TaxTMI 
TaxTMI 
2016 (11) TMI 959
X X X X Extracts X X X X
X X X X Extracts X X X X
....efore us in the context of factual matrix of the case. The question as to whether the assessee has earned capital gain or business profits on the shares sold by him depend on the facts and circumstances of each case. Such decision is Shri Mohan K.Jain, Mumbai 27 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 to be arrived at by taking into account the intention of the assessee while purchasing the shares, as to whether the same was acquired for holding as investment or for doing business therein. The treatment given by the assessee in its books of account is also one of the decisive factors to find out whether the shares were held as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be treated as capital gains. On the other hand, if the shares are purchased with the intention to earn profit thereon and the same is treated as stock in trade in the books of account, the profit arising out of sale of such shares are liable to be treated as business income. Volume and frequency of transaction is also one of the guiding factors to fin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on in case Shri Mohan K.Jain, Mumbai 29 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 of S.M.K. Shares and Stock Broking Private Limited, I.T.A.No.799/Mum/09 order dated 24.11.2010. For this proposition, the decision of Hon'ble Supreme Court in the case of Gopal Purohit, 228 CTR 582, is very much relevant and important. From the record, we found that assessee was investing in shares as well as trading in shares. He has maintained two portfolios of share transactions i.e delivery based share transactions and non-delivery based share transactions. The non-delivery based share transactions were in respect of F&O and intra-day share transactions, profit of which has been shown under the head income from business. In respect of delivery based share transaction, profit has been shown as STCG or LTCG, depending upon the period of holding. However, profit or loss earned on non delivery based transactions are shown as his business income. The assessee has maintained separate ledger accounts. Transactions were recorded separately at the time of purchase of shares. In respect of shares held as investment assessee had valued the same at the year end at cost and in respect of shares held in is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pra), which was affirmed by the Hon‟ble jurisdictional High Court and the SLP filed against the same by the Revenue was also dismissed by the Hon‟ble Supreme Court, held that the AO was prompted to take a different view on the same sets of facts and types of transactions entered into by the assessee in the relevant assessment year and as found in its earlier assessment year. The CIT(A) also elaborately dealt with the consistency in the treatment of profit arose on similar transaction of sale and purchase of shares. The CIT(A) also considered volume, frequency and continuity of transactions, average holding period in respect of each and every shares entered into by the assessee during the year under consideration. The CIT(A) found that no interest was paid on the amount borrowed from associates. The CIT(A) had also considered different ratios viz. capital gain ratio, quantity ratio, number of transaction ratio, purchase cost ratio, so as to establish that gains on sale of shares is to be assessed as capital gains or business profits. So far as frequency of purchases and sale of shares is concerned, the same is due to the electronic system of stock exchange.A single order....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pted, then it would be against the legislative intent itself. Here, it is pertinent to mention the intention of Government for introducing the security transaction tax and exempt the long term capital gain earned from sale of shares and levying 10 % tax on short term capital gain and earned on sale of shares. It is noted that under the old provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities were charged to tax either as long term capital gains or short term capital gains depending on the period of holding of the said securities; Short-term capital gains arising from transfer of securities were taxed at the applicable rates (normal rate) and Long-term capital gains were taxed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the taxpayer had an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the long-term capital gains and short-termShri Mohan K.Jain, Mumbai 34 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 capital gains were taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in sec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f stock in trade which are to be treated as trading assets. 11.1 We have gone through the order of the Tribunal in the case of Smt. Sadhana Navera (supra) as relied by learned DR and found that Shri Mohan K.Jain, Mumbai 36 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 on the basis of finding of both the lower authorities that most of the shares were purchased and sold immediately and there were no shares which were acquired prior to 1st April, 2004 and held after 31st January, 2005, the gain arising out of sale of such shares were held to be business income. However, in the instant case before us, the CIT(A) has appreciated not only frequency of transaction but also period of holding and thereafter recorded a finding to the effect that except transaction in case of four companies the profit so arose were liable to tax as capital gains keeping in view the holding period, frequency of transaction etc. Thus, the facts of the case cited by the learned DR are distinguishable from the facts of the instant case. 11.2 We have gone through decision in the case of Jayshree Pradeep Shah (supra) as relied by learned DR and found that on the basis of findings recorded by both the lower authorit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rders, assertions