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TMI Blog2009 (2) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... t, principle of consistency, though it is an exception to the principle of res judicata must be applied here. It is further so because the payment of securities transactions tax is mandatory i.e., whether an assessee earns the profit or not or suffers a loss and by imposition of such tax, the legislature has not given any benefit to a class of transactions as a whole though it may result into an apparent benefit to individuals entering into those transactions. Thus, in our view, the basis of principle of consistency alone, the action of the Revenue authorities is liable to be quashed. We order accordingly and direct the AO to accept the claims of assessee in regard to short-term capital gain and long-term capital gain. Assessee is maintaining separate records for both types of transactions. Further, it is important to notice that the assessee has entered into two different types of transactions where both activities are entirely different in nature i.e., one activity is of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery), which puts assessee's case on a more strong footing. Hence, in our view, the ratio of the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------- Agricultural income Rs. 68,000 ------------------------------------------------------------ Short-term capital gains taxable @ 10% Rs. 57,31,522,67 ------------------------------------------------------------ Long-term capital gains exempt Rs. 1,12,68,795,77 ------------------------------------------------------------ Long-term capital gains taxable @ 10% Rs. 60,00,16,649 ------------------------------------------------------------ Bank interest Rs. 8,60,463 ------------------------------------------------------------ Dividend on shares Rs. 14.81,33,915 ------------------------------------------------------------ Interest on PPF Rs. 68,055 ------------------------------------------------------------ Profit on sale of plot at Jodhpur Rs. 3,12,500 ------------------------------------------------------------ Refund from LIC Rs. 24,810 ------------------------------------------------------------ Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd dividend income earned by him to show that the treatment given by the assessee in respect of share transactions undertaken by the assessee was in consonance even by the interpretation of the impugned circular. The AO did not accept the claim of the assessee for the following reasons: (i) that the treatment given by the assessee in the books of account to the shares as investment was not determinative factor to decide the real nature of transactions and relied on the following judicial decisions in this regard: (i) Tuticorin Alkali Chemicals Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC); (ii) Chowringhee Sales Bureau (P) Ltd. vs. CIT 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC); (iii) Punjab Distilling Industries Ltd. vs. CIT (1959) 35 ITR 519 (SC); (iv) CIT vs. Provincial Farmers (P) Ltd. (1977) 108 ITR 219 (Cal); (v) CIT vs. J.D. Italia (1983) 32 CTR (AP) 124 : (1983) 141 ITR 948 (AP); (vi) CIT vs. Bazpur Co-op. Sugar Factory Ltd. (sic) (vii) G. Venkataswami Naidu Co. vs. CIT (1959) 35 ITR 594 (SC). (ii) that whether the question that an activity amounted to business or investment activity would depend on the facts of each case an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was only SSC passed and was attached to a broker, namely, Shri R.S. Damani and the assessee used to go with him and was dealing in shares for 20 years. He was also attached to some other sharebrokers and was also using software to understand the trend of shares and the market and was also reading newspapers, hence, the share trading was not a side activity but a full-fledged activity particularly when no other business activity was done by the assessee, and, therefore, merely because some shares were held for a year, the same did not become an investment. The learned CIT(A), thereafter, also relied on various decisions to determine the real nature of transaction and for the proposition that mere entries in the books of account showing shares as investment were not determinative factor. The learned CIT(A) also referred to the Circular No. 4 of 2007 and to various other judicial decisions including ruling of Authority for Advance Rulings as Fidelity Northstar Fund Ors., In re (2007) 207 CTR (AAR) 297 : (2007) 288 ITR 641 (AAR), and held that to decide the nature of transaction, three parameters were important namely; magnitude of purchase and sale, period of holding and moti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,25,000 and these borrowings had by and large, been utilized for other purposes, hence, findings of Revenue authorities, in this regard, were not correct. He further contended that if it was assumed for a moment that these funds were utilized in respect of share transactions even then, having regard to the quantum of investment, it could not be a decisive factor to determine the nature of transactions. 5.3 The learned counsel thereafter, contended that frequency had to be seen scrip-wise and not on the basis of shares of various companies, being treated to be a single commodity and on this basis there was little frequency in the transactions of purchase and sale of shares by the assessee. 5.4 The learned counsel also contended that whether a particular person was an investor in shares or dealer in shares was not a question of volume and if that test was applied, then the LIC would also become a trader. 5.5 The learned counsel contended that, in fact, the assessee worked with brokers and had been a jobber could not be a decisive factor to hold that assessee was not at all an investor and was purely a trader in shares and, rather, the fact that assessee was a broker was irrele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------- 6-9 months 16,62,760 -------------------------------------------------- 9-12 months 5,79,086 -------------------------------------------------- 5.8 He, thereafter, drew our attention to p. 152 to show the period of holding in respect of transactions resulting into long-term capital gain for asst. yr. 2004-05, which is reproduced as under: -------------------------------------------------- Period of holding of shares Amount of long-term capital gain (Rs.) -------------------------------------------------- 13-18 months 37,13,444 -------------------------------------------------- More than 18 months 28,00,889 -------------------------------------------------- 5.9 He, thereafter, referred to pp. 155 and 157 to show the period of holding resulting into long-term capital gains to the assessee during the financial year relevant to the assessment year under consideration prior to 1st Oct, 2004 and post-1st Oct, 2004, which are reproduced as under: -------------------------------------------------- Period of holding of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. and in the case of CIT vs. H. Holde Larsen (1986) 58 CTR (SC) 53 : (1986) 160 ITR 67 (SC) afforded adequate guidance to the AO, hence, these decisions required elaborate consideration. 5.13 The learned counsel stated that in the case of Associated Industrial Development Company (P) Ltd., the assessee was acting as managing agent of several companies and also held shares of those companies which were sold on profit which was offered as capital gains. The AO held the same as of business profit. Appellate authority, Tribunal and the Hon'ble High Court also held that the profit did not arise to the assessee as a dealer in shares and on appeal by the Revenue, the Hon'ble Supreme Court held that there was no bar to a dealer investing in shares, however, whether a particular holding of shares was by way of investment or formed part of the stock-in-trade was a matter which was within the knowledge of the assessee who held the shares and it should, in normal circumstances, be in a position to produce the evidence from its records as to whether it had maintained any distinction between those shares which were its stock-in-trade and those which were held by way of investment and if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment. There is huge variety to choose from. Due to globalization and various uncertainties of modern times, there is increasing volatility in the share market. This has affected the length of period of holding in the cases of investors also. Having regard to these various issues, under the provisions of the Act where shares are held for one year and more, the same qualifies to be assessed as long-term capital assets. The period of less than one year results into short-term capital asset. There is no minimum period prescribed for short-term capital gains. In certain circumstances, holding of even one day may result into a short-term capital asset. It is submitted that due to large number of companies listed on stock exchange and volatility in the market even a serious investor has to frequently shuffle his portfolio that does not signify that the investor is trading. At any rate where a particular lot of shares is primarily intended for trading the same would not be held for weeks or months. In the case of the present assessee lots of shares are retained for months and years before sale. (3) The expressions 'similar transactions by the same person' and 'same sort of property' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as stock-in-trade, the burden of proof was on the party who asserted it to be stock-in-trade and in the present case, there was no material brought on record by the Revenue authorities to suggest that assessee's intention at the time of purchase was trading and not investment, hence, the action of Revenue authorities was not justified in law for this reason also. 5.17 The learned counsel further contended that there was a recent decision of Lucknow Bench of the Tribunal in the case of Samath Infrastructure (P) Ltd. vs. Asstt. CIT (200B) 16 DTR (Lucknow)(Trib) 97, wherein a view had been taken in favour of the assessee after fully considering the CBDT circular, and the facts of the present case were more or less same as in that case and therefore, the ratio of that decision was squarely applicable to the present case. 5.18 The learned counsel also contended that the Revenue authorities merely changed the nomenclature of capital gains to profits, however, was it imperative that income should have been computed in accordance with the provisions of these different heads and by not doing so, the Revenue authorities committed an incurable defect and for this reason alone the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is relevant to the observations to show that the AO was quite aware of difference between the two. The learned Departmental Representative further contended that the assessee had not furnished the details of activities/purposes wherein the borrowed funds had been utilized, hence, in the absence of such details, it was logical to presume that these had been utilized in sale and purchase of shares. She also contended that no separate books of account had been maintained by the assessee in the present case; hence, the intention of the assessee was not established. She further contended that the facts of the present case were closely identical to the facts of the case of Smt. Deepaben Amitbhai Shah, hence, the orders of the Revenue authorities were liable to be upheld. She also contended that the decisions relied on by the assessee were factually different, hence, the ratio of those decisions was not applicable. She further placed reliance on the orders of Revenue authorities. 