Shri Bankim Jayantilal Shah, Ahmedabad V. The ACIT.,Cent.Circle-2(3), Ahmedabad

CO 267/AHD/2008

• Counselvise Citation: [2010] 122 COUNSELVISE.COM (IT) 4789 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 8 month(s) 11 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 02-07-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 28-06-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 22-10-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K MADHUSUDAN SRDR
• Assessee Lawyers: S N SOPARKAR SRAR; P M MEHATA
• Keywords: Capital asset; Business income; Business expenditure; Rule of consistency; Transactions in derivatives; Advance ruling; Question of law
• Section: 143(3); 2(14); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI A.N.PHAUJA, ACCOUNTANT MEMBER ITA NO.2866-2872/AHD/2008 ASSESSMENT YEARS:2000-01 TO 2004-05 DATE OF HEARING:29.6.10 DRAFTED:1.7.10 ASSTT. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2(3), ROOM NO.305, ANNEXE TO AAYAKAR BHAVAN, AHMEDABAD V/S. BANKIM JAYANATILAL SHAH, PREMJYOT SHAH, PREMJYOT BUNGALOW, 7/B, JEEVAN SMRUTI SOCIETY, MIRAMBICA SCHOOL ROAD, NARANPURA, AHMEDABAD PAN NO.ACIPS6574R (APPELLANT) .. (RESPONDENT) ITA NO.2873-2874/AHD/2008 ASSESSMENT YEARS:2005-06 AND 2006-07 ASSTT. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2(3), ROOM NO.305, ANNEXE TO AAYAKAR BHAVAN, AHMEDABAD V/S. BANKIM JAYANATILAL SHAH, HUF, PREMJYOT SHAH, PREMJYOT BUNGALOW, 7/B, JEEVAN SMRUTI SOCIETY, MIRAMBICA SCHOOL ROAD, NARANPURA, AHMEDABAD PAN NO.AALHS4406F (APPELLANT) .. (RESPONDENT) CO NO.263-269/AHD/2008 (ARISING OUT ITA NO.2866 TO 2869/AHD/2008) ASSESSMENT YEARS: 2000-01 TO 2004-05 BANKIM JAYANATILAL V/S. ACIT, CENTRAL CIRCLE- ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 2 SHAH, PREMJYOT SHAH, PREMJYOT BUNGALOW, 7/B, JEEVAN SMRUTI SOCIETY, MIRAMBICA SCHOOL ROAD, NARANPURA, AHMEDABAD PAN NO.ACIPS6574R 2(3), AHMEDABAD (APPELLANT) .. (RESPONDENT) CO NO.270-271/AHD/2008 (ARISING OUT ITA NO.2773-2874/AHD/2008) ASSESSMENT YEARS: 2000-05 & 2006-07 BANKIM JAYANATILAL SHAH, HUF, PREMJYOT SHAH, PREMJYOT BUNGALOW, 7/B, JEEVAN SMRUTI SOCIETY, MIRAMBICA SCHOOL ROAD, NARANPURA, AHMEDABAD PAN NO.AALHS4406F V/S. ACIT, CENTRAL CIRCLE- 2(3), AHMEDABAD (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI S.N.SOPARKAR, SR-AR & SHRI P.M. MEHATA, AR REVENUE BY:- SHRI K. MADHUSUDAN, SR-DR O R D E R PER BENCH:- THESE NINE APPEALS BY REVENUE AND NINE CROSS OBJEC TION (COS) BY ASSESSEE ARE ARISING OUT OF THE ORDER OF COMMISSION ER OF INCOME-TAX(APPEALS)-III, AHMEDABAD IN APPEAL NO.CIT(A)-III/189 TO 195/CC-2(3 )/07-08 DATED 26-05-2008. THE ASSESSMENTS WERE FRAMED BY THE ACIT, CENTRAL CI RCLE -2(3), AHMEDABAD U/S.153C R.W.S 143(3) OF THE INCOME-TAX ACT, 1961 ( HEREINAFTER REFERRED TO AS THE ACT) VIDE HIS DIFFERENT ORDERS DATED 24-12-2007 & 27-12-2007 FOR THE ASSESSMENT YEARS 2000-01 TO 2006-07 RESPECTIVELY. ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 3 2. THE ONLY COMMON ISSUE IN THESE NINE APPEALS OF T HE REVENUE IS AGAINST THE ORDER OF CIT(A) IN DIRECTING TO TAX THE INCOME UNDE R THE HEAD LONG TERN CAPITAL GAINS (LTCG IN SHORT) OR SHORT TERM CAPITAL GAINS ( STCG IN SHORT) AS SHOWN BY THE ASSESSEE INSTEAD OF ASSESSING BY THE ASSESSING OFFI CER UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION. IN ALL THE SEVEN ASS ESSMENT YEARS, THE COMMON GROUND RAISED BY REVENUE, TAKEN FROM ITA NO.2866/AHD/2008 ASSESSMENT YEAR 2000-01 READS AS UNDER:- 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN DIRECTING TO TAX THE INCOME EARNED FROM TRADING IN SHARES UNDER THE HEAD LTCG / STCG AS SHOWN BY THE ASSESSEE INSTEAD OF TAXING IT UNDER TH E HEAD INCOME FROM BUSINESS & PROFESSION. 3. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE, SHR I S.N.SOPARKAR FILED COPY OF TRIBUNALS ORDER IN GROUP CASES OF ASSESSEES IN ITA NO.2875 AHD/2008, 2878- 2881/AHD/2008, 2883-2884/AHD/2008, 2887-2891/AHD/20 08 DATED 17-09-2009 AND STATED THAT EXACTLY ON SIMILAR FACTS, THIS ISSUE HA S BEEN DECIDED BY THE TRIBUNAL CONFIRMING THE ORDER OF CIT(A), ASSESSING THE INCOM E UNDER THE HEAD OF LTCG/STCG. WHEN THE ORDER WAS CONFRONTED, LD. SR-D R, SHRI K. MADHUSUDHAN RELIED ON THE ASSESSMENT ORDERS AND HE COULD NOT MA KE ANY DISTINCTION IN THE ORDER OF TRIBUNAL IN THE OTHER ASSESSEES OF THE GROUP CAS ES. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE COMMON ISSUE RELATES TO TREATMENT OF INCOME BY THE ASSESSEE, IN THE CASE OF INDIVIDUAL, AS CAPITAL GAINS AS AGAINST THE SAME THE ASSESSING OFFICER ASSESSED THE INCOME FROM TRANSACTIONS OF THESE SHARES AS OF BUSINESS OF TRADING IN SHARES. WE FIND THAT THE DETAILS OF ASSESSMENT AND RETURN OF INCOME ARE AS UNDER:- ASST. YEAR DATE OF NOTICE U/S.153C DATE OF FILING RETURN RETURNED INCOME (RS) ASSESSED INCOME (RS) DEMAND (RS) DATE OF NOTICE COMPLIANCE 00-01 22-5-06 17-5-07 4,04,910 11,10,750 15,55,809 31-10-07 7-12-2007 & 18-12- 2007 01-02 22-5-06 17-5-07 - 6,94,040 - 6,94,040 NIL 31-10-07 7-12-2007 & 18-12- 2007 ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 4 02-03 22-5-06 17-5-07 2,92,670 2,94,660 2 0,550 31-10-07 17-12-2007 & 18-12- 2007 03-04 22-5-06 17-5-07 1,91,000 1,91,310 14,,552 31-10-07 17-12-2007 & 18-12- 2007 04-05 22-5-06 17-5-07 13,27,260 3,27,260 3,77, 883 31-10-07 17-12-2007 & 18-12- 2007 05-06 22-5-06 17-5-07 3,51,68,350 3,73,31,660 1,08,78,735 31-10-07 17-12-2007 & 18-12- 2007 06-07 22-5-06 17-5-07 33,54,440 51,72,840 15,82,960 31-10-07 17-12-2007 & 18-12- 2007 WE FURTHER FIND THAT ASSESSEE HAS SHOWN LTCG AND ST CG AS UNDER:- ASSESSMENT YEAR DETAILS OF SHORT TERM CAPITAL GAIN DETAILS OF LONG TERM CAPITAL GAIN INCOME TREATED AS BUSINESS INCOME 2000-2001 - 661024 849343 901762 2001-2002 81905 1143000 1224905 2002-2003 0 -992 1990 2003-2004 -307 0 307 2004-2005 0 1181054 1181054 2005-2006 35085943 2163121 37249064 2006-2007 3088938 1882402 4907340 WE FURTHER FIND THAT THE ASSESSEE HAS ENTERED INTO THE FOLLOWING NUMBERS OF SCRIPTS AND NUMBER OF TRANSACTIONS DURING THE RELEVANT YEAR S AS UNDER:- A.Y NUMBER OF SCRIPTS NUMBER OF SALE TRANSACTIONS 2000-2001 4 6 2001-2002 3 4 2002-2003 2 2 2003-2004 1 1 2004-2005 2 2 2005-2006 36 88 2006-2007 3 4 ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 5 IN VIEW OF THESE FACTS, THE CIT(A) NOTED THAT THE A SSESSEE IS CONSISTENTLY SHOWING INVESTMENT IN HER BOOKS OF ACCOUNT AND THE BALANCE- SHEET. THE FACT THAT THE ASSESSEE HAS EARNED LTCG DURING THE PERIOD CONCLUSI VELY PROVES THAT THE ASSESSEES SHARE HELD BY THE ASSESSEE AS INVESTMENT SHOWN AND NOT AS STOCK-IN- TRADE AND MERELY BECAUSE THE ASSESSEE CHOOSE THE SA LE THE SHARE AT AN APPROPRIATE TIME WITH A VIEW TO AUGMENTING HER WEALTH, IT CANNO T BE SAID THAT ASSESSEE WAS TRADING IN SHARES. THE CIT(A) ALSO NOTED THAT THE ASSESSEE HAS DISCLOSED CAPITAL GAINS AND EARNED REGULAR DIVIDEND INCOME FROM INVES TMENT AND DISCLOSED THE SAME IN THE REGULAR RETURN ORIGINALLY FILED AND ALSO RET URNS FILED U/S.153C OF THE ACT. THE DETAILS OF THREE RELEVANT ASSESSMENT YEARS ARE AS U NDER:- ASST. YEAR DATE OF FILING ORIGINAL RETURN SHOLRT TERM CAPITAL GAIN (RS) LONG TERM CAPITAL GAINA (RS) DIVIDEND AMOUNT (RS.) 1996-1997 31.03.1998 55,202 0 4390 1997-1998 30.03.1999 1,26,925 - 39,042 3511 2000-2001 28.03.2002 - 661024 849343 18765 2001-2002 31.03.2003 81905 1143000 2850 2002-2003 31.03.2003 0 - 992 16489 2003-2004 30.09.2003 - 307 0 6097 2004-2005 10.09.2004 0 1181054 12 5507 2005-2006 U/S15A 17.05.2007 35085943 2163121 610565 5. WE FIND THAT IN THE CASE OF HUF ALSO THE FACTS A RE EXACTLY SIMILAR AND THE DETAILS OF ASSESSMENT AND RETURN OF INCOME ARE AS U NDER:- ASST. YEAR DATE OF NOTICE U/S.153C DATE OF FILING RETURN RETURNED INCOME (RS) ASSESSED INCOME (RS) DEMAND (RS) DATE OF NOTICE COMPLIANCE 05-06 11-9-07 6-1107 3,86,030 3,86,030 1,24,227 2 7-11- 2007 21-12-2007 06-07 11-9-07 6-11-07 28,81,720 27,81,720 7,48,437 22-11- 2007 21-12-2007 WE FURTHER FIND THAT THE ASSESSEE-HUF HAS DECLARED LTCG & STCG AS UNDER:- ASSESSMENT YEAR DETAILS OF SHORT TERM CAPITAL GAIN DETAILS OF LONG TERM CAPITAL GAIN INCOME TREATED AS BUSINESS INCOME ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 6 2005-2006 3,96,032 3,96,032 2006-2007 25,50,052 25,50,052 WE FURTHER FIND THAT THE ASSESSEE-HUF HAS ENTERED I NTO THE FOLLOWING NUMBERS OF SCRIPTS AND NUMBER OF TRANSACTIONS DURING THE RELEV ANT YEARS AS UNDER:- A.Y NUMBER OF SCRIPTS NUMBER OF SALE TRANSACTIONS 2005-2006 5 6 2006-2007 2 3 6. WE FIND THAT THE CIT(A) HAS GIVEN COMMON FINDING IN THE CASE OF INDIVIDUAL AS WELL AS HUF AND THE RELEVANT PARA-4.1 TO 4.3 OF CIT(A) IN THE CASE OF INDIVIDUAL, WHEREIN IT IS HELD THAT INCOME SHOWN BY ASSESSEE IS CAPITAL GAIN IN NATURE DEPENDING UPON TRANSACTION WHETHER IT IS A STCG OR LTCG AND H E HELD IN PARA-4.1 TO 4.3 OF HIS APPELLATE ORDER AS UNDER:- FURTHER THE APPELLANT HAS BEEN CONSISTENTLY SHOWIN G THE SHARES AS INVESTMENTS IN THE BOOKS OF ACCOUNT AND IN THE BALA NCE SHEET. THE FACT THAT THE APPELLANT HAD ALSO EARNED LONG TERM CAPITAL GAI NS PROVES CONCLUSIVELY THAT THE SHARES WERE HELD BY THE ASSESSEE AS INVESTMENT AND NOT AS STOCK IN TRADE. MERELY BECAUSE THE APPELLANT CHOOSE TO SELL THE SHARES AT AN APPROPRIATE TIME, WITH A VIEW TO AUGMENT HIS WEALTH , IT CANNOT BE SAID THAT THE APPELLANT WAS TRADING IN SHARES. THE APPELLANT HAD DISCLOSED CAPITAL GAINS AND EARNED REGULAR DIVIDEND INCOME FROM THE INVESTMENT EVEN IN THE RETURNS ORIGINALLY FILED AND ALSO IN RETURNS FILED U/S.153A . ASSTT. YEAR DATE OF FILING RETURN SHORT TERM CAPITAL GAIN (RS) LONG TERM CAPITAL GAIN (RS) DIVIDEND AMOUNT (RS) 1996-1997 31.03.1998 55,202 O 4390 1997-1998 30.03.1999 1,26,925 - 39,042 3511 2000-2001 28.03.2002 - 661024 849343 18765 2001-2002 31.03.2003 81905 1143000 2850 2002-2003 31.03.2003 0 - 992 16489 2003-2004 30.09.2003 - 307 0 6097 2004-2005 10.09.2004 0 1181054 125507 2005-2006 U/S15A 17.05.2007 35085943 2163121 610565 ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 7 REFERENCE WAS MADE TO THE CASE OF CIT VS. REVA SHAN KER A. KOTHARI 283 ITR 338 (GUJARAT HC). IN THIS DECISION, THE GUJARAT HIG H COURT HAD OBSERVED AS UNDER:- IN ORDER TO DETERMINE WHETHER PROFITS ARISING ON S ALE IS BUSINESS INCOME, THE FOLLOWING TESTS CAN BE APPLIED: (A) THE FIRST TEST IS WHETHER THE INITIAL ACQUISITION OF THE SUBJECT MATTER OF TR ANSACTION WAS WITH THE INTENTION OF DEALING IN THE ITEM, OR WITH A VIEW TO FINDING AN INVESTMENT. IF THE TRANSACTION, SINCE THE INCEPTION, APPEARS TO BE IMPRESSED WITH THE CHARACTER OF COMMERCIAL TRANSACTION ENTERED INTO WI TH A VIEW TO EARN PROFIT, IT WOULD FURNISH A VALUABLE GUIDELINE; (B) THE SECOND TEST IS WHY AND HOW AND FOR WHAT PURPOSE THE SALE WAS EFFECTED SUBSEQUENTLY; (C) THE THIRD TEST IS AS TO HOW THE ASSESSEE DEALT WITH THE SUBJECT MATTER OF TRANSACTION DURING THE TIME THE ASSET WAS WITH THE ASSESSEE, WHETHER IT HAS BEEN TREATED AS STOCK-IN-TRADE, OR BEEN SHOWN I N THE BOOKS OF ACCOUNT AND BALANCE SHEET AS AN INVESTMENT. THIS IN QUIRY, THOUGH RELEVANT, IS NOT CONCLUSIVE; (D) THE FOURTH TEST IS HOW THE ASSESSEE HIMSELF HAS RETURNED THE INCOME FROM SUCH ACTIVITIE S AND HOW THE DEPARTMENT HAS DEALT WITH THE SAME IN THE CURSE OF PROCEEDING AND SUCCEEDING ASSESSMENTS. THIS FACTOR, THOUGH NOT CON CLUSIVE, CAN AFFORD GOOD AND COGENT EVIDENCE TO JUDGE THE NATURE OF TRANSACTION AND WOULD BE A RELEVANT CIRCUMSTANCE TO BE CONSIDERED I N HE ABSENCE OF ANY SATISFACTORY EXPLANATION; (E) THE FIFTH TEST, N ORMALLY APPLIED IN CASES OF FIRMS AND COMPANIES, IS WHETHER THE DEED OF PART NERSHIP OR THE MEMORANDUM OF ASSOCIATION, AS THE CASE MAY BE, AUTH ORIZES SUCH AN ACTIVITY; (F) THE MOST IMPORTANT TEST IS AS TO THE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTIONS OF PURCHA SE AND SALE OF THE GOODS CONCERNED. IN A CASE WHERE THERE IS REPETITIO N AND CONTINUITY, COUPLED WITH THE MAGNITUDE OF THE TRANSACTION, BEAR ING REASONABLE PROPORTION TO THE STRENGTH OF HOLDING, AN INFERENCE CAN READILY BE DRAWN THAT THE ACTIVITY IS IN THE NATURE OF BUSINESS. 4.2 SIMILAR DECISION WAS DELIVERED IN THE CASE OF A CITZ VS. K.A. SHAH, 242 ITR 83 (KERALA) AND BY THE HON. SUPREME COURT IN RA JA BAHADUR K.N. SINGH, 77 ITR 253 AND BY ALLAHABAD HIGH COURT IN THE CASE OF RAJA JOGDISH PRATAP, 70 ITR 235. 4.3 THEREFORE, IF THE PRINCIPLES AND GUIDELINES LAI D DOWN IN THE ABOVE MENTIONED CASES AND THE CIRCULAR ISSUED BY THE CBDT ARE APPROPRIATELY ANALYZED, I WOULD BE SEEN THAT FOR DETERMINING AS T O WHETHER AN ASSET IS HELD BY A PERSON AS INVESTMENT OR AS STOCK IN TRADE, THE CUMULATIVE EFFECT OF ALL THE RELEVANT FACTORS MUST BE CONSIDERED PROPERLY. THIS ISSUE CAN NOT BE DECIDED MERELY BY SATING THAT THE ASSESSEE IS ALSO DEALING IN SHARES OR BY OBSERVING THAT THE ASSESSEE HAS CARRIED OUT A NUMBER OF TRANS ACTIONS. IN THE APPELLANTS CASE THE FACTUAL POSITION WAS PUT BEFORE THE A.O IN DETAIL AND IT WAS EXPLAINED THAT THE MOTIVE AND INTENTION OF THE ASSESSEE WAS O NLY TO MAKE INVESTMENT IN SHARES WITH A VIEW TO EARN DIVIDEND INCOME. WHENEVE R ANY OPPORTUNITY COMES TO THE ASSESSEE FOR MAXIMIZING THE WEALTH, IT IS ON LY LOGICAL AND RATIONAL TO CHANGE THE INVESTMENT BY SELLING THE EXISTING INVES TMENT IN SHARES AND REPLACING IT BY A NEW INVESTMENT. IT IS COMMON KNOW LEDGE THAT SHARE MARKED IS QUITE VOLATILE AND DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 8 APPEAL THERE WAS PERCEPTIBLE UPSWING IN THE MARKET VALUE OF SHARES. ACCORDINGLY THE ASSESSEE HAS TO EXERCISE HIS DISCRE TION AS TO WHETHER AT THE RIGHT TIME AND O GETTING A PROPER OPPORTUNITY THE E XISTING INVESTMENT SHOULD BE ENCASHED. BY ITSELF IT DOES NOT ESTABLISH OR PROVE IN ANY WAY THAT THE ASSESSEE IS A TRADER IN SHARES. FURTHER, IN THE CASE OF THE ASSESSEE THE SHARES HAVE BEEN HELD FOR SUFFICIENTLY LONG TIME AND INTENTION OF THE ASSESSEE WAS ONLY TO MAKE INVESTMENT WHICH IS PROVED FROM THE FACT THAT IN THE BOOKS OF ACCOUNT AND IN THE BALANCE SHEET, THE SHARES WERE SHOWN ONL Y BY WAY OF INVESTMENT. AGGRIEVED, REVENUE CAME IN APPEAL BEFORE US. 7. WE FIND THAT THE TRIBUNAL HAS DEALT WITH THE FAC TS IN PARA-3 OF THE ORDER IN OTHER ASSESSEES OF GROUP CASES (SUPRA) AS UNDER:- 3. THE FACTS OF THE CASE ARE THAT ACTION U/S.153C WAS TAKEN AGAINST THESE ASSESSEES ON THE BASIS OF COMMUNICATION RECEIVED BY THE AO FROM DIRECTOR GENERAL OF INVESTIGATION, AHMEDABAD ON THE BASIS OF WHICH CASES OF THE GROUP WERE CENTRALIZED WITH THE AO, CENTRAL CIRCLE 2(3), AHMEDABAD. IN RESPONSE TO NOTICE U/S.153C RETURNS OF INCOME WERE FILED BY THESE ASSESSEES. WHILE EXAMINING THEIR ACCOUNTS, THE AO NOTICED THAT SHRI HIMANSHU J.SHAH AND HIS FAMILY MEMBERS ARE DEALING IN SHARES CONTIN UOUSLY OVER A PERIOD OF TIME INCLUDING THE PERIOD FROM A.Y. 2000-01 TO 2006 -07. ACCORDING TO THE ASSESSING OFFICER, THE FOLLOWING MEMBERS ARE DEALIN G IN SHARES HEAVILY. SR.NO. NAME. RELATIONSHIP WITH HIMANSHU J.SHAH 1. SHRI HIMANSHU J.SHAH SELF 2. SHRI BANKIM J.SHAH BROTHER 3. SHRI VAIBHAV J.SHAH BROTHER 4. SMT.BELA H.SHAH WIFE 5. SMT. HEMANGI B.SHAH SISTER-IN-LAW 6. SMT. KINNARI V.SHAH SISTER-IN-LAW HE HELD THAT ON THE BASIS OF INVOLVEMENT OF THESE P ERSONS, FREQUENCY AND MAGNITUDE OF TRANSACTIONS AND OTHER RELEVANT FACTOR S AND TOTALITY OF THE FACTS AND CIRCUMSTANCES INVOLVED, THE DEALING IN SHARES S HOULD BE TREATED AS INCOME FROM BUSINESS AND NOT AS LONG TERM/SHORT TER M CAPITAL GAINS AS DECLARED BY THE ASSESSEES. A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE IN RESPONSE TO WHICH A REPLY WAS FURNISHED WHICH IS REPRODUCED BY THE ASSESSING OFFICER IN HIS ORDER. IT WAS EXPLAINED TH EREIN THAT MERELY BECAUSE THE ASSESSEE HAS EARNED PROFIT ON SALE AND PURCHASE OF SHARES DOES NOT MAKE IT A TRADING TRANSACTION. PERIOD OF HOLDING MA Y BE AN IMPORTANT POINT WHILE DECIDING THE INTENTION OF THE ASSESSEE WHILE MAKING INVESTMENT IN SHARES BUT IT CANNOT BE OVERRIDING CRITERIA IN DECI DING THE NATURE OF TRANSACTION. SOME SHARES WERE HELD FOR MORE THAN THREE YEARS AND THEREAFTER THEY WERE DISPOSED OFF. IT IS EVIDENT FROM THE FACT THAT ASSE SSEES HAVE DECLARED LONG TERM CAPITAL GAIN AS WELL. FURTHER ASSESSEES HAVE T O DECIDE TO DISPOSE OF INVESTMENT EVEN AFTER MAKING LOSS IN ORDER TO SAVE INVESTMENT FROM FURTHER ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 9 LOSS. IT WAS ALSO EXPLAINED BY THE ASSESSEES THAT T HEY HAVE BORROWED FUNDS FOR MAKING SUCH INVESTMENT AND USED THE SAME WITH T HE INTENTION OF ACQUIRING RETURN YIELDING INVESTMENT. NO INTEREST HAS BEEN CL AIMED ON THE FUNDS BORROWED FOR MAKING INVESTMENT IN SHARES. THE ASSES SEE HAS REFERRED TO THE CBDT CIRCULAR NO.4/2007 FOR THE PROPOSITION THAT TH E ASSESSEE CAN SIMULTANEOUSLY EARN INCOME FROM TRADING IN SHARES A S WELL AS CAPITAL GAINS FROM INVESTMENT IN SHARES SO LONG AS THE ASSESSEE IS CLEARLY ABLE TO IDENTIFY AND DEMARCATE THE SHARES WHICH ARE HELD FOR TRADING PURPOSE FROM THE SHARES WHICH HE HAS HELD AS INVESTMENT. THE ASSESSING OFFI CER CONSIDERED THE REPLY OF THE ASSESSEES AND ON THE BASIS OF HIS FINDING TH AT THE ASSESSEES HAVE CARRIED OUT NUMBER OF TRANSACTIONS IN SELLING AND P URCHASE IN SHARES; THAT THEY HAVE HARROWED FUNDS SECURED/UNSECURED WHICH ARE INT EREST BEARING; LOOKING TO THE HOLDING PERIOD, HELD THE ACTIVITIES OF THE A SSESSEE AS NOT INVESTMENT IN SHARE BUT TRADING IN SHARES. HE ACCORDINGLY TREATED THE SAME DECLARED BY THE ASSESSEE AS PROFIT FROM PURCHASE AND SALE OF SHARES AND TREATED THEM UNDER THE HEAD BUSINESS AND NOT AS LONG TERM/SHORT TERM CAPITAL GAINS. 8. AND FINALLY IN PARA-11.1 TO 13 OF TRIBUNALS ORDER IN OTHER ASSESSEES OF GROUP CASES (SUPRA) HELD AS UNDER:- 11.1. NOW WE CONSIDER THE RELEVANT AUTHORITIES ON THE SUBJECT. THE ISSUE WHETHER TRANSACTION IN SHARES SHOULD BE TREATED AS INVESTMENT OR TREATED AS BUSINESS AND IN WHAT CIRCUMSTANCES HOLDINGS SHOULD BE TREATED AS INVESTMENT OR AS STOCK IN TRADE, HAS BEEN DISCUSSED IN DETAIL BY THE TRIBUNAL, LUCKNOW BENCH SARNATH INFRASTRUCTURE (P) LTD V. ACIT (122 T TJ 216). IN THAT DECISION TRIBUNAL HAS REFERRED TO THE FOLLOWING JUDGEMENT OF THE COURTS. 1. FIDELITY NORTHSTAR FUND, IN RE (2007) 288 ITR 64 1 (AAR) 2. RAJA BAHADUR VISHESHWAR SINGH VS. COMMISSIONER O F INCOME-TAX (1961) 41 ITR 685 (SC) 3. CENTRAL INDIA AGENCIES (P.) LTD. VS. COMMISSIONE R OF INCOME-TAX (1970) 77 ITR 959 (ALL) 4. SAROJINI RAJAH (MRS.) VS. COMMISSIONER OF INCOME -TAX (1969) 71 ITR 504 (MAD) 5. DALHOUSIE INVESTMENT TRUST CO. LTD. VS. COMMISSI ONER OF INCOME-TAX (1968) 68 ITR 486 (SC) 6. COMMISSIONER OF INCOME-TAX VS. ASSOCIATED INDUST RIAL DEVELOPMENT CO. (P.) LTD. (1971) 82 ITR 586 (SC) 7. COMMISSIONER OF INCOME-TAX VS. HOLCK LARSEN (H.) (1986) 160 ITR 067 (SC) 8. COMMISSIONER OF INCOME-TAX VS. SUTLEJ COTTON MIL LS SUPPLY AGENCY LTD. (1975) 100 ITR 706 (SC) 11.2. PRINCIPLES HAVE BEEN CULLED OUT FROM THESE J UDGEMENT AS UNDER : 13. AFTER CONSIDERING ABOVE RULINGS WE CULL OUT FOL LOWING PRINCIPLES, WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTION(S) IN QUESTION ARE IN THE NATURE OF TRADE OR ARE MERELY FOR INVESTMENT PURPOSES : ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 10 (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE T IME OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM). THIS CAN BE FOUND OUT F ROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER I T IS TREATED AS STOCK-IN- TRADE OR INVESTMENT. WHETHER SHOWN IN OPENING/CLOSI NG STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET. (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHAS E AND PAID INTEREST THEREON ? NORMALLY, MONEY IS BORROWED TO PURCHASE G OODS FOR THE PURPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETA INING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DI SPOSAL IN THAT PARTICULAR ITEM ? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE . SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS MAY SHOW WHETH ER THE ASSESSEE IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOL DINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PRO FIT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE ? FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN TH E CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSEN TIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN T HE BALANCE SHEET ? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDI CATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MAR KET VALUE OR NET REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL INDIC ATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN ME MORANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION ? WHETHER FOR T RADE OR FOR INVESTMENT? IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE S EPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY? AND VICE VERSA. (7) IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO S HOW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE H AS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE AS SESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SH OW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPARENT IS NOT REAL. (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SH ARES (OR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICI ENT TO SAY THAT ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) F OR INVESTMENT. (9) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISI TES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE I S COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING A S A TRADER IN THAT ITEM ? WHETHER IT HAD SUCH AN INTENTION (TO CARRY ON ILLEG AL BUSINESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASES WERE MADE ? ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 11 (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE I S NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. (11) NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WIL L BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SE VERAL FACTORS HAS TO BE SEEN. 11.3. THESE DECISION HAS BEEN FOLLOWED BY THE MUMBA I BENCH IN THE CASE OF GOPAL PUROHIT V. JCIT [(2009) 29 SOT 117 (MUM)] WHE REIN IT HADS BEEN HELD AS UNDER : HELD IT WAS NOTED THAT THE ASSESSEE WAS ENGAGED IN THE A CTIVITY OF SALE AND PURCHASE OF SHARES FOR A QUITE LONG PERIOD. IT WAS ALSO NOTED THAT NON-DELIVERY BASED TRANSACTIONS HAD BEEN TREATED BY THE ASSESSEE AS BUSINESS ACTIVITY AND DELIVERY BASED TRANSACTIONS HAD BEEN TREATED AS AN INVESTMENT ACTIVITY AND, ACCORDINGLY, THE ASSESSEE HAD CLAIMED HIMSELF BOTH DEALER AS WELL AS INVESTOR AND HAD OFFERED INCOME FOR TAXATION ACCORDINGLY, WH ICH HAD BEEN CLAIMED TO HAVE BEEN ACCEPTED BY THE REVENUE AUTHORITIES IN EA RLIER YEARS AND, HENCE, IT BECAME IMPORTANT TO ANALYSE THE FACTS OF FEW EARLIE R YEARS. ON CONSIDERING THE FACTS OF THE EARLIER YEARS, THE FOLLOWING CONCLUSIO NS EMERGED : (I) THE FACTS OF THE YEAR UNDER CONSIDERATION WITH REGARD TO NATURE OF INCOME(S) EARNED BY THE ASSESSEE AND THE TRANSAC TIONS WERE SAME IN ALL THOSE YEARS, EXCEPT TRANSACTIONS IN F&O SEGM ENT IN SOME OF THE YEARS WHEREIN THIS KIND OF ACTIVITY WAS STARTED BY THE STOCK EXCHANGE. (II) INTEREST ON BORROWED CAPITAL HAD BEEN ALLOWED AS BUSINESS EXPENDITURE AGAINST THE PROFIT ON JOBBING ACTIVITIE S SHOWN BY THE ASSESSEE AS BUSINESS PROFIT. (III) THE ASSESSEE HAD SHOWN SHARES PURCHASED ON D ELIVERY BASIS AS INVESTMENT AT THE END OF THE YEAR AND NO STOCK-I N-TRADE EXISTED ON THAT DATE AND THE ASSESSEE HAD EARNED BOTH LONG-TER M AND SHORT-TERM CAPITAL GAINS WHICH MEANT THE ASSESSEE HAD ALSO HEL D SHARES FOR THE PERIOD OF MORE THAN 12 MONTHS. [PARA 8] THUS, THE NATURE OF ACTIVITIES, MODUS OPERANDI OF T HE ASSESSEE, MANNER OF KEEPING RECORDS AND PRESENTATION OF SHARES AS INVES TMENT AT THE YEAR END WERE SAME IN ALL THE YEARS, AND, HENCE, APPARENTLY, THERE APPEARED NO REASON AS TO WHY THE CLAIMS MADE BY THE ASSESSEE SHOULD NO T BE ACCEPTED. HOWEVER, THE REVENUE AUTHORITIES HAD TAKEN A DIFFER ENT VIEW IN THE YEAR UNDER CONSIDERATION BY HOLDING THAT PRINCIPLE OF RES JUDI CATA WAS NOT APPLICABLE TO THE ASSESSMENT PROCEEDINGS. THERE COULD NOT BE ANY DISP UTE ON THIS ASPECT, BUT THERE IS ALSO ANOTHER JUDICIAL THOUGHT THAT THERE S HOULD BE UNIFORMITY IN TREATMENT AND CONSISTENCY UNDER THE SAME FACTS AND CIRCUMSTANCES AND IT WAS ALREADY FOUND THAT FACTS AND CIRCUMSTANCES WERE IDENTICAL, EVEN THOUGH A DIFFERENT STAND HAD BEEN TAKEN BY THE REVENUE AUTHO RITIES. IN THAT VIEW OF THE MATTER, THE ACTION OF THE REVENUE AUTHORITIES IN DI SALLOWING THE CLAIM OF THE ASSESSEE IN THE RELEVANT YEAR NEEDED VERIFICATION. IN THE PROCESS TO FIND THE ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 12 ANSWER, IT WAS NOTED THAT THERE WAS A CHANGE IN THE SCHEME OF TAXATION RELATING TO SHORT-TERM CAPITAL GAINS AND LONG-TERM CAPITAL GAINS. THROUGH THE FINANCE ACT, 2004, THE LEGISLATURE IMPOSED SECURITI ES TRANSACTION TAX ON THE SALE AND PURCHASE OF SHARES AND OTHER DERIVATIVE TR ANSACTIONS AND, SIMULTANEOUSLY, THE LEGISLATURE EXEMPTED LONG-TERM CAPITAL GAIN UNDER SECTION 10(38) FROM THE LEVY OF TAX AND ON SHORT-TERM CAPIT AL GAIN, A CONCESSIONAL RATE OF TAX I.E., 10 PER CENT HAS BEEN LEVIED SUBJECT TO THE CONDITION THAT TRANSACTIONS RESULTING INTO THIS TYPE OF GAIN MUST HAVE SUFFERED SECURITIES TRANSACTION TAX. THAT WAS THE FIRST YEAR OF SUCH CH ANGE AND, HAVING REGARD TO THE QUANTUM OF GAINS, THIS SCHEME OF TAXATION ONLY MUST HAVE PROMPTED THE REVENUE AUTHORITIES TO TAKE A DIFFERENT VIEW ON THE SAME TYPES OF TRANSACTIONS ENTERED INTO BY THE ASSESSEE IN EARLIER YEARS. THER E WAS NO DISPUTE THAT THE ASSESSEE HAD CLAIMED EXEMPTION UNDER SECTION 10(38) AND/OR HAD PAID TAX UNDER SECTION 111A AT CONCESSIONAL RATE ON THE TRAN SACTIONS, WHERE SECURITIES TRANSACTION TAX HAD NOT BEEN PAID. IT WAS ALSO NOTE D THAT THE ASSESSEE HAD PAID TAX ON SHORT-TERM CAPITAL GAINS AT NORMAL RATE S ON SHARE TRANSACTIONS EXECUTED IN THE PERIOD PRIOR TO IMPOSITION OF SECUR ITIES TRANSACTIONS TAX. THE LEGISLATIVE CHANGE OF THIS NATURE, WHEREBY NO CHANG E HAD BEEN MADE IN RESPECT OF NATURE AND MODUS OPERANDI OF SUCH SHARE TRANSACTIONS, RESULTING INTO ANY ADVANTAGE COULD NOT BE TAKEN AWAY BY THE R EVENUE AUTHORITIES IN THAT MANNER AND IN THOSE CIRCUMSTANCES, PRINCIPLE OF CON SISTENCY, THOUGH IT IS AN EXCEPTION TO THE PRINCIPLE OF RES JUDICATA MUST BE APPLIED HERE. IT IS FURTHER SO BECAUSE THE PAYMENT OF SECURITIES TRANSACTION TAX I S MANDATORY, I.E., WHETHER AN ASSESSEE EARNS THE PROFIT OR NOT OR SUFFERS A LO SS AND BY IMPOSITION OF SUCH TAX, THE LEGISLATURE HAS NOT GIVEN ANY BENEFIT TO A CLASS OF TRANSACTIONS AS A WHOLE THOUGH IT MAY RESULT INTO AN APPARENT BENEFIT TO INDIVIDUAL(S) ENTERING INTO THOSE TRANSACTIONS. THUS, IN THE FACTS AND CIR CUMSTANCES OF THE INSTANT CASE, ON THE BASIS OF PRINCIPLE OF CONSISTENCY ALON E, THE ACTION OF THE REVENUE AUTHORITIES WAS LIABLE TO BE QUASHED. IT WAS ORDERE D ACCORDINGLY AND THE ASSESSING OFFICER WAS DIRECTED TO ACCEPT THE CLAIMS OF ASSESSEE IN REGARD TO SHORT-TERM CAPITAL GAIN AND LONG-TERM CAPITAL GAIN. [PARA 8.1] FURTHER, ON THE BASIS OF MERITS ALSO, IN VIEW OF TH E RATIO OF THE DECISION OF SARNATH INFRASTRUCTURE (P.) LTD.S CASE (SUPRA), IT WAS HELD THAT THE DELIVERY BASED TRANSACTION SHOULD BE TREATED AS OF THE NATUR E OF INVESTMENT TRANSACTIONS AND PROFIT THEREFROM SHOULD BE TREATED AS SHORT-TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN DEPENDING UPON THE PERIOD OF HOLDING. [PARA 8.3] THE REVENUE HAD ALSO HELD THAT PRESENTATION IN THE BOOKS OF ACCOUNT WAS NOT CONCLUSIVE WHICH MAY BE TRUE TO SOME EXTENT, BUT IT IS THE MOST CRUCIAL SOURCE OF GATHERING INTENTION OF THE ASSESSEE AS REGARDS T HE NATURE OF TRANSACTION AND, IN LAW, IT IS ALSO SO, I.E., SUCH PRESENTATION REFLECTS, PRIMA FACIE, A VIEW OF THE ASSESSEE ON A PARTICULAR SUBJECT AND THIS PRINC IPLE WAS EFFECTIVELY APPLICABLE IN A SITUATION LIKE THAT AS COMPARED TO A SITUATION WHERE NATURE OF EXPENDITURE OR INCOME IS DIFFERENT IN THE BOOKS OF ACCOUNT AND IN THE RETURN OF INCOME FILED BY THE ASSESSEE WHEREIN THE SPECIFIC P ROVISIONS OF THE ACT HAVE TO BE CONSIDERED OVER SUCH PRESENTATION AND IF THER E EXIST NO SPECIFIC PROVISIONS, THEY ARE THE COMMERCIAL PROFITS WHICH H AVE TO BE TAXED AND EVEN IN THAT SITUATION, THE ASSESSEE MAY BE FOUND TO BE JUSTIFIED IN GIVING DIFFERENT ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 13 TREATMENT IN THE BOOKS OF ACCOUNT AS COMPARED TO RE TURN OF INCOME BECAUSE OF COMMERCIAL CONSIDERATIONS OR ACCOUNTING REQUIREM ENTS. HENCE, THERE WAS NO SUBSTANCE IN THE FINDING OF THE REVENUE AUTHORIT IES IN THE FACTS OF THE INSTANT CASE. THE REVENUE AUTHORITIES HAD ALSO HELD THAT BO RROWED FUNDS WERE UTILIZED FOR MAKING SUCH INVESTMENTS WHEREAS IN EARLIER YEAR S, INTEREST ON SUCH LOANS HAD BEEN ALLOWED AS BUSINESS EXPENDITURE AGAINST PR OFIT ON SHARE TRADING TRANSACTIONS SHOWN AS BUSINESS INCOME AND IN THE YE AR UNDER CONSIDERATION ALSO, NO NEXUS BETWEEN THE INTEREST BEARING FUNDS A ND INVESTMENT HAD BEEN ESTABLISHED AND, HENCE, FOR THIS REASON ALSO, THERE WAS NO MERIT IN TREATING THE LONG-TERM CAPITAL GAIN AND SHORT-TERM CAPITAL GAIN AS BUSINESS PROFITS. [PARA 8.4] IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, THE ASSESSEES CLAIM OF SHORT-TERM CAPITAL GAIN AND LONG-TERM CAPITAL ON SH ARE TRANSACTIONS WHERE THE DELIVERY HAD BEEN TAKEN OR GIVEN AND SECURITIES TRA NSACTION TAX HAD BEEN PAID, WAS LIABLE TO BE ACCEPTED. ACCORDINGLY, THE ORDERS OF REVENUE AUTHORITIES WERE TO BE REVERSED. [PARA 9] 11.4. EVEN CBDT IN CIRCULAR NO.4/2007 DT.15.6.2007 HAS LAID DOWN THE PRINCIPLES FOR HOLDING AS TO WHEN PROFITS EARNED FR OM TRANSACTIONS IN SHARE SHOULD BE HELD AS BUSINESS OR SHOULD BE TREATED AS INVESTMENT CIRCULAR NO. 4/2007, DATED JUNE 15, 2007 SUB : DISTINCTION BETWEEN SHARES HELD AS STOCK-IN-T RADE AND SHARES HELD AS INVESTMENTTESTS FOR SUCH A DISTINCTION. THE INCOME-TAX ACT, 1961 MAKES A DISTINCTION BETWEE N A CAPITAL ASSET AND A TRADING ASSET. 2. CAPITAL ASSET IS DEFINED IN SECTION 2(14) OF THE ACT. LONG-TERM CAPITAL ASSETS AND GAINS ARE DEALT WITH UNDER SECTION 2(29A) AND S ECTION 2(29B). SHORT-TERM CAPITAL ASSETS AND GAINS ARE DEALT WITH UNDER SECTI ON 2(42A) AND SECTION 2(42B). 3. TRADING ASSET IS DEALT WITH UNDER SECTION 28 OF THE ACT. 4. THE CENTRAL BOARD OF DIRECT TAXES (CBDT) THROUGH INSTRUCTION NO. 1827 DATED AUGUST 31, 1989, HAD BROUGHT TO THE NOTICE OF THE ASSESSING OFFICERS THAT THERE IS A DISTINCTION BETWEEN SHARES HELD AS INVESTMENT (CAPITAL ASSET) AND SHARES HELD AS STOCK-IN-TRADE (TRADING ASSET). IN THE LIGHT OF A NUMBER OF JUDICIAL DECISIONS PRONOUNCED AFTER THE ISSUE OF TH E ABOVE INSTRUCTIONS, IT IS PROPOSED TO UPDATE THE ABOVE INSTRUCTIONS FOR THE I NFORMATION OF THE ASSESSEES AS WELL AS FOR GUIDANCE OF THE ASSESSING OFFICERS. 5. IN THE CASE OF CIT V. ASSOCIATED INDUSTRIAL DEVE LOPMENT COMPANY (P) LTD. [1971] 82 ITR 586, THE SUPREME COURT OBSERVED THAT (HEADNOTE) : ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 14 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 HE SHOULD, IN NORMAL CIRCU MSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM HIS RECORDS AS TO WHETHER HE HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHI CH ARE HIS STOCK-IN-TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT. 6. IN THE CASE OF CIT V. H. HOLCK LARSEN [1986] 160 ITR 67, THE SUPREME COURT OBSERVED (PAGE 87) : THE HIGH COURT, IN OUR OPINION, MADE A MISTAKE IN O BSERVING WHETHER TRANSACTIONS OF SALE AND PURCHASE OF SHARES WERE TR ADING TRANSACTIONS OR WHETHER THESE WERE IN THE NATURE OF INVESTMENT WAS A QUESTION OF LAW. THIS IS A MIXED QUESTION OF LAW AND FACT. 7. THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE ABOVE TWO CASES AFFORD ADEQUATE GUIDANCE TO THE ASSESSING OFFICERS. 8. THE AUTHORITY FOR ADVANCE RULINGS (AAR) [2007] 2 88 ITR 641, REFERRING TO THE DECISIONS OF THE SUPREME COURT IN SEVERAL CASES , HAS CULLED OUT THE FOLLOWING PRINCIPLES (PAGE 651) : (I) WHERE A COMPANY PURCHASES AND SELLS SHARES, IT MUST BE SHOWN THAT THEY WERE HELD AS STOCK-IN-TRADE AND THAT EXIS TENCE OF THE POWER TO PURCHASE AND SELL SHARES IN THE MEMORANDUM OF ASSOC IATION IS NOT DECISIVE OF THE NATURE OF TRANSACTION ; (II) THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MA NNER OF MAINTAINING BOOKS OF ACCOUNT, THE MAGNITUDE OF PURCHASES AND SA LES AND THE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD F URNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS ; (III) ORDINARILY THE PURCHASE AND SALE OF SHARES WI TH THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRANSACTION B EING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE ; BUT WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCO ME BY WAY OF DIVIDEND ETC. THEN THE PROFITS ACCRUING BY CHANGE I N SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT. 9. DEALING WITH THE ABOVE THREE PRINCIPLES, THE AAR HAS OBSERVED IN THE CASE OF FIDELITY GROUP AS UNDER (PAGE 661) : WE SHALL REVERT TO THE AFOREMENTIONED PRINCIPLES. T HE FIRST PRINCIPLE REQUIRES US TO ASCERTAIN WHETHER THE PURCHASE OF SHARES BY A FI I IN EXERCISE OF THE POWER IN THE MEMORANDUM OF ASSOCIATION/TRUST DEED WAS AS STOCK-IN-TRADE AS THE MERE EXISTENCE OF THE POWER TO PURCHASE AND SELL SH ARES WILL NOT BY ITSELF BE DECISIVE OF THE NATURE OF TRANSACTION. WE HAVE TO V ERIFY AS TO HOW THE SHARES WERE VALUED/HELD IN THE BOOKS OF ACCOUNT I.E., WHET HER THEY WERE VALUED AS STOCK-IN-TRADE AT THE END OF THE FINANCIAL YEAR FOR THE PURPOSE OF ARRIVING AT BUSINESS INCOME OR HELD AS INVESTMENT IN CAPITAL AS SETS. THE SECOND PRINCIPLE ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 15 FURNISHES A GUIDE FOR DETERMINING THE NATURE OF TRA NSACTION BY VERIFYING WHETHER THERE ARE SUBSTANTIAL TRANSACTIONS, THEIR M AGNITUDE, ETC., MAINTENANCE OF BOOKS OF ACCOUNT AND FINDING THE RATIO BETWEEN P URCHASES AND SALES. IT WILL NOT BE OUT OF PLACE TO MENTION THAT REGULATION 18 O F THE SEBI REGULATIONS ENJOINS UPON EVERY FII TO KEEP AND MAINTAIN BOOKS O F ACCOUNT CONTAINING TRUE AND FAIR ACCOUNTS RELATING TO REMITTANCE OF INITIAL CORPUS OF BUYING AND SELLING AND REALIZING CAPITAL GAINS ON INVESTMENTS AND ACCO UNTS OF REMITTANCE TO INDIA FOR INVESTMENT IN INDIA AND REALIZING CAPITAL GAINS ON INVESTMENT FROM SUCH REMITTANCES. THE THIRD PRINCIPLE SUGGESTS THAT ORDI NARILY PURCHASES AND SALES OF SHARES WITH THE MOTIVE OF REALIZING PROFIT WOULD LEAD TO INFERENCE OF TRADE/ADVENTURE IN THE NATURE OF TRADE ; WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF COMPANIES IS TO DERIVE INCOME BY WAY OF D IVIDENDS ETC., THE TRANSACTIONS OF PURCHASES AND SALES OF SHARES WOULD YIELD CAPITAL GAINS AND NOT BUSINESS PROFITS. 10. THE CENTRAL BOARD OF DIRECT TAXES ALSO WISHES T O EMPHASISE THAT IT IS POSSIBLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS, I. E., AN INVESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRADING PORTFOLIO COMPRISING OF STOCK-IN-TRADE WHIC H ARE TO BE TREATED AS TRADING ASSETS. WHERE AN ASSESSEE HAS TWO PORTFOLIOS, THE A SSESSEE MAY HAVE INCOME UNDER BOTH HEADS I.E., CAPITAL GAINS AS WELL AS BUSINESS INCOME. 11. THE ASSESSING OFFICERS ARE ADVISED THAT THE ABO VE PRINCIPLES SHOULD GUIDE THEM IN DETERMINING WHETHER, IN A GIVEN CASE, THE S HARES ARE HELD BY THE ASSESSEE AS INVESTMENT (AND THEREFORE GIVING RISE T O CAPITAL GAINS) OR AS STOCK-IN-TRADE (AND THEREFORE GIVING RISE TO BUSINE SS PROFITS). THE ASSESSING OFFICERS ARE FURTHER ADVISED THAT NO SINGLE PRINCIP LE WOULD BE DECISIVE AND THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSID ERED TO DETERMINE WHETHER, IN A GIVEN CASE, THE SHARES ARE HELD BY THE ASSESSEE A S INVESTMENT OR STOCK-IN- TRADE. 12. THESE INSTRUCTIONS SHALL SUPPLEMENT THE EARLIER INSTRUCTION NO. 1827 DATED AUGUST 31, 1989. [ F. NO. 149/287/2005-TPL ] 11.5. IN ANOTHER CASE JANAK S. RANGWALLA V. ASSISTA NT COMMISSIONER OF INCOME-TAX, RANGE-12(2), THE TRIBUNAL HAS SIMILARLY HELD AS UNDER : THE MERE VOLUME OF TRANSACTION TRANSACTED BY THE A SSESSEE WOULD NOT ALTER THE NATURE OF TRANSACTION. IT IS AN ESTABLISHED PRI NCIPLE THAT INCOME IS TO BE COMPUTED WITH REGARD TO THE TRANSACTION. THE TRANSA CTION IN WHOLE HAS TO BE TAKEN INTO CONSIDERATION AND THE MAGNITUDE OF THE T RANSACTION DOES NOT ALTER THE NATURE OF TRANSACTION. THOUGH THE PRINCIPLE OF RES JUDICATA DOES NOT APPLY TO THE INCOME-TAX PROCEEDINGS AS EACH YEAR IS AN IN DEPENDENT YEAR OF THE ASSESSMENT BUT IN ORDER TO MAINTAIN CONSISTENCY, IT IS A JUDICIALLY ACCEPTED PRINCIPLE THAT SAME VIEW SHOULD BE ADOPTED FOR THE SUBSEQUENT YEARS, UNLESS THERE IS A MATERIAL CHANGE IN THE FACTS. [PARA 6] ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 16 IN THE FACTS OF THE INSTANT CASE, THE ASSESSEE WAS HOLDING THE SHARES AS INVESTMENT FROM YEAR TO YEAR. IT WAS THE INTENTION OF THE ASSESSEE WHICH WAS TO BE SEEN TO DETERMINE THE NATURE OF TRANSACTION C ONDUCTED BY THE ASSESSEE. THOUGH THE INVESTMENT IN SHARES WAS ON A LARGE MAGN ITUDE BUT THE SAME WOULD NOT DECIDE THE NATURE OF TRANSACTION. SIMILAR TRANSACTIONS OF SALE AND PURCHASE OF SHARES IN THE PRECEDING YEARS HAD BEEN HELD TO BE INCOME FROM CAPITAL GAINS BOTH ON LONG-TERM AND SHORT-TERM BASI S. THE TRANSACTION IN THE YEAR UNDER CONSIDERATION ON ACCOUNT OF SALE AND PUR CHASE OF SHARES WAS SAME AS IN THE PRECEDING YEARS AND THE SAME WAS TO BE ACCEPTED AS SHORT- TERM CAPITAL GAINS. THERE WAS NO BASIS FOR TREATING THE ASSESSEE AS A TRADER IN SHARES, WHEN HIS INTENTION WAS TO HOLD SHARES IN TH E INDIAN COMPANIES AS AN INVESTMENT AND NOT AS STOCK-IN-TRADE. THE MERE MAGN ITUDE OF THE TRANSACTION DOES NOT CHANGE THE NATURE OF TRANSACTION, WHICH AR E BEING ASSESSED AS INCOME FROM CAPITAL GAINS IN THE PAST SEVERAL YEARS . THE ASSESSING OFFICER WAS TO BE DIRECTED TO SET OFF THE LONG-TERM CAPITAL LOSS AGAINST THE SHORT-TERM CAPITAL GAIN OF THE YEAR UNDER CONSIDERATION. [PARA 7] IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE WAS ALLOWED. [PARA 9] 12. WHEN WE APPLY THE PRINCIPLES LAID DOWN IN THE A BOVE JUDGMENTS, WE FIND IN THE PRESENT CASE THAT (1) THE ASSESSEES DID NOT HAVE DEALINGS IN LARGE N UMBER OF SCRIPS OR LARGE FREQUENCY OF TRANSACTIONS WHICH WOULD WARRANT INTER FERENCE THAT THEY ARE TRADERS; (2) IN THE BOOKS OF ACCOUNTS THE ASSESSEES HAVE NEV ER TREATED THE SHARES AS STOCK IN TRADE AND RETURNS OF INCOME HAVE BEEN F ILED PRIOR TO THE SEARCH SHOWING THEM AS INVESTMENTS AND PROFIT THERE FROM A S CAPITAL GAINS; (3) EVEN THOUGH MONEY HAS BEEN BORROWED TO INVEST IN SHARES, NEITHER THE INTEREST PAID ON BORROWED MONEY OR SECURITY TRANSAC TION TAX HAS BEEN CLAIMED WHILE COMPUTING CAPITAL GAINS; (4) THE ASSESSEES HAVE RETAINED THE SHARES FOR ENJO YING APPRECIATION IN VALUE AND NOT FOR THE PURPOSE OF REALIZATION OF PRO FIT. THERE IS APPARENTLY NO COMMERCIAL MOTIVE WHICH IS AN ESSENTIAL INGREDIENT TO BE A TRADER. IT IS CLEARLY SHOWN BY THEM IN THE RETURNS OF INCOME FILED THAT T HEY ARE ENJOYING DIVIDEND INCOME FROM HOLDING SHARES AS INVESTMENT; (5) IT IS NOT SHOWN BY THE REVENUE THAT STOCK OF SH ARES HAVE BEEN VALUED AT COST OR MARKET PRICE WHICHEVER IS LOW BUT THEY H AVE VALUED AT COST WHILE COMPUTING THE CAPITAL GAINS; (6) THE ASSESSEES HAVE APPARENTLY DISCHARGED THE PR IMARY ONUS BY KEEPING RECORD OF INVESTMENT SHOWING HOLDINGS ONLY AS INVESTMENT AND NOT ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 17 STOCK IN TRADE. THE PRIMARY ONUS HAS NOT BEEN REBUT TED BY THE REVENUE. THE CASE OF THE REVENUE IS THUS BASED MERELY ON SUSPICI ON AND ON NUMBER OF TRANSACTIONS CARRIED IN ONE OR TWO YEARS THOUGH WHI CH ARE NOT FREQUENT IF WE SPREAD THEM ON MONTHLY BASIS AS OBSERVED BY US ABOV E; (7) ASSESSEES HAVE ALWAYS TAKEN THE DELIVERY OF SHA RES AND MADE THEM REGISTERED. IT HAS BEEN HELD IN SARNATH INFRASTRUCT URE (P) LTD V. ACIT (122 TTJ 216) THAT ONCE SHARES ARE REGISTERED IN THE NAME OF THE ASSESSEE, INTENTION IS CLEAR THAT IT IS AN INVESTMENT AND NOT A TRADE; (8) THERE IS NO MATERIAL ON RECORD TO SUGGEST THAT THE ASSESSEE HAS FULFILLED THE LEGAL REQUIREMENT FOR DEALING AS A TR ADER IN SHARES. 13. IN OUR CONSIDERED VIEW THE SUSPICION OF THE REV ENUE TO HOLD THE TRANSACTIONS MADE BY THE ASSESSEES AS IN THE NATURE OF TRADE IS BASED ON THE PREMISE THAT THE ASSESSEES ARE FREQUENTLY RESHUFFLI NG ITS PORTFOLIO AND MERELY BECAUSE SHARES ARE REGISTERED/TRANSFERRED IN THE NA MES OF THE ASSESSEES WOULD NOT BE SUFFICIENT TO HOLD THAT THE TRANSACTIO NS ARE INVESTMENT. BUT WE ARE OF THE CONSIDERED VIEW THAT THE PERCEPTION OF T HE DEPARTMENTAL AUTHORITIES IS LEGALLY MISPLACED. THOUGH APPARENTLY IT MAY APPE AR THAT MERELY BECAUSE SHARES ARE REGISTERED/TRANSFERRED IN THE NAME OF TH E ASSESSEE HE MAY NOT GO OUT OF AMBIT OF A TRADER BUT THE FACT IS THAT THE A SSESSEES HAVE DISCHARGED THEIR ONUS BY GETTING THE SHARES REGISTERED IN THEI R NAMES. NOW ONUS SHIFTS TO THE REVENUE TO SHOW THAT INSPITE OF SHARES BEING TR ANSFERRED/REGISTERED IN THE NAME OF THE ASSESSEES, THE ASSESSEE ARE STILL DEALI NG IN SHARES AS A TRADER. THIS CAN BE DONE BY THEM BY SHOWING THAT ASSESSEES ARE CARRYING OUT LARGE FREQUENCY OF TRANSACTIONS, CREATING AN OFFICE, CARR YING OUT RELATED ORGANIZED ACTIVITIES AND COMPLYING WITH OTHER LEGAL REQUIREME NT OF BEING A TRADER. IN THE PRESENT CASE THE FREQUENCY OF TRANSACTIONS ARE NOT SO MUCH TO HOLD THAT THE ASSESSEES ARE STILL TRADERS EVEN THOUGH SHARES ARE REGISTERED IN THEIR NAMES. IN THE ABOVE TWO JUDGMENTS NAMELY SARNATH INFRASTRU CTURE (P) LTD V. ACIT (122 TTJ 216) AND GOPAL PUROHIT V. JCIT [(2009) 29 SOT 117 (MUM)], IT HAS BEEN HELD THAT ASSESSEE WOULD BE INVESTOR PRIMARILY IF SHARES ARE REGISTERED BY IT IN ITS NAME. ONCE THERE IS NO CONTRARY MATERI AL TO HOLD OTHERWISE, WE WOULD RESPECTFULLY FOLLOW THESE DECISIONS AND HOLD THAT THE ASSESSEES IN THE INSTANT CASES ON HAND HAVE DISCHARGED THE PRIMARY O NUS BY GETTING THE SHARES REGISTERED IN THEIR NAMES AND THEREFORE, THE Y CAN VERY WELL CLAIM AS INVESTORS. SINCE THE CASE OF THE REVENUE IS BASED M ERELY ON SUSPICION AND NOT ON ADEQUATE MATERIAL TO SHOW THAT THE ASSESSEE IS ACTING AS A TRADER, WE ARE UNABLE TO INTERFERE WITH THE ORDER PASSED BY TH E LEARNED CIT(A) WHICH IS QUITE ELABORATE, REASONED AND BASED ON JUDGMENTS OF COURTS. 9. WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FA VOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE TRIBUNALS DECISION IN O THER ASSESSEES OF GROUP CASES (SUPRA). WE FURTHER FIND THAT IN THIS CASE ALSO, A SSESSEE HAVE TAKEN DELIVERY OF SHARE AND THERE IS NO MATERIAL TO SHOW THAT SHARES WERE S OLD WITHOUT TAKING DELIVERY AND ITA NO.2866-74 /AHD/2008 & CO 263-71/AHD/2008 A.YS.00-0 1 TO 06-07 ACIT CC-2(3) ABD V. BANKIM J SHAH P AGE 18 EARNED PROFIT ON SPECULATION BASIS. WE FURTHER FIND THAT THE ASSESSEE HAS BORROWED FUNDS FOR INVESTMENT IN THE SHARES BUT INTEREST PAI D HAS NOT BEEN CLAIMED AS DEDUCTION. THIS CLEARLY ESTABLISHES THAT THE INTEN TION OF THE ASSESSEE WAS TO MAKE INVESTMENT AND NOT TO DEAL AS TRADER. ONE MORE FAC T WAS POINTED OUT BY LD. COUNSEL FOR ASSESSEE THAT EVEN THE STT HAS NOT BEEN CLAIMED IN THE COMPUTATION OF CAPITAL GAINS. WE AGAIN FURTHER FIND THAT THE NUMBER OF TRA NSACTIONS AND NUMBER OF SCRIPTS ENTERED INTO BY THE ASSESSEE ARE NOT MUCH ENOUGH AN D NOT REPETITIVE. ACCORDINGLY, RELYING ON THE TRIBUNALS DECISION IN OTHER ASSESSE ES OF GROUP CASES (SUPRA), WE DISMISS THESE APPEALS OF THE REVENUE. NOW COMING TO ASSESSEES CO NO.260-262/AHD/2008. 10. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE HAS NOT PRESSED THE CO AND ACCORDINGLY, SAME ARE DISMISSED AS NOT PRESSED. 11. IN THE RESULT, ALL APPEALS OF REVENUE AND THE COS OF ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 02/07/2010 SD/- SD/- (A.N.PHAUJA) (MAHAVIR SIN GH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, DATED : 02/07/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-III, AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD