TMI Blog2010 (3) TMI 1129X X X X Extracts X X X X X X X X Extracts X X X X ..... t be treated as business transactions and that the profits must be assessed as business profits and not as short term capital gains. However, the securities transaction tax paid by the assessee is allowable as a deduction under section 88E, while computing the business profits. AO is directed to ascertain the details of the payment, if any, and allow the same as a deduction. Similarly, the AO is also directed to examine and take an appropriate decision vis-a-vis the assessee s plea that the AO ought to have considered the stock on hand also, instead of taking into account only the shares which were sold, consistent with his view that the assessee is carrying on business in shares. The assessee shall be given sufficient opportunity to adduce evidence in support of this alternative plea which shall be considered by the Assessing Officer before taking a decision on this alternative plea. Thus, the first six grounds are partly allowed. Computation of the total income - adjustment of the future and option loss while computing the total income - whether loss suffered in trading derivatives cannot be considered as speculative loss? - HELD THAT:- In the Special Bench case of Shree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t price only because she had held those shares on investment portfolio and that all these facts, cumulatively considered would point to the conclusion that the assessee sold the shares as investor and not as stock-in-trade. In addition, it was also pointed out that the assessee was not a trader in shares as can be seen from the fact that there were not too many transactions of high frequency and that even the sale proceeds of the shares were invested in fixed deposits which would not have been the case if the assessee had held those shares as stock-in-trade. It was submitted that the yardstick adopted by the assessee was that she should enjoy reasonable returns on the investment and for this purpose it was the interest payable on the fixed deposits that were considered by her to be the yardstick. It was also pointed out that the assessee did not borrow monies for the purpose of acquiring shares and this is sufficient indication that the shares were held only as investment and not as stock-in-trade. 3. The Assessing Officer did not accept the assessee s submissions. He rejected the same and came to the following findings:- a) From the details filed by the assessee, it is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s arising from this activity should be assessed under the head income from business or profession and not as short term capital gains as claimed by the assessee. In this view of the matter, he computed the profits at ₹ 25,55,597/- and brought the same to tax as business income. 4. The assessee appealed to the CIT(A) and took up several contentions including the contentions which she took before the Assessing Officer. It was also pointed out that the assessee purchased shares from both primary and secondary markets and wherever delivery of shares was not taken, the profits were shown as speculative gains. In addition, it was pointed out from the financial statements that the assessee was in receipt of dividend of ₹ 33,586/- from shares held as investments. As regards the period of holding the shares, on which strong reliance had been placed by the Assessing Officer to defeat the assessee s claim, the assessee submitted before the CIT(A) that during the year ended 31.03.2005, there was a bullish trend in the share market and an investor in shares could get good returns in a few days time and therefore the assessee was able to switch her investments instead of holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in shares. There is also a prior association of business and a systematic course of business operations. The assessee has all the qualities of a trader in shares, which she has acquired over a period of time. These qualities are the ability to assess risk uncertainties and foresightedness to visualize the trends in the share market. These qualities acquired by the assessee over a period of years have paid rich profits which are attributable only to the business acumen of the assessee and not to any investment made by her. In the light of the above findings, the CIT(A) endorsed the decision of the Assessing Officer that the gains on the sale of shares should be assessed as business income subject to the normal rates of tax and not as short term capital gain assessable to concessional rate of tax of 10% under the provisions of section 111A. 6. The assessee is in further appeal before the Tribunal to repeat and reiterate the contentions raised before the income-tax authorities and to draw our attention to the relevant pages in the paper book consisting of 90 pages in support of the contentions. In addition to the contentions already taken before the departmental authorities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 23,34,776/- taken from him. No interest was also charged on the loan of ₹ 5,50,400/- taken from HUF of Ashok Khandelwal. The ledger accounts of these parties are placed at pages 16 17 of the paper book and they also show that no credit has been given towards interest. It is thus submitted that one of the basic traits of carrying on business, namely, borrowing monies for interest, is missing and therefore surplus on the sale of shares cannot be considered as profits of the business. 7. In addition to the above arguments, the learned representative for the assessee also drew our attention to certain omissions made by the Assessing Officer, first being that he did not initiate any penalty proceedings under section 271B which he would have if he had considered the sale of shares as forming part of the assessee s business, because under section 44AB of the Act, if the gross sales from the business exceeds ₹ 40 lakhs, the assessee is bound to get the accounts audited which was not done. The argument is that since the Assessing Officer did not levy any penalty, it must be assumed that he did not consider the sale of shares as business transactions. The second omission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring shares should be capitalized along with the cost of acquisition of the shares. The other decision relied upon was that of the order of the Lucknow Bench of the Tribunal in the case of Saranath Infrastructure(P) Ltd. Vs. ACIT., (2009), 120 TTJ 216. In this case also, according to the learned representative for the assessee, the Tribunal held that the surplus on sale of the shares should be treated as capital gains even though the assessee was carrying on business in share dealings, since it was permissible for an assessee to hold shares both as stock-intrade and as investment. These three authorities were strongly relied upon on behalf of the assessee in support of its claim. 9. The learned representative for the assessee has also filed certain details called for by us during the hearing under cover of letter dated 21st January, 2010 and these have also been taken into consideration by us. Basically these are details of share investments on the cut off date of 31.03.2005 giving market valuation on that date, statement giving details of short term capital gains giving the actual date of purchase of shares so that the period of holding can be ascertained and connected details. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT., 35 ITR 594 2. CIT Vs. Associated Industrial Development Co. Ltd., 82 ITR 586 3. CIT Vs. Sutlej Cotton Mills Supply Agency Ltd., 100 ITR Besides, he pointed out that both in the cases of Gopal Purohit (supra) and Sarnath Infrastructure (P) Ltd.(supra), relied upon by the assessee, the shares were held for two or three years before being sold which would probably indicate the intention to hold the shares rather than turn them into profit, which feature was missing in the present case, where the shares were held only for a few months. He thus pleaded that the orders of the departmental authorities should be upheld. 12. On a careful consideration of the rival contentions, we are of the view that no strong grounds have been made out by the assessee to disturb the conclusion of the departmental authorities. There is no dispute that the assessee was carrying on business in shares in the past. As stated by her she has also been indulging in speculation in shares in the past four years and has disclosed speculation profits. Her case however is that she held some shares as investment and also showed them as such in her balance sheet and the profit on the sale of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Baroda, she merely acquired 10 shares at ₹ 100/- each at a total cost of ₹ 1,000/- on 19.9.2003 and sold them on 28.12.2004 for ₹ 2,289/-, thus reaping a profit of ₹ 1,289/-. In the case of shares of Bank of India, she invested only ₹ 1500/- on 29.3.2003 to buy 30 shares @ ₹ 50/- each and sold them on 28.12.2004 for ₹ 92.27 per share, enjoying the profit of ₹ 1,268/-. Similar features are exhibited with regard to the shares of other banks and also shares of ONGC, SKF Bearings and Tata Vashisti. This is the case in respect of shares which the assessee held for more than one year. In respect of the other shares the frequency of the transactions and their volume judged in the background of the assessee s business gives us an impression that the assessee did not intend to acquire the shares as investment. We may clarify that the assessee may not have paid interest on the amounts borrowed from her husband and his HUF, but the fact remains that she had borrowed monies. It would be somewhat unusual to say that a person would be making investments out of monies borrowed; the word investment would make sense only if the monies belong to one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng funds and the investment in shares. In the present case, it may be recalled, the assessee has not disputed the position that borrowed funds, though not bearing any interest, were used to acquire shares and we have dealt with this aspect earlier. The findings of the Tribunal are contained in paragraph 8 onwards of the said order, but we were unable to locate the finding that frequency of transactions, unless they are in the same scrip or share, is not indicative of a business motive. Each case has to basically turn on its own facts and circumstances, especially in cases of those type where it is a question of gathering the intention of the assessee. We should resist the temptation to match the colour of one with the other. From paragraph 5.3 of the order cited above, we find that it was no doubt contended before the Tribunal that frequency of the transactions should be seen scrip-wise and not on the basis of shares of various companies and if this is done there was little frequency in the transactions of purchase and sale of shares by the assessee in that cases. However, we do not find any finding recorded by the Tribunal on this argument advanced on behalf of the assessee. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o stock-in-trade. In the same decision, the Supreme Court has held that the Tribunal had found that the sale proceeds of the bonus shares were received in the course of and as part of assessee s business in shares and therefore, they were taxable as revenue receipt. What is relevant however in this case is that the Supreme Court held that there is no presumption that every acquisition by a dealer in a particular commodity is an acquisition for the purpose of his business and it is possible that he may acquire the commodity in which he is dealing for his own purposes and hold it apart from stock-in-trade. However, in each case the question is one of intention to be gathered from the evidence or conduct by the acquirer and his dealings with the commodity. If this test is applied to the present case, as we have already seen, the facts and surrounding circumstances clearly point to the conclusion that the assessee only intended to trade in shares and not to hold them as investment. The judgement of the Madras High Court in Trishul Investments Ltd.(supra) also does not further the assessee s case. That was a case where the assessee was in the business of investment in shares and had exh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n appropriate decision visa- vis the assessee s plea that the Assessing Officer ought to have considered the stock on hand also, instead of taking into account only the shares which were sold, consistent with his view that the assessee is carrying on business in shares. The assessee shall be given sufficient opportunity to adduce evidence in support of this alternative plea which shall be considered by the Assessing Officer before taking a decision on this alternative plea. Thus, the first six grounds are partly allowed. 19. Ground nos. 7 8 are to the effect that the income-tax authorities ought to have adjusted the future and option loss of ₹ 4,38,831/- while computing the total income since the loss suffered in trading derivatives cannot be considered as speculative loss. 20. In the Special Bench case of Shree Capital Services Ltd. Vs. ACIT., (2009) 318 ITR (AT) 1(SB) it was held that clause (d) of section 43(5) is prospective in nature and will be applicable to assessment year 2006-07 onwards. This appeal relates to the assessment year 2005-06. The Special Bench decision is therefore in favour of the revenue. The loss in futures and options will therefore be specul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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