TMI Blog2010 (10) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Respondent. ORDER R.K. Panda, Accountant Member This appeal filed by the assessee is directed against the order dated 9-4-2010 of the CIT(A)-5 Mumbai relating to assessment year 2007-08. 2. The only effective ground raised by the assessee reads as under: The ld. CIT(A) erred in confirming the action of the Assessing Officer treating the capital gains as business income without appreciating that the facts that the motive of the appellant in purchasing the shares was investment and not trading. Therefore, treating the income as business income is not justified and the same may be treated as capital gains. 2.1 Facts of the case, in brief, are that the assessee is in the business of trading in shares and securities and also provides financial consultancy services. During the course of assessment proceedings, the Assessing Officer noted from the statement of total income that the total income of Rs. 1,45,49,690 consists of short-term capital gain on sale of shares amounting to Rs. 1,39,29,733 and profits of the business (from sale of shares) of Rs. 6,19,960. He noted that this is effectively the first year of business of the assessee company. The profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s transactions done by the assessee company are delivery based and were made through de-mat account. The shares were physically delivered to the de-mat account and subsequently sold. (ii) All the shares resulting in short-term capital gain were sold through authorized dealer of the stock exchange and STT was paid (iii) he motive for purchase of shares was investment. (iv) The source of funds came out of internal sources. No loans were taken from financial institutions nor was any interest paid on the funds obtained. (v) The intention of the company is clear from the fact that all the shares lying in the de-mat account were classified as investments. All of them were valued at cost. This further proves the real intention of the company was to hold the shares as investments, specially since no loss has been claimed on account of diminution in value of the shares. (vi) The sprit of the law at the time of introduction of STT clearly proves that any transaction on which STT is paid shall be treated as capital gain. (vii) The company acted as a product investor by selling the shares when the prices rose to earn profit. The company has not acted beyond its objections. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount of Rs. 1,39,29,733 claimed to be short-term capital gain under section 111A is taxable as profit and gains of business which is subject to normal rate of tax instead of special rate of 10 per cent as claimed by the assessee. 4. Before the CIT(A), the assessee filed a detailed written submissions and reiterated the same submissions as made before the Assessing Officer. It was submitted that it had carried out certain share transactions which were purely delivery based and on investment basis. The assessee filed a list of shares bought and sold showing period of holding for the claim of Short-Term and Long-Term Capital gains. De-mat account was filed to substantiate that all the shares are through De-mat account and on a single day, no purchase and sale of same share had taken place. It was submitted that due to the uncertain price fluctuation, the sale decision had been taken by the assessee to avoid further loss of investment. It was submitted that the volumes and frequency has no bearing to the issue of determination of capital gains but its periodicity, delivery and subsequent payments are related factors. It was submitted that the transactions were neither speculativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guishing the shares as investment and stock-in-trade, he noted that mere book entries would not make any transaction sacrosanct and beyond any scrutiny. Rather, every such issue has to be examined in the light of the provisions of the Act. 5.1 Referring to the decision of the Hon ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, he came to the conclusion that the way in which entries are made by an assessee in the books of account are not determinative of the question whether the assessee has earned any profit or loss. 5.2 As regards to the contention of the assessee that only internal funds were utilized and that no interest was payable on the said borrowings, he noted that it has been rightly negated by the Assessing Officer considering the negligible share capital and reserves and substantial borrowings made in the year under consideration as also in the past. However, merely for the fact that no interest was payable on the said borrowings does not mean that the said funds which have been exclusively utilized for purchase of shares, can be treated as internal accruals. However, the fact that there is virtually no dividend income earned as als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee reiterated the same submissions as made before the Assessing Officer and the CIT(A). Referring to the Paper Book at page 83, he submitted that it pertains to only 13 scrips. The treatment of the shares as investment in the books of account has not been disputed by the Assessing Officer. He submitted that in the preceding assessment year, the assessee has disclosed certain capital gain which has been accepted under section 143(1) and the department has not taken any recourse under the provisions of section 147 or 263. Therefore, the order of the Assessing Officer for the preceding year being final is binding on both sides. He submitted that at the first entry level, the assessee has treated its purchase as investment and not stock-in-trade. Further, all the shares in investment account are delivery based has not been disputed by the authorities below. No borrowed funds have been taken and utilized for buying of shares and only interest-free funds generated out of internal sources have been utilized for investment purposes. 8.1 Referring to the paper book at pages 88 and 89, he drew the attention of the Bench to the Cash Flow statement and submitted that at no time, the purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r being an investor as well as a trader; therefore, profit from sale of shares has to be treated as short-term capital gains as determined by the assessee and not as business income as determined by the Assessing Officer and upheld by the CIT(A). The ld. counsel for the assessee has also relied on the following decisions: (i) Axis Capital Market India Ltd. v. ITO in IT Appeal No. 4098/M/2009 (ii) Addl. CIT v. Tejas B. Trivedi in IT Appeal No. 5412/M/2009 for assessment year 2006-07 (iii) Management Structure Systems v. ITO [2010] 41 DTR 426 (Mum.) (iv) Vinod M. Shah v. Addl. CIT [2010] 38 SOT 503 (Mum.) (v) Paresh D. Shah v. Jt. CIT [2010] 2 ITR 311 (Mum. - Trib.) (vi) Sugamchand C. Shah v. Asstt. CIT [2010] 37 DTR 345 (Ahd.-Trib.). 9. The ld. DR, on the other hand vehemently relied on the orders of the authorities below. He submitted that the nature of business of the assessee is that of trading in shares and securities. Referring to the decision of the Tribunal in the case of Smt. Rekha Khandelwal v. ACIT vide IT Appeal No. 785/Mum./2009 order dated 17-3-2010 he submitted that the Tribunal, after considering various decisions has held such type of profits from sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed August 31, 1989 had brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of assessees as well as for guidance of the Assessing Officers. 5. In the case of Commissioner of Income-tax (Central), Calcutta v. Associated Industrial Development Company (P.) Ltd. (82 ITR 586), the Supreme Court observed that: 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 any distinction between those shares which are its stock-in-trade and those which are held by way of investment. 6. In the case of Commissioner of Income-tax, Bombay v. H. Holck Larsen (160 ITR 67), the Supreme Court observed : The High Court, in our opinion, made a mistake in observing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome as business income or capital gain can be summarised as under:(a) It is possible for an assessee to be both an investor as well as dealer in shares. (b) Whether a transaction of sale and purchase of shares is a trading or investment transaction is a mixed question of law and fact. (c) Whether a particular holding is by way of investment or of stock-in-trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares held as investments and those held as stock-in-trade. (d) The treatment in the books of an assessee is not conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive, then it becomes business profit and not capital gain. (e) Purchase with intention to resell can constitute capital gain or business profit depending on circumstances like quantity of purchase and nature of activity. (f) No single fact has any decisive significance and the question must be answered depending upon selective effect of all relevant materials brought on record. 13. We fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 344 1 Idea Cellular 6 Ivrcl (407) 2 RedingtonIndia (83) World Wide 969 3 Total 13,929,733 13.2 From the above chart, it can be seen that the shares are held for a few days and in very few case for a few months but in no case it is exceeding 85 days. Purchase of shares during the year and selling them frequently in short period, in our opinion, do indicate that the assessee has purchased the shares with a motive to earn profit in a short period. Therefore, the facts of the instant case do not persuade us to hold that the shares were held as investment since these are not held for such a long period so as to treat the same as investment. The frequency and volume of the transactions in the instant case give an impression that the assessee did not intend to acquire the shares with business motive. In the case of an investment a person usually watches the market over a longer period of time before selling of the shares. The earning of dividend and the appreciation of the shares is the primary consideration. It is only a trader who would look for short-term g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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