TMI Blog2012 (5) TMI 418X X X X Extracts X X X X X X X X Extracts X X X X ..... Pritesh Shah for the Respondent ORDER Mukul Kr. Shrawat, Judicial Member:- This is an appeal at the behest, of the Revenue which has emanated from the order of the learned Commissioner of Income-tax (Appeals)-XI, Ahmedabad, dated March 18, 2009 passed for the assessment year 2006-07. The following grounds were raised by the Revenue in its appeal:- 1. The learned Commissioner of Income-tax (Appeals)-XI, Ahmedabad, has erred in law and on facts in directing the Assessing Officer to treat the income of ₹ 15,53,886 as short-term capital gain instead of business income. 2. The learned Commissioner of Income-tax (Appeals)-XI, Ahmedabad, has erred in law and on facts in directing the Assessing Officer to treat the income of ₹ 2,88,757 as long-term capital gain instead of business income. The assessee is an individual and the sources of income are trading in shares and salary income. Facts in brief as emerged from the corresponding assessment order passed under section 143(3) of the Income-tax Act dated November 10, 2008 were that the return was filed declaring an income of ₹ 11,29,870 as against that the assessment was made on ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase and sale of transactions. The Assessing Officer has treated the entire transactions as business transactions without considering the facts that the appellant had taken the delivery of these shares. Therefore, as it could be seen from the facts of the case, that the appellant had taken the delivery of these shares in the demat account and thereafter only the shares were sold. The sale of these shares, hence, cannot be said to be normal business transactions for treating the same as business income. The shares were bought and sold with a gap of some time after taking the delivery of the shares. Therefore, I am inclined to direct the Assessing Officer to treat the above income as short-term capital gains. From the side of the Revenue, the learned senior Departmental representative Mr. G. S. Souryavanshi appeared and at the outset has referred to the guidelines issued by the Central Board of Direct Taxes Circular No. 4 of 2007, dated June 15, 2007 ([2007] 291 ITR (St.) 384) and highlighted the following points:- (i) where a company purchases and sells shares, it should be shown that they were held as stock in trade, for the activity to constitute business, (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short-term capital gain in the last year, then why the stand is different in the current year. 7. Description of borrowings:- ₹ 50,69,201 Amount of borrowed funds-Bank overdraft and unsecured loans ₹ 1,37,872 Interest on bank overdraft ₹ 2,72,772 Interest on unsecured loan ₹ 4,10,644 Total amount of interest expenses debited to profit and loss account. In the statement of income, the assessee has disallowed interests and added back to the Business Income. Thus, the assessee has not claimed the interest of ₹ 4,10,644 as revenue expenditure, since she has treated shares as investment. 8. The transactions are not 500 but less, since single transaction of sale has been split by computers trading of the stock exchanges into many smaller transactions but that does not mean that the assessee has carried so many transactions. In support of the above arguments, few cases of the Tribunal cited are as under:- Sl. Nos. Decision in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol) 49 (UO) We have heard both sides at length. We have also perused the orders of the authorities below in the light of compilation filed. The compilation has consisted statements showing the share-wise details of date of purchase, date of sale, name of the company with script number, etc. For both types of gains, i.e., for long-term capital gain as also for short-term capital gain separate statements are furnished. The compilation also consisted demat statement accounts . It has also been placed on record that for the assessment year 2005-06 as also for the subsequent assessment year for the assessment year 2007-08, the assessee has disclosed capital gain on share transaction. For the assessment year 2005-06, the long-term capital gain was disclosed at ₹ 3,72,00,532 and for the assessment year 2007-08 the assessee has disclosed long-term capital gain at ₹ 52,948. The learned authorised representative has also specifically pointed out that the purpose of investment in shares was basically to earn dividend income, therefore for the assessment year 2005-06, i.e., in the immediate preceding assessment year dividend income of ₹ 72,083 and for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that frequency of transaction, realisation of sale proceeds and motive behind the transaction are the essential ingredients to determine the exact nature of the transaction. The hon'ble courts have duly realised the difficulty in determining the exact nature of the transaction and therefore it was commented that not one or two factors would be sufficient to come to a definite conclusion, but the cumulative effect of several factors have to be taken into account. We have examined the facts of the case and have found that the assessee has consistently shown in the past several years the share trading income as capital gain, either short-term or long-term or both and that has not been challenged by the Department. There is no material on record to hold that the assessee has deviated from the said accepted nature of transaction or adopted a different method of share transaction more akin to business transaction. In the absence of any contrary evidence, we are of the view that there was no cogent reason to unsettle the settled method of recording of the share transaction of the assessee. As far as the period of holding of an investment is concerned, the accepted legal positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see can be inferred. In the case of Sarnath Infrastructure P. Ltd. v. Asst. CIT [2009] 313 ITR (AT) 13 (Lucknow); 122 TTJ 216, the Lucknow Bench of the Income-tax Appellate Tribunal has laid various principles which may be applied to determine whether the transaction of purchase and sale of share is in the nature of trade or investment. The relevant findings of the Income-tax Appellate Tribunal read as under:- 'The following principles can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes:- (1) What is the intention of the assessee at the time of purchase of the shares. This can be found out from the treatment it gives to such purchase in its books of account-whether it is treated as stock-in-trade or investment; whether shown in opening/closing stock or shown separately as investment or non-trading asset. (2) Whether the assessee has borrowed money to purchase and paid interest thereon. Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. (3) What is the frequency of such purchases and di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made? (10) It is permissible as per the Central Board of Direct Taxes Circular No. 4 of 2007 of June 15, 2007 ([2007] 291 ITR (ST.) 384) that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. (11) Not one or two factors out of the above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. The assessee-company was dealing in shares and it had dealt in shares both as stock-in-trade as well as investment. It sold shares from the investment portfolio and claimed that the profit arising therefrom was capital gain. The Assessing Officer held that the main business of the assessee was purchase and sale in shares. It was neither a share dealer nor a share broker. The details for purchases and sales affected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration on account of sale and purchase of shares was the same as in the preceding years and the same was to be accepted as short-term capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold the shares in the Indian companies as an investment and not as stock-in-trade. The more magnitude of the transaction does not change the nature of transaction, which are being assessed as income from capital gains in the past several years.' 5.2 Similarly, the Income-tax Appellate Tribunal, Mumbai Bench in the case of Gopal Purohit v. Joint CIT [2009] 29 SOT 117 (Mumbai) followed the decision of the Income-tax Appellate Tribunal, Lucknow Bench in the case of Sarnath Infrastructure P. Ltd. [2009] 313 ITR (AT) 13 (Lucknow) and held as under:- 'Further, on the basis of merits also, in view of the ratio of the decision of Sarnath Infrastructure P. Ltd.'s case, it was held that the delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short-term capital gain or long-term capital gain depending upon the period of holding.' In add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of law.' 5.2.2 On the merits also, their Lordships upheld the findings of the Income-tax Appellate Tribunal holding the same to be pure finding of the fact. The hon'ble Supreme Court vide their order dated November 15, 2010 have dismissed SLP filed by the Revenue against the aforesaid decision of the hon'ble Bombay High Court. 5.3 Similar view is taken by the other Benches of the Income-tax Appellate Tribunal in their decision dated May 18, 2011 in Mahendra C. Shah v. Addl. CIT in I. T. A. No. 6289/Mum/2008 for the assessment year 2005-06, and I. T. A. No. 4932/Mum/2009 for the assessment year 2006-07 as also decision dated June 15, 2011 in Hitesh Satishchandra Doshi v. Joint CIT [2011] 46 SOT 336 (Mumbai) in I. T. A. No. 6497/Mum/2009 and others. 5.4 In the instant case, number of transactions is stated to be 1000 in 255 scrips while in the preceding year their number was 533 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; 5.6 In the case of CIT v. H. Hoick Larsen [1986] 160 ITR 67 (SC), the hon'ble Supreme Court has held as under (headnote):- 'In order to determine whether one was a dealer in shares or an investor, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step - the purchase of the shares-was not taken as, or in the course of, a trading transaction. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these. If all the relevant factors have been taken into consideration and there has been no misapplication of the principles of law, then the conclusion arrived at by the Tribunal cannot be interfered with because the inference is a question of law, if such an inference was a possible one, subject, however, that all the relevant factors have been duly weighed and considered by the Tribunal, the inference reached by the Tribunal should not be interfered with.' 5.7 Even the Central Board of Direct Taxes in Circular No. 4 of 2007, dated June 15, 2007 has laid down the principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Authority for Advance Rulings (AAR) Fidelity Northstar Fund, In re [2007] 288 ITR 641 (AAR), referring to the decisions of the Supreme Court in several cases, has culled out the following principles (page 651):- (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 substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; (iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade ; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. 9. Dealing with the above three principles, the AA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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. (F. No. 149/287/2005-TPL). 5.8 We may point out that the hon'ble jurisdictional High Court in CIT v. Rewashanker A. Kothari [2006] 283 ITR 338 (Guj) laid down the following guidelines in order to determine whether profits arising on sale is business income (page 343):- 'The tests laid down by various decisions of the apex court indicate that, in each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction. Each case has to be determined on the total impression created on the mind of the court by all the facts and circumstances disclosed in a particular case. One of the principal tests is whether the transaction is related to the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (f) The last but not the least, rather the most important test, is as to the volume frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can readily be drawn that the activity is in the nature of business.' 5.9 In the preceding year, the Income-tax Appellate Tribunal vide their order dated May 13, 2011 in the assessee's own case in I. T. A. No. 127/Ahd/2009 concluded on similar facts and circumstances as under:- '7. Having heard both sides, we have carefully gone through the orders of the authorities below as well as the latest decision of the hon'ble Gujarat High Court in the case of CIT v. Niraj Amidhar Surti [2011] 238 CTR (Guj) 294 ; 48 DTR 33, relied on by the learned counsel of the assessee. Admittedly, in the past, the assessee was declaring short-term/long-term capital gains in sale and purchase of shares which has been accepted by the Assessing Officer. Even in the assessment order under section 143(3) for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock-in-trade. The mere magnitude of the transaction does not change the nature of transactions, which are being assessed as income from capital gains in the past several years. 5.11 The plea of the learned Departmental representative that the facts and circumstances in the decision relied upon in the case of Gopal Purohit [2009] 29 SOT 117 (Mumbai) by the Income-tax Appellate Tribunal in the preceding year, were different, is not tenable as observed by us already above-firstly, the ratio of the said decision has been followed in a number of decisions referred to above and secondly, the learned Departmental representative did not demonstrate before us as to how the said decisions is not applicable in the facts and circumstances of the instant case before us. To a query by the Bench, the learned Departmental representative admitted that he was not aware as to whether or not the decision of the Income-tax Appellate Tribunal for the preceding year has been challenged before the hon'ble High Court. 5.12 In view of the foregoing, following the view taken in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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