Smt. Dipikaben Mukeshbhai Saraiya, Surat V. The ACIT.,Circle-3, Surat

ITA 2669/AHD/2008

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1782 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 17-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 25-07-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J P SHAH
• Keywords: Business income; Rule of consistency; Transactions in derivatives
• Section: 234B

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M SMT. DIPIKABEN MUKESHBHAI SARAIYA, 92, SNEHSMRUTI CO- OP. HOUSING SOCIETY, ADAJAN PATIA, RANDER ROAD, SURAT. VS. ASSTT. C.I.T., CIRCLE-3, SURAT. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI J. P. SHAH, AR RESPONDENT BY:- SHRI MUDIT NAGPAL, SR.D.R. O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE RAISING FO LLOWING GROUNDS:- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN TREATING INCOME OF SHORT TERM CAPITAL GAIN OF RS .6,56,773/- AS BUSINESS INCOME. (2) THE APPELLANT SUBMITS THAT THE LD. CIT(A) HAS MISCO NSTRUED THE FACTUAL ASPECTS AND RELEVANT LEGAL ASPECTS. (3) THE LD. CIT(A) ERRED IN NOT DEALING WITH INTEREST C HARGED U/S 234A OF THE ACT. (4) THE LD. CIT(A) ERRED IN NOT DEALING WITH INTEREST C HARGED U/S 234B OF THE ACT. (5) THE LD. CIT(A) ERRED IN NOT DEALING WITH INTEREST C HARGED U/S 234C OF THE ACT. ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 2 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS WHETHE R SUM OF RS.6,56,773/- SHOULD BE TREATED AS BUSINESS INCOME OR SHORT-TERM CAPITAL GAINS. OTHER ISSUES RELATE TO CHARGING OF INTEREST WHICH ARE CONSEQUENTIAL TO THE TOTAL ASSESSED INCOME. 3. THE AO WHILE EXAMINING THE DETAILS FURNISHED BY THE ASSESSEE FOUND THAT ASSESSEE WAS ENGAGED IN BUYING AND SELLI NG OF SHARES ON DAILY BASIS BUT HOLDING PERIOD VARIED FROM 14 TO 1404 DAY S. THE ENTIRE DIFFERENCE BETWEEN PURCHASE AND SALE PRICE WAS CLAI MED AS SHORT TERM CAPITAL GAINS WHERE HOLDING PERIOD WAS LESS THAN ON E YEAR. THE AO HAD BIFURCATED THE PROFIT ON SALE OF SHARES INTO TWO AN D TREATED THE PROFIT ON SALE OF SHARES HELD OVER ONE YEAR AS LONG TERM CAPI TAL GAINS BUT IN RESPECT OF THOSE WHERE HOLDING PERIOD WAS LESS THAN ONE YEA R THE AO REJECTED THE CLAIM OF THE ASSESSEE FOR SHORT TERM CAPITAL GAIN A ND TREATED IT AS BUSINESS INCOME. FOR ARRIVING AT THIS CONCLUSION THE AO GAVE FOLLOWING REASONS :- (1) THE MOTIVE BEHIND INVESTMENT WAS BUSINESS. ASSESSEE HAS ONLY EARNED DIVIDEND OF 80,273/- WHEREAS PROFIT ON SALE OF SHARES WAS RS.21,00,907/-. THUS THE RATIO BETWEEN DIVIDEND AND PROFIT IS 1:25. (2) SHARES WERE ON FREQUENT TRANSACTIONS. THE ASSESSEE HAS INVESTED IN 99 SCRIPS. IT HAD MADE 203 PURCHASE TRANSACTIONS AND 230 SALE TRANSACTIONS. THUS THERE ARE 433 TRANSACTIONS IN 99 SCRIPTS. SUCH LARGE FREQUENTLY TRANSACTIONS CLEARLY INDICATE BUSI NESS MOTIVE. (3) THE MAGNITUDE OF SALE AND PURCHASE AS WELL AS RATIO OF SALE AND PURCHASE IN THE CASE OF ASSESSEE INDICATES TRADING ACTIVITY. THE PURCHASE PRICE OF THE SHARES IS RS.1,26,04,590/- WH EREAS SALE PRICE IS 1,32,33,913/-. IT CANNOT BE AN INVESTMENT MOTIVE BUT ONLY TRADING MOTIVE. (4) LENGTH OF PERIOD OF OWNERSHIP OR HOLDING PERIOD IS ALSO ON AN AVERAGE, LESS THAN 45 DAYS. MAJORITY OF THE SCRIPS ARE LESS THAN 45 DAYS AND HENCE ASSESSEE IS ENGAGED IN TRADING. I T HAS ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 3 PURCHASED THE SHARES WITH THE INTENTION TO EARN PRO FITS. IF INTENTION WAS INVESTMENT THEN HE WOULD HAVE HELD TH E SHARES FOR A LONGER PERIOD. (5) THE ASSESSEE HAS EMPLOYED INFRASTRUCTURE FOR SHARE TRANSACTIONS. ASSESSEE HAS ACCOUNTS WITH THREE STOCK BROKERS NAME LY (I) ANGEL BROKING LTD., MUMBAI, (II) R. VADIWALA & CO., SURAT & (III) VAISHNAVI INVESTMENT. THEREAFTER THE AO GAVE FOLLOWING TABLE TO WORK OUT THE CRITERIA AND TO COME TO A CONCLUSION THAT ASSESSEE IS ONLY DEALING IN SHARES AND NOT HOLDING THEM FOR INVESTMENT. THE TABLE PREPARED BY AO IS AS UNDER:- SL. NO. PARAMETERS TO DECIDE THE NATURE OF TRANSACTION BUSINESS NATURE INVESTMENT NATURE 1. MOTIVE BEHIND SUCH INVESTMENT PROFIT MOTIVE ( ) 2. FREQUENCY OF TRANSACTIONS BUSINESS SCALE ( ) 3. MAGNITUDE OF SALE AND PURCHASE SUBSTANTIAL ( ) 4. RATIO BETWEEN PURCHASE AND SALE SALES>PURCHASE ( ) 5. MANNER OF MAINTAINING BOOKS OF ACCOUNTS AUDITED ( ) 6. LENGTH OF PERIOD OF OWNERSHIP LESS THAN 45 DAYS ( ) 7. THE INFRASTRUCTURE EMPLOYED FOR THE SHARE TRANSACTIONS BUSINESS SCALE ( ) 8. NORMAL BUSINESS OF ASSESSEE SHARE TRANSACTION ( ) 4. WHEN THE MATTER CAME UP BEFORE LD. CIT(A) HE CON FIRMED THE ORDER OF THE AO FOR SIMILAR REASONS. 5. BEFORE US THE LD. AR SUBMITTED THAT ASSESSEE IS A HOUSE WIFE AND DOES NOT HAVE EXPERIENCE AS A TRADER. SHE HAS INHER ITED THE SHARES FROM HER PARENTS. THOUGH SHE IS TRANSACTING THE WAY POIN TED OUT BY THE AO BUT THEY ARE HER INVESTMENTS AND NOT STOCK-IN-TRADE. HE REFERRED TO THE DECISION OF THE D BENCH OF THIS TRIBUNAL IN THE C ASE OF SHRI SUGAMCHAND C. SHAH IN ITA NO.3554/AHD/2008 ASST. YE AR 2005-06 AND OTHERS PRONOUNCED ON 29.01.2010 WHEREIN ALL THE REL EVANT AUTHORITIES HAVE BEEN CONSIDERED IN DETAIL AND IT HAS BEEN HELD THAT WHERE SHARES ARE ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 4 HELD FOR LESS THAN A MONTH IT SHOULD BE TREATED AS BUSINESS INCOME AND WHERE SHARES ARE HELD FOR MORE THAN ONE BUT UPTO TW ELVE MONTHS THEY SHOULD BE TREATED AS SHORT TERM CAPITAL GAINS. HE A LSO SUBMITTED THAT IF ASSESSEE WOULD HAVE BEEN ENTIRELY TRADING IN SHARES THEN THE AO COULD HAVE NOT ASSESSED PART OF THE PROFIT AS LONG TERM C APITAL GAIN. THE FACT THAT THE AO HAS TREATED PART OF THE PROFIT AS LONG TERM CAPITAL GAINS SHOWS THAT HE ALSO ACCEPTS THAT ASSESSEE HAS MADE INVESTMENTS AND NOT ENTIRELY TRADING. HE FURTHER SUBMITTED THAT IF ALL THE PROFI TS ARISING FROM SALE OF SHARES HELD FOR LESS THAN TWELVE MONTHS ARE TREATED AS BUSINESS INCOME THEN PROVISIONS RELATING TO SHORT TERM CAPITAL GAIN S WOULD BECOME OTIOSE. IN ANY CASE WHAT IS ENTERED INTO THE BOOKS SHOULD B E GIVEN PRIORITY. THE ASSESSEE HAS PURCHASED AND HELD SHARES AS INVESTMEN T AND, THEREFORE, PROFITS THEREON SHOULD BE ASSESSED AS SHORT TERM CA PITAL GAINS NOT AS BUSINESS. 6. AGAINST THIS, THE LD. DR HEAVILY RELIED ON THE O RDER OF AO AND THAT OF LD. CIT(A) AND SUBMITTED THAT LARGE TRANSACTIONS AND VOLUME CLEARLY INDICATE THAT ASSESSEE IS ACTING AS A TRADER AND NO T AS AN INVESTOR. HER INTENTION IS CLEAR THAT SHE HAS EARNED PROFIT OF OV ER RS.20 LACS WHEREAS DIVIDEND IS ONLY OF RS.80,000/-. THUS THERE WAS CLE AR PROFIT MOTIVE AND NOT EARNING DIVIDEND MOTIVE. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. THE ISSUE RELATING TO WHETHER A PROFIT O N SALE OF SHARES SHOULD BE CONSIDERED AS SHORT TERM CAPITAL GAINS OR BUSINE SS INCOME HAS BEEN CONSIDERED IN GREAT DETAIL IN THE CASE OF SHRI SUGA MCHAND C. SHAH IN ITA NO.3554/AHD/2008 ASST. YEAR 2005-06 AND OTHERS (SUP RA) AND OTHER JUDGMENTS REFERRED THEREIN SUCH AS SARNATH INFRASTR UCTURE (P) LTD. VS. ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 5 ACIT (2009) 120 TTJ 216 (LUCKNOW) AND GOPAL PUROHIT VS. JCIT (2009) 29 SOT 117 (MUM), AS UNDER :- 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IN OUR CONSIDERED VIEW, THE TRIBUNAL IN THE CASES OF GOPAL PUROHI VS. JT. CIT(SUPRA) AND OF SARNATH INFRASTRUCTURE (P) LTD. V S. ASSTT.CIT(SUPRA) LAID DOWN CRITERIA FOR HOLDING AS TO WHEN TRANSACTI ON IN SHARES BE TREATED AS TRADING AND WHEN THEY SHOULD BE TREATED AS INVES TMENT. 10. FOR THE SAKE OF CONVENIENCE, WE REPRODUCE HEREU NDER THE RELEVANT PORTION OF THE ORDER OF ITAT BOMBAY BENCH IN THE CA SE OF GOPAL PUROHIT VS. JT.CIT [2009] 29 SOT 117 (MUM.) . IF THESE FACTS ARE TAKEN INTO CONSIDERATION, THEN, FOLLOWING CONCLUSIONS EMERGE : (I) THE FACTS OF THE YEAR UNDER CONSIDERATION WITH REGA RD TO NATURE OF INCOME(S) EARNED BY THE ASSESSEE AND THE TRANSACTIO NS ARE SAME IN ALL THESE YEARS EXCEPT TRANSACTIONS IN F&O SEGMENT IN S OME OF THE YEARS WHEREIN THIS KIND OF ACTIVITY WAS STARTED BY THE ST OCK EXCHANGE. (II) INTEREST ON BORROWED CAPITAL HAS BEEN ALLOWED AS B USINESS EXPENDITURE AGAINST THE PROFIT ON JOBBING ACTIVITIES SHOWN BY T HE ASSESSEE AS BUSINESS PROFIT. (III) THE ASSESSEE HAS SHOWN SHARES PURCHASED ON DELIVERY BASIS AS INVESTMENT AT THE END OF THE YEAR AND NO STOCK-IN-TRADE EXIST ON THAT DATE AND THE ASSESSEE HAS EARNED BOTH LONG-TERM AND SHORT-TERM C APITAL GAINS WHICH MEANS THE ASSESSEE HAS ALSO HELD SHARES FOR A PERIO D OF MORE THAN 12 MONTHS. 8.1 THUS, THE NATURE OF ACTIVITIES, MODUS OPERANDI OF T HE ASSESSEE, MANNER OF KEEPING RECORDS AND PRESENTATION OF SHARES AS INVES TMENT AT THE YEAR END IS SAME IN ALL THE YEARS, HENCE; APPARENTLY, THERE APP EARS NO REASON AS TO WHY THE CLAIMS MADE BY THE ASSESSEE SHOULD NOT BE ACCEP TED. HOWEVER, THE REVENUE AUTHORITIES HAVE TAKEN A DIFFERENT VIEW IN THE YEAR UNDER CONSIDERATION BY HOLDING THAT PRINCIPLE OF RES JUDI CATA IS NOT APPLICABLE TO THE ASSESSMENT PROCEEDINGS. THERE CANNOT BE, IN OUR VIE W, ANY DISPUTE ON THIS ASPECT BUT THERE IS ALSO ANOTHER JUDICIAL THOUGHT, THAT THERE SHOULD BE UNIFORMITY IN TREATMENT AND CONSISTENCY UNDER THE S AME FACTS AND CIRCUMSTANCES AND WE HAVE ALREADY FOUND THAT FACTS AND CIRCUMSTANCES ARE IDENTICAL, EVEN THOUGH A DIFFERENT STAND HAS BEEN T AKEN BY THE REVENUE AUTHORITIES. THIS ACTION OF THE REVENUE AUTHORITIES HAS LED US TO ASK OURSELVES THAT IN THIS YEAR WHY IT HAS BEEN DONE SO. IN THE P ROCESS TO FIND THE ANSWER, WE NOTED THAT THERE WAS A CHANGE IN THE SCHEME OF TAXA TION RELATING TO SHORT-TERM CAPITAL GAINS AND LONG-TERM CAPITAL GAINS. THROUGH THE FINANCE ACT, 2004, THE LEGISLATURE IMPOSED SECURITIES TRANSACTION TAX ON T HE SALE AND PURCHASE OF SHARES AND OTHER DERIVATIVE TRANSACTIONS AND, SIMUL TANEOUSLY, THE LEGISLATURE ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 6 EXEMPTED LONG-TERM CAPITAL GAIN UNDER SECTION 10(38 ) OF THE ACT FROM THE LEVY OF TAX AND ON SHORT-TERM CAPITAL GAIN, A CONCESSION AL RATE OF TAX I.E., 10 PER CENT HAS BEEN LEVIED SUBJECT TO THE CONDITION THAT TRANSACTIONS RESULTING INTO THIS TYPE OF GAIN MUST HAVE SUFFERED SECURITIES TRA NSACTION TAX. THIS IS THE FIRST YEAR OF SUCH CHANGE AND, HAVING REGARD TO THE QUANT UM OF GAINS, THIS SCHEME OF TAXATION ONLY, IN OUR VIEW, HAS PROMPTED THE REV ENUE AUTHORITIES TO TAKE A DIFFERENT VIEW ON THE SAME TYPES OF TRANSACTIONS EN TERED INTO BY THE ASSESSEE IN EARLIER YEARS. AT THIS STAGE, WE CONSIDER IT FIT TO STATE THAT THERE IS NO DISPUTE BEFORE US THAT ASSESSEE HAS CLAIMED EXEMPTION UNDER SECTION 10(38) AND/OR HAS PAID TAX UNDER SECTION 111A AT CONCESSIONAL RAT E ON THE TRANSACTIONS, WHERE SECURITIES TRANSACTION TAX HAS NOT BEEN. IT I S ALSO NOTED THAT THE ASSESSEE HAS PAID TAX ON SHORT-TERM CAPITAL GAINS AT NORMAL RATES ON SHARE TRANSACTIONS EXECUTED IN THE PERIOD PRIOR TO IMPOSITION OF SECUR ITIES TRANSACTIONS TAX. IN OUR VIEW, THE LEGISLATIVE CHANGE OF THIS NATURE, WHEREB Y NO CHANGE HAS BEEN MADE IN RESPECT OF NATURE AND MODUS OPERANDI OF SUCH SHA RE TRANSACTIONS, RESULTING INTO ANY ADVANTAGE CANNOT BE TAKEN AWAY BY THE REVE NUE AUTHORITIES IN THIS MANNER AND IN THESE CIRCUMSTANCES, WE ARE OF THE VI EW THAT, PRINCIPLE OF CONSISTENCY, THOUGH IT IS AN EXCEPTION TO THE PRINC IPLE OF RES JUDICATA MUST BE APPLIED HERE. IT IS FURTHER SO BECAUSE THE PAYMENT OF SECURITIES TRANSACTION TAX IS MANDATORY I.E., WHETHER AN ASSESSEE EARNS THE PR OFIT OR NOT OR SUFFERS A LOSS AND BY IMPOSITION OF SUCH TAX, THE LEGISLATURE HAS NOT GIVEN ANY BENEFIT TO A CLASS OF TRANSACTIONS AS A WHOLE THOUGH IT MAY RESU LT INTO AN APPARENT BENEFIT TO INDIVIDUAL(S) ENTERING INTO THOSE TRANSACTIONS. THUS, IN OUR VIEW, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, ON THE BASIS OF PRIN CIPLE OF CONSISTENCY ALONE, THE ACTION OF THE REVENUE AUTHORITIES IS LIABLE TO BE QUASHED. WE ORDER ACCORDINGLY AND DIRECT THE ASSESSING OFFICER TO ACC EPT THE CLAIMS OF ASSESSEE IN REGARD TO SHORT-TERM CAPITAL GAIN AND LONG-TERM CAPITAL GAIN. 10.1. IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD . VS. ASSTT.CIT(SUPRA), THE TRIBUNAL CONSIDERED THE CIRCULAR NO.4 OF CBDT(2 007) DATED 15/06/2007, VARIOUS OTHER DECISIONS, SUCH AS, CIT V S. ASSOCIATED INDUSTRIAL CO. LTD. (1971) 82 ITR 586 (SC), CIT VS. H. HOLCK LARSEN (H) (1986) 160 ITR 67 (SC), FIDELITY NORTHSTAR FUND IN RE(2007) 207 CTR (AAR) 297; (2007) 288 ITR 641 (AAR), FIDELITY ADVIS OR SER SERIES VIII IN RE (2004) 271 ITR 1 (AAR), JP HARRISON (WATFORD) LTD. VS. GRIFFITH (H.M. INSPECTOR OF TAXES) (1962) 40 TAX CASES 281 ( HL), RAJA VISHEWARA SINGH (DECEASED) VS. CIT (1961) 41 ITR 685 (SC), CE NTRAL INDIA AGENCIES PVT.LTD.V S. CIT (1970) 77 ITR 959 (ALL.), MRS. SAR OJANI RAJAH VS. CIT (1969) 79 ITR 504 (MAD.), DALHOUSIE INVESTMENT CO.L TD. VS. CIT (1968) 68 ITR 486(SC), CIT VS. ASSOCIATED INDUSTRIAL DEVEL OPMENT CO.LTD. (1971) 82 ITR 586 (SC), CIT VS. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD. (1975) 100 ITR 706 (SC) AND CULLED OUT FOLLOWING PR INCIPLES WHICH ARE DESCRIBED IN PARA NO.13 OF THAT ORDER:- ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 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 TI ME OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM). THIS CAN BE FOUND OUT FROM THE TREATME NT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TREATED 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 GOODS FOR T HE PURPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DIS POSAL IN THAT PARTICULAR ITEM ? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTA NTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PART ICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PU RCHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADING OR INVESTI NG (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AN D HIGH HOLDINGS INDICATE INVESTMENT). (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PROF IT 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 SHARES WHETHE R INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN TH E BALANCE SHEET ? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDICATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NET REALIZABL E VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOC K-IN-TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEM ORANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION ? WHETHER FOR TRADE OR FOR INVESTMEN T ? IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE SEPARATE 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 SH OW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE HAS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO D ISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS IN VESTMENT (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 SHA RES (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 T HAT ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR INVESTMENT. ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 8 (9) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISIT ES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS COMPL YING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING AS A TRADER IN THAT ITEM ? WHETH ER IT HAD SUCH AN INTENTION (TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM) SINCE BEGINNING O R 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 ACCOUNT FOR EACH TYPE, THER E ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTERMINGLING OF HOLDINGS IN THE TW O 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 SEVERAL FAC TORS HAS TO BE SEEN. 11. WHEN WE EXAMINE THE FACTS OF THE CASE, WE FIND ASSESSEE HAS MAINTAINED THE BOOKS OF ACCOUNT IN RESPECT OF DEALI NG IN SHARES AND ASSESSEE HAS SHOWN THE TRANSACTIONS IN SHARES AS IN VESTMENT AND NOT AS STOCK-IN-TRADE. IT HAS BEEN SHOWN CONSISTENTLY FOR SEVERAL YEARS IN THE PAST AND DEPARTMENT HAS NOT CHALLENGED THE BOOK KEEPING OR ACCOUNTING OF SHARES AS INVESTMENT. NO CONTRARY MATERIAL OR FACTS HAVE BEEN POINTED OUT BY THE REVENUE TO SHOW THAT FACTS IN THE CURRENT YE AR ARE DIFFERENT THAN THE FACTS IN EARLIER YEARS. IT IS ALSO NOT POINTED OUT BY THE REVENUE THAT FREQUENCY AND NUMBER OF TRANSACTIONS ARE ABNORMALLY HIGH IN THE CURRENT YEAR AS COMPARED TO WHAT WAS DONE IN EARLIER YEARS. 12. THERE IS ALSO NO MATERIAL TO COME TO THE CONCLU SION THAT THE VALUATION OF INVESTMENT HAS BEEN DONE ON COST OR NE T RELIABLE VALUE WHICHEVER IS LOW. THE ASSERTION OF THE ASSESSEE IS THAT ENTIRE PORT-FOLIO HAS BEEN VALUED AT COST AS AT THE END OF ACCOUNTING YEAR WHICH REMAINED UNCHALLENGED. 13. THE SHARES WHICH ARE SOLD OUT OF SUCH INVESTMEN T THIS YEAR WERE MOSTLY PURCHASED A YEAR OR EARLIER SHOWING THAT THE ASSESSEE HAD INTENTION WHILE PURCHASING THEM TO HOLD THEM AND TH EY WERE REFLECTED IN THAT BALANCE-SHEET AS INVESTMENT. THE ASSESSEE HAS ENJOYED DIVIDEND INCOME AND DECLARED THE SAME IN THE RETURN OF INCOM E TRADING THE TRANSACTIONS AS INVESTMENT, EVEN IF FREQUENCY OF SE LLING OF SHARES MAY BE MORE BUT IN RESPECT OF SHARES HELD FOR A CONSIDERAB LE LONGER PERIOD (FOR MORE THAN 366 DAYS) AS PER FINDING GIVEN BY THE LEA RNED CIT(APPEALS). THIS FINDING REMAINED UNCONTROVERTED. THE ASSESSEE HAS EARNED GAIN OF RS.37,52,281/-, ON SALE OF THOSE SHARES WHICH WERE HELD FOR MORE THAN 366 DAYS AND UPTO 6832 DAYS. IN ANY CASE, WHEN THOS E SHARES WERE PURCHASED IT COULD NOT BE SAID THAT INTENTION OF TH E ASSESSEE WAS TO DEAL IN THEM AND NOT TO HOLD THEM AS INVESTMENT. EVEN IN TH E CASE OF INVESTMENT IT IS FOR THE ASSESSEE TO DECIDE WHEN TO DISPOSE THEM OFF SO THAT TO GIVE ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 9 MAXIMUM RETURN OUT OF THEM. THERE IS NO THEORY THAT ASSET HELD ON LONG- TERM BASIS SHOULD BE SOLD ONLY AT THE TIME OF NEED OR IN EMERGENCY. HE CAN VERY WELL SALE THE INVESTMENTS TO REAP THE BENE FIT WHEN PRICES OF SHARES ARE HIGH SO AS TO EARN BETTER GAINS AND MAKE INVESTMENT ELSEWHERE. IN OUR CONSIDERED VIEW, IT IS THE DECISI ON OF THE ASSESSEE TO DISPOSE OF AN INVESTMENT, IF ACCORDING TO HIM, MARK ET VALUE THEREOF HAVE REACHED A PLATEAU SO AS TO MAKE INVESTMENT IN OTHER ASSETS WHICH HAVE POTENTIAL OF APPRECIATION IN MARKET VALUE. THIS DEC ISION TO SALE HIS INVESTMENT AT HIGH MARKET PRICE CANNOT CONVERT AN O THERWISE INVESTMENT INTO TRADING. IF IN THE PAST, THE DEPARTMENT HAS AC CEPTED THE SALE OF SHARES OF HOLDINGS OF MORE THAN A YEAR AS INVESTMEN T AND PROFITS THEREON HAS BEEN ASSESSED UNDER THE HEAD CAPITAL GAIN, TH EN THERE IS NO REASON TO HOLD DIFFERENTLY THIS YEAR. WE ACCORDINGLY CONFI RM THE ORDER OF THE LEARNED CIT(APPEALS) IN RESPECT OF HOLDING THAT PRO FIT OF RS.37,52,281/- SHOULD BE ASSESSED AS 'LONG-TERM CAPITAL GAIN'. 15. IN RESPECT OF PROFIT OF RS.55,40,679/- BEING 'S HORT-TERM CAPITAL GAIN' AS CLAIMED BY THE ASSESSEE AND HELD AS PROFITS ASSE SSED UNDER THAT BUSINESS BY TWO AUTHORITIES, WE FIND THAT IN MANY C ASES THERE IS DELIVERY OF SHARES AND SHARE WERE REGISTERED IN THE NAME OF THE ASSESSEE. THE HOLDING PERIOD OF THE SHARES IS FROM 0 DAYS TO 3 66 DAYS. IN SOME CASES, THE FREQUENCY OF TRANSACTIONS ARE APPARENTLY SUBSTA NTIAL AS ON ONE DAY THE ASSESSEE HAS PURCHASED SEVERAL SCRIPTS AND SOLD SEVERAL OF THEM ON THE SAME DAY. 16. THE QUESTION IS WHETHER THEREFORE, MERELY FROM FREQUENCY OF THE TRANSACTIONS CARRIED ON BY THE ASSESSEE, HE IS TREA TED AS DEALER IN SHARES OR STILL HE IS HELD AS INVESTOR. AS FOUND IN THE CA SE OF SARNATH INFRASTRUCTURE (P) LTD. VS. ASSTT.CIT(SUPRA) ALSO, ASSESSEE ADDUCED EVIDENCE TO SHOW THAT HIS HOLDINGS ARE FOR INVESTME NT AS RECORDED IN THE BOOKS OF ACCOUNT. THE HOLDINGS ARE VALUED AT COST, AND SUCH ACCOUNTING HAS BEEN ACCEPTED BY THE REVENUE IN EARLIER YEARS. THERE IS NO MATERIAL TO SHOW THAT ASSESSEE HAS DECLARED HIMSELF AS A TRA DER IN SHARES AND LEGAL REQUIREMENTS THEREFOR HAVE BEEN COMPLIED WITH. IT I S ALSO A FACT THAT HE HAS NOT BORROWED ANY MONEY FOR INVESTING IN SHARES. MERELY BECAUSE, ASSESSEE HAD SOME BORROWED FUNDS IT WOULD NOT BY IT SELF SHOW THAT THEY WERE DEPLOYED IN INVESTMENT. NOTWITHSTANDING, EVEN BORROWING ARE REQUIRED TO SETTLE PAYMENTS OBLIGATIONS IN RESPECT OF INVESTMENTS, LIKE ONE TAKES LOAN FOR PURCHASING A HOUSE. IN ANY CASE, HIG H FREQUENCY TRANSACTIONS AND LOW PERIOD HOLDINGS INDICATE TRADE , WHEREAS LOW FREQUENCY TRANSACTIONS AND HIGH PERIOD HOLDINGS IND ICATE INVESTMENT. ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 10 17. IN THIS CASE, THE ASSESSEE HAS DISCHARGED THE O NUS OF SHOWING THAT IT IS MAKING INVESTMENT BUT REVENUE IS ABLE TO SHOW TH AT THERE ARE HIGH FREQUENCIES AND LOW HOLDINGS IN MANY TRANSACTIONS O F SHARES INDICATING THAT ASSESSEE HAS SOME INTENTION OF PURCHASING AND SELLING SHARES AS A TRADER. THE CASE OF THE ASSESSEE IS SUPPORTED BY TH E FACT THAT IT HAS ENTERED THE PURCHASES IN THE BOOKS AS INVESTMENT, S HARES ARE VALUED AT COST AND REVENUE IS HOLDING SUCH ACCOUNTING TREATME NT AS INVESTMENT IN THE PAST. THUS, THERE CANNOT BE A FIXED CRITERIA TO DECIDE AS IN THE PRESENT CASE WHETHER ASSESSEE HAS TRADED IN SHARES EVEN THO UGH ASSESSEE HELD THEM AS INVESTMENT. 18. THOUGH IT HAS BEEN HELD IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD.(SUPRA) THAT DELIVERY OF SHARES IS AN IMPORTANT CRITERIA FOR HOLDING THAT ASSESSEE IS INVESTING IN THEM BUT AFTER DEMATI ZATION WHERE SHARES ARE DELIVERED IN THE DEMAT ACCOUNT THE NEXT DAY, IT CAN NOT BE HELD THAT IN ALL SUCH CASES, IT WOULD BE INVESTMENT AND NOT TRADING. IF THAT IS SO HELD, THEN ALL THOSE TRADERS IN SHARES IN WHOSE DEMAT ACCOUNTS SHARES ARE DELIVERED CAN BE SAID TO HAVE EARNED CAPITAL GAINS AND NOT PROFITS. THEREFORE, ONLY ONE CRITERIA, I.E. DELIVERY OF SHAR ES ALONE WILL NOT BE SUFFICIENT TO DECIDE THE ISSUE. EVEN OTHERWISE IN S ARNATH INFRASTRUCTURE (P) LTD.(SUPRA) ITSELF IT HAS BEEN HELD THAT CUMULA TIVE EFFECT OF SEVERAL FACTORS WILL DECIDE THE ISSUE. 19. CONSIDERING THE TOTALITY AND PECULIARITY OF THE FACTS OF THIS CASE, WE FIND THAT ASSESSEE IS NEITHER FULLY ACTING AS A 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 S ALE SHORT TERM CAPITAL GAIN SHOULD BE CHARGED. WHEN SHARES ARE HELD FOR LE SS THAN A MONTH, GAIN ON THEM SHOULD BE TREATED AS PROFIT FROM BUSINESS. ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 11 20. THE ASSESSEE WILL GIVE THE WORKING AND COMPUTIN G 'SHORT-TERM CAPITAL GAINS' ON THE ABOVE BASIS. THE REST OF THE PROFIT WILL BE TREATED AS ASSESSABLE UNDER THE HEAD BUSINESS. 8. IN OUR CONSIDERED VIEW THE FACTS IN THE PRESENT CASE ARE ALSO SIMILAR AS IN THE CASE OF SHRI SUGAMCHAND C. SHAH AND OTHER S (SUPRA). THE ASSESSEE IS NEITHER ACTING AS FULLY TRADER NOR ACTI NG AS FULLY INVESTOR WHICH IS EVIDENT FROM THE FACT THAT EVEN THE AO HAS HELD PART OF THE PROFIT ON SALE OF SHARES AS LONG TERM CAPITAL GAINS AND, THER EFORE, IT CANNOT BE SAID THAT ASSESSEE IS NOT AN INVESTOR BUT ONLY A TRADER. APPLYING THE TEST LAID DOWN IN THE CASE OF SHRI SUGAMCHAND C. SHAH (SUPRA) WE DIRECT THE AO TO WORK OUT THE PROFITS ON SALE OF SHARES WHICH ARE HELD FOR LESS THAN ONE MONTH AND TREAT THE PROFITS THEREON AS BUSINESS PRO FIT AND PROFITS EARNED ON SALE OF SHARES WHICH ARE HELD FOR MORE THAN ONE MONTH TILL 12 MONTHS SHOULD BE TREATED AS SHORT TERM CAPITAL GAINS. WITH THE ABOVE DIRECTION WE PARTLY ALLOW THE APPEAL OF THE ASSESSEE AND RESTORE IT TO THE FILE OF AO FOR MAKING NECESSARY CALCULATION. AS A RESULT, THE APPE AL FILED BY THE ASSESSEE IS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN OPEN COURT ON 25/3/11. SD/- SD/- (BHAVNESH SAINI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 25/3/11. MAHATA/- ITA NO.2669/AHD/2008 ASST. YEAR 2005-06 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 17/3/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 24/3/ 2011 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..