ITO, Sikar V. SMT. RENUKA AJAY MAROO, Sikar

ITA 541/JPR/2011

• Counselvise Citation: 54123114 RSA 2011
• Duration Of Justice: 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 01-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VINOD JOHRI; SUBHASH CHANDRA
• Keywords: Capital asset; Business income; Transactions in derivatives; Earning of tax free income; Advance ruling; Question of law; Capital Gains

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH A JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO.541/ JP/2011 ASSESSMENT YEAR 2007-08 PAN: AAJPM 6941 R THE ITO VS. SMT. RENUKA AJAY MAROO WARD- 3 W/O SHRI AJAY MAROO, SIKAR NAYA SAHAR, JETHMAL JOSHI KI GALI, SIKA R (APPELLANT ) (RESPONDENT) DEPARTMENT BY : SHRI VINOD JOHRI AND SHRI SUBHASH CHANDRA ASSESSEE BY : SHRI P.C. PARWAL DATE OF HEARING: 15-11-2011 DATE OF PRONOUNCEMENT: 22-11-2011 ORDER PER N.L. KALRA, AM:- THE REVENUE HAS FILED AN APPEAL AGAINST THE ORDER OF THE LD. CIT(A)-III JAIPUR DATED 23-03-2011 FOR THE ASSESSMENT YEAR 2007-08. 2.1 THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) HAS ERRED IN:- (I) DIRECTING THE AO TO ASSESS RS. 50,54,860/- AS L ONG TERM CAPITAL GAIN AND RS. 36,43,920/- (27,37,785 + 9,06, 235/- AS SHORT TERM CAPITAL GAIN INSTEAD OF RS. 78,12,724/- AND RS . 9,06,235/- ASSESSED BY THE AO AS INCOME FROM BUSINESS. (II) DIRECTING THE AO TO TREAT THE SALE PROCEEDS OF RS. 3,66,750/- ON SILVER UTENSIL/ SCRAP AS LONG TERM CAPITAL GAIN INSTEAD OF ASSESSED AS INCOME FROM BUSINESS. 2.2 THE ASSESSEE HAS SHOWN THE INCOME UNDER DIFFERE NT HEADS AS UNDER:- BUSINESS INCOME RS. 9,620/- SHORT TERM CAPITAL GAIN RS. 9,06,235/- INCOME FROM OTHER SOURCES RS. 1,010/- 2 2.3 THE ASSESSEE CLAIMED DIVIDEND INCOME OF RS. 1,7 8,341/- AS EXEMPT INCOME U/S 10(34) OF THE ACT AND INCOME ON ACCOUNT OF LONG TE RM CAPITAL GAIN FROM SHARES AT RS. 78,12,724/- U/S 10(38) OF THE ACT. THE AO AFTER PER USAL OF THE DETAILS FILED BY THE ASSESSEE HELD THAT THE TRANSACTION IN THE SHARES ARE MORE IN THE NATURE OF BUSINESS TRANSACTION THAN IN THE NATURE OF CAPITAL ASSETS TRANSFER. THE ASSES SEE HAS TRIED TO GIVE HER INCOME FROM SHARE DEALINGS THE COLOR OF LONG TERM AND SHORT TER M CAPITAL GAINS WITH THE MOTIVE TO CLAIM EXEMPTION U/S 10(38) IN RESPECT OF SOME TRANSACTION AND TO CLAIM LOWER RATE OF TAX IN RESPECT OF SOME OTHER TRANSACTIONS. FOR ARRIVING AT THIS CONCLUSION, THE AO MADE THE FOLLOWING OBSERVATIONS:- (I) THE BALANCE SHEET AND THE RETURN OF INCOME OF LAST TWO YEARS SHOWS THAT THE ASSESSEE HAD BEEN REGULARLY SELLING AND PURCHASING THE SHARES AND DERIVING PROFIT FROM THE SHARE TRANSACTION. IN HER CAPITAL A CCOUNT FOR A.Y. 05-06 & A.Y. 06-07, A SUM OF RS.32,44,268/- AND RS.28,6,296/- WA S CREDITED AS CAPITAL GAIN ON SALE OF INVESTMENT AND SHARES WITH CLOSING STOCK OF RS.35,00,500/- AND RS.42,45,500/- RESPECTIVELY. THESE DEALING IN SHARE S ARE ADVENTURES IN THE NATURE OF TRADE. (II) ASSESSEE HAS DECLARED STCG OF RS.9,06,235/-, BUT SH E HAS NOT MAINTAINED THE DETAILS REQUIRED AS PER SCHEDULE CG OF THE RETURN. ONLY STATEMENT OF BROKER WAS SUBMITTED. FROM THE STATEMENT IT WAS NOTICED TH AT THE PROFIT OF RS.9,06,235/- COMPRISES OF TRANSACTION THROUGH SURE SH RATHI & ASSOCIATES RS.7,45,510/- AND THROUGH OTHER BROKER RS.1,63,724/ -. ON FURTHER BREAKUP OF RS.7,45,510/- IT WAS NOTICED THAT THERE IS THE NET OF PROFIT OF RS.17,37,059/- AND LOSS OF RS.9,94,549/-. THESE STATEMENTS SHOWS THAT ASSESSEE WAS DEALING IN THE SHARES WITH THE PROFIT MOTIVE AND HER DEALIN G IN THE SHARES HAD ALL THE ESSENTIAL MOTIVE INGREDIENTS OF ADVENTURE IN THE NA TURE OF TRADE AND THEREFORE THE RESULTANT INCOME/LOSS IS BUSINESS INCOME AND NO T CAPITAL GAIN (III) ASSESSEE FAILED TO PRODUCE THE ORIGINAL PURCHASE VO UCHERS OR ANY OTHER INDEPENDENT EVIDENCE WHICH CAN SUPPORT AND AUTHENTI CATE THE GIVEN