TaxTMI 
TaxTMI 
2014 (1) TMI 1441
X X X X Extracts X X X X
X X X X Extracts X X X X
....ding of shares as well as investment in shares. Two separate accounts were maintained in respect of shares so purchased on 'trading account' as well as on 'investment account'. In the audited balance-sheet, the assessee had shown separately investment in shares as well as shares held as stock-in- trade. The assessee was in the activity of investing in shares since inception and showing the said shares as 'investment' in the balance-sheet filed with the return of income and as and when the shares were sold, profit arose thereon were offered as capital gains. However, during the year under consideration the A.O. did not allow the gain so earned on sale of investment as 'capital gains' and treated the same as 'business income'. By the impugned order, the ld. CIT(A) allowed the assessee's claim after having the following observations: "3.7 I have considered the facts of the case and the submissions of the appellant. I find that the appellant has shown short term capital gains on frequent sale to various companies. The appellant has also earned long term capital gains from its investment portfolio during the year. From the perusal of the Profit & Loss account, it is found that appellan....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the appellant. AO is therefore directed to treat the income as Capital gains." 4. Against the above order of the ld. CIT(A), the Revenue is in further appeal before us. 5. Shri O. P. Singh, ld. DR appeared on behalf of the Revenue and contended that the facts during the year are distinguishable from the facts of the earlier year, wherein the tribunal have held that the profit arose on sale of shares were capital gains. He drawn our attention to the observations made by the A.O. with regard to the volume and frequency of transaction and the interest paid by the assessee on the funds borrowed for the purpose of utilization in the shares so purchased. As per ld. DR, in respect of each purchase of shares the assessee has not separately shown the intention of investment or keeping the same as stock-in-trade, however, at the year-end, the shares were classified as investment and stock-in-trade. In terms of observations of A.O., he contended that the profits so arose on sale of shares were correctly taxed by the A.O. as 'business income'. 6. On the other hand, the ld. AR, Shri Rajan R. Vora contended that the assessee was consistently investing in shares and the profits so arose on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....given by the assessee in its books of account is also one of the decisive factors to find out whether the shares were held as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be treated as capital gains. On the other hand, if the shares are purchased with the intention to earn profit thereon and the same is treated as stock in trade in the books of account, the profit arising out of sale of such shares are liable to be treated as business income. Volume and frequency of transaction is also one of the guiding factors to find out whether the assessee is engaged in the business of purchase and sale of shares or making investment to have capital gains thereon. In the instant cases before us, we found that the assessee has invested in shares of Indian Companies since last 5 - 6 years, which is clear from the statement of shareholding of the assessee. Thus, the fact of the assessee investing in shares for the last several years is not in dispute. There is also no dispute to the fact that the assessee has treated the equity shares....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that under the old provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities were charged to tax either as long term capital gains or short term capital gains depending on the period of holding of the said securities; Short- term capital gains arising from transfer of securities were taxed at the applicable rates (normal rate) and Long-term capital gains were taxed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the taxpayer had an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the long-term capital gains and short-term capital gains were taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities, however, the gains were taxed as any other normal business income. Thus tax liability on the income from purchase & sale of shares as regards to the STCG & business income was at par. However, the issue of treatment of income from share transaction as capital gain or business income has in-fact arisen after the amendment brought with Finance Act - 2004 by insertion of provisions o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y investing in shares and income arising from delivery based transaction of sale and purchase of shares had been shown as capital gains i.e. LTCG and STCG depending upon period of holding. Analysis of balance sheet of assessee reflects of holding of shares as investment. In the case of Gopal Purohit, 228 CTR 528 (Bom), SLP was filed by the Department against the decision of Bombay High Court and the same was dismissed by Hon'ble Apex Court vide order dated 15.11.2010. In the speech by Hon'ble Finance Minister regarding Direct Tax Cases (Union Budget - 2004-05), especially clause 111, the intention of Government for introducing the security transaction tax and exempting the long term capital gain or from sale of share and levying 10% tax on short term capital gain or from sale of shares also supports the case of assessee. The idea behind introduction of security transaction tax is to end the litigation on the issue, whether the profit earned from delivery based sale of shares is capital gains for business profit. 12. Even the Hon'ble Apex Court in the case of K.P. Verghese vs TO, 131 ITR 597 (SC) observed as under:- ''The task of interpretation of a statutory enactment is not mech....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sical delivery) reflected as speculative business whereas the income on delivery based transactions of sale and purchase of shares, income was shown from capital gains. The learned AO considered the income which was based on purchase and sale of shares as business income on the grounds as narrated in the assessment order as well as at pages 3 and 4 of the appellate order. Broadly, the learned AO was of the view that the intention of the assessee since beginning was sale of shares as trading activities, as evident from audited profit and loss account by not showing the same as short term capital gain and also in Form 3CD the assessee has mentioned the nature of business as trading/dealing in shares/securities and mutual funds. The frequency of transactions was also considered, consequently he treated the amount of Rs.49,81,915/- as business income from share trading. However, before the learned Commissioner of Income Tax (Appeals) the basis of additions was explained as evident from para 3.1.1 onwards. The crux of claim of the assessee is that in the audited accounts, the sale of shares amounting to Rs. 9.43 crores in which delivery had been taken, STT was paid and the shares were s....