TMI Blog2010 (7) TMI 1043X X X X Extracts X X X X X X X X Extracts X X X X ..... Capital Gains (STCG in short) as shown by the assessee instead of assessing by the Assessing Officer under the head income from business or profession . In all the seven assessment years, the common ground raised by Revenue, taken from ITA No.2866/Ahd/2008 assessment year 2000-01 reads as under:- 1. The learned CIT(A) has erred in law and on facts in directing to tax the income earned from trading in shares under the head LTCG / STCG as shown by the assessee instead of taxing it under the head Income from Business Profession . 3. At the outset, Ld. Counsel for the assessee, Shri S.N.Soparkar filed copy of Tribunal s order in Group cases of assessees in ITA No.2875 Ahd/2008, 2878- 2881/Ahd/2008, 2883-2884/Ahd/2008, 2887-2891/Ahd/2008 dated 17-09-2009 and stated that exactly on similar facts, this issue has been decided by the Tribunal confirming the order of CIT(A), assessing the income under the head of LTCG/STCG. When the order was confronted, Ld. SR-DR, Shri K. Madhusudhan relied on the assessment orders and he could not make any distinction in the order of Tribunal in the other assessees of the Group cases. 4. We have heard the rival contentions and gone throug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Details of Short Term capital gain Details of Long Term capital gain Income treated as business income 2000-2001 - 661024 849343 901762 2001-2002 81905 1143000 1224905 2002-2003 0 -992 1990 2003-2004 -307 0 307 2004-2005 0 1181054 1181054 2005-2006 35085943 2163121 37249064 2006-2007 3088938 1882402 4907340 We further find that the assessee has entered into the following numbers of scripts and number of transactions during the relevant years as under:- A.Y Number of Scripts Number of sale Transactions 2000-2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 125507 2005-2006 u/s15A 17.05.2007 35085943 2163121 610565 5. We find that in the case of HUF also the facts are exactly similar and the details of assessment and return of income are as under:- Asst. Year Date of Notice u/s.153C Date of filing Return Returned Income (Rs) Assessed income (Rs) Demand (Rs) Date of Notice Compliance 05-06 11-9-07 6-1107 3,86,030 3,86,030 1,24,227 27-11-2007 21-12-2007 06-07 11-9-07 6-11-07 28,81,720 27,81,720 7,48,437 22-11-2007 21-12-2007 We further find that the assessee-HUF has declared LTCG STCG as under:- Assessment year Details of Short Term capital gain Details of Long Ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81905 1143000 2850 2002-2003 31.03.2003 0 - 992 16489 2003-2004 30.09.2003 - 307 0 6097 2004-2005 10.09.2004 0 1181054 125507 2005-2006 u/s15A 17.05.2007 35085943 2163121 610565 Reference was made to the case of CIT vs. Reva Shanker A. Kothari 283 ITR 338 (Gujarat HC). In this decision, the Gujarat High Court had observed as under:- In order to determine whether profits arising on sale is business income, the following tests can be applied: (a) the first test is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of commercial transaction entered into with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in shares with a view to earn dividend income. Whenever any opportunity comes to the assessee for maximizing the wealth, it is only logical and rational to change the investment by selling the existing investment in shares and replacing it by a new investment. It is common knowledge that share marked is quite volatile and during the period relevant to the assessment year under appeal there was perceptible upswing in the market value of shares. Accordingly the assessee has to exercise his discretion as to whether at the right time and o getting a proper opportunity the existing investment should be encashed. By itself it does not establish or prove in any way that the assessee is a trader in shares. Further, in the case of the assessee the shares have been held for sufficiently long time and intention of the assessee was only to make investment which is proved from the fact that in the books of account and in the balance sheet, the shares were shown only by way of investment. Aggrieved, Revenue came in appeal before us. 7. We find that the Tribunal has dealt with the facts in para-3 of the order in other assessees of group cases (supra) as under:- 3. The facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to save investment from further loss. It was also explained by the assessees that they have borrowed funds for making such investment and used the same with the intention of acquiring return yielding investment. No interest has been claimed on the funds borrowed for making investment in shares. The assessee has referred to the CBDT Circular No.4/2007 for the proposition that the assessee can simultaneously earn income from trading in shares as well as capital gains from investment in shares so long as the assessee is clearly able to identify and demarcate the shares which are held for trading purpose from the shares which he has held as investment. The Assessing Officer considered the reply of the assessees and on the basis of his finding that the assessees have carried out number of transactions in selling and purchase in shares; that they have harrowed funds secured/unsecured which are interest bearing; looking to the holding period, held the activities of the assessee as not investment in share but trading in shares. He accordingly treated the same declared by the assessee as profit from purchase and sale of shares and treated them under the head business and not as long term/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value ? Former will indicate 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. (5) 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 investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorized in memorandum of association/articles of association ? Whether for trade or for investment? If authorized only for trade, then whether there are separate r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the revenue authorities in earlier years and, hence, it became important to analyse the facts of few earlier years. On considering the facts of the earlier years, the following conclusions emerged : (i) The facts of the year under consideration with regard to nature of income(s) earned by the assessee and the transactions were same in all those years, except transactions in F O segment in some of the years wherein this kind of activity was started by the stock exchange. (ii) Interest on borrowed capital had been allowed as business expenditure against the profit on jobbing activities shown by the assessee as business profit. (iii) The assessee had shown shares purchased on delivery basis as investment at the end of the year and no stock-in-trade existed on that date and the assessee had earned both long-term and short-term capital gains which meant the assessee had also held shares for the period of more than 12 months. [Para 8] Thus, the nature of activities, modus operandi of the assessee, manner of keeping records and presentation of shares as investment at the year end were same in all the years, and, hence, apparently, there appeared no reason as to why ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. It is further so because the payment of securities transaction tax is mandatory, i.e., whether an assessee earns the profit or not or suffers a loss and by imposition of such tax, the Legislature has not given any benefit to a class of transactions as a whole though it may result into an apparent benefit to individual(s) entering into those transactions. Thus, in the facts and circumstances of the instant case, on the basis of principle of consistency alone, the action of the revenue authorities was liable to be quashed. It was ordered accordingly and the Assessing Officer was directed to accept the claims of assessee in regard to short-term capital gain and long-term capital gain. [Para 8.1] Further, on the basis of merits also, in view of the ratio of the decision of Sarnath Infrastructure (P.) Ltd. s case (supra), it was held that the delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short-term capital gain or long term capital gain depending upon the period of holding. [Para 8.3] The revenue had also held that presentation in the books of account was not conclusive which may be true t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital assets and gains are dealt with under section 2(29A) and section 2(29B). Short-term capital assets and gains are dealt with under section 2(42A) and section 2(42B). 3. Trading asset is dealt with under section 28 of the Act. 4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 dated August 31, 1989, had brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of the assessees as well as for guidance of the Assessing Officers. 5. In the case of CIT v. Associated Industrial Development Company (P) Ltd. [1971] 82 ITR 586, the Supreme Court observed that (headnote) : Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and he should, in normal circumstances, be in a position to produce evidence from his records as to whether he ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade ; where the object of the investment in shares of companies is to derive income by way of dividends etc., the transactions of purchases and sales of shares would yield capital gains and not business profits. 10. The Central Board of Direct Taxes also wishes to emphasise that it is possible for a tax payer to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of sale and purchase of shares was same as in the preceding years and the same was to be accepted as shortterm capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock-in-trade. The mere magnitude of the transaction does not change the nature of transaction, which are being assessed as income from capital gains in the past several years. The Assessing Officer was to be directed to set off the long-term capital loss against the short-term capital gain of the year under consideration. [Para 7] In the result, the appeal filed by the assessee was allowed. [Para 9] 12. When we apply the principles laid down in the above judgments, we find in the present case that (1) The assessees did not have dealings in large number of scrips or large frequency of transactions which would warrant interference that they are traders; (2) In the books of accounts the assessees have never treated the shares as stock in trade and returns of income have been filed prior to the search showing them as investments and profit there from as capital gains; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he name of the assessees, the assessee are still dealing in shares as a trader. This can be done by them by showing that assessees are carrying out large frequency of transactions, creating an office, carrying out related organized activities and complying with other legal requirement of being a trader. In the present case the frequency of transactions are not so much to hold that the assessees are still traders even though shares are registered in their names. In the above two judgments namely Sarnath Infrastructure (P) Ltd v. ACIT (122 TTJ 216) and Gopal Purohit v. JCIT [(2009) 29 SOT 117 (Mum)], it has been held that assessee would be investor primarily if shares are registered by it in its name. Once there is no contrary material to hold otherwise, we would respectfully follow these decisions and hold that the assessees in the instant cases on hand have discharged the primary onus by getting the shares registered in their names and therefore, they can very well claim as investors. Since the case of the Revenue is based merely on suspicion and not on adequate material to show that the assessee is acting as a trader, we are unable to interfere with the order passed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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