TMI Blog2011 (6) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... 6497 and 6603 (Mum.) of 2009 and 148, 150 and 812 (Mum.) of 2010 Co No. 239 (Mum.) of 2009, Assessment Years 2003-04, 2004-05 and 2006-07 - - - Dated:- 15-6-2011 - J. Sudhakar Reddy, Accountant Member and Vijay Pal Rao, Judicial Member Vijay Mehta for the Appellant Goli Sriniwas Rao for the Respondent ORDER Vijay Pal Rao, Judicial Member 1. These are cross appeals by the assessee and the revenue except for the assessment year 2004-05 for which the assessee Shri Hitesh S Doshi has filed cross objection against the respective orders of the CIT(A) for the assessment years 2003-04, 2004-05 and 2006-07. The appeals in ITA No. 6497/Mum/2009 and 150/Mum/2010 are also cross appeal by another assessee Smt Pratikshi D Doshi as well as revenue against the order dated 21-10-2009 for the assessment year 2004-05. 2. The first common issue arises in all the appeals and cross objection and assessee is whether in the facts and circumstances of the case the CIT(A) is justified in treating the surplus/loss of shares held for less than 30 days in respect of secondary market purchase and sales as business income/loss. 3. The solitary common issue arises in all the revenue appeal is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1827 dated 31-8-1999 and supplementary instruction were applied. (iii) The expenses claimed against short term capital gain are such which are necessary for carrying out the business. (iv) The ratio of purchase to opening balance and sales to closing balance makes the assessee a trader in shares and not investor in shares. The ratio of turnover to closing stock is also an important indicator to look at the motive of the assessee. 5.4 The Assessing Officer, therefore, held that the assessee is engaged in the one activity only i.e., activity of earning profit through dealing in shares within a short period or long period. He accordingly treated the entire income as business income. For the assessment year 2004-05, the Assessing Officer also denied the deduction under section 54F of the Act. 6. On appeal, the CIT(A) asked the assessees to file the statement of short term capital gains and long term capital gains. The assessees were also required to bifurcate the short term capital gain into two parts namely; shares sold within 30 days of purchase and shares sold after 30 days of purchase. The assessees, accordingly filed the details of long term capital gain and short term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) Section 2(42A) defines the phrase 'short term capital asset' means - a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer but in respect of shares held in a company listed in a recognized stock exchange, the words 30 months are substituted for 12 months. Therefore, the statute itself recognizes the difference between short term and long term capital asset and also difference between capital asset being shares of a listed company and other capital asset. (v) Law relating to differential treatment to short term and long term capital gains came into effect with effect from the date on which Chapter VII of the Fin.N.(2) Act, 2004 come into force. This date is 1-10-2004 on which the levy of securities transaction tax came into effect. He has referred the speech of the Finance Minister on the Securities Transaction Tax. (vi) Once the assessee is called upon to pay the securities transaction tax based on the nature of transaction, it will be unfair to give a different treatment in respect of same transaction for levy of tax under different tax law. As per the intention of legislature, manifested by the speech of the min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated by the assessee as investment. Once the treatment of the shares as investment was accepted by the revenue in the earlier years then the Assessing Officer cannot be allowed, treating the same differently when the shares are sold. The shares are capital asset within the meaning of section 2(14) of the act, any gain or loss on transfer of the shares always taxed under the head 'capital gain'. 8.4 The ld AR vehemently contended that treatment given by the CIT(A) is contrary to the provisions of section 2(42A) of the Act. Under the provisions of the Act, short term capital asset means a capital asset held by an assessee for not more than 36 months/12 months depending upon the nature of the asset. When there is no concept of holding the shares less than 30 days to change the nature of asset and consequently, the income from sale of shares would be treated as business income and not capital gain. A capital asset is always a capital asset and cannot be treated differently at the time of sale. He referred to CBDT circular No. 4 of 2007 dated 15-3-2007 and submitted that CBDT has also emphasised that it is possible for a taxpayer to have two portfolios i.e. an investment portfolio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for the assessment year 2003-04, it was 61 per cent and subsequent years, the investment has been increased to 77 per cent and 87 per cent. For the assessment year 2010-11 it was more than 78 per cent. Thus, the ld AR of the assessee has submitted that the intention of the assessee is always investment only in the selected scrips and more than 75 per cent of the total investment is in the top ten scrips which shows that the intention of the assessee was not trading but only investment latterly. He has summarised his contention as under: (i) that the assessee recorded the investments in the books of account separately and consistently for very year and the assessee has proved his intention at the time of purchase of as investment; (ii) the assessee always valued the investment at cost and never valued at market price or realized value; (iii) the assessee admitted capital loss and never claimed as business loss out of sale of investment in shares which shows from the beginning and the assessee was treated the investment separately; (iii) the assessee consistently treating the investment separately in the last many years, which has been accepted by the revenue except for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that the Tribunal, after considering the decision in the case of Gopal Purohit (supra) has laid down various principles. 8.8 He has referred some principles as held in the said decision that; 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 not capital gain; purchase with intention to resale can constitute capital gains or business profit depending on circumstances like quantity of purchase and nature of activity; no single fact has any decisive significance and the question must be answered depending on the collective effect of all relevant material brought on record. 8.9 He has further submitted that in the said case, the transaction of purchase and sale of share were only about 32 scrips. Since the holding period was only 6 months, the Tribunal has treated the transaction as business and not investment. He has referred the balance sheet of the assessee at page 22 of the paper book and submitted that the assessee has shown the loans of Rs.118 lacs. Therefore, the assessee was using the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to determine the nature of transaction. 10. The Hon'ble Supreme Court in the case of CIT v. Associated Industrial Development Co (P.) Ltd. [1971] 82 ITR 586 as well as in the case of CIT v. H Holck Larzen [1986] 160 ITR 67/26 Taxman 305 has laid down various principles, which has been considered by the CBDT for issuing the Circular No. 4/2007, dated 15-6-2007. In short, the principles laid down in those cases for deciding the question of nature of the transaction as trading or investment, mainly/broadly are;- what is the intention of the assessee at the time of purchase of shares; whether the assessee has borrowed money to purchase and paid interest thereon; what is the frequency of such purchase and disposal in that particular item; whether the purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value; how the value of items has been taken in the balance sheet. Thus, no single factor can be said to be decisive factor and no single principle can be laid down to determine the nature of the transaction i.e., trading activity or investment. Each case has to be decided based on the particular facts of the said case. Therefore, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther, the assessee has been maintaining separate portfolios for investment and trading transactions. It is now settled proposition of law that an assessee can have two separate portfolios one for investment and other for trading transactions and the income from these two portfolios is assessable under the different heads i.e., 'capital gain' and ' business'. The claim of the assessee is further strengthen by the fact that even prior to the differential tax effect with effect from 1-10-2004, the assessee has been treating the investment separately and admitting capital gain as well as capital loss. This consistent treatment of the assessee has not been disputed rather has been accepted by the revenue prior to the assessment year under consideration. Thus, from the facts and materials on records, it is clearly established that the intention of the assessee, at the time of acquiring the shares, which are claimed as investment was for investment and not for trading so far as representing the long term capital gains and short term capital gains. Own funds or borrowed funds used for purchase of shares and payment of interest 13. As per the balance sheet of the assessee at page 22 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the above, the assessee has been regularly earning dividend income. Profit motive is inherently embedded in the transaction of purchase and sale. The important aspect is the intention to earn profit from appreciation of value of capita asset or by way of transfer of trading asset. Valuation of items in balance sheet 14. Undisputedly, the assessee valued the shares under investment portfolio at cost and never valued the balance at the beginning as well as at the end of the year of market price or realization value. 15. In the case of Associated Industrial Development Co. (P.) Ltd. (supra), the Hon'ble Supreme Court has observed 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 share 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." 15.1 In the case in hand, the assessee has treated the shares as investment in the books of account and values the same at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions which have to be considered before a decision is taken as to whether the assessee held the shares as capital assets (investment) or as stock-in-trade. It is also recognized by the revenue that the same assessee can hold the shares in two different portfolios - one portfolio for stock-in-trade and another portfolio as investment. This position has been recognized by the CBDT in its Circular No: 665 dated 5-10-1992. 15. In the present case the commodity in question is shares which are generally traded. But that is not conclusive because it is common knowledge that shares are also held as investment particularly shares of blue chip companies which may yield consistent dividend and may also appreciate in value over a period of years, the appreciation being similar to the appreciation in the value of other investments such as fixed deposits with banks, real estate, gold and other precious metals, etc. It is a fact that in the present case the assessee has shown the shares as investment in his Balance Sheets. The relevant details are given in para 2.2(c) of the order of the CIT(A) for the assessment year 2006-07. The same is set out below: F.Y. ending on No. of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and Toubro Ltd., CEAT Ltd., Tata Steel, Voltas Ltd. The holding period ranges from 387 days to 9016 days. It is seen thus that the assessee has held the shares for quite a long period. For example, the shares of Greaves Cotton Ltd., were held for almost 27 years (9016 days). The shares of Avery India Ltd., were held for 7493 days. The shares of PCS Industries Ltd., were held for 5674 days. Many of the shares were held for 3000 to 4000 days (9 years to 12 years). Similar details have been filed for the assessment year 2006-07 also. For this year in respect of substantial number of sale of shares the holding period was more than one month and in respect of shares which were held for less than a period of twelve months, the surplus was shown as short term capital gains. In respect of the surplus shown as long term capital gains, the period of holding in all the share transactions was several years. It is significant that the revenue has not filed any appeal against the finding of the CIT(A) that the long term capital gains declared by the assessee for the assessment year 2006-07 should be assessed as such and not under the head "business". 17. It is further seen that even in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the sale price. The interest has never been claimed as revenue deduction. On these facts it was held that there was no rule that interest cost cannot be capitalized and especially on the facts of the case of the assessee before the Pune Bench it was held that the right course would be to capitalize the interest cost and deduct the whole cost from the sale price while computing the capital gains. It was observed that the interest cost cannot be segregated from the cost of acquisition and for this purpose reliance was placed on the judgment of the Delhi High Court in CIT v. Mithlesh Kumari [1973] 92 ITR 9 where it was held that interest paid by the assessee on monies borrowed for the purchase of an open plot of land would form part of the actual cost of the assessee for the purpose of determining the capital gains derived from the sale of the plot. This decision certainly lends support to the contention of the assessee before us. Even in the present case the department has no objection to the capitalization of the interest. The alternative submission of the assessee however was that in any case the balance in his capital account as on 31-3-2005 was Rs.4,19,60,788 which is more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investment also increased from Rs.81,59,140 in the year 2000-01 to Rs.1,66,32,000 in the assessment year 2006-07. Therefore, having regard to the facts and circumstances of the case and applying the various principles and guidelines laid down by the Hon'ble Supreme Court, the surplus of sale and purchase of the shares held by the assessee as investment in the books of account cannot be treated as business income. Even otherwise, when in the immediate preceding year right from assessment year 1999-00 to assessment year 2002-03 and subsequent year 2007-08, the claim of the assessee regarding capital gain and investment shown under the head 'investment' in the balance sheet has been accepted by the revenue and when there is no substantial change in the assessment year under consideration with respect to the treatment of the shares by the assessee and the pattern of the purchase and sale as well as availability of assesse's own funds then there should be unity in the treatment and consistency in the same fact and circumstances and the Assessing Officer cannot treat the same income under different character and had only because of change in the provision of Income-tax Act and allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question. Question (b), therefore, does not also raise any substantial question." 16. In view of the facts and circumstances of the case and decisions of the Tribunal as well as the jurisdictional High Court, we hold that the income arising from purchase and sale of share held by the assessee as investment cannot be treated as business income. 17. Next ground in the assessee's appeal for the assessment year 2006-07 as per the revised rounds of appeal is as under: "The ld CIT(A) has erred in facts and in law in holding the loss from derivative transaction as spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taken as effective from the beginning of the relevant year. The issue is thus covered, in favour of the line of reasoning adopted by the assessee, by decision of the coordinate bench in the case of Anand Brothers (supra) and by Hon'ble Gujarat High Court 's judgment in the case of Claris Life Sciences (supra). Respectfully following these decisions, we uphold the grievance of the assessee and hold that the derivate transactions, entered into by the assessee at the recognized stock exchanges even prior to the date of notification in the relevant previous year, are to be treated as covered by the exclusion clause set out in section 43(5)(d). The assessee gets the relief accordingly." 20.1 Further, the Tribunal in the case of Nipra Financial Services (P.) Ltd. (supra) again had an occasion to consider and adjudicate the same issue in paras 8 and 9, which are as under: "8. In the case of G.K. Anand Bros. Buildwell (P.) Ltd. v. ITO [2009] 34 SOT 439 (Delhi) it has been held as follows for the assessment year 2006-07 with respect to speculative transactions the question whether the loss arising in future and option transaction carried out in a recognized stock exchange is to be tre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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