TMI Blog2012 (4) TMI 270X X X X Extracts X X X X X X X X Extracts X X X X ..... ares as capital - profit on sale of bonus shares would be in the nature of capital gain to profit which has to be classified as STCG - bonus shares of Kotak Bank Ltd. and Unitech Ltd. are held to be on capital account and all other transactions are held to be on business account. - ITA Nos.5619 & 5620(Del)/2010, ITA No.4089(Del)/2011 - - - Dated:- 22-2-2012 - I P Bansal, K G Bansal, JJ. For Appellants: Shri Pradeep Dinodia, CA Shri V P Gupta, Adv. For Respondents: Mrs Geetmala Mohananey, CIT, DR Mrs Anusha Khurana, Sr. DR ORDER Per: K G Bansal: These two appeals of the assessee and one appeal of the revenue involve a common ground regarding determination of the appropriate head of income for taxing the surplus realized on sale of shares. In assessment year 2007-08, similar question has been raised by the assessee in respect of surplus realized on redemption of units of the mutual funds ( MF for short) also. The CIT(Appeals)-XXIV, New Delhi, has decided these matters in favour of the revenue by holding that the surplus represents profits and gains of business. However, in assessment year 2008-09, his successor has decided the matter against the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08 STCG LTCG MF 3,90,21,672 19,99,360 1,92,078 3,84,36,248 - 5,85,424 19,99,360 1,92,078 2008-09 STCG MF LTCG MF 83,45,853 33,339 7,81,93,362 2,04,098 49,75,295 - 7,78,57,579 33,70,558 33,339 3,35,783 2,04,098 2009-10 STCG MF LTCG MF (4,82,131) (9,96,356) 64,20,823 (52,188) - - 60,69,336 - (4,82,131) (9,96,356) 3,51,487 (52,188) 2.1 He also pointed out that assessment order for assessment year 2009-10 has been passed by the AO in which the surplus has been taxed as capital gains. A copy of the order dated 30.12.2011 has been placed on record. 2.2 It is submitted that the assessee has been earning dividend income and surplus on transfer of shares etc. right from assessment year 1995-96, the details of which have been placed in the paper book on page no. 15 for assessment years 1995-96 to 2005-06. In all these years, the position of the assessee, in so far as head of taxation of the surplus is concerned, has been accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the share transactions. Therefore, the tax was paid in accordance with section 111(A) of the Act. The details of the gains have been mentioned on page nos. 4 and 5 of the paper book. These details show that the STT was paid in respect of transactions in shares resulting in surpluses which are offered for tax as LTCG and STCG, but the STT is not paid in respect of redemption of units of the MF. These details are reproduced below:- Long-term Capital Gain on which STT paid Share Name Date of purchase Investment No. of shares Date of sale Sale Price Longterm Gain with STT Suzlon Energy Oct.-05 56225 110 Oct.-05 141556 85331 Steel Autho. Of India Feb.05 138740 2000 Aug.06 157600 18860 Simplex Infrastructures April 05 156163 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3403849 3595927 192078 Short Term Capital Gain- Shares Share Name Purchase Month Investment No. of shares Sale Month Sale Price Profit IDFC Aug 05 622043 15910 May06 1155967 533924 Indiabulls Financial Service May-06 760528 2250 Jan-07 615998 -144529 HDFC Bank Aug-05 325974 500 Apr.-06 405855 79881 Unitech Nov-05 3664641 25960 May/July- 06 12656491 8991851 Unitech (Bonus) July-06 0 74000 Oct/Nov- 06 29444398 29444398 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 67 750 Mar-07 232995 46024 Gateway Distriparks Oct-06 827050 5000 Oct.-06 873074 39021672 STCG for the year 15843002 54864674 39021672 2.4 In the course of assessment proceedings, the AO raised questions regarding source of investment in various securities, average period of holding, purpose of investment and the realization of the surplus. It has been submitted that investment has always been made from savings, which have been accumulated from his earnings over the years. The average period of holding in respect of short-term securities is about four and half months. In calculating this average period, the date of acquisition of bonus shares has been taken to be the date of allotment. However, if the date is taken to be the date of acquisition of original shares, the period will be about nine months. The objective is to earn return on surplus funds and consolidate the savings so that immovable properties ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 March 1 March 1+1+1 June, May April 3 Total number of transactions in the year 21 Total of all the transactions 22 2.6 It is further submitted that the AO has furnished the details of STCG and LTCG as shown in the return on page 2 of the assessment order. It has been mentioned by him that the transactions of purchase and sale are spread throughout the year. These transactions have been made industriously and with enterprise which raise the assumption that they are in the nature of business or at least adventure in the nature of business. It is further mentioned that even sale of long-term asset is followed by purchase of share. This is true both in respect of sale of shares and redemption of units. The dividend earned is a petty amount of ₹ 3,25,603/- compared with surplus realized on sale of shares etc., which amounts to about ₹ 4.00 crore. The average holding period is small, which contradicts the assertion that the shares were held as investments. It is further mentioned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade. On the basis of the facts, it has been concluded that the transactions are in the nature of business. The facts of the case of Gopal Purihit, 12 TTJ 87 (Mum.) and Management Structure and System Pvt. Ltd. Vs. ITO, 41 DTR (Mum.) (Trib.) 426 have been distinguished by mentioning that the shares have not been held for years together and the claim for assessment year 2006-07 has not been accepted, which is the first year of commercial trading. 2.9 The case of the ld. counsel is that the assessee is not a trader in shares. He had been investing savings over a period of time in shares as well as in other assets so as to have a balanced approach in the matter. Till assessment year 2005-06 nominal profits accrued, which were offered as capital gains. The assessing officer accepted the returns u/s 143(1)(a). Profit in years under consideration increased significantly on account of realization of investment in the shares of Unitech Ltd. The share was initially sub-divided into five shares and thereafter 12 bonus shares were allotted for each share held by the assessee. The investments and sale thereof was primarily for purchase of investment in immovable properties and another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done to save the capital. But it shows that the motive was to make profit. The focus was not on earning dividends but reaping the profit on account of volatility in the market and, therefore, the stated motive of accumulating savings for investment in house property is not acceptable. After selling shares at loss, further shares have been purchased out of the sale proceedings, which indicates the desire to make systematic transactions with a view to earn profit. The shares were stated to be held on investment account and delivery was taken in all cases. This fact is not material in deciding the issue. Actually what is to be seen is the real nature and effect of the transaction. It also does not make any difference whether the transactions are carried out through a broker or sub-broker. What is really material is the intention of the assessee, namely, whether it was to make a long-term investment or to churn investments with a view to make profit. It is also clear that gain of 346.3% in a few months cannot be achieved if the motive is to hold the assets as long-term investments. Accordingly, it has been held that the assessee has undertaken business and purchases were not made with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Indian Conduit Pipes Ltd. and 10 preference shares of National Rolling Steel Ropes Ltd., resulting into net profit of ₹ 1,26,027/-. It had been acting as managing agents of all these companies. 60700 shares of National Pipes and Tubes Co. Ltd. were acquired in the years 1943 to 1953. 10,700 shares were sold in 1955 and 20000 shares in the year ending on 31.3.1957. The profit on sale of 10700 shares was not earlier subjected to tax. As a matter of fact, the assessee had never been treated as a dealer in shares in past assessments. The claim of the assessee was that the surplus of ₹ 1,26,027/- amounted to capital gain. The shares were sold to reduce bank overdraft and entire sale proceeds were deposited with the bank. The AO took note of the fact that the assessee was authorized to deal in shares, therefore, it was held that the profit was taxable as business income. The AAC took note of the fact that the purchases were made in several lots and past records show that the assessee regularly dealt in shares of the company of which it was acting as the managing agents. The counsel for the assessee also pointed out before the Tribunal that the sale proceeds were credited to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establish that the shares, which have been sold, were treated differently from the shares still held by it. The proceeds were credited to profit and loss account. No decision was invited by the Tribunal as to whether the shares in question had been held by way of investments, therefore, it was not open to the High Court to give a finding on this question. Thus, the question was answered in favour of the revenue and against the assessee. 6.1 Further, in the case of CIT Vs. H Holck Larsen (1986) 160 ITR 67 (SC) , the question of the High Court was-whether, on the facts and in the circumstances of the case, the assessee was a dealer in shares in accounting period relevant to assessment years 1959-60 and 1960-61? The facts are that H. Holck Larsen was a partner in the firm of M/s Larsen Tubro up to 1946. The firm was converted into a private limited company on 08.02.1946. The assessee was allotted 53486 shares of this company in lieu of the interest in the firm. He also subscribed to 1875 shares. In the next few accounting years up to financial year 1953-54, he acquired 2994 shares and sold 1550 shares. Up to this financial year the number of shares purchased and sold and the nu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was converted into stock-in-trade of the business of the assessee. Therefore, the finding of the Tribunal that the shares were held as investment was held to be correct on facts. In the case of CIT Vs. Gopal Purohit (2010) 228 CTR (Bom.) 582 , the assessee had maintained two accounts in respect of share activities, one as investment portfolio and the other as stock-in-trade. All the transactions in investment portfolio were delivery based transactions. The Tribunal returned a finding that sale of shares from the investment portfolio led to capital gains. The Hon ble Court upheld the decision by mentioning that a person can be a dealer and investor at the same time. In absence of any evidence to the contrary brought on record by the revenue, the transactions in investment portfolio were on capital account. 6.3 In the case of Assistant CIT Vs. Om Prakash Arora, (2012) 134 ITD 217 (Del) , the transactions in shares were held to be on capital account and the following finding was recorded:- 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 holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the head capital gains . 7. We have considered the facts of the case and submissions made before us. The ld. counsel has discussed all the appeals with reference to the impugned order for assessment year 2007-08. However, the ld. DR has discussed the facts of each case separately. We have seen from the decision in the case of Gopal Purohit (supra) that a person could be an investor and a dealer in shares simultaneously. Further, as seen from the decision in the case of H. Holck Larsen (supra), an investor may convert himself into a dealer. A dealer may also convert himself into an investor with the passage of time. Therefore, we think it fit to discuss the facts of each year separately and decide the matters accordingly. 8. The facts in respect of assessment year 2006-07 are that the assessee has shown income from salary, house property and capital gains. A loss of ₹ 7,673/- has been shown as speculative loss in shares due to non-delivery of shares. The assessee has undertaken transactions in shares of 52 companies. The gain from these transactions has been shown as STCG amounting to ₹ 10,54,870/-. On perusal of the statement, it is seen that many a time shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ataswamy Naidu Co. Vs. CIT, (1959) 35 ITR 594 also shows that it was acting as managing agents of the mills and adjoining lands were purchased with a view to sell them to the mills on appreciation in value thereof. In the case of H. Holck Larsen (supra), it has been held that the question is a mixed question of fact and law. The right shares were subscribed to ensure that market value of the share did not go down. The shares were sold to reduce the debt from the banks. Therefore, the facts of this case are also distinguishable. In the case of Ess Jay Enterprises (P) Ltd., the assessee acquired the shares of only one company and showed them in the books as investment. The assessee does not maintain any books and he has transacted in a large number of shares and units. In the case of Rohit Anand (supra), the assessee was dealing in jewellery and investment was made in a few shares which were not even rotated. The inference was drawn from classification of the shares in the books. It is also seen that the shares had not been rotated. The facts of this case are to the contrary as shares have been sold ostensibly to safeguard investments. In the case of Om Prakash Arora (supra), the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess . 9. We now proceed with the facts of the case of the assessment year 2007-08. The assessee had filed his return on 31.07.2007 declaring total income of ₹ 4,34,28,744/-. This income was shown under the heads salary, house property, business, capital gain and other sources. Under the head capital gain, the LTCG was shown at ₹ 19,99,360/- and STCG at ₹ 3,90,21,672/-. While the LTCG was claimed to be not includible in the total income by dint of provision contained in section 10(36), lower rate of tax was claimed to be applicable in respect of STCG. We have already reproduced the details of STCG and LTCG in paragraph no. 2.3. The STCG has been shown in respect of sale of shares of 21 companies. The LTCG has been shown in respect of sale of shares of 10 companies. The assessee has also purchased and sold units of three mutual funds. Therefore, the facts prima facie seem to be in pari-materia with the facts for assessment year 2006-07. However, the assessee has also shown STCG of ₹ 2,94,44,398/- in respect of 74,000 bonus shares of Unitech Ltd. Apart from that, the assessee also sold 25,960 sub-divided shares of Unitech Ltd. and earned profit of ₹ 89 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res are accretions to the shares in respect of which they are issued, but on that account those shares do not become stock-in-trade of the business of the shareholder. A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business; in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity. Bonus shares having been received by the assessees in respect of their stock-in-trade did not, therefore, become part of their stock-in-trade, merely because they were accretions to the stock-in-trade. The bonus shares were received as capital; they could be converted by the assessees into their capital asset. The Tribunal observed in paragraph 5 of its order that the assessee deals in shares and the sales proceeds of the bonus shares was (were) received by him in the course and as part of his share dealing business. The amount received by the assessee is therefore part of his profit from the share dealing bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who has applied for a reference to challenge those findings first by an application under s. 66(1). If he has failed to file an application under s. 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or another. The principle of that case applies here. It is not open to the assessees to contend on the question raised that the finding of the Tribunal is not supported by evidence. The answer recorded by the High Court is discharged. The answer to the question submitted is in the affirmative. No order as to costs of the appeal to this Court and of the reference in the High Court. 10. Finally, we take up the appeal of the revenue for assessment year 2008-09. The assessee had filed the return declaring total income of ₹ 1,62,68,906/- on 29.09.2008. The assessee declared income from salary, house property, business of insurance agency, capital gains and other sources. The dispute is only in respect of the head of income under which income from purchase and sale of shares is to be assessed. In the return the assessee declared LTCG in respect of trans ..... X X X X Extracts X X X X X X X X Extracts X X X X
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