TMI Blog2011 (5) TMI 946X X X X Extracts X X X X X X X X Extracts X X X X ..... ect view of the matter and applied the appropriate principles correctly in holding that the assessee was an investor in shares. Since the AO had treated the assessee as a share dealer, he valued 184 shares of Infosys Technology at ₹ 4,896.21 per share. This included 46 original shares which were valued at ₹ 2,25,217. The average cost of 543 bonus shares of Tata Steel was valued at ₹ 68,526. The AO s reasoning would have held good if his decision to treat the assessee as a dealer in shares is upheld. However we have held that the assessee is an investor in shares. The bonus shares cannot therefore be valued as if they are stock-in-trade. We therefore delete the additions of ₹ 2,25,217 and ₹ 68,526. In the result, the assessee s appeal is partly allowed whereas the Department s appeal is dismissed. - R.V. EASWAR, PRESIDENT AND PRAMOD KUMAR, ACCOUNTANT MEMBER For the Petitioner : R.G. Tralshawala For the Respondent : R.S. Srivastav ORDER R.V. Easwar, President These are two appeals, one by the assessee which relates to the asst. yr. 2005-06 and the other by the Revenue which relates to the asst. yr. 2006-07. Since they w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shares after one year from the date of purchase is shown as long-term profit, that every purchase and sale of shares is delivery based and therefore he was only an investor. The AO considered the assessee s submissions from the following points of view, namely : (i)Motive for purchase of securities; (ii)Period of holding; (iii)Frequency of transactions; (iv)Source of acquisition; (v)Infrastructure employed; and (vi)Co-relation with other activities of the assessee. So far as the motive is concerned, he noted that the assessee was carrying on business in futures and options and also speculative transactions. He further noted that a majority of the transactions were settled in a short span of 30 days. Thus, according to the AO, the basic intention of the assessee was to earn quick profits. As far as the period of holding is concerned, he noted from an analysis of the details furnished by the assessee, that more than 30 per cent of the profit is from transactions where the purchase and sales took place within the period of one month. With regard to frequency of transactions, the AO noted from the scrip-wise details filed by the assessee that before 1st Oct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed up as follows : (a)The purchase and sale of securities were not an occasional independent activity, but the assessee was engaged in some real, substantial and systematic business activity. (b)The word business which is defined in s. 2(13) of the IT Act, 1961, is a word of large and indefinite import. The assessee purchased the shares with the intention to resell them at a profit. (c)A substantial number of shares were purchased out of borrowed funds. The assessee borrowed from M/s India Bulls, M/s Shah Enterprises and M/s Chandra Sales Corporation. (d)The assessee has devoted substantial time in the purchase and sale of shares and also earned substantial profits. In support of the aforesaid factual findings, the CIT(A) referred to the guiding principles laid down in the following judgments of the Supreme Court : (1)Raja Bahadur Visheshwara Singh (Decd) Ors. v. CIT [1961] 41 ITR 685 (SC); (2)Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486 (SC); (3)CIT v. Sutlej Cotton Mills Supply Agency Ltd. 1975 CTR (SC) 228 : [1975] 100 ITR 706 (SC). By adopting the above line of reasoning, the CIT(A) concluded that the assessee was enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds and pay huge interest. However, in law there is no prohibition on a person from borrowing funds for the purpose of making investment, just as a trader in shares can also use borrowed funds as well as owned funds in the business activity. Further the assessee s own capital was ₹ 5.15 crores which was sufficient to cover the investment of ₹ 3.32 crores in the shares. (g)In the past many years the assessee was showing the transactions as investment in his books of account and this stand was also accepted by the Department except in the asst. yr. 2005-06. The assessee always took delivery of the shares and the transactions were routed through Demat account. The holding period of more than one month satisfies s. 2(42A), which defines a short-term capital asset . (h)Even in respect of the long-term capital gains declared by the assessee, though the AO has treated them as business income, he is not right in doing so since the period of holding in all the share transactions was several years. Thus the surplus on sale of shares held for more than one year has to be treated as long-term capital gains only and not as business income. 7. In addition to the aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15,04,211 have to be assessed as such and not as business income as held by the AO. It may be clarified at this juncture that the Department s appeal does not question the decision of the CIT(A) for the asst. yr. 2006-07 that the long-term capital gains should be assessed as such and not as business income. The ground before us refers only to the short-term capital gains of ₹ 79,92,714. 8. Both the assessee as well as the Department have addressed elaborate arguments in support of their positions. The main contention of the learned counsel for the assessee was that in all the assessment years starting from 2001-02 to 2004-05 the assessee s stand that the shares were held as investment was accepted by the Revenue and it was pointed out that for the asst. yrs. 2001-02 and 2004-05 the assessments were completed after a scrutiny under s. 143(3) of the Act. In these years the assessee declared both short-term and long-term capital gains and held 42 scrips which were shown at ₹ 98,35,984. In respect of the asst. yr. 2004-05 the assessee declared short-term capital gain which was accepted by the AO. The investment in shares was shown at ₹ 1,69,96,403. It was pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the stand it took in the earlier years, it accepted the assessee s claim that the surplus on sale of shares was assessable only as short-term capital gains. 11. The learned Departmental Representative put forth the following contentions : (a)The assessee is carrying on futures and options transactions as well as speculation transactions and a major part of his activity is constituted by these transactions. (b)The balance sheet of the assessee as on 31st March, 2005 (p. 4 of the paper book) shows the investment in futures and options transactions at ₹ 1,03,01,657 which constitutes almost 1/3rd of the investment of ₹ 3,24,59,391 in shares. It is inconceivable that a person who has indulged in futures and options transactions to such a large extent would also be inclined to hold the shares as investment. (c)The assessee has utilized huge borrowings from M/s India Bulls in acquiring the shares and in law it has been held that if a person borrows money for the purpose of acquiring an asset, it is a strong indication of a business motive, provided the asset is one which is normally traded. An average investor would invest his own funds rather than borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2009] 120 TTJ (Pune) 397 : [2009] 120 ITD 469 (Pune). (c)The fact that the assessee borrowed monies for interest and utilized the same for making investment in shares does not ipso facto mean that the purchase of shares was for the purpose of trading therein. It is not a conclusive factor. Even the IT Department has accepted the assessee s claim that the interest cost should be added to the cost of the investment. In this behalf the learned counsel for the assessee filed two sets of accounts with M/s India Bulls which show that M/s India Bulls Financial Services Ltd. has paid the monies to M/s India Bulls Securities Ltd. on behalf of the assessee for acquiring the shares. It is admitted that the borrowing is in effect by the assessee. 13. The learned counsel for the assessee also put forth an alternative plea that even if the assessment orders are to be upheld and the assessee is to be treated as a dealer in shares, he must be given the option of valuing the closing stock of shares on any of the recognized methods as was held by the Mumbai Bench J in the case of J.M. Shares Stock Brokers Ltd. in ITA Nos. 2801 and 2802/Mum/2000 and ITA No. 5488/Mum/2001, dt. 30th Nov., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 490237 3,24,59,391 31-3-2006 131 541377 3,32,72,973 One aspect which is thrown up by the above Table is that though the investment value increased substantially from year to year, the number of companies whose shares were held by the assessee remained more or less constant and in fact as on 31st March, 2006 it actually fell to 131 from the earlier high of 159. It appears to us that basically the number of shares of a particular company purchased by the assessee had increased which substantially contributed to the increase in the value of the investment. The above analysis prima facie shows that the assessee is basically an investor more than a share dealer. The stand of the assessee has been accepted by the Revenue authorities in the asst. yrs. 2001-02 and 2004-05 in assessment orders passed under s. 143(3) of the Act. The assessment order for the asst. yr. 2001-02 is at pp. 34-35 of the paper book. It is seen therefrom that the AO has accepted the short-term capital loss and the long-term capital gains shown by the assessee on sale of shares. The assessment order for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 69,43,821 on sale of the shares and the same has not been considered as business. 18. It would thus appear that prima facie there is enough evidence to show that the assessee is an investor in shares and therefore the surplus arising on the sale of shares should be assessed as short-term or long-term capital gains, depending on the period of holding and not as business income. 19. But then the contention of the Department is that the assessee is also carrying on F O transactions as speculation business in shares and that the investment in F O transaction as per the balance sheet as on 31st March, 2005 is ₹ 1,03,01,657 as against the investment in the shares of ₹ 3,24,59,391. The point made is that almost 1/4th of the total investment of the assessee is in speculation and F O business and with this kind of background it would be difficult to believe that the assessee can also be treated as investor in shares. We find it difficult to accept the contention because the circular issued by the CBDT referred to supra has itself recognized that a person can have two portfolios, one for investment and the other as stock-in-trade. The Hon ble Bombay High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of carrying on the F O business. In fact this contention has been accepted by the CIT(A) in his order for the asst. yr. 2006-07. Reference may be made in this connection to para 2.3(i) of the order of the CIT(A) for the asst. yr. 2006-07. In that year the assessee had paid interest of ₹ 15.73 lakhs and that was put as one of the points against the assessee s contention that he was an investor in the shares. The CIT(A) held that the assessee s own capital was ₹ 5.15 crores in that year out of which the investment of ₹ 3.32 crores in shares could have come and thus it cannot be said that the assessee was depending totally on borrowed funds. In the light of this finding also it cannot be said that the fact that the assessee paid interest on borrowings should be held against him, particularly when there are other predominating features in the case which give clear impression that the assessee intended only to invest in shares and not hold them as stock-in-trade. 20. It thus appears to us that the CIT(A) took an incorrect view of the matter in the asst. yr. 2005-06 and that the CIT(A) who dealt with the appeal for the asst. yr. 2006-07 has taken the correct vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25,217. The average cost of 543 bonus shares of Tata Steel was valued at ₹ 68,526. The AO s reasoning would have held good if his decision to treat the assessee as a dealer in shares is upheld. However we have held that the assessee is an investor in shares. The bonus shares cannot therefore be valued as if they are stock-in-trade. We therefore delete the additions of ₹ 2,25,217 and ₹ 68,526. 25. Ground No. 3 is as under : 3. On the facts, circumstances and legality of the case, the CIT(A) erred in confirming the loss of future and option transaction (derivatives) for ₹ 14,37,338 as speculative loss as against the loss under the head Other income as claimed and shown by the appellant. 26. The learned counsel for the assessee fairly stated that this ground is covered against the assessee by the order of the Kolkata Special Bench in the case of Shree Capital Services Ltd. v. Asstt. CIT [2009] 124 TTJ (Kol.)(SB) 740 : [2009] 28 DTR (Kol.)(SB)(Trib) 1 : [2009] 121 ITD 498 (Kol.)(SB). Respectfully following the said order, we dismiss the ground. 27. In the result, the assessee s appeal is partly allowed whereas the Department s appeal is dismiss ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