DETAILS. PERUSAL OF THE DETAILS RUNNING INTO 10 PAGES SHOWS THAT THE ASSESSEE HAD BEEN REGULARLY PURCHASING THE SHARES FROM YEAR 2001 TO Y EAR 2006. THE VOLUME OF THE TRANSACTIONS & THE REGULARITY WITH WHICH THE TR ANSACTIONS WERE MADE SHOWS 3 THAT THE ASSESSEE WAS DOING THE BUSINESS OF SHARE T RADING AND IT WAS NOT A MERE INVESTMENT ON THE PART OF THE ASSESSEE. (IV) ASSESSEE OWNS OFFICE FOR SHARE DEALING WORK AND ALS O EMPLOYS PERSON WHICH ADDS TO THE INFERENCE THAT DEALING IN SHARES WAS OF BUSINESS NATURE AND NOT INVESTMENT NATURE. (V) THE AO RELIED ON THE DECISION OF SUPREME COURT IN C ASE OF G VENKATASWAMI NAIDU & CO. VS CIT 35 ITR 594 AND IN CASE OF BAREND RA PRASAD RAY VS ITO 129 ITR 295(SC) FOR HOLDING THAT THE TRANSACTION IN SHARES MADE BY THE ASSESSEE IS A BUSINESS VENTURE. (VI) THE AO ALTERNATIVELY HELD THAT THE ASSESSEE HAS NOT FILED THE AUTHENTIC DETAILS OF THE HOLDING PERIOD OF SHARES AND THEREFORE NOT E LIGIBLE FOR EXEMPTION U/S 10(38). 2.4 THE AO TREATED THE INCOME OF RS.78,12,724/- DEC LARED BY THE ASSESSEE AS LTCG AND RS.9,06,235/- DECLARED BY ASSESSEE AS STCG AS I NCOME FROM TRADING OF SHARES UNDER THE HEAD INCOME FROM BUSINESS AND MADE ADDITION FOR THE SAME ACCORDINGLY. 2.5 BEFORE THE LD CIT(A), ASSESSEE IN ORDER TO ESTA BLISH HER CLAIM AS AN INVESTOR AGAIN FURNISHED EVIDENCE IN THE SHAPE OF STATEMENT OF HER HOLDING INDICATING THE PERIOD OF HOLDING. SHE SUPPORTED THE SAME WITH THE BILLING ST ATEMENT OF DEPOSITARIES/TRANSACTION STATEMENT OF HOLDING WITH THE DEPOSITARIES & FURTHE R WORKED OUT THE DETAILS OF SCRIPTS HAVING PURE LTCG, PURE STCG & PARTLY LTCG/STCG. THE LD. CIT(A) AFTER CONSIDERING THE SAME, ACCEPTED THE CONTENTION OF THE ASSESSEE & DIRECTED THE AO TO ASSESSEE THE LTCG AT RS. 50,54,860/- & THE BALANCE AS STCG. IN D OING SO, THE LD. CIT(A) GAVE THE FOLLOWING FINDINGS AT PAGES 6 AND7 OF HIS ORDER ):- I FIND THAT THE APPELLANT ASSESSEE HAS REGULARLY S HOWN THE SHARES AS INVESTMENT IN THE BALANCE SHEET FILED BY HER WITH THE RETURN OF INCOME AND THAT THE RETURNS OF THOSE YEAR S WERE ACCEPTED BY THE DEPARTMENT. IT IS ALSO NOTED THAT IN THE IMM EDIATELY PRECEDING A.Y. OF 2006-07, THE LD. CIT(A)-34, MUMBA I IN HIS ORDER DATED 30.03.2010 PASSED IN THE APPELLANT'S CASE HAD ACCEPTED THAT THE APPELLANT WAS AN INVESTOR IN SHARES AND HAD DIR ECTED THE AO TO 4 ASSESS THE APPELLANT'S INCOME FROM SALE OF THE SHAR ES UNDER THE HEAD 'CAPITAL GAIN'. FURTHER, IT IS OBSERVED THAT D URING THE YEAR ALSO, THE APPELLANT HAS ENTERED INTO A NUMBER OF SA FE TRANSACTIONS OF THOSE SHARES, WHICH SHE HAD HELD FOR A PERIOD RA NGING FROM ONE YEAR TO SIX YEARS. THEREFORE, I FIND MERIT IN THE A RGUMENT OF LD. AR THAT HAD THE ASSESSEE BEEN A DEALER IN SHARES, THE SCRIPS WOULD NOT HAVE BEEN HELD FOR SUCH A LONG PERIOD BY HER. IN TH IS RESPECT, IT IS SEEN FROM THE RELEVANT STATEMENT GIVEN IN THE PAPER BOOK RELATED TO THE SHARES SOLD AND THE CORRESPONDING DATES OF THE PURCHASE OF THOSE SHARES, THAT THE APPELLANT HAD HELD THOSE SHA RES FOR A SUBSTANTIALLY LONG PERIOD OF TIME. IN ADDITION, IT IS OBSERVED THAT THE AMOUNT REALIZED FROM THE SALE OF SHARES HAS BEE N UTILIZED IN THE PURCHASE OF PROPERTY. THEREFORE, THAT CONDUCT OF TH E ASSESSEE IS A CLEAR POINTER TO THE FACT THAT THE ASSESSEE IS AN I NVESTOR AND NOT A DEALER IN THE SHARES. IN THIS REGARD, I FIND THAT H ON'BLE GUJARAT HIGH COURT, IN THE CASE OF CIT VS. NEERAJ AMIDHAR S HURTI, 48 DTR 33, HAS HELD THAT WHERE THE ASSESSEE HELD THE SHARE S FOR 14 MONTHS, IT WAS A LONG PERIOD FOR THE PURPOSE OF LTCG AND SU CH SHARES COULD NOT BE TREATED AS STOCK IN TRADE. SIMILAR VIE W HAS BEEN TAKEN IN A NUMBER OF OTHER CASES REFERRED TO BY THE LD. A R SUPRA. HENCE, IN THESE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE AND IN VIEW OF THE FINDINGS OF THE LD. CIT(A) IN THE APPELLANT' S CASE FOR