TaxTMI 
TaxTMI 
2010 (6) TMI 812
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....ng Tern Capital Gains (LTCG in short) or Short Term Capital Gains (STCG in short) as shown by the assessee instead of assessing by the Assessing Officer under the head "income from business or profession". In all the three assessment years, the common ground raised by Revenue, taken from ITA No.2863/Ahd/2008 assessment year 2004-05 reads as under:- "1. The learned CIT(A) has erred in law and on facts sin directing to tax the income earned from trading in shares under the head 'LTCG / STCG' as shown by the assessee instead of taxing it under the head 'Income from Business & Profession'. 3. At the outset, Ld. Counsel for the assessee, Shri S.N.Soparkar filed copy of Tribunal's order in Group cases of assessees in ITA No.2875 Ahd/2008, 2878- 2881/Ahd/2008, 2883-2884/Ahd/2008, 2887-2891/Ahd/2008 dated 17-09-2009 and stated that exactly on similar facts, this issue has been decided by the Tribunal confirming the order of CIT(A), assessing the income under the head of LTCG/STCG. When the order was confronted, Ld. SR-DR, Shri K. Madhusudhan relied on the assessment orders and he could not make any distinction in the order of Tribunal in the other assessees of the Group cases. ....
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....ital Gain (Rs) Long Term Capital Gain (Rs) Dividend Amount (Rs.) 2005-2005 20.08.04 0/- 2,14,987/- 17546 2005-2006 31.03.07 18497489 16,97,727/- 245000 2006-2007 18.07.07 68861298 54000 Finally, CIT(A) held that income shown by assessee is capital gain in nature depending upon transaction whether it is a STCG or LTCG and he held in paraa-6.1 of his appellate order as under:- "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 the conclusion of the appellant as being a trader. The doubts of the A.O in this regard have been answered by the appellant as summarized in para 3.4 of this order. The decisions of the Hon'ble High Court of Gujarat reported in 283 ITR 338 has laid down general guidelines I this regard and the conduct of the appellant had not been contradictory. The appellant was not solely occupied with shares but had income from other sources as well as per the details (noted in para 4.4 of this order). ....
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....e disposed off. It is evident from the fact that assessees have declared long term capital gain as well. Further assessees have to decide to dispose of investment even after making loss in order to save investment from further loss. It was also explained by the assessees that they have borrowed funds for making such investment and used the same with the intention of acquiring return yielding investment. No interest has been claimed on the funds borrowed for making investment in shares. The assessee has referred to the CBDT Circular No.4/2007 for the proposition that the assessee can simultaneously earn income from trading in shares as well as capital gains from investment in shares so long as the assessee is clearly able to identify and demarcate the shares which are held for trading purpose from the shares which he has held as investment. The Assessing Officer considered the reply of the assessees and on the basis of his finding that the assessees have carried out number of transactions in selling and purchase in shares; that they have harrowed funds secured/unsecured which are interest bearing; looking to the holding period, held the activities of the assessee as not investment i....
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....aining. (3) What is the frequency of such purchases and disposal in that particular item ? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value ? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet ? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in questi....
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....vity and delivery based transactions had been treated as an investment activity and, accordingly, the assessee had claimed himself both dealer as well as investor and had offered income for taxation accordingly, which had been claimed to have been accepted by the revenue authorities in earlier years and, hence, it became important to analyse the facts of few earlier years. On considering the facts of the earlier years, the following conclusions emerged : (i) The facts of the year under consideration with regard to nature of income(s) earned by the assessee and the transactions were same in all those years, except transactions in F&O segment in some of the years wherein this kind of activity was started by the stock exchange. (ii) Interest on borrowed capital had been allowed as business expenditure against the profit on jobbing activities shown by the assessee as business profit. (iii) The assessee had shown shares purchased on delivery basis as investment at the end of the year and no stock-in-trade existed on that date and the assessee had earned both long-term and short-term capital gains which meant the assessee had also held shares for the period of ....
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....s operandi of such share transactions, resulting into any advantage could not be taken away by the revenue authorities in that manner and in those circumstances, principle of consistency, though it is an exception to the principle of res judicata must be applied here. It is further so because the payment of securities transaction tax is mandatory, i.e., whether an assessee earns the profit or not or suffers a loss and by imposition of such tax, the Legislature has not given any benefit to a class of transactions as a whole though it may result into an apparent benefit to individual(s) entering into those transactions. Thus, in the facts and circumstances of the instant case, on the basis of principle of consistency alone, the action of the revenue authorities was liable to be quashed. It was ordered accordingly and the Assessing Officer was directed to accept the claims of assessee in regard to short-term capital gain and long-term capital gain. [Para 8.1] Further, on the basis of merits also, in view of the ratio of the decision of Sarnath Infrastructure (P.) Ltd.'s case (supra), it was held that the delivery based transaction should be treated as of the nature of investment tr....
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....n between shares held as stock-in-trade and shares held as investment-Tests for such a distinction. The Income-tax Act, 1961 makes a distinction between a capital asset and a trading asset. 2. Capital asset is defined in section 2(14) of the Act. Long-term capital assets and gains are dealt with under section 2(29A) and section 2(29B). Short-term capital assets and gains are dealt with under section 2(42A) and section 2(42B). 3. Trading asset is dealt with under section 28 of the Act. 4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 dated August 31, 1989, had brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of the assessees as well as for guidance of the Assessing Officers. 5. In the case of CIT v. Associated Industrial Development Company (P) Ltd. [1971] 82 ITR 586, the Supreme Court observed that (headnote) : Wh....
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....rade as the mere existence of the power to purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/held in the books of account i.e., whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature o....
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....assessee. Though the investment in shares was on a large magnitude but the same would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income from capital gains both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding years and the same was to be accepted as shortterm capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock-in-trade. The mere magnitude of the transaction does not change the nature of transaction, which are being assessed as income from capital gains in the past several years. The Assessing Officer was to be directed to set off the long-term capital loss against the short-term capital gain of the year under consideration. [Para 7] In the result, the appeal filed by the assessee was allowed. [Para 9]" 12. When we apply the principles laid down in the above judgments, we find in the present case that - (1) The assessees did not have dealings in ....
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....laced. Though apparently it may appear that merely because shares are registered/transferred in the name of the assessee he may not go out of ambit of a trader but the fact is that the assessees have discharged their onus by getting the shares registered in their names. Now onus shifts to the Revenue to show that inspite of shares being transferred/registered in the name of the assessees, the assessee are still dealing in shares as a trader. This can be done by them by showing that assessees are carrying out large frequency of transactions, creating an office, carrying out related organized activities and complying with other legal requirement of being a trader. In the present case the frequency of transactions are not so much to hold that the assessees are still traders even though shares are registered in their names. In the above two judgments namely Sarnath Infrastructure (P) Ltd v. ACIT (122 TTJ 216) and Gopal Purohit v. JCIT [(2009) 29 SOT 117 (Mum)], it has been held that assessee would be investor primarily if shares are registered by it in its name. Once there is no contrary material to hold otherwise, we would respectfully follow these decisions and hold that the assessee....