7. The learned counsel for the assessee, in the rejoinder, contended that the assessee had not contended that delivery was the basic criteria to determine the nature of transaction as contended by the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d taken the loans on interest so as to not to miss any opportunity of earning income due to upward movement of prices, hence, interest on borrowed funds was allowable as business expenditure. The AO, however, treated the utilization of such loans towards granting interest-free loans to his wife and disallowed the interest claimed by the assessee. The learned CIT(A), however, deleted this disallowance which appears to have become final in the absence of any order of the Tribunal, being brought on record. Thus, such interest expenditure was claimed by the assessee as business expenditure against the business profits resulting from share trading transactions. The facts for asst. yr. 2002-03 are similar except that the assessment in this year was completed under s. 143(1) of the Act. Similar is the situation for asst. yr. 2003-04, except the fact that, in this year, the assessee has suffered loss in share trading transactions which has been shown as business loss and there has been an increase in the borrowed funds. In this year, the assessee has also entered into transactions in F O segment lo the tune of Rs. 6,91,169 and which has been carried forward under s. 72 of the Act. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee should not be accepted. However, the Revenue authorities have taken a different view in the year under consideration by holding that principle of res judicata is not applicable to the assessment proceedings. There cannot be, in our view, any dispute on this aspect but there is also another judicial thought. that there should be uniformity in treatment and consistency under the same facts and circumstances and we have already found that facts and circumstances are identical even though a different stand has been taken by the Revenue authorities. This action of the Revenue authorities has led us to ask ourselves that in this year why it has been done so. In the process to find the answer, we noted that there was a change in the scheme of taxation relating to short-term capital gains and long-term capital gains. Through the Finance Act, 2004, the legislature imposed securities transactions tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the legislature exempted long-term capital gain under s. 10(38) of the Act from the levy of tax and on short-term capital gain, a concessional rate of tax i.e., 10 per cent has been levied subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready reference, we reproduce the same as under: "After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes: (1) What is the intention of the assessee at the time of purchase of the shares (or any other item)? This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment? Whether shown in opening/closing stock or shown separately as investment or non-trading asset? (2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. (3) What is the frequency of such purchases and disposal in that particular item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares worth Rs. 21,38,353 and same shares were sold for Rs. 23,89,805. There was neither opening stock nor closing stock. In investment portfolio, opening stock of shares was Rs. 19,22,203 and closing stock was Rs. 46,23,274 whereas sales out of investment portfolio were Rs. 31,80,423 It shows that turnover to stock ratio in investment portfolio is very low as compared to that in trading portfolio. Further, there is no material to show that these shares in the investment portfolio were also traded in the same and like manner as those which were in stock-in-trade portfolio. The board of directors has passed resolutions for making investment whereas memorandum of association has only authorized to carry out trade in shares. It clearly shows intention of the assessee to maintain a separate investment portfolio. All the sales out of this portfolio are identifiable to purchases made in this portfolio. In our considered view, the assessee has discharged its primary onus by showing that it is maintaining separate accounts for two portfolios and there is no intermingling. The onus now shifted on the Revenue to show that apparent is not real. There is no material brought in by the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is the commercial profits which have to be taxed and even in that situation, the assessee may be found to be justified in giving different treatment in the books of account as compared to return of income because of commercial considerations or accounting requirements. In the case of Karam Chand Thapar Bros. (P) Ltd. vs. CIT (1971) 82 ITR 899 (SC), the Hon'ble Supreme Court held that circumstances that the assessee had shown certain shares as investment in its books as well as its balance sheet was by itself might not be a conclusive circumstance but it was irrelevant circumstance. Hence, we do not find much substance in this finding of the Revenue authorities in the facts of the present case. The Revenue authorities have also held that borrowed funds were utilized for making such investments whereas in earlier years, interest on such loans has been allowed as business expenditure against profit on share trading transactions shown as business income and in the year under consideration also, no nexus between the interest-bearing funds and investment has been established, hence, for this reason also, we find no merit in treating the long-term capital gain and short-term capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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