TaxTMI 
TaxTMI 
2015 (6) TMI 605
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....business income" instead of "capital gains" declared by the appellant. 2.1. That the CIT(A) erred, on facts and in law, in holding that the shares held and disclosed as "investment" in the balance sheet were in the nature of trading asset(s) and not capital asset(s), as claimed by the appellant. 2.1. That the CIT(A) erred, on facts and in law, in holding that the shares held and disclosed as "investment" in the balance sheet were in the nature of trading asset(s) and not capital asset(s), as claimed by the appellant. 2.2 That the CIT(A) erred, on facts and in law, in holding that the intention of the appellant in purchasing shares of so-called insignificant companies revealed that the intention of the appellant was to resell the shares, rather than to hold them or retain them as capital asset. 2.3 That the CIT(A) erred, on facts and in law, in affirming the action of the assessing officer in assessing capital gains as business of levelling various false/baseless allegations, without judiciously appreciating the submission of the appellant. 3. That the AO/CIT(A) erred on facts and in law in charging interest under section 2348 and 234C of the Act." 2. Ground No.1 is g....
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....,73,257/- was declared as long term capital gain on which exemption u/s 10(38) of the Act was claimed. The appellant also claimed loss of Rs. 12,11,585/- on sales of future shares as a loss from business or profession which was set off against income from other sources. 6. The claim of the long term capital gains as above became the bone of contention. Therefore a show cause notice was issued to the appellant by the AO vide letter dated 27.02.2013 asking the assessee to explain as to why the income arising from the sale of M/s Balrarnpur Chini, M/s GMR and M/s Pacelep amounting to Rs. 2,77,73,257/- should not be treated as income from business of share transaction. The above referred show cause notice is reproduced for reference as under: "As per Column 8(a) of 3 CD of the audit report, nature of business or profession has been written as share transaction, then why purchase of share of Rs. 3,87,78,265.27 has been shown as investment, in share in the asset side of the balance sheet of the year under consideration and not shown as closing stock of the business. As per Column 8(a) of from 3CD of the audit report, nature of business or profession has been written as share tra....
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.... * Assessee in his reply state that he is director of M/s Subhkarandas Chiranjilal Agencies Pvt. Ltd. But on perusal of the 3CDReport filed during the course of proceedings in the case of M/s Shubhkaran Dass Chiranjilal (Agency) with PAN AAAPC3276C which shows that M/s Subhkaranadass Chiranjilal Agencies is a sole proprietary firm in the name of Sh. Vinod Chaudhary (PAN AAAPC3276C). When the status of the above is a firm then how the assessee has stated that he is a Director in the above company. * Moreover assessee has declared only Rs. 24000/- salary income as a director from the so called company in his computation of income for AY 2010-11. Keeping in view of the above facts, I arrived at the conclusion that the assessee spent most of his time in no other work except share trading. * The assessee is running his business of share trading by making a sole proprietary firm named M/s. Ashish Choudhary stock Investment whose business premises address is 4410, Ganesh Bazar, Cloth Market, Delhi-110006 as declared by the assessee. The assessee filed a profit &loss account balance sheet and tax Audit report of his firm. Keeping in view the above facts, I also arrived at conclusion....
