TaxTMI 
TaxTMI 
2010 (9) TMI 1151
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....the AO be restored to the above extent. " Since similar issues are involved , these five appeals were heard together for the sake of convenience and are being disposed of through this common order. 2 Facts, in brief , as per relevant assessment order for the AY 2000-01 are that a search u/s 132 of the Income-tax Act , 1961 [hereinafter referred to as the "Act"] was conducted in the group cases of Shri Himanshu J Shah on 22-09-2005. A warrant of authorization u/s 132 was issued in the name of the assessee also. Consequently, in response to a notice dated 22.5.2006 u/s 153A(a) of the Act , the assessee filed return declaring income of Rs. 2,21,020/- for the AY 2000-01 on 17.5.2007. Likewise returns were filed for the remaining assessment years also. During the course of assessment proceedings, the Assessing Officer[AO in short ]not iced that Shri Himanshu J. Shah and his following family members had entered in to transact ions in shares over a period of time, including during the period relevant to the A.Ys 2000-2001 to 2006-2007: Sr. No. Name Relationship with Himanshu J. Shah 1: Shri Himanshu J. Shah Self 2. Shri Bankim J. Shah Brother 3. Shri....
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....12-07 & 19-12-07 05-06 22-5-06 17-5-07 15,46,900 41,84,370 16,12, 471 1-11-07 17-12-07 & 19-12-07 06-07 22-5-06 17-5-07 32,76,320 37,08,740 10,23,761 1-11-07 17-12-07 & 19-12-07 3. On appeal, the ld. CIT(A) allowed the claim of the assessee in the following terms:- "6. The details on record, submissions made etc. were carefully considered. It is held that the challenge to the validity of the assessment order(s) is not only misplaced but also misdirected. The appellant has vainly attempted to.yoke together the hetrogenous concepts of the Chapter-XIV B with the provisions of Section 153A. Further, no specific instance of any denial of natural justice is brought on record. Moreover, this is not the forum before which the legal validity of the provisions of the Act can be challenged. Thus, the related grounds of appeal are dismissed without further elaboration. 6.1 The appellant had disclosed income from capital gains / dividends in earlier years and the shares as investments in the books of account/balance sheets. The transactions were on delivery basis and were not repetitive / numerous, enough to warrant ....
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....2. Raja Bahadur Visheshwar Singh Vs. Commissioner of Income-tax (1961) 41 ITR 685 (SC) 3. Central India Agencies (P.) Ltd. Vs. Commissioner of Income-tax (1970) 77 ITR 959 (ALL) 4. Sarojini Rajah (Mrs.) Vs. Commissioner of Income-tax (1969) 71 ITR 504 (MAD) 5. Dalhousie Investment Trust Co. Ltd. Vs. Commissioner of Income-tax (1968) 68 ITR 486 (SC) 6. Commissioner of Income-tax Vs. Associated Industrial Development Co. (P.) Ltd. (1971) 82 ITR 586 (SC) 7. Commissioner of Income-tax Vs. Holck Larsen (H.) (1986) 160 ITR 067 (SC) 8. Commissioner of Income-tax Vs. Sutlej Cotton Mills Supply Agency Ltd. (1975) 100 ITR 706 (SC) 11.2. Principles have been culled out from these judgement as under : 13. After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes : (1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether ....
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....y other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment. (9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item ? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made ? (10) It is permissible as per CBDTs Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. (11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. 11.3. These decision has been fol....
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....In that view of the matter, the action of the revenue authorities in disallowing the claim of the assessee in the relevant year needed verification. In the process to find the answer, it was noted that there was a change in the scheme of taxation relating to short-term capital gains and long-term capital gains. Through the Finance Act, 2004, the Legislature imposed securities transaction tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the Legislature exempted long-term capital gain under section 10(38) from the levy of tax and on short-term capital gain, a concessional rate of tax i.e., 10 per cent has been levied subject to the condition that transactions resulting into this type of gain must have suffered securities transaction tax. That was the first year of such change and, having regard to the quantum of gains, this scheme of taxation only must have prompted the revenue authorities to take a different view on the same types of transactions entered into by the assessee in earlier years. There was no dispute that the assessee had claimed exemption under section 10(38) and/or had paid tax under section 111A at concessional rate on the....
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.... exist no specific provisions, they are the commercial profits which have to be taxed and even in that situation, the assessee may be found to be justified in giving different treatment in the books of account as compared to return of income because of commercial considerations or accounting requirements. Hence, there was no substance in the finding of the revenue authorities in the facts of the instant case. The revenue authorities had also held that borrowed funds were utilized for making such investments whereas in earlier years, interest on such loans had been allowed as business expenditure against profit on share trading transactions shown as business income and in the year under consideration also, no nexus between the interest bearing funds and investment had been established and, hence, for this reason also, there was no merit in treating the long-term capital gain and short-term capital gain as business profits. [Para 8.4] In the facts and circumstances of the instant case, the assessee's claim of short-term capital gain and long-term capital on share transactions where the delivery had been taken or given and securities transaction tax had been paid, wa....
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....ciples laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers. 8. The Authority for Advance Rulings (AAR) [2007] 288 ITR 641, referring to the decisions of the Supreme Court in several cases, has culled out the following principles (page 651) : (i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction ; (ii) the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions ; (iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade ; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield....
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....es are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The Assessing Officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. 12. These instructions shall supplement the earlier Instruction No. 1827 dated August 31, 1989. [F. No. 149/287/2005-TPL] 11.5. In another case Janak S. Rangwalla v. Assistant Commissioner of Income-tax, Range-12(2), the Tribunal has similarly held as under : "The mere 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 alter the nature of transaction. Though the principle of res judicata does not apply to the Income-tax proceedings as each year is an independent year of the assessment but in order to ma....
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....them in the returns of income filed that they are enjoying dividend income from holding shares as investment; (5) It is not shown by the Revenue that stock of shares have been valued at cost or market price whichever is low but they have valued at cost while computing the capital gains; (6) The assessees have apparently discharged the primary onus by keeping record of investment showing holdings only as investment and not stock in trade. The primary onus has not been rebutted by the Revenue. The case of the Revenue is thus based merely on suspicion and on number of transactions carried in one or two years though which are not frequent if we spread them on monthly basis as observed by us above; (7) Assessees have always taken the delivery of shares and made them registered. It has been held in Sarnath Infrastructure (P) Ltd v. ACIT (122 TTJ 216) that once shares are registered in the name of the assessee, intention is clear that it is an investment and not a trade; (8) There is no material on record to suggest that the assessee has fulfilled the legal requirement for dealing as a trader in shares. 13. In our considered view the suspicion ....
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..../Ahd/2008 and others for the AYs 2000-01 to 2004-05. 5.2 We may point out that the Hon'ble jurisdictional High Court in CIT vs. Reva Shanker A. Kothari 283 ITR 338 (Gujarat ) laid down the following guidelines in order to determine whether profits arising on sale is business income:- "The tests laid down by various decisions of the apex court indicate that, in each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction. Each case has to be determined on the total impression created on the mind of the court by all the facts and circumstances disclosed in a particular case. One of the principal tests is whether the transaction is related to the business normally carried on by an assessee. The nature of the commodity would also 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 purchas....