VILAS B. SHAH, MUMBAI V. I.T.O.-19(1)(2), MUMBAI

ITA 7511/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8602 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2006-2007
• Appeal Filed On: 08-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Question of law
• Section: 143(3); 43(5); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F, MUMBAI BEFORE SHRI DINESH KUMAR AGARWAL (J.M.) AND SHRI D. KARUNAKARA RAO (A.M.) ITA NO. 7511/MUM /2011 ASSESSMENT YEAR : 2006-07 MRS. VILAS. B. SHAH, KUSUM KUNJ, IST FLOOR, CORNER OF 9 TH AND 10 TH ROAD, KHAR (WEST), MUMBAI 400 052. PAN AAPPS6153B VS. THE INCOME TAX OFFICER WARD 19(1)(2), PIRAMAL CHAMBERS, MUMBAI. (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI PARESH SHAPARIA DEPARTMENT BY : SHRI RAJARSHI DWIVEDY DATE OF HEARING 16-10-2012 DATE OF PRONOUNCEMENT 19-10-2012 O R D E R PER DINESH KUMAR AGARWAL, J.M. THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DTD. 26-08-2011 PASSED BY THE LD. CIT(A) 22, MUMB AI FOR THE A.Y. 2006-07. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE A SSESSEE IS A PARTNER IN AVON EXPORTS & AMPEX TRADING CO. AND DERIVES INCOME FROM OTHER SOURCES AND CAPITAL GAINS. THE RETURN WAS FILED DEC LARING TOTAL INCOME OF RS. 8,51,715/-. DURING THE COURSE OF ASSESSMENT PR OCEEDINGS IT WAS INTER ALIA OBSERVED BY THE A.O. THAT THE ASSESSEE H AS CLAIMED SHORT TERM CAPITAL GAIN OF RS. 8,44,666/- ON SALE OF SHARES. PERUSAL OF THE WORKING ITA NO. 7511/MUM/2011 2 OF THE CAPITAL GAIN INDICATES THAT THE ASSESSEE WAS ENGAGED IN THE ACTIVITY OF BUYING AND SELLING OF SHARES, THE TOTAL SALE OF SHARES DURING THE YEAR BEING TO THE EXTENT OF RS. 1,03,11,112/- AND THE CO ST CORRESPONDING TO THESE SHARES WAS RS. 94,66,543/- ON WHICH SHORT TER M CAPITAL GAIN OF RS. 8,44,666/- WAS OFFERED AFTER ADJUSTING LOSS OF RS. 48,841/-. HE FURTHER OBSERVED THAT ONE TRANSACTION IS SPECULATIVE IN NAT URE VIZ. PURCHASE AND SALE OF MADRAS CEMENT LTD. HAS BEEN AFFECTED ON THE SAME DAY I.E. 13-07-2005. HE FURTHER OBSERVED THAT THE ASSESSEE H AS HELD SHARES FOR PERIODS RANGING MINIMUM 2 DAYS TO A MAXIMUM OF 232 DAYS. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY THE INCO ME DECLARED UNDER THE HEAD SHORT TERM CAPITAL GAIN ON SALE OF SHARES BE NOT ASSESSED AS BUSINESS INCOME. IN REPLY, THE AUTHORISED REPRESEN TATIVE OF THE ASSESSEE HAS SUBMITTED AS UNDER (PAGE 2 OF THE ASSESSMENT OR DER):- LETTER DATED 28/11/2008 1. THE ASSESSEE IS A PARTNER IN M/S AMPEX TRADING C O. & M/S AVON EXPORTS. 2. THE ASSESSEE MAKES INVESTMENTS IN SHARES AND MUT UAL FUNDS WITH THE EXCLUSIVE INTENTION OF EARNING DIVIDEND AND APP RECIATION IN THE VALUE OF INVESTMENTS FROM THE SURPLUS FUNDS OF THE ASSESS EE AND FAMILY MEMBERS. 3. THE INVESTMENTS IN SHARES ARE MADE THROUGH INITI AL PUBLIC OFFER (IPO) OR PURCHASES THROUGH REGISTERED & RECOGNIZED STOCK BROKER EITHER ON BSE OR NSE. 4. ALL THE SHARES, SECURITIES AND MUTUAL FUNDS ARE REFLECTED IN THE BALANCE SHEET UNDER THE HEAD INVESTMENTS. 5. ALL THE SHARES PURCHASED OR SOLD ARE DELIVERY BA SED. ITA NO. 7511/MUM/2011 3 6. ALL THE SHARES ARE DULY REFLECTED IN THE DEMAT A CCOUNT MAINTAINED BY THE ASSESSEE. 7. ALL TRANSACTION WITH THE BROKER EITHER FOR PURCH ASE OR SALE OF SHARES, THE PAYMENTS AND RECEIPTS ARE MADE WITH THE SETTLEMENT PERIOD AS PER NSE OR BSE BY CHEQUE. 8. ON THE SHARE TRANSACTIONS SECURITIES TRANSACTION TAX (STT) HAS ALSO BEEN PAID WHICH HAS BEEN EXCLUDED IN DETERMINI NG THE CAPITAL GAINS NOR THE SAME HAS BEEN CLAIMED AS REBATE U/S 8 8E. 9. THE ASSESSEE DOES NOT HAVE ANY F & 0 (DERIVATIVE ) TRANSACTIONS. 10. THE ASSESSEE DOES NOT HAVE ANY SPECULATIVE TRAN SACTIONS IN SHARES. 11. NO EXPENSES ARE CLAIMED AGAINST THE EARNING OF DIVIDEND OR CAPITAL GAINS ON SALE OF SHARES EXCEPT THE STAMP DUTY ON SH ARES. 12. DURING THE YEAR THE ASSESSEE HAS SHORT TERM CAP ITAL GAINS OF RS.8.44 LACS AND HAS EARNED DIVIDEND INCOME OF RS. 1.39 LACS. 13. THERE IS NO ADVENTURE IN THE NATURE OF TRADE, A ND ALSO THE ASSESSEE DOES NOT CLAIM ANY EXPENSES. 14. BASED ON THE ABOVE FACTS THE ASSESSEE IS AN INV ESTOR AND NOT A TRADER IN SHARES AND SECURITIES. THE INCOME OFFERED IS REQUIRED TO BE TAXED AS CAPITAL GAINS. 15. FURTHER IN ALL THE EARLIER SCRUTINY ASSESSMENT THE GAINS FROM SALE OF SHARES AND MUTUAL FUNDS HAVE BEEN OFFERED AS CAP ITAL GAINS INCOME. IN VIEW OF THE ABOVE FACTS INCOME FROM SALE OF SHAR ES AND MUTUAL FUNDS REQUIRES TO BE TREATED AS CAPITAL GAINS INCOME. IN VIEW OF THE ABOVE AND ON THE BASIS OF THE CBDT C IRCULAR NO. 4/2007 DTD. 15-6-2007 AND INSTRUCTION NO. 1827 DTD. 31-8-1 989 THE ASSESSEE HAS ALSO JUSTIFIED HER CASE THAT THE GAIN ARISING F ROM THE SALE OF SHARES IS SHORT TERM CAPITAL GAIN AND NOT BUSINESS INCOME. T HE RELIANCE WAS ALSO PLACED ON VARIOUS DECISIONS. THE A.O. AFTER CONSID ERING THE ASSESSEES SUBMISSION OBSERVED THAT DURING THE YEAR UNDER CONS IDERATION, THE ITA NO. 7511/MUM/2011 4 ASSESSEE HAS PURCHASED SHARES TO THE TUNE OF RS. 94 ,66,543/- AND THE ASSESSEE HAS SOLD SHARES FOR RS. 1,03,11,112/-. THE A.O. FURTHER OBSERVED THAT THE TOTAL NUMBER OF SALE TRANSACTIONS WAS 30 AND OUT OF THE TOTAL 30 TRANSACTIONS OF SALE IN THE YEAR, 9 TR ANSACTIONS ARE SUCH THAT THE SALE AND PURCHASE HAVE BEEN AFFECTED IN A MONTH , 7 TRANSACTIONS ARE SUCH THAT THE AVERAGE PERIOD OF HOLDING THOUGH MORE THAN A MONTH DOES NOT EXCEED 3 MONTHS. THE A.O. AFTER CONSIDERING THE CBDT CIRCULAR NO. 4/2007 DTD. 15-6-2007 AND GUIDING PRINCIPLES ON THE BASIS OF RATIO LAID DOWN BY THE HONBLE SUPREME COURT/HIGH COURT/AAR HA S DRAWN THE FOLLOWING CONCLUSION:- (I) THE ASSESSEES DEALING IN SHARES CONTINUED THR OUGHOUT THE YEAR. THE FACT OF REGULAR BUY AND SELL ACTIVITY EARNING S URPLUS MAKES IT CLEAR THAT THE PROFIT MOTIVE WAS THE MAIN REASON OF PURCH ASE OF SHARES, AT THE TIME OF PURCHASE ITSELF. ASSESSEE S METHOD OF ACCO UNTING TREATING THE TRANSACTIONS IN SHARES AS INVESTMENT IS DONE AT THE SOLE DISCRETION OF THE ASSESSEE. THESE