TMI Blog2018 (3) TMI 1030X X X X Extracts X X X X X X X X Extracts X X X X ..... as investments, much prior to the introduction of concessional rate of tax in the statute pursuant to levy of STT. We also find from the perusal of the audited financial statements, the assessee has got sufficient own funds at its disposal which were used for making investments and no part of the borrowed funds were used for making investments. The trading transactions disclosed by the assessee comprised of 96 scrips (trading in shares) and 269 scrips (trading in derivatives) for the Asst Year 2006-07. The profit derived from these trading transactions were duly offered to tax by the assessee as business income and accepted by the revenue. The assessee had after conversion of stock into investment as on 1.4.2005 had held those shares for a reasonable period of time and the weighted average period of holding of those shares was 82 days. This shows the intention of the assessee to hold those shares as investments to earn dividend and reap the benefits of capital appreciation and at the same time, exit at a profitable moment depending upon the market conditions The treatment given by the assessee in respect of share transactions by separately offering business income and short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are taken up for adjudication and decision rendered thereon would apply with equal force for Asst Years 2006-07, 2007-08 and 2008-09 except with variance in figures and variance in name of the scrips. The brief facts of this issue is that the assessee is engaged in the business of finance, trading and investment in shares since last several years. The assessee disclosed profit on sale of shares as business income and profit on sale of investments as capital gains in the return of income. The claim of the assessee is that certain shares were purchased during the Asst Year 2005-06 pursuant to Board resolutions passed in that regard indicating the intention of the assessee company to treat those shares as Investments and meant to be held for a longer period of time. Accordingly, the assessee purchased the following shares and treated the same as investments in its books of accounts :- a) Ahmednagar Forging Ltd b) Mahindra Ugine Ltd c) Numeric Power System Ltd d) Vimta Laboratories Ltd e) Vardhaman Spinning Ltd 2.1. The assessee sold these shares after holding the same for a reasonable period and derived profits thereon on its sale, which were declared by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the subject mentioned scrips as investments right from the inception i.e from the time of its purchase. The assessee had consistently maintained this stand from Asst Year 2005-06 onwards and had not shifted its stand in subsequent asst years also. Infact in Asst Years 2007-08 and 2008-09, the assessee had also earned long term capital gains on sale of certain shares held as investments and had claimed exemption for the same u/s 10(38) of the Act in the return of income, which has been accepted by the ld AO in the scrutiny assessments framed thereon. The ld AO is disputing only the short term capital gains declared by the assessee in all the 4 years under dispute before us. 2.5. The distinctive feature in Asst Year 2006-07 alone is that the assessee converted certain shares from stock in trade into investments by passing an independent board resolution on 1.4.2005 by explaining the reasons for the said conversion to be in line with the economic policies of the country and the growth of the capital markets. Accordingly, it was resolved that the shares held by the company as on 31.3.2005 should be converted into investments at the cost price on 1.4.2005 and profit / loss on sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich included transactions in respect of purchase and sale of shares, securities and units. The ld AO observed that the assessee had produced computer print out of the books of accounts during the assessment proceedings, which included the transactions of shares and securities. The assessee had also furnished audit report in Form 3CB and as per records, it was confirmed that cash book / bank book, journal and ledgers are maintained in a computer system. The minutes book of Board meetings were also furnished before the ld AO. The ld AO had duly acknowledged the filing of these documents before him in the course of assessment proceedings. 2.8. The ld AO however placed complete reliance on the draft trial balance and sauda book which only reflected the combined purchase and sale of shares without any bifurcation into stock in trade and investments. The ld AO for justifying the treatment of short term capital gains as business income observed as under:- a) There are numerous transactions in shares, securities and untis as will be obvious from perusal of the records. There are numerous sales transactions. Therefore, the regularity and frequency of dealings is proved. b) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possession but for profit. - Existence of some real, substantial and systematic or organized course of activity or conduct with a set purpose. - Sale for profit, not for realization of investments. - Existence of activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earn income. - Existence of real, substantial and systematically organized course of activity or conduct with a set purpose. 