were held as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be treated as capital gains. On the other hand, if the shares are purchased with the intention to earn profit thereon and the same is treated as stock in trade in the books of account, the profit arising out of sale of such shares are liable to be treated as business income. Volume and frequency of transaction is also one of the guiding factors to find out whether the assessee is enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. For this proposition, the decision of Hon'ble Supreme Court in the case of Gopal Purohit, 228 CTR 582, is very much relevant and important. From the record, we found that assessee was investing in shares as well as trading in shares. He has maintained two portfolios of share transactions i.e delivery based share transactions and non-delivery based share transactions. The nondelivery based share transactions were in respect of F&O and intra-day share transactions, profit of which has been shown under the head income from business. In respect of delivery based share transaction, profit has been shown as STCG or LTCG, depending upon the period of holding. However, profit or loss earned on non delivery based transactions are shown as his business income. The assessee has maintained separate ledger accounts. Transactions were recorded separately at the time of purchase of shares. In respect of shares held as investment assessee had valued the same at the year end at cost and in respect of shares held in is trading portfolio, he has valued the same at cost or market price, whichever is lower. In the assessment year under consideration the assessee had consistently followed the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as found in its earlier assessment year. The CIT(A) also elaborately dealt with the consistency in the treatment of profit arose on similar transaction of sale and purchase of shares. The CIT(A) also considered volume, frequency and continuity of transactions, average holding period in respect of each and every shares entered into by the assessee during the year under consideration. The CIT(A) found that no interest was paid on the amount borrowed from associates. The CIT(A) had also considered different ratios viz. capital gain ratio, quantity ratio, number of transaction ratio, purchase cost ratio, so as to establish that gains on sale of shares is to be assessed as capital gains or business profits. So far as frequency of purchases and sale of shares is concerned, the same is due to the electronic system of stock exchange. A single order placed for purchases may be completed by way of small equities of shares available for sale to meet out the demand of the purchaser. Therefore, a single order is not necessary to be completed by a single transaction of entire quantity of shares. Likewise, in the case of sales, the same may be divided as per the requirement of the purchaser at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gains or short term capital gains depending on the period of holding of the said securities; Short-term capital gains arising from transfer of securities were taxed at the applicable rates (normal rate) and Long-term capital gains were taxed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the taxpayer had an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the long-term capital gains and short-term capital gains were taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities, however, the gains were taxed as any other normal business income. Thus tax liability on the income from purchase & sale of shares as regards to the STCG & business income was at par. However, the issue of treatment of income from share transaction as capital gain or business income has in-fact arisen after the amendment brought with Finance Act-2004 by insertion of provisions of section 111A and 10(38) as regards to levy of Transaction tax and exemption/concession on capital gain arising from securities entered in a recognized stock exchange. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter recorded a finding to the effect that except transaction in case of four companies the profit so arose were liable to tax as capital gains keeping in view the holding period, frequency of transaction etc. Thus, the facts of the case cited by the learned DR are distinguishable from the facts of the instant case. 11.2 We have gone through decision in the case of Jayshree Pradeep Shah (supra) as relied by learned DR and found that on the basis of findings recorded by both the lower authorities to the effect that there were high number of transaction in shares with borrowed funds and the sale of shares was the only activity of the assessee within a very short holding period, it was held that the profit arose on sale of such shares were liable to tax as business income. However, the facts in the instant case before us are distinguishable and the CIT(A) has appreciated not only frequency and continuity of transactions in each shares dealt with by the assessee vis-à-vis antecedents of the assessee and the stand taken by the department in earlier year and reached to the conclusion that except transaction in shares of four companies, as discussed in his appellate order, the bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpting the long term capital gain from sale of share and levying 10% tax on short term capital gain also supports the case of assessee. The idea behind introduction of security transaction tax is to end the litigation on the issue, whether the profit earned from delivery based sale of shares is capital gains or business profit. 12. Even the Hon'ble Apex Court in the case of K.P. Verghese Vs ITO, 131 ITR 597 (SC) observed as under:- ‟The task of interpretation of a statutory enactment is not mechanical task. It is more than a mere reading of mathematical formulae because few word possesses the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provisions to be „drafted with divine prescience and perfect clarity.‟ We can do better than repeat the famous words of judge Learned Hand when he said." The above observations of Hon'ble Judges of the Apex Court was reiterated by Hon'ble Apex C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned the nature of business as trading/dealing in shares/securities and mutual funds. The frequency of transactions was also considered, consequently he treated the amount of ₹ 49,81,915/- as business income from share trading. However, before the learned Commissioner of Income Tax (Appeals) the basis of additions was explained as evident from para 3.1.1 onwards. The crux of claim of the assessee is that in the audited accounts, the sale of shares amounting to ₹ 9.43 crores in which delivery had been taken, STT was paid and the shares were sold after holding for a few days/few weeks. The mutual funds of ₹ 2.91 lacs were sold and were treated as income from short term capital gains. Before the learned Commissioner of Income Tax (Appeals) the assessee also filed a detailed note on the purchase process for delivery base shares, details of dividend received on the basis of relevant statements by placing reliance on the decision of the Mumbai Bench of the Tribunal in the case of JM Shares & Stock Brokers v. JCIT dated January, 2009. Briefly, the claim of the assessee before the learned Commissioner of Income Tax (Appeals) was that the delivery based transactions were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntically in the case of Nagindas P Seth (ITA No.961/Mum/2010) it was held that despite large number of transactions in shares, the profit can be assessed as capital gains under the facts of the case. The case of the assessee is further fortified by these decisions more specifically when the assessee holds the shares in his books as investor, no interest was paid on the funds. The decision in the case of Janak S Ranawala, 11 SOT 627 (Mum.) further supports the case of the assessee. Likewise, the decision from Hon'ble Madras High Court in CIT vs N.S.S. Investment Pvt Ltd. 227 ITR 149 (Mad), CIT vs Associated Industrial Development Company, 82 ITR 526 (SC) supports the case of the assessee. In the present appeal, we note that the assessee made investment in shares with intention to earn dividend income on appreciation of price of shares. Therefore, it cannot be said that the assessee was doing business. More specifically when, the assessee either utilised his own funds/ family funds/associate‟s funds and did not pay any interest and depicted the transactions in shares under investment portfolio. During hearing, it was also explained by the learned Counsel for the assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
