TaxTMI 
TaxTMI 
2017 (10) TMI 1468
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....filed in respect of capital gains, it was found that the assessees is dealing in large number of securities. Thus, prima facie it was evident that the assessee is not an investor in securities but a trader in securities. The case was taken in full scrutiny with the approval of JCIT, Range-36 vide following noting "In this case assessee has claimed STGC of Rs. 71,81,117/- (as per revised computation filed by the assessee during the assessment proceedings it was shown as Rs. 65,55,066/-) and in the balance sheet he has mentioned an investment of Rs. 2,62,89,244/- in shares. In the liability side of the balance sheet assessee has shown an amount of Rs. 2,36,00,000/- as advances which seems to be loan taken for investing in shares. This issue needs to be examined in detail." 2.1 It was observed by the Assessing Officer that vide order sheet entry dated 15.10.2008, assessee was asked to "show cause as to why share transactions on which STGC has been claimed should not be considered as business income." The Authorised Representative of the assessee has submitted his submission dated 31.10.2008, which has been reproduced in the assessment order. In this connection, it is worthwhile to en....
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.... the decisions of the Supreme Court in several cases, has culled out the following principles : (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 of 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 purchase and sales and the holding would furnish a good guide to determine the nature of transactions. (iii) Ordinary 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 the object of the investment in shares of a derive income by way of dividend etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not reverse receipt. I. Dealing with the above three principles, the AAR has observed in the case of Fidelity Northstar Fund (supra) group as under : "We shall revert to the aforementioned principles. The first principle requi....
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....o determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. Furthermore in P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC), Hon'ble Supreme Court reiterated that it was not possible to evolve any single legal or formula which could be applied in determining whether a transaction was an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. However, in G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594, Hon'ble Supreme Court has laid down following principles to these questions may furnish relevant data for determining the characteristic of any transaction: (1) Was the purchase a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? Affirmative answers to these questions may furnish relevant date for determining the character of the transaction. (2) What is the nature of the commodity purchased and resold and what quantity was it purchased ....
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....III. The characterization of securities in the books of the account and in balance sheet as stock in trade or as an investment. IX. Total numbers of stocks dealt in. X. Whether answering each question in respect of the assessee: Now answering each question in respect of the assessee : I. As per submission of at dated 30.08.2007, during the year under consideration assessee was working as a financial consultant with M/s Gujarat Heavy Chemical Ltd. in the same company assessee has worked as a Chief Manager (Finance) before his retirement. Net income earned from his business was merely Rs. 83,142/-. On the other hand, assessee has shown short capita gain from shares of Rs. 65,55,066/- with a transaction turnover of Rs. 17,79,98,405/- (as specified in Form No. 10DB submitted during assessment proceedings). Furthermore, assessee earned speculation profit amounting to Rs. 1,29,025/- as disclosed by the Authorised Representative during the assessment proceedings which was not declared in the return, from intraday trading. Thus, from the quantum of turnover and presence of the component of intraday trading, it is prima facie evident that the purchase and sale of secur....
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....rnish the same in the required format for all the shares. It was prima facie evident from the bulkiness of contract notes that it was difficult to furnish accurate dates of sales/purchase along with quantity and value, as the transactions were huge and were entered into on regular basis. Only few copies of Contract Notes are taken and placed on records. The assessee has entered into around 62 different securities resulting into around 331 transactions (Including purchase and sale transactions). Moreover, the assessee has done speculative transactions resulting into net profit of Rs. 1,29,025/-, Huge turnover of transactions (Rs. 17,79,98,405) clearly reveals that the transactions are entered into continuously and regularly during the assessment year and there were repetitions in the transactions. For instance, a chart showing number of purchase and sale transactions in respect of single scrip, during the year under consideration is as follows : Name of the Scrip No. of times purchased during the assessment year 2006-07 No. of times sold during the assessment year 2006-07 Total transactions during the assessment year 2006-07 Bajaj Hindustan Ltd., 28 ....
