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TMI Blog2015 (5) TMI 756X X X X Extracts X X X X X X X X Extracts X X X X ..... ome, income from capital gain and income from other sources. The A.O. observed that the assessee was dealing in large number of securities and he held that prima facie, assessee was not investor but a trader in securities. He further observed that in his actual business of trading in carpets etc., he was incurring losses and also there was little turnover in this business. The A.O. relied upon instructions 1827 dated 31.08.1989 along with CBDT circular 4/2007 along with various judicial pronouncements and held the income of the assessee to be form business instead of capital gains. The crux of finding of A.O. as carved out from the three assessment years are detailed as under: (i) The assessee had very little business turnover in respect of carpets and handicrafts whereas in case of shares and mutual funds, the assessee had huge turnover and moreover, the assessee had incurred loss on sale of nifty derivatives and had treated the same as business loss. (ii) That the dividend earned on the investment was negligible and therefore, he held that assessee was not indulging into sale and purchase of securities for earning of dividend but his intention was to earn profit from sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r considering above rulings we cull out following principles, which 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 (or any other item). 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 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 disposal in that particular item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular items is indicative of intention of trade. Similarly ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count 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". {8}. On the touch stone of the principles culled out above, let me examine the facts of the case. In the case in hand, it is observed that the assessee has treated the securities as investment. Balance sheet indicates likewise. The assessee has not borrowed money for dealing/investment in shares. In order to ascertain the frequency of shares and purchase of the shares, I during had referred the matter to the Ld AO under sub-section (4) of section 250. One does not observe anything adverse in the report of the AO. As a matter of abundant precaution, I during the course of hearing, also desired that the assessee prepare a chart to ascertain the retention period. This was filed on 09/11/2009, when the assessee also attended the hearing. It is observed from the chart that the period of retention is from 1 day ( as in the case of 31 Infotech) to 1907 days ( as in the case of Gujarat Alkalies & Chemica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering above rulings we cull out following principles, which 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 (or any other item). 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 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 in vesting in an asset for retaining. (3) What is the frequency of such purchases and disposal in that particular item ? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular items is indicative of intention of trade. Similarly ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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} The facts of the case under consideration need to be analyzed in the background of above detailed principles. It is seen that the assessee has recorded the securities as investments in the books of accounts as against stock-in-trade. The valuation of securities at the end of the year has been at cost as against cost or market price whichever is less. The assessee has utilized his own funds to make investments into securities as against borrowing the interest bearing funds. The issue of frequency of transactions carried out by the assessee has also been examined and the chart submitted in this regard shows that investment in shares was done only for 24 days, investment and encashment was done for 73 days and only encashment was done for 70 days. There have been long periods of inactivity clearly showing that the assessee has not been doing this activity on day-to-day basis. The retention period for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not engaged in either purchase or sale and thus there is no regular or day-to-day activity of trading. The period of retention of the shares on which Short Term Capital Gains have been realized varies from 1 day in one case to 363 days. The retention period for the shares on which long term capital gains have been disclosed varies between 417 days and 977 days. Undoubtedly, the appellant has engaged in this activity of purchase and sale of shares with the intention to realize the appreciation in the value as well as to earn dividends, but it cannot be concluded that he was carrying on trading of shares as a business activity. The contention of the Assessing Officer that the appellant has engaged in trading in derivatives and has made speculative transactions is also not relevant in view of the amendments brought in by the Finance Act, 2005. In view of the above discussion, the appellant succeeds at Ground of Appeal No. 1 and the Assessing Officer is directed to assess the said income as income from capital gains, as disclosed by the appellant." 4. Aggrieved, the revenue is in appeal before us. 5. At the outset, Ld. D.R. submitted that there was voluminous transaction of sale and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther submitted that Ld. CIT(A) had obtained remand report also from assessing officer with a view to ascertain as to whether the delivery of purchased shares was taken into demat account of assessee or not and the A.O. vide remand report dated 18.09.2009 placed at paper book pages 164-166 has held that entries of purchases were found to have been entered in the demat account of assessee. 7. As regards observation of the A.O. regarding loss in carpet business, Ld. Sr. Counsel submitted that loss in carpet business is not relevant and since the shares were brought forward from year to year, the loss/profit was capital gain irrespective of quantum of carpet business. He further submitted that A.O.'s finding that borrowed funds were used for acquisition of shares, was not correct as the said loan was taken against security of shares for investment in a property and in this respect, our attention was invited to paper book pages 90-92 where documents regarding loan of Rs. 1 crores along with bank statement of PNB where funds were transferred and from where, these were utilized, was placed. The Ld. Sr. Counsel placed his reliance on various case laws as placed in paper book pages 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled in the form of paper book and those filed after the conclusion of hearing, we find as under: (i) That assessee has been dealing into shares, securities and portfolio management schemes of various portfolio managers. (ii) The total purchases & sales of Assessee for shares as calculated from the account of broker in the books of accounts of assessee for the three years is as under: 2006-07 2007-08 2008-09 Purchases 4,36,82,144 90,04,364 24,98,628 Sales 4,25,04,465 2,09,07,257 1,95,82,341 (iii) The assessee is having current account with the broker wherein regular entries of purchases and sales, cheques paid and cheques received has been entered. The account has never been settled completely in the three years and sometimes, it had debit balance and sometimes it had credit balance. For the sake of convenience the copy of account of broker as appearing in the books of assessee as submitted by Ld. Sr. Counsel has been made part of this order attached as Annexure A. From the above statement, it can be seen that on many occasions, the shares purchased remained unpaid and dues were settled in succeeding days by making sales out of existing shares. From ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 2006-07 2007-08 2008-09 Total short term 91,87,581/- 50,09,092/- 70,38,179/- Capital gain declared Gain form portfolio 9,25,100/- - 50,39,990/- Schemes included in (p.b.34) (p.b.8.7) Above. For the Assessment Year 2007-08, break up of short term capital gain form scripts and from portfolio schemes could not be found out from paper book, therefore, column has been left blank. The proposition as to whether income from portfolio schemes is a capital gain or business income has not been addressed at all. (vii) The demat account statement as filed for Assessment Year 2006-07 runs into 66 pages and that of Assessment Year 2007-08 runs into 34 pages. The demat statement for Assessment Year 2008-09 has not been filed. The volume of demat statement itself describes the frequency of transactions, which is quite long. (viii) The number of scripts dealt by the assessee as per demat account statement is 259 in Assessment Year 2006-07 whereas the number is 228 scripts in Assessment Year 2007-08. The demat statement for Assessment Year 2008-09 has not been filed. The number of scripts dealt by assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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