A.Y. 2006-07, I DIRECT THE LD. AO TO ASSESS THE APPELLAN T'S INCOME FROM THE SALE OF SHARES UNDER THE HEAD 'CAPITAL GAINS'. HOWEVER, IT IS NOTED THAT THE LD. AR HAS FILED A STATEMENT BEFORE ME, ACCORDING TO WHICH THE LONG TERM CAPITAL OF RS.78,12,724/- CLAIM ED BY THE APPELLANT IN HER RETURN OF INCOME WAS NOT CORRECT A ND AS PER THE SAID STATEMENT, THE CORRECT LONG TERM CAPITAL GAIN AMOUNTED TO RS.50,54,860/- ONLY AND, THEREFORE, THE REMAINING A MOUNT WAS TO BE HELD AS THE SHORT TERM CAPITAL GAIN, OVER AND AB OVE THE AMOUNT OF THE SHORT TERM CAPITAL GAIN ALREADY DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME. THE AO IS, ACCORDINGLY, DIREC TED TO ASSESSEE THE LONG TERM CAPITAL GAIN AT RS.50,54,860/- AND TH E BALANCE AMOUNT AS SHORT TERM CAPITAL GAIN. 2.6 DURING THE COURSE OF PROCEEDINGS BEFORE US, THE LD. DR DREW OUR ATTENTION TO NUMBER OF TRANSACTIONS DONE BY THE ASSESSEE. OUR AT TENTION WAS ALSO DRAWN TOWARDS THE DECISION OF AUTHORITY FOR ADVANCE RULING IN THE CA SE OF FIDELITY ADVISOR SERIES VIII, IN RE [2004] 271 ITR 0001. IF THERE ARE ENORMOUS AND F REQUENT SALES OF PORTFOLIO INVESTMENTS THEN GAINS ARE FOR BUSINESS PROFIT. THE LD. DR ALSO RELIED UPON THE CIRCULAR NO. 4/2007 5 DATED 15-06-2007 ISSUED BY THE CBDT. IF THE PURCHAS ES AND SALE OF SHARES IS WITH A MOTIVE OF EARNING A PROFIT THEN SUCH TRANSACTIONS S HOULD BE CONSIDERED AS A TRADING TRANSACTION. 2.7 BEFORE US, THE LD. AR HAS FILED THE FOLLOWING S UBMISSIONS:- 1. AO ON THE BASIS OF SO CALLED VOLUME, REGULARI TY AND FREQUENCY OF THE TRANSACTIONS HELD THAT THE ASSESSEE IS A TRADER AND ACCORDINGLY TREATED THE INCOME OF RS.78,12,724/- DECLARED BY THE ASSESSEE A S LTCG AND RS.9,06,235/- DECLARED BY ASSESSEE AS STCG AS INCOME FROM TRADING OF SHARES UNDER THE HEAD INCOME FROM BUSINESS AND MADE ADDITION FOR THE SAME. THE ASSESSEE BY REFERRING TO THE PERIOD OF HOLDING OF SHARES PRIOR TO SALE, FREQUENCY AND VOLUME OF TRANSACTION WITH REFERENCE TO THE TOTAL SHAREHOL DING, DIVIDEND INCOME EARNED BY THE ASSESSEE ETC. DEMONSTRATED THAT HER I NTENTION HAS ALWAYS BEEN THAT OF AN INVESTOR AND NOT OF A TRADER. THE EVIDEN CES & ARGUMENTS IN THIS REGARD IS AS UNDER:- A. A.A. A. OBJECT & INTENTION ASSESSEE IS A REGULAR INVESTOR IN SHARES/SECURITIES SINCE 1999. THE POSITION OF INVESTMENT IN SHARES AS PER THE BALANCE SHEET/WEALT H TAX RETURNS RIGHT FROM A.Y. 2001-02 IS AS UNDER:- INVESTMENT IN SHARES HELD AS ON AMOUNT OF INVESTMENT 31-03-2001 49,52,750/- (PB 40) 31-03-2002 29,65,586/- (PB 37) 31-03-2003 29,93,548/- (PB 33) 31-03-2004 30,50,000/- (PB 28) 31-03-2005 35,00,500/- 31-03-2006 98,50.000/- (PB 24) 31-03-2007 52,00,000/- (PB 2) FROM THE ABOVE, IT CAN BE NOTED THAT THE ASSESSEES SHARE HOLDING TOOK A CONSIDERABLE GROWTH. IT IS REGULARLY DISPOSING ITS INVESTMENT ON GETTING A FAVOURABLE OPPORTUNITY AND MAKING INVESTMENT IN NEW SHARES WITH AN INTENSION OF GETTING THE DIVIDEND AND THE CAPITAL APPRECIATION. SUCH AN INTENTION SHOWS THAT THE ASSESSEE IS AN INVESTOR IN SHARES & NOT A TRADER. B. B.B. B. PERIOD OF HOLDING 6 (I) ONE OF THE IMPORTANT CONSIDERATIONS FOR JUDGING WHE THER ASSESSEE IS AN INVESTOR OR NOT IS THE PERIOD OF HOLDING. THE APPEL LANT MADE INVESTMENT IN DIFFERENT SHARES BUT THE SAME WERE NOT SOLD WITHIN A FEW DAYS, MONTHS OR EVEN YEARS. MOST OF THE SHARES SOLD BY HER ARE HELD FOR MORE THAN ONE YEAR. (II) IN EARLIER YEARS THE INCOME DECLARED BY THE ASSESSE E UNDER THE HEAD CAPITAL GAIN ON SALE OF THE SHARES HAS BEEN ACCEPTED BY THE DEPARTMENT. IN A.Y. 2006-07, THE LD. CIT(A) IN PARA 8.2 OF HIS ORDER (PB 25) HAS ALSO HELD THAT SINCE THE HOLDING PERIOD OF SHARES IS MORE THAN ONE YEAR, THIS ITSELF IS AN INDICATOR OF THE INTENTION OF THE ASSESSEE OF HOLDI NG THE SHARE AS INVESTOR. (III) THE APPELLANT STILL HOLDS THE PHYSICAL SHARES OF MA NY COMPANIES OBTAINED THROUGH