2.8.2. The ld AO observed that in view of above facts and circumstances, that he is satisfied that, on balance, there are stronger and weightier materials to assess income from sale of shares, securities and units is to be taxed under the head Profits Gains of Business or Profession than to assess under the head Capital Gains . The ld AO observed that the trial balance found and impounded during the course of survey also reveals that the assessee was trading in shares and securities. The impounded trial balance very clearly reveals that the assessee has not shown any amount as investment nor has any part of profits been declared as Profit on Sale of Investments . The entire profit has been declared as Tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 111A of the I.T. Act, 1961. 5. We have heard the rival submissions and perused the materials available on record including the paper books filed by the assessee for each of the years in appeal before us. The main reasons for the ld AO to treat the profit from shares in respect of 5 scrips as business income are as under:- a) Numerous transactions in shares b) Frequency of transactions in shares c) Sale proceeds of shares are utilized for acquisition of shares again d) The volume of transactions had jumped high during this year when compared to earlier years. e) Dividend income earned in the sum of ₹ 21,07,894/- was very miniscule when compared to the total sales of shares done by the assessee. f) Assessee did not maintain separate bank account for investment portfolio. g) No written documents were produced by the assessee to prove that a particular transaction was for investment or trading purposes. h) The assessee is showing investments only to claim lower tax rate u/s 111A of the Act and exemption u/s 10(38) of the Act. i) The assessee has started investment portfolio for the first time during the Asst Year 2005-06. j) Treatment given i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduction of STT, the entire capital market in the country began to boom like anything and hence the assessee also had decided to involve more in capital market transactions, thereby increasing the volume and frequency of transactions. In fact it cannot be swept under the carpet, that the entire capital market had been booming from 1.10.2004 onwards due to introduction of STT and consequential other tax benefits provided in the statute. In fact the board resolutions to keep certain purchase of new shares as investments have been passed in the board meetings held much prior to 1.10.2004 itself. This itself proves as a clinching evidence to indicate the intention of the assessee. d) The assessee had not claimed rebate u/s 88E of the Act on STT paid transactions of purchase and sale of shares held as investments. The investment portfolio has been shown in the balance sheet on cost basis, whereas the shares held as stock in trade were valued at lower of cost or market value as on 31st march. This also goes to prove clearly the intention of assessee in maintaining two separate portfolios i.e investment and trading. e) There is nothing wrong for an assessee to purchase certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or has adduced proof to show that some transactions were intended to be business transactionm some transactions were intended to be by way of investment and some transactions were by way of speculation and the revenue has not been able to find fault from the evidence adduced then the mere fact that there were 1000 transactions in a year or the mere fact that the majority of the income was from the share dealing or that the Managing Director of the assessee is also a Managing Director of a firm of share brokers cannot have any decisive value. The question essentially is a question of fact. The CIT Appeal and the learned Tribunal have concurrently held against the views of the Assessing Officer. On the basis of the submissions made by the learned Advocate for the appellant, it is not possible to say that the views entertained by the CIT Appeal or the learned Tribunal were not a possible view. Therefore, the judgment cannot be said to be perverse. 5.2. We find that the entire allegations raised by the revenue such as frequency of transactions, volume of transactions, period of holding, intention of the assessee, conduct of the assessee, etc, for treating the gains as business inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmer case would be in the nature of trade and hence business income and the latter would be for the purpose of investment and hence resultant gain would be capital gains. In the instant case, the assessee had reported both dividend income and offered short term and long term capital gains on the investment activities and business income for trading activities. 5.3.1. . 5.3.2 Dual portfolio - whether permitted We also find that nothing prohibits an assessee from holding dual portfolios i.e. (1) shares/units held for investment and (2) shares/units held for trading purposes. It is not in dispute that in the instant case, the assessee had maintained dual portfolios in its books of accounts and had reported capital gains and business income separately as per the consistent practice followed by the assessee over the years and accepted by the revenue in the earlier years. It is well settled that 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate portfolios i.e. (1) for investment purposes and (2) for trading purposes. The Learned AR argued that in respect of shares retained under 'investment category' the assessee had taken due delivery of shares on its purchase and given due delivery of shares on its sale. The Learned AR further informed that the assessee had also kept separate records to record the transactions of each category i.e delivery based and non- delivery based. It is settled law that a particular income is from business or from investment must be decided according to the general common sense view of those who deal with those matters in the particular circumstances. The most excruciating factor to be looked into at this juncture is the conduct of the assessee. 