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TMI Blog2012 (5) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer in assessing short term capital loss in respect of transactions in commodities amounting to Rs. 2,95,16,035/- as loss from business allegedly on the ground that on the basis of nature, volume scale and frequency of transaction same is of business nature." Revenue's appeal (ITA no. 2762/Del/10): "On the facts and in the circumstances of the case the ld. CIT(A) ha erred in law and on facts in directing the AO to verify whether the interest paid amounting to Rs. 1,42,37,378/- is compensatory or penal in nature which is not in accordance with the provisions of Section 25(1) of the Act; the ld. CIT(A) should have given a categorical finding on this issue." 2. Brief facts are: The assessee derives business income from hiring of earthmoving equipments. In addition to hiring income, from purchase and sale of shares, mutual funds, derivatives, futures. Regular books of accounts are maintained. During the course of assessment AO observed that assessee carries on shares and like activities by way of two types: (i) by way of actual delivery transaction; and (ii) by way of non-delivery. 2.1. For the assessment year in question the assessee filed its return, disclosing following type ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal gains both of which are otherwise available to assessee if these transactions are treated a stock in trade and treated as business. (iv) That the average holding period of shares sold during the previous year by the assessee is 41 days meaning a month and a half which given ample indication and evidence that the assessee does not trade in shares on regular or frequent basis to cash opportunities offered by fluctuating market prices but rather choose to invest in bulk. Further it will kindly be appreciated by your honour that in all 98 transactions were undertaken by the assessee during the previous year which means mere 8 transactions per month which is very unlikely of a person dealing in shares. Also for the fact that during the previous year the assessee has maintained a small portfolio of 18 scrips indicated that the transactions in shares are not diversified either. In this connection we submit herewith a statement of average transactions. (v): (a) That on an average 4 scrips are transacted in a month. (b) That there are no transaction in the month April, 2005 and February,2006. (c) That on an average only 8 transactions are entered in a month. (vi) Further, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance is placed on Hon'ble Gujarat High Court judgment in the case of Pari Mangaldas Girdhardas V. CIT (1977) CTR 647 (Guj); &Hon'ble Supreme Court judgment in the case of CIT Vs. H. Holck Larsen 160 ITR 67 (SC). On these observations, the amount of Rs. 7,61,56,446/- claimed by assessee as short term capital, was treat ed by the AO as profits and gains from business, liable to be taxed at the maximum marginal rate of 10%. The STT paid was allowed as rebate as per the provisions of Sec. 88E. Based on these observations, the assessment was framed accordingly. 2.8. Aggrieved, assessee preferred first appeal before the ld. CIT(Appeals), who partly confirmed the observations of the AO by following observations: (i) The assessee purchased/ sold shares of companies and hundreds of transactions during the year. (ii) The assessee was an Engineer from IIT and drawing salary income from a company of Indiabulls group. The assessee had borrowed interest bearing funds from Indiabulls Financial Services Ltd. These borrowed funds have been raised indirectly by making late payments for purchase of shares. The initial payments were made by Indiabulls Financial Services Ltd. The use of borrowed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, this claim cannot be termed as additional claim of the appellant in view of the decision of Hon'ble Apex Court in the case of Goetze (India) Ltd. V. CIT 284 ITR 323 (2006). The business income has to be computed in accordance with the section 29 of the Act after allowing the deduction u/s 30 to 43D of the Act. The AO has changed the head of income, thus it is his duty to compute the income under proper head as per law. The case law relied on by the AO for not allowing the claim of interest is out of context. Since the AO has not verified the fact that whether this interest is compensatory or penal in nature, therefore, the AO is hereby directed to verify this fact and in case he is convinced/ satisfied that this interest expenditure is compensatory in nature, then the same has to be allowed while computing the business income. Therefore, this ground of appeal is allowed for statistical purpose." 2.11. On the ld. CIT(Appeals) not deciding the issue and restoring back to the file of AO, the revenue is in appeal. 3. Learned counsel for the assessee contends that the assessee is an Engineer employed with Indiabulls Financial Services Ltd. and drawing salary therefrom. Sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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 [1986] 160 ITR 67, the Supreme Court observed : "The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact." 7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers. 8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles : "(i) Where a company purchases and sells shares , it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; (ii) the substantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. CBDT also wishes to emphasize that it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads, i.e., capital gains as well as business income. 11. Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The Assessing Officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. 12. These instructions shall supplement the earlier Instruction No. 1827, dated August 31, 1989. 3.3. The Board Circular makes it clear that : (i) There is a distinction between shares held by way of investment and shares held as sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to emphasize the view that the assessee indulged in business adventure in delivery based shares. In the next year the assessee carried out limited number of transactions. There is no bar that assessee cannot undertake investment activities in successive years. 3.7. Assessee had relied on the Hon'ble Delhi High court judgment in the case of CIT Vs. Ess Jay Enterprises (P) Ltd. (2008) 173 Taxman 1(Del.) to the following effect: "6. We are of the view that the Tribunal has not committed any error in the opinion expressed by it. The assessee held the shares as an investment and there is nothing to show that the investment was converted into stock-in-trade of the business of the assessee. In fact, the business of the assessee appears to have been that of running a restaurant. It is true that one of the objects mentioned in the Memorandum of Association is with respect to buying and selling of shares but that was neither the business of the assessee nor is there any material on record to show that the assessee was regularly dealing in shares. 7. The Supreme Court in Raja Bahadur Kamakhya Narain Singh v. CIT (1970) 77 ITR 253, took the view that the treatment given to a transaction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... condition prescribed by the Board Circular that assessee while maintaining an investment portfolio cannot do so by borrowing funds. The fact that the assessee treated these transactions as investment portfolio is further illustrated by the fact that it did not claim the interest on borrowed funds as expenditure while computing capital gains from investment portfolio. This is so because in case of short term capital gains, the interest on borrowed funds is not allowable as a deduction. This is why an alternate claim was made when AO held to be business income. . 3.11. It is pleaded that the Hon'ble Supreme Court, various High Courts, ITAT and CBDT have held that an assessee can maintain two portfolios for share trading - one for trading and another for investment. In such cases, trading and investment in same company shares have been held to be allowable if in the books of accounts trading account as well as in investment a/c are duly maintained. The income earned on trading account is credited to the business income and the income earned from investment account is offered by way of capital gains. The stock in trade held by the assessee will be treated as stock in trade and in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery based transactions; (ii) non-delivery based transactions. Books of accounts are accordingly maintained. The delivery based transactions are separately entered into books of accounts as capital investment and necessary entries about profits are accordingly made. No issue has been raised on the method of accounting adopted by the assessee. 5.1. The grievance of the revenue is to the effect that the frequency of transactions, the intention of the assessee constitute all the transactions i.e. delivery and non delivery to be business income. 5.2. The CBDT Circular no. 4 of 2007 has been referred to by both the parties. Revenue contends that the Board has set the AO free to decide the issue on the basis of the facts of each case. The assessee has no issue on this aspect but contends that Board Circular has referred to Hon'ble Supreme Court judgment in the case of Associated Industrial Development Co. P. Ltd. (supra), for the proposition that in normal circumstances, the assessee should 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (P) Ltd. (supra), was seized with similar controversy as in that case the shares were treated as investment and were not considered stock in trade or business. Though the assessee was running a restaurant and one of the business object of the assessee company was purchase and sale of shares. When a company having a restaurant with an object of selling and purchasing the shares by way of business can be eligible to hold the shares on investment account, we see no justification in holding the capital gains as business income when investment account is separately maintained. Our view is further supported by Hon'ble Bombay High Court judgment in the case of Gopal Purohit (supra) and ITAT Chandigarh bench judgment in the case of Vesta Investments & Trading Co. (P) Ltd. (supra). 5.8. ITAT Delhi Bench 'B' vide judgment dated 30-9-2011 in the case of M/s Dynamic Consultants Pvt. Ltd. Vs. ACIT rendered in ITA no. 2694/Del/09, to which both of us (JM & AM)were party, has decided similar issue and held as under: 9. We have heard both the parties. The assessing officer has treated the purchase and sale of shares as continuous activity of the assessee. In the case before us, there is no dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier years and no objection was taken to this position. Hon'ble Delhi High Court has upheld the order of the Tribunal holding that shares were held as investment. In the case of Ess Jay Enterprises P. Ltd. (supra) Hon'ble Delhi High Court has also held that the assessee having shown the shares as investment in the books of account and there was no material on record to show that the same were converted into stock in trade, Hon'ble Delhi High Court upheld the stand taken by the ITAT that the profits arising on sale of share was assessable as capital gains and not as business income. In the case before us the Id. AO has not brought any material on record to show that the shares were not held by the assessee as investment. Therefore, in our considered opinion, the profits arising on sale of shares held as investment will be assessable as capital gains depending upon the period of holding as long term or short term capital gain. Accordingly, we allow this ground of appeal in favour of assessee 5.9. This order has been upheld by Hon'ble Delhi High Court in appeal nos. 200 & 201/2012 by order dated 9-4-2012. Following the same analogy in present case, we hold that profits arisin ..... 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