IPOS. THE APPELLANT IS NOT SELLING PHYSICAL SHARES OF GOOD COMPANIES EVEN TODAY. THESE FACTS STRONGLY INDICATE THAT THE ASSESSEE IS BASICALLY AN INVESTOR. HAD IT BEEN A CASE OF TRADER , THE APPELLANT WOULD NOT HAVE HELD THEM FOR SUCH A LONG PERIOD. C. C.C. C. VOLUME AND FREQUENCY OF TRANSACTION (I) IN A.Y. 2006-07, THE TOTAL NUMBER OF SCRIPT SOLD BY THE ASSESSEE WAS 501 ON WHICH LONG TERM CAPITAL GAIN OF RS.32,44,268/- AND SHORT TERM CAPITAL GAIN OF RS.1,48,145/- WAS DECLARED. CIT(A) MUMBAI VIDE ORDE R DATED 6-01-2009 ACCEPTED THAT ASSESSEE IS AN INVESTOR AND DIRECTED TO ASSESSEE LONG TERM CAPITAL GAIN/SHORT TERM CAPITAL GAIN AS THE CASE MA Y BE. IT WAS FURTHER HELD THAT THE HOLDING PERIOD OF MORE THAN ONE YEAR ITSEL F IS AN INDICATOR OF INTENTION OF INVESTOR AND DIVIDEND INCOME HAS ALSO BEEN OFFERED FOR TAXATION. (II) DURING THE YEAR UNDER CONSIDERATION THE POSITION OF THE SALE OF THE SHARES ARE ALMOST SIMILAR. THE MAIN FEATURES OF THE TRANSACTIO N EXECUTED DURING THE YEAR ARE AS UNDER (PB 10A-16A) :- - THE ASSESSEE ENTERED INTO SALE TRANSACTION OF 210 S CRIPTS. - OUT OF THIS IN 108 SCRIPTS THERE ARE LONG TERM CAPI TAL GAIN OF RS.28,30,326/- . THE HOLDING PERIOD IN THESE SHARES RANGES FROM 1 YEAR TO MORE THAN 6 YEARS. - IN 71 SCRIPTS, THERE IS LONG TERM AS WELL AS SHORT TERM CAPITAL GAIN. THE SHORT TERM GAIN HAS ARISEN IN THESE SCRIPTS MAINLY ON ACCOUNT OF SALE OF BONUS SHARES RECEIVED DURING THE YEAR AND SMALL QUA NTITY PURCHASED DURING THE YEAR IN THE SCRIPTS WHICH WERE HELD FOR A LONG PERIOD. - IN 31 SCRIPTS THERE IS SHORT TERM CAPITAL GAIN OF R S.2,71,075/-. FROM THE ABOVE, IT CAN BE NOTED THAT THE ASSESSEE H OLD THE SHARES AS AN INVESTOR. NO BUSINESSMAN WOULD HOLD THE SHARES FOR SUCH A LONG PERIOD. NONE 7 OF THE SHARES ARE FREQUENTLY PURCHASED OR SOLD. FAC TS ARE SIMILAR TO A.Y. 2006- 07. CONSIDERING ALL THESE FACTS, THE CLAIM OF THE A SSESSEE BE ACCEPTED. (III) AS FAR AS THE FREQUENCY OF TRANSACTIONS IS CONCERNE D , IT IS TO BE NOTED THAT THERE MAY BE TRANSACTION ON EACH AND EVERY DAY BUT TO JUDGE THE FREQUENCY/REGULARITY AND LONG HOLDING, IT HAS TO BE SEEN W.R.T A PARTICULAR COMPANY. D. D.D. D. DIVIDEND INCOME PERUSAL OF THE EARNINGS OF THE ASSESSEE CLEARLY SHO WS THAT SHE HAS BEEN REGULARLY EARNING DIVIDED INCOME WHICH IS MANY TIMES MORE THA N OTHER INCOMES COMBINED TOGETHER. ASSESSEE HAS EARNED DIVINED INCOME OF RS. 3,83,695/- IN A.Y. 06-07 (PB 16) & RS. 1,78,341/- (PB 1) IN THE YEAR UNDER CONSIDERATION. E. VOLUME/WORTH/FUND THE APPELLANT HAS A HIGH NET WORTH. AS ON 31.03.200 7 (PB 2) THERE IS NO BORROWED CAPITAL WHEREAS INVESTMENT IN SHARES IS OF RS. 52 L ACS. THE ASSESSEE HAS GOT BONUS SHARES AND A NUMBER OF TIMES SHE GOT THE OPPORTUNIT IES FOR RIGHT ISSUE AT PAR WHICH HAS BEEN AVAILED ACCORDINGLY. THE GAIN ON SALE OF S HARES HAS BEEN INVESTED BY THE ASSESSEE IN PURCHASE OF FLAT. F. ASSESSEE NEVER DEALT IN FUTURE OR OPTION (F&O), WHI CH AGAIN INDICATES THAT ASSESSEE WAS NEVER INVOLVED IN ANY SPECULATIVE TRAN SACTION AND THEREFORE ASSESSEE IS AN INVESTOR. THIS IS DUE TO THE FACT THAT A TRAD ER HAS A STRONG GREED AND LUST FOR QUICK MONEY WHICH MAKES HIM UTILIZE ALL HIS SOURCES INCLUDING EQUITY INVESTMENTS TO THE FULLEST POSSIBLE THROUGH ALL MEANS INCLUDING FINANCING, MARGIN TRADING ETC. WHICH THE ASSESSEE HAVE NOT DONE AT ALL. LARGE CHUN K OF PORTFOLIO CONSISTING OF INDEX SCRIPTS (WHICH FALL IN THE CATEGORY OF HIGHLY TRADED SCRIPTS OR HIGH MARKET CAPITALIZATION STOCKS) WERE RARELY TRADED. THIS IS THE BIGGEST PROOF THAT APPELLANT IS AN INVESTOR AND NOT A TRADER. 