TMI Blog2011 (11) TMI 253X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Appellant. Sanjeev Jain for the Respondent. ORDER K.G. Bansal, Accountant Member The only ground taken in this appeal by the revenue is that on the facts and in the circumstances of the case, the ld. CIT(Appeals) erred in directing the AO to treat the profit of Rs. 8,78,16,545/- as short-term capital gain ('STCG' for short) and not the business income as held by the AO. In this connection, board circular no. 4/2007 has also been mentioned. 2. The facts of the case are that the assessee filed his return on 02.11.2007 disclosing total income of Rs. 9,34,80,539/-. The return was processed u/s 143(1) of the Income-tax Act, 1961 ('the Act' for short) and thereafter it was taken up for scrutiny by serving notice u/s 143(2) on the assessee on 25.07.2008. In the course of assessment, it was inter alia found that the assessee had undertaken a large number of transactions of purchase and sale of shares, which have been listed in a tabular form on page no. 5 of the assessment order. The table shows that the assessee undertook transactions in shares of 19 companies. In each scrip there were a number of transactions. The summary of the number of transactions in six s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation shows the gross total income of Rs. 9,35,80,539/-, which consists of STCG of Rs. 8,78,16,545/-. It is argued that transactions in shares do not constitute peripheral activity but the main activity of the assessee. He is carrying on the business as proprietor of M/s Variety Book Depot, the profit from which is only Rs. 39,34,648/-. This amount is less than 20% of the STCG. Our attention has also been drawn towards page no. 40 of the paper book, being computation of total income for assessment year 2005-06. The computation shows gross total income of Rs. 2,17,26,901/- and this amount inter alia includes profit from M/s Variety Book Depot of Rs. 3,42,146/- and STCG of Rs. 2,01,51,090/-. Thus, in that year also the substantial activity of the assessee was in respect of share-transactions. Similar position obtained in assessment year 2006-07, in which business profits from M/s Variety Book Depot amounted to Rs. 4,03,907/- and STCG amounted to Rs. 2,32,33,691/-. Thus, the assessee has been systematically indulging in share transactions leading to substantial profits year after year. 3.3 Our attention has also been drawn towards the balance-sheet of this year, which shows debit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tively, as declared by the assessee. It will be also of interest to refer to paragraph no. 13.4 of the order, which deals with receipts of four sums, aggregating to Rs. 76,04,946/-, from Quantum Securities (P) Ltd., stated to be the sale proceeds of the shares, in respect of which short-term and long-term capital gains were computed. These amounts could not be related to the sale of shares and, therefore, the same were added to the total income u/s 69A of the Act. Our attention has also been drawn towards assessment order for assessment year 2005-06, in which the returned income of Rs. 2,17,14,901/- was accepted. The ld. counsel has also filed a copy of the order for assessment year 2008-09 dated 27.12.2010, in which income of Rs. 8,32,10,320/- has been taxed as STCG. 4.3 It is also submitted that all the transactions are delivery based. 4.4 In the light of the aforesaid facts, it is argued that the surplus from transactions of this year can be taxed only as STCG. 5. In the rejoinder, the ld. CIT, DR again referred to the details of the transactions placed in the paper book from page nos. 30 to 32. The details show scrip-wise profit or loss and the details of transactions. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r business account? 6.1 We may now examine the cases relied upon by the rival parties. The ld. DR relied on the decision of Lucknow bench of the Tribunal in the case of Sarnath Infrastructure (P.) Ltd. v. Asstt. CIT [2010] 124 ITD 71. After considering various decisions and Board circular in the matter, the following principles, in so far as we are concerned, have been culled out which are necessary to ascertain whether the transaction is on capital or business account:- (i) the intention at the time of purchase has to be ascertained, which can be gathered from treatment given in the books of account, i.e., whether they are shown as investments or stock-in-trade; (ii) it may be examined whether investment is made out of borrowed funds and interest is paid thereon; (iii) the frequency of purchase and sale may be examined as habitual dealing will indicate intention of trade. The ratio between purchase and sale and the holdings may also furnish an indicator as to whether the asset is held on capital account or stock-in-trade; (iv) the duration of holding may be ascertained so as to examine whether the intention was to hold on to the assets for enjoying dividend and appreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pleaded the rule of consistency as he was treated as an investor in the earlier years. The Tribunal, however, held that that would not stop the AO from examining the issue afresh. The period of holding was short. The assessee had also entered into futures and options transactions simultaneously. There was no other activity carried on by the assessee. All the receipts were credited to profit and loss account in which other expenses were also debited. It was held that the activity in share transactions was not occasional and it was a regular and systematic activity. Therefore, the surplus realized from it was liable to be taxed as business profit. We may mention here that future and option transactions were also undertaken, which is not the case here. 6.4 In the case of Smt. Sadhna Nabera v. Asstt. CIT [IT Appeal No. 2586 (Mum.) of 2009, dated 26-3-2010], the assessee was an individual and she was a director in a few companies. All the companies were involved in business of trading of shares. The assessee showed surplus realized from transactions in shares as STCG. The AO took the view that looking to frequency of transactions, the surplus is assessable as business income. This v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee as to whether he proposed into dealing in shares or earn dividend and profit out of such investment. The Assessing Officer was guided more because of the total amount involved rather than the actual intention and the way of carrying on share transaction. There is no doubt that even a single transaction can be in the nature of trade but the assessee has demonstrated that his intention was never to trade in shares. The intention is manifested by treatment given to such investment that the investment is out of own fund and not borrowed that the investment is not rotated frequently, that the total number of transactions are very few, that all the shares purchased are not sold and rather held for quite number of days. It is to be noted the Income Tax Act itself has provided that when the shares are held for a period of one year or more will be treated as long term capital asset contrary to other assets where the holding period to treat such asset a long term is more than 36 months Thus even after holding the shares for more than 12 months and showing such intention from the conduct, the Assessing Officer cannot replace his opinion for that of the assessee in holding that the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange in fact, the decision earlier taken should not be unsettled. Coming to the facts of the case, it was found that the assessee was holding shares as investment from year to year. The investment was of a large magnitude. The transactions of sale and purchase were considered as STCG or LTCG. There was no basis to treat the assessee as a trader. Accordingly, it was held that the surplus has to be taxed on capital account. 7.2 In the case of Kunvarji Nanji Kenia v. Addl. CIT [2011] 43 SOT 35 (Mum.)(URO), the facts are that the AO noted that there were numerous transactions on a daily basis in large quantity of shares. The profit was shown as STCG. The assessee had also shown LTCG of Rs. 36.79 lakh. The AO did not dispute the computation of income as LTCG. However, he was of the view that STCG has been shown under the wrong head. It was submitted that he had been an investor over a period of 50 years and profits on sale of shares were offered for taxation on capital account. The assessee had also earned substantial dividend over a period of time. The investment was made out of own funds. The short-term capital asset was also held for 122 days. The Tribunal held that the overwhelmi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) admittedly, the assessee has a long experience and knowledge of equity market operations, a fact exploited even by Quantum Securities (P) Ltd. in its website; (iv) the assessee has undertaken a large number of transactions of purchase and sale of shares, which show that the transactions are undertaken systematically with a view to earn profit; and (v) even the bonus shares of Unitech Ltd. received in this year were sold in this very year showing that there was no intention to hold on them as investment for any length of time. 9. As mentioned earlier, the bulk of profit is on sale of 15000 equity shares and 1,80,000 bonus shares of Unitech Ltd. Therefore, it becomes necessary to examine the nature of these holdings. As mentioned earlier, the assessee had purchased 5000 shares out of which 2000 shares were sold in the earlier year. The AO had accepted that the shares were held on investment account as the gain from sale of 2000 shares was taxed under the head "capital gains". Remaining 3000 shares were sub-divided in 15000 shares in this year. The inference would be that 3000 shares sub-divided into 15000 shares were also held on investment account. In respect of 15000 sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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