Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2014 (2) TMI 1274 - ITAT MUMBAI

2014 (2) TMI 1274 - ITAT MUMBAI - TMI - Income from transaction of shares - short term capital gain or business income - Held that:- The CIT(A) after applying the proposition laid down in the various decisions as discussed above with respect to the facts of the instant case and also keeping in view frequency and continuity of transactions, it recorded categorical finding to the effect that profit earned in respect of four companies as discussed above amounting to ₹ 18,41,027/- was liable t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

re any interference. Accordingly, we do not find any infirmity in the order of CIT(A), which is being upheld. - ITA No.1033/Mum/2010 and ITA No.748/Mum/2013 - Dated:- 21-2-2014 - SHRI R.C. SHARMA, AM AND SHRI AMIT SHUKLA, JM. Assessee by : Shri S.C. Tiwari and Natasha Mangat. Revenue by : Shri Ravi Prakash ORDER PER R.C. SHARMA (A.M.) : These are the cross appeals filed by the assessee and Revenue against the order of CIT(A) dated 27th November, 2009, for the assessment year 2006-07 in the matte .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is an individual is a partner in M/s. Indoplast, a partnership firm. During the relevant assessment year under consideration, the assessee has shown income from futures and options operations and intra-day share transactions which were declared by him as his business income. The assessee has also shown short term capital and long term capital gain on purchase and sale of shares and units of mutual funds depending upon the period of holding. The short-term capital gains declared tor the relevant .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ctivity. The various sources of income of the assessee for the relevant assessment year was as under: Share from partnership firm (-) 8,601 Business income from F & O & Speculation 28,29,423 Short-Term capital gains 1,64,14,957 Long term capital gains 55,21,535 Interest from banks & others 1,87,217/- Dividend income 19,21,917 4. During the course of scrutiny of assessment, In order to ascertain the authenticity of short term capital gains on sale of shares, the AO called for various .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ee is a trader and not an investor of these shares/mutual funds. It was further observed that these shares had been held by the assessee not as an investor but as a trader so as to maximize his profits from repeated and multifarious transactions by merely using the cloak of investment activity. The Assessing Officer, also observed. that at the very outset of these transactions as per the details submitted, it appears that the short-term capital gains shown by the assessee, have proximate and rea .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

fact, in the nature of his income from business. In this regard he has, duly rebutted the submissions of the assessee making elaborate discussion, as per paragraphs 3.2 to 3.6 of the assessment order. The contentions of the assessee in this regard submitted before the AO are mainly on the following lines: i) out of total short-term capital gains of approximately ₹ 1.64 crores approximately ₹ 86.80 lakhs pertain to investment made is immediately preceding assessment year. The shares a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

income, it must be demonstrated that the intention of the assessee was not to hold the shares as his assets, and iv) different types of ratios viz. capital gain ratio, quantity ratio, number of transaction ratio, purchase cost ratio had been given in the reply so as to establish that the short-term capital gains may be assessed as such, v) the short-term capital gain and long term capital gain on sale of shares/mutual funds are in respect to his delivery based transactions and depending upon th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

AO. This according to the A R, shows that the assessee had intended to hold the shares for his investment purpose right from the beginning of the transaction, viii) the same treatment given in his earlier assessment years are accepted by the department, no material change in the method of accounting and manner of earning of the income is taken as during the relevant assessment year in comparison to his earlier assessment years, and ix) the shares held under investment portfolio are valued at cos .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

fication of the portfolio of short-term capital gains of the assessee, the AO has further observed that the assessee has entered into numerous, periodic, repetitive, voluminous transactions with great amount of regularity. He has undertaken 45 transactions involving 19 scripts in which holding period is less than 30 days. Number of shares/units of mutual funds purchase and sold are substantially large. The purchase cost incurred is in the vicinity of approximately ₹ 92.36 lakhs and sale pr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

so observed that for the entire year the number of shares/units dealt in are almost to the tune of 813519, the purchase cost of approx. ₹ 8.18 crores and sale proceeds of approx. ₹ 9.82 crores. The AO has also observed that frequency of transactions are as high as 34 transactions for Dharani Sugars and chemicals Ltd, 25 transactions for Dredging Corporation, 19 transactions for B.O.C India, 13 transactions for Cadila Health care and 15 transactions for Coromandel fertilizers Ltd. It .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ons of less than 60 days and 193 transactions of less than 90 days, undertaken during the relevant assessment year. He is also observed that on perusal of the portfolio of his shares held as shortterm capital gains, shows that there are multiple trades done in respect of shares/mutual fund units of single company or alternatively regular, multiple and frequent transactions across the board i.e. criss-cross transactions. According to the A.O., whenever an activity or transaction is periodic, syst .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rder) and accordingly, held that due to the following parameters the assessee is a trader in these shares: i) the substantial quantum of transactions undertaken, ii) immense number of frequency, volume and multiplicity, iii) criss-crossing of transactions (i.e. multiple trades done in respect of shares/mutual fund units of a singly company or alternatively regular, multiple and frequent transactions across the board,) iv) the fact that assessee is heavily relying on borrowed funds, v) the fact t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

earned business income out of sale of shares and assessee s claim of short term capital gain was declined. 6. Before the CIT(A), it was argued that the assessee was consistently engaged in the activity of share transaction for last number of years and he has consistently disclosed short term capital gain or long term capital gain in respect of his share transaction in which proper delivery was taken, depending upon the period of holding. It was further submitted that the assessee was consistentl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

from inception of the transaction, which shows that the assessee has always intended to hold those shares for the purpose of his Trading Portfolio or Investment Portfolio . Attention was also invited to the scrutiny assessment order of assessee framed u/s 143(3) for the assessment year 2005-06, wherein assessee s claim of short term capital gain as well as business income was accepted. 7. After considering the observations made by the Assessing Officer vis-à-vis, the contention of ld. Aut .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

trading activity. In this regard it was further argued that assessee is consistently engaged in the activity of share transactions for the last number of years It was submitted that the assessee has consistently disclosed short term capital gains or long-term capital gains in respect to his share transactions in which proper delivery is taken, depending upon the period of holding. Similarly, it was argued that the assessee Ham has disclosed this income, in respect to all his transactions, in wh .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

was also argued that the assessee has entered these transactions under the respective ledger accounts, right from the inception of the transaction, which shows that the assessee had always intended to hold those shares for the purpose of his "trading portfolio" or "investment portfolio". It was also argued that similar treatment given in his own case under identical facts and circumstances is already accepted by the AO, in scrutiny assessment u/s 143 (3) of the Act. for the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on different lots are considered as separate transactions by the A.O. instead of treating the same as a single transaction. It was forcefully submitted that due to market constraints it is not feasible to execute the bigger lots of sale and purchase orders in a single lot on a given date, therefore, such transaction are always undertaken through different lots as per the availability of the stock on a given date of sale or purchase. It was also submitted that separate details and accounts are ma .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ortfolio. The same pattern of method of accounting for disclosing his STCG or LTCG on identical facts and circumstances is already accepted and assessed by the AO in his earlier assessment years It was also argued that the closing stocks of all such shares are consistently valued on cost price while finalizing his final accounts. 2.2.1 According to the AR no interest is paid on borrowed funds, since the same is primarily taken from his related concerns. It was also submitted that the intention o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

at arose on sale of shares should be assessed as capital gains, and not as business income. 3.2 In respect of the shares held as investments as on 31/3/2005, which position has been accepted by the Revenue in the earlier year, it is submitted learned A.O. erred in rejecting the assessee s contention that qua those shares, the investment status cannot be changed unless the assessee himself either converts those shares into, or treats the same as, his stock-in-trade, as contemplated u/s. 45(2), an .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s before their sale. It is respectfully submitted that the character of shares would not undergo change depending upon whether the same are sold within 12 months or beyond. If shares are held on investment account, then merely because the same were sold within 12 months cannot by itself transform them into stock-in-trade. Such an inference would clearly run contrary to the very concept of the short term capital gain, which is enshrined in the Act. 3.3 While rejecting the assessee s contention qu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

r Kehar Singh CIT /1991/ 195 ITR 769 (Raj.) CIT vs. Neo Poly Pack (P) Ltd. [2000/245 ITR 492 (Delhi) CIT vs. Belpahar Refractrories Ltd., [1981/128/ITR 610(Ori) M.A. Namazie Endowment vs. CIT /1988/174 ITR 58 (Mad) CIT vs. Shree Nirmal Commercial Ltd./1994/213 ITR 361 (Bom)(FB) Turaben Ramanbhai Patel & Anr. Vs. ITO [1995] 215 ITR 323 (Guj) Dhansiram Agarwalla vs. CIT /1996/217 ITR 4 (Gau) In the context of the dispute whether the share transactions resulted in trading profit or capital gain .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

;s case (Supra), the Tribunal quoted the following passage from the judgement in Radhasoami Satsang (Supra): ...... Strictly speaking, res judicata does not apply to income tax proceedings- Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the or .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uly recognized by the statute in s. 2(47)(iv) read with s.45(2). The learned A.O., therefore, clearly erred in suo motu changing the status of those shares from capital asset into stock in trade and too without following the mandate of s. 45(2). 3.6 In view of above, it is submitted that as far the shares held as on 31/3/2005 are concerned, the profits that arose on their sale ought to have been assessed as capital gains notwithstanding the position that was emerged in the Financial year 2005-06 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e are looked in proper perspective, them it would be clear that there was no trading activity. The question whether a particular activity is in the nature of investment or trading would depend upon a number of factors, and there is no precise universal formula to determine the same. Therefore, it is a mixed question of law and fact to be decided on the factual matrix of each case. Various parameters like volume, frequency, regularity, motive/intention, period of holding, accounting treatment, su .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ely because volume is more or there are more frequent transactions, etc. 2.2.2 Therefore, on account of the above, the AR has submitted that in addition to the various case laws discussed above, this issue is now covered by the order of the Hon'ble ITAT. Mumbai in the case of Sh. Gopal Purohit (supra), decided in favour of the assessee and accordingly the AO may be directed to treat income realized on sale of all delivery based share transactions and mutual fund units as his STCG or L TCG, d .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

, as his business income and gains on purchase and sale of shares (in which delivery is taken), as his STCG or LTCG, depending upon the period of holding. Or in other words, the assessee has shown business income in respect of his non-delivery based shares or derivative transactions; whereas, he has shown STCG/LTCG on his delivery based share transactions. The assessee has maintained separate accounts of the respective share transactions in his books of account. He has maintained separate portfo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

igher in the relevant assessment year as in comparison to his earlier assessment years It is further observed that all the shares in which STCG is shown are covered u/s. 111A of the Act and accordingly the assessee has taken the delivery after paying necessary security transaction tax. According to the AR, although loan is taken but no interest is paid on borrowed funds utilized for his share trading activity. It was explained that most of the loan is taken from his own associate concerns i.e. M .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sessee. 2,3.2 From these specific facts brought on record as discussed above, I find that the case of the assessee is more or less identical to the facts reported in the case of Shri. Gopal Purohit (supra) relied on by the AR, except that in the case of the assessee for the relevant assessment year, he has entered into share transactions in certain scripts quite frequently, consistently and repeatedly i.e. the assessee has bought a particular share, then sold it to realize the gain in a short pe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

an one transaction in a quarter, during the relevant assessment year, to my considered opinion is the nature of a trading transaction. In normal circumstances, a genuine investor will not enter into repetitive transactions that too in the same script over and over again for more than four times in a year. Therefore, due to a repetitive transactions entered in shares coupled with the facts that the volume of transactions are very high, they are undertaken very frequently and consistently, althoug .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

4 of 2007, in which it is clarified that a person can have a trading portfolio and investment portfolio of shares at a given point of time, still due to this unique feature or facts noticed in the case in hand; whereby undisputedly, it is found that the assessee has dealt in or transacted in the shares of same company repeatedly or more than four times during the year, the surplus thereon, to my considered opinion cannot be treated as his capital gain or loss; rather the same is held to be In t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ealt in four such shares and in both these shares the repetitive transactions are carried out for more than 4 times during the relevant assessment year. This fact proves his intention of earning profit beyond doubt as held by the Hon'ble Apex Court in the case of Holock and Larsen (supra), even if he has taken delivery in those shares, and therefore, to my considered opinion the assessee is a trader in all those shares in which he has made repetitive purchase and sale for more than four time .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the AR, to my considered opinion is related to his business carried out in these shares and therefore, the loss or profit realized on these transactions cannot be held as his STCG or LTCG. The script wise details of all such transactions carried out by the assessee are enclosed as AnnexureA to this order. Therefore, in view of the same a net profit or surplus of ₹ 6,00,917/- pertaining to such share transactions undertaken in the shares/units of various companies viz. Coromandel Fertilize .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Therefore, based on these facts available in the case of the assessee and respectfully considering the various case laws relied on by the AR, I find that these peculiar facts are distinguishable to the facts reported in the recent case of Sh. Gopal Purohit (supra), heavily relied on by the AR. As per the facts reported in the said case, the issue before the Hon'ble ITAT was to decide whether the assessee's income on account of sale of shares are in the nature of short term capital gain .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

saction under taken are found to be substantial as available in the case of the assessee. On account of these facts, the Hon'ble ITAT after taking into consideration various citations, Board's circular and the arguments of the parties concerned has decided the issue in favor of the assessee relying on the order of Hon bleITAT Lucknow in the case of Sarnath Infrastructure Pvt. Ltd. Vs. ACIT (2008) 16 DTR 97(Lucknow), and held that as per the facts of the case, the assessee's claim of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ssee is rejected by the departmental authorities. The ITAT has further observed that the AO has taken a different view in the relevant assessment year holding that the principle of res-judicata is not applicable to the income-tax proceedings. According to the ITAT, there cannot be any dispute on this aspect, but at the same time, there is also another judicial thought, that there should be uniformity in treatment and consistency under the same facts and circumstances and accordingly since the sa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e legislature has imposed security transaction tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the legislature exempted LTCG under section 10(38) of the Act from the levy of taxation and on STCG, a concessional rate of tax at the rate of 10% was introduced subject to the condition that the transactions resulting into these type of gain must have suffered the burden of securities transactions tax. This according to the Hon'ble ITAT has prompted th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Thereafter, the Hon'ble ITAT has briefly discussed and relied on the case of Sarnath Infrastructure P.Ltd. Vs. ACIT (Supra) decided by the Hon'ble ITAT, Lucknow Bench and on account of identical facts reported in both the cases, has held that all delivery based transactions are in the nature of investment and all non delivery based transactions under taken by the assessee are in the nature of business transaction. The specific findings of the Hon'ble ITAT as recorded paras 8.3 to 9 r .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of delivery and second activity is purely of jobbing (without delivery), which puts the assessee's case on a more strong footing. Hence, in our view, the ratio of this decision is squarely applies to the facts of the present case. Accordingly, we hold that the delivery based transaction should be treated as of the nature of investment transaction and profit therefrom should be treated as short term capital gain or long term capital gain depending upon the period of holding. 8.4. The Revenue .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ks of account and in the return of income filed by the assessee wherein the specific provisions of I.T. Act have to be considered over such presentation and if there exists no specific provisions, it is 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. In the case of Karam Chand Tha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ch investments whereas in earlier years, interest on such loans has been allowed as business expenditure against profit on shares trading transactions shown as business income and in the year under consideration also, no nexus between tile interest bearing funds and investment has been established, hence, for this reason also, we find no merit in treating the long term capital gain and short term capital gain as business profits. 8.5 The learned counsel for the assessee has also contended that i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

other tools to keep a tract of the developments which are happening on day to day basis and which may happen in the near future and for this, he may have assistance of the financial planner or investment consultant, or may by his own expertise and capabilities to do it on his own, hence, in our view, employment of such infrastructure cannot turn an investment activity into a business activity. We may also add that assessee has also raised various other contentions, which, in our opinion, need n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

3.4.Similarly, in the case of Addl. CIT vs. Shri. Sunder Iyer in ITA No. 295(Mum.) of 2001, the Hon ble Jurisdictional ITAT has held under similar facts and circumstances as under:- "The assessee might have good knowledge of the share market as a broker but, in our opinion, this does not lead to the conclusion that the assessee would only be purchasing shares as stock-in-trade for the purpose of carrying on business. There is no law which prevents the share broker from making investments in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

6, the Hon ble Supreme court has observed on this issue as under:- "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 it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained only distinction between those shares which are its stock-in-trade and those which are held by way of investment."(Emp .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ture of transaction. Similar transactions of sale and purchase of share in the preceding years have been held to be income from Capital Gains both on Long Term and Short Term basis. The transaction in the year under consideration on account of sale and purchase of shares is same as in the preceding years and the same merits to be accepted as Short Term Capital Gains. There is no basis for treating the assesses as a Trader in shares, when his intention was to hold the shores in Indian companies a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d that for determining whether the person was a dealer or investor in shares, the real question was whether the first step i.e. purchase of shares was taken as in the case of a trading transaction. If that be so, the profit there from would be of the nature of business profit and if not so, the profit there from would not be treated as earned by the trader. Therefore, according to the Hon'ble Supreme Court, the basic intention of the assessee at the time of purchase of the share is the guidi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s exempted from tax u/s. 10(38) of the Income-tax Act, 1961, and short term capital gain on sale of shares is subjected to a concessional rate of tax i.e.@10%. The payment of security transaction tax is made mandatory irrespective of the profit of the assessee or loss suffered by the assessee. To appreciate the new concept of STT and consequent changes brought in taxation of capital gains, it would be pertinent to reproduce the speech of the Hon bleFinance Minister made in the Parliament, while .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rities transactions. Our founding fathers had wisely included entry 90 in the Union List in the Seventh Schedule of Constitution of India. Taking a cue from that entry, I propose to abolish the tax on long-term capital gains from securities transactions altogether. Instead, I propose to levy a small tax on transactions in securities on stock exchanges. The rate will be 0.15 per cent. of the value of security. Thus, a transaction involving securities valued at, say, ₹ 1,00,000 will now bear .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ting long term capital gains and imposing flat tax rate of 10% on short-term capital gains. The revenue lost by exemption of long-term capital gains and concessional taxation of short-term capital gains was more than made up by levy of STT. Therefore, by imposition of such tax, the legislature has not given any benefit to a class of transaction as a whole though it may result into an apparent benefit to individuals deriving long-term or shortterm capital gains. It is worthwhile to mention that p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nt that the AO has taken a different stand merely because there was a change in the scheme of taxation relating to STCG and LTCG made effective through the finance Act, 2004, the legislature has imposed security transaction tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the legislature exempted LTCG under section 10(38) of the Act from the levy of taxation and on STCG, a concessional rate of tax at the rate of 10% was introduced subject to the condi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

erely on account of change in law, the advantage provided to the assessee cannot be taken away by the AO in the manner and in the circumstances as held in the assessment order. 2.3.10. As regards the reliance placed by the AO on various cases discussed in the assessment order, it is now settled that no universal criteria can be laid down to decide the controversy of capital gains vs. business income on sale of shares. There are several judgments for and against the assessee. Each of these judgme .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

leBombay bench of ITA.T. in the case of J.M.Share & Stock Brokers Ltd. Vs . J.C.I.T. (I.T.A. No.2801/Mum/2000), has held that an assessee can be an investor as well as a broker and shares-trader. So long as the account of the shares held as stock-in-trade and shares held as investment are recorded separately, profit/loss there from is clearly and distinctly identifiable and the practice of holding some shares as stock-in-trade and some shares as investment is consistently followed, the profi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Sh. Janak S. Rangwala( Supra), as discussed above has held that mere large volume of shares cannot be the sole criteria for deciding if the gains should be assessed as business income or capital gains. The Hon'ble Supreme Court in the case of C.I.T. Vs. H. Holck Larsen (160 ITR 67), as discussed above has held that there is nothing in an investor frequently churning his portfolio to protect his investment and realize appreciation. The Hon bleMumbai Bench of I.T.A.T. in the case of Gopal Pur .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n share trading as well as share investment. The profits from trading operation were assessed as business income and the gains from investment were brought to tax as capital gains. 2.3.11. Therefore, in view of the aforesaid discussion, the following points or facts emerge in the case of the assessee: (i) the assessee has maintained two portfolios of share transactions i.e delivery based share transactions and non-delivery based share transactions (F&O and intra-day share transactions), and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

at cost price in respect of the shares held in his investment portfolio and at the lower of cost or market price, in case of the shares held in his trading portfolio, (iv) during the relevant assessment year, his main business is dealing in various stock market related activities of purchase and sale of shares, mutual fund units, derivatives, speculation in securities, investments in various securities etc" (v) the profits/surplus/loss realized on sale of shares is assessed accepting the s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tain shares/units viz. Coromandel Fertilizers Ltd, and Dharani Sugar & Chemicals Ltd., Dewan Housing Finance Ltd & Heritage Foods Ltd. in which the assessee has shown STCG are frequently and repeatedly transacted, as if the assessee is a trader of these shares, and (viii)considering all other facts as seen and discussed above, the facts available in the case of the appel1ant are found to be more or less identical to the facts reported in the case of Sh. Gopal Purohit (supra), decided by .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

background and further considering to the facts of the case and the position of law as discussed above, I am of the considered opinion that to a large extent the facts available in the case of the assessee, are identical to the facts reported in the case of Sh. Gopal Purohit (supra) decided by the Hon'ble jurisdictional ITAT. However, due to the unique or distinguishable facts particularly on account or his repetitive transactions of sale and purchase of the same shares as discussed above, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

transactions undertaken in this year as discussed above resulting into these repetitive share transactions of a particular company for more than four times, considering the amount of capital employed to my considered opinion is a clear-cut case of trading in those shares irrespective of the fact that delivery is taken in these shares. It cannot he said that the assessee is an investor in these shares, merely because he has taken delivery of these shares; because, the assessee has persistently a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

io decided by the Hon bleSupreme Court, to the peculiar facts available in each case to be decided. It is also settled that a single criteria will not decide the issue but the overall effect thereof is to be considered and applied accordingly. Further, it is also settled that a person can hold two portfolios of shares transactions for his investment and trading purposes at the same point of time. Therefore, on account of the same and trading purposes at the same point of time. Therefore, on acco .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng the year, as discussed above. Accordingly, as per Annexure-A enclosed to this order, STCG shown by the assessee on this account is directed to be assessed as his business income and the balance capital gains assessed by the A.O. as business income is directed to be assessed as his STCG or LTCG depending upon the period of holding. 2.3.13. Therefore, on account of the above, the claim of the assessee to consider the gains/surplus on purchase and sale of shares held as investment pertaining to .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

amounting to ₹ 18,41,027/- is confirmed, and the balance addition made is directed to be deleted. The AO is accordingly, directed to rework out the STCG/business income of the assessee, as discussed above. 2.3.14 During the course of appeal, the AR, as discussed above has raised an alternative ground submitting that in case his main ground of appeal is not fully considered, the assessee may be given the benefit of re-casting of his trading account pertaining to his share transactions on wh .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

onable to accept the said alternative ground of the assessee, in respect to these shares of Coromandel Fertilizers Ltd. and Dharani Sugar & Chemicals Ltd. Dewan Housing Finance Ltd & Heritage Foods Ltd., the gain thereof is assessed as his business income. The AR's demand for recasting of the trading and P&L account, is therefore, found to be reasonable and justified as well as within the provision of the Act. Accordingly, while giving effect to this order, the AO is directed to .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of these shares, as shown in Annexure-A, if held as part of his opening stock as on 31.03.2005, shall be computed by invoking the provisions of section 45(2) of the Act, at the time of its sale, treating that the assessee has converted these shares from his investment portfolio to stock-in-trade as on 01.04.2005, i.e, at the beginning of the relevant assessment year. Or in other words at the time of sale of these shares capital gains will be worked out adopting the market value of the respective .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

plus irrespective of the fact, whether the same is LTCG or STCG, shall be assessed as his business income, and 2.3.15 Therefore, on account of the aforesaid discussion, the action of the AO treating the STCG of the assessee amounting to ₹ 18,41,027/- as his business income is confirmed, and the balance capital gains assessed as business income is directed to be assessed as his STCG instead of business income, for the relevant assessment year. The addition made to this extent on account of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Representative that the assessee was consistently disclosing short term capital gains or long term capital gains in respect of his delivery based share transactions, depending upon the period of holding. Similarly, the assessee has disclosed business income in respect of shares acquired with the intention of trading therein. Thus, as per ld. Authorized Representative, the assessee was consistently having two portfolios of share transaction one for his investment purposes and another for his tra .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

w of the fact that similar treatment was given in the earlier assessment year 2005-06, under scrutiny assessment, wherein facts were same as in the instant assessment year under consideration. As per ld. Authorized Representative, merely based on volume of transactions and its frequency will not make the assessee a trader of these shares. Our attention was invited to the fact that number of transaction of a particular script on a given date, it carried on different lots were considered as separa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Tribunal order. 10. On the other hand, learned Sr. DR contended that there was high volume and frequency of transaction and continuity in the purchase and sales of shares, the AO justified by treating the gain as business income. He further relied upon the decision of ITAT Mumbai Bench in the case of Smt. Sadhana Navera, 41 DTR 393. Reliance was also placed by learned DR on the decision of coordinate bench of ITAT in the case of Jayshree Pradeep Shah, 131 ITD 326. 11. Rival contentions have bee .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

intention of the assessee while purchasing the shares, as to whether the same was acquired for holding as investment or for doing business therein. The treatment given by the assessee in its books of account is also one of the decisive factors to find out whether the shares were held as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nt cases before us, we found that the assessee has invested in shares of Indian Companies in earlier assessment years, which is clear from the statement of shareholding of the assessee, such treatment of capital gains was accepted by the department and there is no material change in the method of accounting and manner of earning of income during the year under consideration as compared this earlier years Thus, the fact of the assessee investing in shares in earlier years is not in dispute. There .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

out of sale of shares could easily be treated as business income. Assessee had not valued the shares as stock but valued the same as investment. Thus, what was a capital asset will remain a capital asset unless a person holding the asset himself changes the nature by a specific action like conversion of capital asset into stock in trade. In the instant cases before us, the assessee has not treated the investment in equity shares of Indian Companies as stock in trade. In view of the decision of H .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the same facts and circumstances is the fundamental of judicial principle, which cannot be brushed aside without proper reasoning. In this regard, reliance can be placed on the decision in case of S.M.K. Shares and Stock Broking Private Limited, I.T.A.No. 799/Mum/09 order dated 24.11.2010. For this proposition, the decision of Hon'ble Supreme Court in the case of Gopal Purohit, 228 CTR 582, is very much relevant and important. From the record, we found that assessee was investing in shares .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

elivery based transactions are shown as his business income. The assessee has maintained separate ledger accounts. Transactions were recorded separately at the time of purchase of shares. In respect of shares held as investment assessee had valued the same at the year end at cost and in respect of shares held in is trading portfolio, he has valued the same at cost or market price, whichever is lower. In the assessment year under consideration the assessee had consistently followed the same syste .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uency of transactions in respect of each and every share and found that in respect of transactions in shares of Coromandel Fertilizers Ltd., Dharani Sugar & Chemicals Ltd., Dewan Housing Finance Ltd & Heritage Foods Ltd., frequencies were more and transactions were entered repeatedly as if the assessee was a trader in shares. The CIT(A) discussed various judicial pronouncements and the guidelines laid down therein with regard to treatment of gains arising out of sale of shares. The CIT(A .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

(STT) on the sale & purchase of shares and other derivative transactions. The CIT(A) also discussed the exemption brought in under Section 10(38) in respect of LTCG and levy of taxation on STCG at the concessional rate of tax of 10% by this Finance Act. The CIT(A) observed that along with these amendments, the Revenue has also levied security transaction tax to the effect that only after a suffering the burden of security transaction tax, such gain was held to be exempt or liable to lower ra .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cy in the treatment of profit arose on similar transaction of sale and purchase of shares. The CIT(A) also considered volume, frequency and continuity of transactions, average holding period in respect of each and every shares entered into by the assessee during the year under consideration. The CIT(A) found that no interest was paid on the amount borrowed from associates. The CIT(A) had also considered different ratios viz. capital gain ratio, quantity ratio, number of transaction ratio, purcha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ares. Likewise, in the case of sales, the same may be divided as per the requirement of the purchaser at stock exchange; The fact that in all the preceding years, where the assessee had liquidated his investment in equity shares in Indian Companies, the Department has accepted the position except the assessment year in question, wherein the Department treated the gain from purchase and sale of shares as business income. The decision to dispose of investment at a short interval is being taken by .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 had all the rights to dispose the investment to reap the maximum benefit when the prices of scripts are high so as to earn better gain. It is true that frequency and volume of transaction is one of a gu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the AO is accepted, then it would be against the legislative intent itself. Here, it is pertinent to mention the intention of Government for introducing the security transaction tax and exempt the long term capital gain earned from sale of shares and levying 10 % tax on short term capital gain and earned on sale of shares. It is noted that under the old provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities were charged to tax either as long te .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rm 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 Fi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cognized stock exchange in India. This tax is collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The provisions relating to the securities transactions tax are contained in Chapter VII of the Finance (No.2) Bill, 2004, and came into effect from 01.10.2004. Further, clause (38) has been inserted in section 10 of the Income-tax Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. A new secti .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

transactions subjected to STT; concessional tax rate of 10% (which has been increased to 15% from AY 2009-10) are applicable in respect of STCG whereas no tax is chargeable in respect of LTCG. It is also noted that the CBDT vide its Circular no.4/2007, dated 15.06.2007 has also recognized possibility of two portfolios, i.e. one 'Investment portfolio' comprising of securities which are to be treated as capital assets and the other 'Trading portfolio' comprising of stock in trade w .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

before us, the CIT(A) has appreciated not only frequency of transaction but also period of holding and thereafter recorded a finding to the effect that except transaction in case of four companies the profit so arose were liable to tax as capital gains keeping in view the holding period, frequency of transaction etc. Thus, the facts of the case cited by the learned DR are distinguishable from the facts of the instant case. 11.2 We have gone through decision in the case of Jayshree Pradeep Shah .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

frequency and continuity of transactions in each shares dealt with by the assessee vis-à-vis antecedents of the assessee and the stand taken by the department in earlier year and reached to the conclusion that except transaction in shares of four companies, as discussed in his appellate order, the balance gain was liable to be taxed as capital gains. 11.3 After considering the findings recorded by the CIT(A), we found that single criteria will not decide the issue but the total effects i. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ons undertaken repeatedly and consistently for more than four times during the year, as discussed by the CIT(A). After discussing all the factors, the CIT(A) has recorded a categorical finding that in respect to number of transactions and frequently transaction in respect of shares of these four shares as per Annexure-A enclosed with his appellate order, which was directed to be assessed as business income. In respect of balance of gain arising on delivery based transactions were treated as STCG .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he assessee had been consistently investing in shares and income arising from delivery based transaction of sale and purchase of shares had been shown as capital gains i.e. LTCG and STCG depending upon period of holding. Analysis of balance sheet of assessee reflects holding of shares as investment. In the case of Gopal Purohit, 228 CTR 528 (Bom), SLP was filed by the Department against the decision of Bombay High Court and the same was dismissed by Hon'ble Apex Court vide order dated 15.11. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is capital gains or business profit. 12. Even the Hon'ble Apex Court in the case of K.P. Verghese Vs ITO, 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 a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the Finance Ministers Speech can be relied upon to throw light on the object and purpose of the particular provisions introduction by the Finance Bill has been recognized by this Court in K.P. Verghese - vs ITO 1981), 131 ITR 597 (SC), at 609. Again in the case of R & B Falcon (A) Pvt. Ltd vs CIT (2008) 301 ITR 309 (SC), it was held that (Page 323):- Rules of executive construction in a situation of this nature may also be applied. Where a representation is made by the makers of legislation .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s there is a material change in facts, meaning thereby, there must be material change in the facts. 14. The Indore Bench of the Tribunal in the case of ACIT vs Om Prakash Suri (supra) held as under:- 3. We have considered the submissions put forth by the learned Senior DR and also perused the material available on record. Brief facts are that in the past the assessee was engaged in road building contractor and was deriving income from contract receipts as well as from sale of gitti and during th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e 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 ₹ 49,81,915/- as business .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s. Before the learned Commissioner of Income Tax (Appeals) the assessee also filed a detailed note on the purchase process for delivery base shares, details of dividend received on the basis of relevant statements by placing reliance on the decision of the Mumbai Bench of the Tribunal in the case of JM Shares & Stock Brokers v. JCIT dated January, 2009. Briefly, the claim of the assessee before the learned Commissioner of Income Tax (Appeals) was that the delivery based transactions were mad .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

or a tax payer to have two port folios i.e. an investment port folio comprising of securities which are to be treated as capital asset and trading port folio comprising stock in trade which are to be treated as trading asset, was considered. The Board further clarifies that no single principle would be decisive and the total proposition needs to be considered. The assessee has maintained only one port folio and claimed that to be an investment folio. Undisputedly, the period of holding is less t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hantilal M Jain vs ACIT vide order dated 27-04-2011 (ITA No. 269/Mum/2010) held that despite large volume of shares transactions, the Assessing Officer cannot ignore the rule of consistency to treat the gains on sale of shares as STCG. In that case, the assessee was engaged in the business of trading in shares and also investment in shares and securities offered ₹ 1.54 crores as short term capital gain and ₹ 2.91 crores from long term capital gain. The long term capital gain was acce .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 holds the shares in his books as investor, no interest was paid on the funds. The decision in the case of Janak S Ranawala, 11 SOT 627 (Mum.) further supports the case of the assessee. Likewise, the decision from Hon'ble Madras High Court in CIT vs N.S.S. Investment Pvt Ltd. 227 ITR 149 (Mad), CIT .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tment portfolio. During hearing, it was also explained by the learned Counsel for the assessee that accounts were maintained by the assessee in two separate capacities i.e. trader and investor and never treated the same as holdings of shares as stock in trade which clarifies the intention of the assessee. This assertion was not controverted by the Revenue. 16. The Board Circular No. 4.2007 dated 15-06-207 also emphasizes that it is possible for a tax payer to have two portfolios namely, an Inves .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

989 was supplemented 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 shoul .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version