2. IN THE COURSE OF ASSESSMENT PROCEEDING, DUE TO N ON AVAILABILITY OF THE COMPLETE RECORDS AS TO THE DATE OF ACQUISITION OF T HE SHARES SOLD (AS THEY WERE DESTROYED IN THE FLOOD AT MUMBAI DATED 26-07-2005) (PB 12-13) , THE ASSESSEE OBTAINED THE DETAILS FROM THE DEPOSITORY REGARDING THE TRANSACTIONS MADE BY HIM IN EARLIER YEARS AND ON THAT BASIS PREPARED THE STATEM ENT OF LONG TERM CAPITAL GAIN. IN THIS STATEMENT, THE DATE OF ACQUISITION WAS TAKE N ON THE BASIS OF MEMORANDUM RECORDS. NOW ON FURTHER VERIFICATION OF THE SAME WI TH REFERENCE TO THE STATEMENT GIVEN BY THE DEPOSITORY, IT IS NOTED THAT THE DATE OF ACQUISITION OF THE SHARES IS NOT TAKEN CORRECTLY AND, THEREFORE, LONG TERM CAPITAL G AIN DECLARED BY THE ASSESSEE IS 8 NOT CORRECT. THE CORRECT POSITION OF THE GAIN ON SA LE OF SHARES IS AT PB 49-78. FROM THIS IT CAN BE NOTED THAT AGAINST THE LONG TERM CAP ITAL GAIN OF RS.78,12,724/- DECLARED IN THE RETURN, RS.50,54,860/- ONLY IS IN R ESPECT OF THE LONG TERM GAIN AND RS.27,37,685/- IS IN RESPECT OF SHORT TERM CAPITAL GAIN. THIS IS OVER AND ABOVE THE SHORT TERM CAPITAL GAIN OF RS.9,06,235/- DECLARED B Y THE ASSESSEE. 3. CBDT IN ITS CIRCULAR NO.4/2007 DATED 15 TH JUNE, 2007, IN PARA 10 & 11 HAVE CLARIFIED AS UNDER:- 8. THE AUTHORITY FOR ADVANCE RULINGS (AAR) [2007] 288 ITR 641, REFERRING TO THE DECISIONS OF THE SUPREME COURT IN SEVERAL CASES, HA S CULLED OUT THE FOLLOWING PRINCIPLES (PAGE 651) : (I) WHERE A COMPANY PURCHASES AND SELLS SHARES, IT MUST BE SHOWN THAT THEY WERE HELD AS STOCK-IN-TRADE AND THAT EXISTENCE OF THE POWER T O PURCHASE AND SELL SHARES IN THE MEMORANDUM OF ASSOCIATION IS NOT DECISIVE OF THE NA TURE OF TRANSACTION; (II) THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MA NNER OF MAINTAINING BOOKS OF ACCOUNT, THE MAGNITUDE OF PURCHASES AND SALES AND T HE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS ; (III) ORDINARILY THE PURCHASE AND SALE OF SHARES WI TH THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRANSACTION BEING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE; BUT WHERE THE OBJECT OF THE INVESTMENT IN SH ARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE PROFITS ACC RUING BY CHANGE IN SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT. 9. DEALING WITH THE ABOVE THREE PRINCIPLES, THE AAR HAS OBSERVED IN THE CASE OF FIDELITY GROUP AS UNDER (PAGE 661): WE SHALL REVERT TO THE AFOREMENTIONED PRINCIPLES. T HE FIRST PRINCIPLE REQUIRES US TO ASCERTAIN WHETHER THE PURCHASE OF SHARES BY A FII I N EXERCISE OF THE POWER IN THE MEMORANDUM OF ASSOCIATION/TRUST DEED WAS AS STOCK-I N-TRADE AS THE MERE EXISTENCE OF THE POWER TO PURCHASE AND SELL SHARES WILL NOT BY I TSELF BE DECISIVE OF THE NATURE OF TRANSACTION. WE HAVE TO VERIFY AS TO HOW THE SHARES WERE VALUED/HELD IN THE BOOKS OF ACCOUNT I.E., WHETHER THEY WERE VALUED AS STOCK-IN- TRADE AT THE END OF THE FINANCIAL YEAR FOR THE PURPOSE OF ARRIVING AT BUSINESS INCOME OR HELD AS INVESTMENT IN CAPITAL ASSETS. THE SECOND PRINCIPLE FURNISHES A GUIDE FOR DETERMINING THE NATURE OF TRANSACTION BY VERIFYING WHETHER THERE ARE SUBSTANT IAL TRANSACTIONS, THEIR MAGNITUDE, ETC., MAINTENANCE OF BOOKS OF ACCOUNT AND FINDING T HE RATIO BETWEEN PURCHASES AND SALES. IT WILL NOT BE OUT OF PLACE TO MENTION THAT REGULATION 18 OF THE SEBI REGULATIONS ENJOINS UPON EVERY FII TO KEEP AND MAINTAIN BOOKS O F ACCOUNT CONTAINING TRUE AND FAIR ACCOUNTS RELATING TO REMITTANCE OF INITIAL COR PUS OF BUYING AND SELLING AND REALIZING CAPITAL GAINS ON INVESTMENTS AND ACCOUNTS OF REMITTANCE TO INDIA FOR INVESTMENT IN INDIA AND REALIZING CAPITAL GAINS ON INVESTMENT FROM SUCH REMITTANCES. THE THIRD PRINCIPLE SUGGESTS THAT ORDINARILY PURCHA SES AND SALES OF SHARES WITH THE 9 MOTIVE OF REALIZING PROFIT WOULD LEAD TO INFERENCE OF TRADE/ADVENTURE IN THE NATURE OF TRADE ; WHERE THE OBJECT OF THE INVESTMENT IN SHARE S OF COMPANIES IS TO DERIVE INCOME BY WAY OF DIVIDENDS ETC., THE TRANSACTIONS OF PURCH ASES AND SALES OF SHARES WOULD YIELD CAPITAL GAINS AND NOT BUSINESS PROFITS. 