TaxTMI 
TaxTMI 
2009 (2) TMI 233
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....s case and in law, the learned CIT(A) has erred in upholding the assessment of the sum of Rs. 1,12,68,796 as business profits as against long-term capital gains on sale of shares after 1st Oct., 2004 and accordingly exempt from tax under s. 10(38)." 3. The facts, in brief, arc that the assessee filed its return of income declaring total income at Rs. 1,55,40,840 which was taken for scrutiny assessment. In the course of assessment proceedings, the AO noted that the assessee's income comprised of the following: ------------------------------------------------------------ Net profit i.e., profit from trading in shares (equity) and (F&O) Rs. 33,70,232 ------------------------------------------------------------ Agricultural income Rs. 68,000 ------------------------------------------------------------ Short-term capital gains taxable @ 10%  ....
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.... the assessee. The AO proceeded to find out the answer by examining the number of companies in respect of which assessee sold or purchased shares, frequency of sale/purchase transactions and volume thereof. The assessee submitted the details of transactions resulting into business profits, short-term capital and long-term capital gain. Based upon these details, the AO held that frequency of the transactions carried out by the assessee was very high with large volume of shares. The AO also observed that the assessee had borrowed funds which were also utilized for carrying out share transactions. The AO also observed that assessee had full office infrastructure for carrying out business of share trading and had claimed an expenditure of Rs. 6,41,895 under various heads. The AO also found that transaction, where no delivery had been taken, had been squared up on the same day and the profit/loss resulting therefrom was shown as business income/loss. In respect of delivery based transactions, the AO found that as per statement of capital gains filed by the assessee, the period of holding of most of the shares was few days only. In view of above facts, the AO required the assessee to exp....
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....hen, it was clear that assessee had, during the year repeatedly bought and sold shares after holding them for few days or for short duration only with one intention i.e., profit making, hence, there was no intention of holding the shares for purposes of investment. The AO also drew support from the decision of the Tribunal in the case of Dy. CIT vs. Smt. Deepaben Amitbhai Shah (2006) 100 TTJ (Ahd) 1065 : (2006) 99 ITD 219 (Ahd) to hold that assessee was engaged in only one activity i.e., activity of earning profit through sale and purchase of shares or purchase and sale within short period or long period and the expenses incurred thereon were also inseparable, hence, the entire profits arising out of such transactions were to be assessed as income from business and profession and consequently, the benefit of indexation on shares claimed as long-term investment was also not allowable. The AO, accordingly, completed the assessment at total income of Rs. 2,74,66,784. Aggrieved by this, the assessee carried the matter in appeal before the learned CIT(A) wherein assessee assailed the order of AO on all counts and also made various submissions in support of its claim. The learned C....
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....d in adventure in the nature of trade. The learned CIT(A) also analysed the transaction of last 5 years to further support his view. Thereafter, the learned CIT(A) also drew support from the decision of Dy. CIT vs. Smt. Deepaben Amitbhai Shah to hold that assessee was engaged in the nature of trading on full scale and he had shown purchases of shares as investment in the books of account to evade tax which were, in fact, stock-in-trade. Finally, he confirmed the action of AO. Aggrieved by this, the assessee is in appeal before us. 5. The learned counsel initiated his arguments by stating that assessee was both trader and investor and entered into transactions of sale and purchase of shares in two forms i.e. delivery based transaction and non-delivery based transaction. The assessee entered into delivery based transaction only with the intention of investment, hence, showed profits as long-term capital gain or short-term capital gain thereon. The assessee squared up non-delivery based transactions on the same day and showed the profit or loss on such transactions as business profit or business loss; hence, on the basis of these factual details only, the assessee's case was liable....
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....the case of Asstt. CIT vs. Sunder Iyer and in the case of Addl. CIT vs. Shri Motilal Oswal. 5.6 The learned counsel also contended that there was some erroneous presentation of the facts of the case both in the orders of AO as well as that of learned CIT(A) and contended that main factual mistake in both the orders was that for most of the scrips, the assessee had purchased and sold shares within few days whereas the fact was that for most of the scrips, the period of holding was of several months and years and the transactions where the share of a particular company were sold within a few days from the date of purchase were very few and far between, and drew our attention to p. 145 to show the period of holding in respect of transactions resulting into short-term capital gain or loss from 1st April, 2004 to 30th Sept., 2004 which is reproduced as under: -------------------------------------------------- Period of holding of shares Amount of short-term capital gain (Rs.) ------....
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.... the period of holding in respect of transactions resulting into long-term capital gain for asst. yr. 2004-05, which is reproduced as under: -------------------------------------------------- Period of holding of shares Amount of long-term capital gain (Rs.) -------------------------------------------------- 13-18 months 37,13,444 -------------------------------------------------- More than 18 months 28,00,889 -------------------------------------------------- 5.9 He, thereafter, referred to pp. 155 and 157 to show the period of holding resulting into long-term capital gains to the assessee during the financial year relevant to the assessment year under consideration prior to 1st Oct, 2004 and post-1st Oct, 2004, which are reproduced as under: -------------....
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.... recognized for long that the same person could be a dealer in shares as well as an investor in shares. For this proposition, the learned Counsel relied on the following judicial decisions and also on the para 10 of Circular No. 4 of 2007 of CBDT: (i) Hon'ble Supreme Court in the case of Ramnarain Sons (P) Ltd. vs. CIT (1961) 41 ITR 534 (SC); (ii) Dwarkadas Kesardeo Morarka vs. CIT (1962) 44 ITR 529 (SC); (iii) CIT vs. Madan Gopal Radhey Lal (1969) 73 ITR 652 (SC); (iv) CIT vs. Associated Industrial Development Co. Ltd. 1972 CTR (SC) 239 : (1971) 82 ITR 586 (SC). Accordingly, he contended that, it could not be either/or situation as held by the Revenue authorities. 5.12 The learned counsel thereafter, contended that in the impugned circular, the CBDT had stated that the principle laid down in the case of Associated Industrial Development Co. Ltd. and in the case of CIT vs. H. Holde Larsen (1986) 58 CTR (SC) 53 : (1986) 160 ITR 67 (SC) afforded adequate guidance to the AO, hence, these decisions required elaborate consideration. 5.13 The learned counsel stated that in the case of Associated Industrial Development Company (P) Ltd., the assessee was acting as m....
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....n depending upon the period of holding of such shares. 5.15 The learned counsel further submitted that the tests of badges of trade evolved by Royal Commission of England and approved by the Hon'ble Supreme Court were also met by the assessee. In this regard, he submitted as under: "(1) An equity share of Indian companies is not essentially a trading commodity. More often than not shares are purchased by Indian public as an investment. While held for long period the shares yield regular income in the form of dividend. It may, however, be noted that some holders buy and sell shares by way of trade and not investment. (2) Where shareholding is for trading, frequency of purchase and sale scrip-wise is very high and the period of holding of a particular lot is minimal. It should be noted that over the course of time equity shares have become a popular mode of investment. There is huge variety to choose from. Due to globalization and various uncertainties of modern times, there is increasing volatility in the share market. This has affected the length of period of holding in the cases of investors also. Having regard to these various issues, under the provisions of the Act wher....
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....e view that in delivery based transactions the assessee has been acting as an investor. These shares are always transferred in the name of the assessee. Generally, the shares are not sold until it becomes necessary to exist or otherwise clue to long holding, the shares have become ripe for realization of profit. In all cases, deliveries are invariably taken and given; full price is paid and collected. There is hardly any involvement of borrowed capital." The learned counsel also referred to the decision of AAR referred by the CBDT in the impugned circular. 5.16 Based upon these, the learned counsel summed up his arguments by stating that there was no presumption that a transaction in shares was for a trade and the correct position was that ordinarily, equity shares were capital assets in which people invested money and if a particular acquisition of shares was treated as stock-in-trade, the burden of proof was on the party who asserted it to be stock-in-trade and in the present case, there was no material brought on record by the Revenue authorities to suggest that assessee's intention at the time of purchase was trading and not investment, hence, the action of Revenue author....
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....nr. vs. ITO (1995) 127 CTR (Guj) 187 : (1995) 215 ITR 323 (Guj); (vi) Dhansiram Agarwalla vs. CIT (1996) 130 CTR (Gau) 559 : (1996) 217 ITR 4 (Gau). 5.20 The learned counsel further submitted that the Bench should take into consideration the written submissions dt. 17th June, 2000 filed before the learned CIT(A) which were placed at pp. 1 to 15 of the compilation rather than depending upon the version of learned CIT(A) in the appellate order. 6. The learned Departmental Representative, on the other hand, contended that if the contentions of the assessee were to be accepted, then, every delivery based transaction would be treated as short-term capital gain and in that situation, there was no need to issue a circular as was done by the CBDT. She further contended that the AO did not intermingle the volume by frequency as contended by the learned counsel and referred to para 4 which is relevant to the observations to show that the AO was quite aware of difference between the two. The learned Departmental Representative further contended that the assessee had not furnished the details of activities/purposes wherein the borrowed funds had been utilized, hence, in the absence of....
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....estment in shares in the balance sheet. It is also noted that no stock-in-trade has been shown as on that date which shows that assessee in case of jobbing transactions does not take delivery and squares up transactions on the same date. It is also noted that assessee was having borrowings to the tune of Rs. 11.50 lacs approx. and loans and advances given to the tune of Rs. 12,80,000 approx. The investment in shares stood at Rs. 2,11,32,389. Apart from this, the assessee was also having various fixed assets, roughly, to the tune of Rs. 25 lacs. In that year tax audit was done and details of records maintained by the assessee were also furnished. The assessment in that year was completed under s. 143(3) of the Act wherein, on a query from AO regarding allowability of interest on borrowed capital, the assessee stated that assessee was doing business of share trading transactions and he had taken the loans on interest so as to not to miss any opportunity of earning income due to upward movement of prices, hence, interest on borrowed funds was allowable as business expenditure. The AO, however, treated the utilization of such loans towards granting interest-free loans to his wife and d....
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....ed by the assessee and the transactions are same in all these 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 has been allowed as business expenditure against the profit on jobbing activities shown by the assessee as business profit. (iii) The assessee has shown shares purchased on delivery basis as investment at the end of the year and no stock-in-trade exists on that date and the assessee has earned both long-term and short-term capital gains which means the assessee has also held shares for a period of more than 12 months. 8.1 Thus, the nature of activities, modus operandi of the assessee, manner of keeping records and presentation of shares as investment at the year end is same in all the years, hence; apparently, there appears no reason as to why the claims made by the assessee should not be accepted. However, the Revenue authorities have taken a different view in the year under consideration by holding that principle of res judicata is not applicable to the assessment proceedings. There cannot be, in our view, any dispute on this aspect but there is also a....
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....e though it may result into an apparent benefit to individuals entering into those transactions. Thus, in our view, in the facts and circumstances of the case, on the basis of principle of consistency alone, the action of the Revenue authorities is liable to be quashed. We order accordingly and direct the AO to accept the claims of assessee in regard to short-term capital gain and long-term capital gain. 8.2 Having stated so. on merits also, we find that in the case of Sarnath Infrastructure (P) Ltd. vs. Asstt. CIT, the Tribunal has considered almost all the important judicial decisions laying down legal principles to determine the nature of transaction i.e. trading the transaction or investment, which have also been cited before us. The Tribunal has also considered the CBDT Circular No. 4 of 2007. The Tribunal has summarized these principles in para 13 of the said order. For the sake of ready reference, we reproduce the same as under: "After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes: (1) What is the i....
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....s investor. It has kept separate accounts for both types of dealings. Valuation of holdings bas been done at cost (for investment portfolio). At least, there is no allegation or material to come to the conclusion that valuation of investment portfolio has been done on cost or net realizable value, whichever is low. The shares which are sold out of investment portfolio, this year, were purchased two to three years ago showing that assessee had intention, while purchasing them, to hold them. They were reflected in the balance sheet as investment. The assessee has enjoyed dividend income and declared the same in return of income. The frequency of such purchase or sale in this portfolio is not large enough to doubt that this portfolio is only a device to pay lesser taxes by parking some stock-in-trade in investment portfolio. We notice that in trading portfolio the assessee had purchased during the year shares worth Rs. 21,38,353 and same shares were sold for Rs. 23,89,805. There was neither opening stock nor closing stock. In investment portfolio, opening stock of shares was Rs. 19,22,203 and closing stock was Rs. 46,23,274 whereas sales out of investment portfolio were Rs. 31,80,423 ....
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....ed transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short-term capital gain or long-term capital gain depending upon the period of holding. 8.4 The Revenue has also held that presentation in the books of account was not conclusive which may be true to some extent, but it is the most crucial source of gathering intention of the assessee as regard to the nature of transaction and in law, it is also so Le., such presentation reflects, prima facie, a view of the assessee on a particular subject and this principle is effectively applicable in a situation like this as compared to a 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 IT 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 c....