SHARES ARE THUS ONLY STOCK IN TRADE OF THE ASSESSEE AND HENCE ACCOUNTING THEM AS INVESTMENTS HAS HELPED THE ASSESEE IN PRESENTING THE REALIZATION, ON SALE OF OSTENSIBLE I NVESTMENT AS CAPITAL GAINS. (II) THE PRIMARY CHARACTERISTIC OF AN INVESTMENT AS SET IS THE FEELING OF SECURITY. THE SECONDARY ASPECT IS CAPITAL ACCRETION . THE NEXT ASPECT IS THE INCREMENTAL PERIODICAL INCOME ACCRUING ON IT. IN TH E CASE OF ASSESSEE WHO IS NOT SUBSTANTIAL SHAREHOLDER IN ANY COMPANIES WHO SE SHARES WERE HELD BY THE ASSESSEE, THE FEELING OF GUARANTEE AND SECUR ITY IN SHARE INVESTMENT IS NOT BEYOND DOUBT. THE CAPITAL ACCRETI ON IS ALSO A PROBABILITY ONLY. AS REGARDS THE PERIODICAL RETURN, A LOOK INTO THE SHARES HELD AND THE DIVIDEND EARNED SHOW THAT THE EARNING IS AROUND 1.4% PER ANNUM. THE SAME IS ALWAYS BELOW MARKET RATE OF INTE REST RETURN. (III) ONLY BECAUSE ASSESSEE HAS TAKEN POSSESSION EI THER PHYSICALLY OR THROUGH DEPOSITORY, PURCHASE OF SHARES DOES NOT BEC OME INVESTMENT LEADING TO CAPITAL ASSET. SHARES HELD FOR LARGER PERIOD ALSO SHOW THE LONGEVITY OF STOCK. HAD THE ASSESSEE NOT TAKEN POSS ESSION OF SHARES THE ITA NO. 7511/MUM/2011 5 ACTIVITY WOULD BECOME SPECULATION AS PER PROVISIONS OF SECTION 43(5) AND WOULD OTHERWISE ALSO BECOME SPECULATION BUSINESS AC TIVITY CHARGEABLE S BUSINESS INCOME ULS.28 OF THE ACT. (IV) MERE SHOWING OF THE SAME AS INVESTMENT AND INV OKING METHOD OF ACCOUNTING TO SHOW IT AS INVESTMENTS, IS A MERE CAM OUFLAGE OF ASSESSEES REAL INTEREST IN TRADING IN SHARES. EFFECTING TRANS ACTION THROUGH THE INVESTMENT A/C IS SOLELY BASED ON THE INTENTION OF THE ASSESSEE TO TREAT IT AS INVESTMENT ACTIVITY. OPENING OF INVESTMENT ACCO UNT AND ACCOUNTING THE TRANSACTIONS IN THE SAME DOES NOT GIVE INCOME F ROM SHARE TRADING AS CAPITAL GAINS A STATUTORY RECOGNITION AS SUCH INCOM E IF CHARGEABLE AS BUSINESS INCOME IS COVERED BY SECTION 145. DEBITI NG OR CREDITING AN ACCOUNT OPENED AT THE DISCRETION OF THE ASSESSEE AS SHARE INVESTMENT ACCOUNT WOULD NOT CHANGE THE CHARACTER OF REAL ACTI VITY OF PURCHASE AND SALE OF SHARES. THE ASSESSEE CANNOT RELY ON ITS OWN DISCRETIONARY HEAD OF ACCOUNT AND NOMENCLATURE AS PROOF TO SHOW THAT THE SHARE INVESTMENT MADE BY THE ASSESSEE YIELDED CAPITAL ASSETS. THE PR ACTICE OF THE ASSESSEE WOULD RESULT IN VIOLATION OF THE ACCOUNTING PRINCIP LES IN VIEW OF THE INTENTION OF THE ASSESSEE OR TRADING IN SHARES. THE COMPUTATION OF CAPITAL GAINS DOES NOT RECOGNIZE ANY METHOD OF ACCOUNTING. THE TEST OF APPLICATION FOR STOCK IN TRADE IN ASSESSEES CASE I S NOT RELEVANT AS ASSESSEE HAS SHOWN IT AS INVESTMENT IN STOCK AND NO T AS STOCK IN TRADE. (V) DURING THE YEAR, THE ASSESSEE HAS TAKEN UNSECUR ED LOANS AMOUNTING TO RS.35,77,421/- WHICH SHOWS THAT FUNDS HAVE BEEN BORROWED FOR PURCHASE OF SHARES. THE ASSESSEE S CL AIM THAT THE TRANSACTIONS WERE IN THE NATURE OF INVESTMENT IS HO LLOW AND DEVOID OF MERIT. (VI) DEPLOYING BORROWED FUNDS IN COMMODITIES WHICH ARE LIKELY TO APPRECIATE REGULARLY SHOWS ASSESSEES BUSINESS INTE REST. UTILIZATION OF BORROWED FUNDS FOR PURCHASE OF SHARES SHOWS THE RES OURCEFULNESS OF THE ASSESSEE AND ACUMEN OF IDENTIFYING CORRECT STOCK FO R FUTURE SALE AND TRADING. MAKING FREQUENT INVESTMENT IN SIMILAR COMM ODITIES AND SELLING IT AT PROFIT OR DIVESTING AT LOSS WHEN HOLDING IT I S LIKELY TO RESULT IN FURTHER LOSS IS A CONTINUOUS ACTIVITY AND IS NOTHING BUT A BUSINESS. (VII) THE ENTIRE TRANSACTIONS WERE MADE WITH PROFIT MOTIVE IS THUS LOUD AND CLEAR. THE ASSESSEE IS CONVENIENTLY FORGETTING THE DIFFERENCE BETWEEN INVESTMENT AND TRADING LIES ON THE PROFIT MOTIVE. P ROFIT MOTIVE, THOUGH DELIBERATE AND INTENTIONAL, IS UNCERTAIN IN LATTER AND WHEREAS IN INVESTMENT IT IS THE GUARANTEE WHICH IS ATTRACTIVE AND ACCRETION THEREON IS AN INCENTIVE. (VIII) IF NOT TRADING, ASSESSEE S ACTIVITY IS AN A DVENTURE IN THE NATURE OF TRADE EVEN THOUGH IN ASSESSEES CASE THE FREQUENCY IS INDICATIVE OF ADVENTURE. IN A NUTSHELL, THE TRANSACTIONS OF ASSES SEE IN SHARES ITA NO. 7511/MUM/2011 6 CONSTITUTE NOTHING BUT BUSINESS ACTIVITY. THUS, ASS ESSEE CAN CARRY ON TRADING IN SHARES AND STOCKS AS BUSINESS ACTIVITY. COMMERCIALLY THE INCOME THERE FROM WILL BE BUSINESS INCOME. HENCE, A SSESSEES ACTIVITY OF TRADING IN SHARES IS BUSINESS ACTIVITY. THIS HAS JU DICIAL SUPPORT FROM THE DECISION OF HON. SC CITED IN 160 ITR 67 CIT VS. H.H OLCK LARSEN WHICH DISTINGUISHES AND ANALYSES ALL CASES ON THE TOPIC O F CHARGEABILITY OF TAXATION ON SHARE TRADING AND IN THE CASE OF M/S. D ALHOUSIE INVT. TRUST CO. LTD VS. CIT (C), CALCUTTA 68 ITR 486. (IX) IF NOT BUSINESS AS TRADE OR ADVENTURE IN THE N ATURE OF TRADE, THE TRANSACTIONS ARE REALIZATION OF TRADE INVESTMENTS H ELD IN THE FORM OF SHARES, THE INCOME OF WHICH IS OTHERWISE ALSO TAXAB LE AS PROFIT AND GAINS OF BUSINESS INCOME. SINCE SECTION 45 AND 28 ARE MU TUALLY EXCLUSIVE, ANYTHING WHICH COME U/S.28 CANNOT BE BROUGHT U/S.45 . ACCORDINGLY THE A.O. ASSESSED THE INCOME SHOWN AS S HORT TERM CAPITAL GAIN AS BUSINESS INCOME. 3. ON APPEAL, THE LD. CIT(A) WHILE AGREEING WITH TH E VIEWS OF THE A.O. HELD THAT THE A.O. WAS JUSTIFIED IN HOLDING THE SHO RT TERM CAPITAL GAIN AS BUSINESS INCOME. 4. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US CHALLENGING IN ALL THE GROUNDS IN TREATING THE SHORT TERM CAPITAL GAIN AS BUSINESS INCOME. 5. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE A SSESSEE SUBMITS THAT THE ASSESSEE IS PARTNER IN TWO FIRMS. THE ASS ESSEE HAS MADE INVESTMENT IN SHARES WITH THE EXCLUSIVE INTENTION O F APPRECIATING IN THE VALUE OF INVESTMENT AND THE INVESTMENT IN SHARES AN D SECURITIES ARE REFLECTED IN THE BALANCE SHEET AS INVESTMENT. HE F URTHER SUBMITS THAT DURING THE YEAR THE ASSESSEE HAS MADE ALL PURCHASES AND SALES ON ITA NO. 7511/MUM/2011 7 DELIVERY BASIS AND CLAIMED AS SHORT TERM CAPITAL GA IN. THE LD. COUNSEL FOR THE ASSESSEE WHILE REFERRING TO SCRIPT-WISE STA TEMENT OF SHORT TERM CAPITAL GAINS APPEARING AT PAGE 2 OF THE PAPER BOOK FURTHER SUBMITS THAT THE PERIOD OF HOLDING AS UNDER:- STATEMENT OF PERIOD OF HOLDING FOR SHORT TERM CAP ITAL GAINS PARTICULARS NO. OF SCRIPTS NO. OF TRANSACTIONS SHORT TERM CAPITAL GAINS. 0-30 DAYS 8 8 90,532 30-90 DAYS 5 5 200,877 90-180 DAYS 8 8 385,640 180-290 DAYS 2 2 167,618 290-365 DAYS NIL NIL NIL 23 23 8,44,666 LESS : STAMP DUTY 2,121 8,42,545 HE FURTHER SUBMITS THAT MONTH-WISE TRANSACTIONS OF PURCHASE AND SALE OF SCRIPTS ARE 15 & 20 RESPECTIVELY. HE FURTHER SUBMI TS THAT NEITHER IN THE PRECEDING ASSESSMENT YEARS NOR IN THE SUBSEQUENT AS SESSMENT YEARS THE A.O. HAS TREATED THE GAINS ARISING FROM PURCHASE AN D SALE OF SHARES AS BUSINESS INCOME. IN OTHER WORDS, THE A.O. HAS ACCE PTED THE SAID GAIN AS SHORT TERM CAPITAL GAIN/LONG TERM CAPITAL GAIN AND IN SUPPORT HE ALSO PLACED ON RECORD COPY OF THE ASSESSMENT ORDER FOR T HE A.Y. 2003-04 PASSED U/S 143(3) OF THE ACT. HE FURTHER SUBMITS T HAT THE ASSESSEE HAS ITA NO. 7511/MUM/2011 8 NOT TAKEN ANY LOAN FOR THE INVESTMENT IN SHARES AND MOREOVER THE ASSESSEES OWN CAPITAL AS ON 31-3-2006 WAS RS. 14,6 04,715.98. AS REGARDS THE OBSERVATION OF THE A.O. THAT THE ASSESS EE HAS TAKEN UNSECURED LOAN OF RS. 35,77,421/-, THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE SAID LOAN WAS TAKEN FOR THE INVEST MENT IN DEBENTURES IN GROUP COMPANIES AS APPEARING IN THE BALANCE SHEET A T PAGE 14 OF THE ASSESSEES PAPER BOOK. AS REGARDS THE OBSERVATION OF THE A.O. THAT ONE TRANSACTION RELATING TO MADRAS CEMENT LTD. WAS EFFE CTED ON THE SAME DAY I.E. 13-7-2005, THE LD. COUNSEL FOR THE ASSESSEE SU BMITS THAT DUE TO WRONG PUNCHING, IT HAS BEEN DONE WHICH HAS BEEN CAN CELLED ON THE SAME DAY. HE, THEREFORE, SUBMITS THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN UPHOLDING THE ORDER OF THE A.O. IN TREATING THE SHO RT TERM CAPITAL GAIN AS BUSINESS INCOME. 6. ON THE OTHER HAND, THE LD. D.R. SUPPORTS THE ORD ER OF THE A.O. AND THE LD. CIT(A). 7. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FI ND THAT THE FACTS ARE NOT IN DISPUTE INASMUCH AS IT IS ALSO NOT IN DISPUT E THAT THE NATURE OF THE ASSESSEES BUSINESS IS PARTNER IN TWO FIRMS. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE HAS SHOWN THE INVESTMENT IN SHARES AS INVESTMENT AND NOT AS A STOCK-IN-TRADE, THE VALUE OF WHICH HAS ALSO BE EN ACCEPTED BY THE A.O. AS DISCLOSED BY THE ASSESSEE. IT IS ALSO NOT IN DISPUTE THAT THE GAIN ITA NO. 7511/MUM/2011 9 ARISING AS A RESULT OF PURCHASE AND SALE OF SHARES IS ON DELIVERY BASED TRANSACTIONS. IT IS ALSO NOT IN DISPUTE THAT IN PA ST AND IN SUBSEQUENT ASSESSMENT YEARS, THE A.O. HAS TREATED THE GAIN ARI SING FROM THE PURCHASE AND SALE OF SHARES AS SHORT TERM /LONG TER M CAPITAL GAIN. THE ISSUE BEFORE US IS AS TO WHETHER THE INCOME EARNED FROM THE ACTIVITY OF PURCHASE AND SALE OF SHARES SHOULD BE TREATED AS IN COME FROM BUSINESS OR IN THE NATURE OF SHORT TERM CAPITAL GAIN. 8. IT IS DESIRABLE TO CONSIDER VARIOUS JUDICIAL PRO NOUNCEMENTS IN THIS REGARD. TO BEGIN WITH IT IS APT TO TAKE NOTE OF TH E DECISION OF THE HONBLE APEX COURT IN BENGAL AND ASSAM INVESTORS LTD. VS. C IT (1996) 59 ITR 547 WHEREIN IT HAS BEEN HELD (HEADNOTE) : PAGE 547 :- FOR A DIVIDEND ON SHARES TO BE ASSESSED UNDER SECT ION 10 OF THE INDIAN INCOME-TAX ACT, 1922, THE ASSESSEE, BE IT AN INDIVI DUAL OR A COMPANY OR ANY OTHER ENTITY, MUST CARRY ON BUSINESS IN RESPECT OF SHARES, THAT IS TO SAY, THE ASSESSEE MUST DEAL IN THOSE SHARES. AN IND IVIDUAL, WHO MERELY INVESTS IN SHARES FOR THE PURPOSE OF EARNING DIVIDE ND, DOES NOT CARRY ON A BUSINESS. THE ONLY WAY HE CAN COME UNDER SECTION 10 IS BY CONVERTING THE SHARES INTO STOCK-IN-TRADE, I.E., BY CARRYING O N THE BUSINESS OF DEALING IN STOCKS AND SHARES. IF A COMPANY MERELY ACQUIRES AND HOLDS SHARES WITH THE OBJECT OF RECEIVING DIVIDENDS, IT DOES NOT CARRY ON BUSINESS WITHIN SECTION 10. THE MERE FACT THAT A COMPANY IS INCORPORATED TO CAR RY ON INVESTMENT DOES NOT SHOW THAT IT IS CARRYING ON BUSINESS. 9. IN COMMISSIONER OF INCOME-TAX (CENTRAL) CALCUTTA V. ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY (P) LIMITED, (1971) 82 ITR 586 (SC) IT HAS OBSERVED AS UNDER :- WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY O F INVESTMENT OR FORMS PART OF THE STOCK-IN-TRADE IS A MATTER WHICH IS WIT HIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS ITA NO. 7511/MUM/2011 10 TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEE N THOSE SHARES WHICH ARE STOCK-IN-TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT. 10. THE HONBLE APEX COURT IN ANOTHER DECISION IN C OMMISSIONER OF INCOME TAX, BOMBAY V. H. HOLCK LARSEN, (1986)160 IT R 67 (SC), HAS HELD AS UNDER (HEAD NOTE PAGE 69) :- IN ORDER TO DETERMINE WHETHER ONE WAS A DEALER IN SHARES OR AN INVESTOR, THE REAL QUESTION WAS NOT WHETHER THE TRANSACTION O F BUYING AND SELLING THE SHARES LACKS THE ELEMENT OF TRADING, BUT WHETHE R THE LATER STAGES OF THE WHOLE OPERATION SHOW THAT THE FIRST STEP-THE PU RCHASE OF THE SHARES- WAS NOT TAKEN AS, OR IN THE COURSE OF, A TRADING TR ANSACTION. THE TOTALITY OF ALL THE FACTS WILL HAVE TO BE BORNE IN MIND AND THE CORRECT LEGAL PRINCIPLES APPLIED TO THESE. IF ALL THE RELEVANT F ACTORS HAVE BEEN TAKEN INTO CONSIDERATION AND THERE HAS BEEN NO MISAPPLICA TION OF THE PRINCIPLES OF LAW, THEN THE CONCLUSION ARRIVED AT BY THE TRIBU NAL CANNOT BE INTERFERED WITH BECAUSE THE INFERENCE IS A QUESTION OF LAW, IF SUCH AN INFERENCE WAS A POSSIBLE ONE, SUBJECT, HOWEVER, THA T ALL THE RELEVANT FACTORS HAVE BEEN DULY WEIGHED AND CONSIDERED BY TH E TRIBUNAL, THE INFERENCE REACHED BY THE TRIBUNAL SHOULD NOT BE INT ERFERED WITH. 11. IN CIT VS. GOPAL PUROHIT (2011) 336 ITR 287 (BO M) IT HAS BEEN HELD AS UNDER (HEADNOTE) : HELD, DISMISSING THE APPEAL, (I) THAT IT WAS OPEN TO THE ASSESSEE TO MAINTAIN TWO SEPARATE PORTFOLIOS, ONE RELATING TO I NVESTMENT AND ANOTHER RELATING TO BUSINESS OF DEALING IN SHARES, THAT A F INDING OF FACT HAD BEEN ARRIVED AT BY THE TRIBUNAL AS REGARDS THE TWO DISTI NCT TYPES OF TRANSACTIONS, NAMELY, THOSE BY WAY OF INVESTMENT AN D THOSE FOR THE PURPOSES OF BUSINESS, AND THIS WARRANTED NO INTERFE RENCE. (II) THAT THERE SHOULD BE UNIFORMITY IN TREATMENT A ND CONSISTENCY WHEN FACTS AND CIRCUMSTANCES FOR DIFFERENT YEARS WERE ID ENTICAL PARTICULARLY IN THE CASE OF THE SAME ASSESSEE. (III) THAT ENTRIES IN THE BOOKS OF ACCOUNT ALONE AR E NOT CONCLUSIVE IN DETERMINING THE NATURE OF INCOME. 12. RECENTLY THE HONBLE GUJARAT HIGH COURT IN CIT VS. VAIBHAV J SHAH (HUF) IN TAX APPEAL NO. 77 OF 2010 WITH TAX APPEAL NO. 78 OF 2010 DTD. 27-6-2012 HAS HELD AS UNDER:- 9. IN VIEW OF THE AFORESAID DECISIONS OF THE APEX COURT AS WELL AS OF THIS COURT, IT IS CLEAR THAT WHERE NUMBER OF TRANSACTION S OF SALE AND PURCHASE ITA NO. 7511/MUM/2011 11 OF SHARES TAKES PLACE, THE MOST IMPORTANT TEST IS T HE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTIONS OF PURCHA SE AND SALE OF THE SHARES. HOWEVER, WHERE THERE IS REPETITION AND CONT INUITY, COUPLED WITH MAGNITUDE OF THE TRANSACTION, BEARING REASONABLE PR OPORTION TO THE STRENGTH OF HOLDING, THEN AN INFERENCE CAN BE DRAWN THAT ACTIVITY IS IN THE NATURE OF BUSINESS. LEARNED COUNSEL FOR THE REVENUE FROM THE RECORDS COULD NOT DEMONSTRATE THAT THERE WERE LARGE NUMBER OF TRANSACTIONS WHICH HAD FREQUENCY, VOLUME, CONTINUITY AND REGULAR ITY AND FELL WITHIN THE TESTS LAID DOWN BY THE DIVISION BENCH OF THIS C OURT. 10. FOR THE AFORESAID REASONS, WE ARE OF THE CONSID ERED OPINION THAT THE INCOME EARNED BY THE ASSESSEE FROM TRADING IN THE S HARES UNDER THE HEAD LONG TERM CAPITAL GAIN / SHORT TERM CAPITAL GA IN WAS CORRECTLY SHOWN. WE DO NOT FIND THAT IN THE ASSESSMENT YEAR 2 005-2006 AND 2006-2007, THE TRANSACTION OF SALE OF SHARES AND VO LUME WERE SUBSTANTIAL. WE DO NOT FIND ANY ERROR OR IRREGULARI TY IN THE IMPUGNED ORDER PASSED BY THE TRIBUNAL. THE SUBSTANTIAL QUEST ION OF LAW FRAMED BY THIS COURT AS MENTIONED ABOVE IS ANSWERED IN THE AF FIRMATIVE AND AGAINST THE REVENUE. BOTH THESE TAX APPEALS ARE ACCORDINGLY DISMISSED. 13. IN ACIT V/S SHRI SATPAL SINGH SETHI IN ITA NO.3 650/MUM/2010 (AY: 2006-2007) DATED 30.9.2011, THE CO-ORDINATE BE NCH OF THE TRIBUNAL AFTER FOLLOWING THE RATIO OF THE DECISION OF THE HO NBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V/S DARIUS PANDOLE (2011) 330 ITR 485 (BOM.) AND CIT V/S GOPAL PUROHIT (2011) 336 ITR 287 (BOM) HAS HELD THAT SINCE IN THE EARLIER YEARS THE DEPARTMENT HAS ACC EPTED THE INCOME FROM SHARES AS FALLING UNDER THE HEAD CAPITAL GAIN S, IN OUR CONSIDERED OPINION AND RESPECTFULLY FOLLOWING THE ABOVE JUDGME NTS, THAT THE LD. CIT(A) WAS JUSTIFIED IN UPHOLDING THE ASSESSEES ST AND. 14. IN HITESH SATISCHANDRA DOSHI V/S JCIT (2011) 46 SOT 336(MUM), THE TRIBUNAL WHILE OBSERVING THAT THERE IS NO INDIC ATION OF HOLDING PERIOD OF 30 DAYS FINDS PLACE EITHER IN THE STATUTE OR IN THE CIRCULAR/INSTRUCTIONS AS WELL AS JUDICIAL PRONOUNCEMENTS HELD THAT THE LD . CIT(A) WAS NOT ITA NO. 7511/MUM/2011 12 JUSTIFIED IN TREATING THE SHARE TRANSACTION AS BUSI NESS TRANSACTIONS IN THE CASE WHERE THE HOLDING PERIOD IS LESS THAN 30 DAYS AND FURTHER HELD THAT THE INCOME ARISEN FROM PURCHASE AND SALE OF SHARES HELD BY THE ASSESSEE IS INVESTMENT, CANNOT BE TREATED AS BUSINESS INCOME . 15. THE JUDGMENTS THUS REFERRED TO ABOVE POINT OUT THE PRINCIPLE THAT THE QUESTION AS TO WHETHER THE ASSESSEE IS ENGAGED IN DEALING IN SHARES AS A COURSE OF BUSINESS ACTIVITY OR NOT, RESTS ON A PPRECIATION OF MATERIALS, THE STARTING POINT BEING THE PURCHASE OF SHARES AS AN INVESTMENT OR STOCK-IN-TRADE. IF THE PURCHASE IS A MERE INVESTME NT, THEN THE RESULT ON THE SALE MUST NECESSARILY BE TAKEN TO THE LOGICAL E ND TO TREAT IT AS AN ASSET YIELDING TO CAPITAL GAINS. HOWEVER, WHEN INV ESTMENT ITSELF IS FOR THE PURPOSE OF MAKING IT AS A BUSINESS THEN THE INCOME EARNED ON DEALING WITH SUCH SHARES IS TO BE TREATED AS BUSINESS INCOM E ONLY. 16. IN THE BACKGROUNDS OF THE ABOVE DECISIONS, WHEN WE ANALYSE THE FACTS OF THE PRESENT CASE WE FIND THAT THERE IS NO DISPUTE THAT THE ASSESSEE HAS SHOWN THE INVESTMENT IN SHARES AS INVE STMENT AND NOT AS A TRADING PORTFOLIO. THE A.O. HAS ADMITTED THE POSIT ION CONSISTENTLY IN PAST AND IN SUBSEQUENT YEARS. THE LD. D.R. FROM THE RECO RDS, COULD NOT DEMONSTRATE THAT THERE WERE LARGE NUMBER OF TRANSAC TIONS WHICH HAD FREQUENCY, VOLUME AND CONTINUITY. ON THE OTHER HAND THE ASSESSEE HAS PROVED THAT IN THE MONTH OF APRIL, 2005 THERE WERE ONLY 2 PURCHASES AND 1 SALE, IN MAY 3 PURCHASES AND 3 SALES, IN JUNE 3 P URCHASES AND 3 SALES, ITA NO. 7511/MUM/2011 13 IN JULY 4 PURCHASES AND 5 SALES, IN AUGUST 2 PURCHA SES AND 3 SALES, IN SEPTEMBER 1 PURCHASE AND 1 SALE, IN OCTOBER 1 PURCH ASE AND 1 SALE, IN NOVEMBER AND DECEMBER NO PURCHASE AND SALE, IN JANU ARY 1 PURCHASE AND 2 SALES AND IN FEBRUARY NO PURCHASE AND 2 SALES AND MARCH, 2006 NO PURCHASE AND SALES. THUS THERE WERE VERY FEW TRA NSACTIONS AND THERE WAS NO CONTINUITY AND REGULARITY INASMUCH AS THE IN VESTMENT IN SHARE WAS MADE OUT OF OWN CAPITAL WITHOUT TAKING ANY INTE REST BEARING LOAN AND, HENCE, IT IS NOT A CASE OF BUSINESS. IN THIS VIEW OF THE MATTER, WE ARE OF THE VIEW THAT THE LD. CIT(A) WAS NOT JUSTIFIED I N UPHOLDING THE ORDER OF THE A.O. IN TREATING THE SHORT TERM CAPITAL GAIN AS BUSINESS INCOME. THE A.O. IS DIRECTED TO TREAT THE GAIN ARISING FROM PUR CHASE AND SALE OF SHARES AS SHORT TERM CAPITAL. THE GROUNDS TAKEN BY THE AS SESSEE ARE, THEREFORE, ALLOWED. 17. IN THE RESULT, ASSESSEES APPEAL STANDS ALLOWED . ORDER PRONOUNCED ON 19-10-2012. SD/- (D. KARUNAKARA RAO ) ACCOUNTANT MEMBER SD/- (DINESH KUMAR AGARWAL) JUDICIAL MEMBER MUMBAI, DATED : 19-10-2012. RK ITA NO. 7511/MUM/2011 14 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- 2, MUMBAI 4. COMMISSIONER OF INCOME TAX 1 MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH C, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI