The ACIT, Circle-2(2), Baroda V. Mr. Nihsil Marfatia, Baroda

ITA 1526/AHD/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9430 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-11-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 26-10-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 02-05-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SAMIR VAKIL
• Keywords: Capital asset; Business income; Question of law
• Section: 10

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M ASSTT. CIT, CIR-292), BARODA. VS. MR. NISHIL MARFATIA, PROP. OF MARFATIA ASSOCIATION, 710, FORTUNE TOWER, SAYAJIGUNJ, BARODA. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI SAMIR VAKIL, DR RESPONDENT BY:- SHRI MILIN MEHTA, AR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUNDS :- (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN REVERSING THE FINDING OF THE AO THAT LONG TERM CAPITAL GAINS OF RS.59,68,498/- AND SHORT TERM CAPITAL GAIN OF RS.1,24,011/- OFFERED BY THE ASSESSEE ON THE SAL E OF SHARES WAS ASSESSABLE AS BUSINESS PROFITS, WITHOUT APPRECI ATING THE COMPOSITE NATURE OF ACTIVITY FOR EARNING PROFITS FR OM SHARE TRANSACTIONS, WHETHER OFFERED AS LONG TERM OR SHORT TERM CAPITAL GAINS, SINCE THE ASSESSEE HAD NOT MAINTAINED TWO SE PARATE PORTFOLIOS, HOLDING OF SHARES BEYOND THE SPECIFIED DATE WAS A NORMAL INCIDENCE OF BUSINESS NOT DETERMINATIVE OF I TS CHARACTER AS INVESTMENT OR TRADING. (2) THE LD. CIT(A) FAILED TO NOTE THAT EVEN IF THE TRAN SACTION WAS NOT TRADING TRANSACTION PROPER, IT WAS ADVENTURE IN THE NATURE OF TRADE IN TERMS OF THE EXTENDED MEANING OF BUSINESS IN SECTION 2(13) AND AS PER TEST LAID DOWN IN THE CASE OF I G VEKATASWAMI ITA NO.1526/AHD/2008 ASST. YEAR :2004-05 ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 2 NAIDU & CO. VS. CIT 35 ITR 594 (SC) AND SMT. INDRAM ANI BAI VS. CIT 200 ITR 594 (SC), SINCE THE MOTIVE OF PURCH ASING THE SHARES WAS SALE THEREOF AND NOT MERE ENJOYING THE F RUITS, I.E. DIVIDEND. 2. THE MAIN ISSUE INVOLVED IS WHETHER PROFIT EARNED ON THE SALE OF SHARES WOULD BE ASSESSED AS CAPITAL GAINS OR WOULD BE ASSESSED AS BUSINESS INCOME. DURING THE ASST. YEAR IN QUESTION THE ASSESSEE HAS DECLARED PROFIT OF RS.59,68,498/- AS LONG TERM CAPI TAL GAIN AND OF RS.1,24,011/- AS SHORT TERM CAPITAL GAINS ON SALE O F SHARES. WHEN ASKED TO FURNISH THE DETAILS, THE ASSESSEE POINTED OUT THAT HOLDING PERIOD OF SHARES ON WHICH LONG TERM CAPITAL GAIN WAS DECLARED IS MOR E THAN 12 MONTHS. FOLLOWING PROFIT WAS EARNED ON SHARES HELD FOR DIFF ERENT PERIOD AS UNDER :- MONTHWISE BREAK UP ABOVE 12 LESS 15 MONTHS 1592503.75 ABOVE 15 LESS 18 MONTHS 1868323.40 ABOVE 18 TO 21 MONTHS 1269210.75 ABOVE 21 LESS 24 MONTHS 875643.70 ABOVE 24 MONTHS 362806.95 NET LONG TERM CAPITAL GAIN 5968488.55 IT WAS ALSO EXPLAINED TO THE AO THAT SHARES WERE HE LD AS INVESTMENT AND NOT AS STOCK-IN-TRADE IN THE BALANCE SHEET. WHEN AS KED TO EXPLAIN THE REPLY OF THE ASSESSEE WAS AS UNDER :- (A) I AM NOT A DEALER IN SHARES HOLDING STOCK I N TRADE OF SHARES AND SECURITIES (B) MY PRINCIPLE SOURCE OF INCOME IS FROM STOCK BROKING ACTIVITY WHICH HAS BEEN DISCLOSED AS MY BUSINESS INCOME. (C) INVESTMENT IN SHARES WAS MADE OUT OF OWN CAPITAL AN D NOT FROM THE BORROWED CAPITAL. (D) THE DOMINANT PURPOSE AT THE TIME OF ACQUIRING THE S HARES AND SECURITIES WAS TO EARN DIVIDENDS AND TO GET CAPITAL APPRECIATION ON MY INVESTMENTS BY HOLDING THE SAME FOR A REASONA BLY LONG PERIOD. ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 3 (E) CLASSIFICATION IN THE ACCOUNTS IS INVESTMENTS AND NOT AS STOCK IN TRADE. (F) I HAVE NEVER VALUED MY INVESTMENT PORTFOLIO IN THE MANNER IN WHICH A TRADER OF SHARES VALUES HIS STOCK IN TRADE. (G) FREQUENCY OF TRANSACTIONS FOR PURCHASE AND SALE OF SHARES IS VERY MINIMAL AND NEGLIGIBLE CONSIDERING THE FACT TH AT I AM ENGAGED IN STOCK BROKING BUSINESS AND THEREFORE ENT ER INTO LACS OF TRANSACTIONS IN A YEAR FOR SALE AND PURCHASE OF SHARES FOR AND ON BEHALF OF MY CLIENTS AND THEREFORE, I AM CAPABLE OF DOING THE SAME ON MY OWN ACCOUNT AS A TRADER IN SHARES AND SE CURITIES WHICH INCIDENTALLY I DO NOT DO BECAUSE EARNING PROF IT ON SALE AND PURCHASE OF SHARES BY WAY OF TRADING IS NOT MY INTENTION. THIS IS THE REASON I HAVE KEPT MY BUSINESS ACTIVITY STRICTLY TO THE EXTENT OF STOCK BROKING ONLY. (H) FOR HOLDING STOCK IN TRADE, THERE IS NOT NEED TO GE T THE ASSET REGISTERED IN THE NAME OF THE OWNER RUNNING THE BUS INESS WHEREAS IN THE CASE OF CAPITAL ASSET IDENTIFICATION OF THE OWNER OF CAPITAL ASSET IS MUST IN ORDER TO DETERMINE THE PERIOD OF HOLDING AS WELL AS THE QUANTUM OF CAPITAL GAINS TO BE TAXED IN THE HANDS OF THE RESPECTIVE OWNERS. (I) I HAVE ALL ALONG CLAIMED LOSSES/PROFITS ON SALE OF INVESTMENTS AS LONG TERM CAPITAL GAINS ASSESSABLE UNDER THE HEAD CAPITAL GAINS INCLUDING THE PAST ASSESSMENT YEARS WHICH HAVE NOT BEEN DISPUTED TILL DATE. (J) I HAVE DISCLOSED BROKERAGE INCOME IN MY BROKERAGE B USINESS IN RESPECT OF INVESTMENT TRANSACTIONS CARRIED OUT BY M E AND ACCOUNTED FOR AS INVESTMENT. THIS ACT ON MY PART IT SELF INDICATES THAT I HAVE ALL ALONG CONSIDERED MY BROKING ACTIVIT Y AS BUSINESS ACTIVITY AND INVESTMENT IN SHARES AS MY PERSONAL IN VESTMENT FOR EARNING OF DIVIDENDS AND TO GET CAPITAL APPRECIATIO N. (K) I HAVE DISCLOSED DIVIDEND INCOME TO THE EXTENT ARIS ING FROM THE BROKING ACTIVITY AS BUSINESS INCOME IN SPITE OF THE FACT THAT THE SAME IS EXEMPT U/S 10 R.W.S. 115-O AND CLAIMED DIVI DEND INCOME EXEMPT ONLY IN RESPECT OF THE SHARES WHICH A RE FORMING PART OF MY INVESTMENT PORTFOLIO. 3. THE AO, HOWEVER, DID NOT AGREE WITH THE ABOVE CO NTENTION AND HELD THAT ACTIVITIES OF THE ASSESSEE GAVE RISE TO T HE BUSINESS INCOME. HIS REASONING ARE SUMMARISED AS UNDER :- ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 4 (1) ASSESSEES MAIN SOURCE OF INCOME IS TRANSACTION IN SHARES WHICH IS SHOWN UNDER THE HEAD CAPITAL GAINS EVEN THOUGH IT I S CLAIMED THAT ASSESSEE IS A MEMBER OF BARODA STOCK EXCHANGE AND CARRYING O N BROKING IN SHARES. (2) TOTAL NUMBER OF 168 TRANSACTIONS IN SALE AND PU RCHASES OF SHARES HAVE TAKEN PLACE DURING THE YEAR. (3) SALE CONSIDERATION OF SHARES AND SECURITIES DUR ING THIS YEAR IS 1.58 CRORES WHICH IS A HUGE AMOUNT. (4) AS PER BOARDS CIRCULAR NO.1827 FOLLOWING CRITE RIA ARE APPLIED AND ACCORDING TO WHICH ASSESSEE IS CONSIDERED AS TRADER AND NOT AS INVESTOR. THESE CRITERIA ARE AS UNDER :- (A) WHETHER THE PURCHASE AND SALE OF SECURITIES WAS ALL IED TO HIS USUAL TRADER OR BUSINESS/WAS INCIDENTAL TO IT OR WA S AN OCCASIONAL INDEPENDENT ACTIVITY. (B) WHETHER THE PURCHASE IS MADE SOLELY WITH THE INTENT ION OF RESALE AT A PROFIT OR FOR LONG TERM APPRECIATION AND OR FO R EARNING DIVIDENDS AND INTEREST. (C) WHETHER SCALE OF ACTIVITY IS SUBSTANTIAL. (D) WHETHER TRANSACTIONS ENTERED INTO CONTINUOUSLY AND REGULARLY DURING THE ASSESSMENT YEAR, ETC. (5) THE ASSESSEE IS REGULARLY TRADING IN SHARES AND SECURITIES INVOLVING HUGE AMOUNT. IT IS INCORRECT TO SAY THAT ASSESSEE H AS ENTERED INTO ONLY A FEW NUMBER OF TRANSACTIONS. (6) IN EARLIER YEARS ALSO ASSESSEE HAS BEEN TRADING IN SHARES. (7) THE REVENUE AUTHORITIES HAVE TO LOOK INTO THE S URROUNDING CIRCUMSTANCES FOR DECIDING THE ISSUE. ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 5 (8) THE ASSESSEES INTENTION IS EARNING PROFIT BY E NTERING INTO BUSINESS OF SHARES. THIS WAS WITHIN THE MEANING OF SECTION 2 (13). 4. THE LD. CIT(A) ON THE OTHER HAND, HELD THAT THE PROFITS SO EARNED SHOULD BE ASSESSED UNDER THE HEAD CAPITAL GAINS BOT H SHORT TERM AND LONG TERM AS SHOWN BY THE ASSESSEE. THE REASONING GIVEN BY THE LD. CIT(A) ARE AS UNDER :- (1) THE ASSESSEE DID NOT SHOW ANY SHARE AS STOCK IN TRADE DURING LAST FOUR YEARS. BALANCE SHEET SHOWED SHARES AS INVESTME NT. IN ASST. YEAR ENDING ON 31.3.2004, 31.3.2003 AND 31.3.2002 & 31.3 .2001 THE ASSESSEE HAS SHOWN INVESTMENT IN SHARES AS PER AUDITED ACCOU NT AT RS.70,28,215/-, RS.54,77,544/-, RS.47,18,044/- AND RS.3,81,651/- RE SPECTIVELY. (2) SALE AND PURCHASE OF SHARES HAVE NOT PASSED THR OUGH PROFIT AND LOSS ACCOUNT. ONLY THE PROFIT ON SALE OF INVESTMENT HAS BEEN TRANSFERRED TO PROFIT AND LOSS ACCOUNT. (3) MOST OF THE SHARES WERE PURCHASED IN FY 2001-02 , 2002-03 AND WERE REFLECTED AS INVESTMENT IN THE BALANCE SHEET A S ON 31.3.2003. ACCORDINGLY THEY ARE CAPITAL ASSET FOR THE ASSESSEE . (4) THE ASSESSEE HAD USED ITS OWN FUND FOR MAKING I NVESTMENT IN SHARES. (5) QUANTUM OF DIVIDEND RECEIPT ON THE SHARES IS RE FLECTED IN THE RETURN OF INCOME. (6) AS PER DECISION OF HON. BOMBAY TRIBUNAL IN J. M . SHARES & STOCK BROKERS LTD. VS. JCIT FOLLOWING CRITERIA ARE APPLIC ABLE :- ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 6 (I) THE ASSESSEE WAS CONSISTENTLY FOLLOWING THE PRACTIC E OF HOLDING SOME SHARES AS STOCK IN TRADE AND OTHER SHARES INVE STMENT. (II) INCOME FROM SHARES HELD AS STOCK IN TRADE WAS OFFER ED TO TAX AS BUSINESS INCOME AND FROM THOSE HELD AS INVESTMENT W AS OFFERED AS CAPITAL GAIN. (III) BALANCE SHEET OF THE ASSESSEE ALSO SHOWED SHARES/DE BENTURES AS INVESTMENT. (7) THE REVENUE DID NOT BRING ANY MATERIAL ON RECOR D TO SHOW THAT SHARES WERE HELD AS STOCK IN TRADE. 5. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE MATERIAL ON RECORD. THE MAIN ARGUMENT OF LD. DR IS THAT AS PER MEANING OF WORD BUSINESS GIVEN IN SECTION 2(13) AND AS PER TEST L AID DOWN IN THE CASE OF I G VENKATASWAMI NAIDU & CO. VS. CIT (SUPRA) THE MOTI VE FOR PURCHASE OF SHARES SHOULD BE SEEN AND THIS MOTIVE WAS THE SALE THEREOF AND NOT MERELY ENJOYING THE DIVIDEND. IN OUR CONSIDERED VIEW WHAT IS TO BE FURTHER LOOKED INTO IS THE INTENTION OF THE ASSESSEE IN ACQ UIRING SHARES AS TO WHETHER THEY ARE ACQUIRED FOR DEALING IN SHARES OR THEY ARE ACQUIRED FOR HOLDING AS INVESTMENT. THE TRIBUNAL, LUCKNOW BENCH IN SARNATH INFRASTRUCTURE LTD. VS. ACIT (2009) 120 TTJ 216 (LU CKNOW) AFTER CONSIDERING FOLLOWING JUDGMENTS :- FIDELITY ADVISOR SERIES VIII, IN RE [2004] 192 CTR (AAR) 201 : [2004] 271 ITR 1 (AAR), CIT V. H. HOLCK LARSEN [1986] 58 CTR (SC) 53 : [1986] 160 ITR 67 (SC) (P. 75): J.P. HARRISON (WATFORD) LTD. V. GRIFFITHS (H.M. INSPECTOR OF TAXES) [1962] 40 TAX CASES 281 (HL) , RAJA BAHADUR VISHESHWARA SINGH (DECEASED) V. CIT [1961] 41 ITR 685 (SC), CENTRAL INDIA AGENCIES (P.) LTD. V. CIT [1970] 77 ITR 959 (ALL.) MRS. SAROJINI RAJAH V. CIT [1969] 71 ITR 504 (MAD.), DALHOUSIE INVESTMENT TRUST CO. LTD. V. CIT [1968] 68 ITR 486 (SC), CIT V. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. LTD. 1972 CTR (SC) 239 : [1971] 82 ITR 586 (SC), CIT V. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD. 1975 CTR (SC) 228 A.V. THOMAS & CO. LTD. V. CIT [1963] 48 ITR 67 (SC), LAID DOWN FOLLOWING PRINCIPLES TO BE APPLIED ON FAC TS OF A PARTICULAR CASE. ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 7 13. AFTER CONSIDERING ABOVE RULINGS WE CULL OUT FOLLOWI NG PRINCIPLES, WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTION(S) IN QUESTION ARE IN THE NATURE OF TRADE OR ARE MERELY FOR INVESTMENT PURPOS ES : (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE T IME OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM). THIS CAN BE FOUND OUT FROM THE TRE ATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TRE ATED AS STOCK-IN-TRADE OR INVESTMENT. WHETHER SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET. (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHAS E AND PAID INTEREST THEREON ? NORMALLY, MONEY IS BORROWED TO PURCHASE G OODS FOR THE PURPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETA INING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DI SPOSAL IN THAT PARTICULAR ITEM ? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE S UBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALIN G IN THAT PARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSE E IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PRO FIT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE ? FORMER WI LL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN THE CASE OF SHA RES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SAL E AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF T RADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN T HE BALANCE SHEET ? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD 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 ARE TREATED AS STOCK- IN-TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN ME MORANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION ? WHETHER FOR T RADE OR FOR INVESTMENT ? IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE S EPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY ? AND VICE VERSA. (7) IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO S HOW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE H AS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE AS SESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPARENT IS NOT REAL. (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SH ARES (OR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICIENT TO SAY THAT ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR I NVESTMENT. (9) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISI TES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS C OMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 8 REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING A S A TRADER IN THAT ITEM ? WHETHER IT HAD SUCH AN INTENTION (TO CARRY ON ILLEG AL BUSINESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASES WERE MADE ? (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCO UNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO I NTERMINGLING 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. 14. WHEN WE EXAMINE THE FACTS OF THE PRESENT CASE WE FI ND THAT THE ASSESSEE IS DEALING IN SHARES BOTH AS A TRADER AS WELL AS INVESTOR. IT HAS KEPT SEPARATE ACCOUNTS FOR BOTH TYPES OF DEALINGS. VALUATION OF HOLDINGS HAS BEEN D ONE AT COST (FOR INVESTMENT PORTFOLIO). AT LEAST THERE IS NO ALLEGATION OR MATE RIAL TO COME TO THE CONCLUSION THAT VALUATION OF INVESTMENT PORTFOLIO HAS BEEN DONE ON COST OR NET REALIZABLE VALUE WHICHEVER IS LOW. THE SHARES WHICH ARE SOLD OUT OF INVESTMENT PORTFOLIO, THIS YEAR, WERE PURCHASED TWO TO THREE YEARS AGO SHOWING THAT ASSESSEE HAD INTENTION, WHILE PURCHASING THEM, TO HOLD THEM. THEY WERE REFLECTED IN THE BALANCE SHEET AS INVESTMENT. THE ASSESSEE HAS ENJOYED DIVIDEND INCOM E AND DECLARED THE SAME IN RETURN OF INCOME. THE FREQUENCY OF SUCH PURCHASE OR SALE IN THIS PORTFOLIO IS NOT LARGE ENOUGH TO DOUBT THAT THIS PORTFOLIO IS ONLY A DEVIC E TO PAY LESSER TAXES BY PARKING SOME STOCK-IN-TRADE IN INVESTMENT PORTFOLIO. WE NOT ICE THAT IN TRADING PORTFOLIO THE ASSESSEE HAD PURCHASED DURING THE YEAR SHARES WORTH RS. 21,38,353 AND SAME SHARES WERE SOLD FOR RS. 23,89,805. THERE WAS NEITHER OPEN ING STOCK NOR CLOSING STOCK. IN INVESTMENT PORTFOLIO, OPENING STOCK OF SHARES WAS R S. 19,22,203 AND CLOSING STOCK WAS RS. 46,23,274, WHEREAS SALES OUT OF INVESTMENT PORTFOLIO WERE RS. 31,80,423. IT SHOWS THAT TURNOVER TO STOCK RATIO IN INVESTMENT PO RTFOLIO IS VERY LOW AS COMPARED TO THAT IN TRADING PORTFOLIO. 15. FURTHER, THERE IS NO MATERIAL TO SHOW THAT THESE SH ARES IN THE INVESTMENT PORTFOLIO WERE ALSO TRADED IN THE SAME AND LIKE MANNER AS THO SE WHICH WERE IN STOCK-IN-TRADE PORTFOLIO. THE BOARD OF DIRECTORS HAD PASSED RESOLU TIONS FOR MAKING INVESTMENT WHEREAS MEMORANDUM OF ASSOCIATION HAS ONLY AUTHORIZ ED TO CARRY OUT TRADE IN SHARES. IT CLEARLY SHOWS INTENTION OF THE ASSESSEE TO MAINT AIN A SEPARATE INVESTMENT PORTFOLIO. ALL THE SALES OUT OF THIS PORTFOLIO ARE IDENTIFIABL E TO PURCHASES MADE IN THIS PORTFOLIO. IN OUR CONSIDERED VIEW THE ASSESSEE HAS DISCHARGED ITS PRIMARY ONUS BY SHOWING THAT IT IS MAINTAINING SEPARATE ACCOUNT FOR TWO PORTFOLIOS AND THERE IS NO INTERMINGLING. THE ONUS NOW SHIFTED ON THE REVENUE TO SHOW THAT APPARE NT IS NOT REAL. THERE IS NO MATERIAL BROUGHT IN BY THE REVENUE TO SHOW THAT SEP ARATE ACCOUNTS OF TWO PORTFOLIOS ARE ONLY A SMOKE SCREEN AND THERE IS NO REAL DISTIN CTION BETWEEN TWO TYPES OF HOLDINGS. THIS COULD HAVE BEEN DONE BY SHOWING THAT THERE IS INTERMINGLING OF SHARES AND TRANSACTIONS AND THE DISTINCTION SOUGHT TO BE C REATED BETWEEN TWO TYPES OF PORTFOLIOS IS NOT REAL BUT ONLY ARTIFICIAL AND ARBI TRARY. THEREFORE, IN ABSENCE OF ANY MATERIAL TO THE CONTRARY, AND ON APPRECIATION OF CU MULATIVE EFFECT OF SEVERAL FACTORS PRESENT (AS CULLED OUT ABOVE ON THE BASIS OF AUTHOR ITIES DESCRIBED), WE HOLD THAT THE SURPLUS IS CHARGEABLE TO CAPITAL GAINS ONLY AND ASS ESSEE IS NOT TO BE TREATED AS TRADER IN RESPECT OF SALE AND PURCHASE OF SHARES IN INVESTMEN T PORTFOLIO. AS A RESULT THIS GROUND OF THE ASSESSEE IS ALLOWED. ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 9 THUS ACCORDING TO THE ABOVE JUDGMENTS WHERE ASSESSE E IS HOLDING SHARES AS INVESTMENT, PRIMARY ONUS IS DISCHARGED. FURTHER IT SHOULD BE SEEN WHETHER MONEY IS BORROWED FOR PURCHASING THE SHARES , WHETHER THE TRANSACTIONS ARE HIGH AND HOLDING PERIOD IS LOW OR TRANSACTIONS ARE LOW OR HOLDING PERIOD IS HIGH AND FURTHER HOW THE VALUATIO N OF THE SHARES HAS BEEN DONE AS ON THE BALANCE SHEET DATE WHETHER AT C OST OR LOWER OF THE COST AND NET REALIZABLE VALUE. 6. SIMILAR VIEW WAS ALSO TAKEN BY ITAT BOMBAY IN T HE CASE OF GOPAL PUROHIT VS. JT. CIT (2009) 122 TTJ 87. THE DECISION OF BOMBAY TRIBUNAL IN ABOVE CASE WAS A FFIRMED BY HON. BOMBAY HIGH COURT IN CIT VS. GOPAL PUROHIT IN ITA N O.1121 OF 2009 (2010) 228 CTR 582 (BOM) WHEREIN IT HAS BEEN HELD A S UNDER :- 2. THE TRIBUNAL HAS ENTERED A PURE FINDING OF FACT THAT THE ASSESSEE WAS ENGAGED IN TWO DIFFERENT TYPES OF TRANSACTIONS. THE FIRST SET OF TRANSACTIONS INVOLVED INVESTMENT IN SHARES. THE SEC OND SET OF TRANSACTIONS INVOLVED DEALING IN SHARES FOR THE PURPOSES OF BUSI NESS (DESCRIBED IN PARAGRAPH 8.3 OF THE JUDGMENT OF THE TRIBUNAL AS TR ANSACTIONS PURELY OF JOBBING WITHOUT DELIVERY). THE TRIBUNAL HAS CORRECT LY APPLIED THE PRINCIPLE OF LAW IN ACCEPTING THE POSITION THAT IT IS OPEN TO AN ASSESSEE TO MAINTAIN TWO SEPARATE PORT FOLIOS, ONE RELATING TO INVESTMENT IN SHARES AND ANOTHER RELATING TO BUSINESS ACTIVITIES INVOLVI NG DEALING IN SHARES. THE TRIBUNAL HELD THAT THE DELIVERY BASED TRANSACTI ONS IN THE PRESENT CASE, SHOULD BE TREATED AS THOSE IN THE NATURE OF I NVESTMENT TRANSACTIONS AND THE PROFIT RECEIVED THEREFROM SHOULD BE TREATED EITHER AS SHORT TERM OR, AS THE CASE MAY BE, LONG TERM CAPITAL GAIN, DEP ENDING UPON THE PERIOD OF THE HOLDING. A FINDING OF FACT HAS BEEN ARRIVED AT BY THE TRIBUNAL AS REGARDS THE EXISTENCE OF TWO DISTINCT TYPES OF TRAN SACTIONS NAMELY, THOSE BY WAY OF INVESTMENT ON ONE HAND AND THOSE FOR THE PURPOSES OF BUSINESS ON THE OTHER HAND. QUESTION (A) ABOVE, DOES NOT RAI SE ANY SUBSTANTIAL QUESTION OF LAW. ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 10 RECENTLY, THE AHMEDABAD TRIBUNAL IN THE CASE OF SHR I SUGANCHAND C. SHAH VS. ACIT, SURAT IN ITA NO. NO.2554/AHD/2008 FO R ASST. YEAR 2005-06 AND OTHERS, HELD THAT DELIVERY OF SHARES IS AN IMPORTANT CRITERIA IN HOLDING WHETHER ASSESSEE HAS INVESTED IN SHARES. WH ERE SHARES ARE DELIVERED IN THE DMAT ACCOUNT NEXT DAY IT CAN BE H ELD THAT IT WOULD BE INVESTMENT AND NOT TRADING. IF IT IS SO HELD THEN A LL THOSE TRADERS IN SHARES IN WHOSE DMAT ACCOUNT SHARES ARE DELIVERED CAN BE SAID 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 I SSUE WHETHER ASSESSEE IS TRADING ITS SHARES AS INVESTOR OR AS TRADER. IT WAS HELD IN SHRI SUGAMCHAND C. SHAH VS. ACIT (SUPRA) AS UNDER:- 19. CONSIDERING THE TOTALITY AND PECULIARITY OF TH E FACTS OF THIS CASE, WE FIND THAT ASSESSEE IS NEITHER FULLY ACTING AS A TRA DER NOR AS FULLY INVESTOR. DEMARCATION IS QUITE HAZY; THOUGH IN THE BOOKS HE I S SHOWING ALL THE PURCHASES AS INVESTMENT BUT FREQUENCY OF TRANSACTIO N IN SEVERAL CASES IS SO LARGE AND HOLDING PERIOD IN MANY CASES IS SO SMA LL FROM 0 TO A WEEK OR SO THAT ASSESSEE IS DE FACTO SELLING AND PURCHAS ING SHARES AS TRADER. HE IS ALSO HOLDING SHARES FOR LONG PERIOD INDICATING THAT THEY ARE HELD AS INVESTMENT. THEREFORE, A CRITERIA HAS TO BE FIXED F OR DETERMINING AS TO WHEN HE IS ACTING AS TRADER AND WHEN AS INVESTOR. A CCORDINGLY, WE DECIDE FOLLOWING CRITERIA TO HOLD WHEN GAINS ARE TO BE TAX ED 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 MON TH, 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 PURCHASES OF SHARES AS INVESTMENT, HE WOULD WAT CH THE FLUCTUATION OF RATES IN THE MARKET FOR WHICH A MINIMUM TIME IS NEC ESSARY, WHICH WE ESTIMATE AT ONE MONTH. WHERE SHARES ARE HELD FOR MO RE THAN A MONTH THEY SHOULD BE TREATED AS INVESTMENT AND ON THEIR SALE S HORT TERM CAPITAL GAIN SHOULD BE CHARGED. WHEN SHARES ARE HELD FOR LESS TH AN A MONTH, GAIN ON THEM SHOULD BE TREATED AS PROFIT FROM BUSINESS. THUS A CRITERIA IS LAID DOWN THAT IF SHARES ARE HEL D FOR MORE THAN 30 DAYS THEY SHOULD BE TREATED AS INVESTMENT AND IF THEY AR E HELD FOR LESS THAN 30 DAYS IT SHOULD BE TREATED AS TRADING. THE LD. AR FO R THE ASSESSEE FAIRLY POINTED OUT THAT IF THE CRITERIA LAID DOWN IN THE C ASE OF SHRI SUGAMCHAND ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 11 C. SHAHS CASE IS FOLLOWED THEN ASSESSEE WOULD HAVE PROFIT OF RS.2,94,847/- ON SALE OF SHARES WITHIN 30 DAYS OF T HEIR PURCHASES AND WOULD HAVE EARNED LOSS OF RS.1,70,841/- BEING SHORT TERM CAPITAL ON SALE OF SHARES HELD FOR MORE THAN 30 DAYS. 7. WHEN WE APPLY THE ABOVE PRINCIPLES TO THE PRESEN T CASE, WE CLEARLY FIND THAT SHARES WHICH ARE HELD FOR MORE THAN 12 MO NTHS AND SHOWN AS INVESTMENT IN THE BALANCE SHEET THE INTENTION WAS C LEARLY TO HOLD THEM AS INVESTMENT AND NOT HELD AS STOCK IN TRADE. WHERE SH ARES ARE HELD FOR MORE THAN 30 DAYS, SHOULD BE TREATED AS INVESTMENT AND W HAT IS EARNED SHOULD BE TREATED AS SHORT TERM CAPITAL GAINS OR LOSS AS T HE CASE MAY BE WHICH IN THE PRESENT CASE IS SHORT TERM CAPITAL LOSS OF RS.1 ,70,841/-. SHARES WHICH ARE SOLD WITHIN 30 DAYS SHOULD BE TREATED AS PART O F TRADE AND THEREFORE, SUM OF RS.2,94,847/- SHOULD BE TREATED AS BUSINESS PROFIT AND NOT AS SHORT TERM CAPITAL GAINS. THUS SUM OF RS.59,69,498/- IS T REATED AS LONG TERM CAPITAL GAINS AND RS.(-) 1,70,841/- AS SHORT TERM C APITAL LOSS AND RS.2,94,847/- AS BUSINESS PROFIT. ACCORDINGLY APPEA L OF THE REVENUE IS PARTLY ALLOWED. 8. IN THE RESULT, APPEAL FILED BY THE REVENUE IS PA RTLY ALLOWED. ORDER WAS PRONOUNCED IN OPEN COURT ON 12.11.10. SD/- SD/- (BHAVNESHSAINI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD, DATED : 12.11.10. MAHATA/- ITA NO.1526/AHD/2008 ASST. YEAR 2004-05 12 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 26/10/2010. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 10/11/2010 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..