TaxTMI 
TaxTMI 
2010 (11) TMI 714
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....ncome." 2. Brief facts of the case are that, the assessee company, a member of Bombay Stock Exchange, in the relevant assessment year, filed return of income declaring total income at Rs. 58,92,409/- which was duly accompanied with tax audit report under section 44AB of the Income Tax Act, 1961 (for short "the Act"). The Assessing Officer noticed that the assessee had disclosed short term capital gains during the year at Rs. 42,34,000 and long term capital gains at Rs. 60,95,000. He noted that the assessee had purchased shares in small lots and entered into more than 300 transactions during the year. Thus, the assessee had consistently purchased and sold the shares during the year. Considering the volume and frequency of sale and purchase, the Assessing Officer concluded that the assessee had no intention to hold the shares. He further observed that the assessee is a broking firm and, therefore, the share transactions relate to the business of the assessee. He further pointed out that in subsequent assessment year, the assessee had treated income from similar transactions as business income. He, thus, concluded that income returned as short term capital gains was actually busine....
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....capital gains (with STT) 39,51,295 42,34,268 c) Long term capital gains (without STT) 15,48,988 d) Long term capital gain (with STT) 45,46, 233 60,95,221 Short term capital gains (without STT) Regular Transactions 251410.13 In short duration / auction sale Short term capital gains (with STT) 102296.88 353707.01 Regular Transactions 3851063.97 In short duration / auction sale 100231.21 3951295.18 Less: Service Tax / Transaction / Other charges 70733.80 Total:- 4234268.39 4. It was pointed out that short term capital gains of Rs. 10,13,678 were out of the opening investments and Rs. 28,37,386 were out of the purchases during the year. The assessee further pointed out that the main object of the company is to carry on the business of shares and stock brokers which reads as under:- "To carry on the business as share and stock brokers, underwriters sub-underwriters, agents and brokers for taking hold, dealing in, converting stock, shares and securities of all kinds, brokers for units Unit Trust of India, brokers for debenture....
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....ngs clearly demonstrate that the assessee's intention was to trade in shares. Learned Departmental Representative pointed out that in such circumstances, the twin criteria for deciding such issue is to consider the frequency of transactions and to find out the intention of the assessee as to whether to earn profits or to earn dividend. He pointed out that the CIT(A) has gone only by one reasoning without considering the entirety of facts. He pointed out that one of the bench marks for deciding true intention of the assessee is to find out whether the assessee had intention to earn dividend by holding the shares as investment or to earn profit by trading in the same. He referred to the assessment order for assessment year 2001-02 contained at Pages-1 to 4 and pointed out that long term capital gains were 7,67,976 whereas short term capital gain was only Rs. 20,584 which was very small as compared to dividend which was only Rs. 4,90,957 being 50% of the total capital gains. This suggests that the assessee had intention to earn dividend. He referred to the computation of income for assessment year 2002-03 contained at Page-5 of the paper book and pointed out that the assessee had incu....
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....n shares and it was assessee's own surplus funds which had been kept invested in shares. Further, Ld. Counsel pointed out that assessee had no intention to avoid tax which is evident from the fact that though the market value of quoted investment as on 31st March 2002 was Rs. 1,30,96,743, the assessee had shown the investment at Rs. 2,04,50,680=54. He submitted that the assessee did not claim the difference on account of fall in value of shares as loss. 10. Learned Counsel further pointed out that in the immediately preceding year viz. 2004-05, the assessee's profit on sale of investment of Rs. 58,00,769 was duly accepted by the Department and, therefore, since no new facts have in this year, there is no reason to deviate from assessee's stand of treating part of its shares under the investment portfolio and balance as part of trading portfolio. He submitted that there is no bar on brokers being investors also. Learned Counsel further submitted that the dividend earned cannot be compared with the profit on sale of investment. Counsel further submitted that the short term capital gains to the extent of Rs. 10,00,000 were out of opening investment and, therefore, investment to thi....
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..... However, in the present case, the assessee had returned under the head "Short Term Capital Gains", not only in respect of shares acquired during the year but also in respect of opening investment carried forward from earlier year. ... 12. We have heard the rival submissions, perused the orders of the lower authorities and the materials available on record. There is no dispute on facts particularly with regard to income returned as "Short Term Capital Gains" to the extent of Rs. 10,00,000 being out of opening investment. By now, the issue that a person can be both "Investor' as well as "Trader" in shares is no more res integra. In this regard Draft Instruction No.2005, under the subject "Distinction between shares held a stock-in-trade and shares held in investment - tests for -", reads as under:- "The Central Board of direct Taxes in its instruction no.1827 dated 31.8.1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. The following supplementary instructions in this regard will provide further guidelines for determining whether a person is a trader in stocks or an investor in stocks. i. Whether....
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....stments in shares. The law itself has recognised this fact by taxing these transactions under the head "Short Term Capital Gains". If the Assessing Officer's reasoning is accepted, then it would be against the legislative intent itself. It is always a vexed question to find out as to whether the assessee was holding the shares as stock in trade or under an investment portfolio particularly because one has to infer the intention of the assessee which is primarily within his own knowledge. The conduct of the assessee assumes significance in this regard. It has been laid down in various judicial pronouncements that there is no acid test to decide this issue. In the present case, we find that the Assessing Officer while passing assessment order under section 143(3) for assessment years 2001-02 and 2004-05, did not dispute the assessee's claim regarding profit on sale of investment. One more important aspect is that the assessee had not borrowed any fund for investment in shares and this fact cannot be lost sight off while deciding the true intention of the assessee. 14. Learned Departmental Representative pointed out that in assessment year 2001-02, the dividend was Rs. 4,90,957 as ....