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TMI Blog2012 (10) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... he service of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act) , issued on 24th July, 2008. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee traded in sale and purchase of shares through M/s Vimgi Investments Pvt. Ltd. To a query by AO, seeking details of the shares, of which the assessee reflected short term gain of Rs. 65,45,321/-, the assessee submitted broker notes and confirmation from the broker. After considering these documents, the AO concluded that M/s Vimgi Investments Pvt. Ltd. had traded on behalf of the assessee in the activity of sale/purchase of shares. Since the assessee did not furnish any evidence that shares were purchased and sold as an investor, relying upon CBDT Instruction no.1827 dated 31.8.1989 and Circular no.4/2007 dated 15.06.2007, the AO , considering the magnitude of purchases and sales as also frequency of transactions in the light of broker notes furnished by the assessee, observed that even on single day, the assessee traded in a number of shares and transactions were huge and the assessee had opening investment of Rs. 1 crore in shares while shares wort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the real decision is whether the first step, purchase of shares was taken as in the course of a trading transaction, if that be so, the profit there-from would be of the nature of business profit and if not so, the profit there-from would not be treated as earned by a trader. Since the appellant has purchased the shares on delivery basis, this signifies his intention of holding the shares as investment purpose to some extent. However, it is to be noted that no single principle would be decisive to judge whether shares are held as stock-in-trade or capital asset. 5.3 The following facts support the appellant's intention that the shares are held for investment purpose:- a) The Assessee is in the business of exporting jewellery and handicrafts goods. b) The Assessee has not borrowed any funds for carrying the shares transactions. c) The Assessee has earned dividend income of Rs. 21,952 in the previous year 2006-07. d) The average length of the ownership of shares purchased through Vimgi Investments Pvt. Ltd. is 118 days and Navratan Capital & Securities limited is 48 days. e) The number of scripts are less than 25. f) The Assessee has no infrastructure in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een accepted by the AO in assessment completed u/s 143(1) of the Act while in the preceding AY2006-07,assessment was completed u/s 143(3) of the Act. However, there is nothing to suggest that the claim of the assessee as investor or trader in shares was examined by the AO nor any material has been placed before us that the AO raised any query on this aspect in the preceding assessment year. Even otherwise, no attempt was made by the ld. AR on behalf of the assessee before us to establish that facts and circumstances in the preceding years were similar to the facts and circumstances in the year under consideration. In these circumstances, reliance on decision of the AO in the preceding year is totally misplaced. 5.1 One of the relevant tests, in determining as to whether or not the shares/securities are a capital asset, is whether it is in the nature of fixed asset or constitutes the stock-in-trade of the assessee's business. Fixed asset is what the owner turns to profit keeping the asset in his own possession, stock-in-trade is what he makes profit of by parting with it, and letting it change masters. Before proceeding further ,we may have a look at the relevant provisions. Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not as investment, then such shares would stand excluded from the definition of "short term capital asset", and the profit earned on the sale of such shares would not be exigible to tax as "short term capital gain", but as "profits and gains from business". 5.3 In determining the issue as to whether, after acquiring the shares, the assessee dealt with it as an investor, or carried on business with it, treating it as its stock-in-trade or as a trading asset, what is relevant is that, if the case falls within the former category, receipts by way of sale of such shares will be capital receipts, but if it falls within the latter the receipts will be trading receipts, and profits therefrom business income. To determine as to whether sale of shares is to be assessed as business income or as income from capital gain , the most important test is whether the initial acquisition of the shares was with the intention of dealing in the shares or it was made as an investment. The intention of the assessee is best known to him and the dispute comes to the appellate authorities only when the Revenue authorities do not accept the claim of the assessee.The distinction whether the investment tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital account or in the nature of trade. A transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale. Whether shares of a company held by a person constitute his capital or his stock-in-trade is not a pure question of law but essentially one of fact. [CIT v. Ram Kumar Aggarwal and Bros., 205 ITR 251(SC)].The various authorities have laid down certain guidelines on the basis of which the intention of the assessee can be inferred. In the case of M/s Sarnath Infrastructure Pvt. Ltd., 120 TTJ 216 ,the ITAT culled out various parameters, 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 observations of the ITAT 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficient to say that assessee was holding the shares (or the items in question) for investment. (9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it 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 CBDT's Circular No. 4 of 2007 of 15-6-2007 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 above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. 5.4 Even CBDT in Circular No.4/2007 dt.15.6.2007 has laid down the principles for holding as to when profits earned from transactions in share should be held as business or should be tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 AAR has observed in the case of Fidelity group as under (page 661) : "We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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] 5.5 . We may point out that the Hon'ble Gujrat High Court in CIT vs. Reva Shanker A. Kothari 283 ITR 338 (Gujarat ) laid down the following guidelines in order to determine whether profits arising on sale is business income:- "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 business normally carried on by an assessee. The nature of the commodity would also be a relevant factor. It is equally well settled that, merely because the original purchase was made with the intention to resell, if an enhanced price could be obtained, that by itself is not enough to infer that an assessee is carrying on business. However, though profit motive in entering into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. 5.6 In the instant case, the assessee has been habitually trading in quoted shares and the frequency of such purchases and disposal as also the fact that with the investment of Rs. 1 crore in shares, the assessee had turnover of over Rs. 4 crores , indicates nothing but intention of trade. It may be pointed out that the assessee earned only a meager amount of dividend of Rs. 21,952/- in the year under consideration. A trader in a commodity is basically motivated by profit in selling the commodity on each and every rise in value, which is apparent in the instant case. High frequency, high volume and regularity of transactions are therefore the basic features of a trading transaction. An investor on the other hand makes purchases with a view to earning income from the investments. He is not tempted to sell the commodity to earn quick profit on each and every rise in the value and holds the commodity for a longer period so as to have income as well as appreciation in value. The ld. CIT(A) pointed out that the assessee has not borrowed any funds for carrying the shares transactions. In our opinion, this is not the crucial factor to ascertain as to whether or not the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 5.8 The ld. AR on behalf of the assessee relied on the decision in the case of Gopal Purohit (supra) where in it was held that income from all delivery based transactions has to be assessed as income under the head capital gains. We have carefully perused the order of the Tribunal in the case of Gopal Purohit (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ; it is not even the assessee's case that they had held all the shares for a long duration. The facts and circumstances of the case before us, when viewed in the light of principles laid down in the various decisions referred to above, lead us to the conclusion that the voluminous share transactions were in the nature of the business; purchase of shares by them was not for the purpose of earning dividend, but with the dominant intention of resale in order to earn profits; the profit made by the assessee is not of mere enhancement of value of the shares, but is a profit made in the carrying on of a business scheme of profit making; huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of "trade"; the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the assessee had not purchased the shares as an investment, but with the intention to trade in such scrips. In the light of view taken in the aforesaid decisions, we are of the opinion that the ld. CIT(A) was not justified in accepting the claim of the assessee as investor in shares .Accordingly, we vacate the findings of the ld. CIT(A) an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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