The ACIT, Circle-7, Ahmedabad V. Shri Bhupendra Shantilal Shah, Ahmedabad

ITA 1496/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 94295 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 17-08-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 26-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D C MISHRA
• Assessee Lawyers: K P SHAH
• Keywords: Capital asset; Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE S/SHRI RAJPAL YADAV, JM & MANISH BORAD, AM . ITA NO.1496/AHD/2011 ASST. YEAR 2006-07 ASSTT. COMMISSIONER OF INCOME- TAX, CIRCLE-7, AHMEDABAD. VS SHRI BHUPENDRA SHANTILAL SHAH, 18, LAD SOCIETY, VASTRAPUR, AHMEDABAD. (APPELLANT) (RESPONDENT) PA NO.ABJPS 1250N APPELLANT BY SHRI D. C. MISHRA, SR.DR RESPONDENT BY SHRI K. P. SHAH, AR DATE OF HEARING: 17/8/2015 DATE OF PRONOUNCEMENT: 28/8/2015 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER. THIS APPEAL OF THE REVENUE IS AGAINST THE ORDER DA TED 25 TH MARCH, 2011 PASSED BY CIT(A)-VI, AHMEDABAD. 2. THE ASSESSMENT WAS FRAMED ON 28.11.2008 BY THE D Y. CIT, CIRCLE-7, AHMEDABAD, UNDER SECTION 143(3) OF THE IN COME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR ASSES SMENT YEAR 2006- 07. THE ONLY ISSUE IN THIS APPEAL OF REVENUE IS AGA INST THE ORDER OF CIT(A) PARTLY CONFIRMING ADDITION MADE BY THE A.O. BY WAY OF TREATING SHORT-TERM CAPITAL GAINS ON THE SHARES HELD FOR LES S THAN 30 DAYS AS BUSINESS INCOME, OUT OF SHORT-TERM CAPITAL GAINS OF RS. 23,69,436/- AS ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 2 SHOWN BY THE ASSESSEE IN HIS RETURN OF INCOME. FOR THIS REVENUE HAS RAISED THE FOLLOWING GROUND OF APPEAL :- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING THE ASSESSING OFFICER TO TREAT THE INCOME OF RS.23,69,4 36/- AS SHORT TERM CAPITAL GAIN AS CLAIMED BY THE ASSESSEE INSTEA D OF BUSINESS INCOME, AS ASSESSED BY THE ASSESSING OFFIC ER. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FI LED HIS RETURN OF INCOME SHOWING INCOME FROM SHORT TERM AND LONG TERM CAPITAL GAINS, INCOME FROM BUSINESS OF TRADING IN SHARES OF F & O MARKET AND INCOME FROM OTHER SOURCES. DURING THE COURSE OF ASS ESSMENT AND AFTER EXAMINING THE TRANSACTIONS RELATING TO PURCHA SE AND SALE OF SHARES WITH REFERENCE TO SHORT TERM CAPITAL GAIN SH OWN BY THE ASSESSEE, THE AO MADE A FINDING THAT AS THE ASSESSE E IS INDULGING IN FREQUENT BUYING AND SELLING OF SHARES OF A VERY LAR GE SCALE CONTINUOUSLY DURING THE YEAR AS WELL AS YEAR AFTER YEAR AND FOR THE PURPOSE OF EARNING PROFIT. THE AO FOUND NO OTHER JU STIFICATION FOR THE FREQUENT BUYING AND SELLING OF SHARES SINCE IT COUL D NOT BE FOR THE PURPOSE OF INVESTMENT AND SINCE THE ASSESSEE WAS AL SO ENGAGED IN SHARES TRADING IN F & O SEGMENT HE BELIEVED THAT TH E TRANSACTIONS OF SHARES IN PURCHASE AND SALE FALLING UNDER THE CATEG ORY OF SHORT TERM CAPITAL GAIN AND THEREFORE TAXED SHORT TERM CAPITAL GAIN( STCG) AS INCOME FROM BUSINESS. AGGRIEVED, ASSESSEE WENT IN A PPEAL BEFORE CIT(A). 4. THE CIT(A) REFERRED TO CBDT CIRCULAR NO.4/007 DA TED 15.6.2007, DECISION OF HONBLE SUPREME COURT IN THE CASE OF ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 3 CIT(CENTRAL), CALCUTTA VS. ASSOCIATED INDUSTRIAL DE VELOPMENT CO. PVT. LTD. 82 ITR 586 AND OTHER JUDGMENTS IN RELATION TO EXAMINING THE FACTS OF THE CASE ON THE PRINCIPLES LAID DOWN FOR F INDING THAT WHETHER THE TRANSACTIONS OF PURCHASE AND SALE OF SHARES CON STITUTE UNDER THIS ACTIVITY OR SHORT TERM/LONG TERM CAPITAL OR BOTH DE PENDING UPON THE TREATMENT GIVEN BY THE ASSESSEE IN HIS BOOKS OF ACC OUNTS. HOWEVER, THE CIT(A) HEAVILY RELIED ON THE DECISION OF ITAT, AHMEDABAD IN THE CASE OF SHRI SUGAM CHAND C. SHAH VS. ACIT, CIRCLE-3 , SURAT IN ITA NO.3554/AHD/2008 FOR AY 2005-06 AND 1932/AHD/2009 F OR AY 2006- 07 AND MADE THE FOLLOWING FINDING :- 2.3 I HAVE CONSIDERED THE FACTS OF THE CASE, ASSES SMENT ORDER AND APPELLANTS SUBMISSION. ASSESSING OFFICER TREATED SHORT-TERM CA PITAL GAIN DISCLOSED BY THE APPELLANT AS BUSINESS PROFIT ON THE GROUND THAT APP ELLANT WAS NOT MAKING INVESTMENT BUT TRADING IN SHARES. ON THE IDENTICAL FACTS, ITAT AHMEDABAD IN THE CASE OF SHRI SUGAM CHAND C. SHAH VS. ACIT, CIRCLE-3 , SURAT IN ITA NOS. 3554/AHD/2008 FOR AY 2005-06 AND 1932/AHD/2009 FOR AY 2006-07 HELD THAT IN CASES THE SHARES ARE HELD FOR MORE THAN 30 DAYS, TH E TRANSACTION HAS TO BE CATEGORIZED ON AN INVESTMENT TRANSACTION WHEREAS TH E SALES HELD FOR A PERIOD UPTO 30 DAYS, THE SAME SHALL BE TREATED AS BUSINESS TRANSACTIONS. IN ARRIVING AT THIS DECISION, THE ITAT AHMEDABAD HAS CONSIDERED SE VERAL DECISIONS OF VARIOUS BENCHES OF ITAT, HIGH COURTS AND SUPREME COURT. THE ITAT AHMEDABAD HAS ALSO CONSIDERED THE CIRCULAR ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES AND HAS COME TO THIS CONSIDERED FINDING THE RELEVANT EXTRAC T OF THE ORDER IS QUOTED BELOW : 15. IN RESPECT OF PROFIT OF RS.55,40,679/- BEING 'S HORT-TERM CAPITAL GAIN' AS CLAIMED BY THE ASSESSEE AND HELD AS PROFITS ASSESSED UNDER THAT BUSINESS BY TWO AUTHORITIES, WE FIND THAT IN MANY CASES THERE IS DELIVERY OF SHA RES AND SHARE WERE REGISTERED IN THE NAME OF THE ASSESSEE. THE HOLDING PERIOD OF THE SHARES IS FROM 0 DAYS TO 366 DAYS. IN SOME CASES, THE FREQUENCY OF TRANSAC TIONS ARE APPARENTLY SUBSTANTIAL AS ON ONE DAY THE ASSESSEE HAS PURCHASED SEVERAL SC RIPTS AND SOLD SEVERAL OF THEM ON THE SAME DAY. 16. THE QUESTION IS WHETHER THEREFORE, MERELY FROM FREQUENCY OF THE TRANSACTIONS CARRIED ON BY THE ASSESSEE, HE IS TREATED AS DEALER IN SHARES OR STILL HE IS HELD AS INVESTOR. AS FOUND IN THE CASE OF SARNATH INFRASTRU CTURE (P) LTD. VS. ASSTT.CIT(SUPRA) ALSO, ASSESSEE ADDUCED EVIDENCE TO SHOW THAT HIS HOLDINGS ARE FOR ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 4 INVESTMENT AS RECORDED IN THE BOOKS OF ACCOUNT. THE HOLDINGS ARE VALUED AT COST, AND SUCH ACCOUNTING HAS BEEN ACCEPTED BY THE REVENU E IN EARLIER YEARS. THERE IS NO MATERIAL TO SHOW THAT ASSESSEE HAS DECLARED HIMS ELF AS A TRADER IN SHARES AND LEGAL REQUIREMENTS THEREFOR HAVE BEEN COMPLIED WITH . IT IS ALSO A FACT THAT HE HAS NOT BORROWED ANY MONEY FOR INVESTING IN SHARES. MER ELY BECAUSE, ASSESSEE HAD SOME BORROWED FUNDS IT WOULD NOT BY ITSELF SHOW THA T THEY WERE DEPLOYED IN INVESTMENT. NOTWITHSTANDING, EVEN BORROWING ARE REQ UIRED TO SETTLE PAYMENTS OBLIGATIONS IN RESPECT OF INVESTMENTS, LIKE ONE TAK ES LOAN FOR PURCHASING A HOUSE. IN ANY CASE, HIGH FREQUENCY TRANSACTIONS AND LOW PE RIOD HOLDINGS INDICATE TRADE, WHEREAS LOW FREQUENCY TRANSACTIONS AND HIGH PERIOD HOLDINGS INDICATE INVESTMENT. 17. IN THIS CASE, THE ASSESSEE HAS DISCHARGED THE O NUS OF SHOWING THAT IT IS MAKING INVESTMENT BUT REVENUE IS ABLE TO SHOW THAT THERE A RE HIGH FREQUENCIES AND LOW HOLDINGS IN MANY TRANSACTIONS OF SHARES INDICATING THAT ASSESSEE HAS SOME INTENTION OF PURCHASING AND SELLING SHARES AS A TRA DER. THE CASE OF THE ASSESSEE IS SUPPORTED BY THE FACT THAT IT HAS ENTERED THE PURCH ASES IN THE BOOKS AS INVESTMENT, SHARES ARE VALUED AT COST AND REVENUE IS HOLDING SU CH ACCOUNTING TREATMENT AS INVESTMENT IN THE PAST. THUS, THERE CANNOT BE A FIX ED CRITERIA TO DECIDE AS IN THE PRESENT CASE WHETHER ASSESSEE HAS TRADED IN SHARES EVENTHOUGH ASSESSEE HELD THEM AS INVESTMENT. 18. THOUGH IT HAS BEEN HELD IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD.(SUPRA) THAT DELIVERY OF SHARES IS AN IMPORTANT CRITERIA FO R HOLDING THAT ASSESSEE IS INVESTING IN THEM BUT AFTER DEMATIZATION WHERE SHAR ES ARE DELIVERED IN THE DEMAT ACCOUNT THE NEXT DAY, IT CANNOT BE HELD THAT IN ALL SUCH CASES, IT WOULD BE INVESTMENT AND NOT TRADING. IF THAT IS SO HELD, THE N ALL THOSE TRADERS IN SHARES IN WHOSE DEMAT ACCOUNTS SHARES ARE DELIVERED CAN BE SA ID TO HAVE EARNED CAPITAL GAINS AND NOT PROFITS. THEREFORE, ONLY ONE CRITERIA , I.E. DELIVERY OF SHARES ALONE WILL NOT BE SUFFICIENT TO DECIDE THE ISSUE. EVEN OT HERWISE IN SARNATH INFRASTRUCTURE (P) LTD.(SUPRA) ITSELF IT HAS BEEN HELD THAT CUMULA TIVE EFFECT OF SEVERAL FACTORS WILL DECIDE THE ISSUE. 19. CONSIDERING THE TOTALITY AND PECULIARITY OF THE FACTS OF THIS CASE, WE FIND THAT ASSESSEE IS NEITHER FULLY ACTING AS A TRADER NOR AS FULLY INVESTOR. DEMARCATION IS QUITE HAZY; THOUGH IN THE BOOKS HE IS SHOWING ALL T HE PURCHASES AS INVESTMENT BUT FREQUENCY OF TRANSACTION IN SEVERAL CASES IS SO LAR GE AND HOLDING PERIOD IN MANY CASES IS SO SMALL FROM 0 TO A WEEK OR SO THAT ASS ESSEE IS DE FACTO SELLING AND PURCHASING SHARES AS TRADER. HE IS ALSO HOLDING SHA RES FOR LONG PERIOD INDICATING THAT THEY ARE HELD AS INVESTMENT. THEREFORE, A CRIT ERIA HAS TO BE FIXED FOR DETERMINING AS TO WHEN HE IS ACTING AS TRADER AND W HEN AS INVESTOR. ACCORDINGLY, WE DECIDE FOLLOWING CRITERIA TO HOLD WHEN GAINS ARE TO BE TAXED AS PROFIT TO BE EARNED UNDER THE BUSINESS OR TO BE TAXED AS SHORT T ERM CAPITAL GAIN, WE HOLD THAT IF SHARES ARE NOT HELD EVEN SAY FOR A MONTH, THEN THE INTENTION IS CLEARLY TO REAP PROFIT BY ACTING AS A TRADER AND HE DID NOT INTEND TO HOLD THEM IN INVESTMENT PORT-FOLIO. WE BELIEVE THAT IF A PERSON INTENDS TO HOLD HIS PUR CHASES OF SHARES AS INVESTMENT, HE WOULD WATCH THE FLUCTUATION OF RATES IN THE MARK ET FOR WHICH A MINIMUM TIME ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 5 IS NECESSARY, WHICH WE ESTIMATE AT ONE MONTH. WHERE SHARES ARE HELD FOR MORE THAN A MONTH, THEY SHOULD BE TREATED AS INVESTMENT AND ON THEIR SALE SHORT TERM CAPITAL GAIN SHOULD BE CHARGED. WHEN SHARES ARE HEL D FOR LESS THAN A MONTH, GAIN ON THEM SHOULD BE TREATED AS PROFIT FROM BUSINESS. 20. THE ASSESSEE WILL GIVE THE WORKING AND COMPUTIN G 'SHORT-TERM CAPITAL GAINS' ON THE ABOVE BASIS. THE REST OF THE PROFIT WILL BE TRE ATED AS ASSESSABLE UNDER THE HEAD BUSINESS. FOLLOWING THE DECISION OF JURISDICTIONAL TRIBUNAL O N THIS ISSUE ON SIMILAR FACTS, IT IS HELD THAT WHENEVER THE ASSESSEE HAS HE LD THE SHARES FOR THE PERIOD MORE THAN 30 DAYS, THE SAME IS TREATED AS INVESTMEN T RESULTING IN CAPITAL GAIN AND WHENEVER SHARES ARE HELD UPTO 30 DAYS, THE INCO ME ARISING THEREFROM AS BUSINESS INCOME OF THE APPELLANT. 5. AGGRIEVED, THE REVENUE IS NOW IN APPEAL BEFORE U S. 6. THE LD. AR HAS SUBMITTED DETAILED PAPER BOOK AND VARIOUS CASE LAWS IN SUPPORT OF HIS CLAIM THAT ASSESSEE CAN HAVE BOTH INCOME FROM BUSINESS FROM SHARES AS WELL AS CAPITAL GAIN I NCOME FROM SHARES TRANSACTIONS HELD AS INVESTMENT. THE LD. AR MAINLY EMPHASIZED ON THE CBDT CIRCULAR NO.4 OF 2007 DATED 15.6.2007 AND ALSO VARIOUS PRINCIPLES LAID DOWN ON THE BASIS OF DECISIONS BY T HE APEX COURT. FOLLOWING PRINCIPLES CAN BE APPLIED ON THE FACTS OF THE CASE TO FIND OUT WHETHER TRANSACTIONS IN QUESTION ARE IN THE NATURE OF TRADE OR MERELY FOR INVESTMENT PURPOSES. THE ABOVE REFERRED CBDT CI RCULAR ALSO RECOGNIZES POSSIBILITIES OF TWO PORTFOLIOS I.E. ONE INVESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSET AND THE OTHER TRADING PORTFOLIO COMPRISING OF STOCK-IN-TRADE WHICH ARE TO BE TREATED AS TRADING ASSETS. THE LD. AR MADE REFERENCE TO CERTAIN PRINCIPLES CULLED OUT FROM THE DECISION OF ITAT LUCKNOW ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 6 BENCH IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD . VS. ACIT 124 ITD 71 (LUCK). AFTER CONSIDERING THE ABOVE RULING WE CU LLED OUT FOLLOWING PRINCIPLES WHICH CAN BE APPLIED ON THE FACTS OF THE CASE TO FIND OUT WHETHER THE TRANSACTIONS IN QUESTION ARE IN THE NAT URE OF TRADE OR ARE MERELY FOR THE PURPOSE OF INVESTMENT. THE RELEVANT PORTION FROM THE ABOVE JUDGMENT READ AS BELOW- IN VIEW OF THE CIRCULAR NO.4 OF 2007, DATED 15.6.20 07, AND VARIOUS DECIDED CASES, FOLLOWING PRINCIPLES CAN BE APPLIED ON FACTS OF A CASE TO FIND OUT WHETHER TRANSACTIONS IN QUESTION ARE IN NATURE OF TRADE OR MERELY FOR INVESTMENT. A. WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIM E OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM)? THIS CAN BE FOUN D OUT FROM THE TREATMENT THAT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TREATED AS STOCK-IN-TRADE OR INVESTMENT. WHETHER IT IS SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET . B. WHETHER THE ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREON? NORMALLY MONEY IS BORROW ED TO PURCHASE GOODS FOR THE PURPOSES OF TRADE AND NOT FO R INVESTING IN AN ASSET FOR RETAINING. C. WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISPOSAL IN THAT PARTICULAR ITEM ? IF PURCHASE AND SALE ARE FREQUENT , OR THERE ARE SUBSTANTIAL TRANSACTIONS OF THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY RATIO BETWEEN THE PUR CHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSE E IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOL DINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HO LDINGS INDICATE INVESTMENT). ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 7 D. WHETHER PURCHASE AND SALE ARE FOR REALIZING PROF IT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION I N VALUE ? FORMER WILL INDICATE AN INTENTION OF TRADE AND LATT ER AN INVESTMENT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE A ND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSEN TIAL INGREDIENT OF TRADE. E. HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN THE BALANCE SHEET? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDICATE THAT THEY ARE INVESTMENT OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NET REALIZABLE VALUE (WHICH EVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. F. HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEMO RANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION? WHETHER FOR TRADE OR FOR INVESTMENT. IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRE CTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY AND VICE VE RSA. G. IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHO W THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT D ISTINCTION HE HAS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE T HE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITE M IS HELD AS INVESTMENT (OR SAY, STOCK IN TRADE) THEN ONUS WOULD SHIFT TO THE REVENUE TO PROVE THAT THE APPARENT IS NOT RE AL. H. THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHAR ES (OR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALO NE BE NOT SUFFICIENT TO SAY THAT THE ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR INVESTMENT . I. ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUIREME NTS FOR DEALING AS A TRADER IN THE ITEM IN QUESTION AND WHE THER THE ASSESSEE IS COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL RE QUIREMENTS IF IT IS CLAIMED THAT IT IS DEALING AS A TRADER IN THA T ITEM? ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 8 WHETHER IT HAD SUCH AN INTENTION (TO CARRY ON ILLEG AL BUSINESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASES WER E MADE? J. IT IS PERMISSIBLE AS PER THE CBDTS CIRCULAR NO. 4 OF 2007 DATED 15.6.2007, THAT AN ASSESSEE CAN HAVE BOTH POR TFOLIOS , ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED I T IS MAINTAINING SEPARATE ACCOUNTS FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTER MINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. K. NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL B E SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EF FECT OF SEVERAL FACTORS, HAS TO BE SEEN. (PRA 13) 7. THE LD. AR OF THE ASSESSEE MADE FOLLOWING SUBMIS SION. WHILE APPLYING THE FACTS OF THE CASE TO THE ABOVE REFERRE D PRINCIPLES - (I) WHERE A COMPANY PURCHASES AND SELLS SHARES, IT SHOU LD BE SHOWN THAT THEY WERE HELD AS STOCK IN TRADE, FOR TH E ACTIVITY TO CONSTITUTE BUSINESS: THE ASSESSEE IN THE GIVEN CASE HAS DISCLOSED THE SHARES AS ASSETS UNDER THE CATEGORY OF INVESTME NTS. THE ASSESSEE HAS THUS DULY ADHERED TO THE FIRST GUIDING PRINCIPLE STATED IN THE CBDT. (II) THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MANNER OF MAINTAINING OF BOOKS OF ACCOUNTS, THE MAGNITUDE OF PURCHASE AND SALE AND THE RATIO BETWEEN PURCHASE AND SALE OF SHARES NEEDS TO BE LOOKED INTO: THE SUBSTANTIAL NATURE OF THE TRANSACTIONS NEED TO BE ANALYZED WITH REFERENCE TO THE AVERAGE H OLDING IN SHARES BY THE ASSESSEE. THE COST OF THE SHARES HELD BY THE ASSESSEE ON 1.4.2005 WAS RS.1,05,11,605/- AND THE CLOSING VALUE OF THE SHARES AT COST AT THE END OF THE YEAR ON 1.4.2006 WAS RS.1,18 ,58,258/-. DURING THE ENTIRE YEAR THE HOLDING OF SHARES HAS BEEN MORE THAN ONE CRORE AT COST. CONSIDERING THE ABOVE FACTS THE AVERAGE HOLDI NG OF THE ASSESSEE IN SHARES WAS RS.1,11,84,931/- (OPENING VA LUE RS.1,05,11,605/- + CLOSING VALUE RS.1,18,58,258/-). ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 9 A KEY RATIO TO JUDGE WHETHER A ASSESSEE IS A TRADER OR A INVESTOR IS TO SEE THE TURNOVER RATIO I.E. THE THE VALUE OF THE SHARES TRANSFERRED/AVERAGE HOLDING OF SHARES. WHILE A TRADER WILL TRY TO ROTATE THE SHARE HOLDING TO MA XIMIZE PROFIT, A INVESTOR WILL BE HOLDING THE SHARES FOR A LONGER PE RIOD. SOME OF THE KEY FEATURES OF A TRADER WOULD BE A) TURNOVER RATIO IN EXCESS OF 6 TO 7 I.E. THE TRAD ER WOULD PURCHASE AND SELL HIS PORTFOLIO AT LEAST 6 TO 7 TIMES A YEAR TO MAXIMIZE THE PROFIT. THE STOCK TURNOVER RATIO OF THE ASSESSEE IS 1.2 TIMES (RS.1,34,26,527/ RS.1,11,84,931). CONSIDERING THE S TOCK TURNOVER RATIO OF THE ASSESSEE AT 1.2 TIMES THE FACT IS THAT THE AVERAGE HOLDING OF THE ASSESSEE FOR EVERY SHARE IS 304 DAYS. A PERS ON ENGAGED IN BUSINESS WOULD NOT HOLD THE STOCK FOR 304 DAYS. B) HIGH AMOUNT OF SECURITY TRANSACTION TAX AND BROK ERAGE AND COMMISSION EXP: SINCE A TYPICAL TRADER CARRYING ON THE BUSINESS OF SALE AND PURCHASE OF SHARES HAS A HIGH TURNOVER OF SALES AND PURCHASE, THE CONSEQUENTIAL SECURITY TRANSACTION TA X AND BROKERAGE AND COMMISSION EXP ARE CONSIDERABLY LARGE, HOWEVER IN THE CASE OF THE ASSESSEE THE SECURITY TRANSACTION TAX IS A MEAG ER RS.26,798/- BEING A VERY LOW EXPENSE COMPARED TO A TRADER IN SH ARES. LOOKING AT THE ABOVE FACTS IT IS APTLY CLEAR THAT T HE TRANSACTIONS EXECUTED BY THE ASSESSEE VIS A VIS HIS AVERAGE HOLD ING OF SHARES IN VALUE AND DAYS, THE ACTIVITY OF THE ASSESSEE ARE NO T IN THE NATURE OF BUSINESS AND HENCE CONSTITUTE INVESTMENT ACTIVITY. THE ASSESSEE IS FOLLOWING A PRUDENT METHOD OF DIVER SIFYING HIS RISK BY INVESTMENT IN A NUMBER OF SCRIPTS AND THIS IS A PRU DENT PRACTICE FOLLOWED BY MAJOR MUTUAL FUNDS TO DERISK THEIR PORT FOLIO. HENCE THE CONTENTION OF THE ASSESSING OFFICER THAT THE ASSESS EE IS HOLDING A LARGE NO OF SCRIPS AND HAS TRANSACTED IN A LARGE NU MBER OF SCRIPT IN NO WAY CAN CLASSIFY THE ACTIVITY OF THE ASSESSEE AS TR ADING ACTIVITY. (III) WHETHER THE MOTIVE BEHIND PURCHASE AND SALE OF SHAR ES WAS EARNING PROFIT OR INCOME BY WAY OF DIVIDEND, ET C: THE ABOVE PRINCIPLE STATES THE INVESTMENT SHOULD BE MADE WITH THE OBJECTIVE TO EARN DIVIDEND, ETC. THE ASSESSEE HAS EARNED SUBSTAN TIAL DIVIDEND INCOME OF RS.2,92,293/-, HAD THE INVESTMENTS BE HEL D FOR A SHORT ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 10 PERIOD THE ASSESSEE COULD NOT HAVE EARNED DIVIDEND INCOME OF SUBSTANTIAL NATURE BEING ALMOST 3% OF THE AVERAGE I NVESTMENT HOLDING. IN LIGHT OF THE ABOVE CIRCUMSTANCES THE CH ANGE IN INVESTMENTS AMOUNTS TO CAPITAL GAIN. THE ASSESSING OFFICER HAS MISUNDERSTOOD AND MISAPPL IED THE CIRCULAR NO.4/2007 AT PARA 3.5 OF HIS ORDER WHERE IN HE HAS REFERRED TO THE F & O TRANSACTIONS, THE ASSESSEE HAS AT THE TIME OF FIL LING THE RETURN PROPERLY CLASSIFIED HIS F & O TRANSACTIONS AS BUSIN ESS INCOME, HAS CLASSIFIED THE SHORT TERM TRANSACTIONS OF SALE AND PURCHASE OF SHARES AS SHORT TERM CAPITAL GAIN AND OFFERED THE LONG TER M CAPITAL PROFITS FROM CHANGE OF INVESTMENTS AS LONG TERM CAPITAL GAI N AND HAS CLAIMED THE DIVIDEND INCOME. THE ABOVE SEGREGATION OF THE ASSESSEE IS IN ACCORDANCE WITH THE PARA 10 OF THE CIRCULAR N O.4/2007, THE SAID PARA IS REPRODUCED FOR READY REFERENCE. 10 CBDT ALSO WISHES TO EMPHASIZE THAT IT IS POSSIB LE FOR A TAXPAYER TO HAVE TWO PORTFOLIO, I.E. AN INVESTMENT PORTFOLIO COMPRIS ING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRADING PORTFOLIO C OMPRISING OF STOCK IN TRADE WHICH ARE TO BE TREATED 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. 8. ON THE OTHER HAND, THE LD. DR MAINLY EMPHASIZED ON THE FINDING OF AO AND ALSO REFERRED TWO CASE LAWS NAMELY ACIT V S. TARUN AMARCHAND JAIN (2012) 21 TAXMANN.COM 319 (MUM) WHER EIN IT HAS OBSERVED THAT SHARES TRANSACTIONS DONE REGULARLY SH OULD BE ATTRIBUTED AS TRADING TRANSACTIONS AND ALSO REFERRED THE DECIS ION OF ITAT RAJKOT BENCH (2013) 32 TAXMANN.COM 6 (RAJKOT-TRIB) IN THE CASE OF DCIT VS. MUKESHBHAI BABULAL SHAH WHEREIN REGULAR SHARE TRANS ACTIONS IN SHORT INTERVALS TO QUICKLY REALIZE PROFITS ARE IN THE NAT URE OF BUSINESS. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS THE PAPER BOOK, CASE LAWS SUBMITTED BY THE LD. AR AND THE LD. DR. FROM THE PE RUSAL OF THE ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 11 COMPUTATION OF TOTAL INCOME IT CAN BE SEEN THAT ASS ESSEE HAS SHOWN INCOME FROM TRADING OF SHARES IN F & O MARKET, SHOR T TERM CAPITAL GAIN FROM SHARES WHICH WERE HELD FOR LESS THAN ONE YEAR AND LONG TERM CAPITAL GAIN FROM SALE OF SHARES WHICH WERE HE LD FOR MORE THAN ONE YEAR. THE A O WHILE FRAMING THE ASSESSMENT ORDE R UNDER SECTION 143(3) HAS TREATED THE SHORT TERM CAPITAL GAINS FRO M SALE OF SHARES OF RS.23,69,436/- AS INCOME FROM BUSINESS MAINLY DUE T O THE REASONS THAT THERE WERE 171 TRANSACTIONS OF PURCHASE AND SA LES AND THE VALUE CAME TO RS.13426527/- ONLY AND RS.15795963/- RESPEC TIVELY AND MAGNITUDE OF SOME TRANSACTIONS WERE VERY HIGH AND T HE AO ALSO MENTIONED THAT IN CASE OF SHARES OF IPCL, ON A PART ICULAR DATE THERE WAS PURCHASE TRANSACTION OF MORE THAN 6900 SHARES I NVOLVING INVESTMENT OF RS.11,93,196/- WHICH WERE SOLD ON TH E VERY SAME DAY AT RS.15,52,426/-. IT IS ALSO SEEN BY THE AO THAT T HE ASSESSEE WAS ENGAGED IN THE BUSINESS OF F & O TRANSACTION AND DU RING THE YEAR THE SALES IN F & O CATEGORY AMOUNTED TO RS.5,66,37,310/ - AND THE ASSESSEE HAS SHOWN THE PROFIT FROM F & O BUSINESS A T RS.4,75,294/-. DUE TO THESE VERY REASONS THE AO HAS BELIEVED THAT THE TRANSACTIONS OF SALE AND PURCHASE OF SHARES WHICH WERE CLAIMED B Y THE ASSESSEE UNDER SHORT TERM CAPITAL GAIN HEAD, AS INCOME FROM BUSINESS TRANSACTION. BUT THE AO HAS ACCEPTED THE CAPITAL G AINS FROM SALE OF SHARES HELD BY THE ASSESSEE FOR MORE THAN ONE YEAR AS LONG TERM CAPITAL GAIN WHICH MEANS THAT THE AO HAS ACCEPTED T HAT ASSESSEE IS HAVING SOME PART OF HIS PORTFOLIO AS FOR INVESTMENT AND NOT FOR BUSINESS WHICH FURTHER GIVES SUPPORT TO THE CLAIM O F ASSESSEE BY SHOWING INCOME FROM SHARE TRANSACTIONS IN TWO HEADS I.E. CAPITAL GAINS AND BUSINESS INCOME. ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 12 10. FURTHER IN THE LIGHT OF VARIOUS DECISIONS QUOTE D BY THE LD. REPRESENTATIVE AS WELL AS VARIOUS PRINCIPLES LAID D OWN AND ON THE BASIS OF FACTS OF THE CASE IT IS VERY CLEAR THAT TH E INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF SHARES WAS VERY CLEAR AND THE SHARES HELD BY THE ASSESSEE AT THE CLOSE OF THE FIN ANCIAL YEAR WERE SHOWN UNDER THE INVESTMENT ACCOUNT IN THE BALANCE S HEET UNDER THE HEAD SHARES IN SECURITIES. THE AO HAS ALREADY ACC EPTED THE CLAIM OF ASSESSEE OF LONG TERM CAPITAL GAINS ON SALE OF S HARES. THE INVESTMENT IN SHARES HAS BEEN SHOWN AT THE COST PRI CE WHICH OTHERWISE IF HELD FOR BUSINESS WOULD HAVE BEEN SHOW N AS STOCK-IN- TRADE TO BE VALUED AT COST OR MARKET PRICE WHICHEV ER IS LOWER. FROM THE PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE IT IS QUITE CLEAR THAT NO SPECIFIC FUNDS WERE BORROWED FOR THE PURCHASE OF SHARES AND THE MAIN SOURCE OF INVESTMENT IN SHARES AND SECURITIES WAS FROM THE CAPITAL ACCOUNT OF THE ASSESSEE. ASSESSEE HAS ALSO MAINTAINED SEPARATE PROFIT AND LOSS ACCOUNT FOR F & O BUSINESS AND NO LINK BETWEEN INVESTMENT ACCOUNT AND F & O BUSINESS HAS B EEN BROUGHT ON RECORD BY THE AO AND THE INVESTMENT IN SHARES AN D SECURITIES HAVE BEEN BROUGHT FORWARD FROM FINANCIAL YEAR WHERE IN AS ON 31 ST MARCH, 2005 THE INVESTMENT IN SHARES AND SECURITY R S.1,05,11,605/- AND THEREAFTER DURING THE FINANCIAL YEAR 2005-06 TH E SHARES PURCHASED AND SOLD UNDER THE INVESTMENT ACCOUNT HAV E BEEN TREATED AS SHORT-TERM AND LONG TERM CAPITAL GAINS. HOWEVER, LOOKING TO THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE AS SHOWN UNDER THE HEAD SHORT TERM CAPITAL GAINS, HAVE BEEN PROPERLY ANALYZ ED BY THE CIT(A) AND, THEREFORE, IN VIEW OF ABOVE, WE DO NOT FIND AN Y ERROR AT THE END OF ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 13 LEARNED FIRST APPELLATE AUTHORITY AND, THEREFORE, N O INTERFERENCE IS CALLED FOR IN THE ORDER OF CIT(A). ACCORDINGLY, THI S GROUND OF REVENUE IS DISMISSED. 11. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISS ED. PRONOUNCED IN THE OPEN COURT ON 28 DAY OF AUGUST, 2015. SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 28/8/2015 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DY. REGISTRAR, ITAT, AHMEDABAD ITA NO. 1496/AHD/2011 ASST. YEAR 2006-07 14 1. DATE OF DICTATION: 19/8/2015 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 24/8/015OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 28/8/2015 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: