TMI Blog2011 (11) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the same is whether in the facts and circumstances of the case the learned CIT(Appeals) is justified in directing the AO to treat the profits on sale of shares as short term capital gain instead of business income. 2. The assessee in the present case is an individual who filed the return of income for the year under consideration on 16-10-2006 declaring total income of Rs. 2,91,69,761/-. The said income comprised of short term capital gains of Rs. 2,28,16,373/- and income from F O and speculative transaction of Rs. 64,29,182/-. The assessee had also declared long term capital gains of Rs. 1,17,41,141/- arising from sale of shares which were claimed to be exempt u/s 10(38). The income earned by the assessee from the dealing in future and option transactions was declared by her as business income and the profit earned from delivery based transaction in shares was declared as capital gains. During the course of assessment proceedings, the assessee was called upon by the AO to explain as to why the profit arising from transactions in shares shown under the head "Capital Gains" should not be treated as her business income. In reply, elaborate submission was made on behalf of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf during the year she traded in more than two hundred different scrips. Furthermore, she made a number of transactions in one particular scrip on different dates. From Form No. 10DB (STT payment certificates) it is obvious that she purchased and sold shares of Rs. 36.77 crore and Rs. 36.27 crore respectively in the case of which delivery was made. She also made speculative transactions to the extent of Rs. 6.68 crore. The amount involved in Future and Option transactions made by assessee is more than 70 crore. No person having intention of investment parks his money in more than 200 different scrips and frequently changes his portfolio. From the balance sheet it is noticed that the total fund including capital of Rs. 5.62 crore and loan of Rs. 72.87 lakhs available with assessee is Rs. 6.35 crore out of which Rs. 6.05 crore which is almost 95% of total fund has been invested in shares only. Thus from the volume and nature of share transactions it can be safely concluded that the assessee engaged herself in systematic business of share trading. 2.2.4 Assessee's another contention that the investment has never been out of the borrowed funds is absolutely wrong and misleading. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h it is evident that the assessee made purchase and sale of shares as on 262 working days of the year having many transactions of many shares on each day. A person having intention of investment is not expected to involve himself on daily basis in share dealing. Furthermore, it is also noticed that most of the shares were sold within short time from the date of their purchase. It is also noticed that there is frequent churning of scrips on regular basis. The shares of same company were purchased and sold many times during the year by closely following the movement of stock prices. For example, she purchased and sold the shares of Century Enka 12 times during the year. It is true that some of the shares were held for a longer period but that too motivated by business intention. During the year, she made more than 1700 transactions of purchase and sale of shares. It is also to be highlighted that the assessee has got no other business or source of income except dealing in shares and Future Options. It has already been pointed out that more than 95% of fund available with her has been invested in shares only. It means that the assessee utilize her entire fund time and infrastruc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter in detail in paragraph Nos. 4 to 4.6 of his impugned order which are reproduced hereunder : "4 I have carefully considered the order of the Assessing Officer and the submission made by the appellant along with the judgments cited and the documents submitted. I find that the major dispute is regarding the determination of the head of income under which the income of the appellant is to be taxed. Section 14 of the Income Tax Act 1961 prescribes 5 heads of income under which the income needs to be classified to be taxed. Each head contains individual computational provisions and therefore it is absolutely necessary to classify the correct head to the income declared. In this context, the following appeal needs to be discussed. To support her contention, the appellant has made an elaborate submissions relying on facts of the case and the case laws applicable. I find that majority of the cases relied upon by the appellant is applicable in her case. Notwithstanding the same even if examined independently, it is apparent from the assessment order that the assessing officer decided the case without investigation and without analyzing all the facts of the case It has been held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in has been accepted by the department. There is nothing to show that in the current year under consideration the appellant's style and method, of earning income has changed and the appellant has become a dealer in shares. The methodology of filing the return of income remains constant where the appellant is concerned in all the years and that the department has been accepting the same without question. The appellant has been declaring both business income and capital gains regarding shares. In fact, records reveal that for Assessment Year 2004- 05, the department assessed the case of the appellant u/s 143(3) of the I.T. Act 1961 and accepted the Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) declared in the return of income filed. For Assessment Year 2005- 06, the case has been processed u/s 143(1) of the I.T Act 1961 and return of income accepted as declared. Therefore, there seems no justification in the action adopted by the Assessing Officer in the year under consideration as the facts of the case remain the same. 4.1 There is no law or practice that a dealer in a particular commodity cannot hold that very commodity as investment. In fact, the Hon'ble C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas the appellant has maintained regular books of accounts disclosing 2 portfolios i.e. investment and trading. In this, the interest liability is debited to the trading portfolio whereby declaring borrowed funds were utilized for business purpose. The Assessing Officer has accepted this activity in totality. He has nowhere argued that the interest liability on borrowed funds are not allowable under the trading account declared. As such there is a dichotomy in the assessment order, if it is also held that borrowed funds were not used for F 0 business declared but to invest in shares shown as investment. The appellant on the other hand has established that loans were not used to buy shares treated as investment. The Assessing Officer has just based his case on the volume of transaction done and the fact that the appellant is also deriving income from business of shares. It is a well-known fact that business enterprise can have two types of assets and there is no bar on business enterprises to invest in immovable assets through surplus generated from the business. It is not necessary that the asset acquired if it is similar to the property used as stock in trade would automatica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided on facts peculiar to it. 4.4 It is seen from the facts submitted that some of the shares sold have been acquired several years back and have been held for a long period clearly indicating that they were not stock in trade of the appellant. In fact, these are delivery based transactions which clearly indicates that the intention of the appellant was to hold them for a certain period and this by itself clarifies them as investments vis-a-vis the Hon'ble CBDT circular and Instructions mentioned above. From the records, it is also seen that some shares have been held for a considerably longer period and in some transactions loss has resulted. If this, activity was business activity, the appellant like any prudent business person would have ensured that sale of shares do not result in losses and their turnover was quick. There is nothing on record to prove or to come to the conclusion that the appellant had converted the capital asset into stock in trade. Merely because there has been profit in a transaction, it cannot be said that business has been done and the transaction covered is one of business. The income from such transaction unless proved otherwise can only be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xamined to determine character of transaction. In order that income can be brought to tax under the head profits gains of business or profession, it is essential that the activities of the person must constitute the carrying on business. Mere motive to derive income by appreciation in the value of investment would not constitute business activity. In this case, if the investment in shares have been converted as stock in trade by the appellant, then section 28 of the I.T Act 1961 would have to be attracted. It is seen that the appellant has clearly distinguished between the shares held as stock in trade and that held as investment and the Assessing Officer has not brought on record to state that the investment in shares have been converted into stock in trade. The appellant has all the liberty to earn income from both the heads of income i.e. business and capital gains and one cannot be merged with the other on presumption and assumptions. The number of transactions and the volume of transactions cannot alter the nature of transaction unless the surrounding circumstances support the same as propounded by the Hon'ble rabad Bench 'A', in the case of Shah-la Investments and Financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f admitted that each case is to be decided individually to classify head of income and all facts and circumstances need to be considered. However, I also find that this has not been done by the Assessing Officer but a general approach adopted. Under the circumstances, the income of Rs. 1,17,41,144/- declared as Long Term Capital Gain by the appellant definitely needs to be classified under the head as declared by the appellant and not business income as done by the Assessing Officer. This is because these are shares bought with the intention of holding them for a long period i.e. more than 12 months and this is a clear indication that the transaction was intended as an investment. Regarding Short Term Capital Gain declared at Rs. 2,28,16,373/-, the facts and circumstances of the case as discussed above clearly indicate that the income has been correctly classified by the appellant and should be accepted as such. This is more so ever, as the appellant has declared income under F 0 consisting of speculation separately and rightly as business income in which no physical delivery of shares were taken. In view of the above, seeing to the history of the case and the finding that the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions in shares was to make profit. She contended that the learned CIT(Appeals), however, simply relied on the decision of the Tribunal in the case of Gopal Purohit (supra) and followed the rule of consistency to give relief to the assessee on this issue. She relied on the following decisions of the Tribunal stating that in the similar facts and circumstances as involved in the assessee's case, profit arising from purchase and sale of shares has been held to be business income of the assessee: (i) Shailesh L. Shah v. Dy. CIT [IT Appeal Nos. 3991 and 3992 (Mum.) of 2008 dated 13-7-2010]. (ii) Asstt. CIT v. V. Nagesh [IT Appeal No. 5410 (Mum.) of 2008 dated 24-9-2009]. (iii) Smt. Sadhana Nabera v. Asstt. CIT [IT Appeal No. 2586 (Mum.) of 2009 dated 26-3-2010]. (iv) Sarnath Infrastructure (P.) Ltd. v. Asstt. CIT [2010] 124 ITD 71 (Luck.). 7. The learned counsel for the assessee, on the other hand, submitted that the profit arising from sale of shares was declared by the assessee as short term capital gain and long term capital gain depending on the period of holding. He submitted that the short term capital gains as well as long term capital gains declared by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to him, if the assessee was a trader in shares, he would have certainly sold all the shares to book the profit, but the fact that he still preferred to hold the shares clearly shows that he was investor in share and not a trader. As regards the decision of the Tribunal in the case of Gopal Purohit (supra) relied upon by the learned CIT(Appeals) to decide the issue in favour of the assessee, he submitted that the said decision has been upheld even by the Hon'ble Bombay High Court and even the SLP filed by the Department in that case has been dismissed by the Hon'ble Supreme Court. He cited various decisions of the Tribunal stating that a similar issue has been decided therein in favour of the assessee following the rule of consistency. 8. We have considered the rival submissions and also perused the relevant material on record. The issue involved in the present appeal is whether the shares sold by the assessee during the year under consideration giving rise to short term capital gains were purchased and held by her as investment or stock in trade. If they were purchased and held by the assessee as investment, the profit arising from sale thereof would be chargeable to tax in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accepted by the learned CIT(Appeals), the Department has not challenged the decision of the learned CIT(Appeals) and this is a peculiar fact involved in the present case having material and direct bearing on the issue under consideration. This is because if the Department has accepted that some of the shares were purchased and held by the assessee as investment while accepting the decision of the learned CIT(Appeals) allowing the claim of the assessee for long term capital gain arising from sale thereof, there is no justification for them to contend that the assessee had purchased and held other shares as stock in trade merely because they were sold within a period of one year especially when other facts relevant thereto are almost similar. For instance, if one lot of 1000 shares of a particular company was purchased by the assessee in the earlier year and 500 shares of the said lot were sold by her in the year under consideration before a period of one year and the balance 500 shares were sold again in the year under consideration but after the period of one year, it cannot be said that there were two different intentions of the assessee behind purchase of the same lot of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X
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