ACIT, CHENNAI V. Sri R.Raman (HUF), CHENNAI

ITA 1028/CHNY/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51679 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 02-08-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 21-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K MEGHANATH CHOWHAN JT
• Assessee Lawyers: T BANUSEKAR
• Keywords: Capital asset; Business income; Cost of acquisition; Date of conversion
• Section: 45(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH C : CHENNAI [BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER] I.T.A.NO.1028/MDS/2010 ASSESSMENT YEAR : 2005-06 THE ACIT CIRCLE XV CHENNAI VS SHRI R.RAMAN(HUF) NO.1 SARASWATHI STREET MAHALINGAPURAM CHENNAI 600 034 [PAN AAAHR1366J ] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.MEGHANATH CHOWHAN, JT.CIT RESPONDENT BY : SHRI T.BANUSEKAR, C.A O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE-HUF, FOR ASS ESSMENT YEAR 2005- 06, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 31.3.2010. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A HUF AND FOR ASSESSMENT YEAR 2005-06 IT FILED RETURN OF INCOME ON 30.10.2005 DECLARING TOTAL INCOME OF ` 10,93,530/-. THE ASSESSEE HAS DECLARED A NET LOSS OF ` 54,536/- UNDER THE HEAD BUSINESS AND PROFESSION. THE CREDITS TO THE PROFIT & LOSS ACCO UNT ARE ON ACCOUNT OF ITA 1028/10 :- 2 -: (I) DIVIDENDS ON SHARES OF ` 2,65,565, CLAIMED AS EXEMPT; (II) INCENTIVES OF ` 330, OFFERED UNDER OTHER SOURCES; (III) INTEREST FROM BANKS AND ASPIRATION COMMUNICATIONS OF ` 17,605 AND ` 13,653, RESPECTIVELY, OFFERED UNDER OTHER SOURCES; (IV) PROFIT ON SALE OF SHARES OF ` 41,07,392, OFFERED AS CAPITAL GAIN; AND (V) REDEMPTION PROCEEDS OF MARICO PREFERENCE SHARES OF ` 35,860, CLAIMED AS EXEMPT U/S 10(33) OF THE ACT. 3. THE ASSESSEE HAS NOT DECLARED ANY RECEIPT FROM BUSI NESS, BUT HAS CLAIMED A LOSS OF ` 54,536/- UNDER THE HEAD INCOME FROM BUSINESS. THE ASSESSING OFFICER FOUND THIS BUSINE SS LOSS DISALLOWABLE ON THE BASIS OF FACTS DISCLOSED BY THE ASSESSEE. H E TRIED ANOTHER COCK IN THE SENSE THAT HE SOUGHT TO TREAT THE TRANSACTI ONS OF SALE OF SHARES AS ASSESSEES BUSINESS TRANSACTIONS AND TO TAX THE PROFITS THEREON AS BUSINESS INCOME. DURING THE YEAR, THE ASSESSEE S OLD SHARES WORTH ` 88,90,860/- AND PURCHASED SHARES WORTH ` 71,18,738/-. THE PROFIT ON SALE OF SHARES REALIZED WAS ` 41,07,392/-. THIS RECEIPT WAS PROPOSED TO BE TAXED AS PROFIT ON SALE OF SHARES BY THE ASSE SSING OFFICER AND HE CALLED FOR ASSESSEES OBJECTIONS THEREON. THE ASSE SSEE MADE FOLLOWING SUBMISSIONS AGAINST THE PROPOSED ACTION OF THE ASSE SSING OFFICER: ITA 1028/10 :- 3 -: A) THERE ARE ONLY 10 INSTANCES OF PURCHASE OF SHAR ES AND 3 INSTANCES OF SALE OF SHARES DURING THE YEAR. B) IN SUPPORT OF THE CONTENTION THAT THE PROFIT A ND SALE OF SHARES IS TAXABLE AS 'CAPITAL GAINS' AND NOT AS 'BU SINESS INCOME', RELIANCE HAS BEEN PLACED IN THE SUBMISSION S ON J AN UNREPORTED DECISION OF THE HON'BLE MADRAS HIGH COUR T IN THE CASE OF CIT VS SUPRIYA INVESTMENTS P LTD., A COPY O F WHICH IS ENCLOSED ALONG WITH THE SUBMISSIONS. C) AT ANY POINT OF TIME, IT IS MENTIONED, THAT THE PORTPOLIA OF SHARES HELD WAS NOT MORE THAN 12 COMPANIES. D) IN RESPECT OF THE SHARE HOLDINGS IN THE FOLLOWIN G COMPANIES, THE SAME NUMBER OF SHARES ON 31.03.2005 CONTINUES T O BE HELD TILL 31.03.2007. A) M M FORGINGS B) GLENMARK PHARMACUITICALS C) WOCKHARDT PHARMA D) CRIOBOS PRODUCTS E) MPHASIS SOFTWARE E) THE AVERAGE PERIOD OF HOLDING OF MANY OF THESE SHARES IS 3 YEARS. F) THE SHARES OF BLUE DART WERE SOLD BACK TO THE CO MPANY DURING THIS YEAR SINCE THEY WERE DELISTED. THESE SH ARES WERE NOT SOLD IN THE MARKET. G) THE DIVIDEND RECEIVED ON ALL THE SHARES HELD DUR ING THE YEAR ENDING ON 31.03.2005, AMOUNTED TO ` 2,65,566/- IT WAS MENTIONED THAT IN THE SUBMISSIONS THAT THE A BOVE FACTS CLEARLY ESTABLISH THE CONTENTION THAT THE ASSESSEE IS ONLY AN INVESTOR AND NOT A TRADER IN SHARES. 4. AFTER REJECTING THE SUBMISSION OF THE ASSESSEE, THE ASSESSING OFFICER ENGAGED HIMSELF IN DEFINING AS TO WHAT IS T HE OBJECT OF ASSESSEE ITA 1028/10 :- 4 -: IN PURCHASE AND SALE OF SHARES IN ITS CASE IN ORDER TO DETERMINE WHETHER THE ASSESSEE IS DEALER IN SHARES OR AN INVE STOR IN SHARES. AFTER DISCUSSING VARIOUS CASE LAWS, THE ASSESSING O FFICER HAS OBSERVED THAT ALTHOUGH IN THE AUDIT REPORT FILED IN FORM NO. 3CB AND 3CD, OBTAINED U/S 44AB OF THE ACT, THE ASSESSEE HAS DI SCLOSED INVESTMENT IN SHARES, BUT AFTER HIS OWN INTERPRETATION THE AS SESSING OFFICER HAS TREATED THE TRANSACTIONS TO BE OF BUSINESS OF SALE AND PURCHASE OF SHARES. HE HAS NOTED THE NUMBER OF BILLS FOR PURCH ASE AND SALE OF SHARES BETWEEN 22.7.2004 AND 24.3.2005 AND HAS FOUN D 44 CONTRACTS OF SALE AND PURCHASE. HE HAS FOUND PURCHASE OF 739 33 SHARES AND SALE OF 18750 SHARES. HE FURTHER NOTICED THE AMOU NT INVOLVED FOR PURCHASE OF SHARES AT ` 71,18,738/- AND SALE RECEIPTS AT ` 61,39,281/-. BUT TO FURTHER ELABORATE THE FACTS, THE ASSESSEE H AS PURCHASED SHARES AS UNDER: (A) M M FORGINGS 3,624 SHARES (B) COSMO FILMS 44,105 SHARES (C) CREW BDS PRODUCTS 19,804 SHARES (D) MPHASIS SOFTWARE 7,400 SHARES TOTAL 73,933 SHARES 5. THE ASSESSEE HELD TOTAL NUMBER OF SHARES OF 50,868 AS ON 1.4.2004 WHICH WERE REFLECTED IN ITS BALANCE SHEET AT THE COST OF ` 1,89,95,710/-. UNTIL 2004-05, THE ASSESSEE HAS BEE N REPORTING THE ITA 1028/10 :- 5 -: INCOME ON TRADING OF SHARES AS BUSINESS INCOME. DURING THE YEAR 2004, IT HAS CONVERTED PART OF ITS SHAREHOLDINGS AS INVESTMENT AND HAS DISCLOSED THIS FACT IN ITS FINAL ACCOUNTS FILED ALO NGWITH THE RETURN OF INCOME FOR ASSESSMENT YEAR 2004-05. TO THE ABOVE FACTS, THE ASSESSING OFFICER HAS FINALLY APPLIED FEW TESTS LAI D DOWN BY THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF PARI MANGALDAS G IRIDAS VS CIT, 283 ITR 338, AND HAS OBSERVED AS UNDER: 10.5.1 FIRSTLY, THE ASSESSEE HAD STARTED HIS A CTIVITY OF PURCHASE .OF SHARES AS A TRADER. THIS PROVES THAT T HE PURCHASE OF SHARES WAS WITH AN INTENTION OF DEALING IN SUCH SHARES WITH A VIEW TO EARN PROFIT. 10.5.2 SECONDLY, THE PURPOSE OF THE SALE OF SHARE S IN THE CASE OF THE ASSESSEE WAS TO REINVEST IN THE PURCHASE OF NEW SHARES AS EVIDENCED BY ITS BANK ACCOUNT AND THE DEM AT ACCOUNT FURNISHED BY THE ASSESSEE. 10.5.3 THIRDLY, ALTHOUGH THE ASSESSEE HAS TREATED SUCH SHARES AS 'INVESTMENTS' IN HIS BOOKS OF ACCOUNTS, THE COURTS HAVE HELD THAT THIS FACT IS NOT CONCLUSIVE TO ARRIV E AT A DECISION THAT THE GAINS ON SALE OF SUCH SHARES CAN BE TAXED AS 'INCOME FROM CAPITAL GAIN'. 10.5.4 FOURTHLY, THE ASSESSEE HAS UNDOUBTEDLY HAS CONSIDERED ITSELF AS A DEALER IN SHARES EVEN FOR TH IS ASSESSMENT YEAR SINCE, IT HAS ENCLOSED ALONG WITH I TS RETURN OF INCOME, THE AUDIT REPORT IN FORM 3CB AND 3CD IN ACCORDANCE WITH THE PROVISIONS OF SECTION 44AB OF THE INCOME-TAX ACT, 1961. 10.5.5 THE FIFTH TEST LAID DOWN GUJARAT HIGH COURT IS APPLICABLE ONLY TO PARTNERSHIP AND COMPANIES AND SO HAS NO RELEVANCE IN THIS CASE. ITA 1028/10 :- 6 -: 10.5.6 A L THOUGH, AS MENTIONED IN THE SUBMISSIONS MADE IN THIS CASE, THE AS SESSEE HAS PURCHASED SHARES OF VERY FEW COMPANIES, FROM THE FACTS MENTIONED IN PARA NO .10.2 ABOVE, IT CAN BE NOTED THAT THE VOLUME IN WHICH THE ASSESS EE PURCHASED THE SHARE S IS VERY LARGE. THE OUTLAY OF INVESTMENT IN PURCHASE OF SUCH SHARES IS ALSO VERY HUGE, WHI CH RUNS INTO SEVERAL CRORES. IN FACT, AS MENTIONED THE FACTS NAR RATED, THE ASSESSEE HE L D SHARES WORTH ` 1 . 89 CRORES AS ON 01 . 04.2004 WHICH HAS I NCREASED TO ` 3. 27 CR OR ES AS ON 31 . 03.2005 DESPITE T H E SALE OF SHARES WORTH ` 47.83 LAKHS. FURTHER, THE FREQU EN CY OF SUCH TRANSACTIONS OF PURCHASE AND SA L E OF SHARES IS ALSO QUITE SUBSTANTIAL . DURING TH E Y EA UNDER CONSIDERATION, AS MENTIONED ABOVE, THERE WERE 44 SU CH CONTRACTS OF S A LE O R PURCHASE OF SHARES INVOLVING PURCHASE OF 73,933 SHARES AND SALE OF 18,750 SHARES, IT IS FURTHER NOTICED THAT TH I S IS A REGU L AR FEATURE OF THE ASSESSEE'S CASE CONSIDER I NG T HE REPETITION AND CONTINUITY, COUPLED WITH THE MAGNITUDE OF THE TRANSACTIONS, I T C A N REASONABLY BE INFERRED THAT THE ACTIVITY OF PURCHASE AND SALE OF SHARE DON E BY THE ASSESSEE IS IN THE NATURE OF 'BUSINESS'. 6. ON THE BASIS OF ABOVE OBSERVATION, THE ASSESSING OF FICER HAS FINALLY FOUND THAT THE PROFIT ON THE SHARE TRANSACT IONS HAS TO BE TAXED AS BUSINESS PROFITS AS AGAINST CAPITAL GAINS C LAIMED BY THE ASSESSEE AND HAS THUS, ARRIVED AT A NET BUSINESS INCOME OF ` 39,23,781/- AND HAS ADDED THE SAME IN THE HANDS OF THE ASSESSEE. A GGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE LD. CIT(A), WH O, IN TURN, HAS CONSIDERED POINTWISE ANSWER OF EACH ASPECT SUBMITTE D BEFORE HIM IN THE WRITTEN SUBMISSION BY THE ASSESSEE WHICH ARE AS UNDER: ITA 1028/10 :- 7 -: 'THE ONLY ISSUE IN DISPUTE IS WHETHER THE PROFITS E ARNED BY THE APPELLANT DURING THE YEAR ARE TAXABLE AS CAPITAL GA INS OR AS BUSINESS INCOME. THE AO HELD THE SAME TO BE BUSINESS INCOME AS AGAIN ST APPELLANT'S CONTENTION THAT IT IS T AS CAPITAL GAIN S. THE AO HAS CITED VARIOUS REASONS TO JUSTIFY HIS ACTION ACH OF THOSE REASONS IS LISTED BELOW TOGETHER WITH APPELLANT'S COUNTER FOR THE SAME. 1) THAT, INITIALLY WHEN THE APPELLANT BOUGHT THE SHARE S IN YEAR ENDED 31-03-2002 AND 31-03-2003 THEY HELD THEM AS S TOCK IN TRADE WHICH REFLECTS THEIR PROFIT MOTIVE . ANSWER:- I) E VE N WHEN A PE R SO N B UYS S H A R ES FO R BE I NG HELD AS INV E STMENTS , THEY AR E B R OUGHT W I TH A MOTIVE TO MAKE A N D R EAL I SE CAP I TAL P R O FI T WH IC H IS ASSESSABL E T O T A X AS CAPITAL GA IN . ME R E MOTIVE TO MAKE PROF I T I S NOT ENOUGH . II) ASSESS I NG O F FICER OUGHT TO HAVE C ONSIDERED THE ACT I ON OF THE APP ELLANT TO HOLD ALL THE SHAREHOLD I NGS AS INVESTMEN T WITH EFFECT F R OM 1 . 4 . 2003 WHICH WA S CLEA R LY S I GN I F I ED AND D I SCLOSED I N THE NOTES ON ACCOUNTS TO THE AUD I TED STATEMENTS OF ACCOUNTS FO R YEAR ENDED 3 1 -03-2004 III ) FUR TH E R , THROUGHOUT T HE PE RI OD , THE APP EL LANT WAS ACT I NG ON LY AS AN INV ESTO R RATHER T H AN AS TRADE R WH I C H I S PROVED BY THE A VE RA GE HOLDING PE RI OD O F SHARES BEING MORE THAN TWO YEARS WHEN THE IT ACT 1961 I TSELF REQUI R ES O NLY ON E YEAR HOLDING PERIOD TO C L ASSIFY CAPITAL GA I N AS LONG TERM . I V ) EVEN WHEN TH E AP P ELLANT WAS HOLDING THE SHARES AS STOCK IN T R AD E , THEY WERE HOLDING THEM FOR LONG PER I ODS SIMILAR TO AN INVESTOR . V ) MANY O F THE SHARES BOUGH T DURING THIS PERIOD HAVE BEEN HELD E V E N UPTO 31 . 03 . 07 AS PER DETAILS G I VEN TO AO . ITA 1028/10 :- 8 -: CASE LAWS AND CIRCULAR APPLICABLE CIT VS JANNAHVI INVESTMENTS LTD (2008) 304 ITR 276(BOM). CIT VS BRIGHT STAR INVESTMENTS P. LTD I.T.A.NO. 674/MUM/2004 02.07.2008 MUMBAI ITAT. IN BOTH THESE C A SES , THE A S S ESSE E WAS IN I T I ALLY HOLD I NG TH E SHARES AS S T OC K IN T RADE AND LATE R C ONVE R T E D T HE M INT O I NVESTMENTS AND THE COURTS HAVE APPROVED THE TA X A TI ON OF P R OF I T S O N SA L E O F T H O SE SHARES AS CAPITAL GA I N . ALSO , CIRC UL A R NO . 4 / 200 7 WH I CH CLARIFIES THAT THE CONDUCT OF THE ASSESSEE I S A CRUC I AL FACTOR I N DE CI D I NG THE NATURE OF INCOME . THEREFORE , THE AC TI ON OF CONVE R T I NG THE SHARES I NTO I NVESTMENTS AND THEN HO L D I NG THEM FOR LONG PE R I ODS BEFORE THE I R SALE C L EARLY ESTABLISH APPELLANT ' S INTENTION AND CONDUCT AS A N IN V E STOR AND NOT AS TRADER I N SHARES . 2) THAT THE A PPELL A NT HAVE BEEN MAK I NG F R EQUENT PURC H ASE S AND SA L ES IN FE W COMPAN I ES ' SHAR E S . ANSWER:- I) AC T UA LL Y TH I S I S A F ACT ' F AVOU R AB L E TO APPELLANT . AS A VA L UE INVES T O R , T H E Y I DENT I FIED FEW COMPAN I ES WHIC H ARE FUNDAMENTAL L Y SOUND AND W E N T ON ACCUMULATING THEIR SHARES GRADUALLY . AFTER HO L DING THEM F O R REASONAB L E P E R I OD , THEY WE R E SOLD A T A PR OF I T . TH I S I S T HE BASIC APPROACH OF AN INVESTOR . II) IN FACT, INSTANCES OF SALES WERE LESS THAN INS TANCES OF PURCHASE. I I I) VALUE OF SH AR ES SOLD DUR I NG THE YEAR WAS NOT EVEN 20% OF THE TO T AL VALU E OF SHARES HELD WH I L E TYP I CAL L Y I N THE CASE OF A DEALE R IN SHARES , THE SAME W ILL BE AT L EAST 0 % TO 300 % HENCE, THIS FACT ALSO PROVES APPELLANTS STATUS AS AN INVESTOR IN SHARES. ITA 1028/10 :- 9 -: 3) THAT THE A P PEL L ANT HAVE GOT THEIR A C COUNTS SUBJECTED TO TAX AUDIT THEREBY SIGN I FYING THAT THEY ARE IN THE B U S I NESS OF SHARES . ANSWER:- I) APPELLANT WERE IN THE BUSINESS OF INVESTMENT IN SHARES AND NOT TRADING IN SHARES. II) BECAUSE THE GROSS RECEIPTS FROM THEIR BUSINESS OF INVESTMENTS IN SHARES EXCEEDED ` 40 LAKHS, THEY GOT THEIR ACCOUNTS SUBJECTED TO TAX AUDIT U/S 44AB. THIS CAN' T BE USED TO HOLD THEM AS TRADERS IN SHARES WHEN THE FACTS AR E OTHERWISE. III) FOLLOWING DECISIONS SUPPORT THE POSITION THAT AN ASSESSEE CAN SIMULTANEOUSLY BE CARRYING ON BUSINESS AS AN IN VESTOR AS WELL AS TRADER IN SHARES AND THAT INCOME FROM BU SINESS OF INVESTMENTS IS TAXABLE AS CAPITAL GAINS. RAMAMIRTHAM CASE - 306 ITR 239 (MDS.) CIT - VS - TRISHULLNVESTMENTS TTD. (2008) 305 ITR 434 (MDS.) CIT - VS - KARAMCHAND THAPER & SONS LTD. 115 ITR 250 (CAL.) WHEREAS THE APPELLANT HAVE BEEN CARRYING ON BUSINES S ONLY AS INVESTOR IN SHARES BY HOLDING THEIR ENTIRE PORTFOLI O AS INVESTMENTS . OTHER DECISIONS CITED CIT - VS - GOPAL PUROHIT APPEAL NO.1121 OF 2009-(20 10) 228 CTR (BOM) 582 IN THIS CASE IT WAS HELD THAT ALL DELIVERY BASED TR ANSACTIONS ARE TO BE HELD AS INVESTMENT TRANSACTIONS AND PROFITS ARIS ING THEREFROM ARE TO BE TAXED AS SHORT TERM OR LONG TERM CAPITAL GAINS ONLY. ALL THE TRANSACTIONS OF THE APPELLANT ARE ONLY DELIVERY BASED WHICH HAS NOT BEEN DISPUTED BY ASSESSING OFFICER. NOTE REGARDING THE SPECIFIC ISSUES RAISED IN THE AS SESSMENT ORDER AND APPELLANT'S SUBMISSIONS THE AO HAS RELIED ON THE DECISION OF THE SUPREME CO URT IN G. VENKATASWAMY NAIDU & CO. VS CIT (35 ITR 594) TO EMP HASISE THE PROPOSITION THAT IF AN ASSET WAS INITIALLY PURC HASED WITH THE SOLE INTENSION OF SELLING THE SAME LATER AT A PROFI T, SUCH INTENSION RAISED A STRONG PRESUMPTION THAT IT IS AN ADVENTURE IN THE NATURE ITA 1028/10 :- 10 - : OF TRADE. HOWEVER, IT WAS A CASE WHERE THE ASSESSEE PURCHASED A PLOT OF LAND WHICH WAS ADJACENT TO THE MILLS RUN BY A COMPANY OF WHICH THE ASSESSEE WAS A MANAGING AGENT. HENCE, THE ASSESSEE WAS FULLY IN THE KNOW OF THINGS THAT WHEN THE MILL GRADUALLY DEVELOPED, THIS PLOT OF LAND ALSO WILL AP PRECIATE IN VALUE AND THEREBY THE ASSESSEE WILL BE ABLE TO SELL THE S AME AT A PROFIT. ACCORDINGLY, THE ASSESSEE SOLD THE PLOT AND REALIZE D THE PROFIT. THE APPELLANT'S CASE IS FACTUALLY DIFFERENT ON THE FOLLOWING GROUNDS:- I) THE APPELLANT HAD PURCHASED THE SHARES WHICH ARE DIFFERENT FROM LANDS. IN THE NORMAL COURSE, NOT EVERY PERSON WILL BUY A LAND FOR MAKING PROFIT. THE SAME WILL BE PURCHASED EITHE R FOR CULTIVATION OR FOR CONSTRUCTION OF A HOUSE OR FACTO RY OR OFFICE COMPLEX. INSTEAD OF DOING ANY OF THESE THINGS, IF A PERSON BUYS A LAND , KEEPS IT VACANT FOR QUITE SOME TIME AND SUBS EQUENTLY RESELLS IT EITHER AFTER PLOTTING IT OUT OR EVEN OTH ERWISE, THEN A PRESUMPTION IS RAISED THAT EVEN AT THE INCEPTION, H E BOUGHT THE LAND ONLY FOR RESALE AT A PROFIT AND THEREBY IT IS AN ADVENTURE IN THE NATURE OF TRADE. II) ON THE OTHER HAND, SHARES ARE PURCHASED AS INVE STMENTS NOT ONLY FOR BEING HELD AND DERIVING DIVIDEND INCOME, B UT ALSO FOR BEING SOLD AT THE APPROPRIATE TIME FOR REALIZING TH E CAPITAL APPRECIATION. THE VERY FACT, THAT THE COMPANIES ACT 1956 PERMITS FREE TRANSFERABILITY OF SHARES IN THE CASE OF PUBLI C LIMITED COMPANIES HIGHLIGHTS THE SPECIAL TYPE OF SHARES AS AN INVESTMENT CLASS OF ASSET. HENCE, IN RESPECT OF SHARES, EXCEPT THOSE PERSONS WHO ACQUIRED THE SHARES OF A PARTICULAR COMPANY AS PART OF THE PROMOTER GROUP WITH A VIEW TO EXERCISE CONTROL OVER THE COMPANY, ALL OTHER PERSONS WHO ACQUIRE SHARES DEFINITELY BUY THEM WITH AN INTENSION TO SELL ON A FUTURE DATE. III) EVEN UNDER THE IT ACT 1961 THE STATUTE HAS MA DE A SIGNIFICANT DISTINCTION BETWEEN SHARES AND OTHER TYPES OF CAPIT AL ASSETS BY PROVIDING THAT FOR SHARES, JUST ONE YEAR HOLDING PE RIOD IS SUFFICIENT TO CHARACTERIZE THEM AS LONG TERM CAPITAL ASSETS. THIS SHOWS THE INTENTION OF THE LAW MAKERS THAT SHARES AS PER SE A RE MEANT TO BE BOUGHT AND SOLD AND NOT MERELY HELD FOR DERIVING DI VIDEND INCOME ALONE. I V ) AGA IN , IN S ECTI ON 111 A OF 1 IT ACT 1961 ITSELF , A SPEC I AL R A T E O F 1 0 % I S P R E S CR I B E D F O R TA X I NG S H O RT TE RM C AP I TA L GA I N S W HI CH SI G N I F I ES TH E I N T E N S I ON OF THE L AW MAKERS THAT EV EN I N A S I T U ATION WHE R E THE S H A R ES ARE SO L D IN L ESS THA N O N E Y EA R , STI LL I T C A N G IV E R I S E TO ON LY SHO RT TERM CAPITAL GAINS AND NEE D N O T NECES S A R I LY BE ITA 1028/10 :- 11 - : BUSINESS I NCO M E . THE R EFORE , TH I S TEST OF I N I T I A L I NTENTION TO MAKE PROFIT IS NO T A C ORREC T TE ST T O B E APP L IED IN THE CASE OF SHARES T O D E C I DE WHETHE R I T IS A N IN VE S TMENT O R A T R A D I NG ACTIVITY . AGAIN, IN PARAGRA P H 9 OF THE ASSESS M ENT ORDE R , TH E ' AO HAS CITED THE DE CI S I O N O F THE GUJARAT HIGH COURT IN PARI MANGALDAS G I RIDAS VS CIT ( 283 ITR 338 GUJ . ) AN D LI S T ED OUT THE VAR I OUS TESTS LA I D DOW N I N THAT DE CI S I ON T O DE T E RM INE W H E THER A PARTICULAR PURCHASE AND SALE OF SHARE IS AN INVESTMENT OR A TRAD I NG ACTIVITY . AT T HE OUTSET. I T I S S U B M ITTED THAT THE CITAT I ON MENTIONED IN THE ASSESSMENT O R DER IS WRONG . THE CORRECT C I TAT I ON I S CIT VS REWASHANKER A. KOTHAR I (283 ITR 338 GUJ ) . THE REPORT OF THE SAID CASE LAW IS ATTACHED HEREWITH . OUT OF THE SIX CRITER I A L A ID DOW N I N TH I S DECI SI ON , THE LAST CRITERION IS THE MOST I MPO R TANT TEST VIZ ., THE VO LU M E , F R EQUENCY , CONTINUITY AND REGU L ARITY O F TRANSACT I ONS OF PURCHASE AN D SA L E . IT CAN BE SEEN F R O M TH E EN CL OSED CASE LAW R EPO R T OF THE SA M E DECI S I O N , I N THE SAME CASE , THE FOLLOW I NG FACTS WERE NOTED IN RESPECT OF THE TRANSACTIONS IN S H A RES AND I T WAS HELD T H AT THE SAME IS ON L Y AN INVESTMENT ACT I V IT Y GIV I NG RI SE TO C API T AL GA IN S A N D NOT B U S IN ESS I NCOME : I) THAT THE R E WAS A LON G GAP BE T WEE N T HE DAT ES O F ACQ UISI TI ON OF S HARES AND THE IR SALE . I I ) THA T SOME O F T H E S H A R ES SO LD DUR I NG TH E YEAR WE R E PU R C H ASED A T LE AST TH R EE YEA R S EARLIER WHI L E SOME OTHE RS WERE P U RCHASED MORE THAN 14 OR 15 YEARS BEFOR E . IT IS T H E CASE OF THE APPE L LA N T THAT THEY ARE ALSO I N THE SAME CATEGO R Y AS DEA L T IN THE AFO R ESA I D DE C I S I ON OF THE GUJARAT H I GH COURT . EVEN T H OUGH AL L T H E DE T A I L S I N TH I S R EGARD IN TH E FO R M OF AUDITED STATEMENT OF ACCOUNTS FOR THE F I NANC I AL YEA RS 2001-02 TO 2005 - 06 HAVE ALREADY BEEN FURN I SHED , THE FOLLOW I NG SUMMARIZED FACTS A R E F URNISHED TO P R OVE TH I S PO INT : ITA 1028/10 :- 12 - : F.Y VALUE OF SHARES PURCHASED ( ` ) VALUE OF SHARES SOLD ( ` ) NO. OF COMPANIES IN WHICH SHARES PURCHASED NO. OF COMPANIES IN WHICH SHARES SOLD DIVIDEND RECEIVED ( ` ) 2 001 - 02 2002 - 03 2 0 03 - 0 4 2 00 4 - 0 5 20 05 - 06 3 5 , 6 9 , 240 43 , 87 , 81 5 8 , 56 ,88 0 1,44 , 7 0 , 3 1 7 3 , 21 , 6 5,4 9 4 4 , 09 ,55 2 8 , 7 2 , 672 2 3 , 69 , 50 3 4 7 , 83 ,4 68 89 , 5 4 , 3 44 9 9 5 10 8 1 2 5 3 5 1 4,4 3 4 1 ,51 , 15 2 1 , 88 ,4 3 1 2 , 65 , 5 65 4 , 11 , 1 4 8 FROM THE ABO V E T ABLE , IT I S EVIDENT THAT EXCEPT IN THE F I NANCIAL YEAR 2003 - 04 , IN A L L OTHE R YEARS , THE VA L UE OF PURCHASES HAD ALWAYS BEEN MORE THAN T HE VA L U E O F SA L ES . SO , A L SO R EGARDING THE NUMBER OF COMPANIES WHOSE S H A R E S WE R E PURCHASED AND SOLD . THE DIVIDEND INCOME ALSO HAS BEEN CONSISTENTLY I NCREAS I NG OVE R THE YEARS T HE REB Y ESTAB LI S HI NG THE FACT THAT THE APPELLANT HAVE BEEN AC T UA L L Y HOLDING THE SHA R E S PU R CHASED FOR LONG PER I ODS AND DER I VING THE D I V I DEND I NCO ME A L SO . IN FACT , ALREADY IT HAS BEEN EXPLAINED DURING ASSESSMENT PROCEEDINGS THA T SOME OF THE SHA R ES PURCHASED IN THE VE R Y FIRST YEAR , I .E 2001 - 02 (VIZ ., SHA R ES IN COMPANIES LIKE MM FORGINGS , MICRO INKS , MOSER AND BAE R , GLENMAR K PHARMACEUTICALS ) WERE CONT I NUED TO BE HELD EVEN UP TO 31 . 03 . 2006 . THIS FACT HAS ALSO BEEN RECORDED IN THE ASSESSMENT O R DER BY STAT I NG THA T THE AVERAGE PE RIOD O F HOLDING OF SHARES BY THE APPELLANT I S MORE THAN 3 YEARS . AS FAR AS THE NUMBER OF INSTANCES OF PURCHASE AND S ALES CITED BY THE A.O, THIS HAS ALREADY BEEN EXPLAINED IN THE EARLIER SUBMISSIONS. IT WAS DUE TO THE NUMBER OF SHARES OF THESE COMPANIES AVAILABLE FOR SALE IN THE MARKET BEING LIMITED THEREBY FORCING T HE APPELLANT TO PURCHI3SE THEIR REQUIREMENT IN VARIOUS LOTS. NECESS ARY STATISTICS TO THIS EFFECT WERE ALREADY FURNISHED AS PART OF THOSE SUBMISSIONS. NO DOUBT , WH I LE IN I T I ALLY BUY I NG THE SHARES , THE APPE L LANT HAVE ACCOU NTED T HE SAME AS STOCK IN TRADE UP TO 3 1 . 03 . 2003 . BUT , THROUGHOUT , THE I R INTENT I ON AS W ELL AS CONDUCT IS BY WAY OF AN I N V E STOR AS HIGHL I GHTED BY THE A F ORESA I D FACTS AND STATIST I CS . T H AT I S WHY , THEY FORMALIZED SUCH I NTENSION AND CO N D UCT BY RECLASS I FYING THE IR ENTIRE PORTFO LI O OF SHARES AS ON 01 . 04 . 2003 AS INVEST M ENT . HENCE , JUST BECAUSE THEY ACCOUNTED THE SHARES IN THE FIRST TWO F I NANCIA L YEA RS AS STOCK I N TRADE , IT IS NOT CO R RECT TO IMPU T E THE MOT I VE OF TRADING IN S UC H S H A RES W HEN T H E F ACTS SPEAK O T HERWISE . MO R EOVER , AS ALREADY SUBM I TTED IN W RITIN G , THE F ACTS OF T H E APPE LLA NT ' S CA SE A R E SQUA R ELY COVE R ED BY THE DECIS I ON OF THE M U MBA I IT A T IN B RI GHT STA R INVES T MENTS CASE QUOTED EARLIER . ITA 1028/10 :- 13 - : T HE RE FO R E , WE H E REBY SUBM IT THAT THE AO HAS QUOTED THE RIGHT D ECIS I O N O F THE GU J ARAT H I GH C OU RT WHICH IS IN FACT FAVOURABLE TO THE APPELLANT ' S CASE BUT W R O NGLY APPL I ED I TS R ATIO BY OVER L OOK I NG THE TOTAL I TY OF THE FACTS OF THE APPELLANT ' S C ASE . IN V I EW OF THIS , WE SUBMIT THAT T H E I NCOME DER I VED BY THE APPE LL ANT ON SALE O F S HARES HAS TO BE ASSE S SED ON LY AS CAP I TA L GAINS AND NOT AS BUS I NESS I NCOME . 7. AFTER CONSIDERING THE ABOVE SUBMISSION WHOSE PITH A ND SUBSTANCE IS THAT THE ASSESSEE HAD BEEN HOLDING THE SHARES FOR A LONG TIME, THE PURCHASES WERE MORE THAN THE SALE MADE DU RING THE IMPUGNED PERIOD AND THE STOCK-IN-TRADE WAS CONVERTE D INTO INVESTMENT DURING THE IMPUGNED PERIOD, THEREFORE, HE FOUND THA T THE CUMULATIVE EFFECT OF THESE FACTORS WOULD BE CONSTRUED THAT THE ASSESSEE WAS IN POSSESSION OF THE SHARES TO BE ELIGIBLE FOR THE CLA IM OF INCOME EARNED OUT OF THE SALES OF THE SHARES AS LONG TERM CAPITAL GAINS. THE SHARES WERE PURCHASED 3-4 YEARS PRIOR TO THE YEAR UNDER CO NSIDERATION IN RESPECT OF CERTAIN SHARES AND REGARDING OTHER SHAR ES, THEY WERE PURCHASED 14 TO 15 YEARS PRIOR TO THE YEAR UNDER CO NSIDERATION. THE LD. CIT(A) HAS FOUND, THE CONVERSION OF SHARES IN I NVESTMENT ALTHOUGH THESE WERE HELD AS STOCK-IN-TRADE TILL THE ASSESSME NT YEAR 2004-05, IN ORDER, IN VIEW OF THE DECISION OF ITAT MUMBAI BENCH H RENDERED IN THE CASE OF ACIT VS BRIGHT STAR INVESTMENT PVT. LTD IN I.T.A.NO. 9543/MUM/2004, DATED 20.7.2008. THE LD. CIT(A) HAS FOUND THAT THIS DECISION IS DIRECTLY APPLICABLE TO THE FACTS OF THE GIVEN CASE AND ITA 1028/10 :- 14 - : THEREFORE, HE HAS HELD THAT THIS IS NOT A BUSINESS INCOME BUT IT IS TO BE TREATED AS CAPITAL GAINS AS HAS BEEN CLAIMED BY TH E ASSESSEE. NOW, THE REVENUE IS AGGRIEVED AND HAS RAISED THE FOLLOWI NG GROUNDS: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. 2. THE LEARNED CIT(A) ERRED IN ALLOWING THE CLAIM OF THE ASSESSEE TO TREAT THE PROFIT ON SALE OF SHARES UNDER THE HEAD 'CAPITAL GAINS' INSTEAD OF PROFITS AND GAINS FROM BUSINESS'. 3. THE ID CIT(A) OUGHT TO HAVE APPRECIATED THE FAC T THAT THE ASSESSEE HAS DECLARED IN FORM 3CB AND 3CD THAT 'INVESTMENT IN SHARES' AS HIS BUSINESS. 4. THE ID CIT(A) ERRED IN NOT APPRECIATING THE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF THE TRANSACTIONS OF PURCHASE AND SALE OF SHARES CARRIED OUT BY THE ASSESSEE. 5. THE ID CIT(A) OUGHT TO HAVE APPRECIATED THE FAC T THAT THE ASSESSEE HAD CONVERTED THE SHARES HELD AS STOCK IN TRADE TO INVESTMENTS IN THE YEAR UNDER APPEAL, ONLY WITH THE SOLE INTENT TO TAKE ADVANTAGE OF THE AMENDMENT TO SECTION 111A AND THUS TO REDUCE THE TAX LIABILITY. 6. THE ID CIT(A) OUGHT TO HAVE APPRECIATED THE FAC T THAT THE SHARES WERE SOLD AS SOON AS THEY WERE CONVERTED INTO 'INVESTMENTS' DEFYING THE VERY DEFINITION OF 'INVESTMENT'. 7. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. ITA 1028/10 :- 15 - : 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE C AREFULLY TREADED THROUGH EACH AND EVERY ASPECT OF THIS COMPL ICATED ISSUE. AFTER CONSIDERING THE WRITTEN SUBMISSION FILED BEFO RE THE LD. CIT(A) ON WHICH THE LD.AR HAS HEAVILY RELIED ON AND THE REAS ONING GIVEN BY THE ASSESSING OFFICER IN HIS ORDER WHICH WE HAVE EXTRAC TED IN THE EARLIER PART OF THIS ORDER, WE HAVE FOUND THAT THE ASSESSEE HAD BEEN HOLDING SHARES FOR A LONG TIME AS MENTIONED ABOVE AND THE D ETAILS FURNISHED BEFORE THE ASSESSING OFFICER AS WELL AS BEFORE THE LD. CIT(A) SHOW THAT SOME OF THE SHARES WERE PURCHASED 14-15 YEARS PRIOR TO THIS ASSESSMENT YEAR AND THE REMAINING WERE PURCHASED BE FORE 3-4 YEARS PRIOR. THE ASSESSEE HAS CONVERTED STOCK-IN-TRADE I NTO INVESTMENT AT THE BOOK VALUE SHOWN IN THE BOOKS OF ACCOUNT. SUBS EQUENTLY, THE SHARES SO HELD IN INVESTMENT WERE SOLD AND THE ASSE SSEE OFFERED CAPITAL GAINS ACCRUED ON THE SALE OF SHARES. PROVI SIONS OF SECTION 45(2) DEALS WITH THE ISSUE OF CAPITAL GAINS WHEN THE INVE STMENT IS CONVERTED INTO STOCK-IN-TRADE. ACCORDING TO THIS SECTION, PR OFITS OR GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO, OR ITS TREATMENT BY HIM AS STOCK-IN-TRADE OF A BUSINESS CARRIED ON BY HIM SHALL BE CHARGEABLE TO TAX AS HIS INCOME FR OM THE PREVIOUS YEAR IN WHICH STOCK-IN-TRADE IS SOLD OR OTHERWISE T RANSFERRED BY HIM AND, FOR THE PURPOSES OF SECTION 48, THE FAIR MARKE T VALUE OF THE ASSET ITA 1028/10 :- 16 - : ON THE DATE OF SUCH CONVERSION OR TREATMENT SHALL B E DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUIN G AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. BUT THE POSITION IN THE GIVEN CASE IS OTHER WAY ROUND THAT THE STOCK-IN-TRADE HAS BEEN CONVERT ED INTO INVESTMENT AND LATER ON THE INVESTMENT HAS BEEN SOLD ON PROFIT . IN SUCH CIRCUMSTANCES, WHERE THERE IS NO SPECIFIC PROVISION AVAILABLE IN THE ACT TO DEAL WITH SUCH TYPE OF SITUATION, A RATIONAL FO RMULA HAS TO BE WORKED OUT TO DETERMINE THE PROFITS AND GAINS ON TR ANSFER OF A CAPITAL ASSET. THE DIFFERENCE BETWEEN THE SALE PRICE OF TH E SHARES AND THE COST OF ACQUISITION OF SHARES WHICH IS THE BOOK VAL UE ON THE DATE OF CONVERSION WITH INDEXATION FROM THE DATE OF CONVERS ION, SHOULD BE COMPUTED AS A CAPITAL GAIN PARTICULARLY IN THE ABSE NCE OF A SPECIFIC PROVISION. WE, THEREFORE, ARE OF THE VIEW THAT THE LD. CIT(A) HAS PROPERLY EXAMINED THIS ISSUE IN DETAIL IN THE PRES ENT SCENARIO AND HAS CORRECTLY DIRECTED THE ASSESSING OFFICER TO ACCEPT THE CAPITAL GAINS OFFERED BY THE ASSESSEE. THE DECISION OF HON'BLE B OMBAY HIGH COURT RENDERED IN THE CASE OF CIT VS GOPAL PUROHIT, 228 C TR(BOM) 582 ON WHICH RELIANCE WAS PLACED BEFORE THE LD. CIT(A) HAS BEEN, IN A WAY, CONFIRMED BY THE HON'BLE SUPREME COURT BECAUSE SLP FILED BY THE REVENUE HAS BEEN DISMISSED. IN THAT CASE IT WAS HE LD THAT ALL DELIVERY BASED TRANSACTIONS ARE TO BE HELD AS INVESTMENT TRA NSACTIONS AND ITA 1028/10 :- 17 - : PROFITS ARISING THEREFROM HAVE TO BE TAXED AS SHORT TERM CAPITAL GAIN ONLY. UNDISPUTEDLY, ALL THE TRANSACTIONS OF SALE A ND PURCHASE OF SHARES IN THE GIVEN CASE ARE DELIVERY BASED HENCE, THIS DE CISION ALSO SUPPORTS OUR ABOVE FINDING. THE HON'BLE BOMBAY HIGH COURT I N THE CASE OF CIT VS GOPAL PUROHIT, 228 CTR (BOM) 582, HAS ALSO TAKEN A SUPPORTIVE VIEW THAT THE ASSESSEE IN SUCH CASES IS PERMITTED T O SIMULTANEOUSLY CARRY ON BUSINESS AS AN INVESTOR AS WELL AS TRADER IN SHARES AND THAT INCOME FROM BUSINESS OR INVESTMENT IS TAXABLE AS CA PITAL GAINS. IN THIS REGARD DECISION OF HON'BLE MADRAS HIGH COURT RENDE RED IN THE CASE OF CIT VS TRISHUL INVESTMENTS LTD, 305 ITR 434 AND IN THE CASE OF CIT VS S.RAMAAMIRTHAM, 306 ITR 239, ARE ALSO RELEVANT. THE POINTS CULLED OUT FROM THE HON'BLE GUJARAT HIGH COURTS DECISION BY T HE ASSESSING OFFICER IN THE CASE OF PARI MANGALDAS GIRIDAS VS CIT (SUPRA ) WOULD NOT HELP THE CONCLUSION DRAWN BY THE ASSESSING OFFICER AS EACH A ND EVERY ASPECT THEREOF HAS BEEN REPLIED AND PROPERLY ANSWERED BY T HE ASSESSEE, WHICH HAS BEEN, IN TOTO, INCORPORATED IN THE BODY O F OUR ORDER. CONSEQUENTLY, WE DO NOT FIND ANY MERIT IN THIS APPE AL OF THE REVENUE AND THE SAME STANDS DISMISSED. 9. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DIS MISSED. ITA 1028/10 :- 18 - : THE ORDER PRONOUNCED IN THE OPEN COURT ON 05.08.2011. SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 5 TH AUGUST, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR