TaxTMI 
TaxTMI 
2012 (5) TMI 89
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....ld be treated as business income and not income from capital gains and an addition of Rs.8,12,84,756/- was made. The said addition was deleted by the first appellate authority and the Tribunal by the impugned order has affirmed the said deletion. 4. The appellant before us has filed a chart giving the details of the sale purchase transactions which are subject matter of the assessment year 2007-08. The chart reads as under : Short Term Capital Gains Sl. No. Name of Company No. of Shares Purchase Price Date of Purchase Date of Sale Months Selling Price Gains/Loss 1. Amtek Auto 15000 4590887 02/09/2005 09/05/2005 8 5350247 759360 2. Unitek 267500 29633058 28/04/2006 24/11/2006 7 81648641 52015583 3. Zee Entertainment 24000 8363126 2.5 5761635 2601491 4. WWTL 12000 4 1342946 1342946 5. Zee News Ltd. 10850 11 402557 402557 6. D.S.Kulkari 15000 2281543 06/09/2005 19/05/2006 8.5 4852211 2570668 7. Ansal Property 47500 43271579 ....
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.... to be in the nature of trade/adventure in the nature of trade. c) The holding period of most of the securities is usually very short. d) The Ratio of sales to purchases is 1.77 (18,64,07,182/10,51,22,426), again pointing that the assessee is engaged in the business of sale and purchase of securities. e) The assessee is indulging in the sale and purchase of securities frequently and regularly during the F.Y. 2006-07. f) The scale of the activity of sale and purchase of securities by the assessee is substantial." 6. Whether a person dealing with shares has made an investment or has treated them as stock-in-trade, has been the subject matter of considerable debate. It is a matter of intention of the assessee, which has to be gathered from his conduct and surrounding circumstances. Various parameter/criteria have been elucidated and explained. A pragmatic and common sense approach has to be adopted, when we determine and decide the question always keeping in mind commercial considerations. 7. The Assessing Officer in this regard referred to the circular issued by the Central Board of Direct Taxes through Instruction No.4/2007 dated 15.6.2007, which reads as under : ....
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....wer 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 account, 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/adventure in the nature of trade ; but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt". 9. Dealing with the above three principles, the AAR has observed in the case of Fidelity group as under : "We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed was as stock-in-trade as the mere existence of the power to purchase and sell shares will ....
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....gust 31, 1989-Circular No.4/2007, dated 15-6-2007." 8. In Commissioner of Income Tax Vs. Rewashanker A. Kothari (2006) 283 ITR 338, the Gujarat High Court, after considering its earlier decision in the case of Pari Mangaldas Girdhardas Vs. CIT (1977) 6 CTR 647 (Guj.), has formulated the following tests to determine whether the assessee can be said to be carrying on business of sale and purchase of various securities or holding them as an investment. The tests are as under: "(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 ....
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.... but in a given case keeping in view period of holding may indicate intention to make investment. The Tribunal applying the aforesaid tests in the present case has accepted the position of the assessee that these shares which are subject matter of short term capital gains were rightly held by the assessee and treated by the assessee an investment portfolio and not a trading portfolio. We also notice that the Tribunal has mentioned that the assessee has received substantial dividend income of more than Rs.19 lakhs and Rs.27 lakhs in the assessment year 2005-06 and 2006-07. The Assessing Officer as noticed above was influenced to a large extent of the fact that the assessee had earned huge profits during the year in question from the sale of the said shares. This can happen even in case of investment portfolio because when investment is liquidated to earn gains and change their portfolio. Element of uncertainty and risk is always there when a person deals in securities but this factor cannot be determinative factor whether the assessee is trading in shares or is an investor. Some investors do take risk. The Assessing Officer has recorded that during the financial year 2006-07, the as....