made by respective counsel and the material available on record are kept in juxtaposition and analyzed, we find that the assessee had been consistently investing in shares and income arising from delivery based transaction of sale and purchase of shares had been shown as capital gains i.e. LTCG and STCG depending upon period of holding. Analysis of balance sheet of assessee reflects holding of shares as investment. In the case of Gopal Purohit, 228 CTR 528 (Bom), SLP was filed by the Department against the decision of Bombay High Court and the same was dismissed by Hon'ble Apex Court vide order dated 15.11.2010. In the speech by Hon'ble Finance Minister regarding Direct Tax Cases (Union Budget - 2004-05), especially clause 111, the intention of Government for introducing the security transaction tax and exempting the long term capital gain from sale of share and levying 10% tax on short term capital gain also supports the case of assessee. The idea behind introduction of security transaction tax is to end the litigation on the issue, whether the profit earned from delivery based sale of shares is capital gains or business profit. 12. Even the Hon'ble....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e learned Senior DR and also perused the material available on record. Brief facts are that in the past the assessee was engaged in road building contractor and was deriving income from contract receipts as well as from sale of gitti and during the impugned year, ventured into investment in share market. The income arising from F&O transactions and daily trading in shares (without physical delivery) reflected as speculative business whereas the income on delivery based transactions of sale and purchase of shares, income was shown from capital gains. The learned AO considered the income which was based on purchase and sale of shares as business income on the grounds as narrated in the assessment order as well as at pages 3 and 4 of the appellate order. Broadly, the learned AO was of the view that the intention of the assessee since beginning was sale of shares as trading activities, as evident from audited profit and loss account by not showing the same as short term capital gain and also in Form 3CD the assessee has mentioned the nature of business as trading/dealing in shares/securities and mutual funds. The frequency of transactions was also considered, consequently he treated th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Court on 4th August, 2010." 15. The aforesaid decision was affirmed by the Hon'ble M.P. High Court and reported in (2012) 19 ITJ 326 (M.P). The Mumbai Bench of the Tribunal in the case of Shantilal M Jain vs ACIT vide order dated 27-04-2011 (ITA No. 269/Mum/2010) held that despite large volume of shares transactions, the Assessing Officer cannot ignore the rule of consistency to treat the gains on sale of shares as STCG. In that case, the assessee was engaged in the business of trading in shares and also investment in shares and securities offered Rs. 1.54 crores as short term capital gain and Rs. 2.91 crores from long term capital gain.The long term capital gain was accepted whereas short term capital gain was held to be business profit. Since in earlier assessment years the claim of the assessee was consistently accepted as short term capital gain, it was held that the rule of consistency as propounded by Hon'ble Bombay High Court in the case of Gopal Purohit (supra), it is fairly applicable and the income has to be treated as short term capital gain. Identically in the case of Nagindas P Seth (ITA Shri Mohan K.Jain, Mumbai 42 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee as investment (and therefore, giving rise to capital gains) or stock-in-trade (and therefore, giving rise to business profit) by further opining that no single principle would be decisive and total effect of all the principles should be considered. If the number of transactions are analysed, we note that, in a computer based trading system/ e-filing, the figures, being split up, give misleading high figures, reflecting the individual component of the transaction but really, if these figures are synchronised then clear picture oozes out. The assessee had also earned dividend income of Rs. 19,21,917/- which further fortify assessee‟s intention of investing in shares for earning fix income. 17. The CIT(A) after applying the proposition laid down in the various decisions as discussed above with respect to the facts of the instant Shri Mohan K.Jain, Mumbai 44 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 case and also keeping in view frequency and continuity of transactions, it recorded categorical finding to the effect that profit earned in respect of four companies as discussed above amounting to Rs. 18,41,027/-was liable to be taxed as business income rather than capital g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e order of the Co-ordinate Bench be restore this issue to the file of the AO for recomputing the disallowance under Section 14A by excluding the amount blocked in shares meant for trading purpose. We direct accordingly. 6. In the Assessment year 2009-2010 revenue is aggrieved by the action of CIT(A) for treating profits of sales of shares held for more than 12 months as long term capital gains instead of business income. The precise observation of CIT(A) was as under:- I have considered tile arguments of the Ld. AR. The decision of the AO is primarily, based on the findings in the assessment orders passed in the case of the assessee for earlier assessment years. Hence it is important to look into the history of the: earlier assessment made in the case of the appellant. The appellant has been held as investor in AY 2003-04, 2004-05 and 2005-06 in the scrutiny assessment order passed u/s.143(3). In the AY 2006-07 on which the AO has heavily relied, it is noted that the assessee had offered short term capital loss as well as long term capital gain in that year also and the AO assessed both short term capital loss and long term capital gains as business income. The matter was taken u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....olume and number of transactions, period of holding, high percentage of number of transactions as well as profits in shares held for shorter period, number of transactions where no delivery of shares was taken, repetitive dealing in same scrip, utilization of borrowed funds whether on interest or otherwise, existence of speculative activity, turnover/investment ratio, existence of business establishment and infrastructure, etc will be required to be looked into to determine whether the assessee is investor or trader. The magnitude is not to be seen in absolute terms but only in relative terms i.e it has to be seen W.r.t the total capital available, price of shares, etc. Sale and purchase of same share several times within the year would be another indication of intention of transactions to be for earning quick profit and not to enjoy appreciation of investments over a period. Where the delivery is not taken, profit from such transactions would definitely fall in business income as also held in case of Gopal Purohit(supra). However converse may not be true in all cases i.e. all delivery based transactions on which SIT is paid would not be a decisive factor alone to suggest that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ding activity and investment activity has to be apparent from the relevant facts. Thus the activity of an assessee amounts to trading or investment can change from year to year depending upon various other factors' such as volume and number of transactions, period of holding, repetitive dealing in same scrip, utilization of borrowed funds, existence of speculative activity, high percentage of number of transactions as well as profits in shares held for shorter period, turnover/investment ratio, etc for each year which will determine whether the assessee is investor or trader in that particular year. In short, no single f8c:tor but it is only the cumulative effect of all relevant factors and. circumstances as discussed above that would determine whether the nature of transaction of the appellant was as an investor or as a trader or both in any particular year? 3.6. If the above parameters are applied to the facts of the appellant's case then it is clear that the total transactions of sale of short term shares are 227 with a turnover of 11 Crores which will be high volume and frequency suggestive of the activities like a trader in shares and not an investor It is also noted....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of short term shares have been held as business Income. 3.7. So far the question taxability of long term capital gain of Rs. 3,20,34,059 on the shares held for more than 12 months is concerned, it is well known ,that the share market is highly volatile and hence no one can be expected 'to be doing trading in shares by holding the same for very long period i.e., more than 12 months. Holding period of 12 months can only be with the intention of trading. Hence for the shares held for more than 12 months there cannot be any reason to treat the same also as a part of trading activity. The mere fact that the assessee has been treated as trader for shares held for less than 12 months, doesn't mean that he is required to be treated as trader in shares in respect of shares held for more than 12 months also, if the nature of transaction, period of holing as well as other factors suggest that the assessee has acted like an investor in case of shares held for more than 12 months. In fact, various courts and as well as CBDT circulars has also made it very clear the person can have two portfolio simultaneously as trader in shares and investor in shares. It is noted that the assessee ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome instead of LTCG just because it is sold in more than 4 times, thereby leading to a distorted conclusion. Thus the sale of single scrip more than 4 times after holding the same for more than 12 months cannot be a criteria to decide the issue because it is known fact in share market that when one places an order for sale of a particular number of shares at a particular price, the sale may not materialize in one lot due to lack of availability of buyers for all shares at that price. Hence such shares though placed for sale in one lot, get ultimately sold to more than one lot to several buyers in parts at different point of time on the same day depending upon the market conditions. So these transactions of sale on same day cannot be treated as separate sale transactions on the part of seller who had all the shares for sale at one lot only. Thus the intention should discernible from period of holding and not from the fact that in how many lots the shares are sold. Under these circumstances it cannot be said that the appellant was acting like a trader in respect of the shares which have peep held for very long period of more than 12 months just because the shares were sold on more th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... incurred in relation to income which does not form part of the total income, is correct. The AO must in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. ) Similar view is held in case of Hero Cycles Ltd. [2009] 323 ITR 518 (Punjab & Haryana) also. Thus without giving a finding as to whether there was any expenditure claimed as deduction in relation to exempt income, section 14A & rule 8D cannot be invoked. Hence the addition of Rs. 2,67,243/- made by the AO u/s.14A r/w rule 8D is directed to be deleted. 10. We have carefully gone through the orders of the authorities below and found that CIT(A) has recorded a clear finding to the effect that AO has made disallowance without giving any finding as to whether there was any expenditure claimed as deduction in relation to exempt income. The findings so recorded by CIT(A) has not been controverted, a....