TaxTMI 
TaxTMI 
2010 (6) TMI 510
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....e are that the assessee who was a member of BSE and NSE had, in addition to brokerage income of Rs.1,75,57,916/- declared business profit of Rs.18,09,37,887/- in trading of shares and short term capital gain of Rs. 16,33,22,167/- from sale and purchase of shares. The AO during the assessment proceedings noted that in the preceding assessment year i.e. A.Y.2004-05, the assessee had not shown any capital gain from investment in shares. The assessee in the earlier years had been declaring business income from both delivery based and non delivery based purchase and sale of shares in the proprietary concern, in addition to brokerage income from share transactions undertaken on behalf of others including FII's. However, from 1.4.2004, all delivery based purchases and sales of shares were declared as investment and income there from as capital gain. The business income was shown only in respect of non delivery based transactions in shares i.e. income from intra day trading and future and option trading. The income from sale of shares appearing in the opening stock as on 1.4.2004 which were on trading account in the earlier year, was however shown as business income and the shares in the o....
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....computing the income from capital gain. The assessee further submitted that it was possible for an assessee to have two portfolios i.e. an investment portfolio and trading portfolio as was clarified by the CBDT in its circular No.4/2007 dated 15.06.2007. Therefore the assessee could also make investment in shares in addition to trading in shares. Further in case of FIIs, the income from frequent purchase and sale of shares on large scale was already being accepted as capital gain treating the same as investment activity and therefore there was no reason that in case of the assessee it should be treated as a business activity. 2.4. The AO however did not accept the explanation given by the assessee. It was observed by him that the objects in the memorandum and articles of association of the assessee company or the fact that the memorandum authorized a particular type of activity was not conclusive in deciding the true nature of transactions. Reliance for this proposition was placed on the judgment of Hon'ble Supreme Court in case of P.K.N. Co Ltd. (60 ITR 65). Similarly the nomenclature given to a particular transaction or the entry in the books of accounts were also not a decisi....
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.... making repetitive transactions in the same scrip. After selling the shares of a particular scrip bought earlier the assessee was buying the same scrip again which also indicated that the assessee was trading and was not an investor as in that case the assessee would have been holding the shares and not sell and buy it again. Referring to the argument of the assessee that the assessee had made the entry at the time of purchase as investment, the AO observed that the same was not conclusive and the assessee even did not produce the books of accounts for verification. The argument of the assessee that the assessee was holding majority of scrip for more than three months which indicated investment activity was also not accepted. The AO observed that in certain scrip in which there was no movement in prices, the assessee was likely to hold for longer period to reap trading profit and therefore this alone will not prove that the activity was investment. The substantial increase in the dividend income received by the assessee also did not establish that the assessee was investor as the dividend would depend upon the number of scrip being bought before the record date. The quantum of divi....
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.... traded. All these activities were with profit motive and not to enjoy income from the investments. The dividend income was only incidental. The high frequency volume and regularity of transactions clearly showed that the assessee was in trading of shares. The transactions were similar as in earlier years and there was no change in attitude of the assessee compared to earlier year. In such a situation, the assessee could not declare similar transactions of delivery based shares as investment activity. The nature of activity remained the same. The AO accordingly held that the said transactions were not investment activity of the assessee and assessed income as income from business in place of capital gain declared by the assessee. 2.10. The assessee disputed the decision of the AO and submitted before CIT(A) that frequency and magnitude was not decisive factor in understanding the true nature of transactions and that the fact that assessee was a trader earlier was no bar on assessee to become an investor. It was pointed out that the very fact that delivery of the shares was taken showed the intention of the assessee at the time of purchase to hold the shares as investments. ....
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....ure of transaction. For this proposition reliance was placed on the judgment of Hon'ble High Court of Mumbai in case of H. Hoick Larsen Vs CIT (85 ITR 252) and the decision of Hyderabad Bench of Tribunal in case of Shahla Investments and Financial Consultants Pvt. Ltd. (2 SOT 371). He also referred to several decisions of the Tribunal in which transactions in shares had been accepted as investments. Though the Learned AR admitted that in those cases the investment accounts were held since earlier years, he argued that no adverse inference could be drawn in case of the assessee only on the ground that it was the first year in which the assessee had started making investments. The intention of the assessee was clear from the board resolution and entry in the books that the nature of transactions were investments. The assessee had also received huge dividend income from the investments which increased to Rs.94,31,290/- in the relevant year compared to Rs.44,51,213/- in the immediate preceding year. It was pointed out that the assessee had held the shares for a considerable period of time and in a significant number of cases holding period exceeded four months. It was pointed out that ....
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....ores. In November, the investments had increased by Rs.16.11 crores but borrowings had increased by only Rs.31 lacs. There was no nexus between the borrowings and investments. Moreover it was further pointed out that borrowings were temporary over drafts which could not be used for making investments. Even if, it was argued, that investments were made out of borrowed funds, it was perfectly legal as there was no bar for making investments from borrowed funds. Reliance was placed on the judgment of Hon'ble Supreme Court in case of Rajendra Prasad Moody (115 ITR 519) in which interest on borrowed funds used for making investments was held allowable as deduction under section 57(iii). It was also argued that by showing the shares as investments the assessee had lost Rs.2.76 crores on account of valuation of shares and Rs.22,83,358/- on account of transaction tax which was not claimed as rebate because the transactions were shown as investments. These factors also showed the genuine intention of the assessee to make investments in shares. 2.14. In relation to the audit note regarding nature of business being same as earlier year as highlighted by the AO, it was submitted that there ....
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....within the frame work of law unless the same falls in the category of a colourable device which may properly be called a device or a dubious method or a subterfuse clothed with apparent dignity. 2.16. It was further argued that the Income Tax Act provided different heads for assessing different types of income. An income falling under a particular head has to be assessed under that head only. The charge under the specific head is not only proper but obligatory on the part of the department. Reference in this regard was made to the judgment of Hon'ble Supreme Court in case of United Commercial Bank Ltd. Vs. CIT (32 ITR 688) and the judgment in case of (20 ITR 579). It was pointed out that Hon'ble Supreme Court in case of United Commercial Bank Ltd. (supra) have held that interest on securities could not be charged as profit of business even if the security was held as a trading asset. In case of the assessee, share transactions had been undertaken as an investment activity and therefore the income had to be computed under the heard 'capital gain' specifically provided for assessment of such income. 2.17. The Learned counsel also referred to the decision of Tribunal i....
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....ed purchases had been shown as short term capital gain. Income from sale of shares appearing in the opening stock as on 1.4.2004 has been shown as business income and the shares in this category which remained unsold as on 30.9.2004 were converted into investment account from 1.10.2004. As regards the income from non delivery based transactions is concerned, the same has been declared as business income as in the earlier years. 2.20 The assessing officer has not accepted the approach of the assessee in treating the transactions in delivery based shares from 1.4.2004 as investment activity. The case of the revenue is that the assessee has regularly made purchases and sales of shares with high frequency and volume. There is continuity in transactions. The assessee has dealt in large number of scrips totalling about 300 shares with a turnover in delivery based transactions of Rs.3500 crores with opening stock of only Rs.18.72 crores. The AO has observed that the fact that objects of the company authorized investment in shares or the entry in the books as investment or the board resolution are not conclusive in ascertaining the true nature of transactions. It has been held that....
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....1,290/- compared to Rs.44,51,213/- in the immediate preceding year which also shows the intention of the assessee to make investment in shares. (vi) The profit motive is also not conclusive in treating the income from sale of shares has business income. Merely because of the shares were acquired with expectation of profit cannot make the income as business income. Even in case of investment there is expectation of profit in the form of appreciation in value. Reliance has been placed on the judgment of Hon'ble Supreme Court in case of Rajabahadur Kamakhya Narayan Singh (77 ITR 253) and the judgment in case of H. Hoik Larsen (160 ITR 81) (vii) There is no evidence of borrowed funds being used in purchase of delivery based shares. Even if some borrowed funds have been used. This alone cannot make the transaction as business transaction as there is no legal bar on borrowed funds being used for investment. (viii) It has been pointed out that in case of FIIs who frequently purchase and sell shares on large scale the transactions are being treated as investment activity and therefore the assessee should not be denied this benefit. In large number of cases shares ha....
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....the shares he is buying he may not be selling during the year and the shares sold may be those purchased more than a year ago. Therefore even if the number of transaction are large and volume is high, the assessee may still be an investor. Crucial factor is the period of holding which will be very short in case of a trader and long in case of an investor because a trader buys the commodity not for holding it in contrast to an investor who buys the commodity for holding it so as to earn some income from investment and have decent appreciation. In case of shares, income is in the form of annual dividend and therefore an investor in shares will normally he holding shares for more than a year and any sale before one year has to be explained from the circumstances of the case. The profit motive is also relevant but this is also not conclusive because even an investor may earn profit by way of appreciation. 2.24 The Learned AR for the assessee has argued that intention at the time of purchase has to be gathered from nature of entry in the books of accounts. It has been submitted that from 1.4.2004 the assessee had entered into the delivery based transaction as an investment trans....
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....ndulge in buying and selling in the same scrip. Shares purchased have been sold mostly during the year. No shares sold have been held for more than one year as the entire capital gain has been shown as short term capital gain. Further about 64% of capital gain is from sale of shares held for less than four months and about 22% of capital gain is from sale of shares held for less than a month. About 88% of gain is from sale of shares held for less than six months. Profit motive is also clearly evident in making the transaction. The total delivery based purchases is about Rs.3500 crore and total gain is about Rs. 16 crore. Thus the assessee has been selling the share on average profit of about .5% which can happen only in a trading transaction and not in investments. The high frequency, volume, low holding period and profit motive clearly show the intention of the assessee to trade in shares. 2.26 The Learned AR for the assessee has argued that there is no minimum holding period prescribed in case of the investment as is clear from section 2(42A) as per which shares sold with holding period of less than a year has to be treated as short term capital gain. Therefore even....
