Shri Dushyant K.Shah, Baroda V. The Income tax Officer, Ward-5(4), Baroda

ITA 129/AHD/2006

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 8995 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 05-08-2009
• Assessment Year: 2000-2001
• Appeal Filed On: 13-01-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M C
• Assessee Lawyers: S N SOPARKAR
• Keywords: Capital asset; Business income; Advance ruling; Question of law; Capital Gains
• Section: 2(14); 142(1); 143(1); 143(2); 28

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL : D BENCH : AHMEDABAD (BEFORE HONBLE SHRI T.K. SHARMA, J.M. & HONBLE SH RI N.S. SAINI, A.M.) I.T.A. NO. 129/AHD./2006 ASSESSMENT YEAR : 2000-2001 SHRI DUSHYANT K. SHAH, BARODA -VS.- INCOME TA X OFFICER, WARD-5(4), BARODA. (APPELLANT) (R ESPONDENT) APPELLANT BY : SHRI S.N. SOPARKAR RESPONDENT BY : SHRI M.C. PANDIT O R D E R PER SHRI T.K. SHARMA, JUDICIAL MEMBER :- THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A)-V, BARODA DATED 29-11-2005 FOR A.Y.2000-2001. IN THE GROUNDS OF APPEAL, GROUND NO.1 RAISED BY THE ASSESSEE HAS NOT BEEN PRESSED FOR ADJUDICATION. ACCORDINGLY, THE SAME IS DISMISSED. THE GROUND NO. 3 IS GENERAL IN NATURE THE SAME IS ACCORDINGLY DEALT WITH. THE REMAINING TWO EFFECTIV E GROUNDS FOR ADJUDICATION ARE AS UNDER: 2. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN TREATING THE LONG TERM CAPITAL GAIN OF RS.6,50,125/- AS BUSINESS INCOME AND THEREBY DENYING THE EXEMPTION O F THE EQUAL AMOUNT U/S.54EB OF THE ACT. 4. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN CON FIRMING THE LEVY OF INTEREST UNDER SEC.234A/B/C/D OF THE ACT. 2. BRIEF FACTS AS CAN BE NOTICED FROM THE ORDERS OF THE TAX AUTHORITIES ARE THAT THE ASSESSEE IS ENGAGED IN SHARE TRADING BUSINESS. THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME AT RS.3,24,545/- WHICH WAS P ROCESSED UNDER SECTION 143(1) OF THE ACT. THE ASSESSEE HAD SHOWN INCOME FROM BUSINESS, CAPITAL GAIN AND ALSO INCOME FROM OTHER SOURCES. IN THE RETURN, THE AO NOTED THAT TH E ASSESSEE HAD SHOWN SHORT TERM CAPITAL GAIN OF RS.6,24,382/- AND LONG TERM CAPITAL GAIN OF RS.6,50,125/-. THE ASSESSEE CLAIMED LONG TERM CAPITAL GAIN OF RS.6,50,125/- AS EXEMPTIO N UNDER SECTION 54EB OF THE INCOME- 2 TAX ACT. THE AO FURTHER NOTED THAT THE ASSESSEE HA D SHOWN SHARE TRANSACTIONS IN TWO PARTS VIZ. CERTAIN SHARES FOR TRADING PURPOSES AND CERTAIN SHARES AS INVESTMENT. ACCORDINGLY, THE ASSESSEE SHOWN TWO TYPES OF PROFIT S ONE FROM TRADING PROFITS OUT OF TRADING OF SHARES AND CAPITAL GAIN (SHORT TERM AND LONG TERM) ARISING OUT OF TRADING OF SHARES CLAIMED TO BE MADE FOR INVESTMENT. THE AMOU NT OF RS.6,50,125/- WAS CLAIMED TO BE CAPITAL GAIN AGAINST WHICH THE ASSESSEE MADE AN INVESTMENT OF RS.10 LAKHS AND CLAIMED EXEMPTION UNDER SECTION 54EB AGAINST THE SA ID LONG TERM CAPITAL GAIN. THE AO WAS OF THE VIEW THAT SINCE ASSESSEE WAS TRADING IN SHARES FOR EARNING PROFIT ALL THE SHARES WERE NOTHING BUT STOCK-IN-TRADE. THE LONG TERM CAP ITAL GAIN COULD NOT BE TREATED IN SUCH CASES WHERE SHARES PURCHASED IN EARLIER YEARS WERE SOLD IN THE SUBSEQUENT YEARS THEREFORE THE EXEMPTION UNDER SECTION 54EB OF THE ACT WAS NOT ALLOWABLE TO THE ASSESSEE. THEREAFTER, THE CASE OF THE ASSESSEE SELECTED FOR S CRUTINY BY ISSUANCE OF NOTICES UNDER SECTION 142(1) AND 143(2) OF THE ACT. IN THE SCRUT INY PROCEEDINGS, THE ASSESSEE WHILE MAINTAINING ITS CLAIM FOR CAPITAL GAIN AND ELIGIBIL ITY OF EXEMPTION UNDER SECTION 54EB OF THE ACT REPLIED THAT THE ASSESSEE IN FACT WAS NOT D EALING SHARES AND SECURES BUT WERE INVESTORS IN SHARES, AND THEREFORE THE SAME COULD N OT BE TREATED AS BUSINESS INCOME; THAT SIMPLY BECAUSE THE CERTAIN SPECIFIED SHARES WERE PU RCHASED ALONG WITH THE LOT OF OTHER SHARES, THE SHARES IN QUESTION WOULD ALSO FORM PART OF THE STOCK-IN-TRADE; THAT THE INVESTMENT MADE BY THE ASSESSEE WAS COMPRISED OF ON LY ONE SCRIPT; THAT INVESTMENT THEREOF WAS MADE OUT OF SURPLUS FUND AVAILABLE WITH THE ASSESSEE; ALL THE SHARES MADE FOR THE PURPOSE OF THE INVESTMENT WERE TRANSFERRED IN T HE NAME OF THE ASSESSEE; THAT INVESTMENT WAS MADE FOR PERIOD OF MORE THAN ONE YEA R; THAT THE BOOKS OF ACCOUNTS WERE AUDITED AND INVESTMENTS WERE SHOWN AND ACCEPTED BY THE ASSESSEE IN THE EARLIER YEAR AND THAT THE IMPUGNED INVESTMENT WAS LONG TERM IN NATUR E AND COULD NOT BE TREATED AS TRANSACTIONS IN THE NATURE OF TRADING. THE AO HOWE VER DID NOT BUY THESE CONTENTIONS OF THE ASSESSEE. THE AO WAS OF THE VIEW THAT THE ASSE SSEE WAS CONTINUOUSLY ENGAGED IN THE ACTIVITY OF BUYING AND SELLING OF THE SHARES AND TH E SIZE AND MAGNITUDE OF THE TRANSACTIONS ITSELF SHOWED THAT THE ASSESSEES INTENTION WAS TO EARN PROFIT THEREOF. THE DEFINITION OF BUSINESS AS DESCRIBED IN SECTION 2(13) OF THE ACT W IDE ENOUGH TO INCLUDE THE TRANSACTIONS 3 OF THE ASSESSEE. THERE WAS NO EVIDENCE THAT THE A SSESSEE PURCHASED SHARES FOR EARNING DIVIDEND AND KEEPING THE SAME LONG TERM. THE SHARE S WERE PURCHASED AT VERY LOW PRICE AND SOLD IT MUCH HIGHER RATE. THE AO RELIED ON THE DECISION OF SUPREME COURT IN THE CASE OF DALHOUSIE INVESTMENT TRUST COMPANY VS. CIT, 68 I TR 486 TO HOLD THAT PURCHASES OF SHARES MADE AT A TIME WHEN THEY WERE NOT EXPECTED T O GOOD RETURN AS INVESTMENT, BUT SOLD AT A VERY GOOD PROFIT, WAS TREATED AS AN ADVENTURE IN THE NATURE OF TRADE. THE AO ACCORDINGLY REJECTED THE CLAIM OF THE ASSESSEE UNDE R SECTION 54EB OF THE ACT. 3. THE ASSESSEE CHALLENGED THIS ORDER OF THE AO BEF ORE THE CIT(A). THE ASSESSEE WHILE REITERATING THE CONTENTIONS AND SUBMISSIONS M ADE BEFORE THE AO, FURTHER CONTENDED THAT THE ASSESSEE WAS NOT ENGAGED IN THE BUSINESS O F DELIVERY BASED TRADING IN SHARES BUT ENGAGED IN THE SPECULATIVE TRADING OF SHARES AND TH E INVESTMENT MADE IN SHARES WERE TRANSFERRED IN HIS NAME. THE ASSESSEE BEFORE THE C IT(A) TRIED TO DISTINGUISH THE CASE LAW RELIED ON BY THE AO IN THE CASE OF DALHOUSIE INVEST MENT TRUST COMPANY, WHICH WERE REPRODUCED BY THE CIT(A) IN THE IMPUGNED ORDER AT P AGE NO.9 AND 10. THE ASSESSEE ALSO RELIED ON THE TWO OTHER DECISIONS IN THE CASE OF VS RM FIRM VS. CIT, 47 ITR 720 (MAD) AND BHIKAM CHAND BAGRI VS. CIT, 44 ITR 746(CAL). I T WAS SUBMITTED THAT THE ACTION ON THE PART OF THE ASSESSEE OF INVESTING THE WHOLE OF THE SALE PROCEEDINGS OF LONG TERM INVESTMENT INTO LONG TERM SPECIFIED SECURITIES AS E NVISAGED IN SECTION 54EB OF THE ACT AND THEREBY BLOCKING THE ENTIRE SALE PROCEEDS REALI ZED FOR A LONG PERIOD AND DISCLOSURE THEREOF IN THE RETURN FILED CLEARLY INDICATED THAT THE SAID SHARES WERE HELD AS INVESTMENT AND NOT AS TRADING ASSET. IT WAS POINTED OUT ORIG INAL INVESTMENT IN UTI (MIP-99) WERE CONVERTED INTO 6.60% TAX FREE BONDS. THE ASSESSEE HAS GIVEN FIGURES OF LAST FOUR YEARS OF INCOME EARNED FROM DEALING IN SHARES EITHER BY WAY OF BROKERAGE OF IPO FORMS, SHARES, INVESTMENT IN SHARES AND SPECULATION BUSINESS TO DE MONSTRATE THAT ASSESSEE WAS NEITHER REGULARLY TRADING IN SHARES NOR HAS BEEN SPECULATIN G IN SHARES. ON THIS BASIS, IT WAS CLAIMED THAT MAIN ACTIVITY WAS INVESTMENT IN SHARES . THE CONTENTION OF THE AO WAS THAT THE ASSESSEE THAT NO BORROWED MONEY WAS INVESTED IN THESE SHARES, WAS NOT TRUE 4 CONSIDERING THE FACT THAT THE ASSESSEE HAS CLAIMED INTEREST TO THE TUNE OF RS.3,30,405 IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE HAS ALSO SHO WN UNSECURED LOAN AND BANK LOAN OF RS.11,90,752 AND RS.2,77,928 RESPECTIVELY WHICH CLE ARLY INDICATED THAT THE FACT OTHERWISE. LOOKING TO THE CHART SHOWING THE FIGURE S OF PROFIT EARNED BY THE ASSESSEE FOR THE LAST FOUR YEARS, IT COULD BE SEEN THAT THE ASSE SSEE WAS DEALING IN SHARES AND SECURITIES HENCE DIVISION OF SUCH DEALINGS INTO SHARE TRADING AND INVESTMENT COULD NOT BE JUSTIFIED. THE AO ALSO RELIED ON CERTAIN AUTHORITIES TO SUPPOR T ITS CASE AS MENTIONED IN THE IMPUGNED ORDER OF THE CIT(A) AT PAGE NO.12. IN RE PLY, THE ASSESSEE CONTENDED THAT ENTIRE INVESTMENT WAS WHOLLY MADE OUT OF SURPLUS FUNDS LYI NG WITH THE ASSESSEE AND THAT ENTIRE BORROWED WAS UTILIZED FOR THE PURPOSE OF BUSINESS A ND NOT FOR ANY INVESTMENT. THESE CONTENTIONS AND SUBMISSIONS OF THE ASSESSEE DID NOT FIND FAVOUR WITH THE LEARNED CIT(A) WHO CONFIRMED THE ORDER OF THE AO ON THIS ISSUE. T HE RELEVANT OBSERVATIONS AND FINDINGS OF THE CIT(A) ARE AS UNDER: 3.2 . . IT HAS BEEN POINTED OUT BY THE APPEL LANTS REPRESENTATIVE THAT THE LD.CIT(A)-V, BARODA VIDE HIS ORDER IN APPE AL NO.CAB/V-466/03-04 DATED 11.06.2004 IN THE CASE OF THE APPELLANT FOR T HE A.Y.2001-2002 HAS DECIDED THE SUBJECT MATTER IN FAVOUR OF THE APPELLA NT. IN THIS ORDER, THE LD.CIT(A)-V DID NOT ACCEPT THE VIEW TAKEN BY THE AO THAT ALL THE TRANSACTIONS ARE IN THE NATURE OF BUSINESS ACTIVITY ON ACCOUNT O F THE FACT THAT THE DEPARTMENT HAD ACCEPTED THE INVESTMENT IN SHARES AS SHOWN BY THE APPELLANT IN EARLIER YEARS. IT HAS BEEN STATED BY THE LD.CIT (A) THAT THIS IS EVIDENT FROM THE FACT THAT THE APPELLANT HAS NOT TREATED SUCH IN VESTMENT AS STOCK-IN-TRADE WHILE FILING RETURNS OF EARLIER YEARS. IN THE CASE OF DALHOUSIE INVESTMENT TRUST COM. LTD. CIT, IT HAS BEEN HELD BY THE HONBLE SUPR EME COURT THAT THE DECISION OF THE DEPARTMENT IN THE EARLIER YEARS THA T THE TRANSACTIONS WERE IN THE NATURE CHANGE OF INVESTMENTS WAS NOT BINDING IN THE PROCEEDINGS FOR ASSESSMENT DURING THE SUBSEQUENT EYARS. THEREFORE, MERELY BECAUSE IN THE YEAR PRIOR TO THE A.Y.2000-2001, SHARES WERE TREATE D AS INVESTMENT AND HAD BEEN ACCEPTED BY THE DEPARTMENT IS NOT BINDING IN T HE PROCEEDINGS FOR THE A.Y.2000-2001. IN VIEW OF THE ABOVE POSITION OF LA W, I RESPECTFULLY DISAGREE WITH THE CONCLUSION DRAWN BY THE LD.CIT(A) IN A.Y.2 001-02. IN THE CASE OF DALHOUSIE INVESTMENT TRUST CO. LTD. VS. CIT, THE HO NBLE SUPREME COURT HAS HELD AS UNDER: 5 XXXXX IT HAS BEEN CLAIMED BY THE APPELLANTS REPRESENTAT IVE THAT THE APPELLANT IS NEITHER REGULARLY TRADING IN SHARES NOR HE HAS BEEN SPECULATING IN SHARES AND THAT HIS MAIN ACTIVITIES ARE INVESTMENT IN SHARES. THIS FACT IS NOT CORRECT. DURING THE YEAR, THE APPELLANT HAS SHOWN A BUSINESS LOSS OF RS.59,171 FROM TRADING OF SHARES. IT IS SEEN THAT THE APPELLANT H AS SHOWN PURCHASE OF SHARES FOR RS.5,30,96,365 AND SALES OF SHARES AT RS.5,31,4 9,286/-. THE APPELLANT HAS SHOWN TRADING PROFIT OF RS.6,41,875 AND TRADING LOS S OF RS.5,88,954. ACCORDINGLY, THE APPELLANT HAS SHOWN SHARE TRADING LOSS OF RS.52,921. FROM THE ABOVE FIGURES, IT CAN BE CONCLUDED THAT THE APP ELLANT IS A REGULAR TRADER IN SHARES. AS PER THE FACTS OF THE CASE, DISCUSSED AB OVE, THE APPELLANT HAD PURCHASED 50000 SHARES OF TRANSCHEM FOR RS.3 LACS O N 16.04.1998. THESE SHARES WERE SOLD ON 21.04.1999 (40000 SHARES) AND 2 2.04.1999 (10000 SHARES) FOR A TOTAL CONSIDERATION OF RS.9,75,000/-. THEREFORE, IT IS VERY CLEAR THAT THE SHARES ON WHICH LONG TERM CAPITAL GAINS HA VE BEEN CLAIMED WERE PURCHASED AT A TIME WHEN THEIR PRICES WERE VERY LOW . IT HAS BEEN CLAIMED BY THE APPELLANT THAT THE ENTIRE INVESTMENT WAS WHOLLY MADE OUT OF SURPLUS FUNDS LYING WITH HIM AND NOT PART OF THE INVESTMENT WAS M ADE OUT OF BORROWED FUNDS. N THIS REGARD, IT MAY BE MENTIONED THAT DUR ING THE FINANCIAL YEAR 1998- 99 WHEN THE APPELLANT HAD PURCHASED THE SHARES, HE HAD CLAIMED INTEREST EXPENSES OF RS.1,92,703. THE APPELLANT HAS SHOWN U NSECURED LOANS OF RS.7,29,003 AND BANK LOAN OF RS.3,27,126. IT HAS ALSO BEEN POINTED OUT BY THE AO THAT THE ASSESSEE HAS SHOWN UNSECURED LOAN AND B ANK LOAN OF RS.11,90,752 AND RS.2,77,928 RESPECTIVELY AS PER TH E BALANCE SHEET AS AT 31.3.20000. THE APPELLANT HAS ALSO CLAIMED INTERES T EXPENSES OF RS.3,30,405 DURING THE AY 2000-2001. THE APPELLANT HAS NOT BEE N ABLE TO EXPLAIN AS TO HOW THE BORROWED FUNDS HAVE BEEN USED FOR THE PURPO SE OF BUSINESS. IN THE CASE OF BHIKMACHAND BAGRI VS. CIT, (1962) 44 ITR 74 6, THE HONBLE CALCUTTA HIGH COURT HAS HELD AS UNDER: XXXX AS DISCUSSED ABOVE, THE APPELLANT IS TRADE IN SHARE S. THE APPELLANT HA SNOT SUBMITTED ANY EVIDENCE THAT THESE SHARES HAD BEEN P URCHASED TO EARN DIVIDEND. THEREFORE, IT IS VERY CLEAR THAT THESE S HARES WERE PURCHASED EVEN INITIALLY NOT AS INVESTMENT BUT FOR THE PURPOSE OF SALE AT A PROFIT. THEREFORE THE TRANSACTIONS AMOUNTED TO AN ADVENTURE IN THE NA TURE OF TRADE AND THE PROFIT DERIVED FROM THE SALE OF THESE SHARES IS ASS ESSABLE AS BUSINESS INCOME. 6 THEREFORE THE AO WAS JUSTIFIED IN TREATING THE SHOR T TERM CAPITAL GAINS AND LONG TERM CAPITAL GAINS SHOWN BY THE APPELLANT AT R S.6,24,382 AND RS.6,50,125 RESPECTIVELY AS BUSINESS INCOME AND IN DISALLOWING THE EXEMPTION CLAIMED FOR LONG TERM CAPITAL GAINS U/S.5 4EB OF THE IT ACT. ACCORDING, THE TREATING OF SHORT TERM CAPITAL GAINS AND LONG TERM CAPITAL GAINS SHOWN BY THE APPELLANT OF RS.6,24,382 AND RS. 6,50,125 RESPECTIVELY AS BUSINESS INCOME AND DISALLOWANCE OF EXEMPTION CLAIM ED FOR LONG TERM CAPITAL GAINS U/S.54EB OF THE IT ACT, IS CONFIRMED. 4. STILL AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE IS BEFORE US. THE LEARNED COUNSEL FOR THE ASSESSEE ADVANCED HIS SUBMISSIONS A ND CONTENTIONS MORE OR LESS ON THE SIMILAR LINES AS MADE BEFORE THE TAX AUTHORITIES. TO FURTHER SUPPORT THE CASE, LEARNED COUNSEL RELIED ON THE DECISION OF TRIBUNAL, MUMBAI BENCH IN THE CASE OF JANAK S. RANGWALLA VS. ACIT TO HOLD THAT MERE VOLUME OF TRAN SACTION TRANSACTED BY THE ASSESSEE WOULD NOT ALTER THE NATURE OF TRANSACTION; THAT JUD ICIALLY ACCEPTED PRINCIPLE THAT SAME VIEW SHOULD BE ADOPTED FOR THE SUBSEQUENT YEARS UNLESS T HERE IS A MATERIAL CHANGE IN THE FACTS. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE AHM EDABAD BENCH OF THE ITAT IN A GROUP MATTER IN THE CASE OF ACIT VS. HIMANSHU J. SH AH AND OTHERS IN ITA NO.2875, 2878, 2879, 2880/AHD/2008 AND OTHERS DATED 17-9-200 9 WHEREIN IT WAS HELD THAT IN THE ABSENCE OF ANY CONTRARY MATERIAL, THE ASSESSEE SHOU LD BE HELD INVESTORS IF THE SHARES ARE TRANSFERRED AND REGISTERED IN ITS NAME AND THAT SIN CE THE CASE OF THE REVENUE WAS BASED MERELY ON SUSPICION AND NOT ON ADEQUATE MATERIAL TO SHOW, IT WAS NOT POSSIBLE TO HOLD THAT THE ASSESSEE WAS ACTING AS A TRADER. FURTHER RELIA NCE WAS PLACED ON THE DECISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE ASSESSEES O WN CASE IN ITA NO.2579 AND 2580/AHD/2004 FOR A.Y.2001-02 WHEREIN THE ASSESSEE HAD RAISED SIMILAR ISSUE AND THE TRIBUNAL VIDE ITS ORDER DATED 5-9-2008 ALLOWED THE CLAIM OF THE ASSESSEE. THEREFORE, IT IS SUBMITTED THAT CONSIDERING ALL THESE MATERIALS AND DECISIONS CITED SUPRA, THE IMPUGNED TRANSACTION IN SHARES BY THE ASSESSEE IS NOTHING BU T INVESTMENT AND IS ELIGIBLE FOR EXEMPTION UNDER SECTION 54EB OF THE ACT. 7 5. THE LEARNED DR ON THE OTHER HAND RELIED ON ORDER S OF BOTH THE TAX AUTHORITIES. THE LD. D.R. RELYING DEFINITION OF BUSINESS CONTAINED I N SECTION 2(13) OF THE INCOME TAX ACT AND CONTENDED THAT THE ASSESSEE IS DEALING IN SHARE S AND, THEREFORE, ALL ITS SHARES WERE STOCK-IN-TRADE, WHICH WERE PURCHASED WITH A VIEW TO EARN PROFIT. THE MERE FACT THAT THE SHARES WERE PURCHASED IN EARLIER YEARS AND SOLD IN SUBSEQUENT YEARS CANNOT BE TREATED AS RESULTING IN CAPITAL NATURE. HE ACCORDINGLY CONTEND ED THAT BOTH THE AUTHORITIES BELOW ARE LEGALLY AND FACTUALLY CORRECT IN HOLDING THAT A.O. RIGHTLY ASSESSED THE PROFIT ON SALE AMOUNTING TO RS.6,50,125/- AS BUSINESS INCOME AND T HEREBY DENYING EXEMPTION OF EQUAL AMOUNT UNDER SECTION 54EB OF THE INCOME TAX ACT, 19 61. 6. AFTER HEARING BOTH THE SIDES, WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ASSESSEE HAD SHOWN CERTAIN S HARES FOR TRADING PURPOSES AND CERTAIN SHARES AS INVESTMENT. THE PROFIT ON SALE OF SHARES HAD ALSO BEEN SHOWN IN TWO PARTS, VIZ. (I) TRADING PROFIT ARISING OUT OF TRADING OF SHARES AND (II) CAPITAL GAINS ARISING OUT OF SALE OF SHARES CLAIMED TO BE INVESTMENT IN NATURE. THE MERE FACT THAT THE ASSESSEE IS DEALING IN SHARES. HE IS PREVENTING FROM HOLDING SOME SHARES A S INVESTMENT. IN THIS CONTEXT, WE HAVE ALSO GONE THROUGH THE CBDT CIRCULAR BEARING NO. 4/2 007 DATED 15 TH JUNE, 2007, WHEREIN IT HAS LAID DOWN THE PRINCIPLES FOR HOLDING AS TO W HEN PROFITS EARNED FROM TRANSACTIONS IN SHARE SHOULD BE HELD AS BUSINESS OR SHOULD BE TREAT ED AS INVESTMENT. THE CBDT ALSO EMPHASIZED THAT IT IS IT IS POSSIBLE FOR A TAX PAYE R 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 WH ICH ARE TO BE TREATED AS TRADING ASSETS. IN THIS CASE, THE ASSESSEE HAS TWO PORTFOLIOS, THER EFORE, THE ASSESSEE MAY HAVE INCOME UNDER BOTH HEADS I.E., CAPITAL GAINS AS WELL AS BUS INESS INCOME. THE CIRCULAR OF CBDT BEARING NO. 4/2007 DATED 15.06.2007 IS RE-PRODUCED HEREUNDER :- 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. 8 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 SECTI ON 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. 4. THE CENTRAL BOARD OF DIRECT TAXES (CBDT) THROUGH INSTRUCTION NO. 1827 DATED AUGUST 31, 1989, HAD BROUGHT TO THE NOTICE OF THE A SSESSING OFFICERS THAT THERE IS A DISTINCTION BETWEEN SHARES HELD AS INVESTMENT (CAPI TAL ASSET) AND SHARES HELD AS STOCK-IN-TRADE (TRADING ASSET). IN THE LIGHT OF A N UMBER OF JUDICIAL DECISIONS PRONOUNCED AFTER THE ISSUE OF THE ABOVE INSTRUCTION S, IT IS PROPOSED TO UPDATE THE ABOVE INSTRUCTIONS FOR THE INFORMATION OF THE ASSES SEES 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) : 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 DISTINCTION BETWEEN THOSE SHARES WHICH ARE HIS STOC K-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 TRADING TRANSAC TIONS OR WHETHER THESE WERE IN THE NATURE OF INVESTMENT WAS A QUESTION OF LAW. THI S IS A MIXED QUESTION OF LAW AND FACT. 9 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, HA S 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 EXISTENCE OF THE PO WER TO PURCHASE AND SELL SHARES IN THE MEMORANDUM OF ASSOCIATION 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 SALES AND T HE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD FURNISH A GOOD GUID E 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 BEING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE ; BUT WHERE THE OBJECT OF THE INVESTMENT I N SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE PROF ITS ACCRUING BY CHANGE 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. T HE FIRST PRINCIPLE REQUIRES US TO ASCERTAIN WHETHER THE PURCHASE OF SHARES BY A FII I N EXERCISE OF THE POWER IN THE MEMORANDUM OF ASSOCIATION/TRUST DEED WAS AS STOCK-I N-TRADE AS THE MERE EXISTENCE OF THE POWER TO PURCHASE AND SELL SHARES WILL NOT B Y ITSELF BE DECISIVE OF THE NATURE OF TRANSACTION. WE HAVE TO VERIFY AS TO HOW THE SHA RES 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 BUSIN ESS INCOME OR HELD AS INVESTMENT IN CAPITAL ASSETS. THE SECOND PRINCIPLE FURNISHES A GUIDE FOR DETERMINING THE NATURE OF TRANSACTION BY VERIFYING WHETHER THERE AR E SUBSTANTIAL TRANSACTIONS, THEIR MAGNITUDE, ETC., MAINTENANCE OF BOOKS OF ACCOUNT AN D FINDING THE RATIO BETWEEN PURCHASES AND SALES. IT WILL 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 TRUE AND FAIR ACCOUNTS RELATING TO REMIT TANCE OF INITIAL CORPUS OF BUYING AND SELLING AND REALIZING CAPITAL GAINS ON INVESTME NTS AND ACCOUNTS OF REMITTANCE TO INDIA FOR INVESTMENT IN INDIA AND REALIZING CAPI TAL GAINS ON INVESTMENT FROM 10 SUCH REMITTANCES. THE THIRD PRINCIPLE SUGGESTS THAT ORDINARILY 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 CAPITA L 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 IN VESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSET S AND A TRADING PORTFOLIO COMPRISING OF STOCK-IN-TRADE WHICH ARE TO BE TREATE D AS TRADING ASSETS. WHERE AN ASSESSEE HAS TWO PORTFOLIOS, 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 S HARES 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 ASS ESSING OFFICERS ARE FURTHER ADVISED THAT NO SINGLE PRINCIPLE WOULD BE DECISIVE AND THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSIDERED TO DETERMINE WHETHE R, 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. WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LTD. VS.- ACIT [122 TT J 216] AND GOPAL PUROHIT VS.- JCIT [2009] 29 SOT 117 (MUM.)], IT HAS BEEN HELD THAT AS SESSE WOULD BE INVESTOR PRIMARILY IF SHARES ARE REGISTERED BY IT IN ITS NAME. ONCE THERE IS NO CONTRARY MATERIAL TO HOLD OTHERWISE, WE WOULD RESPECTFULLY FOLLOW THESE DECIS IONS AND HOLD THAT THE ASSESSEE IN THE INSTANT CASES ON HAND HAVE DISCHARGED THE PRIMARY O NUS BY GETTING THE SHARES REGISTERED IN 11 THEIR NAMES AND, THEREFORE, THEY CAN VERY WELL CLAI M AS INVESTORS. INV VIEW OF THIS, IN OUR OPINION, THE A.O. ASSESSED THE LONG-TERM CAPITAL GA IN OF RS.6,50,125/- UNDER THE HEAD INCOME FROM BUSINESS THEREBY DENYING EXEMPTION OF EQUAL AMOUNT UNDER SECTION 44EB. KEEPING IN VIEW THE TOTALITY OF THE FACTS AND CIRCU MSTANCES OF THE CASE, WE DIRECT THE A.O. TO ASSESS THE PROFIT EARNED ON SHARES AMOUNTING TO RS.6,50,125/- UNDER THE HEAD LONG TERM CAPITAL GAIN AND ALLOW THE DEDUCTION UNDER SE CTION 54EB IN ACCORDANCE WITH LAW. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED AS INDICATED ABOVE. THE ORDER WAS PRONOUNCED IN THE COURT ON 18 . 09.2009 SD/- SD/- (N.S. SAINI) (T.K. SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 18 / 09 / 2009 COPY OF THE ORDER IS FORWARDED TO : 1) SHRI DUSHYANT K. SHAH, BARODA (2) ITO, WARD-5(4), BARODA. 3) CIT(A)- ,BARODA (4) CIT- ,BARODA.(5 ) D.R., ITAT, AHMEDABAD. TRUE COPY BY ORDER LAHA/SR.P.S. DEPUTY REGISTRAR, ITAT, AHMEDA BAD