TaxTMI 
TaxTMI 
2012 (5) TMI 418
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....n individual and the sources of income are trading in shares and salary income. Facts in brief as emerged from the corresponding assessment order passed under section 143(3) of the Income-tax Act dated November 10, 2008 were that the return was filed declaring an income of Rs. 11,29,870 as against that the assessment was made on assessed income of Rs. 14,28,796. It was noted by the Assessing Officer that the assessee had declared an income of Rs. 15,53,886 on account of short-term capital gains and of Rs. 2,88,757 as income from long-term capital gains from the activities of purchase and sale of equities. The assessee has filed the details of shares purchased and sold in respect of the short-term capital gains disclosed. As per the Assessing Officer, considering the number of transactions, it was to decide whether income from purchase and sale to be treated as business income or capital gains. The Assessing Officer has referred to a Central Board of Direct Taxes Circular No. 4 of 2007, dated June 15, 2007 ([2007] 291 ITR (St.) 384), wherein certain guidelines have been issued to resolve whether the activity of shares of sale and purchase constitute a business activity or not. After....
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....e guidelines issued by the Central Board of Direct Taxes Circular No. 4 of 2007, dated June 15, 2007 ([2007] 291 ITR (St.) 384) and highlighted the following points:- (i) where a company purchases and sells shares, it should be shown that they were held as stock in trade, for the activity to constitute business, (ii) the substantial nature of the transactions, the manner of maintaining of books of account, the magnitude of purchase and sale and the ratio between purchase and sale of shares needs to be looked into, (iii) whether the motive behind purchase and sale of shares was earning profit or income by way of dividend, etc. He has vehemently contested that in these type of cases where there are frequent transaction of shares, the Revenue Department has constantly taken a view that the assessee has traded the shares as business, therefore, the Assessing Officer was right in computing the share trading income as business income. From the side of the respondent-assessee, the learned authorised representative Mr. Pritesh Shah appeared and in support of the decision of the learned Commissioner of Income-tax (Appeals) ....
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....been split by computers trading of the stock exchanges into many smaller transactions but that does not mean that the assessee has carried so many transactions. In support of the above arguments, few cases of the Tribunal cited are as under:- Sl. Nos. Decision in the case of In ITA Nos. 1. Ramesh Babu Rao v. Asst. CIT 4084, 5318 and 5319/Mum/2009 dated 13-04-2011 2. Mr. Nehal V. Shah v. Deputy CIT 2733/Mum/2009 dated 15-12-2010 3. Deputy CIT v. M/s. SMK Shares and Stock Broking P. Ltd. 799/Mum/2009 dated 24-11-2010 4. Deputy CIT v. M/s. SMK Shares and Stock Broking P. Ltd. 4591/Mum/2009 dated 30-11-2010 5. Nagindas P. Sheth (HUF) v. Asst. CIT and Asst. CIT v. Nagindas P. Sheth (HUF) 961/Mum/2010 and 1836/Mum/2010 dated 5-04-2011 6. Asst. CIT v. Naishadh V. Vachharajani 6429/Mum/2009 dated 25-2-2011 7. ITO v. Radha Birju Patel [2011] 46 SOT 23 (Mumbai) (URO) The learned authorised representative has also referred to few reported precedents as follows:- Sl. Nos. Decision in the case of Reported in 1. CIT v. Niraj Amidhar Surti [2011] 238 CTR (Guj) 294 ; 48 ....
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....o "business income". Though the change in the income-tax statute had happened through the Finance Act, 2004 but the relevant assessment years were not disturbed by the Revenue authorities in the case of the assessee. We are aware of the legal position that the Legislature had imposed security transaction tax on the sale and purchase of shares. We are also aware that the Legislature had exempted long-term capital gain under section 10(38) of the Income-tax Act. The statute has also imposed a concessional rate of tax, subject to the condition that the transaction should be covered by security transaction tax. As far as the present case is concerned, therefore, there is no dispute that the assessee has claimed exemption under section 10(38) of the Income-tax Act and thereupon paid tax under section 111A at concessional rate. From several rulings, certain principles have been culled-out, in brief, are that the intention of the assessee at the time of purchase of shares has to be examined. In this regard, few courts have held that the books of account of the assessee are one of the deciding factor. It has been informed that the assessee has always recorded the amount as investment in sh....
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....Mulchandbhai S. Amin v. Asst. CIT) and I. T. A. No. 2218/Ahd/2009 (in the Revenue's appeal), dated September 9, 2011, wherein one of us, i.e., the respected learned Accountant Member is the author and held as under:- "5. We have heard both parties and gone through the facts of the case. The issue before us is as to whether sale of shares is to be assessed as business income or as income from capital gain. The Assessing Officer treated both long-term capital gains and short-term capital gains as business income while the learned Commissioner of Income-tax (Appeals) following his own order for the preceding year treated only short-term capital gains as business income. However, the Income-tax Appellate Tribunal in their aforesaid order dated May 13, 2011 in the assessee's own case in I. T. A. No. 127/Ahd/2009 for the assessment year 2005-06 treated the short-term capital gains as business income. The learned authorised representative relied upon this order of the Income-tax Appellate Tribunal, facts and circumstances being same in the year under consideration as were obtaining in the preceding year while the learned Departmental representative pointed out that....
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....are for realising 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 realisable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorised in memorandum of association/articles of association? Whether for trade or for investment? If authorised only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? and vice versa. (7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept to the records or otherwise, between two types of holdings ....
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.... dealing in shares both as business as well as investment. It had kept separate accounts in respect of two portfolios. No material was brought on record to show that demarcation line between business and investment was hazy or that the assessee had not maintained an investment portfolio and it was dealing in shares only like a trader. Thus, on appreciation of cumulative effect of several factors present it was to be held that the surplus was chargeable to capital gains only and the assessee was not to be treated as trader in respect of sale and purchase of shares in the investment portfolio.' 5.1 The Income-tax Appellate Tribunal, Mumbai Bench in the case of Janak S. Rangwalla [2007] 11 SOT 627 (Mumbai) held as under:- 'The more volume of transaction transacted by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not after the nature of transaction. Though the principle of res judicata does not apply to the income-tax proceedings as each year is....
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....nd presentation of shares as investment at the year end were same in all the years, and, hence, apparently, there appeared no reason as to why the claims made by the assessee should not be accepted. However, the Revenue authorities had taken a different view in the year under consideration by holding that principle of res judicata was not applicable to the assessment proceedings. There could not be any dispute on this aspect, but there is also another judicial thought that there should be uniformity in treatment and consistency under the same facts and circumstances and it was as already found that facts and circumstances were identical even though a different stand had been taken by the revenue authorities.' 5.2.1 The Revenue filed an appeal before the hon'ble Bombay High Court against the decision of the Income-tax Appellate Tribunal in the case of Gopal Purohit [2009] 29 SOT 117 (Mumbai) and a specific question was raised against the rule of consistency applied by the Income-tax Appellate Tribunal. The hon'ble High Court vide order dated January 6, 2010, CIT v. Gopal Purohit [2011] 336 ITR 287 (Mumbai); 228 CTR 582 upheld the order of the Income-tax A....
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....ept the parameter of frequency in purchase/sale of shares all other parameters indicate that the transactions were in the nature of investment and not the trade transactions. Even for frequency, it was explained by learned counsel that the assessee was mostly making the investment in B-Group scrips and to avoid risk he made investment in several scrips instead of investing in one scrip. He also stated that shares were kept for long period and there is no frequent purchase/sale of same scrips. The learned Departmental representative appearing before us did not controvert these contentions. It is well settled that, to determine whether the assessee is a trader or investor in shares, no single test is conclusive but cumulative effect of all the facts are to be seen. In the case of the assessee, one fact, i.e., frequent purchase/sale of shares cannot be said to be against the assessee especially when in the preceding years all along the assessee has been treated as investor. The plea of the learned Departmental representative that in the assessment year 2003-04 there was no difference in tax rates on short-term capital gains and business income and therefore, the issue did not assume s....
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....b:- Distinction between shares 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 hat 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 Co. P. Ltd. [1971] 82 ITR 586 (SC), the S....
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....ll 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 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 realising capital gains on investments and accounts of remittance to India for investment in India and realising capi....
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....be a relevant factor. It is equally well settled that, merely because the original purchase was made with the intention to resell, if an enhanced price could be obtained, that by itself is not enough to infer that an assessee is carrying on business. However, though profit motive in entering into a transaction is not decisive, if the facts and circumstances indicate that 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] 6 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 furni....
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....003-04, the Assessing Officer has accepted the income declared under the head "Capital gains" on sale and purchase of shares. The facts and circumstances of this year are the same as in the earlier year. Therefore, the ratio of the judgment of the hon'ble Bombay High Court in the case CIT v. Gopal Purohit [2011] 336 ITR 287 (Bom) as well as the hon'ble Gujarat High Court in the case of Niraj Amidhar Surti are squarely applicable to the facts of assessee's case. We, therefore, following the aforesaid decisions, direct the Assessing Officer to accept the short-term capital gain amounting to Rs. 68,87,173 declared by the assessee in the return of income. This ground of appeal taken by the assessee is allowed.' 5.10 In a nutshell, the claim of the assessee regarding income from sale of shares has all along been accepted under the head short-term/long-term capital gains. The learned Commissioner of Income-tax (Appeals) as also the learned Departmental representative appearing before us in his written submissions have observed that the facts of the case pertaining to the claim of short-term capital gain remain the same this year as were obtaining in the im....