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2015 (9) TMI 952 - ITAT AHMEDABAD

2015 (9) TMI 952 - ITAT AHMEDABAD - TMI - Purchase and sale of shares - Short term capital gain v/s business income - Held that:- AO has accepted the capital gains from sale of shares held by the assessee for more than one year as long term capital gain which means that the AO has accepted that assessee is having some part of his portfolio as for investment and not for business which further gives support to the claim of assessee by showing income from share transactions in two heads i.e. ‘capit .....

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shown as “stock-intrade” to be valued at cost or market price whichever is lower. From the perusal of the balance sheet of the assessee it is quite clear that no specific funds were borrowed for the purchase of shares and the main source of investment in shares and securities was from the capital account of the assessee. Assessee has also maintained separate profit and loss account for F & O business and no link between investment account and F & O business has been brought on record by the AO .....

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CIT(A) and, therefore, in view of above, we do not find any error at the end of learned first appellate authority and, therefore, no interference is called for in the order of CIT(A). - Decided against revenue. - ITA No.1496/Ahd/2011 - Dated:- 28-8-2015 - Shri Rajpal Yadav and Manish Borad, JJ. For The Appellant : Shri D. C. Mishra, Sr.DR For The Respondent : Shri K. P. Shah, AR ORDER PER Manish Borad, Accountant Member. This appeal of the Revenue is against the order dated 25th March, 2011 pass .....

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s shown by the assessee in his return of income. For this Revenue has raised the following ground of appeal :- 1. The ld. CIT(A) has erred in law and on facts in directing the Assessing Officer to treat the income of ₹ 23,69,436/- as short term capital gain as claimed by the assessee instead of business income, as assessed by the Assessing Officer. 3. Brief facts of the case are that the assessee filed his return of income showing income from short term and long term capital gains, income .....

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ification for the frequent buying and selling of shares since it could not be for the purpose of investment and since the assessee was also engaged in shares trading in F & O segment he believed that the transactions of shares in purchase and sale falling under the category of short term capital gain and therefore taxed short term capital gain( STCG) as income from business. Aggrieved, assessee went in appeal before CIT(A). 4. The CIT(A) referred to CBDT Circular No.4/007 dated 15.6.2007, de .....

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of ITAT, Ahmedabad in the case of Shri Sugam Chand C. Shah vs. ACIT, Circle-3, Surat in ITA No.3554/Ahd/2008 for AY 2005-06 and 1932/Ahd/2009 for AY 2006- 07 and made the following finding :- 2.3 I have considered the facts of the case, assessment order and appellant s submission. Assessing Officer treated short-term capital gain disclosed by the appellant as business profit on the ground that appellant was not making investment but trading in shares. On the identical facts, ITAT Ahmedabad in th .....

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Court. The ITAT Ahmedabad has also considered the circular issued by the Central Board of Direct Taxes and has come to this considered finding the relevant extract of the order is quoted below : 15. In respect of profit of ₹ 55,40,679/- being short-term capital gain as claimed by the assessee and held as profits assessed under that business by two authorities, we find that in many cases there is delivery of shares and share were registered in the name of the assessee. The holding period of .....

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show that his holdings are for investment as recorded in the books of account. The holdings are valued at cost, and such accounting has been accepted by the Revenue in earlier years. There is no material to show that assessee has declared himself as a trader in shares and legal requirements therefor have been complied with. It is also a fact that he has not borrowed any money for investing in shares. Merely because, assessee had some borrowed funds it would not by itself show that they were depl .....

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in many transactions of shares indicating that assessee has some intention of purchasing and selling shares as a trader. The case of the assessee is supported by the fact that it has entered the purchases in the books as investment, shares are valued at cost and Revenue is holding such accounting treatment as investment in the past. Thus, there cannot be a fixed criteria to decide as in the present case whether assessee has traded in shares eventhough assessee held them as investment. 18. Thoug .....

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e, only one criteria, i.e. Delivery of shares alone will not be sufficient to decide the issue. Even otherwise in Sarnath Infrastructure (P) Ltd.(supra) itself it has been held that cumulative effect of several factors will decide the issue. 19. Considering the totality and peculiarity of the facts of this case, we find that assessee is neither fully acting as a trader nor as fully investor. Demarcation is quite hazy; though in the books he is showing all the purchases as investment but frequenc .....

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or to be taxed as short term capital gain, we hold that if shares are not held even say for a month, then the intention is clearly to reap profit by acting as a trader and he did not intend to hold them in investment port-folio. We believe that if a person intends to hold his purchases of shares as investment, he would watch the fluctuation of rates in the market for which a minimum time is necessary, which we estimate at one month. Where shares are held for more than a month, they should be tr .....

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r the period more than 30 days, the same is treated as investment resulting in capital gain and whenever shares are held upto 30 days, the income arising therefrom as business income of the appellant. 5. Aggrieved, the Revenue is now in appeal before us. 6. The ld. AR has submitted detailed Paper Book and various case laws in support of his claim that assessee can have both income from business from shares as well as capital gain income from shares transactions held as investment. The ld. AR mai .....

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other trading portfolio comprising of stock-in-trade which are to be treated as trading assets. The ld. AR made reference to certain principles culled out from the decision of ITAT Lucknow Bench in the case of Sarnath Infrastructure (P) Ltd. vs. ACIT 124 ITD 71 (Luck). After considering the above ruling we culled out following principles which can be applied on the facts of the case to find out whether the transactions in question are in the nature of trade or are merely for the purpose of inve .....

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her it is treated as stock-in-trade or investment. Whether it is shown in opening/closing stock or shown separately as investment or non-trading asset. b. 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. c. What is the frequency of such purchases and disposal in that particular item ? If purchase and sale are frequent, or there are substantial tran .....

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n intention of trade and latter an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. e. How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investment or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that item .....

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se, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock in trade) then onus would shift to the revenue to prove that the apparent is not real. h. The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone be not sufficient to say that the assessee was holding t .....

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s per the CBDT s Circular No.4 of 2007 dated 15.6.2007, that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate accounts for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. k. 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.(Pra 13) 7. The ld. AR of the assesse .....

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ining of books of accounts, the magnitude of purchase and sale and the ratio between purchase and sale of shares needs to be looked into: The substantial nature of the transactions need to be analyzed with reference to the average holding in shares by the assessee. The cost of the shares held by the assessee on 1.4.2005 was ₹ 1,05,11,605/- and the closing value of the shares at cost at the end of the year on 1.4.2006 was ₹ 1,18,58,258/-. During the entire year the holding of shares h .....

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ger period. Some of the key features of a trader would be a) turnover ratio in excess of 6 to 7 i.e. the trader would purchase and sell his portfolio at least 6 to 7 times a year to maximize the profit. The stock turnover ratio of the assessee is 1.2 times (Rs.1,34,26,527/ ₹ 1,11,84,931). Considering the stock turnover ratio of the assessee at 1.2 times the fact is that the average holding of the assessee for every share is 304 days. A person engaged in business would not hold the stock fo .....

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clear that the transactions executed by the assessee vis a vis his average holding of shares in value and days, the activity of the assessee are not in the nature of business and hence constitute investment activity. The assessee is following a prudent method of diversifying his risk by investment in a number of scripts and this is a prudent practice followed by major mutual funds to derisk their portfolio. Hence the contention of the assessing officer that the assessee is holding a large no of .....

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idend income of substantial nature being almost 3% of the average investment holding. In light of the above circumstances the change in investments amounts to capital gain. The assessing officer has misunderstood and misapplied the circular no.4/2007 at para 3.5 of his order where in he has referred to the F & O transactions, the assessee has at the time of filling the return properly classified his F & O transactions as business income, has classified the short term transactions of sale .....

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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. 8. On the other hand, the ld. DR mainly emphasized on the finding of AO and also referred two case laws namely ACIT vs. Tarun Amarchand Jain (2012) 21 taxmann. Com 319 (Mum) wherein it has observed that shares transactions done regularly should be attribu .....

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ome it can be seen that assessee has shown income from trading of shares in F & O market, short term capital gain from shares which were held for less than one year and long term capital gain from sale of shares which were held for more than one year. The A O while framing the assessment order under section 143(3) has treated the short term capital gains from sale of shares of ₹ 23,69,436/- as income from business mainly due to the reasons that there were 171 transactions of purchase a .....

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e sales in F & O category amounted to ₹ 5,66,37,310/- and the assessee has shown the profit from F & O business at ₹ 4,75,294/-. Due to these very reasons the AO has believed that the transactions of sale and purchase of shares which were claimed by the assessee under short term capital gain head, as income from business transaction. But the AO has accepted the capital gains from sale of shares held by the assessee for more than one year as long term capital gain which means .....

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