TaxTMI 
TaxTMI 
2011 (11) TMI 126
X X X X Extracts X X X X
X X X X Extracts X X X X
....pital Gain. For the sake of convenience, both these grounds are considered together. 3.1 The brief facts leading to the above grounds are as under :- The assessee is a Private Limited Company engaged in the business of dealing in shares and securities. It filed its return of income on 27.11.2006 declaring total income of Rs 12,78,98,311/-. During the course of assessment proceedings the AO noted that the assessee has shown Short Term Capital Gain of Rs.12,70,35,823/- which was adjusted against the brought forward unabsorbed depreciation loss for the Assessment Year 2002-03 of Rs. 45,12,141/-, for the Assessment Year 2003-04 of Rs. 5,79,112/-/- and for the Assessment Year 2004-05 of Rs. 408,825/-and short term capital loss of Rs. 5,54,943/- for A.Y. 2004-05 and Rs. 1,23,448/- for A.Y. 2005-06. This resulted into Short Term Capital Gain of Rs. 12,08,52,354/- on which the assessee applied tax rate of 10%. The assessee has also shown Long Term Capital Gain of Rs. 27,80,39,738/- and claimed the same as exempt u/s.10(38) of the I.T. Act. 3.2 The A.O. noted that the Assessee was doing trading, speculation, investment and also the transaction from the derivative market. The tax au....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dger account in reference to loan and advances to various associates and group concerns which shows huge amount of loan taken and repaid for the so called activity of investment without any interest having been paid. These accounts are generally squared up at the end of the year so as to avoid the reflection in the balance sheet as borrowed loans. From the various details furnished by the assessee he noted that the assessee's account with M/s. Subhkam Stocks and shares under the head "advances" shows various entries for such kind of amount being taken and given back totalling to Rs. 9,68,25,000/-, but ultimately showing NIL balance due to squared up of the amount. 4.2 Similarly in the case of M/s. Khazana Tradelinks Ltd., the amount involved was Rs. 59,05,25,000/-. According to the AO, the frequency and the amount of such borrowing itself shows the intention of the assessee that primarily assessee was doing a business in the trading of shares and securities on a day to day basis. 4.3 From the scrip-wise summaries filed by the assessee in response to the query, the AO noted that the same show the speculative transaction resulting into speculation loss/speculation gain. The dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in 2734146 nos valued at Rs. 20,44,44,438/- were sold resulting into profit of Rs. 2,17,74,887/- and loss of Rs. 25,66,252/- thereby the net profit of trading at Rs. 1,92,08,635/-. The same detail also has speculation income detail which shows that for 3801388 nos. of share for the purchase consideration of Rs. 37,50,53,312/- the assessee squared up and sold the same at Rs. 37,54,81,917/- which has resulted into profit of Rs. 4,28,605/-. The two important aspect required consideration here. a. Various scrip in which assesee is trading and also doing speculation activity are featuring in the list of investment also. b. The volume of speculation activity with huge amount clearly shows that assessee is doing trading activity including speculation and whatever residual remains is shifted to investment activity. Any prudent person doing such activity on such a scale with volume cannot justify taking a decision after the completion of transaction that out of such transaction a part is investment activity and another part is trading and speculation activity. This view will be further supported by the fact that the assessee also doing trading in derivative market with a huge volume ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The intention of the investment by the assessee is not to hold them for a long term appreciation but to sell them at a profit as evident from the transactions of M/s. Syndicate Bank and M/s. Shoppers Stop Shares shown as investment activity. 3. The assessee is operating on a big scale in the activity of trading, investment, speculation. 4. Assessee's transactions are continuous and regular throughout the previous year. Even the purchases in the same scrip on the same day is divided into speculation and investment. 5. The assessee is making purchases out of borrowing. 6. The assessee's holding period in respect of current investment is not substantial. 7. If the ratio is derived between the sales to purchases, and also to have a percentage number of shares kept as holding then it is evident that the assessee is selling its current investment almost like trading." 5.1 Relying on the decisions of Hon'ble Supreme Court in the case of G. Venkatswami Naidu & Co. vs. CIT reported in 35 ITR 594 and in the case of Sardar Indra Singh and Sons Ltd. reported in 24 ITR 415, the decision of Hon'ble Gujarat High Court in the case of H. Mohamed & Co. vs. CIT reported in 107 ITR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eyond doubt that the entire investment was made out of own funds and no borrowing has been done. 8.1 It was claimed that the AO himself was confused about the treatment of delivery based share transaction, as at one place he has accepted the contention of the assessee whereby shares held for more than a year is treated as LTCG and those held for less than a year was taxed as "business". It was further argued that if the same scrip is held for 90 days, it is taxed as "Business" whereas if its is held for 380 days, the same is accepted as Capital Gain. It was submitted that in order to decide whether a transaction is Capital Gain or business income what is relevant is intention at the time of purchase. It was submitted that the only intention at the time of purchase of shares where delivery has been taken was to hold the same as investment. The intention is proved beyond doubt in the line of the Board resolution dated 25th March, 2005. 