5.3.4 Frequency of transactions The next point to be addressed in this issue is whether the frequency of transactions would alone indicate the trading activity. In this regard, we find the co-ordinate bench of Mumbai Tribunal had an occasion to consider the same in the case of Janak S. Rangwalla v. Asstt. CIT [2007] 11 SOT 627 (Mum), wherein it was held that: It is the intention of the assessee which is to be seen to dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal : Held, dismissing the appeal, that the assessee had adduced proof to show that some transactions were intended to be business transactions, some transactions were intended to be by way of investment and some transactions were by way of speculation. The Revenue had not been able to find fault from the evidence adduced. The mere fact that there were 1,000 transactions in a year or the mere fact that the majority of the income was from the share dealing or that the managing director of the assessee was also a managing director of a firm of share brokers could not have any decisive value. The Commissioner (Appeals) and the Tribunal had concurrently held against the views of the Assessing Officer. On the basis of the submissions made on behalf of the Revenue, it was not possible to say that the view entertained by the Commissioner (Appeals) or the Tribunal was not a possible view. Therefore, the decision of the Tribunal could not be said to be perverse. No fruitful purpose was likely to be served by remanding the matter. 5.3.4.2 We also find that the Hon'ble Calcutta High Court in the case of CIT v. H K Financiers (P.) Ltd. [2015] 61 taxmann.com 175/234 Taxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question could only be, whether the views expressed upon appreciating the facts and circumstances of the case were perverse. The question is now formulated and is answered in the negative. The appeal is thus dismissed.' 5.3.5 Existence of borrowed funds The next point to be addressed in this issue is the existence of borrowed funds and payment of interest thereon by the assessee. The Learned CIT(A) had given a factual finding that no nexus has been brought on record between the borrowed funds and the investments made. The Learned CIT(A) found that for the Asst Year 2005-06, the assessee had made short term borrowings from its director for a period of seven months only in order to meet its working capital requirements and the said loan was also squared up during the year. Similarly in Asst Year 2006-07, the assessee had made borrowings of ₹ 3 crores and utilized the same for investment as well as for trading activity. The Learned CIT(A) also found that the assessee has got a share capital of ₹ 10,00,000/- and reserves and surplus as on 31.3.2005 at ₹ 1,73,98,009/- in addition to generation of own funds in the form of sale of shares held a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in view of the aforesaid resolution of the assessee and of the fact that it had been dealing in shares in a commercial spirit as is evident from its claim for loss in dealings in the shares of M/s. Titaghur Paper Mills Ltd. and devaluation of shares of M/s. Pilani Investment Corporation on the basis that they had fallen in value. Secondly, the Tribunal said that from 1947 to 1956, no dividend had been declared by the Rayon company and that the money which went into the purchase of these shares was borrowed by the assessee. In other words, the view of the Tribunal was, it was with borrowed funds that the assessee purchased the shares. It is no doubt true that there was no evidence to show that the money was specifically borrowed for the purpose of buying shares. But there was evidence before the Tribunal for its finding that the liabilities of the assessee exceeded its assets. The finding, therefore, that the shares were purchased with the borrowed funds on which the assessee was paying interest, was a finding supported by evidence. The reasoning of the Tribunal that it is most improbable that the assessee would be investing borrowed money on which interest would have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within a month. Other than these two shares, the average period of 4 months has been maintained by the assessee from the date of purchase. We also find from the workings of long term capital gains for Asst year 2006-07, the shares were held for a period of 13 months. This shows that the assessee always intended these shares to be retained only under the investment category and it will be highly improper to state that these shares/units were held as stock in trade by the assessee. We find that this aspect has been considered by the co-ordinate bench of this tribunal in the case of Dy. CIT v. Reliance Trading Enterprises Ltd. in ITA No. 944/Kol/2008 dated 3.1.2008 wherein it was held that : We have heard both the parties and perused the records as well as the documents contained in the paper book filed before us. There is no denying the fact that as per the account maintained the assessee had acted both as a trader as well as investor in shares as per the Memorandum and Articles of Association. Accounts were maintained for trading/business shares which are held as stock in trade and separately for investment shares which are held and shown in balance sheet under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asst Years 2005-06 and 2006-07. We do not find any logical reason for the revenue to deviate from its consistent stand taken in the earlier years. It is also evident from the scrutiny assessment orders for Asst Years 2008-09 and 2010-11, the revenue had accepted the stand of the assessee having dual portfolio and offering income under capital gains and business income in subsequent years. 5.3.9 We find that the Hon'ble Bombay High Court in the case of Gopal Purohit (supra) had considered the issue under consideration and held as under:- '4.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the Learned AR before us. We find that the assessee has been engaging himself in the share transactions both as an investor and as well as trader. It is seen that the assessee had clearly bifurcated the investment and trading transactions including speculative share transactions in his books of accounts and it is also seen that the average period of holding of shares range from one month to more than one year and accordingly short term or long term capital gains are duly offered to tax by the assessee dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s activities in current year? ( c) Whether, on the facts and circumstances of the case and in law., the Hon'ble ITAT was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards to the nature of transaction without appreciating that the entries in the books of accounts alone are not conclusive proof to decide the income? The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween two types of holdings. This could have been done by showing that there is intermingling of shares and transactions and the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present as culled out above, we hold that the surplus is chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolio. Accordingly, the ground no. 2 in ITA No. 1148/Kol/2009 for Asst Year 2005-06 and ground no. 1 in ITA No. 1437/Kol/2009 for Asst Year 2006-07 raised by the revenue are dismissed. 6. In the instant case, the assessee had maintained dual portfolio and had received dividend income of ₹ 21,07,894, ₹ 12,63,710/-, ₹ 13,73,472/- and ₹ 17,47,070/- for the Asst Years 2005-06, 2006-07, 2007-08 and 2008-09 respectively. The assessee had declared long term capital gains for the Asst Years 2007-08 and 2008-09 in the sums of ₹ 5,18,754/- and ₹ 44,01,695/- which has been accepted by the revenue and this goes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare transactions) are concerned. Only in respect of share transactions, the ld AO had resorted to place reliance on the sauda book impounded during survey, which in our considered opinion, is not to be appreciated. Admittedly, the assessee had submitted the computerized and audited books of accounts before the ld AO which fact has been duly acknowledged by the ld AO in his order itself. The most excruciating factor is that the very same impounded materials consisting of trial balance for the period ended 31.3.2006 contained the proper bifurcation of shares into trading and investment and trading profits and investment profits (profit on sale of investments) as a separate line item in the trial balance. This also goes to prove the intention of the assessee with regard to maintenance of dual portfolio. 6.2. The ld AR also placed reliance on the CBDT Circular No. 6/2016 dated 29.2.2016, which would be applicable to the instant case. For the sake of convenience, the said circular is reproduced below:- SECTION 45, READ WITH SECTION 28(i), OF THE INCOME-TAX ACT, 1961 - CAPITAL GAINS, CHARGEABLE AS - ISSUE OF TAXABILITY OF SURPLUS ON SALE OF SHARES AND SECURITIES - CAPITAL GAINS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income, ( b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; ( c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. 4. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions. 5. It is reiterated that the above principles have been formulated with the sole objective of reducing li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prove that the assessee had purchased the shares that the assessee had invested in the aforesaid scrips with an intention to earn dividend and for holding for quite a long period of time and earn capital appreciation thereon. These are also supported by the Board Resolution passed by the assessee company to treat the purchase of certain scrips in each year as investments, much prior to the introduction of concessional rate of tax in the statute pursuant to levy of STT. We also find from the perusal of the audited financial statements, the assessee has got sufficient own funds at its disposal which were used for making investments and no part of the borrowed funds were used for making investments. 6.4.The one distinctive feature in Asst Year 2006-07 is that the shares held as stock in trade as on 31.3.2005 had been converted into investments by the assessee with effect from 1.4.2005 pursuant to the Board resolution passed on 1.4.2005 which is reproduced hereunder:- INVESTMENT IN SHARES The Chairman stated that the Indian shares and securities market is looking up at this point of time because of the present Economic Policies of the Government followed by good monsoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01.04.2005 be and is hereby treated as Investments unless otherwise decided by the Board. CONVERSION OF STOCK-IN-TRADE INTO INVESTMENT The chairman stated that shares and securities held by the Company as on 31.03.2005 are treated as stocks in trade in the Books of Account of the Company. Now the Company has decided to sell the shares after holding the same for a reasonable period therefore all the shares treated as stock-in-trade as on 31.03.2005 should be converted into Investment at the cost price on 01.04.2005 and profit/loss on sale of such shares be treated as short term/long term capital gain as the case may be. After some discussion, following resolution was passed- RESOLVED THAT shares and securities held by the Company as on 31 st March, 2005 be converted into Investment at the cost price on 0l.04.2005 and Sri Dinesh Kumar Sharma be and is hereby directed to pass necessary entries in the books of account and to take all steps that may be necessary in connection therewith or incidental or ancillary thereto. DISCUSSION OF GENERAL AFFAIRS The Directors than discussed the general and financial affairs of the Company. VOT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n full by the assessee and immediately the shares of the same companies were purchased in the trading portfolio. This action of the assessee could neither be faulted with nor any malign intention could be attributed towards the same. The assessee could repurchase the shares of the same company due to various reasons. The assessee has every right to exit at the profitable moment from a particular scrip either in part or in full and due to sentimental reasons and the same could again be repurchased by an assessee. These actions cannot be questioned just because it results in an incidental tax loss to the revenue. ■ Moreover, even in business, the assessee would not deliberately indulge in a transaction to incur loss. Hence the allegation cast on the assessee is not appreciated. It is well settled that it is for the assessee to decide as to whether a particular scrip is to be retained under-investment portfolio or in trading portfolio and the revenue cannot step into the shoes of the assessee in that regard and decide what action should have been taken by a person in the given set of facts and circumstances. The assessee knows its interest best. It cannot be disputed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment order framed for the Assessment year 2005-06 under section 143(3) that the Assessing Officer had accepted the claim of short-term capital gains and long-term capital gains of the assessee. Hence the principles of consistency should be followed in the instant case. Though the principle of res judicata does not apply to income-tax proceedings, the principle of consistency cannot be given ago by. [Para 5.6] 6.5. In view of our aforesaid findings and respectfully following the various judicial precedents relied upon hereinabove, the treatment given by the assessee in respect of share transactions by separately offering business income and short term capital gains / long term capital gains does not warrant any disturbance and deserves to be accepted. Accordingly, the Grounds 1 to 3 raised by the assessee for the Asst Years 2005-06, 2006-07, 2007-08 and 2008-09 are allowed. 7. The Ground No. 4 raised by the assessee for the Asst Year 2005-06 was stated to be not pressed by the ld AR at the time of hearing before us. The same is reckoned as a statement from the Bar and accordingly the Ground No. 4 for Asst Year 2005-06 is dismissed as not pressed. 8. Disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various capital market transactions and dissimilation of information of various companies which would inturn assist the assessee in making proper investment decisions in shares thereon. This payment of consultancy charges by the assessee was doubted by the assessee on the ground that the copy of research reports prepared by M/s Batliwala Karani Securities India Pvt Ltd were not submitted by the assessee before the ld AO. Accordingly, the genuineness of the incurrence of this expenditure was doubted by the ld AO. The assessee replied that the said consultancy charges were duly subjected to levy of service tax at the rate of 8% every month and assessee had duly deducted the tax at source and made remittance of the TDS during Asst Year 2006-07 and submitted the copy of TDS certificate issued in this regard. The ld AO observed that at the time of survey, this was put to question by the survey team on the director of the company to furnish the research reports. The Director replied that he had not preserved those research reports. The ld AO observed that since the transactions had happened with a group company, the assessee had managed to reduce the taxable income by way of claiming t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d AR stated that the director of the assessee company had mentioned the name of Mr Rohit Bhatt who is from advisory team of Batliwala Karani Securities India Pvt Ltd and the ld AO in order to verify the genuineness of transactions ought to cross verified from him or from Batliwala Karani Securities India Pvt Ltd by using the legal process known to law. Without doing any such verification, when the other party had also shown this ₹ 84 lacs as receipt of consultancy charges and more so the said payment of consultancy charges was subjected to service tax and deduction of tax at source, there is no reason to doubt the veracity of the said expenditure merely on the ground that the research reports were not submitted by the assessee. He argued that the principal activity of the assessee is to make investment in shares and it would receive various research reports running to several pages and hence the same could not be preserved. Once a decision is taken for purchase and sale of shares, those reports would be destroyed. Hence in this scenario, the only way is to understand the veracity of the transactions is by cross verifying the other side who had submitted those reports. He ..... X X X X Extracts X X X X X X X X Extracts X X X X
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