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....8 07.02.2008 05.03.2009 08.06.2009 11.06.2009 13.06.2009 13.06.2009 29.07.2009 31.07.2009 06.08.2009 17.09.2009 79200 21160 440 30000 10000 75000 5000 20800 10000 10000 10000 10000 79200 100360 100800 25800 20800 0 30000 20000 10000 20000 10000 0 2. SVC Resources 31.08.2007 14.07.2009 14.07.2009 17.07.2009 04.08.2009 11.08.2009 12.08.2009 21.08.2009 26.08.2009 03.09.2009 07.09.2009 08.09.2009 11.09.2009 15.09.2009 15.09.2009 16.09.2009 22.09.2009 23.09.2009 400000 30000 20000 25000 5000 30000 20000 25000 25000 50000 10000 15000 25000 25000 15500 3000 6500 25000 400000 370000 350000 325000 275000 245000 225000 200000 175000 125000 115000 100000 75000 50000 34500 31500 25000 0 3. Spentex Industries Limited 31.05.2007 31.05.2007 28.06.2007 03.07.2007 05.07.2007 18.07.2007 19.07.2007 27.07.2007 27.07.2007 24.01.2008 18.07.2008 14.10.2008 17.10.2008 24.10.2008 31.10.2008 04.02.2011 05.02.2011 07.02.2011 07.02.2011 08.02.2011 08.02.2011 08.02.2011 09.02.2011 09.02.2011 10.02.2011 10.02.2011 11.02.2011 11.02.2011....
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....139662 400000 600000 625000 650000 660000 660338 662447 771223 774788 793863 796901 921104 951104 981204 989104 991066 991104 998104 1052067 1069975 1072567 1076591 1141668 1160338 133917 1360338 1500000 7. Valeccha Engineering Limited 16.05.2007 16.05:2007 21.05.2007 26.06.2001 26.06.2007 10.07.2007 12.07.2007 13.07.2007 I 2.11.2007 13.1l.2007 05.01.2008 15.01.2008 2I.10.2008 09.04.2010 7000 7969 31 1000 3000 1500 1000 6000 3000 1540 1460 200 2800 4500 7000 14969 1500 14000 8000 5000 3460 2000 1800 280 0 3000 4500 0 JMC Projects (India) Limited 08.05.2007 10.05.2007 12.05.2007 26.05.2007 01.06.2007 28.06.2007 29.06.2007 03.07.2007 03.07.2007 05.07.2007 35000 5000 5000 1004 996 1103 6897 5000 5000 5000 35000 30000 25000 23996 23000 21897 15000 10000 5000 0 9. Venus Remedies Limited 08.05.2007 26.11.2007 27.11.2007 29.11.2007 03.02.2010 01.02.2011 08.02.2011 08.02.2011 24.12.2011 04.04.2012 12.04.2012 20200 10....
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....going through the share account on demat account, it was noticed by the AO that the assessee had conducted number of transactions and traded in a number of share and transactions were huge. The AO notes that in determining the issue as to whether, after acquiring the share, 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 receipt, and profits there from are business income. 11. The AO observes that to determine as to whether sale of share is to be assessed as business income or as income from capital gain, the most important test is whether the initial acquisition of the share was with the intention of dealing in the share as an investment or to treat it as stock-in-trade. The intention of the assessee is best known to him; however the conduct of the assessee shows his intention. In the instant case the transaction of share have been made which are in the ordinary line of assessor‟s business and the assessee has also accepted this fact by opening a share trading firm conducting share business. 1....
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....long term capital gains of Rs. 2,77,73,257, which were claimed as exempt in the return of income, and short term capital gains of Rs. 4,06,124, on which tax @ 15% was paid under section 111A of the Act. The assessing officer, made addition to the income of the appellant by bringing to tax the capital gains realized by the appellant in share investments by treating the same as business income. One of the objections raised by the assessing officer for treating the capital gains from investment in shares as business income is that as per Column 8(a) of Form 3CD of the audit report submitted by the assessee, the nature of business or profession has been written as share transactions, then the AO wondered as to why the investment in shares should not be treated as stock in trade and resultant gains arising there from as income from business. In reply to the said objection the ld AR contended before the authorities below that the appellant is transacting in the capital markets in two capacities: (a) As an investor in shares through physical delivery of shares in the demat account b) As a trader dealing in share derivatives (futures and options) without physical delivery on recogniz....
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....o borrowings. The same can be seen from the audited balance sheet of the appellant. (Refer P-4 in the paper book) (ii) The shares were held for a long period of the time and were bought with an intention of capital appreciation. (iii) The appellant dealt in limited number of scrips- 3 in case of long-term capital gains and again 3 scrips in case of short term capital gains. According to ld AR, this fact is contrary to the observation of assessing officer that the appellant has dealt in 25 scrips, which is without any basis. The complete chart of Long-Term and Short-Term Capital Gains is enclosed herewith (Refer Pg 1 0 and 11 of paper book, which is reproduced above in para 21 and 22 ) (iv) The total volume of trade of shares during the year was around Rs. 4 crores. So, the same cannot be said to be huge considering the daily average turnover on stock exchanges is to the tune of Rs. 5,000 crores. (v) To the observation of the AO that the appellant has earned a meagre dividend of Rs. 1,09,444/- during the year under consideration on opening share investment of Rs. 4,07,48,118/- viz, 0.27% of the value of investment, it was pointed out by the ld AR that Reliance Industries....
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....e firms. The ld AR pointed out that the combined turnover for the firms was to the tune of Rs. 41 crores during year 2009-10 and the appellant being the only son was responsible for the running the said firms. He was the authorised signatory in bank in both the firms and signs all the sale bills of the firm, which goes to show his involvement in the business. Further, as a customary practice and mark of respect for his father, he does not draw a salary from the proprietorship firm, which is their flagship business. The private limited company is a smaller venture and had turnover of Rs. 40 lacs during 2009-10 and the appellant drew a salary of Rs. 24,000 from it. Thus, according to the Ld. AR the allegation of the assessing officer that the appellant spends most of his time in share - trading is baseless and is a figment of imagination. According to the ld AR, investment in shares is only a secondary task and is intended to capital appreciation of his own money. 25. Countering the next objection of the assessing officer that the appellant is running his business in the name of proprietorship firm namely, M/s Ashish Choudhary Stock Investments and has a well developed infrastruct....
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.... four corners of the aforesaid decisions of Hon‟ble Delhi High Court and the Bombay High Court which were affirmed by Hon‟ble Supreme Court. According to the ld AR, the appellant also maintained two portfolios and the period of holding of shares was significant and thus, it was the submission of the ld AR that the tax demand raised by the AO by classifying LTCG and 'the STCG realized by the appellant as business income ought to be deleted. 29. Reference was also made to the decision of Delhi High Court in the case of CIT vs. Rohit Anand 327 ITR 445 (Delhi). Attention was also invited to the decision in the case Of S.K. Finance vs DCIT: 13 ITR(Trib) 236 (Mum ITAT), dated o4.o2.2010, wherein the ITAT held that depending upon the frequency and volume of shares and comparing the same with the other decided cases, the profit from share investments was held as short term capital gain. In this case, the data with respect to the frequency and volume in a few decided cases was compared where the transactions have been held as investments. The table containing the same was shown to us which is reproduced below:- 30. Further, the period of holding for capital gains reali....
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....to be strongly against the treatment of shares as `Investment‟ are as under:- a) Assessee in past Assessment Years has no where shown in the balance sheet accompanying the returns as to which shares are held as investment which thus negates the very hypothesis of holding either as investment or as trading stock fails at the outset. Copy of balance sheet filed for A Y 08-09, 09-10 was enclosed for ready perusal of us b) In fact the account statement with Tamil Nadu clearly states that the opening stock of many a scrips bought was zero. Copy of Tamil Nadu statement as available on record enclosed thus depicting that with opening stock of zero purchases, the purchase and sale effected via PKC stock broking firm and also via Dynamic securities equities Pvt Ltd entity (two different firm) c) The stock - futures and options trading were also done d) The assessee continued to receive dividend on matters (scrips) irrespective of whether it showed it as alleged investment or for trading, and in fact the reconciliation of so called alleged investment scrips with details on record is not done to support the stand of assessee as the so called scrips on which L TCG and STCG we....
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....ling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is ( Narain Swadeshi Weaving Mills Vs Commissioner Of Excess Profits Tax: 26 ITR 765 (SC)) 39. The Hon‟ble Supreme Court, in the case of Saroj Kumar Mazumdar vs CIT 37 ITR 242, observed that where a 'transaction was not in the line of business of the assessee but was an isolated or single instance of, a transaction, the 'onus was on the Department to prove that the transaction was an adventure in the nature of trade. 40. The Hon‟ble Apex court in Raja Bahadur Kamakhya Narain Singh vs CIT: 77 ITR 253 observed as under: "The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue, if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself no....
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....rder shows that the assessee never intended to trade in shares and being salaried person intended to investor. Therefore, the profit on sale of shares has to be classified as capital gain either as short term capital gain or long term capital gain depending upon the period holding. Since the CIT(A) has directed the Assessing Officer to treat the same as capital gain we do not find any infirmity in the order of lower authority. Accordingly the same is confirmed." (Emphasis supplied) 42. From the aforesaid precedents we need to find out whether the activity of the assessee was adventure in the nature of trade; and that depends upon the intention of the assessee at the time of purchase and the conduct of the assessee thereafter 43. The rationale behind introduction of section 10(38) of the Act was to promote investment in capital markets, the said section being an incentive provision, should be liberally construed as held by the Supreme Court in the case of Bajaj Tempo Ltd. v. CIT : (1992) 196 ITR 188, wherein the Hon'ble Supreme Court observed as under: "A provision in a taxing statute granting incentive for promoting growth and development should be construed liberally ....
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....ding is for trading, frequency of purchase and sale scrip-wise is very high and the period of holding of a particular lot is minimal. We cannot over look the fact noted that over the course of time equity shares have become a popular mode of investment. There is huge variety to choose from. Due to globalization and various uncertainties of modern times, there is increasing volatility in the share market. This has affected the length of period of holding in the cases of investors also. Having regard to these various issues under the provisions of the Act where shares are held for one year and more, the same qualify to be assessed as long term capital assets. The period of less than one year results into short term capital asset. There is no minimum period prescribed for short term capital gains. In certain circumstances, holding of even one day may result into a short term capital gain. It is to be noted that due to large number of companies listed on stock exchange and volatility in the market, even a serious investor has to frequently shuffle his portfolio but it does not signify that the investor is trading. 46. At any rate, where a particular lot of shares are primarily inten....
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....ry at the time of sale in respect of all the shares in its investment portfolio and the assessee had also kept separate records to record the transactions of each category, i.e., delivery based and non-delivery based (F&O). Also, by treating the delivery based transaction as an investment, the assessee clearly established that it did not take the first step as a trader, hence, the result of the delivery based transaction it was treated as short term capital gain or long term capital gain depending upon the period of holding of such shares. The tests of badges of trade evolved by Royal Commission of England and approved by the Hon‟ble Supreme Court are also not met by the assessee. Therefore, it cannot be said that the assessee has dressed up in such way so as to wear the badge of trading. 49. Admittedly the assessee does not indulge in advertising or canvassing of any kind whatsoever and there is no organized effort to obtain profit. 50. The intention of the assessee is the key to decide whether the transaction in shares was for trading or investment let us look into some case laws in CIT vs. Jindal Exports Ltd. (Delhi) TM 101 ITD 129 where in the it was observed at pag....
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.... shares and investments. On the facts both the first appellate authority and the Tribunal had correctly held that the surplus derived from the sale of shares had to be assessed under the head "Capital gains". The findings were based on valid materials and evidence and the order of the Tribunal was not a perverse one warranting interference. Similarly the Hon'ble Madras High Court in CIT vs Trishul Investments Ltd. 305 ITR 434 has stressed on the intention of the assessee in determining whether it was business income or income from Capital Gains. On page 437 their Lordships have observed as under: "Heard the counsel. The assessee is in the business of investments in shares and securities and it was never in the business of trading in shares. The term "business" is defined in section 2( 13) of the Act. The "capital asset" is defined in section 2( 14) of the Act. The test to decide whether it was an investment or an adventure. in the nature of trade, has a very thin line of demarcation. Even a single instance of transaction can be regarded as business an 'even multiple transaction sometimes is deemed as investments. So the criteria for deciding . whether it is investment or ....
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.... ITR 652 (SCe) (iv) CIT v. Associated Development Co. Ltd. as reported in 82 ITR 586 (SC). The above judgments clearly state that the same person can be a trader as well as investor in shares. 57. We have reproduced the table on Para 22 (supra) which divulges the dates of purchase of these shares starting from 28th August 2007 to 04 Feb 2008 and, thereafter, the sale started from 24th May 2009 till 25th September 2009 in respect to his claim for treating the gain a perusal of the table reproduced in Para 33 (supra) it reveals that as long term capital gains whereas for claiming short term capital gain the assessee has purchased the share from 12 June 2008 to 15th October 2008 and sale was between 5th May 2009 till 24th October 2009. The assessee paid STT at the time of sale of such shares. This table indicates that the assessee firstly purchased all the shares over a period of time and, thereafter, started their disposal. In other words, there is no frequent in and out of these shares. 58. It is manifest from a perusal of the Balance Sheet at Page 4 investment, schedule 2, reveals an investment of Rs. 3,87,78,265/- for the year ending 31.03.2010. And from a perusal of t....
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....e sold during the relevant assessment year were acquired in the earlier year(s) and were accepted to be investment in the assessment year 2009-10. Then, it is not open to the Revenue to contend that income from shares transferred is taxable as business income and not as capital gain. The Supreme Court in the case of Karam Chand Thapar And Bros (P) Limited vs. CIT: 82 ITR 899 wherein the Court held that manner of disclosure of investments in books, though not conclusive, is very material. 62. To the ld DR‟s contention that account statement with Tamil Nadu clearly shows that the opening stock of many scripts brought were zero, it was clarified by the ld AR that the demat statement, viz., Tamilnad statement which has been filed by the DR for the period from 1.4.2004 to 14.3.2013, i.e., for a period of 10 years. The said statement contains script wise details of the investment made by the appellant over a period of 10 years. Insofar as shares acquired during the intervening period, say in 2008, obviously the opening balance as on 01.04.2004 would be reflected as „nil‟ in the statement from the period from 01.04.2004. Therefore, the contention of the DR that in res....
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....lant being shown as share transaction in Form 3CD, it was pointed out by the ld AR that the said disclosure was in fact on account of business of dealing in F&O transactions. On perusal of clause 12(a) of Form 3CD, it is noticed that opening/ closing stock of inventory is shown as Nil, which supports the case of the appellant that shares were held as "investment" and not as "stock-in-trade". 66. The allegation of ld DR about frequent trading was vehemently denied by the ld AR. He took our attention to pages 4 to 10 of the assessment order, and showed us that the assessing officer has reproduced transactions for the period from 01.04.2007 to 31.03.2013, i.e., spread over period of 6 years. On the contrary we find that the shares transferred during the year were held for substantial period of time prior to its transfer as is evident from a perusal of Para 22 and 23 (supra) that the assessee sold total only five (5) scrips to earn both the LTCG and STCG. 67. The allegation of the ld DR that amount were advanced to M/s. Shubkaran Das Chiranji Lal for trading in shares is factually incorrect for the simple reason as pointed out by the ld AR that the said firm has never traded/ inv....
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....has made questions the veracity of the claim, it should be remembered that receipt of dividend is dependent on various factors viz., declaration of dividend by the investee company, holding of shares on the record date, etc and cannot be the only indicator to decide the nature of gain. The Hon‟ble Delhi High Court in the case of CIT vs. Ashok Wadia: 224 Taxman 23, wherein the Hon‟ble High Court held that the quantum of dividend is not relevant in determining the nature of gain arising on transfer of shares. 72. As regards the decisions referred by the ld DR are concerned, the same are distinguishable and not applicable to the fact of the present case as elaborated hereunder:- a) Dalhousie Trust Company Investment: 68 ITR 486 (SC): In that case shares were held as stock-in-trade by the assessee and therefore profit was held to be in the nature of business income. In the present case, shares are held as "investment" and not as stock-in-trade and therefore, gain has rightly been offered for tax under the head "capital gain". b) Raja Bahadur Visheshwara Singh vs. ClL: 41 ITR 685(SC): In that case, on account of substantial nature of transactions, magnitude of share....
