Smt. Rhuta K. Patel, Surat V. The ACIT.,Circle-3, Surat

ITA 3231/AHD/2009

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 6455 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 26-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 02-12-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J P JANGID
• Assessee Lawyers: D K PURI
• Keywords: Business income; Opportunity of being heard; Rule of consistency; Transactions in derivatives

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B BEFORE SHRI D. K. TYAGI, JUDICIAL MEMBER AND SHRI D. C. AGRAWAL, ACCOUNTANT MEMBER I.T.A. NO. 3231/ AHD/2009 (ASSESSMENT YEAR 2006-07) SMT. RHUTA K PATEL, 89, NEHRUNAGAR SOCIETY, ICHCHHANATH ROAD, SURAT VS. ACIT, CIRCLE 3, SURAT PAN/GIR NO. :AGOPP5954C (APPELLANT) .. (RESPONDENT) APPELLANT BY: SHRI D K PURI AR RESPONDENT BY: SHRI J P JANGID, SR. DR O R D E R PER SHRI D. C. AGRAWAL, AM:- THIS APPEAL BY THE ASSESSEE HAS BEEN PREFERRED AGA INST THE ORDER OF CIT(A)-II, SURAT FOR THE ASSESSMENT YEAR 2006-07. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THAT THE CIT(A) ERRED IN CONFIRMING STCG INCOM E OF RS. 17,94,6697- AS BUSINESS INCOME. 2. THAT THE CIT(A) FAILED TO APPRECIATE THAT THE AS SESSEE IS A NON - RESIDENT LADY. 3. THAT THE CIT(A) FAILED TO APPRECIATE THAT THE AS SESSEE HAS NOT TAKEN ANY NEW LOANS & SUCH INTEREST FREE LOANS ARE FROM R ELATIVES ONLY & NOT FROM MARKET. 4. THAT THE STCG INCOME OF RS. 17,94,6697- MAY KIND LY BE TREATED AS STCG INCOME & CONCESSIONAL RATE MAY BE CHARGED. 3231/AHD/2009 2 2. THE ONLY ISSUE IN THE APPEAL IS WHETHER PROFIT O F RS.17,94,669/- SHOULD BE TREATED AS BUSINESS INCOME OR SHORT TERM CAPITAL GAIN ON SALE OF SHARES. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. FOUND THAT THE ASSESSEE HAS SHOWN INCOME AS UNDER: TOTAL DIVIDEND INCOME RS.2,64,334.00 TOTAL INTEREST INCOME RS. 93,768.00 TOTAL RS.3,58,102.00 TAXABLE CAPITAL GAIN AS PER RETURN. RS. 19,72,5 62.00 4. OUT OF THE ABOVE, THE A.O. WORKED OUT A SUM OF R S.17,94,669/- CLAIMED BY THE ASSESSEE AS SHORT TERM CAPITAL GAIN BUT TREATED BY THE A.O. PARTLY AS BUSINESS INCOME AND PARTLY AS LONG TERM C APITAL GAIN AT RS.3,94,863/-. WHEN ASKED TO EXPLAIN AS TO WHY THE SHORT TERM CAPITAL GAIN AS CLAIMED BY THE ASSESSEE BE NOT TREATED AS BUSINE SS INCOME, THE ASSESSEE SUBMITTED A DETAILED REPLY ON 18.09.2008, WHICH HAS BEEN REPRODUCED BY THE A.O. IN THE ASSESSMENT ORDER. THE A.O. DID NOT AGR EE WITH THE SUBMISSION OF THE ASSESSEE THAT ASSESSEE HAS EARNED SHORT TERM CA PITAL GAIN. HIS REASONS FOR TREATING THE PROFITS AS FROM BUSINESS ARE: I) DIVIDEND EARNED ON SHARES IS RS.76,328 WHEREAS S HORT TERM CAPITAL GAIN ON SHARES IS RS.17,29,605/- EXCLUDING STCG ON UNITS. THUS, THE RATIO OF DIVIDEND TO PROFIT IS 1:23. II) ASSESSEE HAS DEALT IN 82 SCRIPTS. IN EVERY SCR IPT THE TRANSACTION IS ON AN AVERAGE 5 TIMES. THUS, THE ASSESSEE IS TR ADING IN THE SAME SCRIPT SEVERAL TIMES JUST TO MAKE PROFIT LIKE A TRA DER. III) ASSESSEE IS NOT HOLDING THE SCRIPT AS INVESTMENT BU T FACTUALLY TURNING THEM BY PURCHASE AND SALE. IV) THE MAGNITUDE OF SALE AND PURCHASE IS RUNNING IN CR ORES OF RUPEES AND USING HER RESOURCES TO CHURN OUT PROFITS FROM SALE AND PURCHASE OF SHARES. 3231/AHD/2009 3 V) THE PERIOD OF OWNERSHIP OR HOLDING PERIOD IS QUITE LOW IN THE CASE OF THE ASSESSEE WHICH IS LESS THAN 45 DAYS ON AN AVERAGE. VI) THE ASSESSEE HAS EMPLOYED INFRASTRUCTURE FOR SHARE TRANSACTION. SHE IS NOT AN ORDINARY INVESTOR BUT A TRADER USING INFRA STRUCTURE IN BUSINESS. SHE HAS INCURRED FOLLOWING EXPENSES I N THE P & L ACCOUNT: I) VEHICLE MAINT. EXPNESES RS.2,990 II) SALARIES RS.26,000 III) STAMP AND OTHER CHARGES RS.13,582 IV) TRAVELING EXPENSES RS.40,000 V) D-MAT CHARGE RS.17,776 VI) INTRA SETTLEMENT CHARGES RS,5,768 VII) PETROL EXPENSES RS.2,700 VIII) SERVICE CHARGES RS.32,979 VII) THE ASSESSEE IS ALSO CARRYING EXCLUSIVE TRANSACTION S IN SHARES. VIII) ASSESSEE HAS OBTAINED LOAN FROM VARIOUS PARTIES INC LUDING LOAN FORM M/S. S H JARIWALA OF RS.68,36,755/- AND FROM S H TEXTILES OF RS.15,12,000/-. HER OWN CAPITAL IS ONLY RS.48,87,789/-: THUS, THE RATIO OF LOAN TO CAPITAL IS 17:10. HE ACCORDINGLY, TREATED THE PROFIT ON SALE OF SHARE S AS BUSINESS INCOME. 5. LD. CIT(A) ALSO CONFIRMED THE VIEW OF THE A.O. F OR THE SAME REASONS. IN THIS REGARD, HE OBSERVED AS UNDER: 5.6 I FIND MAT THE AR HAS MADE VERY BASIC SUBMIS SIONS WHICH ARE ESSENTIALLY REPETITIONS OF WHAT HAD BEEN STATED BEFORE THE A.O. HE HAS NOT BEEN ABLE TO REBUT THE DETAILED FINDINGS AND SPECIFIC OBSERVATIONS OF THE AO ON VAR IOUS POINTS. IT HAS THUS BEEN POINTED OUT BY THE AO TH AT THE ASSESSEE HAD DEALT IN 82 SCRIPTS AND UNITS AND HAD ENGAGED IN MORE THAN 410 TRANSACTIONS DURING THE; YEAR, RESULTING IN EACH SCRIP BEING BOUGHT AND SOLD MORE THAN FIVE TIMES. T HIS ISSUE HAS NOT BEEN ADDRESSED BY THE AR. AS ALREADY POINTE D OUT ABOVE, IN THE WORDS OF THE ASSESSEE AND THE AR THEM SELVES, 3231/AHD/2009 4 SUCH TRANSACTIONS WOULD CLEARLY BE IN THE NATURE OF BUSINESS. DEALING IN THE SAME SHARE OR PURCHASING AND SELLING THE SAME SHARE MORE THAN ONCE ON THE SAME DAY MEANS THAT THE OWNER OF THE SHARE HAS BEEN ATTEMPTING TO RIDE THE VOLATI LITY IN THE MARKET, SINCE, MULTIPLE TRANSACTIONS WOULD MEAN BUY ING THE SHARES WHEN THE PRICE IS LOW AND SELLING WHEN THE PRICE IS HIGH. THIS COULD BE DONE ONLY WHEN THE MARKET GOES UP AND DOWN SEVERAL TIMES ON THE SAME DAY. WHET IS FREQUEN TLY STATED BY INVESTMENT GURUS IS THAT, WHEN THE MARKET IS VOLATILE, ANY RETAIL OR SMALL TIME INVESTOR SHOULD STAY AWAY FROM THE MARKET AND HOLD ON TO THE INVESTMENTS UNTIL THE MARKET STABILISES. A PERSON WHO TRANSACTS IN TIMES OF MARKET VOLATILITY IS A HIGH-RISK TAKER WHO SEEKS TO REAP PROFITS FROM SUCH' TURBULENCE. A NORMAL HOUSEHOLD INVESTOR CANNOT BE EXPECTED TO RIDE -SUCH A VOLATILE MARKET. THUS, THE VOLUME OF THE TRANSACTIONS, THE FREQUENCY, AS ALSO THE MAGNITUDE OF THE TRANSACTIONS CLEARLY INDICATE AND POINT TO THE FACT THAT THE ASSESSEE WAS NOT A SMALL TIME HOUSEHOLD INVESTOR, BUT A PERSON WHO WAS, INVOLVED IN THE BIG TIME BUSINESS OF SHARE TRADING. 5.7 IT WAS ALSO CLEARLY BROUGHT OUT BY THE AO THAT THE ASSESSEE HAD TAKEN LOANS FROM VARIOUS PARTIES INCLUDING ONE FROM SMT. S H JARIWALA OF RS.68,36,755 AND THE OTHER FROM S.H. 'TEXTILES OF RS.15, 12,000 FOR THE PURPOSE OF TRADING IN THE SHARES AND UNITS. ONCE AGAIN, THE AR HAS NET COMMENTED OR MADE ANY OBSERVATION ON THIS ISSUE THIS IMPORTAN T FINDING OF THE AO CLEARLY CONTRADICTS THE ASSESSEE'S AND THE AR'S CLAIM THAT SHE HAD INVESTED HER OWN FUNDS WHICH SHE HAD INHERITED FROM HER FATHER. THE FACT THAT THE ASSESSEE HAD TAKEN SUCH SUBSTANTIAL LOANS TO BUY THE SHARES, CLE ARLY SHOWS THAT IT WAS ESSENTIALLY A BUSINESS ACTIVITY THAT SH E WAS ENGAGED IN. N O PRUDENT PERSON WOULD TAKE LOANS FROM THE MARKET 'OR EVEN FROM KNOWN PERSONS AND RELATIVES WHERE INTEREST RATES ARE L5% AND UPWARDS, TO EARN SIMPLE APPRECIATION ON INVESTMENTS WHICH IN PERCENTAGE TER MS WOULD ALWAYS BE BELOW THE COST OF SUCH BORROWINGS, UNLESS OF COURSE SUCH BORROWINGS WERE MADE FOR THE PURPOSE OF EARNING PROFITS FROM A VOLATILE MARKET. THIS FACT O F THE BORROWINGS BY THE ASSESSEE. ALONG WITH THE OTHER FA CT-; SUCH AS 'HE ELABORATE ESTABLISHMENT MAINTAINED BY THE ASSESSEE, 3231/AHD/2009 5 THE ENGAGEMENT OF A RENOWNED BROKER AND THE MAINTEN ANCE OF THREE DIFFERENT BANK ACCOUNTS WITH THREE DIFFERE NT BANKS, AND THE OTHER FACTS PERTAINING TO THE LAST NUMBER O F TRANSACTIONS INVOLVING LARGE NUMBER OF SCRIPTS WITH AVERAGE HOLDING PERIOD OF LESS THAN 45 DAYS, AS ALSO THE TOTAL TURNOVER OF THE TRANSACTIONS, CLEARLY LEAD TO THE IRREFUTABLE CONCLUSION THAT THE STCG THAT THE ASSESSEE HAD CLAIMED OF RS.L7,94 , 669 WAS ESSENTIALLY THE ASSESSEE'S INCOME FROM THE BUSIN ESS OF SHARE DEALINGS/TRANSACTIONS. THE AO'S ACTION IN TRE ATING THE SUM OF RS.17,94,669 AS INCOME FROM BUSINESS IS THER EFORE, SUSTAINED. HOWEVER, THE A.O. WILL HAVE TO ALLOW DEDUCTION OF EXPENSES AGAINST SUCH INCOME. 6. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE MATERIAL ON RECORD. THE CLAIM OF THE LD. A.R. IS THAT SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN THE CASE OF SMT. REKHABEN HASMUKHLAL I.T.A.NO. 3487/3491/A/08 PRONOUNCED ON 21.01.2011, THEREFORE, IN THIS ORDER, THE VIEW TAKEN IN SUSHILABEN H JARIWALA ANOTHER GROUP M EMBERS HAS BEEN FOLLOWED. 7. ON THE OTHER HAND, LD. D.R. SUBMITTED THAT IN SU CH CASES, THE VIEW OF THE TRIBUNAL IN THE CASE OF SHRI SUGAMCHAND C SHAN VS ACIT IN I.T.A.NO. 3554/A/2008 PRONOUNCED ON 29.01.2010 SHOULD ALSO BE CONSIDERED WHEREIN IT IS HELD THAT IF HOLDING PERIOD IS LESS THAN ONE MON TH THEN PROFITS ON SALE OF SHARES SHOULD BE TREATED AS BUSINESS INCOME AND IF HOLDING PERIOD IS OVER ONE MONTH, THEN PROFITS THEREON SHOULD BE CONSIDERED AS SHORT TERM CAPITAL GAIN. THIS ORDER OF THE TRIBUNAL WAS NOT CONSIDERED IN TH E CASE OF SMT. REKHABEN AND THEREFORE, THAT JUDGEMENT IS PER INQURIUM AND T HE VIEW OF THE TRIBUNAL SHOULD BE MODIFIED ACCORDINGLY. 8. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE CONSIDERED VIEW THAT THE VIEW TAKEN BY THE TRIBUNAL IN SUGAMCHAND C . SHAH (SUPRA) SHOULD ALSO BE CONSIDERED AND THE A.O. SHOULD FIND OUT THE HOLDING PERIOD OF EACH SCRIPT. IF HOLDING PERIOD IS LESS THAN ONE MONTH T HEN PROFITS ON SALE OF SUCH 3231/AHD/2009 6 SHARES SHOULD BE TREATED AS BUSINESS INCOME AND THE PROFITS SHOULD BE ASSESSED AS BUSINESS INCOME. IF HOLDING PERIOD IS MORE THAN ONE MONTH THEN PROFITS ON SUCH SHARES SHOULD BE TREATED AS SHORT T ERM CAPITAL GAIN AND TAXED ACCORDINGLY. IN THIS REGARD, WE MAY REFER FOLLOWIN G PORTION OF THE ORDER OF SHRI SUGAMCHAND C. SHAH: 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABL E ON RECORD. IN OUR CONSIDERED VIEW, THE TRIBUNAL IN THE CASES OF G OPAL PUROHI VS. JT. CIT(SUPRA) AND OF SARNATH INFRASTRUCTURE (P ) LTD. VS. ASSTT.CIT(SUPRA) LAID DOWN CRITERIA FOR HOLDING AS TO WHEN TRANSACTION IN SHARES BE TREATED AS TRADING AND WHE N THEY SHOULD BE TREATED AS INVESTMENT. 10. FOR THE SAKE OF CONVENIENCE, WE REPRODUCE HEREU NDER THE RELEVANT PORTION OF THE ORDER OF ITAT BOMBAY BENCH IN THE CASE 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 ACTIVITIE S SHOWN BY THE ASSESSEE AS BUSINESS PROFIT. (III) THE ASSESSEE HAS SHOWN SHARES PURCHASED ON DELIVERY BASIS AS INVESTMENT AT THE END OF THE YEAR AND NO S TOCK-IN-TRADE EXIST ON THAT DATE AND THE ASSESSEE HAS EARNED BOTH LONG- TERM AND SHORT- TERM CAPITAL GAINS WHICH MEANS THE ASSESSEE HAS ALS O HELD SHARES FOR A PERIOD 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 IN VESTMENT AT THE YEAR END IS SAME IN ALL THE YEARS, HENCE; APPARENTLY, TH ERE APPEARS NO REASON AS TO WHY THE CLAIMS MADE BY THE ASSESSEE SHOULD NO T BE ACCEPTED. HOWEVER, THE REVENUE AUTHORITIES HAVE TAKEN A DIFFE RENT VIEW IN THE YEAR UNDER CONSIDERATION BY HOLDING THAT PRINCIPLE OF RE S JUDICATA IS NOT APPLICABLE TO THE ASSESSMENT PROCEEDINGS. THERE CAN NOT BE, IN OUR VIEW, 3231/AHD/2009 7 ANY DISPUTE ON THIS ASPECT BUT THERE IS ALSO ANOTHE R JUDICIAL THOUGHT, THAT THERE SHOULD BE UNIFORMITY IN TREATMENT AND CONSIST ENCY UNDER THE SAME FACTS AND CIRCUMSTANCES AND WE HAVE ALREADY FOUND T HAT FACTS AND CIRCUMSTANCES ARE IDENTICAL, EVEN THOUGH A DIFFEREN T STAND HAS BEEN TAKEN BY THE REVENUE AUTHORITIES. THIS ACTION OF THE REVE NUE AUTHORITIES HAS LED US TO ASK OURSELVES THAT IN THIS YEAR WHY IT HAS BE EN DONE SO. IN THE PROCESS TO FIND THE ANSWER, WE NOTED THAT THERE WAS A CHANG E IN THE SCHEME OF TAXATION RELATING TO SHORT-TERM CAPITAL GAINS AND L ONG-TERM CAPITAL GAINS. THROUGH THE FINANCE ACT, 2004, THE LEGISLATURE IMPO SED SECURITIES TRANSACTION TAX ON THE SALE AND PURCHASE OF SHARES AND OTHER DERIVATIVE TRANSACTIONS AND, SIMULTANEOUSLY, THE LEGISLATURE E XEMPTED LONG-TERM CAPITAL GAIN UNDER SECTION 10(38) OF THE ACT FROM T HE LEVY OF TAX AND ON SHORT-TERM CAPITAL GAIN, A CONCESSIONAL RATE OF TAX I.E., 10 PER CENT HAS BEEN LEVIED SUBJECT TO THE CONDITION THAT TRANSACTI ONS RESULTING INTO THIS TYPE OF GAIN MUST HAVE SUFFERED SECURITIES TRANSACT ION 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 REVENUE AUTHORITIES TO TAKE A DIFFERENT VIEW ON THE SAME TY PES OF TRANSACTIONS ENTERED INTO BY THE ASSESSEE IN EARLIER YEARS. AT T HIS STAGE, WE CONSIDER IT FIT TO STATE THAT THERE IS NO DISPUTE BEFORE US THA T ASSESSEE HAS CLAIMED EXEMPTION UNDER SECTION 10(38) AND/OR HAS PAID TAX UNDER SECTION 111A AT CONCESSIONAL RATE ON THE TRANSACTIONS, WHERE SECURI TIES TRANSACTION TAX HAS NOT BEEN. IT IS ALSO NOTED THAT THE ASSESSEE HAS PA ID TAX ON SHORT-TERM CAPITAL GAINS AT NORMAL RATES ON SHARE TRANSACTIONS EXECUTED IN THE PERIOD PRIOR TO IMPOSITION OF SECURITIES TRANSACTIONS TAX. IN OUR VIEW, THE LEGISLATIVE CHANGE OF THIS NATURE, WHEREBY NO CHANG E HAS BEEN MADE IN RESPECT OF NATURE AND MODUS OPERANDI OF SUCH SHARE TRANSACTIONS, RESULTING INTO ANY ADVANTAGE CANNOT BE TAKEN AWAY B Y THE REVENUE AUTHORITIES IN THIS MANNER AND IN THESE CIRCUMSTANC ES, WE ARE OF THE VIEW THAT, PRINCIPLE OF CONSISTENCY, THOUGH IT IS AN EXC EPTION TO THE PRINCIPLE OF RES JUDICATA MUST BE APPLIED HERE. IT IS FURTHER SO BECAUSE THE PAYMENT OF SECURITIES TRANSACTION TAX IS MANDATORY I.E., WHETH ER AN ASSESSEE EARNS THE PROFIT OR NOT OR SUFFERS A LOSS AND BY IMPOSITION O F SUCH TAX, THE LEGISLATURE HAS NOT GIVEN ANY BENEFIT TO A CLASS OF TRANSACTIONS AS A WHOLE THOUGH IT MAY RESULT INTO AN APPARENT BENEFIT TO IN DIVIDUAL(S) ENTERING INTO THOSE TRANSACTIONS. THUS, IN OUR VIEW, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, ON THE BASIS OF PRINCIPLE OF CONSISTENCY ALON E, THE ACTION OF THE REVENUE AUTHORITIES IS LIABLE TO BE QUASHED. WE ORD ER ACCORDINGLY AND DIRECT THE ASSESSING OFFICER TO ACCEPT THE CLAIMS O F 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 CIRCU LAR NO.4 OF CBDT(2007) DATED 15/06/2007, VARIOUS OTHER DECISION S, SUCH AS, CIT VS. ASSOCIATED INDUSTRIAL CO. LTD. (1971) 8 2 ITR 586 (SC), CIT VS. H. HOLCK LARSEN (H) (1986) 160 ITR 67 (SC), FIDELITY NORTHSTAR FUND IN RE(2007) 207 CTR (AAR) 2 97; 3231/AHD/2009 8 (2007) 288 ITR 641 (AAR), FIDELITY ADVISOR SER SERI ES VIII IN RE (2004) 271 ITR 1 (AAR), JP HARRISON (WATFORD) LT D. VS. GRIFFITH (H.M. INSPECTOR OF TAXES) (1962) 40 TAX CA SES 281 (HL), RAJA VISHEWARA SINGH (DECEASED) VS. CIT (1961 ) 41 ITR 685 (SC), CENTRAL INDIA AGENCIES PVT.LTD.V S. CIT ( 1970) 77 ITR 959 (ALL.), MRS. SAROJANI RAJAH VS. CIT (1969) 79 ITR 504 (MAD.), DALHOUSIE INVESTMENT CO.LTD. VS. CIT (1968) 68 ITR 486(SC), CIT VS. ASSOCIATED INDUSTRIAL DEVELOPMENT CO.LTD. (1971) 82 ITR 586 (SC), CIT VS. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD. (1975) 100 ITR 706 (SC) AND CULLED OUT FOLLOWING PRINCIPLES WHICH ARE DESCRIBED IN PARA NO.13 OF THA T ORDER:- 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 TRA DE OR ARE MERELY FOR INVESTMENT PURPOSES : (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 F ROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHE THER IT IS TREATED AS STOCK-IN-TRADE OR INVESTMENT. WHETHER SHOWN IN OPEN ING/CLOSING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET . (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHAS E AND PAID INTEREST THEREON ? NORMALLY, MONEY IS BORROWED TO PURCHASE G OODS FOR THE PURPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR 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 SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE . SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS MAY SHOW W HETHER THE ASSESSEE IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PROF IT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE ? FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN TH E CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSEN TIAL 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 INDI CATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MAR KET VALUE OR NET 3231/AHD/2009 9 REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL INDIC ATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEM ORANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION ? WHETHER FOR T RADE OR FOR INVESTMENT ? IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE AR E 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 H AS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SH OW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPARENT IS NOT REAL. (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF 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 THAT ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QU ESTION) FOR INVESTMENT. (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 ASS ESSEE IS COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE TH AT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEA LING AS A TRADER IN THAT ITEM ? WHETHER IT HAD SUCH AN INTENTION (TO CARRY ON ILL EGAL BUSINESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASES WERE MADE ? (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE I S NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. (11) NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SEVERAL FACTORS 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 D EALING IN SHARES AND ASSESSEE HAS SHOWN THE TRANSACTIONS IN S HARES AS INVESTMENT AND NOT AS STOCK-IN-TRADE. IT HAS BEEN S HOWN CONSISTENTLY FOR SEVERAL YEARS IN THE PAST AND DEPA RTMENT HAS NOT CHALLENGED THE BOOK KEEPING OR ACCOUNTING OF SH ARES AS INVESTMENT. NO CONTRARY MATERIAL OR FACTS HAVE BEEN POINTED OUT 3231/AHD/2009 10 BY THE REVENUE TO SHOW THAT FACTS IN THE CURRENT YE AR ARE DIFFERENT THAN THE FACTS IN EARLIER YEARS. IT IS AL SO NOT POINTED OUT BY THE REVENUE THAT FREQUENCY AND NUMBER OF TRANSAC TIONS 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 O R NET 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 SHOWIN G THAT THE ASSESSEE HAD INTENTION WHILE PURCHASING THEM TO HOL D THEM AND THEY WERE REFLECTED IN THAT BALANCE-SHEET AS INVEST MENT. THE ASSESSEE HAS ENJOYED DIVIDEND INCOME AND DECLARED T HE SAME IN THE RETURN OF INCOME TRADING THE TRANSACTIONS AS IN VESTMENT, EVEN IF FREQUENCY OF SELLING OF SHARES MAY BE MORE BUT IN RESPECT OF SHARES HELD FOR A CONSIDERABLE LONGER PE RIOD (FOR MORE THAN 366 DAYS) AS PER FINDING GIVEN BY THE LEARNED 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 U PTO 6832 DAYS. IN ANY CASE, WHEN THOSE SHARES WERE PURCHASED IT COULD NOT BE SAID THAT INTENTION OF THE ASSESSEE WAS TO D EAL IN THEM AND NOT TO HOLD THEM AS INVESTMENT. EVEN IN THE CAS E OF INVESTMENT IT IS FOR THE ASSESSEE TO DECIDE WHEN TO DISPOSE THEM OFF SO THAT TO GIVE MAXIMUM RETURN OUT OF THEM. THE RE 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 BENEFIT WHEN PRICES OF SHAR ES ARE HIGH SO AS TO EARN BETTER GAINS AND MAKE INVESTMENT ELSE WHERE. IN OUR CONSIDERED VIEW, IT IS THE DECISION OF THE ASSE SSEE TO DISPOSE OF AN INVESTMENT, IF ACCORDING TO HIM, MARKET VALUE THEREOF HAVE REACHED A PLATEAU SO AS TO MAKE INVESTMENT IN OTHER ASSETS WHICH HAVE POTENTIAL OF APPRECIATION IN MARKET VALU E. THIS DECISION TO SALE HIS INVESTMENT AT HIGH MARKET PRIC E CANNOT CONVERT AN OTHERWISE INVESTMENT INTO TRADING. IF IN THE PAST, THE DEPARTMENT HAS ACCEPTED THE SALE OF SHARES OF HOLDI NGS OF MORE 3231/AHD/2009 11 THAN A YEAR AS INVESTMENT AND PROFITS THEREON HAS B EEN ASSESSED UNDER THE HEAD CAPITAL GAIN, THEN THERE IS NO REA SON TO HOLD DIFFERENTLY THIS YEAR. WE ACCORDINGLY CONFIRM THE O RDER OF THE LEARNED CIT(APPEALS) IN RESPECT OF HOLDING THAT PRO FIT OF RS.37,52,281/- SHOULD BE ASSESSED AS 'LONG-TERM CAP ITAL GAIN'. 15. IN RESPECT OF PROFIT OF RS.55,40,679/- BEING 'S HORT-TERM CAPITAL GAIN' AS CLAIMED BY THE ASSESSEE AND HELD A S PROFITS ASSESSED UNDER THAT BUSINESS BY TWO AUTHORITIES, WE FIND THAT IN MANY CASES THERE IS DELIVERY OF SHARES AND SHARE WE RE REGISTERED IN THE NAME OF THE ASSESSEE. THE HOLDING PERIOD OF THE SHARES IS FROM 0 DAYS TO 366 DAYS. IN SOME CASES, THE FRE QUENCY OF TRANSACTIONS ARE APPARENTLY SUBSTANTIAL AS ON ONE D AY THE ASSESSEE HAS PURCHASED SEVERAL SCRIPTS AND SOLD SEV ERAL OF THEM ON THE SAME DAY. 16. THE QUESTION IS WHETHER THEREFORE, MERELY FROM FREQUENCY OF THE TRANSACTIONS CARRIED ON BY THE ASS ESSEE, HE IS TREATED AS DEALER IN SHARES OR STILL HE IS HELD AS INVESTOR. AS FOUND IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD . VS. ASSTT.CIT(SUPRA) ALSO, ASSESSEE ADDUCED EVIDENCE TO SHOW THAT HIS HOLDINGS ARE FOR INVESTMENT 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 TRADER IN SHARES AND LEGAL REQUIREMENTS THEREFOR HAVE BEEN COMPLIED WITH. IT IS ALSO A FACT THAT HE HAS NOT BORROWED AN Y MONEY FOR INVESTING IN SHARES. MERELY BECAUSE, ASSESSEE HAD S OME BORROWED FUNDS IT WOULD NOT BY ITSELF SHOW THAT THE Y WERE DEPLOYED IN INVESTMENT. NOTWITHSTANDING, EVEN BORRO WING ARE REQUIRED TO SETTLE PAYMENTS OBLIGATIONS IN RESPECT OF INVESTMENTS, LIKE ONE TAKES LOAN FOR PURCHASING A H OUSE. IN ANY CASE, HIGH FREQUENCY TRANSACTIONS AND LOW PERIOD HO LDINGS INDICATE TRADE, WHEREAS LOW FREQUENCY TRANSACTIONS AND HIGH PERIOD HOLDINGS INDICATE INVESTMENT. 17. IN THIS CASE, THE ASSESSEE HAS DISCHARGED THE O NUS OF SHOWING THAT IT IS MAKING INVESTMENT BUT REVENUE IS ABLE TO SHOW THAT THERE ARE HIGH FREQUENCIES AND LOW HOLDIN GS IN MANY TRANSACTIONS OF SHARES INDICATING THAT ASSESSEE HAS SOME INTENTION OF PURCHASING AND SELLING SHARES AS A TRA DER. THE CASE 3231/AHD/2009 12 OF THE ASSESSEE IS SUPPORTED BY THE FACT THAT IT HA S ENTERED THE PURCHASES IN THE BOOKS AS INVESTMENT, SHARES ARE VA LUED AT COST AND REVENUE IS HOLDING SUCH ACCOUNTING TREATMENT AS INVESTMENT IN THE PAST. THUS, THERE CANNOT BE A FIX ED CRITERIA TO DECIDE AS IN THE PRESENT CASE WHETHER ASSESSEE HAS TRADED IN SHARES EVEN THOUGH ASSESSEE HELD THEM AS INVESTMENT. 18. THOUGH IT HAS BEEN HELD IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD.(SUPRA) THAT DELIVERY OF SHA RES IS AN IMPORTANT CRITERIA FOR HOLDING THAT ASSESSEE IS INV ESTING IN THEM BUT AFTER DEMATIZATION WHERE SHARES ARE DELIVERED I N THE DEMAT ACCOUNT THE NEXT DAY, IT CANNOT BE HELD THAT IN ALL SUCH CASES, IT WOULD BE INVESTMENT AND NOT TRADING. IF T HAT IS SO HELD, THEN ALL THOSE TRADERS IN SHARES IN WHOSE DEMAT ACC OUNTS SHARES ARE DELIVERED CAN BE SAID TO HAVE EARNED CAP ITAL GAINS AND NOT PROFITS. THEREFORE, ONLY ONE CRITERIA, I.E. DEL IVERY OF SHARES ALONE WILL NOT BE SUFFICIENT TO DECIDE THE ISSUE. E VEN OTHERWISE IN SARNATH INFRASTRUCTURE (P) LTD.(SUPRA) ITSELF IT HAS BEEN HELD THAT CUMULATIVE EFFECT OF SEVERAL FACTORS WILL DECI DE THE ISSUE. 19. CONSIDERING THE TOTALITY AND PECULIARITY OF THE FACTS OF THIS CASE, WE FIND THAT ASSESSEE IS NEITHER FULLY ACTING AS A TRADER NOR AS FULLY INVESTOR. DEMARCATION IS QUITE HAZY; THOUG H IN THE BOOKS HE IS SHOWING ALL THE PURCHASES AS INVESTMENT BUT FREQUENCY OF TRANSACTION IN SEVERAL CASES IS SO LAR GE AND HOLDING PERIOD IN MANY CASES IS SO SMALL FROM 0 TO A WEEK OR SO THAT ASSESSEE IS DE FACTO SELLING AND PURCHASING 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 FOR DETERMINING AS TO WHEN HE IS ACTING AS TRADER AND W HEN AS INVESTOR. ACCORDINGLY, WE DECIDE FOLLOWING CRITERIA TO HOLD WHEN GAINS ARE TO BE TAXED AS PROFIT TO BE EARNED U NDER THE BUSINESS OR TO BE TAXED AS SHORT TERM CAPITAL GAIN, WE HOLD THAT IF SHARES ARE NOT HELD EVEN SAY FOR A MONTH, THEN T HE 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 T HAT IF A PERSON INTENDS TO HOLD HIS PURCHASES OF SHARES AS I NVESTMENT, HE WOULD WATCH THE FLUCTUATION OF RATES IN THE MARKET FOR WHICH A MINIMUM TIME IS NECESSARY, WHICH WE ESTIMATE AT ONE MONTH. WHERE SHARES ARE HELD FOR MORE THAN A MONTH, THEY S HOULD BE 3231/AHD/2009 13 TREATED AS INVESTMENT AND ON THEIR SALE SHORT TERM CAPITAL GAIN SHOULD BE CHARGED. WHEN SHARES ARE HELD FOR LESS TH AN A MONTH, GAIN ON THEM SHOULD BE TREATED AS PROFIT FROM BUSIN ESS. 9. WE AGREE WITH THE LD. D.R. THAT DECISION GIVEN I N THE CASE OF REKHABEN H JARIWALA WAS PER INQURIUM OF THE DECISIO N IN THE CASE OF SHRI SUGAMCHAND C. SHAN CASE AND IT WOULD BE FAIR AND RE ASONABLE TO STRIKE A BALANCE BETWEEN THE CLAIM OF BUSINESS INCOME AND SH ORT TERM CAPITAL GAIN. WE ACCORDINGLY DIRECT THE A.O. TO WORK OUT BUSINESS INCOME AND SHORT TERM CAPITAL GAINS ACCORDINGLY. HE WOULD GIVE REASONABL E OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. 11. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MAY, 2011. SD./- SD./- (D. K. TYAGI) (D. C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED :31 ST MAY, 2011 SP COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR, AHMEDABAD 6. THE GUARD FILE 3231/AHD/2009 14 1. DATE OF DICTATION 26.05.11 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 27.05.11 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P .S./P.S.30.05.11 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 31.05.11 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S.31.05.11 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 31.05.11 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 9. DATE OF DESPATCH OF THE ORDER. ..