ACIT, New Delhi V. M/s. Puran Associates Pvt. Ltd., New Delhi

ITA 1118/DEL/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58626 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 18-01-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 12-03-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Advance ruling; Question of law; Cost of acquisition; Capital receipt
• Section: 2(14); 12; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI F BENC H BEFORE SHRI U.B.S. BEDI, JM & SHRI A.N. PAHUJA, AM ITA NOS.1118, 942 & 943/DEL/2010 AYS:2005-06 TO 2007-08 ASSISTANT C.I.T., CIRCLE-14(1), NEW DELHI V/S. M/S PURAN ASSOCIATES PVT. LTD., 4 TH FLOOR, PUNJABI BHAWAN, 10, ROUSE AVENUE, NEW DELHI [PAN NO.: AAACP 0458 J] (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI GURJEET SINGH, AR REVENUE BY SHRI ROHIT GARG, DR DATE OF HEARING 18-01-2012 DATE OF PRONOUNCEMENT 31-01-2012 O R D E R A.N.PAHUJA:- THESE THREE APPEALS FILED BY THE REVENUE ON 12.03.2 010 AGAINST AN ORDER DATED 12.11.2009 OF THE LD. CIT(A)-III, DE LHI FOR THE AY 2005-06;AND ON 05.03.2010 FOR THE AYS 2006-07 AND 2007-08,AGAINST SEPARATE ORDERS DATED 24.12.2009 FOR THE AY 2006-07 AND DATED 29.12.2009 FOR THE AY 2007-08 OF THE LD. CIT(A)-XVII, NEW DELHI, RAISE THE FOLLOWING GRO UNDS:- I.T.A. NO.1118/D/2010[AY2005-06] 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN TREATING PROFIT FR OM PURCHASE AND SALE OF SHARES AS SHORT TERM CAPITAL G AIN AS AGAINST BUSINESS INCOME TREATED BY THE ASSESSING OFFICER. 2. THAT APPELLANT CRAVES TO BE ALLOWED TO ADD, DELE TE OR AMEND ANY OTHER GROUNDS OF APPEAL. I.T.A. NO.942& 943/D/2010[AYS2006-07& 2007-08] 1) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN TREATING PROFIT FROM PURCHASE AND SALE OF SHARES AS LONG TERM CAPITAL GA IN ITA NOS.1118 ,942&943/DEL./2010 2 AND SHORT TERM CAPITAL GAIN AS AGAINST BUSINESS INCOME TREATED BY THE ASSESSING OFFICER BY HOLDING THAT THE ASSESSEE IS AN INVESTOR IN SHARES AND NOT A TRADER. 2) THAT APPELLANT CRAVES TO BE ALLOWED TO ADD, DELE TE OR AMEND ANY OTHER GROUNDS OF APPEAL. 2. ADVERTING FIRST TO GROUND NO.1 IN THESE THREE A PPEALS, FACTS, IN BRIEF, AS PER RELEVANT ORDERS FOR THE AY 2005-06 ARE THAT RETURN DECLARING INCOME OF ` ` 1,91,03,684/- FILED ON 29.10.2005 BY THE ASSESSEE, AFTER BEING PROCESSED ON 31.03.2006 U/S 143(1) OF THE INCOME-TAX ACT, 1961 ( HEREAFTER REFERRED TO AS THE ACT) WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF NOTICE U/S 143(2) OF THE ACT ON 4 TH JULY, 2006. DURING THE COURSE OF ASSESSMENT PROCE EDINGS, THE ASSESSING OFFICER (A.O. IN SHORT) NOTICED THAT THE ASSESSEE D ECLARED LONG-TERM CAPITAL GAINS OF ` ` 7,89,81,518/- ON SALE OF SHARES, CLAIMING EXEMPTION U/S 10(38) OF THE ACT BESIDES SHORT TERM CAPITAL GAIN OF ` `1,22,42,439/- TAXED AT SPECIAL RATES. TO A QUERY BY THE AO AS TO WHY INCOME SHOWN AS CAPITAL G AIN FROM SALE OF SHARES BE NOT TREATED AS BUSINESS INCOME, THE ASSESSEE REPLIE D THAT THEIR INTENTION IS NOT TO REGULARLY TRADE IN SHARES AND ACCORDINGLY, THE QUOT ED SHARES/SECURITIES OF OTHER BODIES CORPORATE HELD BY THE ASSESSEE AS STOCK IN T RADE AS ON 31.3.2004 WERE CONVERTED IN TO INVESTMENTS AMOUNTING TO ` 2,08,03,217/- W.E.F 1.4.2004 AS PER RESOLUTION PASSED ON 22.4.2004 BY THE BOARD OF DIRE CTORS OF THE COMPANY. TOTAL VALUE OF SHARES HELD BY THE ASSESSEE AS INVESTMENT WAS ` 3.94 CRORES OUT OF TOTAL MARKET VALUE OF INVESTMENTS AS ON 31.3.2005 AT ` 505.38CRORES . IT WAS FURTHER SUBMITTED THAT , THE NATURE OF TRANSACTIONS & THE MANNER OF MAINTENA NCE OF BOOKS OF ACCOUNTS INDICATED THAT THE TRANSACTION ENTERE D INTO BY THE ASSESSEE WAS AN INVESTMENT TRANSACTION . THE NUMBER OF COMPANIES FOR WHICH TRANSACTION HAS BEEN ENTERED INTO DURING THE YEAR BY WAY OF SALE WA S VERY INSIGNIFICANT TO THE TOTAL VALUE OF SHARES HELD BY THE ASSESSEE COMPANY WHILE THE HOLDING PERIOD OF THE SHARES BEING FAIRLY LONG, THE RESULTANT PROFIT OR LOSS ARISING OUT OF DISPOSAL WAS LONG-TERM/SHORT-TERM CAPITAL GAIN AS DEPICTED IN TH E BOOKS OF ACCOUNTS OF THE ITA NOS.1118 ,942&943/DEL./2010 3 ASSESSEE COMPANY. THE ASSESSEE COMPANY EARNED LONG- TERM CAPITAL GAIN OF RS.7.90 CRORE MAINLY CONSISTING OF GAINS EARNED ON DABUR PHARMA SHARES ALLOTTED TO THE ASSESSEE ON DEMERGER SCHEME, APPRO VED BY HON'BLE DELHI HIGH COURT BY VIRTUE OF DEMERGER OF PHARMA BUSINESS W.E. F. 01/04/2003. THESE SHARES WERE ALWAYS HELD, TREATED, AND ACCEPTED AS CAPITAL ASSETS AND NOT TRADING ASSETS, THE ASSESSEE PLEADED. IN NUTSHELL, IT WAS C ONTENDED THAT THE ASSESSEE WAS NOT A TRADER IN SHARES. HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE WHILE OBSERVING THAT APART FROM SHARES OF 56 COMPANIES TRANSFERRED AS ON 1.4.2004 FROM STOCK IN TRADE AS ON 31 ST MARCH, 2004, THE ASSESSEE PURCHASED SHARES OF 122 COMPANIES. THE DETAILS OF TRANSACTIONS REVEALED AS UNDER:- TOTAL NO. OF COMPANIES WHOSE SHARES TRANSFERRED FROM STOCK-IN-TRADE TO INVESTMENT ACCOUNT. 56 TOTAL NUMBER OF COMPANIES WHOSE SHARES PURCHASED ON INVESTMENT ACCOUNT DURING THE YEAR 122 TOTAL NUMBER OF COMPANIES 178 TOTAL NUMBER OF COMPANIES WHOSE SHARES SOLD COMPLETELY INCLUDING SHARES TRANSFERRED TO INVESTMENT ACCOUNT FROM STOCK-IN-TRADE 65 TOTAL NUMBER OF COMPANIES WHOSE SHARES SOLD PARTLY 45 TOTAL NUMBER OF COMPANIES WHOSE SHARES SOLD COMPLETELY RELATING TO STOCK-IN-TRADE BEING TRANSFERRED TO INVESTMENT ACCOUNT. 49 TOTAL NUMBER OF COMPANIES WHOSE SHARES SOLD PARTLY RELATING TO STOCK-IN-TRADE BEING TRANSFERRED TO INVESTMENT TO INVESTMENT ACCOUNT. 4 2.1 IN THE LIGHT OF AFORESAID POSITION WHILE REFER RING TO CBDT INSTRUCTION NO.4/2007 DATED 15.06.2007 AND DECISION OF THE HON BLE APEX COURT IN THE CASE OF CIT VS. ASSOCIATED INDUSTRIAL DEVELOPMENT COMPA NY (P) LTD.,82 ITR 586; CIT VS. H. HOLCK LARSEN,160 ITR 67, AND DECISION OF THE AAR IN THE CASE OF FIDELITY GROUP, 288 ITR 641, THE AO CONCLUDED AS UNDER:- I) THE ASSESSEE WAS KEEPING THE IMPUGNED SHARE HOL DING AS STOCK IN TRADE TILL 31.3.04 AND THE TRANSFER FROM T HE STOCK IN ITA NOS.1118 ,942&943/DEL./2010 4 TRADE TO THE INVESTMENT ACCOUNT IS PURELY MOTIVATED WITH A VIEW TO AVAILING LOWER TAX RATE AS APPLICABLE ON GA IN FROM SALE OF SHARES HELD AS INVESTMENT BY PAYING STT ON SALE TRANSACTION AS PRESCRIBED IN THE NEWLY INTRODUCED P ROVISION OF SPECIAL RATE AS PER SECTION 111(A). II) THE DECISION OF THE BOARD OF DIRECTORS TO TRANS FER THE STOCK IN TRADE TO INVESTMENT ACCOUNT IS SQUARELY TO AVOID TH E NORMAL TAX RATE, WHICH WOULD HAVE BEEN CHARGED, HAD THE AS SESSEE KEPT THE STOCK POSITION STATUS QUO I.E. IN STOCK IN TRADE. THE INTENTION WAS NEVER INCONFORMITY OF THE LEGAL POSIT ION AS WELL AS CONTINUED BUSINESS PRACTICE. IT IS VERY SURPRIS ING THAT THE SHARES OF 45 COMPANIES OUT OF THE 56 NUMBER OF COMP ANIES WHOSE SHARES TRANSFERRED FROM STOCK IN TRADE TO INV ESTMENT ACCOUNT WERE TOTALLY SOLD AND FURTHER IN RESPECT OF 4 COMPANIES THE SHARES WERE PARTLY SOLD. HAD THERE B EEN INTENTION OF THE COMPANY TO KEEP THEM IN INVESTMENT ACCOUNT WITH A VIEW TO EARNING DIVIDEND THEREON, THE ASSESS EE WOULD HAVE NEVER SOLD THE SHARES IN BULK OF THE CASES IN QUICK SUCCESSION IN A SHORT SPAN OF TIME AFTER CONVERSION . THIS FACT CLEARLY PROVES THAT THE ACTION OF CONVERTING T HE STOCK IN TRADE TO TRANSFER ACCOUNT WAS NOT GENUINE. III) THE ASSESSEES CONTENTION THAT IT WAS NOT THE INTENTION TO REGULARLY TRADE IN SHARES, THEREFORE, BY WAY OF RES OLUTION TREATED THE SHARES OF STOCK IN TRADE AS INVESTMENT FROM 1.4.2004 IS PROVED WRONG IN THE FACE OF THE STARK R EALITY OF THE FACTS THAT ASSESSEE HAS SOLD COMPLETELY SHARES OF 49 COMPANIES AND SOLD PARTLY SHARES OF 4 COMPANIES OUT OF TOTAL NUMBER OF SHARES OF 65 COMPANIES TRANSFERRED FROM S TOCK IN TRADE TO INVESTMENT ACCOUNT. THIS VERY FACT SPEAKS VOLUMES OF THE NATURE OF TRANSACTION OF SALE AND PURCHASE O F SHARES BEING BUSINESS ACTIVITY. IV) THE ASSESSEE HAS EMPHASIZED THAT THE TOTAL PROP ORTION OF THE VALUE OF ASSETS HELD AS INVESTMENT IS VERY SIGN IFICANT TO THE TOTAL HOLDING INCLUDING VARIOUS MUTUAL FUNDS HE LD AS STOCK IN TRADE AND THE CONSEQUENT TRADING OF FEW SHARES, WHICH WERE CONVERTED AS INVESTMENT, THE VALUE OF WHICH IS INSIGNIFICANT TO THE TOTAL VALUE. HOWEVER, THAT IS CONTRARY TO THE FACT THOUGH SEEMING APPARENTLY TRUE. IT IS SEE N FROM THE RECORD THAT THE VALUE OF STOCK IN TRADE OF ` 5.48 CRORE. THE POSITION HAS UNDERGONE A SEA CHANGE DURING THE YEAR BY INVESTMENT IN PURCHASE OF SHARES OF VOLUMINOUS BLUE CHIP COMPANIES ADDED UNDER THE LIST OF INVESTMENT. V) THE ASSESSEE HAS SOLD VARIOUS SHARES HOLDING, PU RPORTEDLY KEPT IN INVESTMENT DURING THE YEAR. FURTHERMORE AS STATED IN ABOVE PARA, THE ASSESSEE HAS ADDED INVESTMENT IN VA RIOUS COMPANIES AS MANY AS 122 COMPANIES. IT IS A MATTER OF FACT ITA NOS.1118 ,942&943/DEL./2010 5 THAT THE ASSESSEE IS PURCHASING AND SELLING SHARES AT THE LARGE SCALE. IT CLEARLY INDICATES THAT THE PURCHAS E AND SALE OF SHARES AT MASSIVE LEVEL CAN NEVER BE CATEGORIZED AS INVESTMENT BUT IT IS SHARE BUSINESS OF THE ASSESSEE COMPANY. VI) THE ASSESSEES PLEA THAT VALUE OF CAPITAL GAIN EARNED BY THE ASSESSEE COMPANY INCLUDING SHORT TERM CAPITAL GAIN AMOUNTING TO ` `9.34 CRORE IN COMPARISON TO INVESTMENT AS ON 31.3.2005 WAS ` `505.38 CRORE DOES NOT JUSTIFY THE CASE OF THE ASSESSEE. OUT OF CAPITAL GAIN OF ` ` 9.34 CRORE, THE MAJOR AMOUNTS OF ` `7.89 CRORE RELATES TO SALE OF SHARES OF M/S DABUR PHARMA LTD. THE SHARES OF DPL WERE RECEIVED ON ACCOUNT OF SHARE HOLDING OF M/S DABUR INDIA LTD. AF TER DEMERGER. THESE SHARES WERE SOLD IN ITS ENTIRETY A FTER THE RECEIPT OF THE SAME. AS PER BOOKS THE VALUE OF INV ESTMENT IN SHARES OF M/S DABUR INDIA LTD. IS ONLY A SUM OF ` 68,281/-. THE VALUE OF INVESTMENT IN SHARES OF ` ` 505.38 CRORE IS MAINLY ON ACCOUNT OF PREVAILING MARKET PRICE OF THE SHARES OF M/S DABUR INDIA LIMITED. THE ASSESSEE COMPANY IS ONE O F THE GROUPS MAJOR HOLDING AND PROMOTOR COMPANIES OF M/S DABUR INDIA LTD. AND THE INVESTMENT IN SHARES RIGHT FROM THE INCEPTION IS NOT THE ISSUE AT HAND TO THE ISSUE BEI NG DEALT WITH. IF THE FACE VALUE OF INVESTMENT IS TAKEN AS PER BOOK VALUE, THE ASSESSEES ACTIVITIES OF PURCHASE AND SA LE OF SHARES FORMS A MAJOR BUSINESS ACTIVITY OF THE COMPA NY. VII) IT IS ALSO SIGNIFICANT TO MENTION THAT NOT ONL Y IN THE CASE OF THE ASSESSEE ITSELF BUT ALSO IN THE OTHER INVESTMENT CO MPANIES OF THE GROUP, THE SALE AND PURCHASE OF SHARES HAS BEEN DONE ON MASSIVE SCALE. VIII) IT IS ALSO WORTHWHILE TO MENTION THAT IN THE AUDITORS REPORT IN FORM NO.3CD PART-B, THE NATURE OF BUSINESS OR PROFE SSION OF THE COMPANY HAS BEEN MENTIONED AS TRADING IN SHARE S, SECURITIES AND DEBENTURES, ETC. IN THE LIGHT OF HIS AFORESAID OBSERVATIONS, THE AO TREATED THE ENTIRE SHORT TERM CAPITAL GAINS ON SALE OF SHARES AS BUSINESS INCOME. 3. LIKEWISE IN ASSESSMENT YEARS 2006-07 AND 2007-0 8, FOLLOWING THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF DALHOUSIE INVESTMENT TRUST CO. LTD. VS. CIT (1968) 68 ITR 486 (SC); CIT VS. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD. (1975) 100 ITR 706 (S.C.) AND RAJA BAHA DUR VISHESHWARA SINGH VS. CIT (1961) 41 ITR 685 (S.C.),THE AO TREATED THE ENTIRE LONG TERM AND SHORT TERM GAIN ON SALE OF SHARES AS BUSINESS INCOME. ITA NOS.1118 ,942&943/DEL./2010 6 4. ON APPEAL, THE LD. CIT(A), WHILE RELYING UPON D ECISIONS IN ACIT VS. M/S SARNATH INFRASTRUCTURE PVT. LTD., 120 TTJ 216 A ND BRIGHT STAR INVESTMENT PVT. LTD. REPORTED IN 120 TTJ 494, ALLOWED THE CLAIM OF THE ASSESSEE FOR THE AY 2005- 06 IN THE FOLLOWING TERMS:- 5. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE, THE OBSERVATIONS OF THE A.D. AND THE SUBMISSIONS MADE B Y THE COUNSEL OF THE APPELLANT. THE APPELLANT COMPANY IS RECOGNIZ ED BY THE RESERVE BANK OF INDIA AS NON-BANKING FINANCIAL CORP ORATION. IT IS OBSERVED THAT THE COMPANY IS HAVING AN INVESTMENT P ORT-FOLIO AND ALSO HELD CERTAIN AS STOCK IN TRADE. THE MATTER WAS PUT BEFORE THE BOARD TO CONVERT THESE SHARES FROM STOCK IN TRADE I NTO INVESTMENTS. THE RESOLUTION WAS APPROVED BY THE BOARD AND LATER ON THE APPELLANT HAS FOLLOWED THE SAME METHOD OF VALUATION AT COST PRICE ON PERMANENT BASIS. IT IS OBSERVED FROM THE DETAILS SUBMITTED BEFORE THE AO THAT THE SHARES HELD IN STOCK IN TRAD E HAVE BEEN CONVERTED INTO INVESTMENTS W.E.F. 1ST OF APRIL, 200 4. THE VALUE OF ACQUISITION HAS BEEN TAKEN TO BE THE MARKET VALUE A S ON 31ST OF MARCH, 2004. IT IS SUBMITTED BY THE COUNSEL OF THE APPELLANT THAT THE DIFFERENCE BETWEEN PURCHASE PRICE OF THE SCRIP AND THE MARKET VALUE AS ON 31ST OF MARCH, 2004 HAVE BEEN TAKEN INT O ACCOUNT WHILE WORKING OUT THE PROFITS FOR THE YEAR ENDING A S ON 31ST OF MARCH, 2004. IT IS CLEAR FROM THE BALANCE SHEET FOR THE FINANCIAL YEAR 2003-04 THAT THE MARKET VALUE OF THE SHARES AS ON 3 1ST OF MARCH, 2004 HAS BEEN TAKEN INTO ACCOUNT BY WORKING OUT THE CLOSING STOCK OF THE SHARES AND THIS HAS BEEN TAKEN INTO ACCOUNT FOR WORKING OUT THE PROFITS FOR THAT YEAR. THE MARKET VALUE AS ON 3 1ST OF MARCH, 2004 HAS BEEN TAKEN AS THE COST OF ACQUISITION OF T HESE SHARES AND THE DIFFERENCE BETWEEN COST OF ACQUISITION AND THE SALE PRICE HAS BEEN OFFERED FOR TAXATION AS INCOME FROM SHORT TERM CAPITAL GAIN. 5.1 ADVERTING BACK TO THE FACTS OF THE CASE, IT IS OBSERVED THAT THE APPELLANT WAS TRADING IN SHARES REGULARLY FOR T HE LAST MANY YEARS. DURING THESE YEARS THE COMPANY WAS TRAD ING IN SHARES AS WELL AS HAVING AN INVESTMENT PORTFOLIO. T HE SEPARATE BOOKS OF ACCOUNTS WERE MAINTAINED FOR TRAD ING AS WELL AS INVESTMENT PORTFOLIO. THE COMPANY DECIDED T O CONVERT THE SHARES HELD IN TRADING PORTFOLIO, INTO INVESTMENTS. THE MATTER WAS PUT BEFORE THE BOARD IN THE ANNUAL G ENERAL MEETING TO CONVERT THE SHARES FROM STOCK IN TRADE T O INVESTMENTS. THIS RESOLUTION WAS APPROVED BY THE BO ARD AND THE MARKET VALUE AS ON 31ST OF MARCH, 2004 WAS TAKE N AS THE COST OF ACQUISITION OF THESE SHARES WHICH WERE ITA NOS.1118 ,942&943/DEL./2010 7 TRANSFERRED TO THE INVESTMENT PORTFOLIO. LATER ON T HE APPELLANT HAD FOLLOWED THE SAME METHOD OF VALUATION AT COST P RICE ON PERMANENT BASIS. PART OF THESE SHARES WERE SOLD BY THE APPELLANT DURING THE YEAR. THE APPELLANT HAD TAKEN THE CLOSING VALUE AS ON 31.03.2004 AS THE COST OF ACQUI SITION AND WITHOUT TAKING THE BENEFIT OF INDEXATION, THE DIFFE RENCE BETWEEN THE SALE COST OF ACQUISITION HAS BEEN OFFER ED FOR TAXATION AS SHORT TERM CAPITAL GAIN. IS WORTH MENTI ONING HERE THE WHEREAS THE SHARES HELD HE COMPANY IN TRADING A CCOUNT WERE TRANSFERRED TO THE INVESTMENT PORTFOLIO, HOWEV ER, THE TRADING IN MUTUAL FUNDS CONTINUES TO BE BUSINESS AC TIVITY OF THE COMPANY. IN VIEW OF THE FACTS DISCUSSED ABOVE A ND DECISIONS OF THE HON'BLE IT AT IN THE CASE OF ACIT VS. BRIGHT STAR INVESTMENT PVT. LTD AND M/S SARNATH INFRASTRUC TURE PVT. LTD., IT IS HELD THAT THE APPELLANT IS A REGULAR IN VESTOR AND UNDER NO STRETCH OF IMAGINATION, IT CAN BE TREATED AS TRADER IN SHARES. .5 FOLLOWING THE AFORESAID DECISION, THE LD. CIT(A ) ALLOWED THE CLAIM OF ASSESSEE IN THE AYS. 2006-07 AND 2007-08 ALSO IN TH E LIGHT OF AFORESAID DECISIONS IN THE CASE OF ACIT VS. M/S SARNATH INFRA STRUCTURE PVT. LTD. , 120 TTJ 216) AND BRIGHT STAR INVESTMENT PVT. LTD. REPORTED IN 120 TTJ 494. 6. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. DR WHILE CARRYI NG US THROUGH THE FINDINGS OF THE AO AND DOCUMENTS PLACED AT PAGES 61 TO 68 OF THE PA PER BOOK SUBMITTED THAT TRANSACTIONS OF SALE AND PURCHASE OF SHARES UNDERTA KEN BY THE ASSESSEE YIELDED BUSINESS INCOME. THE INTENTION OF THE ASSESSEE, A S IN EARLIER YEARS, WAS TO TRADE IN SHARES AND NOT FOR HOLDING THESE SHARES A S LONG TERM INVESTMENT. WHILE DISTINGUISHING THE DECISION RELIED UPON BY THE LD. CIT(A) IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LTD. (SUPRA), THE LD. DR SUBMIT TED THAT IN THAT CASE SHARES WERE HELD FOR 2 TO 3 YEARS AND NONE OF THE SHARE PURCHA SED IN THE SAME YEAR OR PREVIOUS YEAR WAS SOLD. AS REGARDS THE DECISION IN BRIGHT STAR INVESTMENT PVT. LTD. (SUPRA), THE LD. DR SUBMITTED THAT THE ISSUE I N THAT CASE WAS CONVERSION OF SHARES IN STOCK IN TRADE INTO INVESTMENT AND THE AO ACCEPTED THE CALCULATION MADE BY THE ASSESSEE. THUS, RELIANCE BY THE LD. CI T(A) ON THE SAID DECISIONS IS MISPLACED. THE LD. DR VEHEMENTLY ARGUED THAT SUBSE QUENT CIRCUMSTANCES HAVE ITA NOS.1118 ,942&943/DEL./2010 8 TO BE SEEN IN ASCERTAINING THE INTENTION OF THE ASS ESSEE. INTER ALIA, THE LD. DR RELIED UPON DECISION IN MADAN GOPAL RADHEY LAL, 73 ITR 652 (SC); WALLFORT FINANCIAL SERVICES LTD.VS. ACIT 134 TTJ 656(MUMBAI) . FORT PROPERTIES PVT. LIMITED. VS CIT,208 ITR 232 (BOMBAY). 6.1 ON THE OTHER HAND, LEARNED AR ON BEHALF OF THE ASSESSEE WHILE SUPPORTING THE FINDINGS OF LEARNED CIT(A) RELIED UP ON DECISIONS IN ACIT VS. BRIGHT STAR INVESTMENT PVT. LTD. (2009) 120 TTJ 498 (MUM.) ; LOHIA METALS (P) LTD. VS. ACIT (2010) 40 DTR (CHENNAI)(TRIB) 246; CIT VS. GOP AL PUROHIT (2010) 228 CTR 582 (BOM); CIT VS. RAMAAMIRTHAN (2008) 306 ITR 239 (MADRAS); 277 ITR 149 (MADRAS); CHOWDHARY ASSOCIATE I.T.A. NO.1241/D/2010 DELHI BENCH B FOR THE ASSESSMENT YEAR 2005-06; SURESH KUMAR SEKSARIA VS. ACIT (2010) 1 ITR 783 (TRIB. MUMBAI); KAUR SINGH VS. CIT (1983) 144 ITR 7 56 (P&H); CIT VS. PNB FINANCE & INDUSTREIS (2010) 236 CTR 1 (DEL.); KUNVA RJI NANJI KENIA VS. ACIT (2010) 131 TTJ 87 (MUM)(UO) AND NAGINDAS P. SHETH ( HUF) I.T.A. NO.961/MUM/2010 BENCH G ASSESSMENT YEAR 2006-07 O RDER DATED 05.04.2011.THE LD. AR ADDED THAT IN SIMILAR FACTS A ND CIRCUMSTANCES, A CO- ORDINATE BENCH IN THEIR DECISION DATED 18 TH FEBRUARY, 2011 IN CHOWDHARY ASSOCIATE(SUPRA) TREATED THE ASSESSEE AS INVESTOR I N SHARES . INTER ALIA, THE LEARNED AR SUBMITTED THAT DECISION IN THE CASE OF W ALLFORT WAS NOT APPLICABLE IN THIS CASE BECAUSE IN THAT CASE TURN OVER WAS MUCH H IGHER VIS--VIS IN THE INSTANT CASE. 7. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISIONS RELIED UPO N BY BOTH THE SIDES. THE ISSUE BEFORE US IS AS TO WHETHER THE SHA RES QUOTED IN STOCK EXCHANGE AND DEALT WITH BY THE ASSESSEE UNTIL 31.3 .2004 AS STOCK IN TRADE AND THOSE SUBSEQUENTLY PURCHASED IN THE YEARS UNDER CON SIDERATION, WHICH WERE CLASSIFIED AS INVESTMENT IN THEIR BOOKS OF ACCOUN TS, WERE THEIR INVESTMENT OR THEIR STOCK-IN-TRADE? THE AO TREATED SHORT TERM CAPITAL GAINS IN THE AY 2005- 06 AND BOTH LONG TERM CAPITAL GAINS AND SHORT TERM CAPITAL GAINS IN THE AYS 2006- 07 & 2007-08 ON SALE OF SUCH SHARES AS BUSINESS IN COME WHILE THE LD. CIT(A) ITA NOS.1118 ,942&943/DEL./2010 9 FOLLOWING THE VIEW TAKEN IN ACIT VS. M/S SARNATH I NFRASTRUCTURE PVT. LTD. ( SUPRA) AND BRIGHT STAR INVESTMENT PVT. LTD.(SUPRA) ACCEPTE D THE CLAIM OF THE ASSESSEE IN REFLECTING THE INCOME UNDER THE HEAD SHORT/LONG TER M CAPITAL GAINS. THE ASSESSEE COMPANY WAS INCORPORATED ON 3.3.1979.ONE OF THE MAI N OBJECTS OF THE COMPANY IS TO CARRY ON THE BUSINESS OF DEALER IN SHARES, S TOCKS, DEBENTURES, BONDS, OBLIGATIONS, UNITS, SECURITIES ETC. AS ALSO TO ACQU IRE AND HOLD BY WAY OF STOCK IN TRADE, SHARES, STOCKS ,SECURITIES ETC..AS EXPLAINED BEFORE US, UNTIL THE AY 2004- 05, THE ASSESSEE HAS BEEN TREATING ALL THE QUOTED S HARES & SECURITIES LISTED IN STOCK EXCHANGE AS STOCK-IN-TRADE AND REFLECTING I NCOME FROM TRADING IN SHARES UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PRO FESSION. IT IS ONLY IN THE AY 2005-06 THAT THE QUOTED SHARES/SECURITIES OF 56 COM PANIES OF THE VALUE OF ` ` 2,08,03,217.30 HELD AS STOCK IN TRADE UNTIL 31.3.20 04 WERE CONVERTED IN TO INVESTMENT AT BOOK VALUE ON 1.4.2004 IN TERMS OF RE SOLUTION DATED 22.4.2004 OF THE BOARD OF DIRECTORS OF THE COMPANY. THE REASONS FOR CONVERTING THE SHARES HITHERTO HELD AS STOCK IN TRADE IN TO INVESTMENTS ARE NOT EVIDENT FROM THE SAID RESOLUTION NOR ARE EVIDENT FROM THE IMPUGNED ORDER AND NOR EVEN HAVE BEEN SUBMITTED BEFORE US. THERE IS NOTHING IN THE SAID R ESOLUTION THAT THE ASSESSEE SHALL HOLD FURTHER PURCHASE OF SHARES DURING THE Y EARS UNDER CONSIDERATION AS INVESTMENTS AND NOT STOCK IN TRADE. IN FACT, THE AU DIT REPORTS FOR THE YEAR ENDING 31.3.2005 ,31.3.2006 & 31.3.2007 REVEAL THAT THE ASSESSEE IS CARRYING ON THE BUSINESS OF TRADING IN SHARES, SECURITIES AND DEBEN TURES. COL. 11(B) OF THE SAID AUDIT REPORT REVEALS THAT THERE IS NO CHANGE IN TH E METHOD OF ACCOUNTING AS COMPARED TO THE PREVIOUS YEAR. THE DETAILS OF TOTAL TURNOVER DURING THESE THREE YEARS REVEAL AS UNDER: AY TOTAL TURNOVER AS PER AUDIT REPORT [IN ` `] SALE OF SHARES/MUTU AL FUND AS PER P & L A/C[IN ` `] PURCHASE OF SHARES/MUTUAL FUND AS PER P & L A/C[IN ` `] GP/TURN OVER NP/TURN OVER STOCK/T URNOVER ITA NOS.1118 ,942&943/DEL./2010 10 2004-05 550256029 466907061 522945905 NA NA NA 2005-06 810892003 613472393 646941188 24.58% 23.26% 8.56% 2006-07 2119314877 1464954511 1855627696 NOT SHOWN 30.31% 21.69% 2007-08 3517610642 3189695548 3032018240 0.01% 7.78% 9.48% 7.1 ONE OF THE RELEVANT TESTS, IN DETERMINING AS TO WHETHER OR NOT THE SHARES/SECURITIES ARE A CAPITAL ASSET, IS WHETHER I T IS IN THE NATURE OF FIXED ASSET OR CONSTITUTES THE STOCK-IN-TRADE OF THE ASSESSEE'S BU SINESS. FIXED ASSET IS WHAT THE OWNER TURNS TO PROFIT KEEPING THE ASSET IN HIS OWN POSSESSION, STOCK-IN-TRADE IS WHAT HE MAKES PROFIT OF BY PARTING WITH IT, AND LET TING IT CHANGE MASTERS. BEFORE PROCEEDING FURTHER ,WE MAY HAVE A LOOK AT THE RELEV ANT PROVISIONS. SECTION 2(14) OF THE ACT DEFINES CAPITAL ASSET TO MEAN PROPERTY OF ANY KIND HELD BY AN ASSESSEE, WHETHER OR NOT CONNECTED WITH HIS BUSINES S OR PROFESSION. THE DEFINITION OF CAPITAL ASSET EXCLUDES STOCK-IN-TRADE HELD FOR THE PURPOSE OF BUSINESS. SECTION 2(22) OF THE ACT DEFINES DIVIDEND TO INCLUDE ANY DISTRIBUTION BY A COMPANY OF ACCUMULATED PROFITS, WHETHER CAPITA LIZED OR NOT. SECTION 2(42- A)OF THE ACT DEFINES SHORT-TERM CAPITAL ASSET TO MEAN A CAPITAL ASSET HELD BY AN ASSESSEE FOR NOT MORE THAN THIRTY SIX MONTHS IMMEDI ATELY PRECEDING THE DATE OF ITS TRANSFER. HOWEVER FOR SHARE HELD IN A COMPANY O R ANY OTHER SECURITY LISTED IN A RECOGNISED STOCK EXCHANGE IN INDIA, THIS PERIOD IS 12 MONTHS. SECTION 2(42-B) DEFINES SHORT TERM CAPITAL GAIN TO MEAN CAPITAL GAIN ARISING FROM THE TRANSFER OF A SHORT TERM CAPITAL ASSET. UNDER SECTION 28(I) OF THE ACT, THE PROFITS AND GAINS OF ANY BUSINESS CARRIED ON BY THE ASSESSEE, AT ANY TIM E DURING THE PREVIOUS YEAR, IS CHARGEABLE TO INCOME TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION . UNDER SECTION 45(1) OF THE ACT ANY PROFITS OR GA INS, ARISING FROM THE TRANSFER OF A CAPITAL ASSET EFFECTED IN THE PREVIOU S YEAR, IS DEEMED TO BE INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLA CE. SECTION 111-A, INSERTED BY FINANCE ACT, 2004, RELATES TO TAX ON SHORT TERM CAP ITAL GAINS IN CERTAIN CASES AND, UNDER SUB-SECTION (1) THEREOF, WHERE THE TOTAL INCO ME OF AN ASSESSEE INCLUDES ANY INCOME CHARGEABLE UNDER THE HEAD CAPITAL GAINS , ARISING FROM THE TRANSFER ITA NOS.1118 ,942&943/DEL./2010 11 OF A SHORT TERM CAPITAL ASSET BEING AN EQUITY SHARE IN A COMPANY AND SUCH TRANSACTION IS CHARGEABLE TO SECURITIES TRANSACTION TAX, THE TAX PAYABLE BY THE ASSESSEE SHALL BE THE AGGREGATE OF THE AMOUNT OF IN COME TAX CALCULATED, ON SUCH SHORT TERM CAPITAL GAINS, AT THE RATE OF FIFTEEN PE R CENT. 7.2. IF THE SHARES PURCHASED BY THE ASSESSEE ARE HE LD TO BE CAPITAL ASSETS, SHORT TERM CAPITAL GAIN ON SALE OF SUCH SHARES COUL D FALL WITHIN THE AMBIT OF SECTION 111A OF THE ACT, AND SUCH CAPITAL GAINS WOU LD BE SUBJECT TO TAX AT A LOWER RATE. IF THE SHARES ARE HELD BY THE ASSESSEE AS ST OCK IN TRADE, PROFIT ON THE SALE OF SUCH SHARES WOULD CONSTITUTE BUSINESS INCOME, AN D BE SUBJECT TO TAX AT A HIGHER RATE. AS MENTIONED ABOVE, SECTION 2(14) (I) OF THE ACT DEFINES A CAPITAL ASSET AS NOT INCLUDING STOCK IN TRADE. IF THE ASSES SEE HELD THE SHARES AS STOCK IN TRADE , AND NOT AS INVESTMENT, THEN SUCH SHARES WOULD ST AND EXCLUDED FROM THE DEFINITION OF SHORT TERM CAPITAL ASSET , AND THE PROFIT EARNED ON THE SALE OF SUCH SHARES WOULD NOT BE EXIGIBLE TO TAX AS SHORT TERM CAPITAL GAIN , BUT AS PROFITS AND GAINS FROM BUSINESS . 7.3 . IN DETERMINING THE ISSUE AS TO WHETHER, AFTER ACQUIRING THE SHARES, THE ASSESSEE DEALT WITH IT AS AN INVESTOR, OR CARRIED O N BUSINESS WITH IT, TREATING IT AS ITS STOCK-IN-TRADE OR AS A TRADING ASSET, WHAT IS R ELEVANT IS THAT, IF THE CASE FALLS WITHIN THE FORMER CATEGORY, RECEIPTS BY WAY OF SALE OF SUCH SHARES WILL BE CAPITAL RECEIPTS, BUT IF IT FALLS WITHIN THE LATTER THE REC EIPTS WILL BE TRADING RECEIPTS, AND PROFITS THEREFROM BUSINESS INCOME. TO DETERMINE AS TO WHETHER SALE OF SHARES IS TO BE ASSESSED AS BUSINESS INCOME OR AS INCOME FROM CAPITAL GAIN , THE MOST IMPORTANT TEST IS WHETHER THE INITIAL ACQUISITION O F THE SHARES WAS WITH THE INTENTION OF DEALING IN THE SHARES OR IT WAS MADE A S AN INVESTMENT. THE INTENTION OF THE ASSESSEE IS BEST KNOWN TO HIM AND THE DISPUT E COMES TO THE APPELLATE AUTHORITIES ONLY WHEN THE REVENUE AUTHORITIES DO NO T ACCEPT THE CLAIM OF THE ASSESSEE. AS OBSERVED BY HONBLE MADRAS HIGH COURT IN NSS INVESTMENTS P LTD.(SUPRA) A COMPANY CAN HOLD SOME SHARES AS STOCK -IN-TRADE FOR THE PURPOSE OF DOING BUSINESS OF BUYING AND SALE OF SUCH SHARES, W HILE AT THE SAME TIME IT CAN ALSO HOLD SOME OTHER SHARES AS ITS CAPITAL FOR THE PURPOSE OF EARNING DIVIDEND ITA NOS.1118 ,942&943/DEL./2010 12 INCOME. INDISPUTABLY, SHARES PURCHASED BY THE ASSES SEE UNTIL 31.3.2004 AND LATER CONVERTED IN TO INVESTMENT W.E.F 1.4.2004 WER E ACQUIRED WITH THE INTENTION TO TRADE. UNTIL THE PRECEDING ASSESSMENT YEAR, THE ASSESSEE HAS ONLY BEEN DEALING IN QUOTED SHARES AS ALSO MUTUAL FUNDS AND REFLECTING INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS BESIDES INCOM E FROM SPECULATION BUSINESS. THE DISTINCTION WHETHER THE INVESTMENT TRANSACTION IS A MERE REALISATION OF THE INVESTMENT OR AN ACT DONE FOR MAKING PROFITS DEPEND S ON THE QUESTION WHETHER THE EXCESS WAS AN ENHANCEMENT OF THE VALUE BY REALI SING A SECURITY OR A GAIN IN AN OPERATION OF PROFIT MAKING. IF THE TRANSACTION I S IN THE ORDINARY LINE OF THE ASSESSEE'S BUSINESS THERE WOULD HARDLY BE ANY DIFFI CULTY IN CONCLUDING THAT IT WAS A TRADING TRANSACTION BUT, WHERE IT IS NOT, THE FAC TS MUST BE PROPERLY ASSESSED TO DISCOVER WHETHER IT WAS IN THE NATURE OF TRADE. THE SURPLUS REALISED ON THE SALE OF SHARES, FOR INSTANCE, WOULD BE CAPITAL IF THE ASSES SEE IS AN ORDINARY INVESTOR REALISING HIS HOLDING; BUT IT WOULD BE REVENUE IF H E DEALS WITH THEM AS A TRADER. THE TEST OFTEN APPLIED IS, HAS THE ASSESSEE MADE HI S SHARES AND SECURITIES THE STOCK-IN-TRADE OF A BUSINESS?, AS WAS OBSERVED IN R AJA BAHADUR KAMAKHYA NARAIN SINGH V. CIT, 77 ITR 253(SC). IN THE INSTANT CASE, INDISPUTABLY THE ASSESSEE HAS BEEN TRADING IN SHARES AND SECURITIES AND REFLECTED INCOME FROM SUCH TRADING UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS . THERE IS NO MATERIAL BEFORE US EXCEPT A RESOLUTION DATED 22.4.2 004 OF BOD OF THE COMPANY THAT THE ASSESSEE CONVERTED ITS STOCK IN TRADE OF S HARE AND SECURITIES WORTH 2,08,03,217.30 IN TO INVESTMENTS. THERE IS NO MATER IAL BEFORE US THAT SHARES AND SECURITIES PURCHASED IN THE YEARS UNDER CONSIDERAT ION AND CLASSIFIED AS INVESTMENT IN BOOKS WERE ACTUALLY INTENDED TO BE H ELD AS LONG TERM INVESTMENTS. IN FACT, THE ASSESSEE, AS IN EARLIER YEARS, IS TRA DING IN SUCH SHARES AND SECURITIES AND EVEN THE AUDIT REPORTS U/S 44AB OF THE ACT FOR THE YEARS UNDER CONSIDERATION DO NOT SUGGEST OTHERWISE. EXCEPT THE AFORESAID RESO LUTION OF BOD OF THE COMPANY ,NO MATERIAL IS EVIDENT FROM THE IMPUGNED O RDERS NOR HAS BEEN BROUGHT TO OUR NOTICE THAT ACTIVITY OF TRADING IN SHARES H ITHER TO IS MATERIALLY DIFFERENT IN THE YEARS UNDER CONSIDERATION; RATHER WE FIND THAT TURN OVER AS WELL PURCHASE OF SHARES HAS BEEN CONTINUALLY INCREASING. PROFITS RE ALISED BY THE SALE OF SHARES ITA NOS.1118 ,942&943/DEL./2010 13 MAY BE CAPITAL IF THE SELLER IS AN ORDINARY INVESTO R CHANGING HIS SECURITIES, BUT IT MAY BE INCOME IF THE SELLER OF THE SHARES IS TRADIN G IN SHARES, AS HELD IN RAJA BAHADUR VISHESHWARA SINGH V. CIT, 41 ITR 685(SC) .I N THE INSTANT CASE, THERE IS NOTHING TO SUGGEST THAT THE ASSESSEE HITHER TO A T RADER IN SHARES, HAS STOPPED TRADING IN SHARES AND HAS BECOME INVESTOR ALONE. TH E SUBSTANTIAL NATURE OF THE TRANSACTIONS, THE MAGNITUDE OF THE SHARES PURCHASED AND SOLD AND THE RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS, I S ON THE SIMILAR LINES AS IN THE PRECEDING YEARS. RATHER THE TURNOVER IN THE YEA RS UNDER CONSIDERATION IS INCREASING VIS--VIS PRECEDING YEARS. THE DOMINANT OR EVEN SOLE INTENTION TO RESELL IS A RELEVANT FACTOR AND RAISES A STRONG PRE SUMPTION, BUT BY ITSELF IS NOT CONCLUSIVE PROOF, OF TRADE. THE INTENTION TO RESELL WOULD, IN CONJUNCTION WITH THE CONDUCT OF THE ASSESSEE AND OTHER CIRCUMSTANCES, PO INT TO THE BUSINESS CHARACTER OF THE TRANSACTIONS. [SUTLEJ COTTON MILLS SUPPLY AGENCY LTD,100 ITR 706(SC) AND VENKATASWAMI NAIDU & CO., 35 ITR 594(S C)].WHERE A PURCHASE IS MADE WITH THE INTENTION OF RESALE, IT DEPENDS UPON THE CONDUCT OF THE ASSESSEE AND THE CIRCUMSTANCES OF THE CASE WHETHER THE VENTU RE IS ON CAPITAL ACCOUNT OR IN THE NATURE OF TRADE. A TRANSACTION IS NOT NECESSARI LY IN THE NATURE OF TRADE BECAUSE THE PURCHASE WAS MADE WITH THE INTENTION OF RESALE. WHETHER SHARES OF A COMPANY HELD BY A PERSON CONSTITUTE HIS CAPITAL O R HIS STOCK-IN-TRADE IS NOT A PURE QUESTION OF LAW BUT ESSENTIALLY ONE OF FACT. ( CIT V. RAM KUMAR AGGARWAL AND BROS., 205 ITR 251(SC).THE VARIOUS AUTHORITIES HAVE LAID DOWN CERTAIN GUIDELINES ON THE BASIS OF WHICH THE INTENTION OF T HE ASSESSEE CAN BE INFERRED. IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LTD.,(SUPRA ) THE ITAT CULLED OUT VARIOUS PARAMETERS, AS MENTIONED IN THE IMPUGNED ORDER, WHI CH MAY BE APPLIED TO DETERMINE WHETHER THE TRANSACTION OF PURCHASE AND S ALE OF SHARE IS IN THE NATURE OF TRADE OR INVESTMENT. THE RELEVANT OBSERVATIONS OF THE ITAT READ AS UNDER: THE FOLLOWING PRINCIPLES CAN BE APPLIED ON THE FAC TS OF A CASE TO FIND OUT WHETHER TRANSACTION(S) IN QUESTION ARE IN THE NATURE OF TRA DE OR ARE MERELY FOR INVESTMENT PURPOSES: (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF THE SHARES. THIS CAN BE FOUND OUT FROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNTWHETHER IT IS TREATED AS STOCK-IN- TRADE OR INVESTMENT; WHETHER ITA NOS.1118 ,942&943/DEL./2010 14 SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON- TRADING ASSET. (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHA SE AND PAID INTEREST THEREON. NORMALLY, MONEY IS BORROWED TO PURCHASE GO ODS FOR THE PURPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINI NG. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISPOSA L IN THAT PARTICULAR ITEM ? IF PURCHASES AND SALES ARE FREQUENT, OR THERE ARE S UBSTANTIAL 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 WHETHER THE ASSESSEE IS TRADING O R INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREA S LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). (4) WHETHER PURCHASE AND SALE ARE FOR REALIZING PROFIT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE? FORMER WIL L INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN THE CASE OF SHARES WH ETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PUR CHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN THE BA LANCE SHEET ? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDICATE T HAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NE T REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION A RE TREATED AS STOCK-IN-TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEMORAN DUM 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 SHOW T HAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE H AS KEPT TO THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS: IF THE AS SESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTIC ULAR 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 SHARES (OR FOR THAT MATTER ANY ITA NOS.1118 ,942&943/DEL./2010 15 OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICIENT TO SAY T HAT ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR INVESTMENT. (9) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITES F OR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS C OMPLYING 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 ILLEGAL BUSIN ESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASES WERE MADE ? (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2 007 OF 15-6-2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EAC H TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. (11) NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SE VERAL FACTORS HAS TO BE SEEN. 7.4 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 INVESTM ENT. THE RELEVANT CIRCULAR READS AS UNDER: 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 SECTION 2(29B). SHORT-TERM CAPITAL ASSETS AND GAINS ARE DEALT WITH UNDER SECTION 2(42A) AND SECTION 2(42B). 3. TRADING ASSET IS DEALT WITH UNDER SECTION 28 OF THE ACT. ITA NOS.1118 ,942&943/DEL./2010 16 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 THE ABOVE INSTRUCTIONS, IT IS PROPOSED TO UPDATE THE AB OVE INSTRUCTIONS FOR THE INFORMATION OF THE ASSESSEES AS WELL AS FOR GUIDANC E 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) : WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK-IN-TRADE IS A MATTER WHICH IS WIT HIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND HE SHOULD, IN NOR MAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM HIS RECOR DS AS TO WHETHER HE HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHICH ARE HIS STOCK- IN-TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTM ENT. 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 CA SES, 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 ASSOCIATION IS NOT DECISIVE OF THE NATURE OF TRANSA CTION ; (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 W OULD FURNISH 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 ITA NOS.1118 ,942&943/DEL./2010 17 OF TRADE/ADVENTURE IN THE NATURE OF TRADE ; BUT WHE RE THE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE PROFITS ACCRUING BY CHANG E IN SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL G AIN 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. THE FIRST PRINCIPLE REQUIRES US TO ASCERTAIN WHETHER THE PURCHASE OF SH ARES BY A FII IN EXERCISE OF THE POWER IN THE MEMORANDUM OF ASSOCIAT ION/TRUST DEED WAS AS STOCK-IN-TRADE AS THE MERE EXISTENCE OF THE POWE R TO PURCHASE AND SELL SHARES WILL NOT BY ITSELF BE DECISIVE OF THE NATURE OF TRANSACTION. WE HAVE TO VERIFY AS TO HOW THE SHARES WERE VALUED/HELD IN THE BOOKS OF ACCOUNT I.E., WHETHER 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 ASSETS. THE SECOND PRINCIPLE FURNISHES A GUIDE FOR DETERMINING THE NATURE OF TRANSACTION BY VERIFYING WHETHER THER E ARE SUBSTANTIAL TRANSACTIONS, THEIR MAGNITUDE, ETC., MAINTENANCE OF BOOKS OF ACCOUNT AND FINDING THE RATIO BETWEEN PURCHASES AND SALES. IT W ILL NOT BE OUT OF PLACE TO MENTION THAT REGULATION 18 OF THE SEBI REGULATIONS ENJOINS UPON EVERY FII TO KEEP AND MAINTAIN BOOKS OF ACCOUNT CONTAINING TR UE AND FAIR ACCOUNTS RELATING TO REMITTANCE OF INITIAL CORPUS OF BUYING AND SELLING AND REALIZING CAPITAL GAINS ON INVESTMENTS AND ACCOUNTS OF REMITT ANCE 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 O F DIVIDENDS 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 PORTFOLIO S, THE ASSESSEE 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 SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT (AND THEREFORE GIVING RISE TO CAPITAL GAINS) OR AS STOCK-IN-TRADE (AND THEREFORE GIVING RISE TO BUSINESS PROFITS). THE ASSESSING OFFICERS ARE FURTHER ADVISED THAT NO SING LE PRINCIPLE WOULD BE ITA NOS.1118 ,942&943/DEL./2010 18 DECISIVE AND THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSIDERED TO DETERMINE WHETHER, IN A GIVEN CASE, THE SHARES ARE HELD BY THE ASSESSEE AS 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 ] 7.5 . WE MAY POINT OUT THAT THE HONBLE G UJRAT HIGH COURT IN CIT VS. REVA SHANKER A. KOTHARI 283 ITR 338 (GUJARAT ) LAID DOWN THE FOLLOWING GUIDELINES IN ORDER TO DETERMINE WHETHER PROFITS AR ISING ON SALE IS BUSINESS INCOME:- THE TESTS LAID DOWN BY VARIOUS DECISIONS OF THE APEX COURT INDICATE THAT, IN EACH CASE, IT IS THE TOTAL EFFECT OF ALL RELEVANT F ACTORS AND CIRCUMSTANCES THAT DETERMINES THE CHARACTER OF THE TRANSACTION. EACH C ASE HAS TO BE DETERMINED ON THE TOTAL IMPRESSION CREATED ON THE MIND OF THE COU RT BY ALL THE FACTS AND CIRCUMSTANCES DISCLOSED IN A PARTICULAR CASE. ONE O F THE PRINCIPAL TESTS IS WHETHER THE TRANSACTION IS RELATED TO THE BUSINESS NORMALLY CARRIED ON BY AN ASSESSEE. THE NATURE OF THE COMMODITY WOULD ALSO BE A RELEVAN T FACTOR. IT IS EQUALLY WELL SETTLED THAT, MERELY BECAUSE THE ORIGINAL PURCHASE WAS MADE WITH THE INTENTION TO RESELL, IF AN ENHANCED PRICE COULD BE OBTAINED, THA T BY ITSELF IS NOT ENOUGH TO INFER THAT AN ASSESSEE IS CARRYING ON BUSINESS. HOWEVER, THOUGH PROFIT MOTIVE IN ENTERING INTO A TRANSACTION IS NOT DECISIVE, IF THE FACTS AND CIRCUMSTANCES INDICATE THAT THE PURCHASE OF THE ASSET WAS MADE SOLELY AND EXCLUSIVELY WITH AN INTENTION TO RESELL THE ASSET AT A PROFIT, IT WOULD BE A STRO NG FACTOR FOR INFERRING THAT THE TRANSACTION WAS IN THE NATURE OF BUSINESS. IN THE CASE OF PARI MANGALDAS GIRDHARDAS V. CIT [19 77] CTR 647 (GUJ), AFTER ANALYSING VARIOUS DECISIONS OF THE APEX COURT, THIS COURT HAS FORMULATED CERTAIN TESTS TO DETERMINE AS TO WHETHER AN ASSESSEE CAN BE SAID TO BE CARRYING ON BUSINESS. (A) THE FIRST TEST IS WHETHER THE INITIAL ACQUISITI ON OF THE SUBJECT-MATTER OF TRANSACTION WAS WITH THE INTENTION OF DEALING IN TH E ITEM, OR WITH A VIEW TO FINDING AN INVESTMENT. IF THE TRANSACTION, SINCE THE INCEPT ION, APPEARS TO BE IMPRESSED WITH THE CHARACTER OF A COMMERCIAL TRANSACTION ENTE RED INTO WITH A VIEW TO EARN PROFIT, IT WOULD FURNISH A VALUABLE GUIDELINE. (B) THE SECOND TEST THAT IS OFTEN APPLIED IS AS TO WHY AND HOW AND FOR WHAT PURPOSE THE SALE WAS EFFECTED SUBSEQUENTLY. (C) THE THIRD TEST, WHICH IS FREQUENTLY APPLIED, IS AS TO HOW THE ASSESSEE DEALT WITH THE SUBJECT-MATTER OF TRANSACTION DURING THE T IME THE ASSET WAS WITH THE ASSESSEE. HAS IT BEEN TREATED AS STOCK-IN-TRADE, OR HAS IT BEEN SHOWN IN THE BOOKS OF ACCOUNT AND BALANCE SHEET AS AN INVESTMENT . THIS INQUIRY, THOUGH RELEVANT, IS NOT CONCLUSIVE. ITA NOS.1118 ,942&943/DEL./2010 19 (D) THE FOURTH TEST IS AS TO HOW THE ASSESSEE HIMSE LF HAS RETURNED THE INCOME FROM SUCH ACTIVITIES AND HOW THE DEPARTMENT HAS DEA LT WITH THE SAME IN THE COURSE OF PRECEDING AND SUCCEEDING ASSESSMENTS. THI S FACTOR, THOUGH NOT CONCLUSIVE, CAN AFFORD GOOD AND COGENT EVIDENCE TO JUDGE THE NATURE OF THE TRANSACTION AND WOULD BE A RELEVANT CIRCUMSTANCE TO BE CONSIDERED IN THE ABSENCE OF ANY SATISFACTORY EXPLANATION. (E) THE FIFTH TEST, NORMALLY APPLIED IN CASES OF PA RTNERSHIP FIRMS AND COMPANIES, IS WHETHER THE DEED OF PARTNERSHIP OR THE MEMORANDUM O F ASSOCIATION, AS THE CASE MAY BE, AUTHORISES SUCH AN ACTIVITY. (F) THE LAST BUT NOT THE LEAST, RATHER THE MOST IMP ORTANT TEST, IS AS TO THE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTION S OF PURCHASE AND SALE OF THE GOODS CONCERNED. IN A CASE WHERE THERE IS REPETITIO N AND CONTINUITY, COUPLED WITH THE MAGNITUDE OF THE TRANSACTION, BEARING REASONABL E PROPORTION TO THE STRENGTH OF HOLDING, THEN AN INFERENCE CAN READILY BE DRAWN THA T THE ACTIVITY IS IN THE NATURE OF BUSINESS. 7.6 IN THE INSTANT CASE, THE ASSESSEE HAS BEEN TRADING IN QUOTED SHARES AND AS THE CONTENTS OF AUDIT REPORTS SUGGEST , THE ASSE SSEE IS A DEALER IN SHARES. THE ASSESSEE DEALT IN BOTH DELIVERY BASED AND NON-DELIV ERY BASED SHARE TRANSACTIONS IN QUOTED SHARES. SIMILAR DELIVERY AND NON-DELIVERY BASED SHARE TRANSACTIONS HAD BEEN UNDERTAKEN BY THE ASSESSEE IN THE EARLIER YEAR S ALSO AND INCOME FROM BOTH THE TYPES OF TRANSACTIONS HAVE BEEN DECLARED AS BUS INESS INCOME. HOWEVER ,FROM THIS ASSESSMENT YEAR, I.E., FROM 1ST APRIL, 2 004 PURCHASES OF QUOTED SHARES HAD BEEN SHOWN AS INVESTMENT ACTIVITY AND INCOME FR OM THE SALE OF SUCH SHARES HAD BEEN SHOWN AS SHORT-TERM CAPITAL GAIN IN THE PE RIOD RELEVANT TO AY 2005-06 AND LONG TERM AS WELL SHORT TERM CAPITAL GAIN IN TH E PERIOD RELEVANT TO SUBSEQUENT TWO ASSESSMENT YEARS I.E. AYS 2006-07 & 2007-08. AS REGARDS THE INCOME FROM NON-DELIVERY BASED TRANSACTIONS IS CONCERNED, THE S AME HAS BEEN DECLARED AS SPECULATIVE INCOME AS IN THE EARLIER YEARS. THOUGH TRADING AND INVESTMENT TRANSACTIONS HAVE THEIR OWN DISTINCTIVE FEATURES, D IFFICULTY ARISES IN BORDERLINE CASES IN UNDERSTANDING THE TRUE NATURE OF TRANSACTI ON. A TRADER IN A COMMODITY IS BASICALLY MOTIVATED BY PROFIT IN SELLING THE COMMOD ITY ON EACH AND EVERY RISE IN VALUE. HE AIMS TO EARN PROFIT BY GENERATING VOLUME BY FREQUENTLY TURNING OVER THE STOCKS IN WHICH HE IS DEALING. HIGH FREQUENCY, HIGH VOLUME AND REGULARITY OF TRANSACTIONS ARE THEREFORE THE BASIC FEATURES OF A TRADING TRANSACTION. AN INVESTOR ON THE OTHER HAND MAKES PURCHASES WITH A VIEW TO EA RNING INCOME FROM THE ITA NOS.1118 ,942&943/DEL./2010 20 INVESTMENTS. HE IS NOT TEMPTED TO SELL THE COMMODIT Y TO EARN QUICK PROFIT ON EACH AND EVERY RISE IN THE VALUE AND HOLDS THE COMMODITY FOR A LONGER PERIOD SO AS TO HAVE INCOME AS WELL AS APPRECIATION IN VALUE. THE T RUE NATURE OF TRANSACTION CAN BE UNDERSTOOD FROM THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE. CRUCIAL FACTOR IS THE PERIOD OF HOLDING WHICH WILL BE VERY SHORT IN CASE OF A TRADER AND LONG IN CASE OF AN INVESTOR BECAUSE A TRADER BU YS THE COMMODITY NOT FOR HOLDING IT IN CONTRAST TO AN INVESTOR WHO BUYS THE COMMODITY FOR HOLDING IT SO AS TO EARN SOME INCOME FROM INVESTMENT AND HAVE DECENT AP PRECIATION. IN CASE OF SHARES, INCOME IS IN THE FORM OF ANNUAL DIVIDEND AN D THEREFORE AN INVESTOR IN SHARES WILL NORMALLY BE HOLDING SHARES FOR MORE THA N A YEAR AND ANY SALE BEFORE ONE YEAR HAS TO BE EXPLAINED FROM THE CIRCUMSTANCES OF THE CASE. THE PROFIT MOTIVE IS ALSO RELEVANT BUT THIS IS ALSO NOT CONCLU SIVE BECAUSE EVEN AN INVESTOR MAY EARN PROFIT BY WAY OF APPRECIATION. AS IS APPAR ENT FROM THE FACTS IN THE INSTANT CASE, THE TRANSACTIONS OF PURCHASE OF SHARES , SINCE THE INCEPTION, WERE IMPRESSED WITH THE CHARACTER OF A COMMERCIAL TRANSA CTION ENTERED INTO WITH A VIEW TO EARN PROFIT WHILE THE ASSESSEE HAS NOT EXPL AINED BEFORE THE LOWER AUTHORITIES AND EVEN BEFORE US THE REASONS FOR IMP RESSING THE STOCK IN TRADE IN TO INVESTMENT NOR AS TO WHY AND FOR WHAT PURPOSE THE SALE OF THESE SHARES WAS EFFECTED SUBSEQUENTLY. IN THE PRECEDING YEARS THE A SSESSEE HAS ALL ALONG RETURNED INCOME FROM SIMILAR TRANSACTIONS UNDER TH E HEAD BUSINESS AND THE MEMORANDUM OF ASSOCIATION AUTHORISES SUCH AN ACTIVI TY AS A DEALER IN SHARES. THE , FREQUENCY, CONTINUITY AND REGULARITY OF TRANS ACTIONS OF PURCHASE AND SALE OF THE SHARES IS MORE OR LESS SAME AS IN THE PRECEDIN G YEARS AND WITH CONTINUAL INCREASE IN TURNOVER. IN THE INSTANT CASE, NO MATER IAL HAS BEEN PLACED BEFORE US, EXCEPT A RESOLUTION DATED 22.4.2004 OF BOD OF THE COMPANY, WHICH WOULD SUGGEST THAT ACTIVITIES OF TRADING IN SHARES IN THE YEARS UNDER CONSIDERATION ARE MATERIALLY DIFFERENT FROM THE ACTIVITIES IN THE PRE CEDING YEARS. IN FACT, PURCHASES AS WELL AS TURNOVER ARE CONTINUALLY INCREASING.. T HERE IS NO MATERIAL BEFORE US REFLECTING CHANGE IN FREQUENCY OR PERIODICITY OR E VEN IN VOLUME VIS--VIS PRECEDING YEARS. THE ASSESSEE HAS REGULARLY DEALT I N PURCHASE AND SALES OF SHARES. OUT OF SHARES OF 178 COMPANIES, SHARES OF 1 10 COMPANIES HAVE BEEN ITA NOS.1118 ,942&943/DEL./2010 21 SOLD FULLY OR PARTLY IN THE PERIOD RELEVANT TO THE AY 2005-06. PROFIT MOTIVE IS ALSO CLEARLY EVIDENT IN MAKING THE TRANSACTION. 7.7 IN JANAK S. RANGWALA (SUPRA);GOPAL PUROHIT (SUPRA);SURESH KUMAR SEKSARIA(SUPRA); KUNWAR NANJI KENIA(SUPRA); NAGINDA S P SHETH,HUF(SUPRA) ; AND S. RAMAAMIRTHAM(SUPRA), RELIED UPON BY THE LD. AR, THE ASSESSEE HAS BEEN CONTINUALLY HOLDING THE SHARES AS INVESTMENT FROM YEAR TO YEAR AND THE SIMILAR TRANSACTIONS OF SALE AND PURCHASE OF SHARES IN THE PRECEDING SEVERAL YEARS HAD BEEN HELD TO BE INCOME FRONT CAPITAL GAINS BOTH ON LONG-TERM AND SHORT-TERM BASIS. THIS IS NOT THE SITUATION IN THE INSTANT CA SE. IN THE CASE BEFORE US, THE ASSESSEE HAS BEEN CONTINUALLY TRADING IN SHARES AN D REFLECTING INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS . IN THE INSTANT CASE, THE ASSESSEE CONVERTED SHARES OF 56 COMPANIES FROM STOCK IN TRADE IN TO IN VESTMENT IN THE PERIOD RELEVANT TO THE AY 2005-06 AND PURCHASED SHARES OF 122 COMPANIES BY WAY OF INVESTMENT. OUT OF THESE SHARES OF 178 COMPANIES, S HARES OF 65 COMPANIES WERE COMPLETELY SOLD OFF WHILE SHARES OF 45 COMPANIES WE RE PARTLY SOLD.THE AUDIT REPORTS FOR THE YEARS UNDER CONSIDERATION DO NOT SU GGEST ANY VITAL CHANGE IN THE NATURE OF ACTIVITY NOR ANY SUCH MATERIAL HAS BEEN PLACED BEFORE US. THE TRANSACTIONS IN THE YEARS UNDER CONSIDERATION ON AC COUNT OF SALE AND PURCHASE OF QUOTED SHARES ARE SAME AS IN THE PRECEDING YEARS AN D THE SAME HAS TO BE ACCEPTED AS INCOME UNDER THE HEAD BUSINESS OR PROFE SSION. THERE IS NO BASIS FOR TREATING THE ASSESSEE AS AN INVESTOR IN SHARES, WH EN HIS INTENTION WAS TO TRADE IN QUOTED SHARES. 7 .71 IN M/S CHOWDRY ASSOCIATES(SUPRA) RELIED UPON B Y THE LD. AR , THE SAID ASSESSEE CONVERTED ONLY FOUR SHARES IN ITS STOCK I N TRADE IN TO INVESTMENT AND ACCORDINGLY, THE ITAT ACCEPTED THE CLAIM OF THE ASS ESSEE. LIKEWISE IN SARNATH INFRASTRUCTURE PVT. LTD., THE ITAT CONCLUDED IN FA VOUR OF THE ASSESSEE BECAUSE NO MATERIAL WAS BROUGHT ON RECORD TO SHOW THAT DEMA RCATION LINE BETWEEN BUSINESS AND INVESTMENT WAS HAZY OR THAT THE ASSESS EE HAD NOT MAINTAINED AN INVESTMENT PORTFOLIO AND IT WAS DEALING IN SHARES O NLY LIKE A TRADER. WITH RESPECT, ITA NOS.1118 ,942&943/DEL./2010 22 WE ARE NOT INCLINED TO FOLLOW THE SAID DECISIONS WH ICH WERE RENDERED ON THE FACTS OF THEIR OWN. IN THE INSTANT CASE, AS ALREAD Y OBSERVED,NUMBER OF SHARES CONVERTED IS MUCH MORE AND THE ASSESSEE IS CARRYI NG ON ITS TRADING ACTIVITIES IN THE YEARS UNDER CONSIDERATION ON THE SAME LINES AS IN EARLIER YEARS AND NO MATERIAL HAS BEEN PLACED BEFORE LD. AR EXCEPT A MER E RESOLUTION OF BOD OF THE COMPANY, CLAIMING TO BE INVESTOR. 7.72 IN LOHIA METALS (P) LTD.(SUPRA) ISSUE WAS AS TO WHETHER PROFIT ON SALE OF SHARES CONVERTED FROM STOCK IN TRADE IN TO INVESTME NT WERE TO BE ASSESSED AS LONG TERM CAPITAL GAINS OR SHORT TERM CAPITAL GAINS . THE DECISION IN KAUR SINGH(SUPRA) RELATES TO SALE OF SOLITARY TRANSACTIO N OF SALE OF PLOTS CARVED OUT IN LAND .HOW THESE DECISIONS HELP THE ASSESSEE BEFORE US , THE LD. AR DID NOT EVEN ATTEMPT TO EXPLAIN NOR EVEN DREW ANY PARALLEL. WITH RESPECT, WE ARE OF THE OPINION THAT THESE DECISIONS ARE NOT APPLICABLE IN THE FACT S AND CIRCUMSTANCES OF THE INSTANT CASE. 7.73 IN PNB FINANCE & INDUSTRIES LTD. (SUPRA), T HE ISSUE RELATED TO SALE OF SHARES HELD FOR SEVEN YEARS AND NO SUCH REGULAR ACT IVITY OF TRADING IN SHARES WAS FOUND. ACCORDINGLY, THE HONBLE HIGH COURT CONCLUDE D THAT THESE SHARES WERE HELD IN INVESTMENT ACCOUNT AND SALE THEREOF GAVE RI SE TO CAPITAL GAINS. AS POINTED OUT BY THE LD. DR, THIS DECISION DOES NOT ASSIST THE ASSESSEE AT ALL, WHEREIN REGULAR ACTIVITY OF TRADING IN SHARE FOR THE PAST S O MANY YEARS IS CONTINUING IN THE YEARS UNDER CONSIDERATION. 7.8 WE FIND THAT IN THE CASE OF CIT (CENTRAL), CALCUTTA VS ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY (P) LTD.,82-ITR-586, THE HON'BLE SUPREME COURT HELD AS UNDER: WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK-IN-TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND HE SHOULD, IN NORMAL CIRCUMSTA NCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM HIS RECORDS AS TO WHETHER HE HAS MAINTAINED ANY ITA NOS.1118 ,942&943/DEL./2010 23 DISTINCTION BETWEEN THOSE SHARES WHICH ARE HIS STOC K-IN-TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT . 7.9 IN THE CASE OF CIT, BOMBAY VS H HOLCK LARSEN (160-I TR-67), THE HON'BLE SUPREME COURT HAS HELD AS UNDER : IN ORDER TO DETERMINE WHETHER ONE WAS A DEALER IN SHARES OR AN INVESTOR, THE REAL QUESTION WAS NOT WHETHER THE TRANSACTION OF BUY ING AND SELLING THE SHARES LACKS THE ELEMENT OF TRADING, BUT WHETHER THE LATER STAGES OF THE WHOLE OPERATION SHOW THAT THE FIRST STEP THE PURCHASE O F THE SHARES WAS NOT TAKEN AS, OR IN THE COURSE OF, A TRADING TRANSACTION. THE TOTALITY OF ALL THE FACTS WILL HAVE TO BE BORNE IN MIND AND THE CORRECT LEGAL PRINCI PLES APPLIED TO THESE. IF ALL THE RELEVANT FACTORS HAVE BEEN TAKEN INTO CONSIDERAT ION AND THERE HAS BEEN NO MISAPPLICATION OF THE PRINCIPLES OF LAW, THEN THE C ONCLUSION ARRIVED AT BY THE TRIBUNAL CANNOT BE INTERFERED WITH BECAUSE THE INFEREN CE IS A QUESTION OF LAW, IF SUCH AN INFERENCE WAS A POSSIBLE ONE, SUBJECT, HOWEV ER, THAT ALL THE RELEVANT FACTORS HAVE BEEN DULY WEIGHED AND CONSIDERED BY THE TRIBUNAL, THE INFERENCE REACHED BY THE TRIBUNAL SHOULD NOT BE INTERFERED WITH . 8. . WE ARE OF THE OPINION THAT THE CHARACTER OF A TRANSACTION CANNOT BE DETERMINED SOLELY ON THE APPLICATION OF ANY ABSTRAC T TEST OR RULE AND THE CUMULATIVE FACTORS AFFECTING THE TRANSACTIONS HAV E TO BE SEEN. HABITUAL DEALING IN A PARTICULAR ITEM AND THAT TOO SINCE INCEPTION I S INDICATIVE OF THE ASSESSEES INTENTION OF TRADING. MERELY FOR TAKING BENEFIT OF PROVISIONS OF SEC. 111A OF THE ACT APPLICABLE FROM THE AY 2005-06, THE ASSESSEE CAN NOT BE CATEGORISED AS AN INVESTOR, ESPECIALLY WHEN THE AFORESAID FACTS SPEAK OTHERWISE AND THE LD. AR DID NOT PLACE ANY MATERIAL, OTHER THAN RESOLUTION DATED 22.4.2005, BEFORE US WHILE THE AUDITOR REPORTS AND FACTS FOR THE YEARS UNDER CONSIDERATION ,REFLECTING INTENTION OF THE ASSESSEE, LEAD US TO THE CONCLUSIO N THAT THE ASSESSEE IS CONTINUING ITS ACTIVITIES AS IN EARLIER YEARS OF A TRADER IN SHARES. . AS OBSERVED IN SUTLEJ COTTON MILLS SUPPLY AGENCY LTD . (SUPRA), IT IS A MATTER OF FIRST IMPRESSION WITH THE COURT WHETHER A PARTICULAR TRANSACTION IS IN THE NATURE OF TRADE OR NOT. , IT IS NOT EVEN THE ASSESSEES CASE THAT THEY HAD HELD ALL THE SHARES FOR A LONG DURATION. THE FACTS AND CIRCUMSTANCES OF THE CASE BEFORE US, WHEN VIEWED IN THE LIGHT OF PRINCIPLES LAID DOWN IN THE VARIOUS DECISI ONS REFERRED TO ABOVE, LEAD US TO THE CONCLUSION THAT THE VOLUMINOUS SHARE TRANSACTIO NS WERE IN THE ORDINARY LINE OF ITA NOS.1118 ,942&943/DEL./2010 24 THE ASSESSEES BUSINESS; PURCHASE OF SHARES BY THEM WAS NOT FOR THE PURPOSE OF EARNING DIVIDEND, BUT WITH THE DOMINANT INTENTION O F RESALE IN ORDER TO EARN PROFITS; THE PROFIT MADE BY THEM IS NOT OF MERE ENHANCEMENT OF VALUE OF THE SHARES, BUT IS A PROFIT MADE IN THE CARRYING ON OF A BUSINESS SCHE ME OF PROFIT MAKING; HUGE VOLUME OF SHARE TRANSACTIONS, THE REPETITION AND CO NTINUITY OF THE TRANSACTIONS, GIVE THEM A FLAVOUR OF TRADE; THE MAGNITUDE, FREQ UENCY AND THE RATIO OF SALES TO PURCHASES ON THE TOTAL HOLDINGS IS EVIDENCE THAT TH E ASSESSEE HAD NOT PURCHASED THE SHARES AS AN INVESTMENT, BUT WITH THE INTENTION TO TRADE IN SUCH SCRIPS. IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISIONS, INC LUDING IN WALLFORT FINANCIAL SERVICES LTD.(SUPRA) RELIED UPON BY THE LD. DR, WE ARE OF THE OPINION THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN ACCEPTING THE CLAIM OF THE ASSESSEE AS INVESTOR IN SHARES ,ESPECIALLY WHEN THE NATURE OF TRANSACTIONS IN THE YEARS UNDER CONSIDERATION WAS SIMILAR TO WHAT THE ASSESSEE HAD UNDERTAKEN HITHER TO AND TURNOVER OF THE ASSESSEE CONTINUALLY INCREASED IN T HE YEARS UNDER CONSIDERATION. ACCORDINGLY, WE VACATE THE FINDINGS OF THE LD. CIT( A) AND RESTORE THE ORDER OF THE AO. THEREFORE, GROUND NO.1 IN THESE APPEALS IS AL LOWED. 9. NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE US IN TERMS OF THE RESIDUARY GROUND NO.2 IN THESE THREE APPEALS, ACCORDINGLY, TH IS GROUND IS DISMISSED. 10. NO OTHER ARGUMENT OR PLEA WAS MADE BEFORE US. 11. IN THE RESULT, THESE APPEALS ARE ALLOWED. SD/- SD/- (U.B.S. BEDI) (A.N. PAHUJA) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NS COPY OF THE ORDER FORWARDED TO :- 1. ASSTT. C.I.T., CIRCLE 14(1), NEW DELHI. 2. M/S PURAN ASSOCIATES PVT. LTD., 4 TH FLOOR, PUNJABI BHAWAN, 10, ROUSE AVENUE, NEW DELHI. ORDER PRONOUNCED IN OPEN COURT ITA NOS.1118 ,942&943/DEL./2010 25 3. CIT(A)-III & XVII, NEW DELHI. 4. CIT CONCERNED. 5. DR, ITAT,F BENCH, NEW DELHI 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, DELHI