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....e fact that the assessee did not compute capital gain in accordance with section 48, the Tribunal held that the dominant intention trading in shares. The aforesaid decision is not applicable to the facts of the present case inasmuch as the assessee dealt with only five scripts during the relevant year and the gains were computed in accordance with the provisions of section 45 of the Act. g) Manoj Kumar Sanda ria vs. CIT: ITA No.97 of2014: In that case, the Tribunal noticed that the shares were traded very frequently and the average period was one month only. It was further noticed that volume of transaction in 25 scripts was quite high. In those facts, gain arising on transfer of shares was held to be business income. In the present case, gain arose in only 5 scripts and the shares were held for substantial period of time. 73. Another factor which is of paramount importance is the assessee‟s contention raised before the authorities below that these shares were purchased out of the assessee‟s own funds without making any borrowing. This argument of the assessee has not been controverted on behalf of the Revenue by any cogent material, whereas, it is clear fro....
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....est that there is no alteration in the character of income shown by the assessee. The principle of consistency in terms of the assessee doing business in F & O transaction as well as investment in shares cannot be lost sight of. 77. In view of the above discussion, and after careful consideration of various case laws and the Board‟s Circular on the subject referred above, we are of the considered opinion that ld. CIT(A) erred by holding that the Assessing Officer was justified in changing the treatment of income of appellant from Short term capital gains and long term capital gain to income from business. The impugned order to treat the income of Rs. 4,06,124/- declared by the assessee as Short term capital gains as Business Income and to treat the income declared by the assessee as long term capital gain of Rs. 2,77,73,257/- as business income is not sustainable in the eyes of law and so it need to set-aside and we do so. In the background of the aforesaid discussions, we set aside the finding of the ld CIT(A) and we allow the appeal. 78. In the result the appeal is allowed. Order pronounced in the open court on 12.06.2015. ============= Document 1 T Y. SALE ro....
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....PKC STOCK BROKING P 20800 LTD, NORMAL/2009 105 8. 13/06/200910090241 By DYNAMIC EQUITIEIS PVT 30000 30000 LTD/10003983 9. 13/06/200910090277 To CM PKC STOCK BROKING P LTD, NORMAL/2009 106 10000 20000 10. 29/07/200910095505 To CM DYNAMIC EQUISITIES PVT 10000 10000 LTD, ROLLING MARKET LOT/0910082 11. 31/07/200910095770 ROLLING By CM DYNAMIC EQUITIES PVT LTD, 10000 20000 MARKET LOT/0910082 12. 06/08/200910096444 To CM PKC STOCK BROKING P 10000 LTD, NORMAL/2009144 10000 13. 17/09/200910102722 To CM PKC STOCK BROKING P LTD, NORMAL/2009175 10000 0 GMR INFRA STREET 17. 14. 15. 22/05/200910086838 ION EXCHANGE (INDIA) LIMITED 16. 31/07/200915269 31/07/200910095771 06/05/200910084639 To CM PKC STOCK BROKING P 1000 LTD, NORMAL/ 2009078 2500 To CM PKC STOCK BROKING P 2500 LTD, NORMAL/2009090 0 By Inter Depository transfer 7075 7075 CDS/12028800000000110 ROLLOING By CM DYNAMIC EQUITIES PVT 5195 LTD, 12270 MARKET LOT/0910082 18. 03/08/200915284 By Inter Depository transfer 12730 25000 CDS/....