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TMI Blog2013 (12) TMI 1548X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 Rs. 16,05,41,706/- and sold shares of Rs. 14,12,79,276/- and earned profit of Rs. 1,74,56,316/-. The assessee declared this profit as "short term capital gain" whereas the AO held that the same is to be assessed under the head "Profits and gains of business or profession" which is challenged by the assessee. It was observed by the Assessing Officer that it was evident from the copies of bank statement, submitted by the assessee, that the assessee has not invested his saving in shares. He has borrowed funds from M/s. Krishidhan Seeds Limited and utilized these funds for his own benefit. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 invited our attention to the statement giving script wise details of investment made and sold during the year, which indicate that the assessee had never indulged in bulk trading in shares nor in any speculative activities in share line. He submitted that all the shares in which investment was made are of highly reputed listed company having huge volume on day to day basis. It was also contended that neither in the past nor in the subsequent year, the assessee had undertaken trading activities or F & O activities in jobbing shares. Our attention was also invited to the vital f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative 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 requirement of the assessee. Merely because shares were purchased on same day or more than one occasion will not indicate that the assessee has entered in to separate transaction of purchases but only because the broker of the assessee was able to lift a lesser amount of shares from one seller, this position occurred. Such position should not be adversely taken for treating that the assessee has entered into huge transaction of purchase of shares in the same company. 9. It was further contended by the ld. Authorized Representative that the assessee was engaged in making invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee. Thus, the fact of the assessee investing in shares for the last several years is not in dispute. There is also no dispute to the fact that the assessee has treated the equity shares of Indian Companies as investment i.e. capital asset all along. The assessee has also valued the shares at cost thus given a particular treatment to the shares held as investment, therefore, without brining on record contrary material, the AO cannot change the intention and manner of investment being made by the assessee. Had the assessee valued the shares at cost or market price whichever is lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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 the heading as investment in shares, the position will not change since during the assessment year in question no profit was earned by the assessee on the sale of shares for which the heading was bona fidely changed. This fact is clear from the details of script-wise and date-wise purchases and sales of shares placed in the paper book. We also found that there is not a single transaction where the assessee squared up the transaction on the same date without taking delivery of the shares. It is undisputed that the assessee had taken delivery of all the shares by making full payment an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interval, cannot be solitary yardstick for treating such action as an adventure in the nature of trade, giving rise to business profits, when all the surrounding circumstances, indicate otherwise. No where the AO has indicated any transaction of purchase of shares without taking delivery and making full payment of such investment. Even in the case of investment it is for the assessee to decide when to dispose them off so as to have a maximum return out of them. There is no theory that the shares held as investment should be disposed of only at the time of need or in emergency. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 from share transaction as capital gain or business income has in-fact arisen after the amendment brought with Finance Act - 2004 by insertion of provisions of section 111A and 10(38) as regards to levy of Transaction tax and exemption / concession on capital gain arising from securities entered in a recognized stock exchange. With a view to simplify the tax regime on securities transactions, a tax at the rate of 0.015 per cent. (see: change in rates on securities transactions, by Finance Acts, at appropriate head) is levied on the value of all the transactions of purchase of securities that take plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 18.02.2005 80000 2. KRISHIDHAN SEEDS LTD.ES 617890 6178900 30.03.2003 21700 18.02.2005 56400 31.03.2006 539790 617890 3. RAJENDRA SEEDS CO. PVT. LTD. 3087 308700 31.03.2004 3087 4. UNION BANK SHARE 38390 20.02.2006 16. In the preceding years also the assessee liquidated his investment in equity shares of Indian Companies which were accepted by the Department accepted, except in the assessment year in question where in the Department treated the gain from purchase and sales of shares as business income. The year wise details of capital gain earned in preceding years are as under :- A.Y. Capital Gain/Loss on sales of shares offered in return of income (Rs.) Remark 2004-05 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R GANGA 2000 12/01/2006 500 13/01/2006 2000 16/01/2006 2000 2181749.88 17/01/2006 19. In the case of Manish Jaynarain Karwa, the facts and circumstances are pari materia. The assessee was holding shares as investment and shown the same as capital assets in the balance sheet. In preceding and subsequent year also the assessee liquidated his investment in equity shares of Indian Companies which were accepted by the department 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KRISHIDHAN SEEDS LTD. PS 100000 1000000.00 18/02/2005 100000 2. KRISHIDHAN SEEDS LTD. ES 569559 5695590.00 30/03/2002 45800 31/03/2003 31950 31/03/2004 759 491050 569559 3 RAJENDRA SEEDS CO PVT LT 18700 187000.00 31/03/2004 1870 4 SUBHASH FERTILIZERS P. LTD 32250 322500.00 31/03/2000 27600 31/03/2003 4650 32250 5 MERIGOLD WAREHOUSING & FINANCIAL SERVICES LTD. 39040 390400.00 05/10/2005 23/06/2005 26540 12500 39040 6 SHARES OF UNION BANK 6400.00 Before 31/03/2005 38390.00 20/02/2006 23. In the case of Subhash P. Karwa, HUF, the assessee started investment in equity shares of Indian Company since 27.03.1997. All along the shares are treated as investment in the accounts maintained by the assessee. A detailed date wise list of investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. of Shares 1 KRISHIDHAN SEEDS LTD. ES 861457 8614570.00 27.03.97 91400 30.03.98 107000 30.03.02 73500 31.03.03 31000 31.03.04 597 31.03.06 557960 861457 2 RAJENDRA SEEDS CO PVT LT 990 99000.00 31/03/97 990 3 SUBHASH FERTILIZERS P. LTD 136200 1362000.00 31/03/2000 46200 31/03/2001 90000 136200 25. In the case of Smt. Suvarna Karwa, the assessee started investment in equity shares of Indian Company since 27.03.1997. All along the shares 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment 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. 28. 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 gain from 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 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 P. LTD. 62850 628500.00 Since 1995-96 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undisputed fact that the assessee treated the equity shares of India Companies as investment i.e. "Capital Assets" a along. In preceding years also the assessee liquidate his investment in equity shares of Indian Companies and department accepted, except in the assessment year in question where in the department treated the gain from 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 2004-05 Rs.2,11,908/- Copy of Computation of Income and acknowledgement enclosed 2005-06 Rs.3,89,662/- Copy of Computation of Income and acknowledgement is enclosed in paper book refer page no. 6 33. 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 389765 3897650.00 30/03/2002 76600 31/03/2003 15600 31/03/2004 46 18/02/2005 6619 31/03/2006 2909 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of Bombay High Court and the same was dismissed by Hon'ble Apex Court vide order dated 15.11.2010. In the speech by Hon'ble Finance Minister regarding Direct Tax Cases (Union Budget - 2004-05), especially clause 111, the intention of Government for introducing the security transaction tax and exempting the 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 po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as shown from capital gains. The learned AO considered the income which was based on purchase and sale of shares as business income on the grounds as narrated in the assessment order as well as at pages 3 and 4 of the appellate order. Broadly, the learned AO was of the view that the intention of the 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 Rs. 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 Rs. 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 Rs. 2.91 lacs were sold and were treated as income from short term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term capital gain. The long term capital gain was accepted whereas short term capital gain was held to be business profit. Since in earlier assessment years the claim of the assessee was consistently accepted as short term capital gain, it was held that the rule of consistency 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 H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by CBDT circular no. F.No.149/287/2005-TPL [reported in 210 CTR 29 (St.)], advising the Assessing Officers that the principles contained in the circular should guide them in determining whether, in given cases, the shares are held by the assessee as investment (and therefore, 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 Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deeming provisions of Section 2(22)(e). Further reliance was also placed on the decision of Hon'ble Delhi High Court in the case of CIT v. Indian TechnocratsLtd. [IT Appeal No. 352 of 2011 11-5-2011], wherein after considering the decision of the Hon'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 j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Company but they can also exercise their voting rights u/s 41 of the Companies Act. There is also no dispute to the fact that the shares held by the minor sons were fully paid. Therefore, there is no question of inclusion of the shares 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... older. Thus, in accordance to the provisions and the above mentioned decision of the Supreme Court, if the loan has been given to the beneficial owner, then the provisions of deemed dividend shall not be applicable 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Superior Courts, and the legislature has repeated them in a subsequent statute, the legislature must be taken to have used them according to the meaning which a 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5] 1 SOT 142 (Mum), it was held that dividend under section 2(22)(e) could not be taxed in the 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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