TMI Blog2010 (7) TMI 1075X X X X Extracts X X X X X X X X Extracts X X X X ..... m capital gains amounted to ₹ 2,26,60,995/-. The AO was prima facie of the view that the short term capital gains declared in the return should be assessed as income from the business in shares and accordingly called upon the assessee to explain why it should not be so assessed. The assessee explained her return and contended that (a) she was only an investor and did not carry on any business in shares; (b) the details of the share transactions would make it clear that they were held as investments; (c) the assessee did not borrow any money for the purpose of investing in shares; (d) the assessee did not have the necessary experience and expertise in investment in shares and engaged the services of Portfolio Management Service Providers; (e) the assessee earned dividends out of the investments, most of which were held for more than one year. It was thus contended that the shares were held as investment and their sale gave rise only to short term capital gains. 3. The AO was not convinced by the assessee s explanation and he noticed the following features of the case: - (a) There were frequent transactions in shares including speculative transactions. There were 138 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not necessary that the assessee herself should be managing the investments was not relevant because during the year no investments were made through Portfolio Management Services. As regards the assessee s claim that the investments were earning dividends and most of them were held for more than a year, the AO observed that almost all the shares which gave rise to short term capital gains were purchased during the year except three shares which were sold prior to 30th September 2004. He observed that just because the assessee had some share holding as opening balance, it does not make all her activity during the year as investment activity. 5. In the course of the assessment proceedings the assessee again wrote a letter to the AO in which the following facts were brought to the notice of the AO: - (1) The services of well known professionals such as ENAM Group, Kotak Securities and Falcon Securities were employed for the purpose of making the investments and for such services separate fees were paid in addition to the normal brokerage. The decision to buy or sell shares was taken strictly as per their advice. (2) All the investments were categorized as investments an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determine the nature of the transactions. (ii) The motive or intention of the assessee is relevant and ordinarily a profit motive would indicate a business in the shares whereas an intention to invest and derive income therefrom would indicate that the surplus arising on the sale of the shares is a capital receipt. (iii) As recognized in the Circular of the CBDT (supra) it is possible for a taxpayer to have two portfolios, i.e. an investment portfolio and a trading portfolio and no single principle can be decisive to decide whether the surplus should be considered as business income or capital gains and it is the total effect of all principles that should be considered. (iv) All the shares, securities and mutual funds are reflected in the Balance Sheet of the assessee under the head Investments . (v) The assessee had two portfolios, one in investment portfolio and another a trade portfolio. All the purchases were classified as investments in the Balance Sheet. However, the assessee was not satisfied by merely investing in the share market, she was also dictated by the upward trends in the market and wanted to reap the profits with the result that she freque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in terms of value but the scrips held numbered only to 26 and thus the average holding in each scrip is approximately ₹ 45.00 lakhs. According to him such a huge portfolio amounting to ₹ 12,59,85,603/- consisting of only 26 scrips clearly shows that it is an investment portfolio only and the assessee never acquired these shares with a view to turning them into profit. Our attention was also drawn to the other investments in various tax saving bonds and equity mutual funds which totalled to only ₹ 3,79,80,707/-. The contention was that if the investments in tax saving bonds and mutual funds amounting to a much lesser figure can be considered as investments in the proper sense, it is all the more reason that the portfolio of 26 scrips aggregating to ₹ 12,59,85,603/- should be considered only as investment and not as stock-in-trade. Drawing our attention to page 17 read with page 30 of the Paper Book, it was the contention of the learned representative for the assessee that in all there were 49 transactions of purchases during the year aggregating to ₹ 24,55,92,694/- and the transactions of sales during the year amounted to 43 in number and the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is indulging in speculative transactions. (2) The assessee has not engaged herself in any futures and options transactions during the year. (3) In the assessment year 2004-05 (preceding year) and in the assessment year 2007-08 (a later year) the AO has accepted the assessee s claim that the sale of shares held in the investment portfolio has given rise to short term capital gains or long term capital gains as the case may be and these assessments were completed after scrutiny under section 143(3) of the Act. Our attention was drawn to page 192 of the Paper Book which contains a comparative statement of facts between the year under appeal on the one hand and the assessment years 2004-05 and 2007- 08. The attempt is to show that the facts in all the three years are the same and, therefore, a different treatment for the year under appeal is not justified. (4) The CIT took action under section 263 for the year under appeal to treat the long term capital gains derived by the assessee on sale of shares also as business income, but after considering the assessee s explanation the proceedings were dropped. The notice of the CIT dated 26th November 2009 and the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... high to contend that the activity is an investment activity. On the contrary such a high ratio is indicative of business. (4) The absence of borrowed funds for investment may be a relevant factor in deciding the nature of the activity but is not conclusive. (5) There is no finality attached to the earlier or later year s assessment though they were completed under section 143(3) because it is essentially a question of fact as to whether the assessee, going by the facts obtaining in the year of appeal, is an investor or dealer in shares. (6) In case the assessee s activity is held to be business activity, appropriate directions may be given to the AO to consider the expenses to be allowed against the profits. In support of the aforesaid submissions, the learned CIT DR cited the following authorities: - (1) Sir Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC) (2) G Venkataswami Naidu Co. vs. CIT (1959) 35 ITR 594 (SC) (3) Raja Bahadur Visheshwara Singh (Deceased) vs. CIT (1961) 41 ITR 685 (SC) (4) CIT vs. Prabhu Dayal (1971) 82 ITR 804 (SC) (5) Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) (6) CIT vs. Sutlej Cotton Mills Suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontained the list of the shares of the 26 companies held by the assessee. The Balance Sheet also disclosed ₹ 3,79,80,707/- as other investments which consisted mainly of bonds and mutual funds. There were no shares which were shown in the Balance Sheet or the Profit and Loss Account as stock-in-trade. Surplus received on the shares sold during the year were shown as either short term capital gains or as long term capital gains. So far as the long term capital gains is concerned, we have already seen that the AO did not dispute the nature of the gains and made no attempt to treat them as business profits. It is only with regard to the short term capital gains that he has taken a view that they represent business profits apparently because of the period of holding. If the average investment made by the assessee in one scrip is taken, it comes to around ₹ 45.00 lakhs as pointed out by the assessee, which appears to be too high for an individual to hold as stock-in-trade. The portfolio of the shares shows that many of the scrips are of blue chip companies, their shares in which are normally considered to be safe and sound investments. The list is attached to the Balance S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee that when the shares of Automo Cor were purchased on 25.11.2004 in three lots, they have to be treated as a single purchase transaction and similarly when the shares of the said company were sold on 29.11.2004 in three separate lots, they have to be taken as a single sale. It seems to us that this is a reasonable way of ascertaining the frequency of the transactions. This is the way in which the statement at page 30 of the Paper Book has been prepared from which it is seen that the transactions of purchases, counted month-wise, came to 49 in number during the year and transactions of sales reckoned in a similar manner came to 43 in number during the year. 12. It seems to us from the facts noted above that it is difficult to uphold the conclusion of the Departmental authorities that the assessee held the shares as her stock-in-trade. In the assessment year 2004-05 the assessee sold 30 scrips and earned capital gains of ₹ 1.05 crores, which was accepted by the AO as short term capital gains under section 143(3) of the Act. Similarly in the assessment year 2007-08 also the capital gains of ₹ 0.08 crores on sale of 24 scrips was treated as short term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X
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