TaxTMI 
TaxTMI 
2011 (5) TMI 946
X X X X Extracts X X X X
X X X X Extracts X X X X
....d ground the Department has questioned the order of the CIT(A) for the asst. yr. 2006-07, in which he had directed the AO to treat the surplus of Rs. 79,92,714 arising on sale of shares as short-term capital gains instead of business income as held by the AO. We thus have two contrary decisions taken by the CIT(A) for the two years under appeal on the same issue. These grounds can be taken up together for decision. 4. In the return for the asst. yr. 2005-06, the assessee declared loss of Rs. 14,37,338 from futures and options in the share market and claimed the same to be business loss. Loss from speculative business was shown at Rs. 3,87,616. The assessee also declared short-term capital gains of Rs. 38,11,627 and long-term capital gains of Rs. 1,68,863 on sale of shares. These details were examined by the AO. He first proceeded to examine the nature of the share transactions. From the details filed by the assessee, he noted that there were extensive share transactions including speculative dealings and futures and options transactions. He therefore called upon the assessee to show cause as to why he should not be treated as a person dealing in shares as against the claim of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....capital gains. The AO further noted that the assessee had own capital of Rs. 4,00,00,000 but apparently this was not sufficient for the share dealings and therefore had to resort to the borrowings. As regards the infrastructure employed by the assessee and its co-relation with the other activities of the assessee, the AO reiterated that the assessee was deeply engaged in share speculation business and futures and options transactions and was also utilizing substantial borrowed funds and the investment in shares and debentures and the balances with brokers were almost 75 per cent of the assessee's total funds. Referring to the above aspects of the case, the AO summed up the position in the following words in para 3.11 of his order : "3.11 In the light of the aforesaid analysis, I have no doubt in my mind of whatsoever nature that the assessee cannot be treated as an investor in shares but he is clearly a trader in shares and as such the entire short-term capital gains/long-term capital gains shown by him would also be liable to be treated as business income considering the background discussed hereinabove. The substantial use of borrowed funds, volume of the transactions, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The aggregate turnover of these firms was around Rs. 33 crores. In respect of the assessee's individual business which is that of commission agency in yarn, the turnover was around Rs. 13.56 crores on which the assessee derived commission of Rs. 8.21 lakhs. The assessee thus was left with no time to engage in the business of shares. (b)Even going by the volume of transactions, which in any case is not decisive of the question, the transactions are not voluminous. The short-term capital gains arose from sale of 57 scrips and the total transactions were around 120. This is a small number and it cannot be said that there was huge frequency of share transactions. The average comes to less than one transaction per day. (c)As against the total turnover of around Rs. 84 crores both in the proprietary and partnership firms carrying on yarn business, the turnover in share transactions was only Rs. 12 crores. (d)Out of the total of 128 transactions, the holding period was within one month in respect of 27 transactions and it was within one to two months in respect of 35 transactions. In respect of the balance, the holding period was more than two months. Thus the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... utilized any facts and figures of preceding asst. yr. 2005-06. On the basis of facts of the year under consideration I am of the considered opinion that the appellant was engaged in share investment activities and not in share trading activities. During the year under consideration the purchase and sale of shares were not an independent activity as the average transactions of share was not even one transaction per day. There is no denial of the fact that every economic/financial activity is carried out with the intention of profit only and not with the intention of loss. Thus if the shares were purchased with the intention of resale at a profit, the profit would be assessable as capital gain on sale of shares held as investment. Though, apart from his own capital, appellant has also utilized borrowed capital on which interest was paid at Rs. 15.73 lakhs but during the year no new borrowings were made by the appellant. During the year the appellant made repayment of loan taken in earlier years. The loan amount as at 31st March, 2005 amounting to Rs. 1.10 crores was reduced to Rs. 49 lakhs only as on 31st March, 2006. Thus keeping in view the entirety of facts and circumstances and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n submitted by the learned counsel for the assessee that the investments were shown at Rs. 3,24,59,391. However, the assessee started futures and options dealings this year and it was only in respect of this activity that the assessee had borrowed funds from M/s India Bulls. It was again pointed out that the capital account balance of Rs. 4,19,60,788 was more than the investment in shares and our attention was drawn to p. 149 of the paper book to the statement set out therein showing the number of transactions and the number of scrips, giving rise to short-term capital gains, long-term capital gains, speculation income and futures and options income for the asst. yrs. 2005-06 to 2007-08. 10. It was further contended on behalf of the assessee as follows : (a)The assessee's main business activity has always been trading in yarn or commission agency, either as proprietor or as a partner. So far as the shares are concerned, he has always been an investor for the past 40 years. (b)For the asst. yr. 2006-07, for which year the Department is in appeal, they have not challenged the finding of the CIT(A) that the long-term capital gains declared by the assessee have to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ies. If the PPF balance and the investment in gold and in house properties are excluded from the total of the individual assets in the balance sheet, it would be clear that the investment in shares and debentures and balances with brokers was almost 75 per cent of the assessee's funds. Thus the infrastructure employed by the assessee is heavily oriented towards the share transactions and this is a strong indication that the share transactions amount to a business. (f)So far as the asst. yr. 2006-07 is concerned, though the CIT(A) has referred to the correct principles to be applied, but he has not properly applied them to the facts of the case. For instance, the time devoted to the share transactions is a wrong test to adopt and it is out of tune with the technology available today where share transactions can be entered into and managed online with the aid of computer technology. The CIT(A) has also adopted criteria which are not very important such as frequency and volume of transactions. Thus the wrong application of the settled principles to the facts and the inappropriate criteria adopted by the CIT(A) has vitiated his findings for the asst. yr. 2006-07. 12. In his....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the asset in the books of account, the consistent stand taken by the Revenue authorities in respect of the sale proceeds of the asset in the earlier years, the frequency and volume of the transactions, the period of holding the shares, whether the assessee took or gave delivery of the shares, are all questions which have to be considered before a decision is taken as to whether the assessee held the shares as capital assets (investment) or as stock-in-trade. It is also recognized by the Revenue that the same assessee can hold the shares in two different portfolios-one portfolio for stock-in-trade and another portfolio as investment. This position has been recognized by the CBDT in its Circular No. 665, dt. 5th Oct., 1993. 15. In the present case the commodity in question is shares which are generally traded. But that is not conclusive because it is common knowledge that shares are also held as investment particularly shares of blue chip companies which may yield consistent dividend and may also appreciate in value over a period of years, the appreciation being similar to the appreciation in the value of other investments such as fixed deposits with banks, real estate, gold an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to 3981 days. The details of sale of shares in respect of the second period show shares of Avery India Ltd., Ballarpur Industries Ltd., Colgate Palmolive (India) Ltd., HDFC Bank Ltd., ICICI Bank Ltd., Larsen & Toubro Ltd., CEAT Ltd., Tata Steel, Voltas Ltd. The holding period ranges from 387 days to 9016 days. It is seen thus that the assessee has held the shares for quite a long period. For example, the shares of Greaves Cotton Ltd. were held for almost 27 years (9016 days). The shares of Avery India Ltd. were held for 7493 days. The shares of PCS Industries Ltd. were held for 5674 days. Many of the shares were held for 3000 to 4000 days (9 years to 12 years). Similar details have been filed for the asst. yr. 2006-07 also. For this year in respect of substantial number of sale of shares the holding period was more than one month and in respect of shares which were held for less than a period of twelve months, the surplus was shown as short-term capital gains. In respect of the surplus shown as long-term capital gains, the period of holding in all the share transactions was several years. It is significant that the Revenue has not filed any appeal against the finding of the CIT(A) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rplus on the sale of shares was declared under the head capital gains and for the purpose of computing the gains, the interest cost was also capitalized and reduced from the sale price. The interest has never been claimed as revenue deduction. On these facts it was held that there was no rule that interest cost cannot be capitalized and especially on the facts of the case of the assessee before the Pune Bench it was held that the right course would be to capitalize the interest cost and deduct the whole cost from the sale price while computing the capital gains. It was observed that the interest cost cannot be segregated from the cost of acquisition and for this purpose reliance was placed on the judgment of the Delhi High Court in CIT v. Mithlesh Kumari [1973] 92 ITR 9 (Delhi) where it was held that interest paid by the assessee on monies borrowed for the purchase of an open plot of land would form part of the actual cost of the assessee for the purpose of determining the capital gains derived from the sale of the plot. This decision certainly lends support to the contention of the assessee before us. Even in the present case the Department has no objection to the capitalization o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on 27th Feb., 2004 @ Rs. 4,896 per share. The total cost was Rs. 23,06,114. The company declared bonus shares of 1 : 3 as on 2nd July, 2004 and accordingly the assessee got 1413 equity shares as bonus shares. He thus became the owner of 471 + 1413 = 1884 shares. Out of the shares, he sold 1000 shares in July, 2004 at Rs. 14,85,953 and claimed a loss of Rs. 8,20,161. He further sold 700 shares for Rs. 14,19,838 and offered the entire amount as short-term capital gains under s. 111A. The assessee also had 1187 equity shares of Tata Steel at a cost of Rs. 1,40,113. These shares were purchased in July, 2000. They were sold on 8th July, 2004, 10th Dec., 2004 and 31st March, 2005. In the assessment order the profit on sale of the above shares, both Infosys Technology and Tata Steel, was treated as business income. 24. The argument before the CIT(A) was that the cost of bonus shares was Rs. nil since the assessee is an investor. This dispute is also an offshoot of our decision with regard to ground No. 1. The shares which remained with the assessee as at the close of the previous year were 184 in respect of Infosys Technology and 543 in respect of the Tata Steel. The entire Tata Steel....