10. THE CENTRAL BOARD OF DIRECT TAXES ALSO WISHES TO EMPHASIZE THAT IT IS POSSIBLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS, I.E., AN IN VESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSET S AND A TRADING PORTFOLIO COMPRISING OF STOCK-IN-TRADE WHICH ARE TO BE TREATED AS TRADIN G ASSETS. WHERE AN ASSESSEE HAS TWO PORTFOLIOS, THE ASSESSEE MAY HAVE INCOME UNDER BOTH HEADS I.E., CAPITAL GAINS AS WELL AS BUSINESS INCOME. 11. THE ASSESSING OFFICERS ARE ADVISED THAT THE ABO VE PRINCIPALS SHOULD GUIDE THEM IN DETERMINING WHETHER, IN A GIVEN CASE, THE SHARES AR E HELD BY THE ASSESSEE AS INVESTMENT (AND THEREFORE GIVING RISE TO CAPITAL GA INS) OR AS STOCK-IN-TRADE (AND THEREFORE GIVING RISE TO BUSINESS PROFITS). THE ASS ESSING OFFICERS ARE FURTHER ADVISED THAT NO SINGLE PRINCIPLE WOULD BE DECISIVE AND THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSIDERED TO DETERMINE WHETHER, IN A GIV EN CASE, THE SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT OR STOCK-IN-TRADE. IN THE CASE OF ASSESSEE IT HAS HOLD THE SHARES AS INVESTMENT AS EVIDENT FROM HER BALANCE SHEET, THE WEALTH TAX RETURN AND THE HOLDIN G PERIOD OF THE SHARES. THE MAGNITUDE OF THE TRANSACTION IN SHARES IS VERY MEAG ER AS COMPARED TO THE DEALER IN THE SHARES AND SECURITIES. THIS WAS POSSIBLE ONLY BECAU SE ASSESSEE HOLD THE SHARES FOR A LONG DURATION ON WHICH IT RECEIVED THE BONUS AND ON FAVOURABLE OPPORTUNITY THEY WERE SOLD RESULTING INTO SUCH GAIN. HAD IT BEEN THE BUSI NESS THERE WOULD HAVE BEEN DAILY PURCHASE AND SALE WHICH IS NOT THE FACTS OF THE PRE SENT CASE. THE LD. CIT (A) AFTER CONSIDERING THESE FACTS AND C ARRYING THE NECESSARY VERIFICATION HAS RIGHTLY HELD THAT ASSESSEE IS AN I NVESTOR. THERE IS NO ERROR IN THESE FINDINGS OF THE LD. CIT (A) AND THEREFORE HIS ORDER IN HOLDING THAT ASSESSEE IS NOT A DEALER IN SHARES SHOULD BE UPHELD. 2.8 THE LD. AR FURTHER SUBMITTED THAT ON SIMILAR IS SUE IN THE CASE OF ACIT VS. SMT. KAVITA DEVI AGARWAL (ITA NO.1103/ JP/2010 FOR THE A SSESSMENT YEAR 2003-04 TO 2005- 06, THE TRIBUNAL VIDE ITS ORDER DATED 23-09-2011 DI RECTED THE AO TO WORK OUT THE CAPITAL GAIN BY TREATING THE ASSESSEE AS AN INVESTOR IN SHA RES AND NOT A TRADER. THE LD. AR HAS ALSO PLACED RELIANCE ON THE FOLLOWING DECISIONS. 1.NAGINDAS P SHETH (HUF) VS. ACIT 2011-TIOL-228 (MU M.)(TRIB.) 10 2. DCIT VS. SH. RAVINDRA M AGARWAL 2011-TIOL-185 (A HM.) (TRIB.) 3. SURESH KUMAR SEKSARIA/ SMT. URMILA SEKSARIA VS. ACIT 001 ITR 783 (TRIB) (MUM.) 4. CIT VS. ROHIT ANAND 327 ITR 0445 (HC) (DEL.) 5. CIT VS. NIRAJ AMIDHAR SURTI 48 DTR 33 (GUJ.) ( HC) 6. SUGAM CHAND C SHAH VS. ACIT 37 DTR 345 (TRIB.) (AHM.) 7. CIT VS. S. RAMAAMIRTHAM 217 CTR 206 (MAD.) 8. SHAH-LA INVESTMENTS & FINANCIAL CONSULTANTS (P) LTD. V/S. DCIT ITAT, HYDERABAD 2 SOT 371 (2005) 9. CIT VS. N.S.S. INVESTMENTS P. LTD. 277 ITR 0149 (MAD.) 10. CIT VS. GIRISH MOHAN GANERIWALA 260 ITR 0417 (P&H) (HC) 2.9 WE HAVE HEARD BOTH THE PARTIES. THE ISSUE OF CO NSIDERING THE PROFIT ARISING FROM THE SALE OF SHARES HAS BEEN CONSIDERED BY THE TRIBU NAL IN THE CASE OF ACIT VS. SMT. KAVITA AGARWAL (SUPRA). IN THAT CASE, WE HAVE REFER RED TO THE PRINCIPLES APPLICABLE IN DECIDING THE ISSUE AS TO WHETHER THE PROFIT ARISIN G FROM PURCHASE AND SALE OF TRANSACTION IS TO BE CONSIDERED AS BUSINESS OR CAPITAL GAIN. IT WILL BE USEFUL TO REPRODUCE PARA 2.13 FROM THAT ORDER. 