TMI Blog2010 (4) TMI 1069X X X X Extracts X X X X X X X X Extracts X X X X ..... he treats the transactions. The assessee has not borrowed any money for investing in shares and used his own surplus funds and these facts have not been disputed by the A.O. The proposition has been accepted by the Board also in Circular No. 4/ 2007 that the assessee is entitled to maintain two portfolios. It is true that the rule of res judicata is not applicable to the Income Tax Proceedings, but at the same time, it is also well settled principles that if there is no change in the facts, then, there should be consistency in the approach of the Revenue authorities while deciding the tax liability of the assessee. The transactions of sale and purchase of the shares by the assessee cannot be treated in the line of trading in the shares nor it can be treated as an adventure in the nature of the trade. We hold that the entire income from the sale and purchase of the shares is to be assessed under the head capital gain as rightly declared by the assessee either Long Term Capital Gain (LTCG) or Short Term Capital gain (STCG) depending upon the period of holding. We, therefore, direct the A.O to accept the capital gains declared by the assessee from the sale of the shares a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment was framed u/s. 143(3). The assessee had declared the capital gain of ₹ 103,21,714/- as under :- i) Long Term Capital Gain ₹ 99,11,474 ii) Short Term Capital Gain ₹ 19,82,900 Total: Rs.1,03,21,714 The A.O was not in favour of accepting the computation of capital gains as declared by the assessee as in his opinion the assessee s activity in shares was a business activity. The A.O, therefore, issued Notice dt. 4.12.2006 asking the assessee to show cause to explain why the income from the investment from the shares should not be assessed as business income under the head of profits and gains of business, instead of assessing the same under the head capital gains. The assessee filed its reply resisting the action of the A.O. It was stated that the assessee is not trading in equity shares. It invests in shares and hold such shares as an investment and not as a stock-in-trade. The shares are held for the purpose of earning the dividend and for the purpose of investments in shares, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod of accounting, trading transactions in the shares are shown as sale of investment, that would not make any difference. 5.3In the opinion of the A.O, the shares are stock-in-trade of the assessee and in accounts, merely because same has been shown as an investment, it will not change the nature of the transaction. The A.O has further noted that the primary characteristics of an investment of an asset is the feeling of the security and secondary, aspect is capital accretion. Moreover, there should be incremental periodical income accruing on the investment. In the opinion of the A.O, all the fundamental characteristics for treating/holding the shares as an investment were lacking. The A.O also noted that only because the assessee had taken possession either physically or through depository, while purchase of the shares would not become investment leading to capital asset. Even if the shares are held for the longer period, that shows longevity of the stocks. The A.O has further noted that debiting and crediting an account open at the discretion of the assessee as share investment account would not change the character of real activity of purchase and sales of the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is in appeal before us. 7.The Ld Counsel for the assessee, vehemently argued that the fact that 83% of total capital gains comprises the Long Term Gains,in respect of shares held for substantially long period and that shows that the company chooses to make Long Term Investment rather than trading in securities. It is argued that majority of the shares are held for more than five years and the single largest Long Term Capital Gains in the A.Y. 2004-05 was in respect of the sale of shares in Infosys Technologies Ltd (in short Infosys Ltd.) and the said shares were on an average held for more than 6 years. It is argued that it was never the intention of the assessee to do the trading in the shares and securities. The assessee has never borrowed any money for making the investment in shares and it was only own money which was invested in the shares. The Ld Counsel also gave the example in respect of the shares of the Infosys which were sold in the previous year relevant to the A.Y. 2004-05 by submitting that except for 200 shares purchased in December 1996 and January 1997, every single share of Infosys Ltd which was sold, was the Bonus share received by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CBDT has accepted that it is possible for the tax payer to have two portfolios, (i) in respect of the Investment Portfolios which is to be treated as a capital asset and (ii) Trading Portfolio comprising of stock-in-trade. The Ld Counsel further argued that as per the well settled principles, the intention of the assessee at the time of purchasing the securities/shares is decisive and at the same time if a investment is made with own funds which goes to straighten the case of the assessee. The Ld Counsel referred to page No. 23 of the Paper Book which is the copy of the profit Loss Account as on 31.3.2004 and submitted that there is no opening or closing stock of shares/securities declared by the assessee. It is also argued that there is no frequency of the buying and selling of the same script. The Ld Counsel relied on the following precedents : (1)CIT v/s. Associated Industrial Development Company Ltd., 82 ITR 586 (SC) (2)CIT v/s. H. Holsck Larzen, 160 ITR 67 (SC) (3)Fidelity Northstar Funds Others, 288 ITR 641 (4)Gopal Purohit v/s. Jt. CIT, 122 TTJ (Mum) 87 (5)Savna Infrastructure King Pvt. Ltd., v/s. ACIT, 120 TTJ (Luck.) 216. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uncements certain guiding principles have been fixed . Admittedly in this case, in the past also, the assessee has never claimed that he was having any trading in the shares and securities but always claimed that he was making the investment and accordingly treating the gain on the sales of shares/securities, either as a Long Term Capital Gain or Short Term Capital Gain. This fact has been stated by the A.O on the page No. 5 of the assessment order, giving the details in respect of the preceding five years. On the perusal of the Profit and Loss Account and Balance Sheet filed by the assessee, for the Year Ending 31.3.2004 as well as for the preceding years, it is seen that there is no opening or closing stock shown by the assessee but the shares and securities are shown under the head Long Term Investment and Current Investment . So far as the present year is concerned, there is a force in the argument of the Ld Counsel that almost 83% of the Capital Gain declared by the assessee is from the Long Term Capital Gains (LTCS). Moreover, it also appears that the single largest Long Term Capital Gain in this year is from the sale of the shares of the Infosis Technology Ltd. As pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those shares which are its stock-in-trade and those which are held by way of investment. 6.In the case of Commissioner of Income Tax, Bombay Vs. H. Holck Larsen (160 ITR 67), the Supreme Court observed : The High Court, in our opinion, made a mistake in observing whether transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact. 7.The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the assessing officers. 8.The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :- (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 accounts, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness income and declared to assessee as a capital gain. When the matter reached before the Tribunal by way of assessee s appeal, the in which after referring to the plethora of decisions, including the decisions of the Hon ble Supreme Court in the case of Associated Industrial Development Co. Ltd. (supra) and H. Holsck Larzen (supra) has held that: 8.2Having stated so, on merits also, we find that in the case of Sarnath Infrastructure (P) Ltd. vs. Asstt. CIT (supra), the Tribunal has considered almost all the important judicial decisions laying down legal principles to determine the nature of transaction i.e. trading the transaction or investment, which have also been cited before us. The Tribunal has also considered the CBDT Circular No. 4 of 2007. The Tribunal has summarized these principles in para 13 of the said order. For the sake of ready reference, we reproduce the same as under : After 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der as well as investor. It has kept separate accounts for both types of dealings. Valuation of holdings has been done at cost (for investment portfolio). At least, there is no allegation or material to come to the conclusion that valuation of investment portfolio has been done on cost or net realizable value, whichever is low. The shares which are sold out of investment portfolio, this year, were purchased two to three years ago showing that assessee had intention, while purchasing them, to hold them. They were reflected in the balance sheet as investment. The assessee has enjoyed dividend income and declared the same in return of income. The frequency of such purchase or sale in this portfolio is not large enough to doubt that this portfolio is only a device to pay lesser taxes by parking some stock-in-trade in investment portfolio. We notice that in trading portfolio the assessee had purchased during the year shares worth ₹ 21,38,353 and same shares were sold for ₹ 23,89,805. There was neither opening stock nor closing stock. In investment portfolio, opening stock of shares was ₹ 19,22,203 and closing stock was ₹ 46,23,274 whereas sales out of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment. 14. The decision of the Tribunal in the case of Gopal Purohit (supra) has been affirmed by the Hon ble High Court of Bombay in CIT V/S. Gopal Purohit-ITA No. 1121/09 Dt. 6/01/10(unreported) and operative part of the judgment reads as under: 3. In so far as Question (b) is concerned, the Tribunal has observed in paragraph 8.1 of its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position, that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, 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 approa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has received the substantial dividend and that is also disclosed. After considering the totality of the facts, we are of the opinion that the transactions of sale and purchase of the shares by the assessee cannot be treated in the line of trading in the shares nor it can be treated as an adventure in the nature of the trade. For the reasons given herein-above, we hold that the entire income from the sale and purchase of the shares is to be assessed under the head capital gain as rightly declared by the assessee either Long Term Capital Gain (LTCG) or Short Term Capital gain (STCG) depending upon the period of holding. We, therefore, direct the A.O to accept the capital gains declared by the assessee from the sale of the shares and accordingly, set aside the order of the Ld CIT(A). 17 Ground no.2 is in respect of the disallowance made u/s 14(A) of the Act. 17.1The ld counsel of the assessee submitted that considering the smallness of the amount of the disallowance and as per the instructions of the assessee he is not pressing the ground no.2. 18 As the ground no.2 has not pressed by the ld counsel; therefore, the same is dismissed as not pressed. 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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