8.2 Relying on a couple of decisions including the CBDT Circular No.4 of 2007 dated 15.06.2007 it was argued that the profit from sale of shares has to be treated as "Short Term Capital Gain" as against "business income" treated by the AO. 8.3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rther, the entire investment has been made out of own funds and no interest bearing fund has been utilized by the assessee. He noted that the A.O. himself has partially agreed with the assessee that profit earned on shares held for more than a year has to be taxed as long term capital gain. According to him, once the intention of the assessee at the time of purchase is accepted as that of investment, it is immaterial whether the assessee holds the same for 90 days or 380 days and it cannot alter the nature of transaction. Relying on various decisions, the ld. CIT(A) directed the A.O. to treat the profit of Rs. 10,10,29,762/- as short term capital gain. 9. Aggrieved with such order of the Ld. CIT(A) the Revenue is in appeal before us. 9.1 The ld. D.R. while supporting the order of the A.O. submitted that the A.O. in the body of the assessment order has given a clear finding that the assessee has borrowed money for investment in shares. The frequency and amount of such borrowings and the magnitude of the transaction justify the income as "business income" as against "short term capital gain" treated by the assessee. Referring to the decision of the co-ordinate Bench of the Trib....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ze of portfolio holding period of 1 day or so is not unusual. Referring to Circular No. 4/2007 dtd. 15th June, 2007 issued by the CBDT, he submitted that the assessee can have two portfolios of securities, one for investments and the other for stock-in-trade and how the shares are valued in the books of account i.e. whether they are valued as stock-in-trade or held as investment in capital assets, has an important bearing in the matter. Referring to the decision in the case of Janak S. Rangwala v. ACIT (Mum) reported in [2007] 11 SOT 627 (Mum) he submitted that mere volume of transactions does not mean that assessee is a trader. Intention with which purchase had been made has to be seen. He submitted that if in the earlier year department has treated the assessee as an investor, it cannot take a different view in subsequent year. Referring to the decision of Hon'ble Bombay High Court in the case of CIT v. Gopal Purohit reported in 228 CTR 582 he submitted that the delivery based transaction should be treated as investment transaction and the principle of consistency should be followed. He submitted that the SLP filed by the Revenue has been dismissed by the Hon'ble Supreme Court. R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or for investment. Therefore, the Board Resolution becomes insignificant. Referring to various decisions relied on by the ld. counsel for the assessee he submitted that these are distinguishable and not applicable to the facts of the present case. 11. We have considered the rival arguments made by both the sides, perused the orders of A.O. and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the series of decision relied on by both the parties. There is no dispute to the fact that the assessee during the year has claimed short term capital gain of Rs.12,70,35,823/- .Out of the above, short term capital gain on profit on sale of shares allotted in IPO amounting to Rs. 5059857/- has been held as business income by the ld. CIT(A) for which the assessee is not in appeal. Therefore, the issue to be decided by us is regarding the treatment of the profit of Rs. 2,09,82,204/- on sale of shares which were held as on 31.3.2005 and profit of Rs. 10,10,29,762/- on shares purchased and sold during the year as business income as held by the A.O. or short term capital gain as treated by the assessee and upheld by the CIT(A). 11.1 According to the A.O. the n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arsen (160 ITR 67), the Supreme Court observed : The High Court, in our opinion, made a mistake in observing whether transactions or whether these were in the nature of investment was a question of law. This was a mixed question 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/adv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ive significance and the question must be answered depending upon selective effect of all relevant materials brought on record. 11.4 From the various details furnished by the assessee in the paper book filed we find , the shares are held for a few days and in a very few cases for a few weeks or few months. In our opinion, purchase of shares during the year and selling them frequently in short period do indicate that the assessee has purchased the shares with a motive to earn profit in a short period. Therefore the facts of the instant case do not persuade us to hold that the shares were held as investment since these are not held for such a longer period so as to treat the same as investment. The frequency and volume of the transactions in the instant case give an impression that the assessee do no intend to acquire the shares with investment motive. In the case of an investment a person usually watches the market over a longer period of time before selling of the shares. The earning of dividend and the appreciation of the shares is the primary consideration. It is only a trader who would look for short-term gains from purchase and sale of shares. Therefore, the treatment given ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....been utilized for the purpose of investment in shares. 11.6 The various decisions relied on by the ld. Counsel for the assessee are not applicable to the facts of the present case. It may be mentioned here that every case depends on its own sets of facts. The decision in one particular case cannot be applied to the facts of another case. It depends on a combination of factors. There is no dispute to the legal proposition that the assessee can have two portfolios i.e one for investment and one for trading. There is also no dispute to the legal proposition that mere volume of transaction does not mean that assessee is a trader. It is the intention with which purchase has been made has to be seen. However, in the instant case, the intention of the assessee appears to be whimsical. Purchases in the same scrip on the same day has been divided into speculation and investment. Although the ld. counsel for the assessee filed a series of decisions in its favour, we find there are equal number of decisions against the assessee. Therefore, the ratio of one decision cannot be applied to the facts of the case of the assessee. It has be decided on the basis of its own set of facts and circums....