TaxTMI 
TaxTMI 
2012 (4) TMI 266
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....& 943/D/2010 [AYs 2006-07& 2007-08] (1) "That on the facts and circumstances of the case and in law, the learned CIT(A) erred in treating profit from purchase and sale of shares as long term capital gain and short term capital gain as against business income treated by the Assessing Officer by holding that the assessee is an investor in shares and not a trader. (2) That appellant craves to be allowed to add, delete or amend any other grounds of appeal." 2. Adverting first to ground no.1 in these three appeals, facts, in brief, as per relevant orders for the AY 2005-06 are that return declaring income of Rs. 1,91,03,684/- filed on 29.10.2005 by the assessee, after being processed on 31.03.2006 u/s 143(1) of the Income-tax Act, 1961 (hereafter referred to as the Act) was selected for scrutiny with the service of notice u/s 143(2) of the Act on 4th July, 2006. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee declared long-term capital gains of Rs. 7,89,81,518/- on sale of shares, claiming exemption u/s 10(38) of the Act besides short term capital gain of Rs. 1,22,42,439/- taxed at special rates. To a quer....
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....ompanies whose shares sold partly 45 Total number of companies whose shares sold completely relating to stock-in-trade being transferred to investment account. 49 Total number of companies whose shares sold partly relating to stock-in-trade being transferred to investment to investment account. 4 2.1 In the light of aforesaid position while referring to CBDT Instruction no.4/2007 dated 15.06.2007 and decision of the Hon'ble Apex Court in the case of CIT v. Associated Industrial Development Co. (P) Ltd. [1971] 82 ITR 586; CIT v. H. Holck Larsen [1986] 160 ITR 67/26 Taxman 305 (SC), and decision of the AAR in the case of Fidelity Northstar Fund, In re [2007] 288 ITR 641/158 Taxman 372 (New Delhi) the AO concluded as under:- (i) "The assessee was keeping the impugned share holding as stock in trade till 31.3.04 and the transfer from the stock in trade to the investment account is purely motivated with a view to availing lower tax rate as applicable on gain from sale of shares held as investment by paying STT on sale transaction as prescribed in the newly introduced provision of special rate as per section 111(A). (ii) The d....
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....that the assessee is purchasing and selling shares at the large scale. It clearly indicates that the purchase and sale of shares at massive level can never be categorized as investment but it is share business of the assessee company. (vi) The assessee's plea that value of capital gain earned by the assessee company including short term capital gain amounting to Rs. 9.34 crore in comparison to investment as on 31.3.2005 was Rs. 505.38 crore does not justify the case of the assessee. Out of capital gain of Rs. 9.34 crore, the major amounts of Rs. 7.89 crore relates to sale of shares of M/s Dabur Pharma Ltd. The shares of DPL were received on account of share holding of M/s Dabur India Ltd. after demerger. These shares were sold in its entirety after the receipt of the same. As per books the value of investment in shares of M/s Dabur India Ltd. is only a sum of Rs. 68,281/-. The value of investment in shares of Rs. 505.38 crore is mainly on account of prevailing market price of the shares of M/s Dabur India Limited. The assessee company is one of the group's major holding and promotor companies of M/s Dabur India Ltd. and the investment in shares right from the inception is ....
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....ppellant that the difference between purchase price of the scrip and the market value as on 31st of March, 2004 have been taken into account while working out the profits for the year ending as on 31st of March, 2004. It is clear from the balance sheet for the financial year 2003-04 that the market value of the shares as on 31st of March, 2004 has been taken into account by working out the closing stock of the shares and this has been taken into account for working out the profits for that year. The market value as on 31st of March, 2004 has been taken as the cost of acquisition of these shares and the difference between cost of acquisition and the sale price has been offered for taxation as income from short term capital gain. ** ** ** 5.1 Adverting back to the facts of the case, it is observed that the appellant was trading in shares regularly for the last many years. During these years the company was trading in shares as well as having an investment portfolio. The separate books of accounts were maintained for trading as well as investment portfolio. The company decided to convert the shares held in trading portfolio, into investments. The matter was put b....
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.... the calculation made by the assessee. Thus, reliance by the ld. CIT(A) on the said decisions is misplaced. The ld. DR vehemently argued that subsequent circumstances have to be seen in ascertaining the intention of the assessee. Inter alia, the ld. DR relied upon decision in CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC); Wallfort Financial Services Ltd. v. Addl. CIT [2010] 41 SOT 200 (Mum.). Fort Properties (P.) Ltd. v. CIT [1994] 208 ITR 232/72 Taxman 415 (Bom.). 6.1 On the other hand, learned AR on behalf of the assessee while supporting the findings of learned CIT(A) relied upon decisions in Asstt. CIT v. Bright Star Investment (P.) Ltd. [2008] 24 SOT 288 (Mum.); Lohia Metals (P) Ltd. v. Asstt. CIT [2010] 131 TTJ 472 (Chennai); CIT v. Gopal Purohit [2010] 188 Taxman 140 (Bom); CIT v. S. Ramaamirtham [2008] 306 ITR 239 (Mad.); CIT v. N.S.S. Investments (P.) Ltd. [2005] 277 ITR 149/[2007] 158 Taxman 13 (Mad.); Chowdhary Associate I.T. Appeal No.1241/Delhi/2010 Delhi Bench 'B' for the assessment year 2005-06; Suresh Kumar Seksaria v. Asstt. CIT [2010] 1 ITR (Trib.) 783 (Mum.); Kaur Singh v. CIT [1983] 144 ITR 756/[1982] 11 Taxman 207 (Punj. & Har.); CIT v. PNB Finance & ....
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....as stock in trade in to investments are not evident from the said resolution nor are evident from the impugned order and nor even have been submitted before us. There is nothing in the said resolution that the assessee shall hold further purchase of shares during the years under consideration as investments and not stock in trade. In fact, the audit reports for the year ending 31.3.2005, 31.3.2006 & 31.3.2007 reveal that the assessee is carrying on the business of trading in shares, securities and debentures. Col. 11(b) of the said audit report reveals that there is no change in the method of accounting as compared to the previous year. The details of total turnover during these three years reveal as under: AY Total turnover as per audit report [In Rs.] Sale of shares/mutual fund as per P & L a/c [In Rs.] Purchase of shares/mutual fund as per P & L a/c [In Rs.] GP/turn Over NP/turn over Stock/turnover 2004-05 550256029 466907061 522945905 NA NA NA 2005-06 810892003 613472393 646941188 24.58% 23.26% 8.56% 2006-07 2119314877 1464954511 1855627696 Not shown 30.31% 21.69% 2007-08 3517610642 318....
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....see are held to be capital assets, short term capital gain on sale of such shares could fall within the ambit of Section 111A of the Act, and such capital gains would be subject to tax at a lower rate. If the shares are held by the assessee as stock in trade, profit on the sale of such shares would constitute business income, and be subject to tax at a higher rate. As mentioned above, Section 2(14) (i) of the Act defines a capital asset as not including stock in trade. If the assessee held the shares as "stock in trade", and not as investment, then such shares would stand excluded from the definition of "short term capital asset", and the profit earned on the sale of such shares would not be exigible to tax as "short term capital gain", but as "profits and gains from business". 7.3. In determining the issue as to whether, after acquiring the shares, the assessee dealt with it as an investor, or carried on business with it, treating it as its stock-in-trade or as a trading asset, what is relevant is that, if the case falls within the former category, receipts by way of sale of such shares will be capital receipts, but if it falls within the latter the receipts will be trading rec....
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....s stock in trade of share and securities worth 2,08,03,217.30 in to investments. There is no material before us that shares and securities purchased in the years under consideration and classified as investment in books were actually intended to be held as long term investments. In fact, the assessee, as in earlier years, is trading in such shares and securities and even the audit reports u/s 44AB of the Act for the years under consideration do not suggest otherwise. Except the aforesaid resolution of BOD of the company, no material is evident from the impugned orders nor has been brought to our notice that activity of trading in shares hither to is materially different in the years under consideration; rather we find that turnover as well purchase of shares has been continually increasing. Profits realised by the sale of shares may be capital if the seller is an ordinary investor changing his securities, but it may be income if the seller of the shares is trading in shares, as held in Raja Bahadur Visheshwara Singh (supra). In the instant case, there is nothing to suggest that the assessee hither to a trader in shares, has stopped trading in shares and has become investor alone. T....
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....t for investing in an asset for retaining. (3) What is the frequency of such purchases and disposal in that particular item ? If purchases and sales 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 trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale are for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet ? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (wh....
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....res held as stock-in-trade and shares held as investment-Tests for such a distinction. The Income-tax Act, 1961 makes a distinction between a capital asset and a trading asset. 2. Capital asset is defined in section 2(14) of the Act. Long-term capital assets and gains are dealt with under section 2(29A) and section 2(29B). Short-term capital assets and gains are dealt with under section 2(42A) and section 2(42B). 3. Trading asset is dealt with under section 28 of the Act. 4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 dated August 31, 1989, had brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of the assessees as well as for guidance of the Assessing Officers. 5. In the case of CIT v. Associated Industrial Development Company (P) Ltd. [1971] 82 ITR 586, the Supreme Court observed that (headnote) : Whether a particular holding of shares is by way of....
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....l not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/held in the books of account i.e., whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade ; where the object of the investment in shares of companies is ....
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....at the purchase of the asset was made solely and exclusively with an intention to resell the asset at a profit, it would be a strong factor for inferring that the transaction was in the nature of business. In the case of Pari Mangaldas Girdhardas v. CIT [1977] CTR 647 (Guj), after analysing various decisions of the apex court, this court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business. (a) The first test is whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. (b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. (c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was with the assessee. Has it been treated as stock-in-trade, or ha....
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....sically motivated by profit in selling the commodity on each and every rise in value. He aims to earn profit by generating volume by frequently turning over the stocks in which he is dealing. High frequency, high volume and regularity of transactions are therefore the basic features of a trading transaction. An investor on the other hand makes purchases with a view to earning income from the investments. He is not tempted to sell the commodity to earn quick profit on each and every rise in the value and holds the commodity for a longer period so as to have income as well as appreciation in value. The true nature of transaction can be understood from the intention of the assessee at the time of purchase. 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 be holding shares for more than a year and any sale before one year ....
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....der the head profits and gains of business. In the instant case, the assessee converted shares of 56 companies from stock in trade in to investment in the period relevant to the AY 2005-06 and purchased shares of 122 companies by way of investment. Out of these shares of 178 companies, shares of 65 companies were completely sold off while shares of 45 companies were partly sold. The audit reports for the years under consideration do not suggest any vital change in the nature of activity nor any such material has been placed before us. The transactions in the years under consideration on account of sale and purchase of quoted shares are same as in the preceding years and the same has to be accepted as income under the head business or profession. There is no basis for treating the assessee as an investor in shares, when his intention was to trade in quoted shares. 7.7.1 In Chowdhary Associates (supra) relied upon by the ld. AR, the said assessee converted only four shares in its stock in trade in to investment and accordingly, the ITAT accepted the claim of the assessee. Likewise in Sarnath Infrastructure Pvt. Ltd., the ITAT concluded in favour of the assessee because no material....
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....hether one was a dealer in shares or an investor, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step - the purchase of the shares - was not taken as, or in the course of, a trading transaction. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these. If all the relevant factors have been taken into consideration and there has been no misapplication of the principles of law, then the conclusion arrived at by the Tribunal cannot be interfered with because the inference is a question of law, if such an inference was a possible one, subject, however, that all the relevant factors have been duly weighed and considered by the Tribunal, the inference reached by the Tribunal should not be interfered with." 8. We are of the opinion that the character of a transaction cannot be determined solely on the application of any abstract test or rule and the cumulative factors affecting the transactions have to be seen. Habitual dealing in a particular item and that too since inception is indicative of the ....