TMI Blog2013 (12) TMI 1548X X X X Extracts X X X X X X X X Extracts X X X X ..... These are the appeals filed by the different assessees challenging the order of CIT(A) for the assessment year 2006-07, against the order passed by the Assessing Officer u/s 143(3) of the Income-tax Act, 1961. 2. Common grounds have been taken in all the appeals. Main grievance of the assessee pertains to assessing the profit offered on sale of assets being S.T.T. paid on listed shares under the head Income from business as against income from short term capital gains u/s 111(1)(i) of the Income-tax Act, 1961, on which tax is leviable at flat rate of 10 %. 3. As the common grounds are involved in all the appeals, these were heard together and are now being decided by this consolidated order. 4. Ld. Authorized Representative, Shri Prakash Jain, firstly argued the case of Shri Sushil Karwa (I.T.A.No.308/Ind/09) and submitted that the assessee is a Managing Director of M/s. Krishidhan Seeds Limited. The assessee was also having income from sale of shares, which were offered for taxation under the head Capital Gains . During the course of assessment, the AO observed that the assessee had purchased shares of ₹ 16,05,41,706/- and sold shares of ₹ 14,12,79,276/- a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the motive of the assessee is not to earn dividend, therefore, he has sold most of shares and shown stock of ₹ 39,74,951/-. In view of above discussion profit derived from sales of shares amounting to ₹ 1,74,56,316/- was treated as business profit in place of short term capital gain as shown by the assessee and paid the taxes u/s 111A to special rate.' 5. By the impugned order, the ld. CIT(A) confirmed the action of the AO for treating the profit earned on sale of shares as profit from business and profession against which the assessee is in further appeal before this Tribunal. 6. It was argued by the ld. Authorized Representative, Shri Prakash Jain that the assessee is not involved in business of trading in shares but was having income from salary as a Director of a Company. He was fully employed in the management of the affairs of the company in which he was Managing Director. The assessee has invested major income and past years savings in the shares for the purpose of earning dividend income and also ripening the benefits of appreciation in price of shares, which every investor always does in shares. The ld. Authorized Representative invit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that an investor may invest for not too a long term but wait for some appreciation in the price and then offer the shares to make profit out of it. The law lexicon by P. Ramnatha Aiyer (2nd Edn.) says that the word investment is not a word of art but a word of current vernacular. The word invest and investment are to be taken in the sense of laying out of money with the object to earn profit. In the instant case assessee has not entered into a frantic activity, but hold on to the shares thus it is an investment and not a business. 8. As per ld. Authorized Representative the shares were disclosed in the balance sheet as investment and not as stock in trade, this fact itself proves that the assessee is an investor and not trader in shares. With regard to the observation of the CIT(A) that the assessee has entered on the very same day transaction of purchasing shares of same company on many occasions, the contention of the ld. Authorized Representative was that whenever the assessee wants to buy shares, only the available lots can be purchased and, therefore, to fulfil the requirements of the assessee, the broker has to approach the another seller to meet the buying re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking into account the intention of the assessee while purchasing the shares, as to whether the same was acquired for holding as investment or for doing business therein. The treatment given by the assessee in its books of account is also one of the decisive factors to find out whether the shares were held as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be treated as capital gains. On the other hand, if the shares are purchased with the intention to earn profit thereon and the same is treated as stock in trade in the books of account, the profit arising out of sale of such shares are liable to be treated as business income. Volume and frequency of transaction is also one of the guiding factors to find out whether the assessee is engaged in the business of purchase and sale of shares or making investment to have capital gains thereon. In the instant cases before us, we found that the assessee has invested in shares of Indian Companies since last 5 - 6 years, which is clear from the statement of shareholding of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heading as investment in shares. If the assessee was having such an intention, then he could instead of correcting his mistake by using eraser and pen, could have taken the new print out and submitted before the CIT(A). Action of the assessee in correcting by using eraser and changing the heading by pen itself shows that the intention of the assessee was bona fide one and not mala fide. However, while putting this allegation, the ld. CIT(A) has ignored the factual position to the effect that in the balance sheet of subsequent and preceding year, the assessee had shown the shares under the head investment . Furthermore, in the preceding years also, the gain arising on shares was offered by the assessee under the head Short term capital gain and the same was accepted by the Department. Undisputedly, since the financial year 1995-96 the assessee was making investment in shares and in all these years, the assessee had classified the same under the head Investment in shares and not under the head Closing stock . Even if contention of the ld. CIT(A) is accepted that the shares are shown by the assessee in the balance sheet as closing stock and later on the assessee has changed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09. Thus, the intention of the assessee, nature of activities, modus operandi of assessee and the manner in which he has kept his record and presented the shares as investment in the balance sheet clearly suggests that the gain arising out of their sale is liable to be assessed as capital gains and not as business profits . It is also relevant to mention here that for doing systematic and organized activities of purchase and sale of shares, the assessee is required to have an infra structure in the form of office, employees, equipments etc., where as in the instant case, the assessee was not having such infrastructure and whatever decision of investment or sale of shares is taken, the same was materialized through broker. Thus, there was no organized efforts to obtain profits except that shares are purchased cautiously and whenever it is felt that prices of such shares are quoted nicely, they were sold. The decision to dispose of investment at a short interval is being taken by the assessee keeping in view the eventuality of down trend in the market sentiments over a particular script. Merely because the assessee was able to realize better prices of its investment at a short int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xempt the long term capital gain earned from sale of shares and levying 10 % tax on short term capital gain and earned on sale of shares. 14. It is noted that under the old provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities were charged to tax either as long term capital gains or short term capital gains depending on the period of holding of the said securities; Short-term capital gains arising from transfer of securities were taxed at the applicable rates (normal rate) and Long-term capital gains were taxed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the taxpayer had an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the long-term capital gains and short-term capital gains were taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities, however, the gains were taxed as any other normal business income. Thus tax liability on the income from purchase sale of shares as regards to the STCG business income was at par. However, the issue of treatment of income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or income in past years saving in the shares for the purpose of earning dividend income and also getting good benefits of appreciation in price of shares which every investor always does in shares. Merely because some of the funds were borrowed on interest will not disentitle the assessee to loose his character as investor and does not become a trader. It is also not in dispute that the assessee was not doing any jobbing or F O activities as a regular dealer in shares. In view of these facts, profit arose on shares in respect of delivery based transaction are liable to be taxed as capital gain and not as business income. 15. Similar is the facts and circumstances in case of Shri Ashish Subhashchandra Karwa, wherein the assessee has treated equity shares of Indian Company as investment all along. The details of investment in shares as on 31.3.2006 are as under : - S .No. Name of Securities No. of Shares Amount Date of Purchase No. of shares 1. KRISHIDHAN SEEDS LTD.PS 80000 800000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of income and acknowledgement enclosed in paper book 2007-08 25,18,668 Copy of computation of income and acknowledgement enclosed in paper book 18. Details of investment in shares as on 31st March, 2006 was as under :- S. No. Name of Securities No of Shares Amount Date of Purchase No. of Shares 1 KRISHIDHAN SEEDS LTD. ES 562649 5626490.00 27.03.97 30600 30.03.98 9800 30.03.02 114900 31.03.2006 407349 562649 2 RAJENDRA SEEDS CO PVT LT 4349 434900.00 27/03/97 1500 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment treated the gain from purchase and sales of shares as business income. The year wise details of capital gain earned in preceding and subsequent years are as under:- Assessment year Capital Gain/Loss on sales of shares offered in Return of Income Remark 2002-03 Rs.1,22,419/- Copy of acknowledgement enclosed. 2004-05 Rs.2,47,226/- Copy of Computation of Income and acknowledgement enclosed 2005-06 Rs.10,11,082/- Copy of Computation of Income and acknowledgement is enclosed in paper book. 2007-08 Rs.1,64,993/- Copy of Computation of Income and acknowledgement is enclosed in paper book. 20. Details of investment in shares as on 31st March, 2006 was as under :- S.No. Name of Securities No of Shares Amount Date of Purchase No. of Shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had acquired the shares with intention of investment, accordingly treated in the balance sheet as capital assets. In preceding years also the assessee liquidated his investment in equity shares of Indian Companies and department accepted the same, except in the assessment year in question wherein the department treated the gain on purchase and sales of shares as business income. The year wise details of capital gain earned in preceding years are as under:- Assessment year Capital Gain/Loss on sales of shares offered in Return of Income Remark 2002-03 Rs.1,22,419/- Copy of acknowledgement enclosed. 2004-05 Rs.1,49,677/- Copy of Computation of Income and acknowledgement enclosed 2005-06 Rs.4,92,221/- Copy of Computation of Income and acknowledgement is enclosed in paper book. 22. Details of investment in shares as on 31st March, 2006 was as under :- S. No. Name of Securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that assessee had shown the shares at the year end as closing stock in his balance sheet. The contention of ld. Authorized Representative was that all the shares held by assessee were disposed off and no shares were held by assessee at year end, therefore, no question arises for showing the same as closing stock. Our attention was also invited to balance sheet of assessee, wherein we found that at the year end nothing was held by assessee as closing stock. Since no shares remained with assessee at the year end, the finding recorded by AO is factually incorrect. The assessee has given a particular treatment i.e. investment of the shares in all the earlier years, the Assessing Officer cannot change the nature of the Asset. In this case assessee has not treated the investment in equity shares of Indian Companies as stock-in-trade, thus, the Ld A.O. and CIT (A) erred in treating the profit earned from purchase and sales of shares which were entered by the assessee as investment in books of accounts. It is also undisputed that there is not a single transaction where the assessee squared off the transaction on the same date without taking delivery of the shares. It is also undisputed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are treated as investment in the accounts maintained by the assessee. A detail date wise list of investment in shares is placed on record. It is undisputed that the assessee treated the equity shares of Indian Companies as investment i.e. Capital Assets all along. It is not permissible either for the assessee or for the Assessing Officer to treat the same as stock-in-trade. In preceding and subsequent year also the assessee liquidated his investment in equity shares of Indian Companies and department accepted the same, except in the assessment year in question wherein the department treated the gain from purchase and sales of shares as business income. The year wise details of capital gain earned in preceding and subsequent years are as under:- Assessment year Capital Gain/Loss on sales of shares offered in Return of Income Remark 2004-05 Rs.2,11,308/- Copy of Computation of Income and acknowledgement enclosed. 2005-06 Rs.3,82,830/- Copy of Computation of Income and acknowledgement is enclosed in paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails of capital gain earned in preceding years are as under : Assessment year Capital Gain/Loss on sales of shares offered in Return of Income Remark 2004-05 Rs.2,47,226/- Copy of Computation of Income and acknowledgement enclosed 2005-06 Rs.3,55,481/- Copy of Computation of Income and acknowledgement is enclosed in paper book. 29. Details of investment in shares as on 31st March, 2006 was as under :- S. No. Name of Securities No of Shares Amount Date of Purchase 1 KRISHIDHAN SEEDS LTD. ES 198526 1985260.00 Since 1995-96 and further increases time to time. 2 RAJENDRA SEEDS CO PVT LT 50800 50800.00 Since 1995-96 and further increase time to time. 3 SUBHASH FERTILIZERS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 005 75100 31/03/2006 811760 95308 5 3 RAJENDRA SEEDS CO PVT LT 2522 252200.00 31/03/2004 2522 4 SUBHASH FERTILIZERS P. LTD 15400 154000.00 31/03/2000 10600 31/03/2003 4800 15400 5 SHARES OF UNION BANK 4800.00 Before 31/03/2005 6 BANK OF BARODA 74520.00 17/01/2006 32. In the case of Smt. Arti Karwa, the assessee started investment in equity shares of Indian Company since 31.03.2002. All along the shares are treated as investment in the accounts maintained by the assessee. A detail date wise list of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arwa, the details of investment as on 31st March, 2006, was as under :- S. No. Name of Securities No of Shares Amount Date of Purchase 1 KRISHIDHAN SEEDS LTD. PS 120000 1200000.00 Since 1995-96 and further increase time to time. 2 KRISHIDHAN SEEDS LTD.ES 775214 7752140.00 Since 1995-96 and further increase time to time. 3 RAJENDRA SEEDS P LTD (Share) 104700 1047000.00 Since 1995-96 and further increase time to time 4 SUBHASH FERTILIZERS P. LTD 88100 881000.00 Since 1995-96 and further increase time to time 5 U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... long term capital gain or from sale of share and levying 10% tax on short term capital gain or from sale of shares also supports the case of assessee. The idea behind introduction of security transaction tax is to end the litigation on the issue, whether the profit earned from delivery based sale of shares is capital gains for business profit. 36. Even the Hon'ble Apex Court in the case of K.P. Verghese v. ITO [1981] 131 ITR 597 (SC) observed as under:- The task of interpretation of a statutory enactment is not mechanical task. It is more than a mere reading of mathematical formulae because few word possesses the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provisions to be 'drafted with divine prescience and perfect clarity.' We can do better than repeat the famous words of judge Learned Hand when he said. The above observations of Hon'ble Judges of the Apex Court was reiterated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee since beginning was sale of shares as trading activities, as evident from audited profit and loss account by not showing the same as short term capital gain and also in Form 3CD the assessee has mentioned the nature of business as trading/dealing in shares/securities and mutual funds. The frequency of transactions was also considered, consequently he treated the amount of ₹ 49,81,915/- as business income from share trading. However, before the learned Commissioner of Income Tax (Appeals) the basis of additions was explained as evident from para 3.1.1 onwards. The crux of claim of the assessee is that in the audited accounts, the sale of shares amounting to ₹ 9.43 crores in which delivery had been taken, STT was paid and the shares were sold after holding for a few days/few weeks. The mutual funds of ₹ 2.91 lacs were sold and were treated as income from short term capital gains. Before the learned Commissioner of Income Tax (Appeals) the assessee also filed a detailed note on the purchase process for delivery base shares, details of dividend received on the basis of relevant statements by placing reliance on the decision of the Mumbai Bench of the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stency as propounded by Hon'ble Bombay High Court in the case of Gopal Purohit (supra), it is fairly applicable and the income has to be treated as short term capital gain. Identically in the case of Nagindas P Seth (IT Appeal No.961 (Mum) of 2010) it was held that despite large number of transactions in shares, the profit can be assessed as capital gains under the facts of the case. The case of the assessee is further fortified by these decisions more specifically when the assessee was hold the shares in his books as investor, was not having office or administrative set up, no interest was paid on the funds and there was not a single instance where the assessee squared up the transactions on the same without taking the delivery of shares. The decision in the case of Janak S Ranawala v. Asstt. CIT [2007] 11 SOT 627 (Mum.) further supports the case of the assessee. Likewise, the decision from Hon'ble Madras High Court in CIT v. N.S.S. Investment(P.) Ltd. [2005] 227 ITR 149 CIT v. Associated Industrial Development Co. [1971] 82 ITR 586 (SC) supports the case of the assessee. In the present appeal, we note that the assessee made investment in shares with intention to earn divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, giving rise to capital gains) or stock-in-trade (and therefore, giving rise to business profit) by further opining that no single principle would be decisive and total effect of all the principles should be considered. If the number of transactions are analysed, we note that, in a computer based trading system/ e-filing, the figures, being split up, give misleading high figures, reflecting the individual component of the transaction but really, if these figures are synchronised then clear picture oozes out. Since the gain has been earned from the delivery based transactions, therefore, respectfully following the decision from Hon'ble Jurisdictional High Court in the case of Shri Om Prakash Suri (supra), we do not find any merit in the conclusion drawn by the lower authorities for treating the gains arising out of sale of shares as business income rather than capital gain. Accordingly, we direct the Assessing Officer to treat the gain arising out of sale of shares as capital gains. We direct accordingly. Addition u/s 2(22)(e) on account of deemed dividend : 39. During the course of scrutiny assessment in the case of Sushil Jai Narayan Karwa, the AO found that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court in the case of C. P. Sarathy Mudaliar, it was held that to attract first limb of provisions of Section 2(22)(e), the payment must be to a person, who is a registered holder of share, the expression shareholder found in the 1961 Act, has to be construed as applying to registered shareholder. In the nut-shell, it was held that the assessee must be a registered shareholder as well as beneficial owner of the share for bringing him within the mischief of Section 2(22)(e) of the Act. 42. On the other hand, the ld. CIT DR relied on the decision of CIT v. Rameshwar Lal Sanwarmal [1971] 82 ITR 628 (SC), and submitted that where shares are held by karta, when shares were acquired from the funds of the HUF, could be considered to be the shares held by the HUF and the loans made to the family members could fall within the definition dividend u/s 2(22)(e) of the Income-tax Act, 1961. Reliance was also placed on the judgment reported at Asstt. CIT v. Saurashtra Kutch Stock Exchange Ltd. [2008] 305 ITR 227, in the case of Saurashtra Kutch Stock Exchange Limited and S.A.I. Narayan Row v. Model mills Nagpur Ltd. [1967] 64 ITR 67 (SC). In view of these judgments, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares registered in the name of minor children, while computing shareholding of the assessee. There is also no restriction in allotment of shares to the HUF. HUF can apply for shares in a company and the same can be allotted in their names. These shares are duly registered in the name of HUF. The shares so registered in the name of HUF cannot be treated as shares held by the assessee for the purpose of Section 2(22)(e). The proposition laid down by the I.T.A.T., Special Bench in the case of Bhaumik Color Lab (supra) clearly laid down the condition for bringing the assessee within the mischief of Section 2(22)(e), according to which conditions of registered shareholders as well as beneficial shareholders is required to be complied with for bringing the assessee within the purview of Section 2(22)(e). If any one of the conditions are absent, an assessee cannot be brought within the mischief of Section 2(22)(e) of the Act. Hon'ble Mumbai High Court have duly approved the proposition laid down by I.T.A.T., Special Bench in the case of Bhaumik Color Lab (supra). 44. Now we deal with the following decisions cited by Ld. CIT DR, with regard to their applicability to the issue of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable since the beneficial owner is not the registered holder. (d) However, the definition of deemed dividend under section 2(22)(e) of the Income- tax Act, 1961 has been amended to read in its present form and no longer corresponds to the definition under section 2(6A)(e) of the Income-tax Act, 1922. 46. As per the definition of deemed dividend under section 2(22)(e) of the Income-tax Act, 1961, the provisions are applicable to a person who is registered shareholder, and also a person who is the beneficial owner of the shares. (e) Thus, for the applicability of the provisions relating to deemed dividend, the following two conditions precedent for invoking section 2(22)(e) should be satisfied: (i) The person receiving the amount, being a shareholder should be the registered holder of shares; and (ii) Such person should also be the beneficial owner of shares. 47. Thus, as per the amended definition, merely being a registered holder of the shares will not be sufficient for the applicability of the provisions and such person should also be the beneficial owner of such shares. Thus, under the present provisions, if a loan has been given to a registered ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court of competent jurisdiction has given them.' Page 46 para 23 'In the 1961 Act, the word shareholder is followed by the following words being a person who is the beneficial owner of shares . This expression used in Section 2(22)(e), both in the 1961 Act and in the amended provisions w.e.f. 1st April,1968 only qualifies the word shareholder and does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression 'being is a present participle. A participle is a word which is partly a verb and partly an adjective. In Section 2(22)(e), the present participle being is used to described the noun 'shareholder' like an adjective. The expression being a person who is the beneficial owner of shares is therefore a further requirement before a shareholder can be said to fall within the parameters of Section 2(22)(e) of the Act. In the 1961 Act, Section has also to be beneficial owner of shares (not being shares entitled to a fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of a person other than a registered shareholders. 48. If the conclusion drawn in the impugned orders, observations made from the assessment orders, assertions made by respective counsel and the material available on record are kept in juxtaposition and analyzed, we find that the assessee is not coming within the mischief of 2(22)(e). 49. In view of the above discussions we do not find any merit in the actions of lower authorities in invoking the provisions of sec. 2(22)(e) of IT Act 1961, in case of Sushil Karwa. 50. The assessee is also aggrieved for addition of ₹ 6,04,988/- made u/s 2(22)(e) in case of Anoop Karwa for the assessment year 2006-07. 51. We have considered the rival contentions and found that Shri Anoop Karwa has taken a loan from M/s. Krishi Dham Seeds Limited. We found that Shri Anoop Karwa has more than 10 % voting rights in the share capital of Krishi Dham Seeds Limited, therefore, the provisions of Section 2(22)(e) is clearly applicable for loans and advances so taken by the assessee. Accordingly, the addition made by the Assessing Officer u/s 2(22)(e) was perfectly justified. 52. In the result, the appeals are allowed in part in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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