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TaxTMI 
2011 (1) TMI 1377
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....declared at Rs. 8,87,249/-. Income from short term capital gain arising from sale of shares amounting to Rs. 1,06,25,612/- was offered to tax at lower rate of 10% u/s 111-A whereas long term capital gain arising from sale of shares amounting to Rs. 1,23,52,566/- was claimed to be exempt. The dividend income of Rs. 2,00,819/- was also claimed to be exempt. In the audit report filed along with the return of income, the nature of business of the assessee was shown as of trading in shares, mutual funds, options and derivative products and commodity trading. It was noted by the A.O. that the assessee firm was carrying on the share transactions in the year under consideration as well as in the immediately preceding two years and substantial profit arising from the said transactions was classified and declared as speculation profit, business profit, short term capital gain and long term capital gain. He also noted that the assessee was very actively involved in the futures and options transactions right from the introduction of such transactions to the Indian markets. He also noted that the activities of speculation trading in futures and options and purchase and sale of delivery based sh....
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....cerns. f) The assessee has an audited P&L A/c. to which all the receipts are credited against which the various establishment expenses are claimed. This signifies an organized and systematic activity. g) There is a clear profit motive in the transactions resulting in substantial incomes generated as can be seen from the returns filed. h) The dividend income credited to the P & L A/c. is only from few of the companies. It is seen that the assessee had exited from several counters even before the dividend is disclosed. From the details filed of the SHORT TERM CAPITAL GAIN and the dividend details, it is seen that no dividend is received from Alstom Ltd., Bajaj Hindustan, Flextronics, Grieves Cotton, Lupin Chemicals, Mphasis BFL Ltd., Rajratan Gas, Ratnamani Metals, Sesa Industries Ltd., Shaw Wallace, Shiv Vani Universal Ltd. and Yes Bank Ltd. As against this, the assessee disclosed dividend only from six scrips. Therefore, it is evident that the assessee is more interested in profit maximization than retaining the shares over a period of time for deriving the benefits of investment. It is noteworthy that the assessee has not received a single bonus issue or....
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....ading activity since its inception from 17th January, 1993. it has also commenced business in derivative segment of shares and commodity. 2. The profit and loss from derivatives of shares is offered as business income whereas the profits from investment activity have been continued to be offered as STCG and LTCG. 3. There are no borrowings by the assessee for its investment activity. 4. All the transactions are through the broker and proper delivery. The transactions are not merely by a book entry. 5. The assessee has surplus own funds which it deploys in securities / shares to have appreciation and dividend over a period of time. The partners apply their mind for proper investment in securities. 6. The investment in shares is made for capital appreciation and also for earning dividend income. 7. The average holding period in most of the cases is more than 2 months which clearly falls under the definition of short term capital assets. Whenever the holding period exceeds 12 months, its investments are eligible to be treated as LTCG. 8. The assessee also derives capital gains from investments in units of mutual funds. ....
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....reas the profits from investment activity are offered as STCG and LTCG. This submission at best can be taken as the description of the heads under which incomes generated from different activities are to be offered for tax. Merely because assessee has classified them on its own, it does not mean that they should be assessed in the same way. In fact, the case of the Revenue is that the entire activity itself constitutes business. Therefore, the way he has been offering incomes, has no relevance. (3) The assessee stated that there are no borrowings for the investment activity. This is a matter of facts. Though business activity may generally involve raising of loans etc, it is not hard and fast nor is it compulsory that every business should invariably have borrowed funds. In fact, in the terminology of corporate world, "a zero-debt company" is a term existing from ages. Several companies across the world operate on a "zero-debt philosophy" and they are well appreciated. Therefore, at best, this submission of the assessee speaks of its sources of funding the transactions but it cannot in any way disqualify the transactions to be treated as business in nature. (4) Th....
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....y cases it is for few days. Therefore, the assessee's submission is incorrect. (8) The next submission is that the assessee also derives capital gains from investments in units of mutual funds. It is worth mentioning here that in the case of STCG declared from mutual fund units, it is seen that the assessee acquired units of the same scheme whose units it sold few days before. That is, it is not an acquisition at one go and disposing of the same but repeated purchases and sales in the same units. The details are provided in the chart form: Name of the Mutual Fund and scheme : Templeton India STIP (Quarterly) Date of purchase Date of Sale 28.03.05 24.08.05 23.08.05 24.08.05 23.08.05 16.11.05 03.10.05 16.11.05 11.10.05 16.11.05 26.10.05 16.11.05 26.10.06 05.12.05 From the above chart, it may be seen that the assessee acquired certain units on 28.03.05 and 23.08.05 which were sold on 24.08.05. Thereafter, the assessee again purchased the same units from 03.10.05 onwards till 26.10.05 which were all sold in the month of November. Therefore, the assessee is repeatedly entering the s....
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....10%. The assessee's submission is on bottom-up logic. Since he is paying 10% tax, he opines that the transactions are in the nature of capital gains. This is an incorrect interpretation of the provisions leading to wrong conclusion. When a transaction is first classified under capital gains and when it falls under the clauses (a) & (b) mentioned above, then the tax payable is 10%. This provision cannot be distorted or wrongly stretched to imply that whenever tax is paid at 10% then it should be invariable treated as capital gains. Hence the assessee's submission is not acceptable. (10) The next point of the assessee is that the shares are all along reflected under investments in the balance-sheet and the shares in trading are regularly shown as stock-in-trade. The assessee's mention of the shares as investment in its balance-sheet does not in any way deter the way the asset has to be treated. Since the assessee is of the opinion that the transactions yield capital receipts, it classified the assets as investments. However, when the transactions are proposed to be assessed as business incomes (revenue receipts), then the assets will be classified as business assets....
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.... administration. (14) The last submission of the assessee is that the CBDT circular stipulates that it is possible for a taxpayer to have two portfolios i.e. an investment portfolio and a trading portfolio. Where an assessee has two portfolios, the assessee may have income under both heads i.e. capital gains as well as business income. This submission of the assessee is nothing but the clarification which the Hon'ble CBDT intended to make. The circular says there is a possibility of an assessee having incomes from both the heads i.e. business as well as capital gains. This clarification is not being challenged; on the contrary, it is being fully followed. However, to give effect to this clarification, it must first be established that the incomes are definitely classifiable under two different heads. In the instant case, the entire transactions are being put to test for arriving at the conclusion as to whether they can be treated as business or not" therefore, the CBDT circular cited by the assessee is being fully complied with and not controverted. 5. The A.O. also referred to the CBDT Instruction No. 1827 dtd. 31.8.89 wherein various factors were given for de....
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....less at 5.94%, implying that almost all the shares acquired during the year have been sold. This again reflects a trading approach and not an investment approach. (vii) The time devoted to the activity and the extent to which it is the means of livelihood. The assessee is involved full time in the share transaction and the commodity transactions. Apart from the receipts from them, the assessee has not a single receipt from any other activity. His day-to-day occupation is that of purchase & sale of shares either on delivery-basis or non-delivery basis. While the receipts from sale of shares is at Rs. 2.29 crores, the receipts from F&O transactions in shares is at Rs. 43.5 lakhs and the receipts from F&O transaction sin commodity items is at Rs. 13.18 lakhs. Therefore, it is evident that the receipts and income from purchase and sale of shares is substantial as compared to the F & O transactions. However, since the substantial part of F & O transaction is again in shares, the assessee's major activity can be held to the share transactions. Therefore, it squarely qualifies to be business in nature. (viii) Whether the securities purchased and sold are listed ....
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....was doing all the share transactions as a 'trader' and not as 'investor' and the entire profits arising from the said transactions was chargeable to tax in its hands under the head "profits and gains of business/profession". Accordingly, the entire profit earned by the assessee from the purchase and sale of shares including that declared by the assessee as long term capital gain and short term capital gain was brought to tax by him in the hands of the assessee under the head "profits and gains of business or profession" in the assessment completed u/s 143(3) vide an order dated 31.12.08. 7. Against the order passed by the A.O. u/s 143(3), an appeal was filed by the assessee before the ld. CIT(A) and the following facts were highlighted on its behalf at the time of hearing before the ld. CIT(A) stating the same to be relevant to decide the issue in dispute:- (i) The Appellant is a partnership firm in existence since 01.01.1976 and it was reconstituted vide deed of partnership dated 1st December, 2003. (ii) The object of the partnership firm as per clause 4 of Deed of partnership is as under:- Clause 4 : NATURE OF BUSINESS That the partnership f....
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.... term gains resulted fromt eh sale of shares held since last year. Further, the short term gains resulted partly from the sale of shares held since last year and partly from the investments of current year. (x) All the transactions done on account of share purchases through broker is purely on delivery basis and cheques are paid by assessees from its own account i.e. not from borrowed funds on pay in date and delivery is transferred to its demat account accordingly by the broker vice versa at the time of sale of the shares. The appellant generally and regularly makes payment for investment by way of purchase in shares and receives payment on sale of investment in shares. All the transactions are executed through a recognised stock broker. These transactions are not merely by a book entry. (xi) In the short term capital gain list, the volume of transactions are few. But because of splitting the purchases corresponding to sale seems to be more because the software picks up each trade wise date instead of bill wise. (xii) (a) The appellant has its own surplus fund which it deploys in securities/ shares to have appreciation and dividend over a period of time.....
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.... The full accounts of the appellant were subjected to audit u/s.44AB of the Income Tax Act,1961. the appellant for all of its income and expenses has followed mercantile system of accounting as stated in column 11(a). (3) Point No.7 on Page No.3 of order AO's Remark Code no. for nature of business in tax audit report. Appellant's submissions We are attaching herewith a full list of codes (page 1 to 2) From the perusal of the same, your honour will appreciate that the ONLY code where business activities of the Appellant like derivatives in shares and commodities, trading in shares are covered is "0204- Trading - Others". Investment activities are not business activities and further there is no code relevant to investment activities prescribed in the list of codes. (4) Point No.8 and 9 on Page No.4 of order AO's Remark Nature of business mentioned in earlier year in tax audit report and break up of income of earlier year. Appellant's submissions It does not have any effect on nature of income since it was specified on computation of income. In the table of year-wise income given ....
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....erefore, the activities of the appellant which bears the characteristics mentioned in the judicial pronouncements referred to by Assessing Officer has already been classified by the appellant as business activities at its OWN. The AO is attempting to give the same colour to the transactions involving acquisition of shares intended for investment by the appellant. Point No.12 (a) to (i) AO's Remark AO repeated and summarized in points remarks made under above points and mentioned details of certain transactions. Appellant's Submissions The appellant is carrying on business of trading in shares, derivatives in shares and commodities in an organized and synthetic manner. It also make investment in shares. As per generally accepted accounting practice universally applied if a concern is engaged in various activities, it shall prepare only one profit and loss account for all its activities. All its receipts/incomes shall be credited to it and all expenses shall be debited to it. Further due to any legal requirement if account are to be audited than automatically full profit and loss account shall be audited. Because of this, investment activi....
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....eton India Mutual Fund 89.76 Vimta Laboratories 7723159.10 Total 12352566.36 9. In addition to the above submission made by the assessee before the ld. CIT(A), the assessee also made an attempt to distinguish all the judicial pronouncements relied upon by the A.O. in support of his decision. After considering all these submissions made on behalf of the assessee before him as the as well as the material available on record, the ld. CIT(A) decided the issue in dispute vide para No. 3.7 to 3.9 of his impugned order as under:- "I have perused the assessment order and have carefully considered the findings and the conclusions of the Assessing Officer. I have also carefully considered the submissions of the appellant. I have considered the facts of the case and various judicial pronouncements referred by Assessing Officer as well as by appellant. I have also perused the accounts of the assessee and computation of income of the appellant for last three years. I found that the appellant has properly reflected the business income and capital gains in the accounts and has also reflected in accordance with the provisions of section 14 in computation. I am ....
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....he surplus/loss on sale of shares held for less than 30 days as business income/loss and the to treat the surplus/loss on sale of shares held for more than 30 days as Capital gains/Loss. This will have an impact of taking only a sum of Rs. 15.72 lakhs as business income in place of short term capital gain." 10. The ld. CIT(A) thus held that the assessee has entered into share transactions both as investor as well as trader. He held that the period of holding of shares was crucial to decide whether assessee had entered into particular transaction in shares as investor or trader. According to him, where the shares were sold by the assessee after holding the same for less than 30 days, the transactions of sale of such shares could be treated as business transactions of the assessee giving rise to business income. As regards the sale of transactions of shares which were hold for more than 30 days, he held that the profit/loss arising from such transactions was chargeable to tax under the head "capital gain" either as short term or long term capital gain depending on the period of holding. The ld. CIT(A) thus allowed a part relief to the assessee on this issue by his appellate order ....
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....BDT were applied by the A.O. to the facts of the assessee's case which clearly revealed that the assessee was a trader in shares and not the investor. In this regard, he took us through the relevant findings/observations given by the A.O. on page No. 17 of the assessment order and strongly relied on the same. He contended that all these findings/conclusions recorded by the A.O. in the assessment order in support of his action in treating all the transactions in shares made by the assessee as business transactions and bringing to tax the profit arising from such transactions under the head "profits and gains of business/profession" have been completely overlooked/ignored by the ld. CIT(A) who has decided the issue as to whether the shares were held by the assessee as stock-intrade/ investment merely going by the holding period of such shares. He contended that this issue has to be decided on the basis of intention of the assessee to hold the shares and such intention has to be gathered from all the relevant facts and circumstances of the case. He contended that the approach adopted by the ld. CIT(A) while deciding the said issue merely on the basis of holding period of the shares th....
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....to ensure better returns. He contended that the burden to prove that the transactions in shares made by the assessee were on trading account was on the Revenue which they have failed to discharge satisfactorily. He contended that the transactions in shares thus were carried out by the assessee as investor and not as trader and the profit arising from the said transaction was rightly offered by it under the head 'capital gains' as short term and long term depending on the period of holding. In support of his contention, the learned counsel for the assessee relied, inter alia, on the decision of ITAT in the case of Gopal Purohit vs. JCIT 122 TTJ 87 and submitted that the same has already been affirmed by the Hon'ble Bombay High Court in 228 CTR 582. 14. We have considered the rival submissions and also perused the relevant material on record. As regards the first contention raised by the learned counsel for the assessee relying on the Rule of Consistency that the assessee having treated as investor in shares in earlier years and the profit arising from sale of shares having been accepted as capital gains in the earlier years, there was no reason for the Revenue authorities to take....
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....rt period of less than three months in most of the cases except three transactions wherein shares were held by the assessee for more than one year and that to by a couple of months. The average period of holding thus was very short. In the case of Sarnath Infrastructure Ltd. (supra), the assessee had enjoyed dividend income and such income received on shares held by it as investment was duly declared by the assessee in the return of income. As noted by the A.O., the dividend income was received by the assessee in the present case only from six scrips and the assessee had exited from several counters even before the dividend was declared. The A.O. has also given in his order several names of the companies the shares of which held by the assessee did not receive any dividend income. As further noted by the A.O., the assessee had not received even a single bonus issue or a rights issue on any of the shares held by it. In the case of Sarnath Infrastructure Ltd. (supra) , the opening stock of shares held in investment portfolio was Rs. 19,22,203/- and closing stock was Rs. 46,23,274/- whereas sales out of investment portfolio was Rs. 31,18,423/- showing a very low turnover to stock rati....
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....this context, the assessee was found to be entered in to the transactions of shares as a 'trader' irrespective of the treatment given by it in the books of account which are otherwise is not conclusive. As noted by the A.O. in this context, apart from the transactions in delivery based shares, the assessee was indulging in F&O transactions in shares and commodities simultaneously and there was no other activity whatsoever carried on by the assessee in the year under consideration as well as in the past several years. All the receipts from the transactions in shares and F&O transactions were credited by the assessee to the P&L account and various establishment expenses were debited in the said P&L account indicating that an organized and systematic activity was being carried on by the assessee. Income in the form of dividend was earned by the assessee only in respect of few scrips which gave a very low rate of return as compared to the value of shares held by the assessee. In majority of the transactions in shares, the assessee did not hold the scrips beyond a period of two months. Although there were no funds borrowed by the assessee for purchase of shares, we agree with the A.O. t....