2.13 WE HAVE HEARD BOTH THE PARTIES. WHEN SHARES ARE PURCHASED THEN ONE HAS TO SEE INTENTION OF THE ASSE SSEE FOR THE PURPOSE OF PURCHASING THE SHARES. IF THE OBJECT OF INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE THE INCOME BY WAY OF DIVIDEND THEN SUCH INVESTMENT IS TO BE CONSIDERED AS CAPITAL . A PERSON CAN BE AN INVESTOR AS WELL AS TRADER IN SHARES. IN THE PAPER BOOK FILED BEFORE US, WE HAVE NOTICED THAT ASSESSEE HAS SOLD THE 11 SHARES DURING THE ASSESSMENT YEAR 2003-04 OUT OF SH ARES WHICH HAS BEEN ACQUIRED IN THE YEARS 1988 ONWARDS. WE HAD ALREADY MENTIONED THE QUANTUM OF DIVIDEND WHICH THE ASSESS EE HAS EARNED DURING ALL THE THREE YEARS. IT IS AN ADMITTE D FACT THAT THE ASSESSEE HAS BEEN PURCHASING SHARES OR GETTING THE SHARES AS BONUS SHARES OR RIGHT SHARES. THE CAPITAL GAIN WILL DEPEND UPON MODE OF ACQUISITION. IN CASE SHARE IS BONUS SHARE T HEN THE COST WILL HAVE TO BE TAKEN AS NIL OR COST OF ORIGINAL SH ARES BE SPREAD ON ORIGINAL SHARES AND BONUS SHARES. IN THE CASE OF RIGHT SHARES, THE COST IS TO BE TAKEN AT WHICH SUCH RIGHT SHARES WERE OFFERED BY THE COMPANY. IF THE SHARES HAVE BEEN RECEIVED ON ALLOTMENT THEN COST WILL BE THE COST AT WHICH SHARES HAVE BEE N ALLOTTED. IN THE YEARS OF 1980 AND 1990, THE SHARES IN PUBLIC IS SUE WERE BEING GENERALLY ALLOTTED ON FACE VALUE OR AT NOMINA L PREMIUM. THE ITAT MUMBAI BENCH IN THE CASE OF JAY SHREE PRAD IP SHAH VS. ACIT, 137 TTJ 173 HAS BRIEFLY NARRATED THE PRIN CIPLES APPLICABLE IN DECIDING THE ISSUE AS TO WHETHER THE PROFIT ARISING FROM PURCHASE AND SALE OF TRANSACTION IS TO BE CONS IDERED AS BUSINESS OR CAPITAL GAIN. THE PRINCIPLES AS LAID DO WN AND CONSIDERED BY THE MUMBAI TRIBUNAL ARE AS UNDER:- (A) WHETHER TRANSACTIONS OF SALE AND PURCHASE OF SHARES WERE TRADING TRANSACTIONS OR WHETHER THEY WE RE IN THE NATURE OF INVESTMENTS ARE MIXED QUESTION OF LAW AND FACT [CIT VS. H HOLCK LARSEN (1986), 58 CTR (SC) 53: (1986) 1 60 ITR 67 (SC)] (B) IT IS POSSIBLE FOR AN ASSESSEE TO BE BOTH AN IN VESTOR AS WELL AS A DEALER IN SHARES. WHETHER A PARTICULAR HOLDING IS BY 12 WAY OF INVESTMENT OR FORMED PART OF STOCK IN TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE AND I T IS FOR THE ASSESSEE TO PRODUCE EVIDENCE FROM HIS RECORDS AS TO WHETHER HE MAINTAINED ANY DISTINCTION BETWEEN SHARES WHICH WER E HOLD BY HIM AS INVESTMENTS AND THOSE AS STOCK IN TRADE [CIT VS. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. LTD. 1972 CTR (SC) : (1971) 82 ITR 586 (SC) ( C ) TREATMENT IN THE BOOKS BY AN ASSESSEE WILL NO T BE CONCLUSIVE. IF THE VOLUME, FREQUENCY AND REGULARITY WITH WHICH TRANSACTIONS ARE CARRIED OUT INDICATE SYSTEMATIC AN D ORGANIZED ACTIVITY WITH PROFIT MOTIVE, THEN IT WOULD BE A CAS E OF BUSINESS PROFIT AND NOT CAPITAL GAIN. [CIT VS. MOTILAL HIRAB HAI & WVG. CO. LTD. 1977 CTR (HON'BLE GUJARAT HIGH COURT IN TH E CASE OF .) 674 : (1978) 113 ITR 173 (HON'BLE GUJARAT HIGH C OURT IN THE CASE OF .), RAJA BAHADUR VISHESHWARA SINGH (DECD.) & ORS VS. CIT (1961), 41 ITR 685 (SC)]. (D) PURCHASE WITHOUT AN INTENTION TO RESELL WHERE T HEY ARE SOLD UNDER CHANGED CIRCUMSTANCES WOULD BE CAPIT AL GAINS. CIT VS. PKN CO. LTD. (1966) 60 ITR 65 (SC). PURPOSE WITH AN INTENTION TO RESELL WOULD RENDER THE GAIN /PROFIT O N SALE AS BUSINESS. PROFIT DEPENDS ON THE CIRCUMSTANCES OF TH E CASE LIKE NATURE AND QUANTITY OF ARTICLE PURCHASED, NATURE OF THE OPERATION INVOLVED [SAROJ KUMAR MAZUMDAR VS. CIT (1959) 37 I TR 242 (SC). (E) NO SINGLE FACT HAS ANY DECISIVE SIGNIFICANCE AN D THE QUESTION MUST DEPEND UPON THE COLLECTIVE EFFORT OF ALL THE 13 RELEVANT MATERIALS BROUGHT ON RECORD. [JANKI RAM BA HADUR RAM VS. CIT (1965) 57 ITR 21 (SC)]. 2.10 WE HAVE RECORDED THE FINDINGS IN THE CASE OF SMT. K AVITA AGARWAL IN PARA 2.14 OF AND THE SAME ARE REPRODUCED AS UNDER:- 2.14 WE HAVE ALSO CONSIDERED THE CASE LAWS ON WHI CH ASSESSEE'S LD. AR HAS PLACED RELIANCE. WE ARE NOT H AVING BENEFIT OF THE D-MAT ACCOUNT OR THE BILLS OF THE BROKERS. AFTER CO NSIDERING THE ENTIRE FACTS, WE HOLD AS UNDER:- (I) THE SHARES WHICH HAVE BEEN HELD FOR MORE THAN A YEAR SHOULD BE TREATED AS SHARES HELD AS INVESTMENT. THE PROFIT ARISING FROM SALE OF SUCH SHARES IS TO BE CONSIDERED AS CAPITAL GAIN. IT MEANS THAT LONG TERM CAPITAL GAIN SHOWN BY THE ASSESSEE IS TO BE ACCEPTED. (II) IN RESPECT OF PURCHASE AND SALE OF THE TRANSA CTIONS ON THE SAME DAY, THE PROFIT AND GAINS ARISING FROM SUCH TR ANSACTIONS IS TO BE CONSIDERED AS PROFIT OR LOSS FROM SPECULATIVE BUSIN ESS. (III) IN CASE THE SHARES HAVE BEEN HELD FOR MORE TH AN 30 DAYS THEN THE PROFIT AND LOSS ARISING FROM SALE OF SUCH SHARES IS TO BE CONSIDERED AS SHORT CAPITAL GAIN OR LOSS. HOWEVER, IN CASE THE SHARES HAVE BEEN PURCHASED OR SOLD WITHIN 30 DAYS THEN THE PROFIT OR LOSS ARISING FROM SUCH PURCHASE AND SALES OF SHARES IS T O BE CONSIDERED AS BUSINESS INCOME. (IV) THE SHARES WHICH ARE BEING SOLD ARE TO BE ASCE RTAINED AS TO WHETHER SUCH SHARES WERE PURCHASED OR ALLOTTED I N PUBLIC ISSUE OR 14 RECEIVED AS BONUS SHARES OR RECEIVED SHARES ON ACCO UNT OF AMALGAMATION / MERGER SO THAT COST PRICE CAN BE ASC ERTAINED. 2.11 IN THE CASE OF SMT. KAVITA AGARWAL, THE LD. AR HAS RELIED UPON CERTAIN DECISIONS WHICH HAVE BEEN REFERRED IN THE CASE OF THE ASSESSE E ALSO. WE THEREFORE, FEEL THAT ISSUE STANDS DECIDED BY THE TRIBUNAL AND THEREFORE, WE DI RECT THE AO TO COMPUTE THE PROFIT ARISING FROM PURCHASE AND SALE OF THE SHARES AS PER DIRECTIONS GIVEN IN PARA 2.14 OF THE ORDER OF SMT. KAVITA AGRAWAL REPRODUCED ABOVE. ACCO RDINGLY THE AO WILL RECOMPUTE THE INCOME. 3.1 THE SECOND ISSUE IS IN RESPECT OF SALE OF SILVE R SCRAP DIRECTED BY THE LD. CIT(A) TO ASSESS THE CAPITAL GAIN WHILE THE ASSESSEE CONTENDE D BEFORE THE AO THAT PROFIT IS EXEMPT BECAUSE SILVER UTENSILS ARE PERSONAL ASSETS WHILE T HE AO HAS HELD THE PROFIT FROM SALE OF SILVER UTENSILS SCRAP AS BUSINESS INCOME. 3.2 THE FACTS ARE THAT DURING THE YEAR UNDER CONSID ERATION THE ASSESSEE CREDITED A SUM OF RS.3,66,750/- IN HER CAPITAL ACCOUNT ON ACCOUNT OF SALE OF SILVER SCRAP (AS EXEMPTED INCOME). THE AO OBSERVED THAT THE INCOME IS STATED BY THE ASSESSEE AS SILVER SCRAP SALE WHEREAS THE COPIES OF THE BILLS PRODUCED SHOWS THAT THE SAME IS SILVER UTENSILS. FURTHER THE PURCHASE VOUCHERS HAVE THE REMARK RESALE AGAINST S T. THUS THE FACTS SHOW THAT ASSESSEE HAD PURCHASED SILVER SCRAP FOR PROFIT. ACCORDINGLY, THE AO ASSESSED THE INCOME OF RS.3,66,750/- AS INCOME FROM BUSINESS IN PURCHASE A ND SALE OF SILVER SCRAPS. 3.3 THE LD. CIT(A) HELD THE SILVER UTENSILS AS A C APITAL ASSETS & ACCORDINGLY DIRECTED THE AO TO ASSESS IT UNDER THE HEAD CAPITAL GAIN A S AGAINST BUSINESS INCOME ASSESSED BY THE AO. IN DOING SO, THE LD. CIT(A) GAVE THE FOLLO WING FINDINGS:- 15 THE CONTENTION OF THE LD. AR THAT SILVER UTENSILS PURCHASED BY HER IN 1999 WERE HER PERSONAL EFFECT CAN NOT BE ACCEPTE D, CONSIDERING THE QUANTITY OF THE UTENSILS INVOLVED AND IN THE ABSENC E OF ANY EVIDENCE FURNISHED BY HER TO PROVE THAT SUCH QUANTITY OF UTE NSILS WAS IN DAY TO DAY USE OF THE ASSESSEE. HOWEVER, ONCE THE LD. AO HAS A CCEPTED THE FACT THAT THE SILVER UTENSILS WERE ACQUIRED BY THE ASSESSEE I N THE YEAR 1999, AND HAD BEEN SOLD AS SCRAP IN THE YEAR UNDER CONSIDERATION, THE SAME HAS TO BE ASSESSED UNDER THE HEAD 'CAPITAL GAIN' AND NOT AS B USINESS INCOME, AS ASSESSED BY THE LD. AO. THE AO IS, THEREFORE, DIREC TED TO WORK OUT THE LONG TERM CAPITAL GAIN ON SALE OF THE SILVER UTENSI LS / SCRAPS AND ASSESS ACCORDINGLY. 3.4 WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. T HE ASSESSEE IS NOT ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SILVER UTENSILS. T HE LD. CIT(A) WAS JUSTIFIED IN DIRECTING THE AO TO TREAT THE SALE PROCEEDS OF RS. 3,66,750/- AS LONG TERM CAPITAL GAIN INSTEAD OF ASSESSED AS INCOME FROM BUSINESS. 4. IN THE RESULT, THE APPEAL OF THE REVENUE IS PART LY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 22-11 -2011. SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 22 /11/2011 *MISHRA COPY FORWARDED TO :- 1. THE ITO, WARD- 3, SIKAR 2. SMT RENUKA AJAY MAROO, SIKAR 3. THE LD. CIT BY ORDER 4. THE LD. CIT(A) 5. THE LD.DR 6. THE GUARD FILE (ITA NO.541/JP /11) A.R, ITAT, JAIPUR 16 17