TaxTMI 
TaxTMI 
2014 (2) TMI 1274
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....nt year under consideration, the assessee has shown income from futures and options operations and intra-day share transactions which were declared by him as his business income. The assessee has also shown short term capital and long term capital gain on purchase and sale of shares and units of mutual funds depending upon the period of holding. The short-term capital gains declared tor the relevant assessment year is amounting to Rs. 1,64,14,957/-. Besides, the assessee has also shown income from other sources being interest on FDRs, bank interest, dividend etc. In the scrutiny assessment, the AO has observed that the assessee has himself shown net surplus from the futures and option - and index futures in the stock market as his business income. This income is credited to his profit and loss account and against that various expenses are claimed to arrive at the net profit from this activity. The various sources of income of the assessee for the relevant assessment year was as under: Share from partnership firm (-) 8,601 Business income from F & O & Speculation 28,29,423 Short-Term capital gains 1,64,14,957 Long term capital gains 55,21,535 I....
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....05-06, ii) only approximately Rs. 8.52 lakhs of short-term capital gains is in relation to holding period of less than 30 days and the rest of the short-term capital gains are far more than 30 days to one year period, iii) the average holding period of shares is 136 days and therefore, in order to consider short-term capital gains as business income, it must be demonstrated that the intention of the assessee was not to hold the shares as his assets, and iv) different types of ratios viz. capital gain ratio, quantity ratio, number of transaction ratio, purchase cost ratio had been given in the reply so as to establish that the short-term capital gains may be assessed as such, v) the short-term capital gain and long term capital gain on sale of shares/mutual funds are in respect to his delivery based transactions and depending upon the period of holding duly following the various provisions of the Act., vii) the assessee has separate portfolio of his delivery based transactions and non-delivery based transactions. Separate ledger accounts are maintained for this purpose. The respective ledger account are posted immediately on purchase of r....
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....res. The AO has also observed that frequency of transactions are as high as 34 transactions for Dharani Sugars and chemicals Ltd, 25 transactions for Dredging Corporation, 19 transactions for B.O.C India, 13 transactions for Cadila Health care and 15 transactions for Coromandel fertilizers Ltd. It was further observed that the very fact that a wide range of scripts are involved and frequency of transactions in them is very substantial, goes on to show that they could not have been held as assets for any kind of appreciation at all, whether in the near future or otherwise. The A.O. has also observed that the analyses of the portfolio of the short term capital gains of the assessee shows that there are 31 transactions of less than 15 days, 48 transactions of less than 30 days, 122 transactions of less than 60 days and 193 transactions of less than 90 days, undertaken during the relevant assessment year. He is also observed that on perusal of the portfolio of his shares held as shortterm capital gains, shows that there are multiple trades done in respect of shares/mutual fund units of single company or alternatively regular, multiple and frequent transactions across the board i.e. cri....
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...., the assessee was maintaining separate ledger account and other details in respect of his transactions shown as investment purposes and trading purposes. It was further highlighted that the assessee has entered these transactions in the respective ledger account, right from inception of the transaction, which shows that the assessee has always intended to hold those shares for the purpose of his "Trading Portfolio" or "Investment Portfolio". Attention was also invited to the scrutiny assessment order of assessee framed u/s 143(3) for the assessment year 2005-06, wherein assessee's claim of short term capital gain as well as business income was accepted. 7. After considering the observations made by the Assessing Officer vis-à-vis, the contention of ld. Authorized Representative, the ld. CIT(A) partly disallowed assessee's claim to the extent of Rs. 18,41,027/- whereas balance of short term capital gain was directed to be treated as such. Precise observation of the CIT(A) was as under :- "In appeal, the AR of the assessee Shri Nikhil Gandhi, CA strongly contested that the AO has not appreciated the correct facts available in the case of the assessee while decidin....
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.... as per the availability of the stock on a given date of sale or purchase. It was also submitted that separate details and accounts are maintained in case of shares purchased and sold on which the' assessee has shown STCG or LTCG depending upon the period of holding, and invariably in all such transactions delivery is taken, payments are made from his bank accounts and the shares are credited and debited in his de-mat account. The stock of shares held at the end of the year is valued on "cost price" in case of his investment portfolio and on "cost or market price whichever is lower" in case of his trading portfolio. The same pattern of method of accounting for disclosing his STCG or LTCG on identical facts and circumstances is already accepted and assessed by the AO in his earlier assessment years It was also argued that the closing stocks of all such shares are consistently valued on cost price while finalizing his final accounts. 2.2.1 According to the AR no interest is paid on borrowed funds, since the same is primarily taken from his related concerns. It was also submitted that the intention of the assessee on purchase of these shares was to make investment and not to ho....
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....hasoami Satsang vs. CIT /1991/ 193 ITR 321 (SC) Sardar Kehar Singh CIT /1991/ 195 ITR 769 (Raj.) CIT vs. Neo Poly Pack (P) Ltd. [2000/245 ITR 492 (Delhi) CIT vs. Belpahar Refractrories Ltd., [1981/128/ITR 610(Ori) M.A. Namazie Endowment vs. CIT /1988/174 ITR 58 (Mad) CIT vs. Shree Nirmal Commercial Ltd./1994/213 ITR 361 (Bom)(FB) Turaben Ramanbhai Patel & Anr. Vs. ITO [1995] 215 ITR 323 (Guj) Dhansiram Agarwalla vs. CIT /1996/217 ITR 4 (Gau) In the context of the dispute whether the share transactions resulted in trading profit or capital gains, the rule of consistency has been applied in the following two decisions of the Hon'ble Tribunal, Mumbai Benches: (Gopal Purohit vs. Jt. CIT/2009/20 DTR 99(Mumbai Trib.) .Janak S. Rangwala vs. ACIT /2007] 11 SOT 627 (Mumbai) Following the rule of consistency. tile Hon'ble Tribunal in above cases, accepted the assessee's contention that he was investor in shares and not trader because in the earlier years, the Revenue had accepted that the assessee was investor. In Janak Rangawala‟s case (Supra), the Tribunal quoted the following passage fr....
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...., frequency, regularity, motive/intention, period of holding, accounting treatment, surrounding circumstances, etc. are considered in this regard though no one factor is decisive. The facts of the case are necessarily to be considered in the background of these parameters. However, in the present day scenario if must also be appreciated that having regard to the depth, breadth and growth of the stock markets in Indio, the line of demarcation between trading and investment is getting more and more blurred, which leads to a tendency of branding an investment activity as trading merely because volume is more or there are more frequent transactions, etc. 2.2.2 Therefore, on account of the above, the AR has submitted that in addition to the various case laws discussed above, this issue is now covered by the order of the Hon'ble ITAT. Mumbai in the case of Sh. Gopal Purohit (supra), decided in favour of the assessee and accordingly the AO may be directed to treat income realized on sale of all delivery based share transactions and mutual fund units as his STCG or L TCG, depending upon the period of holding. Finally, it was further submitted that the capital gain on sale of shares ....
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.... 2,3.2 From these specific facts brought on record as discussed above, I find that the case of the assessee is more or less identical to the facts reported in the case of Shri. Gopal Purohit (supra) relied on by the AR, except that in the case of the assessee for the relevant assessment year, he has entered into share transactions in certain scripts quite frequently, consistently and repeatedly i.e. the assessee has bought a particular share, then sold it to realize the gain in a short period, thereafter again purchased the same share and again sold it to realize the gain, as tabulated by the AO at page nos. 9 & 10 of the assessment order. This pattern of purchase and sale is found to be undertaken repeatedly in certain scripts i.e. for more than 4 times in the same shares during the relevant assessment year. Therefore, due to this particular fact noticed in this year i.e. the assessee consistently transacted in one particular share that too more than four times i.e. more than one transaction in a quarter, during the relevant assessment year, to my considered opinion is the nature of a trading transaction. In normal circumstances, a genuine investor will not enter into repetitive ....
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....sessment year. It is also noticed that in certain instances the assessee has sold these shares incurring loss, only to minimize his further loss, when he visualized the market is going down and again purchased the same script later on, when he expected that the market is improving or going up. This unique feature or the factual aspect noticed in the case of the assessee and not denied by the AR, to my considered opinion is related to his business carried out in these shares and therefore, the loss or profit realized on these transactions cannot be held as his STCG or LTCG. The script wise details of all such transactions carried out by the assessee are enclosed as AnnexureA to this order. Therefore, in view of the same a net profit or surplus of Rs. 6,00,917/- pertaining to such share transactions undertaken in the shares/units of various companies viz. Coromandel Fertilizers Ltd., Dharani Sugar & Chemicals Ltd., Dewan Housing Finance Ltd & Heritage Foods Ltd. to my considered opinion is in the nature of his business income. Since, these shares were purchased and sold and again purchased and sold on numerous times ( i.e. more than four times during the year) by the assessee during ....
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....e income-tax proceedings. According to the ITAT, there cannot be any dispute on this aspect, but at the same time, there is also another judicial thought, that there should be uniformity in treatment and consistency under the same facts and circumstances and accordingly since the same facts and circumstances are found to be identical In the case of the assessee in the relevant assessment year as in comparison to its earlier assessment years, the different stand taken by the AO is not found to be tenable. The Hon'ble ITAT has further observed that as per the facts available on record it is apparent that the AO has taken a different stand mainly because there was a change in the scheme of taxation relating to STCG and LTCC made effective through the Finance Act, 2004, the legislature has imposed security transaction tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the legislature exempted LTCG under section 10(38) of the Act from the levy of taxation and on STCG, a concessional rate of tax at the rate of 10% was introduced subject to the condition that the transactions resulting into these type of gain must have suffered the burden of ....
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....ew of the assessee on a particular subject and this principle is effectively applicable in a situation like this as compared to as situation where nature of expenditure or income is different in the books of account and in the return of income filed by the assessee wherein the specific provisions of I.T. Act have to be considered over such presentation and if there exists no specific provisions, it is 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. In the case of Karam Chand Thapar & Bros(P)Ltd vs. CIT (1971) 82 ITR 899 (SC), the Hon'ble Supreme Court has held that circumstances that the assessee had shown certain shares as investment in its books as well as its balance sheet was by itself might not be a conclusive circumstance but it was irrelevant circumstance. Hence, we do not find much substance in this findings of the Revenue authorities in the facts of the present case. The Revenue authorities have also held that borrowed funds were utilized for making such....
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....tock-in-trade for the purpose of carrying on business. There is no law which prevents the share broker from making investments in shares. We hold that no material has been brought on record by the Assessing Officer to substantiate his finding that the assessee had been trading in shares in his individual capacity. The Assessing Officer has also failed to specifically point out that the borrowings were utilized for making investments in shares. The assessee had enough capitol of his own to enable him to make the investments in shares." 2.3.5.In the case of CIT vs. Associated Industrial Development Company (P) Ltd. 82 ITR 586, the Hon'ble Supreme court has observed on this issue as under:- "Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained only distinction between those shares which are its stock-in-trade and those which are held by way of investment."(Emphasis supplied") 2.3.6. Likewise, again the Hon'ble jur....
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....me time, long term capital gains on sale of shares is exempted from tax u/s. 10(38) of the Income-tax Act, 1961, and short term capital gain on sale of shares is subjected to a concessional rate of tax i.e.@10%. The payment of security transaction tax is made mandatory irrespective of the profit of the assessee or loss suffered by the assessee. To appreciate the new concept of STT and consequent changes brought in taxation of capital gains, it would be pertinent to reproduce the speech of the Hon'bleFinance Minister made in the Parliament, while introducing the new provisions, which read as under: Extract of Finance Minister‟s Speech while introducing new capital gain tax regime: Capita! gains tax is another vexed issue. When applied to capital market transactions, the issue becomes more complex. Questions have been raised about the definitions of long-term and short-term, and the differential tax treatment meted to the two kinds of gains. There are no easy answers, but I have decided to make a beginning by revamping taxes on securities transactions. Our founding fathers had wisely included entry 90 in the Union List in the Seventh Schedule of Constitution o....
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....esulting into these type of gain must have suffered the burden of securities transactions tax. This according to the Hon'ble ITAT has prompted the AO to take a different view on the same set of facts and types of transactions entered into by the assessee in the relevant assessment year and as found in the its earlier assessment years Therefore on account of these facts, the Hon'ble ITAT has concluded that on the given set of facts and identical transactions, merely on account of change in law, the advantage provided to the assessee cannot be taken away by the AO in the manner and in the circumstances as held in the assessment order. 2.3.10. As regards the reliance placed by the AO on various cases discussed in the assessment order, it is now settled that no universal criteria can be laid down to decide the controversy of capital gains vs. business income on sale of shares. There are several judgments for and against the assessee. Each of these judgments is decided on the independent set of facts available in that particular case. These judgments as explained in the CBDT's circular, merely laid down several broad and general guidelines on the basis of which one has to....
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....nvestment were brought to tax as capital gains. 2.3.11. Therefore, in view of the aforesaid discussion, the following points or facts emerge in the case of the assessee: (i) the assessee has maintained two portfolios of share transactions i.e delivery based share transactions and non-delivery based share transactions (F&O and intra-day share transactions), and has shown profit or loss earned in respect to his delivery based share transactions as his STCG or LTCG, depending upon the period of holding; whereas, profit or loss earned on non delivery based transactions are shown as his business income. (ii) he has carried out these activities separately maintaining separate ledger accounts and recording these entries separately at the time of purchase of the shares. (iii) the closing stock held at the end of the respective assessment year is always valued at cost price in respect of the shares held in his investment portfolio and at the lower of cost or market price, in case of the shares held in his trading portfolio, (iv) during the relevant assessment year, his main business is dealing in various stock market related activities of purchase and ....
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....ll not apply in the instant case in hand. The repeated purchase and sale of shares of the same company for more than four times during the relevant year as enclosed as Annexure-A to this order, to my considered opinion proves that the rule of consistency will not apply for the relevant assessment year. Due to large volume and frequency of share transactions undertaken in this year as discussed above resulting into these repetitive share transactions of a particular company for more than four times, considering the amount of capital employed to my considered opinion is a clear-cut case of trading in those shares irrespective of the fact that delivery is taken in these shares. It cannot he said that the assessee is an investor in these shares, merely because he has taken delivery of these shares; because, the assessee has persistently and repeatedly purchased and sold the same shares for more than four times (i.e. more than a transaction per quarter), during the relevant assessment year. This unique fact, to my considered opinion makes the assessee a trader of these shares, and therefore, the resultant loss or gain, can only be considered as his business income/loss. It is now settle....
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....AR, as discussed above has raised an alternative ground submitting that in case his main ground of appeal is not fully considered, the assessee may be given the benefit of re-casting of his trading account pertaining to his share transactions on which STCG is disclosed; whereby, he may be allowed to value his closing stock of shares held at the end of the year on the basis of "cost or market value whichever is lower", he may also be allowed the credit of the security transaction tax paid and further he may also be allowed to re-cast his opening stock- in- trade by invoking the provisions of section 45(2) of the Act, in respect to all those shares which are treated as part of his trading shares. As discussed above, I find it reasonable to accept the said alternative ground of the assessee, in respect to these shares of Coromandel Fertilizers Ltd. and Dharani Sugar & Chemicals Ltd. Dewan Housing Finance Ltd & Heritage Foods Ltd., the gain thereof is assessed as his business income. The AR's demand for recasting of the trading and P&L account, is therefore, found to be reasonable and justified as well as within the provision of the Act. Accordingly, while giving effect to this ord....
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.... above is therefore, partly allowed. 8. Against the above order of CIT(A), both the assessee and Revenue are in appeal before us. 9. It was argued by the ld. Authorized Representative that the assessee was consistently disclosing short term capital gains or long term capital gains in respect of his delivery based share transactions, depending upon the period of holding. Similarly, the assessee has disclosed business income in respect of shares acquired with the intention of trading therein. Thus, as per ld. Authorized Representative, the assessee was consistently having two portfolios of share transaction one for his investment purposes and another for his trading purposes. Our attention was also invited to the ledger account, wherein shares were entered which were duly audited. In view of the transactions having been entered for investment purposes, it was argued that right from inception of the transaction, the assessee had always intended to hold those shares for the purposes of "Investment portfolio". Similarly, other shares intended for trading was entered in the ledger account as "Trading portfolio". The rule of consistency was also argued in view of the fact that simil....
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....e 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 find out whether the assessee is engaged in the business of purchase and sale of shares or making investment to have capital gains thereon. In the instant cases before us, we found that the assessee has invested in shares of Indian Companies in earlier assessment years, which is clear from the statement of shareholding of the assessee, such treatment of capital gains was accepted by the department and there is no material change in the method of accounting and manner of earning of income during the year under consideration as compared this earlier years Thus, the fact of the assessee investing in shares in earlier years is not in dispute. There is also no dispute to the fact that the assessee has treated the equity shares of Indian Companies as investment i.e.....
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.... 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 trading portfolio, he has valued the same at cost or market price, whichever is lower. In the assessment year under consideration the assessee had consistently followed the same system of accounting as followed in preceding years The profit earned on investment was disclosed as STCG/LTCG, depending upon period of holding. In the scrutiny assessment, the AO has accepted assessee's status as investor in the assessment year 2005-06. Only during the year under consideration by referring to volume of transaction, number of shares, frequency of transaction, the AO disallowed assessee's claim of capital gains and treated the same as business income. The CIT(A) has analyzed the frequency of transactions in respect of each and every share and found that in respect of transactions in shares of Coromandel Fertilizers Ltd., Dharani Sugar & Chemicals Ltd., Dewan Housing Finance Ltd & Heritage Foods Ltd., freq....
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....purchases and sale of shares is concerned, the same is due to the electronic system of stock exchange. A single order placed for purchases may be completed by way of small equities of shares available for sale to meet out the demand of the purchaser. Therefore, a single order is not necessary to be completed by a single transaction of entire quantity of shares. Likewise, in the case of sales, the same may be divided as per the requirement of the purchaser at stock exchange; The fact that in all the preceding years, where the assessee had liquidated his investment in equity shares in Indian Companies, the Department has accepted the position except the assessment year in question, wherein the Department treated the gain from purchase and sale of shares as business income. The decision to dispose of investment at a short interval is being taken by the assessee keeping in view the eventuality of down trend in the market sentiments over a particular script. Merely because the assessee was able to realize better prices of its investment at a short interval, cannot be solitary yardstick for treating such action as an adventure in the nature of trade, giving rise to business profits, when....
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....on the income from purchase & sale of shares as regards to the STCG & business income was at par. However, the issue of treatment of income from share transaction as capital gain or business income has in-fact arisen after the amendment brought with Finance Act-2004 by insertion of provisions of section 111A and 10(38) as regards to levy of Transaction tax and exemption/concession on capital gain arising from securities entered in a recognized stock exchange. With a view to simplify the tax regime on securities transactions, a tax at the rate of 0.015 per cent. (see: change in rates on securities transactions, by Finance Acts, at appropriate head) is levied on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax is collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The provisions relating to the securities transactions tax are contained in Chapter VII of the Finance (No.2) Bill, 2004, and came into effect from 01.10.2004. Further, clause (38) has been inserted in section 10 of the Income-tax Act, so as to provide exemption from long-term capital gains arising out o....
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....ch shares were liable to tax as business income. However, the facts in the instant case before us are distinguishable and the CIT(A) has appreciated not only frequency and continuity of transactions in each shares dealt with by the assessee vis-à-vis antecedents of the assessee and the stand taken by the department in earlier year and reached to the conclusion that except transaction in shares of four companies, as discussed in his appellate order, the balance gain was liable to be taxed as capital gains. 11.3 After considering the findings recorded by the CIT(A), we found that single criteria will not decide the issue but the total effects i.e. frequency and volume of transaction, intention of assessee while purchasing and holding the shares etc. are to be considered for arriving at a conclusion. Thus, it is a mixed question of law and fact to find out as to whether the assessee has earned capital gain or business income. The gain arising on delivery based share transaction are essentially in the nature of STCG and LTCG and not in the nature of business income, except where such gains or losses realized in respect of those transactions undertaken repeatedly and consisten....
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....ge used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provisions to be „drafted with divine prescience and perfect clarity.‟ We can do better than repeat the famous words of judge Learned Hand when he said." The above observations of Hon'ble Judges of the Apex Court was reiterated by Hon'ble Apex Court in the case of Kerala State Industrial Corporation, 259 ITR 51 (SC) holding as under:- ‟That the Finance Ministers Speech can be relied upon to throw light on the object and purpose of the particular provisions introduction by the Finance Bill has been recognized by this Court in K.P. Verghese - vs ITO 1981), 131 ITR 597 (SC), at 609. Again in the case of R & B Falcon (A) Pvt. Ltd vs CIT (2008) 301 ITR 309 (SC), it was held that (Page 323):- Rules of executive construction in a situation of this nature may also be applied. Where a representation is made by the makers of legislation at the time of introduction of Bill or construction thereupon is put by the executive upon its coming ....
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..... Before the learned Commissioner of Income Tax (Appeals) the assessee also filed a detailed note on the purchase process for delivery base shares, details of dividend received on the basis of relevant statements by placing reliance on the decision of the Mumbai Bench of the Tribunal in the case of JM Shares & Stock Brokers v. JCIT dated January, 2009. Briefly, the claim of the assessee before the learned Commissioner of Income Tax (Appeals) was that the delivery based transactions were made with an investment motive and as such the income therefrom was in the nature of short term capital gains whereas the income arose from F&O transactions and daily trading in shares were with the business motive which were showed as business income only which was mainly through stock broker, Arihant Capital Markets Limited, registered with NSC, NSE and BSE. It is also seen that in the impugned order the board circular no. 4/2007 dated 15.6.2007 wherein it was emphasized that it is possible for a tax payer to have two port folios i.e. an investment port folio comprising of securities which are to be treated as capital asset and trading port folio comprising stock in trade which are to be treated a....
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....nt appeal, we note that the assessee made investment in shares with intention to earn dividend income on appreciation of price of shares. Therefore, it cannot be said that the assessee was doing business. More specifically when, the assessee either utilised his own funds/ family funds/associate‟s funds and did not pay any interest and depicted the transactions in shares under investment portfolio. During hearing, it was also explained by the learned Counsel for the assessee that accounts were maintained by the assessee in two separate capacities i.e. trader and investor and never treated the same as holdings of shares as stock in trade which clarifies the intention of the assessee. This assertion was not controverted by the Revenue. 16. The Board Circular No. 4.2007 dated 15-06-207 also emphasizes that it is possible for a tax payer to have two portfolios namely, an Investment Portfolio, comprising of Securities, which are to be treated as capital assets and „Trading Portfolio‟ comprising of stock in trade which are to be treated as trade assets. No single principle would be decisive and the fact has to be considered in entirety. The totality of facts plainly i....