Appeal Details
Counselvise Citation
[2015] 134 COUNSELVISE.COM (IT) 0767 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 3 month(s) 3 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
14-12-2015
Appeal Filed By
Department
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
11-12-2014
Assessment Year
2008-2009
Appeal Filed On
11-09-2013
Judgement Text
] IQ.KS ] IQ.KS ] IQ.KS ] IQ.KS IQ.KS IQ.KSIQ.KS IQ.KS IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , , ' # BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1734/PN/2013 '% % / ASSESSMENT YEAR 2008-09 DCIT, CIRCLE-4, PUNE . / APPELLANT V/S POONAWALLA SHARES & SECURITIES PVT.LTD., 16-B/1, SAROSH BHAVAN, DR. AMBEDKAR ROAD, PUNE 411001 PAN NO.AAACP6087P . / RESPONDENT / ASSESSEE BY : SHRI R.S. ABHYANKAR / DEPARTMENT BY : SMT. HARSHAVARDHINI BUTY / ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE OR DER DATED 28-02-2013 OF THE CIT(A)-II, PUNE RELATING TO ASS ESSMENT YEAR 2008-09. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF SHARE BROKING AND DEALING IN S HARES AND SECURITIES. IT FILED ITS RETURN OF INCOME FOR THE IMPUGNED A SSESSMENT YEAR ON 30-09-2008 DECLARING TOTAL INCOME OF RS.14,12,39,709 /-. / DATE OF HEARING :15.09.2015 / DATE OF PRONOUNCEMENT:14.12.2015 2 ITA NO.1734/PN/2013 DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOT ED THAT THE ASSESSEE HAS SHOWN BUSINESS INCOME AT RS.29,30,619/- WHIC H HAS BEEN SET OFF AGAINST THE BROUGHT FORWARD LOSS LEAVING NIL T AXABLE INCOME. LONG TERM CAPITAL GAIN HAS BEEN SHOWN AT RS.2,03, 64,431/- WHICH HAS BEEN CLAIMED AS EXEMPT U/S.10(38). SHORT TERM CAPITAL GAIN OF RS.14,12,36,708/- HAS BEEN OFFERED TO TAX @10%. THE ASSESSEE, BESIDES THE ABOVE, HAS DECLARED DIVIDEND INCOME OF RS.1,91,650/- OUT OF WHICH INCOME OF RS.1,88,650/- HAS BEEN CLAIMED AS EXEMPT U/S.10(34). THE AO FURTHER NOTED THAT B ELOW THE COMPUTATION OF INCOME, THE FOLLOWING 2 NOTES HAVE BEEN GIVEN BY THE ASSESSEE WHICH READ AS UNDER : (1) A BOARD RESOLUTION WAS PASSED BY BOARD OF DIRECTOR S EFFECTIVE FROM 01-04-2007 DECIDING THE INVESTMENT POLICY OF TH E COMPANY. AS PER THE SAID BOARD RESOLUTION SECURITIES HELD FOR MORE THAN 30 DAYS WERE CONSIDERED AS CURRENT INVESTMENT & SECURITIES HELD FOR MORE THAN 365 DAYS WERE CONSIDERED AS LONG TERM INVESTMENTS & SUBSEQUEN T SALE OF THE SAID SECURITIES WERE OFFERED TO TAX UNDER THE HEAD CAPITAL GAINS BEING NO SPECIFIC TREATMENT PRESCRIBED BY THE INCOME TAX ACT FOR SUCH CONVERSION. RELYING ON THE DECISION OF KALYANI EXPOR TS & INVESTMENTS PVT. LTD. VS. DCIT 78 ITD 95 (PUNE ITAT) THE ORIGINA L DATE OF ACQUISITION OF SHARES (I.E. WHEN THE SHARES WERE PURCHASED UNDER STOC K-IN-TRADE) IS CONSIDERED AS THE ACQUISITION DATE FOR RECOGNIZING THE SECURITIES AS SHORT TERM CAPITAL ASSSET/LONG TERM CAPITAL ASSET. 2) PROFIT ON CONVERSION OF CAPITAL ASSET (I.E. SHARES) TO STOCK-IN-TRADE IS OFFERED FOR TAX UNDER THE HEAD INCOME FROM BUSINE SS. 3. THE AO OBSERVED THAT THE ASSESSEE HAS BEEN DEALING IN SHARES AND SECURITIES FOR A NUMBER OF YEARS AND HAS BEEN OFFERING THE GAINS ON SALE OF SHARES AND SECURITIES AS INCOME FROM BUSINESS IN ALL THESE YEARS. THE YEAR UNDER CONSIDERATION IS THE FIRST YEAR IN WHICH PROFIT ON SALE OF SHARES HAS BEEN CLAIMED TO BE LONG TERM/SHORT TERM CAPITAL GAINS. HE OBSERVED FROM THE PROFIT AND LOSS ACCOUN T AND BALANCE SHEET FOR THE F.Y. 2000-01 TO 2009-10 THAT THE NATURE OF WORK CARRIED ON BY THE ASSESSEE IS THE SAME OVER THE YEARS. 3 ITA NO.1734/PN/2013 4. THE AO THEREFORE ISSUED A NOTICE U/S.142(1) ASKING THE ASSESSEE FOR THE REASONS AND BASIS OF CLAIMING PROFIT ON SALE OF SHARES AS SHORT TERM/LONG TERM CAPITAL GAIN RATHER THAN BUSINES S PROFITS AS IN EARLIER YEARS. THE ASSESSEE WAS ALSO ASKED TO STATE WHAT HAS CHANGED MATERIALLY SINCE PRECEDING YEARS IN THIS REGARD. IT WAS EXPLAINED BY THE ASSESSEE VIDE LETTER DATED 26-11-2010 THAT THE REASON AND BASIS OF CLAIMING PROFIT ON SALE OF SHARES AS CAPITAL GAIN IS THE INVESTMENT POLICY AS APPROVED BY THE BOARD OF DIRECT ORS OF THE COMPANY VIDE BOARD RESOLUTION DATED 21-06-2007. 5. AS REGARDS THE MATERIAL CHANGES IN THE OPERATION OF TH E COMPANY AS COMPARED TO THE EARLIER YEARS IT WAS SUBMITT ED THAT THE COMPANY WAS INCORPORATED WITH THE MAIN OBJECTS TO ACT AS A SHARE BROKER, STOCK BROKER ETC. AND TO CARRY OUT OTHER SERV ICES LIKE ISSUE MANAGEMENT, FINANCIAL SERVICES ETC. THE COMPANY IS REGISTER ED AS A BROKER IN PUNE STOCK EXCHANGE. HOWEVER, DUE TO CHANGE D SCENARIO, THERE WERE LIMITATIONS TO CONTINUE THE BUSINESS AS A BROK ER AS PUNE STOCK EXCHANGE BECAME ALMOST DEFUNCT DURING THE PERIOD IN WHICH THE COMPANY WAS DOING SUBSTANTIAL BROKERAGE BUSINESS. I T WAS ALSO HAVING SHARES AND SECURITIES IN ITS TRADING PORTFOLIO. THE C OMPANY HAS CEASED TO CARRY ON THE SHARE BROKING BUSINESS SINC E F.Y. 2005- 06. THE BROKERAGE REFLECTED IN THE PROFIT AND LOSS ACCOU NT FOR THE CURRENT YEAR REFLECTS BROKERAGE REVENUE FROM AMFI ADVIS ORY BROKERAGE ON MUTUAL FUNDS. AS A RESULT, TRADING ACTIVITY ALSO REDUCED CONSIDERABLY AFTER STOPPING BROKERAGE ACTIVITY. FROM THE F.Y. 2007-08 THE COMPANY STARTED TO HAVE INVESTIBLE SURP LUS FUNDS AND AS A RESULT COMPANY THOUGHT IT DESIRABLE TO HAVE T HE INVESTMENT POLICY BY WHICH THERE WILL BE DISTINCTION BETWEEN THE TRADIN G ACTIVITY AND INVESTMENTS MADE ON LONG TERM BASIS. THIS POLICY WAS ALSO 4 ITA NO.1734/PN/2013 NECESSARY IN VIEW OF THE FACT THAT WHEN THE MARKET IS V OLATILE, ONLY THE LONG TERM INVESTMENT IN COMPANY HAVING STRONG FUNDAM ENTALS WILL PROTECT THE INVESTIBLE SURPLUS. IT ALSO THOUGHT THAT THE ACTIVITIES OF THE COMPANY SHOULD BE STREAMLINED THROUGH IMPLEMENTAT ION OF THIS POLICY. 6. THE ASSESSEE ALSO MADE ELABORATE SUBMISSIONS TO JUS TIFY AS TO WHY CAPITAL GAIN ON SALE OF SHARES SHOULD NOT BE TREATED AS BUSINESS INCOME. THE ASSESSEE GAVE THE FOLLOWING REASONS : 1. THE ASSESSEE HAS FOLLOWED THE INVESTMENT POLICY WHICH CLEARLY LAYS DOWN THE INTENTION OF IT BEEN PURCHASED WITH TRA DING MOTIVE OR INVESTMENT MOTIVE. ACCORDINGLY THE SAME HAS BEEN RECO RDED IN BOOKS OF ACCOUNTS. 2. THE SHARES ARE HELD AS INVESTMENT AND ACCOUNTED FOR AS INVESTMENTS IN BOOKS. 3. OUR COMPANY HAS TAKEN THE DELIVERY OF ALL THE EQU ITY SHARES IN COMPANY'S DEMAT ACCOUNT. 4. OUR COMPANY HAS BROUGHT THE AFORESAID SHARES ONLY ON 30 DIFFERENT DATES OUT OF AROUND 250 TRADING DAYS. NO SHA RES WERE PURCHASED ON BALANCE 220 DAYS AVAILABLE IN THE FINANC IAL YEAR FOR MAKING PURCHASE ON THE STOCK EXCHANGE. 5. OUR COMPANY HAS SOLD THE AFORESAID SHARES ONLY ON 23 DIFFERENT DATES OUT OF AROUND 250 TRADING DAYS. NO SHARES WERE SOL D ON BALANCE 227 DAYS AVAILABLE IN THE FINANCIAL YEAR FOR MAKING SALE ON THE STOCK EXCHANGE. 6. THE ASSESSEE DEALT WITH ONLY 9 SCRIPTS & GENERATED A S HORT TERM CAPITAL GAIN OF RS.13.31 CRORES. THE BREAK-UP OF SHOR T TERM CAPITAL GAIN IS AS UNDER : SR HOLDING PERIOD OF SHARES SHORT TERM NO CAPITAL GAIN RS 1 MORE THAN 200 DAYS 9,36,84,503 2 100 DAYS TO 200 DAYS (82,00,061) 3 30 DAYS TO 100 DAYS 5,57,52,268 4 LESS THAN 30 DAYS NIL TOTAL SHORT TERM CAPITAL GAIN 14,12,36,408 7. OUT OF THE 9 SCRIPTS DEALT BY THE ASSESSEE PROFIT GEN ERATED BY ONE SCRIPT IS MORE THAN 60% OF THE TOTAL STCG REPORTE D BY THE ASSESSEE. THE SAID SCRIP I.E. IFCI WHICH GENERATED MORE THAN 60% OF STCG WAS HELD FOR A PERIOD OF MORE THAN 200 D AYS. 5 ITA NO.1734/PN/2013 8. FREQUENCY OF THE TRANSACTION IS VERY LESS COMPARED T O THE AMOUNT OF INVESTMENT MADE. 9. IT CAN BE VERIFIED FROM THE ANNUAL REPORT THAT T HE COMPANY HAS NOT TAKEN ANY LOANS. ALL THE INVESTMENTS WERE MADE OUT OF OWN FUNDS. 10. ON THE BASIS OF THE INVESTMENT POLICY, PROFIT OF R S.1.14 CRORES ON SALE OF SHARES HELD FOR LESS THAN 30 DAYS WERE SUOMOTO OFF ERED AS BUSINESS INCOME BY THE ASSESSEE, WHICH FURTHER STRENGTHEN S THE INTENTIONS OF THE ASSESSEE & ITS DETERMINATION TOWAR DS FOLLOWING THE INVESTMENT POLICY. 11. THE LONG TERM INVESTMENTS WERE VALUED AT COST & CU RRENT INVESTMENTS WERE VALUED AT LOWER OF COST OR MARKET VA LUE. THE ASSESSEE WOULD HAVE BEEN BENEFITTED BY CONSIDERING THE INVESTM ENT AS STOCK IN TRADE & VALUE THE STOCK AT COST OR MARKET VALUE WHICH EVER IS LESS. HOWEVER, THE ASSESSEE DID NOT TAKE BENEFIT OF DIMINUTI ON IN VALUE OF INVESTMENT OF RS.54.08 LACS WHILE FILING THE ROI. T HIS FURTHER STRENGTHENS ASSESSEE INTENTION OF HOLDING THE SHARES UNDER INVESTMENT PORTFOLIO. 12. THE INVESTMENT POLICY WAS STRICTLY FOLLOWED IN THE YEAR UNDER CONSIDERATION & ALL THE SUBSEQUENT YEARS. IN VIEW OF THE ABOVE, THE GAIN ON SHARES HELD FOR MOR E THAN 30 DAYS IS CLEARLY ASSESSABLE AS CAPITAL GAINS. RELYING ON VARIOUS DECISIONS IT WAS SUBMITTED THAT THE PR OFIT FROM SHARES SHOULD BE TREATED AS INCOME FROM CAPITAL GAINS AND NOT BUSINESS INCOME. 7. WHEN ASKED BY THE AO AS TO WHETHER ANY DISTINCTION H AS BEEN MAINTAINED BY THE ASSESSEE BETWEEN THE SHARES HELD AS STOCK IN TRADE AND SHARES HELD AS INVESTMENT, THE ASSESSEE SUBM ITTED THAT IT HAS FOLLOWED INVESTMENT POLICY FOR CLASSIFICATION OF SHARES AND ACCORDINGLY ENTRIES ARE MADE IN THE BOOKS OF ACCOUNT. A S REGARDS THE QUERY RAISED BY THE AO AS TO WHAT POLICY WAS FOLLOWED IN E ARLIER YEARS, THE ASSESSEE SUBMITTED THAT IN THE PAST THERE W AS NO POLICY AS SUCH ON THE BASIS OF WHICH SHARES WERE DIFFERENTIATED AS T O BUSINESS OR INVESTMENTS. MAJOR HOLD WAS STOCK IN TRADE AND SOM E HOLDINGS WERE UNDER INVESTMENT. 6 ITA NO.1734/PN/2013 7.1 WHEN ASKED BY THE AO TO PRODUCE THE RECORDS AS T O THE EXPECTED PERIOD OF HOLDING DECIDED AT THE TIME OF INVESTMEN T AND WHETHER IT IS DECIDED AT/BEFORE THE TIME OF PURCHASE OF SC RIP AS TO WHETHER IT IS PURCHASED AS STOCK IN TRADE OR AS INVESTM ENT, THE ASSESSEE SUBMITTED THAT AS PER THE INVESTMENT POLICY ALL THE INVESTMENT DECISIONS ARE MADE BY THE CHAIRMAN/CEO OF THE COMPANY. THE INVESTMENT DECISIONS ARE MADE WITH THE PRIM ARY OBJECT OF APPRECIATION IN VALUE OF INVESTMENTS, STUDY OF REG ULAR INCOME ON THE INVESTMENTS, RISK MINIMISATION AND CASH FLOW REQUIREMENTS. THE CHAIRMAN/CEO ON BASIS OF ACTUAL PROSPE CTS OF THE TARGET COMPANY/MARKET TREND, ECONOMIC CONDITIONS, TE CHNICAL CHARTS AND MARKET NEWS MAKES THE DECISION OF PURCHASE. SCRIPS INTENDED TO BE HELD FOR LESS THAN 30 DAYS ARE VERBALLY IN FORMED TO BE ACCOUNTED UNDER STOCK IN TRADE PORTFOLIO AND SCRIPS INTEN DED TO BE HELD FOR MORE THAN 30 DAYS ARE VERBALLY INFORMED TO BE A CCOUNTED UNDER INVESTMENT PORTFOLIO. ACCORDINGLY, ENTRIES ARE MADE IN THE BOOKS AND SAME ACTS AS A RECORD REFLECTING THE HOLDING P ERIOD AND INTENTION OF THE MANAGEMENT. 8. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE ANALYSED THE TRANSACTIONS IN SHAR ES FOR F.YRS. 2005-06, 2006-07 AND 2007-08 WHEREIN THE SHARES WERE SHOWS AS LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN AND CAM E TO THE CONCLUSION THAT IN F.Y. 2005-06 THE ASSESSEE PURCHASED S HARES OF ONLY ONE COMPANY AND SOLD THE PREVIOUSLY HELD SHARES O F 8 COMPANIES, BROUGHT IN EARLIER YEARS FOR RS.7.15 CRORES IN 68 TRANSACTIONS OF SALES LEADING TO PROFITS OF RS.2.33 CRORES. THE ENTIRE PROFIT WAS OFFERED TO TAX @30% AS BUSINESS INCOME EVEN TH OUGH THE OVERALL PERIOD OF HOLDING WAS 393 DAYS. IN F.Y. 2005-06 TH E ASSESSEE 7 ITA NO.1734/PN/2013 BOUGHT SHARES OF 5 COMPANIES IN 8 TRANSACTIONS AND ALON G WITH PREVIOUSLY HELD SHARES, SOLD SHARES IN 10 COMPANIES IN 92 TRANSACTIONS VALUED AT RS.18.80 CRORES LEADING TO PROFITS OF RS.4.24 CRORES. THE ENTIRE PROFIT WAS OFFERED TO TAX @30% AS BUS INESS INCOME EVEN THOUGH THE AVERAGE PERIOD OF HOLDING IS 316 DAYS. HOWEVER, DURING F.Y. 2007-08, I.E. A.Y. 2008-09, THE ASSESSEE HAS UND ERTAKEN 54 TRANSACTIONS OF PURCHASE AND 83 TRANSACTION OF SALE O N DIFFERENT DATES. THE PURCHASES MADE DURING THE YEAR ALONG WITH O PENING STOCK OF SHARES WERE SOLD FOR VALUE OF RS.68.10 CRORES LEA DING TO OVERALL PROFIT OF RS.17,30,58,382/- AND THE AVERAGE HOLDING PE RIOD IS 171 DAYS. ON THE SAID PROFIT THE ASSESSEE HAS EARNED LO NG TERM CAPITAL GAIN OF RS.2,03,64,353/- AND CLAIMED THE SAME AS FULLY EXEMPT U/S.10(38). THE ASSESSEE HAS SHOWN SHORT TERM CA PITAL GAIN OF RS.14,12,36,709/- AND OFFERED TO TAX @10% AND HAS SHOWN BUSINESS INCOME OF RS.1,14,57,559/- AND CLAIMED THE SAME AS FULLY SET OFF AGAINST F&O LOSS AND BROUGHT FORWARD LOSS. IN VIE W OF THE ABOVE FINDINGS, THE AO HELD THAT THE ASSESSEE HAS UNDERT AKEN MORE TRANSACTIONS BOTH FOR PURCHASE AND SALE OF SHARES COMP ARED TO EARLIER 2 YEARS. IT HAS BOUGHT AND SOLD SHARES ON GREA TER VALUE LEADING TO HIGHER PROFITS. THE AVERAGE PERIOD OF HOLDING OF SHARES IS MUCH LESSER IN THE CURRENT YEAR AS COMPARED TO EARLIER YEARS. INSTEAD OF THIS, THE ASSESSEE HAS CLAIMED THE GAIN ON SALE OF SHARES TO BE LONG TERM CAPITAL GAIN/SHORT TERM CAPITAL GAIN RATHER T HAN BUSINESS INCOME AS WAS SHOWN CONSISTENTLY OVER THE LAST 6 TO 7 YEARS. THEREFORE, THERE IS NO JUSTIFICATION FOR DOING SO GO ING BY THE NATURE, QUANTUM, AND PATTERN OF TRANSACTIONS ESPECIALLY W HEN SEEN AGAINST THE ASSESSEES HISTORY. 8 ITA NO.1734/PN/2013 9. THE AO FURTHER NOTED THAT THE ONLY BASIS OF THIS CH ANGE IS THE NEW INVESTMENT POLICY APPROVED BY THE BOARD OF THE COMP ANY DURING THE YEAR. THE AO REFERRED TO THE CBDT CIRCULAR NO.4/20 07 DATED 15- 06-2007 WHICH CLARIFIES THE DISTINCTION BETWEEN THE SHARES HELD AS STOCK IN TRADE AND SHARES HELD AS INVESTMENT AND THE D ECISIONS FOR SUCH A DISTINCTION. HE ALSO REFERRED TO THE EARLIER INSTR UCTION NO.1827 DATED 31-08-1989 WHICH LAYS DOWN CERTAIN TESTS FOR DECIDING AS TO WHETHER SUCH PROFIT HAS TO BE TREATED AS BUSINESS INCOME OR INCOME FROM CAPITAL GAIN. AFTER ANALYSING THE VA RIOUS DECISIONS THE AO CAME TO THE CONCLUSION THAT THE SHARES DEALT IN BY THE ASSESSEE ARE IN THE NATURE OF STOCK IN TRADE AND N OT INVESTMENT AS CLAIMED BY THE ASSESSEE. THE GAINS ON SALE OF THE SHA RES WILL GIVE RISE TO INCOME CHARGEABLE AGAINST INCOME FROM BUSINESS AND NOT CAPITAL GAINS. THE AO FURTHER NOTED THAT THE CLAIM OF THE ASSESSEE THAT IN A.Y. 2004-05 THEIR CLAIM FOR LONG TERM CAPITAL GAIN WA S ACCEPTED BY THE CIT(A) DOES NOT HOLD GOOD AS IN THAT YE AR MOST OF THE SHARES SOLD WERE HELD FOR A PERIOD EXCEEDING 4 YEARS. M OREOVER, IN THE BALANCE SHEET EVERY YEAR THESE SHARES WERE SHOWN AS LONG TERM INVESTMENTS VALUED AT COST. ACCORDINGLY, THE CIT(A) HELD T HE GAIN ON THE SALE OF THESE SHARES FOR THAT YEAR AS LONG TERM CAP ITAL GAIN. HOWEVER, THIS IS NOT SO IN THE CASE OF THE CURRENT YEAR . THE AO ACCORDINGLY BROUGHT TO TAX RS.13,72,72,396/- AS BUSINESS INCOME IN THE HANDS OF THE ASSESSEE AS AGAINST NIL INCOME SHOWN IN THE RETURN OF INCOME FILED BY THE ASSESSEE ON ACCOUNT OF PROFIT ON SALE OF SHARES. 10. BEFORE CIT(A) THE ASSESSEE REITERATED THE SAME SUBM ISSIONS AS MADE BEFORE THE AO. IT ALSO FILED VARIOUS SUBMISSIONS AND C ASE DECISIONS. IT WAS SUBMITTED THAT THE ASSESSEE HAS FOLLOWE D THE INVESTMENT POLICY WHICH CLEARLY LAYS DOWN THE INTENTION OF IT WHEN 9 ITA NO.1734/PN/2013 PURCHASED WITH TRADING MOTIVES OR INVESTMENT MOTIVE. ACC ORDINGLY, THE SAME HAS BEEN RECORDED IN THE BOOKS OF ACCOUNT. T HE SHARES ARE HELD AS INVESTMENT AND ACCOUNTED FOR AS INVESTMENT IN BO OKS. THE COMPANY HAS TAKEN THE DELIVERY OF ALL THE EQUITY SHARES IN COMPANYS DEMAT ACCOUNT. THE COMPANY BROUGHT THE AFORESAID SHAR ES ONLY ON 30 DIFFERENT DATES OUT OF AROUND 250 TRADING DAYS. NO SH ARES WERE PURCHASED ON BALANCE 220 DAYS AVAILABLE IN THE FINANCIAL YE AR FOR MAKING PURCHASE ON THE STOCK EXCHANGE. THE COMPANY S OLD THE SHARES ONLY ON 23 DIFFERENT DATES OUT OF AROUND 250 TRA DING DAYS. NO SHARES WERE SOLD ON BALANCE 227 DAYS AVAILABLE IN THE FINAN CIAL YEAR FOR MAKING SALE ON THE STOCK EXCHANGE. THE ASSESSEE DE ALT WITH ONLY 9 SCRIPS AND GENERATED SHORT TERM CAPITAL GAIN AT RS.13 .31 CRORES. OUT OF 9 SCRIPS DEALT WITH BY THE ASSESSEE PROFIT GENERAT ED BY ONE SCRIP IS MORE THAN 60% OF THE TOTAL SHORT TERM CAPITAL G AIN REPORTED BY THE ASSESSEE. THE SAID SCRIP, I.E. IFCI WHICH GENERATE D MORE THAN 60% OF SHORT TERM CAPITAL GAIN WAS HELD FOR A PERIOD OF MO RE THAN 200 DAYS. FREQUENCY OF THE TRANSACTION IS VERY LESS COM PARED TO THE AMOUNTS OF INVESTMENT MADE. THE ASSESSEE COMPANY HAS NOT TAKEN ANY LOAN AND ALL INVESTMENTS WERE MADE OUT OF OWN FUNDS. ON THE BASIS OF THE INVESTMENT POLICY PROFIT OF RS.1.14 CRORES ON SA LE OF SHARES HELD FOR LESS THAN 30 DAYS WERE SUO MOTU OFFERED AS BUSINESS INCOME BY THE ASSESSEE WHICH FURTHER STRENGTHENS THE IN TENTIONS OF THE ASSESSEE AND ITS DETERMINATION TOWARDS FOLLOWING THE IN VESTMENT POLICY. THE LONG TERM INVESTMENTS WERE VALUED AT COST AN D CURRENT INVESTMENTS WERE VALUED AT LOWER OF COST OR MARKET VALUE . THE ASSESSEE WOULD HAVE BEEN BENEFITTED BY CONSIDERING THE IN VESTMENT AS STOCK IN TRADE AND VALUED THE COST AT COST OR MARK ET PRICE WHICHEVER IS LESS. HOWEVER, THE ASSESSEE DID NOT TAKE BE NEFIT OF DIMINUTION IN VALUE OF INVESTMENT OF RS.54.08 LAKHS WHILE FILING T HE 10 ITA NO.1734/PN/2013 RETURN OF INCOME. THIS FURTHER STRENGTHENS THE INTENTION OF THE ASSESSEE OF HOLDING SHARES UNDER INVESTMENT PORTFOLIO. IT WAS SUBMITTED THAT THE INVESTMENT POLICY WAS STRICTLY FOLLOWED IN THE YEAR UNDER CONSIDERATION AND ALL THE SUBSEQUENT YEARS. VARIOUS DECISIONS WERE ALSO BROUGHT TO THE NOTICE OF THE CIT(A) INCLUDING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GOPAL P UROHIT REPORTED IN 34 DTR 52, THE DECISION OF HONBLE DELHI HIGH CO URT IN THE CASE OF CIT VS. ROHIT ANAND REPORTED IN 327 ITR 44 5 AND THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT V. S. RAMMAAMIRTHAN REPORTED IN 217 CTR 206. 11. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DIRECTED THE AO TO TREAT THE INCOME OF RS.14,12, 36,708/- AS SHORT TERM CAPITAL GAIN AND RS.2,03,64,152/- AS LONG TER M CAPITAL GAIN. THE RELEVANT OBSERVATION OF THE CIT(A) FROM PAGES 23 TO 45 OF THE ORDER READ AS UNDER : THE FACT BROUGHT ON RECORD HAS BEEN CONSIDERED ALONG WITH THE SUBMISSION MADE BY THE APPELLANT. THE ISSUE INVOLVED IN THE APPEAL IS REGARDING THE TAXABILITY OF THE INCOME EARNED OUT O F SALE OF SHARES WHICH HAS BEEN OFFERED TO TAX UNDER THE HEAD 'CAPITAL GAIN ' AND ASSESSED AS 'BUSINESS INCOME' BY THE AO. THE TRANSACTION ENTERED I NTO BY THE APPELLANT DURING THE PERIOD AND THE PROFIT HAVE BEE N SHOWN UNDER THE HEAD 'CAPITAL GAIN' COMPRISES OF TWO PARTS. THE FIRST P ART COMPRISES OF THE CAPITAL GAINS EARNED BOTH SHORT TERM AS WELL AS LON G-TERM OUT OF THE SALE OF SHARES ON CONVERSION OF THE STOCK-IN-TRADE TO I NVESTMENTS. THE DETAILS OF WHICH ARE AS UNDER : 1. LONG TERM CAPITAL GAIN - 2,03,64,152/- 2. SHORT TERM CAPITAL GAIN - 80,84,449/- THE OTHER PART COMPRISES OF THE SALE AND PURCHASE OF SHA RES AND THE HOLDING PERIOD OF THE SHARES ABOVE 30 DAYS HAVE BEEN T REATED BY THE APPELLANT AS STCG WHICH AMOUNTS TO RS.13,31,52,260/-. THE AO HAS TREATED BOTH INCOMES AS INCOME UNDER THE HEAD BUSINESS I NCOME AS AGAINST CLAIMED BY THE APPELLANT UNDER THE HEAD CAPI TAL GAINS. 3.6 THE APPELLANT COMPANY WAS INCORPORATED WITH OBJECT T O ACT AS A SHARE BROKERS AND TO CARRY OUT OTHER SERVICES LIKE MANA GEMENT AND FINANCIAL SERVICES AND INVESTMENT OF THE SURPLUS FUND WA S ALSO ONE OF THE MAIN OBJECT OF THE COMPANY. HOWEVER, AFTER THE PUNE STOCK EXCHANGE 11 ITA NO.1734/PN/2013 BECOMING DEFUNCT, THE APPELLANT'S BROKERAGE BUSINESS BE CAME LIMITED. THIS FACT GETS EVIDENT FROM THE SUMMARY OF THE PROFIT AND LOSS ACCOUNT FOR THE YEAR 2000-01 TO 2009-10 WHEREIN THE APPELLA NT EARNED BROKERAGE ON SHARES UPTO 2004-05 AND, THEREFORE, EARN ED BROKERAGE ON MUTUAL FUNDS RECEIVED FROM AMFI ADVISORY BROKERAGE ON MUTUAL FUNDS. THE APPELLANT WAS HOLDING SHARES AND SECURITIES UNDER BO TH PORTFOLIO I.E. INVESTMENT AS WELL AS BUSINESS I.E. STOCK IN TRADE AND I N ALL THE YEARS UPTO 2007 -08 THE APPELLANT HAD REPORTED PROFIT ON SALE O F SHARES AS BUSINESS INCOME EXCEPT FOR AY. 2004-05 WHEN THE APPELLANT HA D REPORTED BOTH CAPITAL GAIN AS WELL AS BUSINESS INCOME ON SALE OF SHARES. DURING AY. 2004-05, THE CAPITAL LOSS REPORTED BY THE APPELLANT W AS TREATED AS BUSINESS PROFIT BY THE AO., HOWEVER, IN THE APPELLATE PROCEEDINGS BEFORE MY PREDECESSOR CIT(A)-II PUNE, THE SAME WAS ALLOWED AS C APITAL LOSS. THE CIT(APPEALS)-II PUNE IN HIS ORDER NO. PN/CIT(A)-I I/ ACIT CIR.4, PUNE/555/06-07 DATED 26.7.2010 HELD AS UNDER: '3.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND THE MATERIAL AVAILABLE ON RECORD. THE ASSESSING OFFICER'S DISCUS SION HIGHLIGHT THE FACTS THAT THE APPELLANT IS A SHARE BROKER HOLDING CARD OF PUNE STOCK EXCHANGE, AS WELL AS INDULGES IN SHARES AND SECURITIES TRADIN G BUSINESS OF WHICH THE TURNOVER WAS QUITE LARGE I. E. TO THE TUNE OF RS. 13.65 CRORES IN THIS YEAR AND RS.136 CRORES IN THE EARLIER ASSESSMENT YEAR. T HIS IS A FACT WHICH THE APPELLANT HAS NEVER DENIED, AND THE APPELLANT HAS D ULY STATED THIS IN THE STATEMENT OF FACTS AS WELL AS IN THE SUBMISSION DATED 19.7.2010. BUT THIS DOES NOT MEAN THAT THE APPELLANT CANNOT HAVE SOME I NVESTMENT IN SHARES. THE CBDT CIRCULAR NO.4/2007 DATED 15.6.2007 HAS DUL Y TAKEN INTO ACCOUNT THIS POINT. IN THIS CIRCULAR OF CBDT, RELIA NCE HAS BEEN PLACED ON TWO SUPREME COURT DECISIONS IN THE CASE OF CIT VS. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. (P) LTD. (1971) 82 ITR 586 (S.C) AND CIT VS. H. HOLCK LARSEN (1986) 160 ITR 67 (S.C), AS ALSO THE DECISION OF THE AUTHORITY FOR ADVANCE RULINGS IN THE CASE OF FIDELITY NORTHSTAR F UND & ORS. (2007) 288 ITR 641 (AAR). IN THIS CIRCULAR IT WAS MENTIONED THAT THE S AME TAX PAYER CAN HAVE TWO PORTFOLIOS IN THE BOOKS OF ACCOUNTS AN D BALANCE SHEET, ONE INVESTMENT PORTFOLIO AND THE OTHER STOCK IN TRADE P ORTFOLIO OF SHARES. SECONDLY, IT WAS STATED THAT IT WAS TO BE VERIFIED AS TO HOW THE SHARES WERE HELD AND VALUED IN THE BOOKS OF ACCOUNTS, I.E. EITHER AS STOCK IN TRADE IN THE FINANCIAL YEAR FOR THE PURPOSE OF ARRIVING A T THE BUSINESS INCOME, OR AS INVESTMENT AS CAPITAL ASSET IN THE BALANCE SHEET . THE METHOD FOR VALUATION WOULD ALSO THEREFORE, BE DIFFERENT I. E. WHEN IT WAS HELD AS INVESTMENT IT WOULD BE HELD AS COST IN THE BALANCE SHEET, WHEREAS IN THE CASE OF STOCK IN TRADE, THE METHOD OF VALUATION WOU LD BE COST OR MARKET PRICE, WHICHEVER IS LOWER. IN APPELLANT'S CASE, IT IS NOTICED THAT ON ACCOUNT OF THE TRADING IN SHARES AND SECURITIES FOR WHICH A TURNOVER OF RS. 13.67 CRORES HAVE BEEN SHOWN DURING THE YEAR, THERE IS A NET PROFIT (BEFORE TAX) AS PER PROFIT AND LOSS ACCOUNT AMOUNTING TO RS.4,88 ,01,829/- AND THE TOTAL INCOME BEFORE SET OFF OF EARLIER YEARS' LOSSE S WAS SHOWN AT RS. 4, 07, 83,446/-. AS AGAINST THE SAME, THERE WAS .THIS LONG TERM CAPI TAL LOSS ON SHARES AMOUNTING TO RS.3, 49,998/- FOR WHICH THE GROSS CONSIDERATION OF SALE WAS ONLY RS.42, 87, 930/- AND INDEX COST OF ACQUISITION WAS RS.46,37,928/-, THEREBY RESULTING I N THE LOSS. THE HOLDING PERIOD OF THESE SHARES WAS QUITE SUBSTANTIAL. IN TH E COMPUTATION OF LONG TERM CAPITAL LOSS ON SHARES GIVEN IN THE RETURN FIL ED BY THE APPELLANT, WHICH WAS ALSO FURNISHED DURING THE APPELLATE PROCE EDINGS, IT SHOWED THAT ALL THESE SHARES WERE ACQUIRED BETWEEN THE PER IOD 4.9.1998 AND 25. 1.2000, WHEREAS THE DATE OF SALE DURING THE CURRENT YEARS WERE BETWEEN JULY 2003 AND NOVEMBER, 2003. IT IS, THEREF ORE, REVEALED THAT MOST OF ALL THESE SHARES WERE HELD FOR A PERIOD EXCEEDING 4 YEARS. BY NO 12 ITA NO.1734/PN/2013 STRETCH OF IMAGINATION SUCH A PORTFOLIO CAN BE TREATED AS HELD FOR THE PURPOSES OF TRADING. MOREOVER, WHEN THE BALANCE SHE ET OF THE APPELLANT IS PERUSED IT IS NOTICED THAT EVERY YEAR SOME SHARES A ND MUTUAL FUNDS ARE BEING SHOWN AS LONG TERM INVESTMENT (VALUED AT COST ). 3.3 CONSIDERING THE ABOVE FACTUAL MATRIX OF THE CAS E AND THE LEGAL POSITION, IT IS HELD THAT THE APPELLANT HAD RIGHTLY CLAIMED THE AMOUNT OF RS. 3,49,998/- AS LONG TERM CAPITAL LOSS ON SHARES. THE GROUND OF APPEAL NO.1 IS THEREFORE, HELD TO BE ALLOWED. ' 3.7 IT IS EVIDENT FROM THE MATERIAL ON RECORD THAT IN THE PAST, THERE WAS NO POLICY AS SUCH ON THE BASIS OF WHICH SHARES WERE DI FFERENTIATED AS TO BUSINESS OR INVESTMENT BUT IN THE HOLDING THE SAME WERE HELD AS STOCK IN TRADE AS WELL AS INVESTMENT. THE APPELLANT WAS PERMITTED TO DEVISE A POLICY FOR INVESTMENT IN THE LIGHT OF THE CH ANGE IN ECONOMIC SCENARIO BECAUSE OF THE PUNE STOCK EXCHANGE BECOMING D EFUNCT. THE NEW INVESTMENT POLICY BROUGHT OUT A DISTINCTION BETWE EN THE TRADING ACTIVITY AND INVESTMENT. THE APPELLANT HAS, THEREAFT ER CONVERTED THE STOCK-IN-TRADE TO INVESTMENT AS ON 1-4-2007 AS PER THE BOOKS OF ACCOUNT. THE APPELLANT RELYING ON THE DECISION OF KA LYANI EXPORTS & INVESTMENT PVT. LTD VS DCIT 78 ITD 95 (PUNE ITAT) (TM ) TOOK THE ORIGINAL DATE OF ACQUISITION OF SHARES I.E. WHEN THE SHARES WERE PURCHASED UNDER STOCK-IN-TRADE AS THE ACQUISITION DATE FOR RECOGNIZING THE SECURITIES AS SHORT TERM CAPITAL ASSET AND LONG TERM CAPITAL ASSET. THE PROFIT ON THE CONVERSION OF CAPITAL ASSET I.E. SHAR ES TO STOCK IN TRADE HAS BEEN RIGHTLY OFFERED TO TAX BY THE APPELLANT UND ER THE HEAD 'INCOME FROM BUSINESS AND CAPITAL GAINS BOTH SHORT-TERM CAPITAL GAIN AND LONG- TERM CAPITAL GAIN' AND CAPITAL GAINS BOTH SHORT-TERM CAPITAL GAIN AND LONG-TERM CAPITAL GAIN. SO FAR AS THE DECISION OF THE PUNE ITAT RELIED BY THE APPELLANT IN THE CASE OF KALYANI EXPORT & INVEST MENT (P) LTD (CITED SUPRA) IS CONCERNED, IT HELD THAT THERE CANNOT BE TWO DATES OF ACQUISITION OF THE SAME ASSET ONE AS NON-CAPITAL ASSET AND ANOTHER AS CAPITAL ASSET. THE BENCH HELD THAT THE YEAR OF ACQUI SITION IS ONLY ONE THAT IS THE YEAR IN WHICH IT IS PURCHASED FOR THE FIRST TIME BY THE ASSESSEE. THE PUNE ITAT IN THE AFORESAID CASE AFTER RELYI NG ON THE OBSERVATIONS OF THE BOMBAY HIGH COURT DECISION IN THE CASE OF KESHAVJI KARSANDAS VS CIT (1994) 207 ITR 737 (BOM) AND THE GUJA RAT HIGH COURT DECISION IN THE CASE OF RANCHODBHAI BHAIJIBHAI PATEL VS CIT (1971).81 ITR 446 (GUJ) , HELD THAT THESE CANNOT BE TWO DATES OF ACQUISITION OF THE SAME ONE AS NON- CAPITAL ASSET AND A GAIN AS CAPITAL ASSET. THE YEAR OF ACQUISITION IS ONLY ONE THAT IS THE Y EAR IN WHICH IT IS PURCHASED FOR THE FIRST TIME BY THE ASSESSEE. THE DETAILS OF THE LONG TERM AND SHORT TERM CAPITAL GAINS AND BUSINESS INCOME EARNED BY WAY OF SALE/CONVERSION OF SHARES ARE AS UNDER: 1. LONG-TERM CAPITAL GAIN RS.2,03,64,152/- 2. SHORT-TERM CAPITAL GAIN RS. 80,84,449/- 3. BUSINESS INCOME - RS.21,11,850/- 3.8 THE APPELLANT CAME OUT WITH THE INVESTMENT POLICY EFFECTIVE FROM 01.04.2007 WITH AN OBJECTIVE OF APPRECIATION IN VAL UE OF INVESTMENTS RISK MINIMIZATION AND CASH FLOW REQUIREMENTS AND ALSO ST EADY / REGULAR INCOME IN INVESTING. THE SHARES HELD AS ON 31.03.2007 U NDER THE TRADING PORTFOLIOS WERE TRANSFERRED / CONVERTED TO INVESTMENT AS PER THE NEW POLICY ADOPTED BY THE APPELLANT COMPANY. THE APPELL ANT HAS ALSO OFFERED THE RESULTANT GAINS / LOSS TO TAX. THE APPELLANT AS PER THE POLICY CLASSIFIE D THE SHARES UNDER STOCK-IN-TRADE PORTFOLIO AND THE INVE STMENT PORTFOLIO. 13 ITA NO.1734/PN/2013 THE APPELLANT HAS PLACED RELIANCE ON THE CASE OF MU MBAI ITAT IN THE CASE OF CIT VS BRIGHT STAR INVESTMENT (P) LTD., 24 SOT 288, WHEREIN IT IS HELD THAT: RECEIPTS FROM SALE OF SHARES AFTER CONVERSION FROM STOCK-IN-TRADE TO INVESTMENT WERE RIGHTLY OFFERED BY THE ASSESSEE AS LONG-TERM CAPITAL GAINS, I.E., THE DIFFERENCE BETWEEN THE SALE PRICE OF THE SHARES AND THE COST OF ACQUISITION OF SHARE, WHICH IS THE BOOK VALUE ON THE DATE OF CONVERSION WITH INDEXATION FROM THE DATE OF CONVERSION, THERE BEING NO PROVISION LIKE S. 45(2) TO DEAL WITH SUCH A SITUATION. THE DECISION OF HONBLE MUMBAI HIGH COURT IN THE CASE OF CIT VS GOPAL PUROHIT, 34 DTR 52 (2009) AND THE DECISION OF THE AH MEDABAD TRIBUNAL IN THE CASE OF SUGAMCHAND C. SHAH VS ACIT (2 010) 37 DTR 345, ALSO SUPPORTS THE ACTION OF APPELLANT COMPANY WHE REIN IT WAS HELD THAT IT IS OPEN TO AN ASSESSEE TO MAINTAIN TWO SEPAR ATE PORTFOLIOS, ONE RELATING TO INVESTMENT IN SHARES AND ANOTHER RELAT ING TO BUSINESS ACTIVITIES INVOLVING DEALING IN SHARES. THE HON'BLE HI GH COURT HELD THAT THE DELIVERY BASED TRANSACTIONS ARE TO BE TREATED AS IN VESTMENT TRANSACTIONS AND THE PROFIT RECEIVED THEREFROM IS TO B E TREATED AS SHORT TERM OR LONG TERM CAPITAL GAINS DEPENDING UPON THE P ERIOD OF HOLDING OF SHARES. FURTHER IN THE CASE OF ACIT VS R. RAMAN, 48 SOT 28, THE ASSESSEE HAD CONVERTED STOCK-IN-TRADE INTO INVESTMENT AND SOLD THE SHARES. IT HELD THAT SECTION DEALS WITH THE SITUATION WH ERE SHARES HELD AS INVESTMENT HAVE BEEN CONVERTED INTO STOCK-IN-TRADE AND THERE IS NO SPECIFIC SECTION IN THE ACT TO DEAL WITH THIS SITUATION . HENCE THE INCOME FROM SALE OF SHARES SHOULD BE TREATED AS INCOME FROM CAP ITAL GAINS. RECENTLY, THE BOMBAY HIGH COURT IN ORDER DATED 28.0 1.2013, APPEAL NO.1007 OF 2011, IN THE CASE OF CIT VS YATISH TRADING CO. PVT. LTD., THE HON'BLE BOMBAY HIGH COURT ON THE FOLLOWING QUESTION OF LAW HAS HELD AS UNDER: 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN TREATING THE DIFFERENT BETWEEN THE PURCHASE PRICE OF SHARES AND THE MARKET VALUE OF SHARES, AS ON DA TE OF CONVERSION OF SHARES FROM STOCK-IN-TRADE TO INVESTMENTS, AS 'BUSINESS I NCOME' AND DIFFERENCE BETWEEN SALE PRICE OF SHARE AND MARKET VAL UE OF SHARES, AS ON DATE OF CONVERSION AS 'CAPITAL GAINS'? 'THE TRIBUNAL HELD THAT IT IS NOT IN DISPUTE THAT THE CONVERSION OF ITS STOCK IN TRADE INTO INVESTMENT WAS ACCEPTED BY THE DEP ARTMENT IN ASSESSMENT YEARS 2003-04 AND 2005-06. IT IS ALSO NOT IN DI SPUTE THAT THE SHARES WHICH WERE SOLD AND GAINS FROM SUCH SALES WERE OFFE RED UNDER THE HEAD CAPITAL GAINS FROM THE DATE OF CONVERSION FR OM STOCK IN TRADE INTO INVESTMENTS AND PRIOR THERETO AS BUSINESS PROFITS. FU RTHER IN ITS BOOKS OF ACCOUNTS THE RESPONDENT-ASSESSEE SHOWED THE SHARES O N WHICH TAX IS LEVIED UNDER THE HEAD CAPITAL GAIN AS INVESTMEN TS. FURTHER THE FACT THAT THE ASSESSEE WAS TRADING IN THE SHARES WOULD NOT ESTOP THE ASSESSEE FROM DEALING IN SHARES AS INVESTMENT AND OFFER THE GAIN FOR TAX UNDER THE HEAD CAPITAL GAINS. THUS, IT IS OPEN TO THE TRADER TO HOLD SHARES AS STOCK IN TRADE AS WELL AS INVESTMENTS. ONCE THE FINDING OF FACT IS RECORDED THAT THE SHARES SOLD WERE HELD BY RESPONDENT-ASSESSEE AS INVESTMENTS, T HE GAINS ARISING OUT OF THE SALE OF INVESTMENT WERE TO BE ASSESSED UNDER THE HEAD CAPITAL GAINS AND NOT UNDER THE HEAD BUSINESS AND NOT UNDER THE HEAD BUSINESS PROFITS.' 14 ITA NO.1734/PN/2013 IN VIEW OF THE ABOVE FACTS AND THE RATIO OF THE DECI SION THE LONG TERM CAPITAL GAINS OF RS. 2,03,64,152/- AND SHORT-TERM CAPI TAL GAIN OF RS. 80,84,449/- SHOWN BY THE APPELLANT ON CONVERSION OF ST OCK-IN-TRADE TO INVESTMENT BE VALID AS AGAINST THE SAME TREATED AS BUSIN ESS INCOME BY THE A.O. IN THE RESULT THE SAME IS TREATED AS INCOME TO BE ASSESSED UNDER THE HEAD CAPITAL GAINS AND NOT UNDER THE HEAD 3.9 THE APPELLANT ALSO EARNED SHORT-TERM CAPITAL GAIN OF RS. 13,31,52,260/- ON SALE OF SHARES PURCHASED AND SOLD DURI NG THE YEAR WHICH WAS ALSO TREATED BY THE A.O. AS BUSINESS INCOME AS AGAINST CAPITAL GAINS REPORTED BY THE APPELLANT. THE AO DURING THE A SSESSMENT PROCEEDINGS HAD ALSO SOUGHT THE REASONS AND BASIS OF CLA IMING PROFIT ON SALE OF SHARES AS SHORT-TERM / LONG-TERM CAPITAL GAIN A S AGAINST BUSINESS PROFITS SHOWN IN EARLIER YEAR. THE APPELLANT IN THE E XPLANATION FURNISHED BEFORE THE AO HAD SUBMITTED THAT AS PER THE RESOLUTION PASSED BY THE BOARD OF DIRECTORS OF THE COMPANY, IN THE MEETING ON 21-6-2007 A NEW INVESTMENT POLICY WAS ADOPTED AND APPROVED W.E.F. 1- 4-2007. IT WAS EXPLAINED THAT FROM F.Y. 2007-08 THE APPELLANT COMP ANY STARTED TO HAVE INVESTIBLE SURPLUS FUND WHICH WERE TO BE UTILIZED FOR MAKING INVESTMENTS AND WITH A DISTINCTION BETWEEN THE TRADING ACTIVITY AND THE INVESTMENTS. IT WAS THUS STATED BY THE APPELLANT THAT TH E SURPLUS FUNDS WERE INVESTED INTO SHARES AND SECURITIES AND THAT THE C BDT CIRCULAR NO.7 OF 2007 ALSO STATED THAT AN ASSESSEE CAN HAVE BOTH PORTFO LIO ONE OF TRADING AND OTHER OF INVESTMENT. THE APPELLANT GAVE THE FOLLOWING REASONS FOR ITS CLAIM MADE: I) THE INVESTMENT POLICY CLEARLY LAID DOWN THE INT ENTION AND MOTIVE OF PURCHASES MADE WITH TRADING/INVESTMENT MOTIVES AND T HE SAME HAVING BEEN RECORDED IN THE BOOKS OF ACCOUNT. II) SHARES WERE HELD AS INVESTMENT AND ACCOUNTED FOR AS INVESTMENT IN THE BOOKS OF ACCOUNTS. III) DELIVERY OF ALL THE EQUITY SHARES WERE TAKEN IN THE DEMAT ACCOUNT. IV) THE COMPANY HAD BOUGHT SHARES ONLY ON 30 DIFFER ENT DATES OUT OF 250 TRADING DAYS AND NO SHARES PURCHASED ON BALANCE 220 DAYS. V) THE COMPANY SOLD THE SHARES ONLY ON 23 DIFFERENT D ATES OUT OF 250 TRADING DAYS. VI) THE APPELLANT DEALT ONLY WITH 9 SCRIPTS AND GENER ATED STCG OF 13.31 CRORES OUT OF WHICH 60% OF THE GAIN WAS ATTRIBU TABLE TO ONE SCRIPT OF IFCI, HELD FOR MORE THAN 200 DAYS. THE BREAKUP OF SHORT-TERM CAPITAL GAIN IS AS UNDER: 1. MORE THAN 200 DAYS - 9,36,84,503/- 2. 100 TO 200 DAYS - 82,00,061/- 3. 30 10 DAYS - 5,57,52,268/- 4. LESS THAN 30 DAYS - NIL ----------------- 14,12,36,408/- VII) FREQUENCY OF THE TRANSACTIONS IS VERY LESS AS COMPA RED TO THE AMOUNT OF INVESTMENT MADE. 15 ITA NO.1734/PN/2013 VIII) THE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NO LOANS WERE TAKEN FOR INVESTMENTS. IX) ON THE BASIS OF THE INVESTMENT POLICY PROFIT OF 1.14 CRORES ON SALE OF SHARES HELD FOR LESS THAN 30 DAYS WERE SUO MOTO OFFER ED AS BUSINESS INCOME. X) THE LONG TERM INVESTMENT WERE VALUED AT COST AND C URRENT INVESTMENTS WERE VALUED AT LOWER OF COST OR MARKET VAL UE DESPITE THE FACT THAT THE ASSESSEE WOULD HAVE BENEFITED BY CONSIDERI NG THE INVESTMENT AS STOCK IN TRADE AND VALUED THE STOCK AT CO ST OR MARKET VALUE WHICHEVER WAS LESS AND BENEFIT TO THE EXTENT OF RS. 54. 08 LACS WAS NOT AVAILED. XI) THE INVESTMENT POLICY WAS STRICTLY FOLLOWED IN TH E YEAR AND SUBSEQUENT YEARS. IT WAS ALSO EXPLAINED BY THE APPELLANT BEFORE THE AO THAT THE GAIN ON SHARES HELD FOR MORE THAN 30 DAYS WAS ASSESSABLE AS CAPITAL GAINS AS PER THE INVESTMENT POLICY AND THAT THE SAID PRINCIPLES OF PERIOD OF HOLDING OF SHARES WAS SUPPORTED BY THE AHMEDABAD TRIBUNAL DECISION IN THE CASE OF SUGAMCHAND L. SHAH VS ACIT (2010) 37 ITR 345 (AHD )(TRIB). THE APPELLANT ALSO CITED THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS GOPAL PUROHIT (2009) 34 DTR 32 (BOM) FOR THE PROPOSITION THAT IT WAS OPEN TO AN ASSESSEE TO MAINTAIN SEPARATE PORTFOLIO O NE RELATING TO INVESTMENT IN SHARES AND ANOTHER RELATING TO BUSINESS AC TIVITIES INVOLVING DEALING IN SHARES AND SECURITIES. THE HON'BLE COURT HELD THAT THE DELIVERY BASED TRANSACTIONS ARE TO BE TREATED AS IN VESTMENT TRANSACTIONS AND THE PROFIT RECEIVED THEREFROM IS TO B E TREATED AS SNORT TERM OR LONG TERM CAPITAL GAIN DEPENDING UPON THE P ERIOD OF HOLDING OF SHARES. THE HON'BLE COURT ALSO HELD THAT THE ENTRIES IN THE BOOKS OF ACCOUNT ALONE ARE NOT CONCLUSIVE IN DETERMINING THE NATURE OF INCOME BUT IT DOES HAVE A BEARING. 3.10 THE AO, HOWEVER, AFTER EXAMINING AND ANALYZING TH E TRANSACTION IN SHARES BY THE ASSESSEE FOR THE CURRENT YEAR AND TWO PRECEDING YEARS I.E. F.Y. 2005-06 AND F.Y. 2006-07 CONCLUDED IN PAR A 7.4 THAT THE ASSESSEE HAD UNDERTAKEN MORE TRANSACTIONS BOTH FOR THE PU RCHASE AND SALE OF SHARES COMPARED TO EARLIER YEARS OF GREATER VAL UE AND' HIGHER PROFITS AND THAT THE AVERAGE PERIOD OF HOLDINGS OF SHA RES WAS MUCH LESSER IN THE CURRENT YEAR COMPARED TO EARLIER YEARS W HEN THE PROFIT WAS SHOWN AS BUSINESS INCOME AND, THEREFORE, THERE WAS NO JUST IFICATION FOR CLAIMING THE INCOME UNDER CAPITAL GAINS DURING THE C URRENT YEAR WHEN THE NATURE, QUANTUM AND PATTERN OF TRANSACTIONS REMAI NED THE SAME AS EARLIER YEARS EXCEPT FOR THE PLEA TAKEN FOR THE CHAN GE BEING THE NEW INVESTMENT POLICY APPROVED BY THE BOARD OF THE COMPA NY DURING THE YEAR. 3.11 THE APPELLANT DURING THE APPELLATE PROCEEDINGS HAS CONTENDED THAT THE APPELLANT COMPANY IS REGISTERED AS A BROKER I N PUNE STOCK EXCHANGE, HOWEVER, AFTER THE PUNE STOCK EXCHANGE BEC OMING DEFUNCT, LIMITATIONS TO CONTINUE THE BUSINESS AS A BROKER AROSE A ND, THEREFORE, THE BUSINESS AS A BROKER WAS REDUCED FROM F.Y. 2005-06. IT HAS BEEN ALSO CONTENDED BY THE APPELLANT THAT TILL A.Y. 2005-06 T HE INCOME ARISING FROM SALE OF SHARES WERE OFFERED AS BUSINESS INCOME DESPITE THE FACT THAT SOME WERE CAPABLE OF EXEMPTION U/S 10(35)/10(38) FOR LONG TERM CAPITAL GAIN. IT HAS BEEN EXPLAINED THAT BECAUSE THER E WAS NO CLARITY REGARDING MAINTENANCE OF TWO PORTFOLIOS I.E. AS INVEST MENT AND AS A 16 ITA NO.1734/PN/2013 TRADER PARTICULARLY WITH RESPECT TO SHARE BROKERS THE SAME WAS OFFERED AS BUSINESS INCOME. THE APPELLANT HAS ALSO DRAWN ATTENTIO N TOWARDS THE CLARIFICATION MADE BY THE CBDT VIDE CIRCULAR NO.4 O F 2007 WHEREBY IT WAS STATED THAT AN ASSESSEE CAN HAVE TWO PORTFOLIOS, THE APPELLANT DECIDED TO IMPLEMENT THE INVESTMENT POLICY AND TO HO LD THE SHARES FOR INVESTMENT AND THAT WAS THE REASON FOR SHIFTING FROM TR ADING BUSINESS TO INVESTMENT. IT HAS ALSO BEEN CONTENDED THAT THE PRINCI PLE OF RES JUDICATA SHOULD NOT OPERATE IN THE MATTER AND THE PARTICULAR PRACTICE OF OFFERING THE INCOME UNDER 'INCOME FROM BUSINESS' TILL F.Y. 2006 -07 CANNOT PRECLUDE THE APPELLANT FROM HOLDING THE SHARES AS INVE STMENT AND CONSIDER THE INCOME FROM CAPITAL GAIN. THE AO, HAS AL SO REFERRED TO THE CBDT CIRCULAR NO. 4 OF 2007 DATED 15-6-2007 WHICH C LARIFIED THE DISTINCTION BETWEEN SHARES HELD AS STOCK-IN-TRADE AND SHA RES HELD AS INVESTMENT AND WHICH ALSO OUTLINED THE TEST FOR SUCH DI STINCTION AND THE EARLIER INSTRUCTION NO. 1827 DATED 31-8-89 LAID DOWN THE TESTS WHICH WERE APPLIED TO THE CASE OF APPELLANT TO EXAMINE WHE THER THE HOLDINGS AND TRANSACTION IN SHARE WERE IN THE NATURE OF STOCK I N TRADE OR INVESTMENTS. THE OBSERVATIONS OF THE A.O. HAS BEEN DISCUSSE D IN PARA 8 OF THE ORDER. THUS THE AO CONCLUDED ON THE BASIS OF TH E TESTS THAT THE SHARES DEALT IN BY THE APPELLANT WERE IN THE NATURE O F STOCK IN TRADE AND NOT INVESTMENT AS CLAIMED BY THE ASSESSEE, AND THE INCOME WERE THUS CHARGEABLE UNDER THE HEAD 'INCOME FROM BUSINESS' AND N OT CAPITAL GAIN. 3.12 THE APPELLANT DURING THE APPELLATE PROCEEDINGS IN ITS SUBMISSION HAS CONTENDED THAT THE APPELLANT COMPANY HAD TAKEN T HE DELIVERY OF ALL THE EQUITY SHARES IN THE COMPANY'S DEMAT ACCOUNT AND T HE AMOUNT OF F&O WAS VERY NEGLIGIBLE. IT HAS ALSO BEEN STATED THAT THE COMPANY HAD BOUGHT ALL SHARES ONLY ON 30 DIFFERENT DATES AND SOLD THE SHARES ONLY ON 23 DIFFERENT DATES OUT OF AROUND 250 TRADING DAYS. MOREOVER, THE APPELLANT HAD DEALT WITH ONLY 9 SCRIPTS WHICH GENERATED SHORT-TERM CAPITAL GAIN OF 13.31 CRORES AND ONE OF THE SCRIPTS OF IFCI GENERATED MORE THAN 60% OF SHORT-TERM CAPITAL GAIN WAS HELD FOR A PERIOD OF MORE THAN 200 DAYS . THE BREAK-UP OF THE SHORT-TERM CAPITAL GAIN WAS AS U NDER: 1. MORE THAN 200 DAYS RS. 9,36,84,503/- 2. 100 DAYS TO 200 DAYS RS. 82,00,0611- 3. 30 DAYS TO 100 DAYS RS. 5,57,52,268/- 4. LESS THAN 30 DAYS NIL IT WAS THUS CONTENDED THAT THE FREQUENCY OF THE TRANSA CTIONS WAS VERY LESS COMPARED TO THE AMOUNT OF INVESTMENT MADE. THE AP PELLANT HAS FURTHER CONTENDED THAT THE SHARES WERE PURCHASED WITH THE INTENTION OF INVESTMENT AND HAD BEEN REFLECTED IN THE BOOKS OF ACC OUNTS AS INVESTMENT AND ALL THE SHARES ARE REFLECTED IN THE DEM AT ACCOUNT OF THE COMPANY EXCEPT THE SHARES REPORTED UNDER F & O. IT HAS ALSO BEEN STATED THAT THE RECEIPT OF DIVIDEND IN RESPECT OF LIST ED SHARES IS ALWAYS SMALL IN COMPARISON TO ITS MARKET VALUE OF SHARES. REGAR DING THE SCALE OF ACTIVITY BEING HELD TO BE SUBSTANTIAL BY THE AO IN AS MUCH AS THE SCALE VALUE OF SHARES OF RS. 68 CRORES AS AGAINST SHARE CAPITA L OF RS. 18.37 CRORES, THE APPELLANT STATES THAT THE COMPANY HAD GENE RATED PROFITS IN THE PAST TWO YEARS, HENCE THE TURNOVER SHOULD NOT ONLY BE RELATED TO SHARE CAPITAL BUT THE ACCUMULATED PROFIT ALSO NEED T O BE CONSIDERED WHILE DETERMINING THE TURNOVER AND IN ANY CASE THE N UMBER OF SCRIPTS DEALT IS VERY FEW. 17 ITA NO.1734/PN/2013 3.13 THE AO HAS HOWEVER, ACCEPTED TO THE FACT THAT NO BOR ROWED FUNDS WERE UTILIZED FOR THE PURCHASE OF SHARES BUT HAS NOTED THE SAME HAD BEEN THE CASE IN THE PRECEDING 2 YEARS AS WELL, WHEN T HE APPELLANT HAD SHOWN THE PURCHASE AS STOCK IN TRADE AND THE GAINS ON SA LE AS BUSINESS INCOME. THE APPELLANT ON THE ABOVE OBSERVATION OF TH E AO HAS STATED THAT IN THE CURRENT ASSESSMENT YEAR I.E. AY. 2008-09 AL L THE SHARE ACTIVITY WAS TREATED AS BUSINESS ACTIVITY ON THE TRAIL OF THE EA RLIER YEARS BY THE A 0., HOWEVER, IN A Y. 2009-10 THE AO DISREGARDING THE AFORESAID VIEW HAS CONSIDERED SOME OF THE SHARES AS INVESTMENT THOUGH THE SAM E WERE TREATED AS STOCK-IN-TRADE IN AY. 2008-09. A COPY OF T HE ASSESSMENT ORDER OF AY. 2009-10 HAS ALSO BEEN ENCLOSED WHICH CONFIRMS T HE ABOVE FACT. THE APPELLANT DREW ATTENTION WITH RESPECT TO MEMORAN DUM AND ARTICLES OF ASSOCIATION AND HAS OBSERVED THAT THE MAIN OBJECT OF THE MOA IS TO ACT AS SHARE BROKER AND TO INVEST IN SHARES, STOCK AND DEBEN TURES AND HAS STATED THAT THE OBJECT CLAIM AS OBSERVED BY THE AO SUPP ORTED THE VIEW THAT INVESTMENT IN SHARES IS ALSO THE OBJECT OF THE APPELLANT COMPANY. THE AO REGARDING THE HOLDING PERIOD FOR THE SECURITI ES BOUGHT AND SOLD HAS HELD THAT THE AVERAGE HOLDING PERIOD OF SECURITIE S SOLD DURING THE YEAR WAS 171 DAYS WHICH WAS MUCH LESSER IN COMPARISON TO 393 AND 316 DAYS IN THE PRECEDING 2 YEARS WHERE IN PROFIT ON SALE OF SHARES WAS SHOWN AS BUSINESS INCOME BY THE ASSESSEE. THE APPELLANT HAS C ONTENDED THAT THOUGH IN THE ASSESSMENT YEAR 2008-09 THE SHARE AC TIVITY WAS TREATED AS BUSINESS ACTIVITY CONSIDERING THE TRAIL OF TH E EARLIER YEARS, IN A Y. 2009-10 THE AO HAS CONSIDERED SOMA OF THE SHARES AS I NVESTMENTS. THOUGH THE SAME WERE TREATED AS STOCK IN TRADE IN A.Y. 2008-09, IN RESPECT OF THOSE SHARES WHICH WERE NOT SOLD AS INVESTMENT IRRESPECTIVE TO THE PERIOD OF HOLDING. THE AO HAD ALSO OBSERVED RE GARDING THE SALES TO PURCHASE AND HOLDING THAT WERE 54 TRANSACTIONS OF PURC HASES AND 83 TRANSACTIONS OF SALES ON DIFFERENT DATES AND DURING THE YEAR THE ASSESSEE HAD OPENING STOCK OF 8.58 CRAMS AND THE PURCHASES WERE OF RS. 56.81 CRORES AND THE SALES EFFECTED WAS FOR THE VALUE OF 68.1 0 CRORES LEAVING CLOSING STOCK OF RS. 14.01 CRORES AND, THEREFORE, THE SU BSTANTIAL PART OF THE SALES WERE EFFECTED OUT OF CURRENT PURCHASES AND CL OSING STOCK IS ONLY 20% OF THE SALES. THE APPELLANT IN ITS SUBMISSION HAS STAT ED THAT THE NUMBER OF TRANSACTION CONSIDERED BY THE A.O. IS THE NU MBER OF CONTRACT NOTES EXECUTED BY THE BROKER, HOWEVER, THERE ARE THE SE CONTRACT NOTES FOR THE SALE OF SHARES ON THE SAME DAY WHICH SHOULD BE C ONSIDERED AS ONE AND THE CAPITAL GAIN STATEMENT OF SHORT-TERM CAPITAL GAIN AND LONG-TERM CAPITAL GAIN REVEALS THAT THE ORDER OF SALE IS IN BULK BUT HAS BEEN EXECUTED IN PIECEMEAL MANNER ON THE SAME DAY AND, TH EREFORE, CONTENDED THAT ON THE FACE OF IT APPEARS THAT THERE ARE NUMBER OF TRANSACTIONS WHICH IN FACT IS NOT THE CASE. THE APPELLA NT HAS ALSO SUBMITTED THAT THE SALE OF SHARES WAS ONLY ON 23 DIFFER ENT DATES OUT OF THE 250 TRADING DAYS AND THE PROFIT GENERATED MORE T HAN 60% OF THE SHORT-TERM CAPITAL GAIN OUT OF THE 9 SCRIPTS DEALT BY ONE SCRIPT OF IFCL AND WHICH WAS HELD FOR MORE THAN 200 DAYS. THE APPELLANT HAS ALSO EXPLAINED THAT THE PORTFOLIOS MAINTAINED WERE AS PER THE INVESTMENT POLICY OF THE COMPANY AND THE INTENTIONS IS TO HOLD SH ARES FOR LONG TERM PERIOD WHICH ALSO GETS EVIDENT FROM THE STATEMENT OF L ONG-TERM CAPITAL GAIN THAT THE SHARES HELD ARE FOR ALMOST 2 YEARS. THE A PPELLANT HAS ALSO CONTENDED THAT THE REASON FOR SALE OF SHARES IN SHORT PE RIOD BETWEEN DECEMBER 2007 TO JANUARY 2008 IS BECAUSE THE MARKET W AS AT ITS PEAK IN THESE MONTHS AND THE SAME COLLAPSED FROM 22 ND JANUARY ONWARDS, WHICH IS ALSO EVIDENT FROM THE HISTORICAL DATA. THE APPELLAN T HAS ALSO SUBMITTED THAT THE SHARES WERE PURCHASED WITH THE INTENTION OF I NVESTMENT AND THE SAME HAVE BEEN REFLECTED IN THE BOOKS OF ACCOUNT AS IN VESTMENT AND REFLECTED IN THE DEMAT ACCOUNT EXCEPT THE F & 0 IT IS WELL SETTLED THAT IN 18 ITA NO.1734/PN/2013 ORDER TO DECIDE AS TO WHETHER PURCHASE AND SALE OF SHAR ES WOULD FALL IN THE CATEGORY OF TRADING ACTIVITY OR INVESTMENT DEPEN DS UPON VARIOUS FACTORS AND COURTS HAVE FROM TIME TO TIME LAID DOWN V ARIOUS PRINCIPLES AND IN TUNE WITH THE COURTS' RULINGS, THE CBDT APPEAR TO HAVE ISSUED A CIRCULAR. NO SINGLE CRITERIA LAID DOWN BY THE COURTS OR IN THE CIRCULAR IS DECISIVE AND THEY HAVE TO BE CONSIDERED CUMULATIVELY TO BRING OUT THE REAL INTENTION OF THE ASSESSEE BEFORE ENTERING INTO SUC H TRANSACTION. IN THE PRESENT CASE, HOWEVER, THE APPELLANT HAS TREATED T HE SHARES AS INVESTMENT DURING THE YEAR WITH THE PRIMARY OBJECT O F WEALTH MAXIMIZATION AND TREATED THE SAME AS INVESTMENT IN ITS BOOKS OF ACCOUNT. ADMITTEDLY, APPELLANT HAS NOT BORROWED FUND S FOR THE PURPOSE OF MAKING INVESTMENTS IN SHARES AND THE CASE OF THE APPE LLANT IS THAT THE SHARES ONCE SOLD WERE NOT PURCHASED WAS 30 DAYS OR MORE A ND THUS THE PLEA OF THE APPELLANT THAT THE PRIMARY INTENTION OF PURCHASE OF SHARES WAS WITH THE PURPOSE OF LONG TERM APPRECIATION CANNOT BE RULED OUT. AT ANY RATE, AO HAS NOT CONTRADICTED THE PLEA OF ASSESSEE B Y HIGHLIGHTING ANY PARTICULAR TRANSACTION WHEREIN ANY OTHER INTENTI ON COULD BE DISCERNED FROM. 3.14 THE DEFINITION OF INVESTMENTS IN ACCORDANCE WITH THE ACCOUNTING STANDARD-13 IS AS UNDER: 'INVESTMENTS ARE ASSETS HELD BY AN ENTERPRISE FOR E ARNING INCOME BY WAY OF DIVIDENDS, INTEREST, AND RENTALS, FOR CAPITAL APPRECIATION, OR FOR OTHER BENEFITS TO THE INVESTING ENTERPRISE. ASSETS HELD A S STOCK IN TRADE ARE NOT 'INVESTMENTS'. IT HAS BEEN SUBMITTED BY THE APPELLANT THAT THE INVEST MENTS IN SHARES WERE NOT ONLY FOR DIVIDEND, BUT ALSO FOR CAPITAL APP RECIATION AND OTHER BENEFITS. WHEN A SUBSTANTIAL CAPITAL APPRECIATION HAS TAKEN PLACE IN A HOLDING OF SHARES BROUGHT FORWARD FROM THE EARLIER YE AR, OR PURCHASED AT THE BEGINNING OF THE YEAR, WITHIN A SPAN OF, SAY, 3 TO 4 MONTHS FROM THE START OF THE YEAR, IT MAY BE PRUDENT TO SELL SUCH INVE STMENTS FOR BOOKING THE CAPITAL APPRECIATION. THERE MAY BE CASES WHEN CIR CUMSTANCES WARRANT PURCHASE OF THE SAME SCRIP DURING THE LATER PA RT OF THE YEAR, WHEN, FOR SOME EXTERNAL OR INTERNAL FACTORS PRICES HAV E GONE DOWN TO MAKE THE INVESTMENT ATTRACTIVE ONCE AGAIN. THERE IS FORCE IN THE ARGUMENT OF THE APPELLANT, SINCE INVESTMENT IN THE ST OCK MARKET WAS OF COMPLEX NATURE, AND THE SHARE PRICES MAY BE SUBJECT TO WILD FLUCTUATIONS BASED ON DIRECT OR INDIRECT REASONS, AND EVEN REMOTE A ND INTERNATIONAL EVENTS OR HAPPENINGS. FOR EXAMPLE, A TERRORIST ATTACK LIKE THAT OF 9/11, THOUGH IN THE USA, IMMEDIATELY IMPACTED THE STOCK PR ICES IN INDIA ALSO; WHICH CRASHED IRRESPECTIVE OF THE LOCAL FUNDAMENTALS. DECISION TO EXIT AN INVESTMENT AND TO RE-ENTER MAY BE WARRANTED BY SUCH E VENTS OR CIRCUMSTANCES. IT IS NOBODY'S CASE THAT IN CASE OF INVEST MENTS IN SHARES, CAPITAL APPRECIATION SHOULD NOT BE TAKEN BENEFIT OF, SINCE IT CANNOT BE A CASE OF MAKING ONLY PAPER GAINS. WHEN THE LEGISLATURE HAD PRO VIDED FOR THE CONCEPT OF SHORT TERM CAPITAL ASSETS AND GAIN IN CA SE OF SHARES AND MUTUAL FUNDS, FOR THE PERIOD OF HOLDING LESS THAN ONE YEAR, IT IS QUITE LOGICAL TO TREAT THE GAIN WHEN THE HOLDING PERIOD O F SHARES WAS 3 TO 4 MONTHS AS SHORT TERM CAPITAL GAIN. 3.15 SO FAR AS VOLUME AND FREQUENCY OF TRANSACTIONS ARE CON CERNED, IT HAS BEEN EXPLAINED THAT ACTUALLY THE NUMBER OF SCRIP TRADED WAS NOT VERY LARGE BEING ONLY 9 SCRIPS, ENGAGED DURING THE YE AR, WHICH WAS NOT MUCH CONSIDERING THAT ABOUT 2000 COMPANIES' SHARES WERE ACTIVELY TRADED IN THE STOCK EXCHANGES. IT WAS ALSO CLARIFIED TH AT THE FREQUENCIES 19 ITA NO.1734/PN/2013 OF TRANSACTIONS WAS NOT MUCH. SOMETIMES SEVERAL TRANSACTI ONS MAY HAVE TO BE MADE IN THE SAME SCRIP, WHICH INCREASES THE FREQU ENCY. IT WAS EMPHASIZED THAT IN THE TRADING ACTIVITY EVEN THOUGH THE SHARES INVOLVED WERE PROPORTIONATELY MUCH LESS AS COMPARED TO THE TURN OVER, SINCE THE INTENTION WAS TO CARRYON BUSINESS ACTIVITY, THE SAME WAS SHOWN UNDER THE HEAD 'BUSINESS INCOME'. THE APPELLANT HAS ALSO EMPHA SIZED THAT IT WAS PRUDENT INVESTMENT ACTIVITY TO BUY A TARGET QUANT ITY OF A PARTICULAR SCRIP IN SMALL LOTS FOR AVERAGING PURPOSE; AND IT SHOUL D NOT BE TREATED AS FREQUENT AND REPETITIVE TRANSACTIONS. THE APPELLANT FINDS SUPPORT IN THE DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF JAN AK S. RANGWALA, 11 SOT 627 IN WHICH IT WAS OBSERVED THAT MERE VOLUME AND MAGNITUDE OF TRANSACTION WILL NOT ALTER THE NATURE OF TRANSACTION IF THE INTENTION WAS TO HOLD THE SHARES AS INVESTMENT AND NOT AS STOCK IN TRADE. 3.16 IN THIS CONNECTION, IT IS ONCE AGAIN PERTINENT TO M ENTION THE CBDT CIRCULAR NO.4/2007, IN WHICH IT WAS EMPHASISED THAT NO SINGLE PRINCIPLE WAS DECISIVE AND THE TOTAL EFFECT OF ALL THE PRINCIPL ES SHOULD BE CONSIDERED TO DETERMINE WHETHER IN A GIVEN CASE THE P ORTFOLIO OF SHARES WAS INVESTMENT OR STOCK IN TRADE. THE APPELLANT HAS ALSO GIVEN A LIST OF RECENT TRIBUNAL/HIGH COURT DECISIONS IN ITS SUBMISSIONS, W HICH EMPHASIZE THAT NO SINGLE PRINCIPLE WAS DETERMINATIVE A ND DEALT WITH THE ISSUES OF VOLUME, FREQUENCY ETC. IN CASE OF TRANSACTION S IN SHARES. OUT OF THESE, THE RELEVANT PARAS FROM THE DECISION OF THE ITA T, MUMBAI E-BENCH IN THE CASE OF SMK SHARES AND STOCK BROKING PVT. LTD. IN ITA NO.799/MUM/2009 DTD.24.11.2010 / (2010) 8 TAXMANN.C OM 120 (MUM) ARE REPRODUCED BELOW: 'CBDT, VIDE CIRCULAR NO.4/2007 DTD.15 TH JUNE, 2007, HAS OBSERVED THAT WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMEN T OR FORUM PART OF THE STOCK IN TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS HIS SHARES AND HE SHOULD, IN NOR MAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM HIS RECORDS AS TO WHETHER HE IS MAINTAINING ANY STOCK IN TRADE OR HOLDING THE SHARE S BY WAY OF INVESTMENT. IN THE PRESENT CASE, IT IS NOT DISPUTED THAT THE AS SESSEE HAD MAINTAINED THIS DISTINCTION IN ITS RECORDS. IT IS TRUE THAT VOLUME OF TRANSACTION IS AN IMPORTANT INDICATOR OF THE INTENTION OF THE ASSESSE E WHETHER TO DEAL IN SHARES AS TRADING ASSET OR TO HOLD THE SHARES AS INVESTOR BUT CERTAINLY NOT THE SOLE CRITERION. IN OUR CONSIDERED OPINION, THE ASSESSING OFFICER'S CONCLUSION THAT SINCE SALE AND PURCHASE HAD BEEN DE TERMINED BY THE VOLATILITY IN THE MARKET, THE SAME IS AGAINST THE B ASIC FEATURE OF INVESTOR, IS NOT BASED ON SOUND RATIONAL REASONING. A PRUDENT IN VESTOR ALWAYS KEEPS A WATCH ON THE MARKET TRENDS AND, THEREFORE, IS NOT B ARRED UNDER LAW FROM LIQUIDATING HIS INVESTMENTS IN SHARES. THE LAW ITSE LF HAS RECOGNIZED THIS FACT BY TAXING THESE TRANSACTIONS UNDER THE HEAD 'S HORT TERM CAPITAL GAINS'. IF THE ASSESSING OFFICER'S REASONING IS ACC EPTED, THEN IT WOULD BE AGAINST THE LEGISLATIVE INTENT ITSELF. ..... ONE MORE IMPORTANT ASPECT IS THAT THE ASSESSEE HAD NOT BORROWED ANY FUND FOR INVESTME NT IN SHARES AND THIS FACT CANNOT BE LOST SIGHT OFF WHILE DECIDING THE TR UE INTENTION OF THE ASSESSEE . . . . . . . IT IS TRUE THAT PRINCIPLES OF RES JUDICATA DO NOT S TRICTLY APPLY TO INCOME TAX PROCEEDINGS BUT AT THE SAME TIME IT IS A WELL SETTLED LAW THAT THE PRINCIPLES OF CONSISTENCY SHOULD NOT BE IGNORED. THE UNIFORMIT Y IN TREATMENT AND CONSISTENCY UNDER' THE SAME FACTS AND CIRCUMSTANCES IS ONE OF THE FUNDAMENTALS OF THE JUDICIAL PRINCIPLES WHICH CANNO T BE BRUSHED ASIDE WITHOUT PROPER REASON.' [EMPHASIS SUPPLIED] 20 ITA NO.1734/PN/2013 3.17 IN ANOTHER DECISION GIVEN BY THE APPELLANT OF ITAT M UMBAI BENCH IN THE CASE OF ACIT VS. VINOD K. NEVATIA (2011) 49 DTR 16 (MUM)(TRIB), THE MUMBAI TRIBUNAL HAS CITED CBDT CIRCULAR NO.4/200 7 TO OBSERVED THAT THE APPELLANT COULD MAINTAIN TWO DI STINCT PORTFOLIO IN SHARES SIMULTANEOUSLY I.E. AN INVESTMENT PORTFOLIO AND A TRADING PORTFOLIO; AND NO SINGLE FACTOR CAN BE SAID TO BE DEC ISIVE. IT WAS FURTHER HELD THAT 'IF THE ASSESSEE PURCHASES THE SHARES FROM ITS OWN FUNDS, WITH A VIEW TO KEEP THE FUNDS IN EQUITY SHARES TO EARN CONSIDERABL E RETURN ON ACCOUNT OF ENHANCEMENT IN THE VALUE OF SHARE OVER A PERIOD, THEN MERELY BECAUSE THE ASSESSEE LIQUIDATES ITS INVESTMENTS WITHIN SIX MONT HS OR EIGHT MONTHS WOULD NOT LEAD TO THE CONCLUSION THAT THE ASSESSEE HAD NO INTENTION TO KEEP THE FUNDS AS INVESTED IN EQUITY SHARES BUT WAS ACTUALLY INTENDED TO TRADE IN SHARES . MERE INTENTION TO LIQUIDATE THE INVESTMENT AT HIG HER VALUE DOES NOT IMPLY THAT THE INTENTION WAS ONLY TO TRADE IN SECUR ITY . . . . . HOWEVER, IF THE ASSESSEE, ON THE OTHER HAND, BORROWS FUNDS FOR MAKI NG INVESTMENT IN SHARES THEN DEFINITELY IT IS A VERY IMPORTANT INDICATOR OF ITS INTENTION TO TRADE IN SHARES. . . . . [EMPHASIS SUPPLIED] 3.18 IN THE DECISION DATED 15.12.2010, THE MUMBAI BENCH IN THE CASE OF NEHAL V. SHAH, ITA NO.2733/MUM/2009 FOR A.Y .2005-06 HAS HELD THAT SOMETIMES A SINGLE TRANSACTION IS SPLIT BY THE COMPUTERS OF THE STOCK EXCHANGES INTO MANY SMALLER TRANSACTIONS, BUT THAT DOES NOT MEAN THAT ASSESSEE HAS CARRIED SO MANY TRANSACTIONS. IF SOMEONE P LACES AN ORDER FOR PURCHASE OF 1000 SHARES AND THE SAME IS EXECUT ED BY THE ELECTRONIC TRADING SYSTEM OF STOCK EXCHANGE INTO 100 SM ALL TRANSACTIONS, IT DOES NOT MEAN THAT 100 TRANSACTIONS HAVE BEEN ENTER ED INTO. IN THAT CASE, THE ASSESSEE HAD CARRIED OUT ONLY 31 PURCHASE AND 4 5 SALE TRANSACTIONS, WHICH WAS HELD AS NOT A GREAT VOLUME OF T RANSACTIONS. MOREOVER, AT THE END OF THE YEAR, THE ASSESSEE WAS HOLDI NG SHARES WORTH RS.11.56 CRORES WITH A MARKET VALUE OF RS.17.69 CRORES. IT WAS OBSERVED THAT IN CASE THE ASSESSEE WAS A TRADER, HE WOULD HAVE DEF INITELY REALISED THE HUGE PROFIT OF ALMOST RS.6 CRORES IMMEDIATELY AND NOT CARRIED OUT THE STOCK TO THE NEXT YEAR, THE ASSESSEE HAS NOT BORROWED ANY MONEY FOR INVESTMENT IN SHARES AND HE WAS OCCUPIED FULL TIME IN T HE BUSINESS OF GARMENTS. IN ANOTHER DECISION OF MUMBAI TRIBUNAL CIT ED BY THE APPELLANT, IN THE CASE OF BHARAT KUNVERJI KENIA (2010) 130 TTJ (MUMBAI) 86, THE ASSESSEE WAS SHOWING SHARES UNDER THE HEAD INVESTMENTS IN THE BALANCE SHEET SINCE PAST YEARS, NO BOR ROWED FUNDS WERE USED FOR MAKING THE INVESTMENTS IN SHARES, SUCH HOLD ING OF SHARES 'AS INVESTMENT WAS ACCEPTED BY THE ASSESSING OFFICER IN TH E PAST; AND IT WAS HELD THAT MERELY ON THE BASIS OF VOLUME OF TRANSACT IONS IN PURCHASE AND SALE OF SHARES, IT CANNOT BE TREATED AS BUSINESS ACTIV ITY, AS FREQUENCY IN THE TRANSACTIONS WAS NOT PER SE DECISIVE; AND IT WAS H ELD TO BE ASSESSABLE AS CAPITAL GAINS. THESE TRIBUNAL DECISIONS LEND STRENGTH TO THE APPELLANT'S ARGUMENTS. 3.19 COMING TO THE OTHER DECISIONS CITED BY THE APPELLAN T, IT IS NOTICED THAT THERE WERE TWO LANDMARK DECISIONS WHICH FIND PLA CE IN AND FORM THE BASIS OF MOST OF THE OTHER DECISIONS BEING GIVEN BY DIFFERENT TRIBUNAL BENCHES IN RECENT TIMES. THESE ARE THE DECISIONS OF THE LUCKNOW BENCH IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD. VS. ACIT, (2009) 12 0 TTJ 216 (LUCKNOW), AND THE DECISION OF MUMBAI BENCH IN THE CASE OF GOPAL PUROHIT VS. JCIT (2009) 29 SOT 117 (MUM.); WHICH HAS ALSO BEEN AFFIRMED BY THE HON'BLE BOMBAY HIGH COURT IN CIT VS. GOPAL 21 ITA NO.1734/PN/2013 PUROHIT (2010) 228 CTR 582 (BOM.). EVEN THE MUMBAI TRIBUNAL IN THE CASE OF GOPAL PUROHIT HAD OBSERVED THAT IN THE DECISIO N OF SARNATH INFRASTRUCTURE (SUPRA) THE LUCKNOW BENCH HAD ALREADY CONSIDERED ALL THE IMPORTANT JUDICIAL DECISIONS LAYING DOWN THE LEGA L PRINCIPLES TO DETERMINE THE NATURE OF TRANSACTIONS IN SHARES, WHETHER TRADING OR INVESTMENT. ON THE BASIS OF THESE JUDICIAL PRONOUNCEME NTS, THE ITAT IN THE CASE OF SARNATH INFRASTRUCTURE HAD FORMULATED 11- POINT TEST TO FIND OUT WHETHER THE TRANSACTIONS IN SHARES WERE IN THE NATU RE OF TRADE OR FOR INVESTMENT. I FIND THAT HERE THE APPELLANT HAS EXPLAI NED THE NATURE OF ITS TRANSACTIONS CARRIED OUT BY ANSWERING TO THE SIMILAR 11 QUESTIONS FORMULATED BY THE TRIBUNAL IN THE CASE OF SARNATH IN FRASTRUCTURE. THE APPELLANT HAS ALSO APPLIED THESE TESTS AS WELL AS THOSE A RISING OUT OF THE DECISION OF GOPAL PUROHIT VS. JCIT (SUPRA) WHICH WAS U PHELD BY THE HON'BLE JURISDICTIONAL HIGH COURT, IN A COMPREHENSIVE MANNER TO EMPHASIZE HIS. ARGUMENT THAT THE TRANSACTIONS WERE OF T HE NATURE OF INVESTMENT. IN SOME OF THE DECISIONS DISCUSSED ABOVE AS WEL L AS MENTIONED BY THE APPELLANT, IT WAS POINTED OUT THAT THE APPELLANT HAD TO MAINTAIN DISTINCTION IN ITS ACCOUNTS BETWEEN THE SHARES HELD AS INVESTMENT AND AS STOCK IN TRADE. IT WAS ALSO ALLOWABLE IN ACCORDANCE WITH THE CBDT CIRCULAR NO. 4/2007 THAT THE SAME ASSESSEE COULD MAINTAIN BOTH THE PORTFOLIOS SIMULTANEOUSLY, HOWEVER, THERE HAS TO BE MAINTAINED A DISTINCTION BETWEEN THE TWO. IN APPELLA NT'S CASE, THERE WAS A CLEARCUT DISTINCTION. IN THE CASE OF SARNATH INFRAST RUCTURE (SUPRA) ALSO, TWO DISTINCT PORTFOLIOS WERE MAINTAINED AND SEPARATE A CCOUNTS WERE MAINTAINED FOR THESE TWO PORTFOLIOS. IT WAS HELD IN TH AT CASE THAT NO MATERIAL WAS BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT THERE WAS INTERMINGLING OF THE TWO PORTFOLIOS, OR THAT THE SEPA RATE ACCOUNTS WERE ONLY A SMOKESCREEN, OR THAT THE DISTINCTION CREATED WA S ARTIFICIAL AND ARBITRARY; AND, THEREFORE, THE APPELLANT'S TREATMENT OF SALE OF SHARES FROM THE INVESTMENT PORTFOLIO WAS HELD TO BE TAXABLE AS CAP ITAL GAIN. IT IS SEEN THAT IN APPELLANTS' CASE, THIS DISTINCTION HAS BEEN CL EARLY MAINTAINED THROUGH THE INVESTMENT BASED ON THE INVESTMENT POLICY, ANOTHER DECISION OF CIT VS. S. RAMAMIRTHAM, 306 ITR 239 (MAD. ) CITED BY THE APPELLANT ALSO SUPPORT THE VIEW TAKEN BY THE APPELLAN T. 3.20 MOST OF THE DECISIONS DISCUSSED AS WELL AS POINTED OUT B Y THE APPELLANT DO EMPHASIZE THE 'MOTIVE OR INTENTION' FAC TOR OF THE APPELLANT WHILE PURCHASING THE SHARES, TO DETERMINE WHETHER' IT WAS FOR INVESTMENT OR BUSINESS PURPOSE. IT WAS CONTENDED BY THE A SSESSING OFFICER THAT SINCE THE TRANSACTIONS HANDLED SHOWED THE INTENTION TO EARN PROFIT THROUGH BUSINESS ACTIVITY. HOWEVER, THE APPELLA NT HAS CLARIFIED THE SAME THAT ITS INTENTION WAS TO CARRY OUT BUSINESS IN SHARE S AS WELL AS INVESTMENT IN SHARES SEPARATELY; AND THE CBDT CIRCULAR NO.4/2007 DTD.15.6.2007 ALLOWED THAT AN ASSESSEE CAN HAVE TWO POR TFOLIOS COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAP ITAL ASSETS AS WELL AS STOCK IN TRADE. THE RECORDS WERE STATED TO HAVE BEEN MAINTAINED SEPARATELY FOR THE PURPOSE OF BUSINESS ACTIVITY IN SHARE TRADING TRANSACTION WHERE IT IS HELD FOR LESS THAN 30 DAYS. THE APPELLANT HAS ON ITS OWN ON THE BASIS OF INVESTMENT POLICY OFFERED THE PROFIT OF RS. 1.14 CRORES, WHICH INCLUDES RS. 93,45,709/- ON SALE OF SHARE S HELD FOR LESS THAN 30 DAYS SUO MOTO AS BUSINESS INCOME WHICH INDICATES AND STRENGTHENS THE INTENTION OF THE APPELLANT AND TOWARD S FOLLOWING THE POLICY OF INVESTMENT ADOPTED. THE BASIS ON WHICH THE A PPELLANT HAS ADOPTED AND BIFURCATED THE TRANSACTIONS OF SALE AND PU RCHASE RESULTING IN SHORT-TERM CAPITAL GAIN ON THE BASIS OF HOLDING PE RIOD ON THE CRITERIA OF MORE THAN 30 DAYS AND BUSINESS INCOME FOR LESS THAN 30 DAYS BASED ON THE DECISION OF THE AHMEDABAD TRIBUNAL IN THE CASE OF SUGAMCHAND C. 22 ITA NO.1734/PN/2013 SHAH (CITED SUPRA). SIMILAR VIEW HAS ALSO BEEN HELD IN THE CASE OF ACIT VS JAGDISH MASTER (HUF) (2011) 12 TAXMANN.COM 456 (MUM), WHEREIN THE GAIN FROM SALE OF SHARES HELD FOR MORE THAN 30 DAYS WAS TREATED AS CAPITAL GAIN. IT IS PERTINENT TO NOTE THAT THERE IS A CRITERIA PROVIDED U/S 2(42A) WHICH DEFINES THE SHORT-TERM CAPITAL ASSET AS AN ASSET HELD FOR NOT MORE THAN 12 MONTHS IN THE CASE OF SHARES AND SECURI TIES. SECTION 2(428) FURTHER DEFINES THE SHORT-TERM CAPITAL GAIN AS CAPITAL GAIN ARISING FROM THE TRANSFER OF SHORT-TERM CAPITAL ASSET. THUS, THE STATUTE HAS PRESCRIBED CRITERIA FOR TREATING THE CAPITAL ASSET ON THE BASIS OF THE HOLDING PERIOD AND-EVEN THERE IS NO INDICATION OF HO LDING PERIOD OF 30 DAYS FINDS PLACE EITHER IN THE STATUE OR IN THE CIRCUL ARS / INSTRUCTIONS EXCEPT FOR THE AFORESAID JUDICIAL PRONOUNCEMENTS. EV EN OTHERWISE, HOLDING PERIOD IS ONE OF THE VARIOUS CRITERIA AND PRI NCIPLE TO DETERMINE THE NATURE OF TRANSACTION I.E. TRADING OR INVESTMENT, NO SINGLE FORMULA OR PRINCIPLE CAN BE THE DETERMINATIVE FACTOR DECIDING THE NATURE OF TRANSACTION. A BUNDLE OF CRITERIA, FACTS, PRINCIPLES A RE TO BE TAKEN INTO ACCOUNT IN ORDER TO DETERMINE THE NATURE OF TRANSACT IONS SUCH AS THE INTENTION, BORROWAL OF FUNDS, FREQUENCY OF TRANSACTIO NS, ENTRIES RECORDED IN THE BOOKS OF ACCOUNT, WHETHER THE PURCHASE AND SAL E IS FOR REALIZING PROFIT OR FOR RETENTION AND APPLICATION IN ITS VALUE . THUS THERE BEING NO SINGLE FACTOR WHICH CAN BE DECISIVE AND HENCE EACH C ASE HAS TO BE DECIDED BASED ON THE PARTICULAR FACTS. THERE CANNOT B E ANY PRECEDENT IN THE MATTER OF ADJUDICATION ON THE ISSUE OF THE NATURE OF TRANSACTION AND, THEREFORE, THE ISSUE CAN BE DETERMINED ONLY BY TAKING INTO ACCOUNT ALL THE RELEVANT FACTS AND PRINCIPLES AS LAID DOWN BY THE COU RTS AND TRIBUNALS, WHICH COULD ACT AS A GUIDELINE IN THE FACTS OF THE CA SE. THE APPELLANT HAS TREATED THE INVESTMENT TRANSACTION IN THE OAKS OF ACCO UNT WHICH INCLUDES THE SHORT-TERM CAPITAL GAIN AS CLAIMED BY THE APPELLA NT. THE APPELLANT HAS BEEN MAINTAINING SEPARATE PORTFOLIO FOR INVESTMENT AND STOCK-IN- TRADE AND IT IS NOW A SETTLED PROPOSITION OF LAW THAT AN ASSESSEE CAN HAVE TWO SEPARATE PORTFOLIOS; ONE FOR INVESTMENT & OTHER FO R TRADING TRANSACTIONS AND INCOME FROM THESE IS ASSESSABLE UNDER DIFF ERENT HEADS I.E. 'CAPITAL GAIN' AND 'BUSINESS'. IT IS AN ACCEPTED F ACT AND PRACTICE THAT IN ORDER TO REDUCE THE RISK OF LOSS OF CAPITAL OR INCOME, THE INVESTOR MAY TRY TO DIVERSITY THE INVESTMENT, THEREFORE, THERE MAY BE A CASE OF RESHUFFLING PORTFOLIOS BY SELLING OF SOME SCRIPS AND BUYING OF SOME O THER SCRIPS TO MITIGATE THE SCOPE OF LOSS OF CAPITAL OR INCOME. THERE FORE, THE RESHUFFLING IN A SHORT PERIOD IS NOT NECESSARILY TO BE TAKEN AS AN A CTIVITY OF TRADING WHEN THE INTENTION WAS TO REDUCE THE RISK OF LOSS OF CAPITAL. 3.21 NOW, THE ISSUE AT HAND HAS GOT TWO DIFFERENT CONNOTAT IONS: ONE IS RELATED TO THE GENERAL PRINCIPLES FOR DECIDING THE MATTER WHETHER AN ASSESSEE'S TRANSACTIONS IN THE SHARE MARKET WAS TO BE CATEGO RISED UNDER THE HEAD 'INCOME FROM BUSINESS' OR AS 'CAPITAL GAINS'. A PLETHORA OF DECISIONS ARE AVAILABLE IN THE MATTER WHICH HAS BEEN ELABORATELY DISCUSSED ABOVE; ALONG WITH THE GUIDELINES LAID DOWN BY CBDT CIRCULAR NO.4/2007 DTD.15.6.2007, AND THE EARLIER INSTRUCTION NO.1827. THE IMPORTANT POINT ENUNCIATED BY THE CBDT CIRCULAR WAS THAT NO SINGLE PRINCIPLE IS DECISIVE IN DECIDING THE MATTER, AND THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSIDERED TO DETERMINE WHETHER I N A GIVEN CASE, THE SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT OR AS STOCK IN TRADE, HOWEVER, ALL THESE PRINCIPLES AND LEGAL PROPOSITIONS D ISCUSSED ABOVE IN ACCORDANCE WITH THE VARIOUS JUDICIAL PRONOUNCEMENTS A ND THESE CIRCULARS OF THE CBDT ARE MOSTLY RELATED TO THE CASE O F A GENERAL INVESTOR OR TRADER DEALING IN SHARES HIMSELF OR DIRECTLY. AO H AS NOT DIFFERENTIATED THE PURPOSE OF PURCHASE OF SHARES PURCHASED AND HELD FO R MORE THAN ONE YEAR. THE SALE OF A SHARE AFTER HOLDING IT FOR MORE T HAN 30 DAYS AND SALE 23 ITA NO.1734/PN/2013 OF THE SAME SHARE BEFORE 30 DAYS CANNOT CHANGE THE MOT IVE OF PURCHASE FROM INVESTMENT TO TRADING. THE MOTIVE IS DETERMINED AT THE TIME OF PURCHASE AND NOT SALE. THE APPELLANT HAS APPLIED ITS OW N CAPITAL AND RESERVE FUNDS TO ACQUIRE THE SHARES AND HAS EARNED REASON ABLE DIVIDEND ON SUCH INVESTMENT. EVEN THOUGH THE CONSTITUENT SHARES OF SUCH INVESTMENT HAS KEPT CHANGING AND RESULTING IN SOMETIMES LONG TERM AND SOMETIMES SHORT TERM CAPITAL GAIN OR LESS. IT IS WELL ACC EPTED PRINCIPLE THAT AN INVESTOR CAN HAVE SHARE TRANSACTION WITH A MOT IVE OF MAKING INVESTMENT AS WELL AS TRADING IF THAT IS SEPARATELY SHOWN IN THE BOOKS OF ACCOUNT. AS FAR AS VOLUME OF TRANSACTION IS CONCERNED, IT CAN ONLY BE AN INDICATIVE FACTOR BUT IT CANNOT BE A DETERMINATIVE FACTOR IN ANALYZING ANY TRANSACTION. IN CURRENT DAYS, CHANGE IN PORTFOLIO IS R EQUIRED ON THE BASIS OF PERFORMANCES OF THE COMPANIES IN VARIOUS INDUSTRIAL AND OTHER SECTORS AND VOLATILE SHARE MARKET. THE VOLUME OF PURCHASE AND SALE OF SHARE UNDER INVESTMENT IS ONLY INCIDENTAL TO THE NECESSARY CH ANGES REQUIRED IN MAINTAINING A HEALTHY INVESTMENT PORTFOLIO OF SHARE I N A VOLATILE SHARE MARKET. 3.22 IN THE PRESENT CASE THE APPELLANT IS DEALING IN SHARE S BOTH AS A TRADER AND INVESTOR. IT HAS KEPT SEPARATE ACCOUNTS FOR BOTH TYPES OF DEALINGS. THE VALUATION OF THE HOLDING HAS BEEN DONE AT COST FOR THE INVESTMENT PORTFOLIO. FURTHER, THERE IS NO MATERIAL T O SHOW THAT THE SHARES IN THE INVESTMENT PORTFOLIO WERE ALSO TRADED IN THE SAME AND LIKE MANNER AS THOSE WHICH WERE IN STOCK-IN-TRADE PORTFOLIO S. THE INVESTMENT POLICY CLEARLY SHOWS INTENTION OF THE APPEL LANT TO MAINTAIN A SEPARATE INVESTMENT PORTFOLIO. ALL THE SALES OUT OF THI S PORTFOLIO ARE IDENTIFIABLE TO PURCHASE MADE IN THE PORTFOLIO. THE TRANSACTIONS ENTERED INTO WERE NOT CONTINUOUS AND REGULAR BUT SPORADIC AN D FEW AND NO BORROWED FUNDS WERE UTILIZED FOR PURCHASE OF SHARES. A LL THE TRANSACTIONS WERE DELIVERY BASED AND THE INTENTION OF THE APPELLANT WAS TO HOLD SHARES AS INVESTMENT AND CIRCUMSTANCES DID NOT J USTIFY GIVING A DIFFERENT TREATMENT. THUS IN MY CONSIDERED OPINION TH E APPELLANT HAS DISCHARGED ITS PRIMARY ONUS BY SHOWING THAT IT IS MAINTA INING ACCOUNT FOR TWO PORTFOLIOS AND THERE IS NO INTERMINGLING. THE RE IS NO MATERIAL BROUGHT IN BY THE AO. TO SHOW THAT THE SEPARATE ACCOU NTS OF TWO PORTFOLIOS ARE ONLY A SMOKE SCREEN AND THERE IS NO REAL DISTINCTION BETWEEN TWO TYPES OF HOLDINGS, THEREFORE, IN THE ABSEN CE OF ANY MATERIAL TO THE CONTRARY, AND ON APPRECIATION OF CUMULATIVE EFFECT OF SEVERAL FACTORS PRESENT, I FIND THAT THE SURPLUS IS CHARGEABLE TO CAPITAL GAINS ONLY AS SHOWN BY THE APPELLANT AS AGAINST BUSINESS INCOME TREA TED BY THE ASSESSING OFFICER. THEREFORE, CONSIDERING ALL THE FACT ORS AS MENTIONED ABOVE, I DIRECT THE ASSESSING OFFICER TO TREAT THE INCO ME OF RS. 14,12,36,708/- (13,31,52,260 + 80,84,449) AS SHORT TE RM CAPITAL GAIN AND RS. 2,03,64,152/- AS LONG-TERM CAPITAL GAIN. IN V IEW OF THE ABOVE FACTS, THE GROUND OF APPEAL NO. 2 RAISED BY THE APPEL LANT IS LIABLE TO BE ALLOWED. 4. THE CONTENTION OF THE APPELLANT IN GROUND NO. 3 IS T HAT THE ASSESSING OFFICER ERRED IN ASSESSING LOSS ON SALE OF SHARES OF RS.8,30,820/- AS SPECULATIVE BUSINESS LOSS. DURING THE ASSESS MENT PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE HAD ENTERED INTO INTRADAY SALE AND PURCHASE OF SHARES WITHOUT TAKING DELIVERY IN RESPECT OF SHARES WHEREIN LOSS OF RS.8,30,820/- WAS INCURRED AND THE ASSESSEE HAD SHOWN THE SAID LOSS AS REGULAR BUSINESS INCOME RATHER THAN SPECUL ATIVE BUSINESS LOSS. IN RESPONSE TO THE EXPLANATION AND REASONS SOUGHT BY THE AO. FROM THE ASSESSEE IT WAS SUBMITTED THAT THIS WAS A FIRST INSTANCE WHEN SUCH TRANSACTIONS WERE ENTERED INTO AND THAT SUCH STRAY TRA NSACTIONS SHOULD 24 ITA NO.1734/PN/2013 NOT BE TREATED AS SPECULATION BUSINESS. THE AO, HOWEVE R, FOUND THE CONTENTION OF THE APPELLANT TO BE NOT ACCEPTABLE IN VIEW OF SECTION 43(5) OF THE ACT. THE AO HELD THAT IN THE GIVEN TRANSACTI ON, THE PURCHASE AND SALE WAS SETTLED WITHOUT TAKING DELIVERY WHICH WERE SPE CULATIVE TRANSACTIONS GIVING RISE TO SPECULATIVE LOSS WHICH COULD NOT BE SET OFF AGAINST NORMAL BUSINESS PROFITS THOUGH THE TRANSACTIONS MA Y BE INFREQUENT. THUS THE A.O. DISALLOWED THE SPECULATION L OSS OF RS. 8,30,820/-. 4.1 DURING THE APPELLATE PROCEEDINGS, THE APPELLANT HAS R EITERATED THE SAME AS CONTENDED BEFORE THE A.O. DURING THE ASSESSMENT P ROCEEDINGS THAT THE APPELLANT ENTERED INTO ONLY FOUR TRANSACTIO NS WITHOUT TAKING DELIVERY ON WHICH LOSS OF RS.8,30,820/- WAS INCURRED AND WHICH WAS OFFERED TO TAX AS NORMAL BUSINESS INCOME AND THAT THERE IS NO HISTORY OF ENTERING INTO SUCH TRANSACTIONS EXCEPT FOR THE FOUR STR AY TRANSACTIONS ENTERED AS ABOVE DURING THE YEAR AND SUCH TRANSACTIONS SHOULD NOT BE TREATED AS SPECULATION BUSINESS AND THE SAME MAY BE TAXED UNDER THE HEAD CAPITAL GAINS. 4.2 EXPLANATION - 2 TO SECTION 28 OF THE ACT PROVIDES T HAT SPECULATION BUSINESS SHOULD BE DEEMED TO BE DISTINCT AND SEPARATE FRO M ANY OTHER BUSINESS. WHERE DURING THE COURSE OF CARRYING ON OF A N ON-SPECULATION BUSINESS SPECULATIVE TRANSACTIONS ARE ENTERED INTO BY THE ASSESSEE, IT WOULD BE TREATED AS 'SPECULATION BUSINESS'. ACCORDING T O SECTION 43(5) 'SPECULATIVE TRANSACTION' MEANS A TRANSACTION IN WHIC H A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE SCRIPS. IN THE PRESENT CASE IT IS UNDI SPUTED THAT THE FOUR TRANSACTIONS ENTERED INTO BY THE APPELLANT WHICH RESULTED IN A LOSS AMOUNTING TO RS. 8,30,820/- WAS CLEARLY SPECULATIVE TR ANSACTION WHICH HAS ALSO BEEN ADMITTED BY THE APPELLANT. IT IS NOT A C ASE WHERE THE CONTRACT WAS ENTERED INTO TO GUARD AGAINST LOSS IN HOLD ING THE STOCK AND SHARES THROUGH PRICE FLUCTUATIONS AS THE APPELLANT HAS N OT BROUGHT ANY SUCH MATERIAL IN THIS REGARD. THE SETTLEMENT IN THE AF ORESAID TRANSACTION AS IS EVIDENT HAS BEEN SETTLED WITHOUT ACTUAL DELIVERY. PHYSICAL DELIVERY OF SHARES IS A CONDITION FOR AVOIDING THE INFERENCE OF SPECULATION WHICH HAS NOT BEEN PROVED BY THE APPELLANT. MOREOVER, SUCH SPECULATION LOSS CAN BE SET OFF ONLY AGAINST GAINS IN RESPECT OF ANY SPEC ULATION BUSINESS AS PER SECTION 73 OF THE ACT. 4.3 IN VIEW OF THE ABOVE FACTS, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS LIABLE TO BE UPHELD AND THE GROUND OF APP EAL NO. 3 RAISED BY THE APPELLANT IS LIABLE TO BE DISMISSED. 12. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : (1) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN TREATING THE INCOME OF RS.14,12,36,708/- AS SHORT TERM CAPITAL GAINS AND RS.2,03,64,152/- AS LONG TERM CAPITAL GAINS WITHOUT AP PRECIATING THE FACT THAT THE ASSESSEE HAD BEEN CONSISTENTLY OFFERING THE GAIN S ON SALE OF SHARES AS 'INCOME FROM BUSINESS' IN THE PRECEEDING YEARS. 25 ITA NO.1734/PN/2013 (2) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN RELYING ON THE INVESTMENT POLICY APPROVED BY THE BOARD OF CO MPANY EFFECTIVE FROM 01.04.2007 WITHOUT APPRECIATING THE FACT THAT VARIOUS FACTORS LIKE NATURE, QUANTUM & PATTERN OF SHARE TRANSACTIONS, PERIO D OF HOLDING ETC. DETERMINE WHETHER THE HOLDINGS & TRANSACTIONS IN SHARES ARE IN THE NATURE OF STOCK-IN-TRADE OR INVESTMENTS. (3) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN NOT CONSIDERING THAT THE ASSESSEE DO NOT FULFILL THE TESTS LAI D DOWN FOR DISTINCTION BETWEEN SHARES HELD AS 'STOCK-IN-TRADE' AND SHARES HELD A S 'INVESTMENTS' IN INSTRUCTION NO.1827 DATED 31.08.1989 AND IN CIRCULAR NO.4 OF 2007 DATED 15.06.2007 OF CBDT, NEW DELHI. (4) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN NOT CONSIDERING THE OBJECT OF THE MEMORANDUM AND ARTICLE S OF ASSOCIATION WAS TO ACT AS SHARE BROKER AND TO INVEST IN SHARES, STOCKS & DEBENTURES THUS EVIDENCING THAT THE SHARES,STOCKS & DEBENTURES WERE TO BE HELD AS STOCK-IN-TRADE. (5) THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY OR ALL THE GROUNDS OF APPEAL. 13. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY CHALLEN GED THE ORDER OF THE CIT(A). HE SUBMITTED THAT THE ASSESSEE IS NO T FOLLOWING THE CBDT CIRCULAR IN LETTER AND SPIRIT AND FOLLOWED THE POLIC Y OF BACKWARD CALCULATION. THE INTENTION OF PURCHASE IS NOT CO MING OUT FROM THE INVESTMENT POLICY AND THE SHARES ARE HELD AS ST OCK IN TRADE. REFERRING TO PARA 6.3 AT PAGE 8 OF THE ASSESSMENT ORDER THE LD. DEPARTMENTAL REPRESENTATIVE DREW THE ATTENTION OF THE B ENCH TO THE VERBAL INFORMATION TO BE FOLLOWED FOR TREATMENT OF THE SHARE S. HE SUBMITTED THAT THERE WAS NO WRITTEN COMMUNICATION. THER E IS NO RESOLUTION TO TREAT OPENING STOCK OF SHARES TO BE CONV ERTED TO INVESTMENT. REFERRING TO PARA 7.4 OF THE ASSESSMENT OR DER THE LD. DEPARTMENTAL REPRESENTATIVE DREW THE ATTENTION OF THE B ENCH TO THE FINDINGS GIVEN BY THE AO FOR TREATING THE GAIN ON SALE OF SH ARES AS BUSINESS INCOME. HE SUBMITTED THAT THE LD.CIT(A) WENT BY THE FORM AND NOT BY SUBSTANCE. THE POLICY ADOPTED BY THE ASSES SEE CANNOT BE THE BASIS TO CATEGORISE THE SHARES AS INVESTMENT. HE SUBMITTED THAT AN ASSESSEE CANNOT BE ALLOWED TO CONVERT ITS STOCK IN T RADE TO 26 ITA NO.1734/PN/2013 INVESTMENT OVER NIGHT. HE SUBMITTED THAT THE ASSESSEE COMPANY COULD HAVE PASSED A RESOLUTION ON 01-04-2007 ITSELF WHERE AS THE RESOLUTION WAS PASSED ON 21-06-2007. 14. REFERRING TO THE DECISION OF HONBLE BOMBAY HIGH COUR T IN THE CASE OF CIT VS. YATISH TRADING COMPANY LTD. REPORTED IN 3 59 ITR 320 HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DEC ISION HAS HELD THAT WHEN AN ASSESSEE CONVERTS ITS SHARES FROM ST OCK IN TRADE TO INVESTMENT THE DIFFERENCE BETWEEN SALE PRICE OF SHARES AND MARKET VALUE OF SHARES AS ON THE DATE OF CONVERSION IS ASSESSAB LE AS CAPITAL GAINS. SINCE THE ASSESSEE IN THE INSTANT CASE HAS NOT OFFERED SUCH DIFFERENCE AS INCOME FROM CAPITAL GAINS THE PLEA OF THE ASSES SEE CANNOT BE ACCEPTED AND THE CIT(A) WAS NOT JUSTIFIED IN TR EATING THE GAIN ON SALE OF SHARES AS INCOME FROM LONG TERM CAPITAL G AIN/SHORT TERM CAPITAL GAIN. 15. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAN D HEAVILY RELIED ON THE ORDER OF THE CIT(A). HE SUBMITTED THAT IN TH E PAST YEARS THE ASSESSEE WAS SHOWING THE AMOUNT FROM SALE OF SHARES AS BUSINESS INCOME. FROM A.Y. 2004-05 ONWARDS CERTAIN CHANG ES WERE BROUGHT INTO THE STATUTE ACCORDING TO WHICH THE LONG TE RM CAPITAL GAIN WAS EXEMPT FROM TAX SUBJECT TO PAYMENT OF SECURITY TRANSACTION TAX. THE ASSESSEE COULD HAVE ARRANGED ITS AFFAIRS IN SUC H A WAY THAT THE ASSESSEE COULD HAVE CLAIMED SUCH EXEMPTION. HOWEVER, SINCE THE ASSESSEE WAS A TRADER THE ASSESSEE USED TO OFFER THE PROFIT AS BUSINESS INCOME. REFERRING TO PAGE 40 OF THE ORDER OF TH E CIT(A) THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT NO MATERIAL H AS BEEN BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT THERE WAS INTERMINGLING OF THE 2 PORTFOLIOS OR THAT THE SEPARATE ACCO UNTS WERE 27 ITA NO.1734/PN/2013 ONLY A SMOKESCREEN OR THAT THE DISTINCTION CREATED WA S ARTIFICIAL AND ARBITRARY. 16. REFERRING TO PAGE 42 (PARA 3.21) OF THE ORDER OF THE C IT(A) HE SUBMITTED THAT THE LD.CIT(A) HAS GIVEN A FINDING THAT THE A O HAS NOT DIFFERENTIATED THE PURPOSE OF PURCHASE OF SHARES PURCHAS ED AND HELD FOR MORE THAN ONE YEAR. THE SALE OF SHARES AFTER HOLDING IT FOR MORE THAN 30 DAYS AND THE SALE OF SHARES BEFORE 30 DAYS CAN NOT CHANGE THE MOTIVE OF PURCHASE FROM INVESTMENT TO TRADING. REFERR ING TO PAGE 43 OF THE ORDER OF THE CIT(A) (PARA 3.22) HE SUBMITTED THAT THE ASSESSEE IN THE PRESENT CASE IS DEALING IN SHARES BOTH AS A TRADER AND AS AN INVESTOR. IT HAS KEPT SEPARATE ACCOUNTS FOR BOT H TYPES OF DEALINGS. THE VALUATION OF THE HOLDING HAS BEEN DONE AT CO ST FOR THE INVESTMENT PORTFOLIO. THERE IS NO MATERIAL TO SHOW THAT T HE SHARES IN INVESTMENT PORTFOLIO WERE ALSO TREATED IN THE SAME AND LIK E MANNER AS THOSE WHICH WERE IN STOCK IN TRADE PORTFOLIOS. THE INVE STMENT ALSO CLEARLY SHOWS THE INTENTION OF THE ASSESSEE TO MAINTAIN A SEPARATE INVESTMENT PORTFOLIO. THE TRANSACTIONS ENTERED INTO WERE NOT CONTINUOUS AND REGULAR BUT SPORADIC AND NO BORROWED FU NDS WERE UTILISED FOR PURCHASE OF SHARES. ALL TRANSACTIONS WERE DELIVE RY BASED AND THE INTENTION OF THE ASSESSEE WAS TO HOLD SHARES A S INVESTMENT AND CIRCUMSTANCES DID NOT JUSTIFY GIVING A DIFFERENT TREATMENT. 17. AS REGARDS THE ARGUMENT OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT THE ASSESSEE WENT BACKWARD THE L D. COUNSEL FOR THE ASSESSEE SUBMITTED THAT NO FINDING HAS BEEN GIVEN BY THE AO AT ANY POINT OF TIME THAT THE ASSESSEE WENT BACKWARD. HE SUBMITTED THAT THE ASSESSEE BEING A PRUDENT BUSINESSMAN AND CON SIDERING THE VOLATILITY IN THE STOCK MARKET CHANGED ITS STRATEGY. AS REGARDS THE ARGUMENT OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT TH E 28 ITA NO.1734/PN/2013 INVESTMENT POLICY WAS ONLY THROUGH VERBAL COMMUNICATION AND THERE WAS NO WRITTEN COMMUNICATION THE LD. COUNSEL FOR THE ASSE SSEE SUBMITTED THAT ENTRIES CAN BE MADE IN THE BOOKS OF ACC OUNT ON THE BASIS OF VERBAL INSTRUCTIONS AND NO WHERE IT IS WRITTEN TH AT IT SHOULD BE ONLY THROUGH WRITTEN COMMUNICATION. HE SUBMITTED THA T THE ASSESSEE HAS NOT CHANGED ITS POLICY AND THERE WAS NO B ACKWARD CALCULATION. REFERRING TO VARIOUS DECISIONS HE SUBMITTED THA T THE ASSESSEE CAN HAVE 2 PORTFOLIOS, I.E. INVESTMENT PORTFOLIO AND TRADING PORTFOLIO. HE SUBMITTED THAT THE ASSESSEE HAS OFFERED THE INCOME ON CONVERSION OF SHARES FROM STOCK-IN-TRADE TO INVESTMENT. REFERRING TO PROVISIONS OF SECTION 45(2) HE SUBMITTED THAT THE ABOVE PR OVISION PROVIDES FOR CONVERSION OF INVESTMENT INTO STOCK IN TRADE BUT THE REVERSE HAS NOT BEEN PROVIDED. HE ACCORDINGLY SUBMITTE D THAT THE ORDER OF THE LD.CIT(A) BEING IN ACCORDANCE WITH LAW SHOULD B E UPHELD AND THE GROUNDS RAISED BY THE REVENUE SHOULD BE DISMISSED. 18. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED T HE VARIOUS DECISIONS CITED BEFORE US. WE FIND IN THE INSTANT CASE THE ASSESSEE HAD SHOWN THE INCOME FROM SALE OF SHARES CONVERTED TO IN VESTMENT AND SHARES PURCHASED AND SOLD DURING THE YEAR UNDER T HE HEAD CAPITAL GAIN. WE FIND THE AO AFTER EXAMINATION OF THE FACT S OF THE CASE, VIS--VIS, CBDT CIRCULAR CAME TO THE CONCLUSION THAT THE SHARES DEALT IN BY THE ASSESSEE WERE IN THE NATURE OF S TOCK IN TRADE AND NOT INVESTMENTS AS CLAIMED BY THE ASSESSEE. THE AO ACCORDINGLY HELD THE GAINS ON SALE OF SHARES UNDER THE HEAD INCOME FROM BUSINESS AND NOT CAPITAL GAINS. WE FIND THE LD.CIT(A) ON THE BASIS OF VARIOUS SUBMISSIONS FILED BY THE ASSESSEE AS WELL A S THE 29 ITA NO.1734/PN/2013 FACTS BROUGHT ON RECORD BY THE AO CAME TO THE CONCLUSION THAT IN TH E CASE OF THE ASSESSEE THERE WAS A CLEAR CUT DISTINCTION B ETWEEN THE SHARES HELD AS STOCK IN TRADE AND SHARES HELD AS INVEST MENT. HE HAD ALSO GIVEN A FINDING THAT IN THE CASE OF THE ASSESSEE THE AO HAS NOT DIFFERENTIATED THE PURPOSE OF SHARES PURCHASED AND H ELD FOR MORE THAN ONE YEAR. THE SALE OF SHARE AFTER HOLDING FOR MORE THAN 30 DAYS AND SALE OF THE SAME BEFORE 30 DAYS CANNOT CHA NGE THE MOTIVE OF PURCHASE FROM INVESTMENT TO TRADING. HE HAS ALS O GIVEN A FINDING THAT THE ASSESSEE IN THE INSTANT CASE IS DEALING IN SHARES BOTH AS A TRADER AND INVESTOR. IT HAS KEPT SEPARATE ACCOUNTS FOR BOTH TYPES OF DEALINGS. THE VALUATION OF THE HOLDING HAS BE EN DONE AT COST FOR THE INVESTMENT PORTFOLIO. THERE IS NO MATERIAL T O SHOW THAT THE SHARES IN THE INVESTMENT PORTFOLIO WERE ALSO TRE ATED IN THE SAME AND LIKE MANNER AS THOSE WHICH WERE IN STOCK IN T RADE PORTFOLIOS. THE INVESTMENT ALSO CLEARLY SHOWS THE INTENTION OF THE ASSESSEE TO MAINTAIN A SEPARATE INVESTMENT PORTFOLIO. ALL THE SALES OUT OF THE INVESTMENT PORTFOLIO ARE IDENTIFIABLE TO PURCHASE MADE IN THE PORTFOLIO. NO BORROWED FUNDS WERE UTILIZED FOR PURCHASE OF SHARES. FURTHER, ALL THE TRANSACTIONS WERE DELIVERY BASE D AND THE INTENTION OF THE ASSESSEE WAS TO HELD SHARES AS INVESTME NT AND CIRCUMSTANCES DID NOT JUSTIFY THE GIVING OF A DIFFERENT TREA TMENT. THE LD. DEPARTMENTAL REPRESENTATIVE COULD NOT CONTROVERT TH E ABOVE FACTUAL FINDINGS GIVEN BY LD.CIT(A). 19. WE ALSO FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE COULD HAVE ARRANGED ITS AFFA IRS IN SUCH A WAY THAT IT COULD HAVE CLAIMED EXEMPTION FROM PAYING ANY T AX IN THE PAST. HOWEVER, AS A PRUDENT BUSINESSMAN THE ASSESSEE IN THE PAST HAD PAID TAXES ON THE PROFITS ARISING ON SALE OF SHARES AS BUSINESS 30 ITA NO.1734/PN/2013 INCOME. DURING THE YEAR, THE ASSESSEE AS A PRUDENT BUS INESSMAN AFTER CONSIDERING THE VOLATILITY IN THE STOCK MARKET CHANGE D ITS STRATEGY AND CONVERTED THE STOCK IN TRADE INTO INVESTMENT. 20. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS . GOPAL PUROHIT REPORTED IN 34 DTR 52 HAS HELD THAT IT IS OPEN T O AN ASSESSEE TO MAINTAIN 2 SEPARATE PORTFOLIOS, I.E. (1) RELATING T O INVESTMENT IN SHARES AND (2) TRADING IN SHARES. VARIOUS OT HER DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE A LSO SUPPORT THE CASE OF THE ASSESSEE ON THIS ISSUE. HOWEVER, AS MEN TIONED EARLIER, THE ASSESSEE WAS A TRADER IN SHARES UPTO A.Y. 20 07-08. ONLY DURING A.Y. 2008-09 THE ASSESSEE BY PASSING A BOARD RES OLUTION ON 21-06-2007 DECIDED THAT SECURITIES HELD FOR MORE THAN 3 0 DAYS TO BE TREATED AS CURRENT INVESTMENT AND SECURITIES HELD FOR M ORE THAN 365 DAYS AS LONG TERM INVESTMENTS. THE ASSESSEE HAS ALSO OFFERED THE PROFIT ON CONVERSION OF CAPITAL ASSET TO STOCK-IN-TRADE TO TAX UNDER THE HEAD INCOME FROM BUSINESS. THE ASSESSEE IN THE INS TANT CASE HAS PASSED THE BOARD RESOLUTION ON 21-06-2007. THEREFO RE, THE SAME IN OUR OPINION WOULD ENTITLE THE ASSESSEE COMPANY TO CHANGE ITS INVESTMENT POLICY WITH EFFECT FROM THAT DATE ONWARDS. T HE COMPANY BY PASSING A RESOLUTION ON 21-06-2007 CANNOT C HANGE THE INVESTMENT POLICY WITH RETROSPECTIVE EFFECT, I.E. FROM 01-04-20 07. THE INTENTION CAN BE MADE KNOWN ONLY AFTER THE BOARD R ESOLUTION WAS PASSED. IT WILL BE EFFECTIVE PROSPECTIVELY AND NOT RET ROSPECTIVELY, I.E. W.E.F. 01-04-2007. THEREFORE, THE ORDER OF THE CIT(A) TO THIS EXTENT, IN OUR OPINION, IS ERRONEOUS. WE THEREFORE ARE O F THE CONSIDERED OPINION THAT THE INVESTMENT POLICY OF THE COMPA NY SHOULD BE RECKONED FROM THE DATE OF THE RESOLUTION PASSE D BY THE BOARD OF DIRECTORS, I.E. W.E.F. 21-06-2007. IN THIS VIEW OF THE MATTER, 31 ITA NO.1734/PN/2013 WE RESTORE THE ISSUE BACK TO THE FILE OF THE AO WITH A D IRECTION TO GIVE EFFECT TO THE INVESTMENT POLICY OF THE COMPANY W.E.F. 21-06-2 007. THE AO WILL EXAMINE THE PURCHASES AND SALES FROM 01-04- 2007 TO 20-06-2007 AND FROM 21-06-2007 TILL 31-03-2008. THE INVE STMENT POLICY OF THE COMPANY WILL BE APPLICABLE FOR THE PERIOD FROM 21 -06- 2007 TILL 31-03-2008. THE AO WILL RECOMPUTE THE BUSINESS IN COME AND CAPITAL GAIN IN THE LIGHT OF OUR ABOVE DISCUSSION. WE HO LD AND DIRECT ACCORDINGLY. THE GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY PARTLY ALLOWED FOR STATISTICAL PURPOSES. 21. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 14-12-2015. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER IQ.KS PUNE ; # DATED : 14 TH DECEMBER, 2015. LRH'K ( )'+ , / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. CIT (A) - I I, PUNE 4. 5. 6. CIT-II, PUNE ' *, *, IQ.KS / DR, ITAT, B PUNE; / GUARD FILE. / BY ORDER , ' //TRUE COPY// / * / SR. PRIVATE SECRETARY *, IQ.KS / ITAT, PUNE
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