TaxTMI 
TaxTMI 
2014 (5) TMI 1246
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....t of transactions in shares of 29 different scrips, mainly those of M/s IFCI, India Bulls, Monnet Ispat, Sterling Biotech etc., while the long term capital gain related to purchase and sale of shares of M/s D-Link India and ESAB India. It was further found that in terms of number of transactions, there were 69 transactions of purchase and 114 transactions of sale. However, in terms of value, the total value of purchase was found to be Rs. 48,60,60,899/- while the total value of sale both long term and short term shares was found at Rs. 56,73,66,207/-. The assessee was asked to explain on what basis the profit on sale of shares of aforesaid magnitude has been claimed to be short term capital/long term capital gains/loss, as distinct from business income. In response, the assessee explained that assessee had surplus funds available and that these were invested in shares. It was further pointed out that these shares constituted investments and not stock-in-trade and that the transactions were delivery based and that the STT has been added back in the computation of income and that no rebate u/s.88E is claimed. The AO did not accept the explanation of the assessee on the various reason....
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....he high volume, high magnitude and high frequency of transactions. Further, I find that the transactions were carried out consistently throughout the year. Most significantly, the holding period of the shares transacted are very low as low as even 1 to 20 days in many cases indicating very clearly that the Appellant did not want to stay invested in these shares. In this light, when the volume, magnitude, frequency and average period of holding are seen together, it is quite clear that the intention of the appellant is not to make investment for the purpose of earning of dividend or for capital appreciation but very clearly for deriving regular income. from the sales and purchases. Accordingly, I find that the appellant's intention was to earn profit in a systematic manner and this being so, the income from the transaction is to be treated as business income. In this respect, a recent decision of the Hon. ITAT, Mumbai in the case Wallfort Financial Services Ltd. Vs Add. CIT Range 4(2) 41 SOT 200 bears special mention. In this case, the share broker tried to pass off his trading transactions in shares after 1.10.2004 as investment in light of the possibility of availing lower tax....
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....ents for A.Y.2005-06 & 2006-07 were completed u/s.143(3), wherein similar gains/loss, short term/long term, declared under the head "capital gains" were accepted by the AO. The assessee also submitted that it is settled position in law that where there are no changes in the material facts and circumstances, nature as well as modus operandi of such share transactions, the principle of consistency should be applied. For this purpose, reliance was placed on the following decisions :- i) CIT Vs. Darius Pandole 330 ITR 485 (Bom) ii) CIT Vs. Gopal Purohit, (2010) 188 Taxman 140 (Bom); and iii) ACIT Vs. Naishadh Vs. Vachharajani (passed by Mumbai Bench of the Tribunal in ITA No.6429.Mum/2009 and CO No.136/Mum/2010, dated 25.02.2011 4.1 In regard to issue of short holding period as alleged by the AO, the learned AR submitted that breakup of the short term capital gains of Rs. 8.27 crore, though in the tabular form, as under which prove that holding period is not so small as alleged by lower authorities :- Rs. in crore Period for which corresponding shares were held Amount of gain(Rupees in Crore) Upto 60 days 1.94 61 to 120 days 2.17 12....
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....d, 266 ITR 349(Del); CIT Vs. Girish Mohan Ganeriwala, 260 ITR 417(P&H); CIT Vs. Gopal Purohit, ITA No.1121 of 2009, dated 06.01.2010(Mum). It was further submitted by learned AR that while rejecting the assessee's contention regarding capital gains on shares, the CIT(A) has argued that principles of 'estoppel' or "res judicata" do not apply to tax proceedings. There can be no quarrel with this basic proposition of law, but at the same time it is well settled that the Rule of consistency cannot he ignored in tax proceedings. 4.3 It was also contended by learned AR that assessee entered only delivery basis transactions, wherein shares so purchased were taken delivery for which proper accounting was made in Demat account. Similarly, on sale delivery was given. However, the account was not settled by difference, meaning thereby there was actual delivery both in case of purchase and sales of shares and securities. 5. On the other hand, learned DR submitted that the essence of the CBDT Circular is that the transactions have to be examined in their totality before coming to the finding in the matter. However, assessee's case being voluminous, numerous, having very short hold....
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....facts and circumstance of each case. The issue whether shares/securities held by an assessee as "investment" or as "stock-intrade" and whether the profit derived from sale of shares/securities is assessable as "capital gains" or "business income", depends upon the intention of the assessee which is to be ascertained predominantly from the objective of the assessee in acquiring the shares. Whether the objective was to acquire shares as an "investment" and enjoyed income therefrom or to make profit by buying and selling shares in the short term. The manner in which such shares has been classified in the financial statements are also relevant factor. Whether distinction has been maintained between the investment portfolio and stock in trade or is also relevant. The period for which the shares have been held, frequency of transaction, how the shares have been acquired whether out of own funds or borrowed funds are also required to be examined in the light of intention of assessee in acquiring the shares. The Hon'ble Supreme Court in the case of CIT Vs. Sutlej Cotton Mills Supply Agency Ltd., [1975] 100 ITR 706 (SC), observed that a capital investment and resale do not lose their capita....
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.... accounts forming part of audited accounts, it was clearly stated that assessee has been valuing the investment at cost and not at cost or market price, whichever is lower. The sale proceeds of the shares have not been reflected as turnover, while rejecting the assessee's contention regarding capital gains on shares, the CIT(A) has argued that principles of 'estoppel' or "res judicata" do not apply to tax proceedings. There can be no quarrel with this basic proposition of law, but at the same time it is well settled that the Rule of consistency cannot he ignored in tax proceedings. This rule is an exception to the above rule, and has been well recognized in various judicial rulings cited below: 1. Radhasoami Satsang vs. CIT /1991/ 193 ITR 321 (SC) 2. Sardar Kehar Singh CIT /1991/ 195 ITR 769 (Raj.) 3. CIT vs. Neo Poly Pack (P) Ltd.[2000/245 ITR 492 (Delhi) 4. CIT vs. Belpahar Refractrories Ltd., [1981/128/ITR 610(Ori) 5. M.A. Namazie Endowment vs. CIT /1988/174 ITR 58 (Mad) 6. CIT vs. Shree Nirmal Commercial Ltd./1994/213 ITR 361 (Bom)(FB) 7. Turaben Ramanbhai Patel & Anr. Vs. ITO [1995] 215 ITR 323 (Guj) ....
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....ich 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 any distinction between those shares which are its stock-in-trade and those which are held by way of investment." From the record, we found that being a prudent investor, the assessee purchased shares when prices were falling and sold shares when the scrip achieved its target or it had anticipated further erosion in value. The transactions of purchase and sale of shares were to nurse investment and to avoid erosion of capital, surplus arising from sale of shares is to be treated as capital receipt in such circumstances. 9. The frequency and magnitude of purchase and sale transactions, no doubt, play important role, but the same is not conclusive and other factors like main business/profession of assessee, intention while purchasing shares, holding the same as investment, funds used for such transaction i.e. borrowed funds at interest or own funds etc. are required to be seen for reaching to the conclusion regarding assessee being investor or trader in shares. In the case of Bharat Kuverji....
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....ated 15th November, 2010. 12. In case of DCIT vs. SMK Shares & Stock Broking (ITA No. 799/Mum/2009) the Hon'ble Mumbai tribunal held that "the fact that the AO accepted the appellant's claim in earlier years that it was an investor is material because though the principles of res judicata do not strictly apply to income tax proceedings it is well settled law that the principles of consistency should not be ignored. Uniformity in treatment and consistency under the same facts and circumstances is one of the fundamentals of the judicial principles which cannot be brushed aside without proper reason. 13. The CIT(A) has relied on the decision of Wallfort Financial Services Ltd. Vs. ADCIT, 41 SOT 200 for coming to the conclusion that the profit earned on sale of shares was business income. In this case, it was held by Mumbai Bench of the Tribunal that where the assessee had dealt in more than 300 scripts during the year and the turnover was about Rs.3500 crores and the assessee had regularly dealt in purchase and sales of shares with high frequency and volume for repetitive purchase and sales in the same scripts, with no shares being held for more than 1 year, profit accru....
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....ng shares which are sold within 12 months of its acquisition. Under these circumstances, if the contention of the AO and CIT(A) is accepted, then it would be against the legislative intent itself. 15. If the conclusion drawn in the impugned order, observations made from the assessment order, assertions made by respective counsels, proposition of law laid down in various judicial pronouncements as discussed above, 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 and same was accepted by department under scrutiny assessment proceedings. Analysis of balance sheet of assessee reflects holding of shares as investment. 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 from sale of....
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....e 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 of securities sold on the stock exchange. A new section 111A has also been inserted and section l15AD is amended, so as to provide that short term capital gains arising from sale of such securities to an investor including FIIs shall be charged at the rate of ten per cent. These amendments apply to assessment year 2005-2006 and subsequent years. Through Finance Act, 2008, sections 111A and 115AD have further been amended whereby the rate of tax on such short-term capital gain has been raised to fifteen percent. Thus, w.e.f. 01.10.2004; on the share transactions subjected to STT; concessional tax rate of 10% (which has been increased to 15% from AY 2009-10) are applicable in respect of STCG whereas no tax is chargeable in respect of LTCG. 17. Even the Hon'ble Apex Court in the case of K.P. Verghese vs ITO, 131 ITR 597 (SC) observed as under:- "The task of interpretation of a statutory enactment is not mechanical task. It is more than a mere reading of mathema....