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....d converted into an investor in subsequent period has to be gathered from his conduct and the way he has dealt with the shares in the subsequent period. The argument of the Learned AR that the entry in books conclusively prove that the assessee had changed its attitude towards shares from 1.4.04 cannot be accepted as entry in the books of account as held earlier is not conclusive. Reliance has been placed on the judgment of Hon'ble Supreme Court in case of New Era Agencies Pvt. Ltd. Vs. CIT (68 ITR 585) in support of the said proposition. The said judgment in our view is distinguishable. In that case, from 1942 to 1948, the assessee had dealt in shares including those of E-Mills income from which had been declared as business income. From 1949 onwards there were slump in the prices of E-Mills and the assesse had not affected any sales but purchased some more shares of E-Mills. In 1953 the assessee sold all the shares of E-Mills and profit of Rs.2,34,231/- was declared as capital gain. The Hon'ble Supreme Court held that these shares were held as trading stock in the earlier year and there was nothing in the books to show that the assessee had treated the shares of E-Mills as invest....
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....finding of revenue authorities. Though the assessee has filed the holding period wise details of shares transacted during the year as mention in para 2.11 earlier, it has not been shown how the transactions this year are different from those in earlier year. Therefore following the principle of uniformity and consistency, the approach of the revenue to assess the income this year also as business income has to be upheld. Even on merit, considering the holding periods given by the assessee for this year, frequency, volume and other factors as mentioned earlier the transactions have all the attributes of trading activity. The case of Gopal Purohit is quite different. In that case the Tribunal has decided on merit mainly because the decision of the Tribunal in case of Sharnath Infrastructure Pvt. Ltd. Vs. ACIT (120 TTJ 216) holding that facts in case of Gopal Purohit was identical. In case of Sharnath Infrastructure Pvt. Ltd. the shares sold out of investment account had been held for 2 to 3 years. The revenue could not show any shares sold which had been purchased during the year or in the immediate preceding year. In the present case no shares had been held by the assessee for more ....
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....for sales and renouncing. The purchase and sale was to prevent erosion of capital and accordingly it was held that the assessee was not a trader. The judgment of the High Court was upheld by the Supreme Court. In this case there are no such special circumstances necessitating frequent purchase and sales of shares by the assessee. The assessee had not acquired the shares sold in right issues Shares have been freely purchased and sold from open market at short intervals generating very high volume running into Rs.3500 crores involving 300 scrips with funds deployed of less than Rs.50 crores. Considering the entirety of facts and circumstances we have no difficulty in arriving at the conclusion that the assessee during the year had traded in delivery based shares as in earlier year and accordingly the order of CIT(A) is upheld. 3. The appeal of the revenue in ITA NO.2468/M/2009. In this appeal the revenue has raised disputes on three different grounds. 3.1. The first dispute is regarding disallowance of depreciation on membership card of BSE. The assessee for the relevant year had claimed depreciation @ 25% amounting to Rs. 15,33,087/- on BSE card. The AO following the....
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....terest of Rs.10,72,161/- till the date of payment which was claimed as deduction under section 43B. The assessee argued that the interest had the same character as the fees itself in view of the judgment of Hon'ble Supreme Court in case of Mahalaxmi Sugar Mills Co. Ltd. (123 ITR 429). The AO however held that the said judgment was distinguishable as in that case issue was allowability of interest on cess as revenue expenditure and the court was not concerned with the provision of section 43B. The AO observed that section 43B referred to payment by way of tax, duty, cess or fees and it did not talk about interest which was covered only by clause (d) and clause (e) of section 43B which relate to payment of interest on loan. The AO referred to the judgment of Hon'ble High Court of Kolkata in case of Padmavati Rajiv Cotton Mills Ltd. (239 ITR 355) in which it was held that interest was neither a tax under the Income-Tax Act nor it was known as tax under the common parlance. The AO therefore held that the interest was not covered under section 43B and as the same related to earlier year it could not be allowed in the current year. Accordingly he disallowed the claim. In appeal CIT(A), f....
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....the government. The fees for technical services has been defined as any consideration for rendering of any managerial, technical or consultancy services. AO held that V-SAT and lease line charges were fees for technical services and thus liable for deduction of tax at source. Since the assessee had not deducted tax at source, claim was disallowed. In appeal CIT(A) observed that department of telecommunication had granted license to stock exchanges for installation and setting up of Close Use Group Telecommunication Network based on V-SAT and lease lines and the stock exchanges were to collect V-SAT and lease line charges from members and pay the same to the service provider. CIT(A) held that V-SAT and lease line charges were the reimbursement charges paid by the members to stock exchanges in lieu of infrastructure and trading facilities provided by the stock exchanges and these were not fees for technical services. Accordingly he held that tax was not required to be deducted. The addition made by the AO was thus deleted aggrieved by which the revenue is in appeal before the Tribunal. 3.3.1Before us the Learned AR for the assessee submitted that the issue was covered in favour of....