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....d in share trading activity on a daily basis. Thus, dealing in securities is the chief source of livelihood of the assessee, especially in light of the fact that the income from consultancy business is very low. VIII. In respect of eighth question, it would be desirable to mention that even though, in the balance sheet the assessee has shown stock of Rs. 2,62,89,244/- under the head investment but still it does not change the nature of transactions, as it is the substance that matters rather than form. Here, it is relevant to quote the following judgment. In Karam Chand Thapar and Brothers (P.) Ltd. v. CIT (Central) [1971] 82 ITR 899, Hon'ble Supreme Court has held that the circumstances that the assessee had shown these shares as investment in its books as well as in the balance sheet was by itself not a conclusive circumstance, though it was relevant circumstances. Thus, even if the assessee had shown these transactions as investments, it does not make these transactions as investment. It is the intention of the assessee which has to be looked into rather than the treatment. Furthermore, it is meaningful to quote the judgment of Hon'ble Kerala High Court....
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....e made through book entry or journal entry. Finally, it is advisable to furnish the judgment of Hon'ble Supreme Court in the case of Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486. In this case the Hon'ble Supreme Court held that "the decision of the Department in the earlier years that the transactions were in the nature of change of investment was not binding in the proceedings for assessment during the subsequent years. Thus, even though the transactions were treated as investment in earlier years. It does not make the transaction as investment in every year. It has to be verified based on the facts and circumstances as arises in that year. In lieu of all facts and circumstances as mentioned above, short term capital gain of Rs. 65,55,066/- (as per revised computation filed by the assessee, he has shown capital gain of Rs. 65,55,066/- instead of Rs. 71,81,117/- declared in the return. (Evidence regarding same is placed on the record) is considered under the head "Profits and gains of business and profession". Thus, in the total an amount of Rs. 65,55,066/- is added to the head "Profits and gains of Business and profession" and income chargea....
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....ng assessment proceedings). Furthermore, assessee earned speculation profit amounting to Rs. 1,29,025/- as disclosed by the Authorised Representative during the assessment proceedings which was not declared in the return, from intraday trading. Thus, from the quantum of turnover and presence of the component of intraday trading, it is prima facie evident that the purchase and sale of securities was his usual trade or business. In fact, it seems to be the main business of the assessee" 7.1. It is clear from the various transactions undertaken by the assessee that the purchase of shares was with intent to make quick profits on escalation & sale rather than long term earning of dividend, interest or appreciation. The scale of activity is substantial & not commensurate to the pattern of investments as is sought to be projected by the appellant. 7.2. The sheer volume of the transactions in fact precluded the assessee from furnishing details of purchase & sale transactions in the ordinary course of business. The fact of assessee's intent in undertaking speculative transactions resulting in profit were also noticed on many such occasion. 7.3. It is also pertinent to note that th....
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....ed to above providing guidelines as to whether the transaction of sale and purchase of shares is investment or business activity disclosing income on account of capital gain or business income and referred to certain decisions. The A.O. found that assessee has earned business income merely of Rs. 83,142. However, on sale and purchase of shares assessee has earned Rs. 65,55,066 with a transaction turnover of Rs. 17.79 crores. The assessee has also earned speculative profit amounting to Rs. 1,29,025 on account of intraday transactions/speculative transactions, which was not disclosed in return, is evident that assessee is in business. Thus, from the quantum of turnover and presence of the component of intraday trading, it was found that purchase and sale of securities was the usual trade or business of the assessee. The assessee was therefore, found to be involved mainly in business activities. It was also found that assessee has earned dividend of Rs. 3,71,459 only which was very meagre and negligible in comparison to the total sales and forms only 5.7% of total capital gains. Further there is not even a single share out of total share transaction which has been retained by the asse....
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....estments were mostly short term and driven by market force and the business of sale and purchase was carried on by the assessee with an intention to make substantive profit rather than hold position by making long term investments. The sale and purchase of securities in this case is continuous and regular business activity of the assessee with an intention to earn profit on regular basis. The intention of the assessee in the facts and circumstances is very clear that assessee purchased and sold the shares to earn business profits only. In preceding assessment year, admittedly, no assessment have been made by the department. Therefore, what treatment has been given by assessee in the return of income, whether investment or stock-in-trade would not be relevant. The Hon'ble Supreme Court in the case of Dalhousie Investment Trust Co. Ltd. (supra) held as under : "The appellant company, whose principal activity was investment of its capital in shares and stocks, confined its activities mostly to the shares of McLeod and Co. and companies managed by McLeod and Co. It changed its investments by sale of its shares from time to time. During the previous years ending March 31 of 1953 t....