TMI Blog2010 (9) TMI 1151X X X X Extracts X X X X X X X X Extracts X X X X ..... hese five appeals were heard together for the sake of convenience and are being disposed of through this common order. 2 Facts, in brief , as per relevant assessment order for the AY 2000-01 are that a search u/s 132 of the Income-tax Act , 1961 [hereinafter referred to as the Act ] was conducted in the group cases of Shri Himanshu J Shah on 22-09-2005. A warrant of authorization u/s 132 was issued in the name of the assessee also. Consequently, in response to a notice dated 22.5.2006 u/s 153A(a) of the Act , the assessee filed return declaring income of ₹ 2,21,020/- for the AY 2000-01 on 17.5.2007. Likewise returns were filed for the remaining assessment years also. During the course of assessment proceedings, the Assessing Officer[AO in short ]not iced that Shri Himanshu J. Shah and his following family members had entered in to transact ions in shares over a period of time, including during the period relevant to the A.Ys 2000-2001 to 2006-2007: Sr. No. Name Relationship with Himanshu J. Shah 1: Shri Himanshu J. Shah Self 2. Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (Rs.) Date of Notice Compliance 00-01 22-5-06 17-5-07 2,21,020 12,81,020 7,40,825 1-11-07 17-12-07 19-12-07 02-03 22-5-06 17-5-07 2,17,060 2,15,140 28,636 1-11-07 17-12-07 19-12-07 03-04 22-5-06 17-5-07 2,28,520 2,28,520 23,967 1-11-07 17-12-07 19-12-07 05-06 22-5-06 17-5-07 15,46,900 41,84,370 16,12, 471 1-11-07 17-12-07 19-12-07 06-07 22-5-06 17-5-07 32,76,320 37,08,740 10,23,761 1-11-07 17-12-07 19-12-07 3. On appeal, the ld. CIT(A) allowed the claim of the assessee in the following terms:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. DR, on the other hand, did not oppose these submissions on behalf of the assessee. 5. We have heard both the parties and gone through the facts of the case. We find that the ITAT vide their order dated 17.9.2009 in the group case of Himanshu J Shah others while adjudicating a similar issue, concluded as under : 11.1. Now we consider the relevant authorities on the subject. The issue whether transaction in shares should be treated as investment or treated as business and in what circumstances holdings should be treated as investment or as stock in trade, has been discussed in detail by the Tribunal, Lucknow Bench Sarnath Infrastructure (P) Ltd v. ACIT (122 TTJ 216). In that decision Tribunal has referred to the following judgement of the Courts. 1. Fidelity Northstar Fund, In re (2007) 288 ITR 641 (AAR) 2. Raja Bahadur Visheshwar Singh Vs. Commissioner of Income-tax (1961) 41 ITR 685 (SC) 3. Central India Agencies (P.) Ltd. Vs. Commissioner of Income-tax (1970) 77 ITR 959 (ALL) 4. Sarojini Rajah (Mrs.) Vs. Commissioner of Income-tax (1969) 71 ITR 504 (MAD) 5. Dalhousie Investment Trust Co. Ltd. Vs. Commissioner of Income-tax (1968) 68 ITR 486 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orandum of association/articles of association ? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice versa. (7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real. (8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment. (9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as investment at the year end were same in all the years, and, hence, apparently, there appeared no reason as to why the claims made by the assessee should not be accepted. However, the revenue authorities had taken a different view in the year under consideration by holding that principle of res judicata was not applicable to the assessment proceedings. There could not be any dispute on this aspect, but there is also another judicial thought that there should be uniformity in treatment and consistency under the same facts and circumstances and it was already found that facts and circumstances were identical, even though a different stand had been taken by the revenue authorities. In that view of the matter, the action of the revenue authorities in disallowing the claim of the assessee in the relevant year needed verification. In the process to find the answer, it was noted that there was a change in the scheme of taxation relating to short-term capital gains and long-term capital gains. Through the Finance Act, 2004, the Legislature imposed securities transaction tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the Legislature exempted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The revenue had also held that presentation in the books of account was not conclusive which may be true to some extent, but it is the most crucial source of gathering intention of the assessee as regards the nature of transaction and, in law, it is also so, i.e., such presentation reflects, prima facie, a view of the assessee on a particular subject and this principle was effectively applicable in a situation like that as compared to a situation where nature of expenditure or income is different in the books of account and in the return of income filed by the assessee wherein the specific provisions of the Act have to be considered over such presentation and if there exist no specific provisions, they are the commercial profits which have to be taxed and even in that situation, the assessee may be found to be justified in giving different treatment in the books of account as compared to return of income because of commercial considerations or accounting requirements. Hence, there was no substance in the finding of the revenue authorities in the facts of the instant case. The revenue authorities had also held that borrowed funds were utilized for making such investments wherea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... normal circumstances, be in a position to produce evidence from his records as to whether he has maintained any distinction between those shares which are his stock-in- trade and those which are held by way of investment. 6. In the case of CIT v. H. Holck Larsen [1986] 160 ITR 67, the Supreme Court observed (page 87) : The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This is 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) [2007] 288 ITR 641, referring to the decisions of the Supreme Court in several cases, has culled out the following principles (page 651) : (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxes also wishes to emphasise that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income. 11. The Assessing Officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The Assessing Officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. 12. These instructions shall supplement the earlier Instruction No. 1827 dated August 31, 1989. [F. No. 149/287/2005-TPL] 11.5. In another case Janak S. Rangwalla v. Assistant Commissioner of Income-tax, Range-12(2), the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments and profit there from as capital gains; (3) Even though money has been borrowed to invest in shares, neither the interest paid on borrowed money or security transaction tax has been claimed while computing capital gains; (4) The assessees have retained the shares for enjoying appreciation in value and not for the purpose of realization of profit. There is apparently no commercial motive which is an essential ingredient to be a trader. It is clearly shown by them in the returns of income filed that they are enjoying dividend income from holding shares as investment; (5) It is not shown by the Revenue that stock of shares have been valued at cost or market price whichever is low but they have valued at cost while computing the capital gains; (6) The assessees have apparently discharged the primary onus by keeping record of investment showing holdings only as investment and not stock in trade. The primary onus has not been rebutted by the Revenue. The case of the Revenue is thus based merely on suspicion and on number of transactions carried in one or two years though which are not frequent if we spread them on monthly basis as observed by us above; (7) Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere with the order passed by the learned CIT(A) which is quite elaborate, reasoned and based on judgments of Courts. 5.1 The view taken in the aforesaid decision has subsequently been followed by the ITAT in their decision dated 24-06-2010 in another group case of Smt. Hemangi Bankim Shah in ITA nos.2863 to 2865/Ahd/2008 for the AYs 2004-05 to 2006-07 and order dated 2-07-2010 in Bankim Jayantilal Shah others in ITA nos.2866 to 2874/Ahd/2008 and others for the AYs 2000-01 to 2004-05. 5.2 We may point out that the Hon ble jurisdictional High Court in CIT vs. Reva Shanker A. Kothari 283 ITR 338 (Gujarat ) laid down the following guidelines in order to determine whether profits arising on sale is business income:- The tests laid down by various decisions of the apex court indicate that, in each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction. Each case has to be determined on the total impression created on the mind of the court by all the facts and circumstances disclosed in a particular case. One of the principal tests is whether the transaction is related to the business normally carried on by an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can readily be drawn that the activity is in the nature of business. 5.3 In the light of view taken by the ITAT and the guidelines laid down by the Hon ble jurisdictional High Court in their aforesaid decisions as also in the light of CBDT circular, if we analyse the transactions in the instant case, we find that undisputedly, the assessee disclosed income from capital gains / dividends in earlier years and the shares have been treated as investments in the books of account/balance sheets. The ld. CIT(A) found that the transactions were on delivery basis and were not repetitive / numerous enough to warrant the conclusion that the assessee was trading in shares. This is evident evident from the following details: AY STCG returned LTCG returned Income held as business Number of scrips Number of sal ..... 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