IN THE INCOME TAX APPELLATE TRIBUNAL DELHI `E' BENCH
BEFORE SHRI I.C. SUDHIR , JM & SHRI A.N. PAHUJA, AM
ITA no.1262/Del./2012
Assessment year: 2007-08
Asstt. CIT,Circle 31(1), V/s .Manoj Kumar Samdaria
Room no.185A, C.R. Prop.Love Art India,
Building,I.P. Estate, 26, Jain Bhawan, 12
New Delhi Bhagat Singh Marg,
New Delhi
[PAN : ABBPS9884J]
(Appellant) (Respondent)
Assessee by Shri Greenize Jain&
Ms. Jasmeet Kaur Kohli, ARs
Revenue by Shri Aroop Kumar Singh, DR
Date of hearing 26-09-2012
Date of pronouncement 05-10-2012
ORDER
A.N.Pahuja:- This appeal filed on 14.03.2012 by the Revenue against an order
dated 15th December, 2011 of the ld. CIT(A)-XXVI, New Delhi, raises the
following grounds:-
"1. Whether in the facts and circumstances of the
case, CIT(A) was justified in treating the income of
``65,45,321/- from sale purchase of shares as income
from short term capital gain as against business
income?
2. The appellant craves leave to add, alter or amend
any/all the grounds of appeal before or during the
course of hearing of the appeal."
2. Facts, in brief, as per relevant orders are that return declaring
income of ``91,54,936/- filed on 20th July, 2007 by the assessee, deriving income
2 ITA no.1262/Del./2012
from house property, income from business, short term capital gain and income
from other sources, was selected for scrutiny with the service of a notice u/s
143(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act) , issued on
24th July, 2008. During the course of assessment proceedings, the Assessing
Officer (A.O. in short) noticed that the assessee traded in sale and purchase of
shares through M/s Vimgi Investments Pvt. Ltd. To a query by AO, seeking
details of the shares, of which the assessee reflected short term gain of
``65,45,321/-, the assessee submitted broker notes and confirmation from the
broker. After considering these documents, the AO concluded that M/s Vimgi
Investments Pvt. Ltd. had traded on behalf of the assessee in the activity of
sale/purchase of shares. Since the assessee did not furnish any evidence that
shares were purchased and sold as an investor, relying upon CBDT Instruction
no.1827 dated 31.8.1989 and Circular no.4/2007 dated 15.06.2007, the AO ,
considering the magnitude of purchases and sales as also frequency of
transactions in the light of broker notes furnished by the assessee, observed that
even on single day, the assessee traded in a number of shares and transactions
were huge and the assessee had opening investment of ``1 crore in shares while
shares worth ``4.10 crore have been sold and shares of ``4.9 crore had been
purchased during the year. Accordingly, the AO concluded that the assessee
traded in shares with the motive for profits and, therefore, gain resulting from
purchase & sale of shares has to be assessed as business income and not short
term gain.
3. On appeal, the ld. CIT(A) accepted the claim of the assessee,
holding as under:-
"5. ......I have considered the findings recorded by the
Assessing Officer as per the assessment order, the submissions
made by the AR of the appellant and the facts if the case on record.
In order to judge whether any income falls under the head income
from business or profession or income from capital gains, it is
necessary to refer the charging section for the respective heads.
3 ITA no.1262/Del./2012
5.1 Section 28 is the charging section for the Incomes under the
head business or profession. The relevant extract of section 28 is
as follows:-
"the profits and gains of any business or profession" which was carried on
by the Assessee at any time during the previous year. "
Section 45 is the charging section for the Income under the head
Capital Gains. The relevant extract of section 45 is as follows:-
"Any profits or gains arising from the transfer of a capital asset effected
in the previous year shall. . ... be chargeable to income tax under the head
"Capital gains" .
The term capital asset is defined in the Income Tax Act, 1961. The
relevant extract of the said definition is mentioned herein as below:
"In this Act, unless the context otherwise requires, "Capital asset" means
property of any kind held by an assessee, whether or not connected with
his business or profession, but does not include-
i)Any stock-in-trade, consumable stores or raw materials held for
the purposes of his business or profession ......
Thus, it can be concluded that any gain from the transfer of shares
other than the shares held as stock in trade is chargeable under the
head capital gain.
5.2 Circular no. 4/2007 laid out certain tests for examining
the distinction between shares held as stock-in-trade and shares
held as capital asset in the light of a number of judicial decisions. In
the case of H. Holck Larsen as stated therein, the Hon'ble Supreme
Court after considering various English as well as Indian decisions
held that for determining whether a person is a dealer or investor in
shares, the real decision is whether the first step, purchase of
shares was taken as in the course of a trading transaction, if that be
so, the profit there-from would be of the nature of business profit
and if not so, the profit there-from would not be treated as earned
by a trader. Since the appellant has purchased the shares on
delivery basis, this signifies his intention of holding the shares as
investment purpose to some extent. However, it is to be noted that
no single principle would be decisive to judge whether shares are
held as stock-in-trade or capital asset.
4 ITA no.1262/Del./2012
5.3 The following facts support the appellant's intention
that the shares are held for investment purpose:-
a) The Assessee is in the business of exporting jewellery and
handicrafts goods.
b) The Assessee has not borrowed any funds for carrying the
shares transactions.
c) The Assessee has earned dividend income of Rs.21,952 in the
previous year 2006-07.
d) The average length of the ownership of shares purchased
through Vimgi Investments Pvt. Ltd. is 118 days and Navratan
Capital & Securities limited is 48 days.
e) The number of scripts are less than 25.
f) The Assessee has no infrastructure in the form of office,
employees, equipments etc. The Assessee has not indulged in
advertising or canvassing etc.
g) The Assessment as made in earlier year though there is no
major change in the facts of the case or the law.
5.4 Further I have also referred to the Hon'ble Bombay
High Court judgment in the case of CIT vs. Gopal Purohit. The
judgment also throws the same view and is also upheld by the
Apex Court.
Thus, in view of the aforesaid discussion, the view opined by the
AO is rejected and direct him to recompute the income under the
head capital gains and not under the head business income and
pass a consequential order accordingly.
4. The Revenue is now in appeal before us against the aforesaid
findings of learned CIT(A).The ld. DR while carrying us through the assessment
order and findings of the ld. CIT(A) supported the order of the AO while relying
upon the decision dated 2.11.2011 in the case of Mafatlal Fabrics P. Ltd. Vs.
DCIT in I.T.A. no.903/Mum/2010 for assessment year 2006-07 dated 02.11.2011
and decision dated 6th January, 2012 in the case of M/s Diligent Services Pvt.
Ltd. in I.T.A. no.3299/Del./09 and 3318/Del./09. On the other hand, the ld. AR on
5 ITA no.1262/Del./2012
behalf of the assessee supported the order of the ld. CIT(A) while contending
that their claim as an investor has been accepted in the preceding year. Inter
alia, the ld. AR relied upon decision dated 6-1-2010 in CIT vs. Gopal Purohit,
228 CTR 582 (Bom.), upholding decision of the Tribunal in Gopal Purohit v. JCIT
[(2009) 29 SOT 117 (Mum).
5. W e have heard both the parties and gone through the facts of
the case as also the aforesaid decisions relied upon by both the
sides. The issue before us is as to whether the shares quoted in stock
exchange and traded in by the assessee , which were classified as "investment"
in their books of accounts, were their "investment" or their "stock-in-trade"? The
AO treated short term capital gains of ``65,45,321/-, on sale of such shares as
business income while the ld. CIT(A) following the view taken in. M/s Gopal
Purohit(supra) accepted the claim of the assessee, reflecting the income under
the head short term capital gains. The assessee is in the business of exporting
jewellery and handicrafts goods and is stated to be trading in shares for the
preceding three or four years. The assessee claimed that in the earlier years
their claim as an investor has been accepted by the AO in assessment
completed u/s 143(1) of the Act while in the preceding AY2006-07,assessment
was completed u/s 143(3) of the Act. However, there is nothing to suggest that
the claim of the assessee as investor or trader in shares was examined by the
AO nor any material has been placed before us that the AO raised any query on
this aspect in the preceding assessment year. Even otherwise, no attempt was
made by the ld. AR on behalf of the assessee before us to establish that facts
and circumstances in the preceding years were similar to the facts and
circumstances in the year under consideration. In these circumstances, reliance
on decision of the AO in the preceding year is totally misplaced.
5.1 One of the relevant tests, in determining as to whether or not the
shares/securities are a capital asset, is whether it is in the nature of fixed asset or
constitutes the stock-in-trade of the assessee's business. Fixed asset is what the
6 ITA no.1262/Del./2012
owner turns to profit keeping the asset in his own possession, stock-in-trade is
what he makes profit of by parting with it, and letting it change masters.Before
proceeding further ,we may have a look at the relevant provisions. Section 2(14)
of the Act defines "capital asset" to mean property of any kind held by an
assessee, whether or not connected with his business or profession. The
definition of "capital asset" excludes "stock-in-trade" held for the purpose of
business. Section 2(22) of the Act defines "dividend" to include any distribution
by a company of accumulated profits, whether capitalized or not. Section 2(42-
A)of the Act defines "short-term capital asset" to mean a capital asset held by an
assessee for not more than thirty six months immediately preceding the date of
its transfer. However for share held in a company or any other security listed in a
recognised stock exchange in India, this period is 12 months. Section 2(42-B)
defines "short term capital gain" to mean capital gain arising from the transfer of
a short term capital asset. Under Section 28(i) of the Act, the profits and gains of
any business carried on by the assessee, at any time during the previous year, is
chargeable to income tax under the head "profits and gains of business or
profession". Under Section 45(1) of the Act any profits or gains, arising from the
transfer of a capital asset effected in the previous year, is deemed to be income
of the previous year in which the transfer took place. Section 111-A, inserted by
Finance Act, 2004, relates to tax on short term capital gains in certain cases and,
under sub-section (1) thereof, where the total income of an assessee includes
any income chargeable under the head "capital gains", arising from the transfer
of a short term capital asset being an equity share in a company and such
transaction is chargeable to securities transaction tax, the tax payable by the
assessee shall be the aggregate of the amount of income tax calculated, on such
short term capital gains, at the rate of fifteen per cent.
5.2. If the shares purchased by the assessee are held to be capital assets,
short term capital gain on sale of such shares could fall within the ambit of
Section 111A of the Act, and such capital gains would be subject to tax at a lower
rate. If the shares are held by the assessee as stock in trade, profit on the sale
7 ITA no.1262/Del./2012
of such shares would constitute business income, and be subject to tax at a
higher rate. As mentioned above, Section 2(14) (i) of the Act defines a capital
asset as not including stock in trade. If the assessee held the shares as "stock in
trade", and not as investment, then such shares would stand excluded from the
definition of "short term capital asset", and the profit earned on the sale of such
shares would not be exigible to tax as "short term capital gain", but as "profits
and gains from business".
5.3 . In determining the issue as to whether, after acquiring the shares, the
assessee dealt with it as an investor, or carried on business with it, treating it as
its stock-in-trade or as a trading asset, what is relevant is that, if the case falls
within the former category, receipts by way of sale of such shares will be capital
receipts, but if it falls within the latter the receipts will be trading receipts, and
profits therefrom business income. To determine as to whether sale of shares is
to be assessed as business income or as income from capital gain , the most
important test is whether the initial acquisition of the shares was with the
intention of dealing in the shares or it was made as an investment. The intention
of the assessee is best known to him and the dispute comes to the appellate
authorities only when the Revenue authorities do not accept the claim of the
assessee.The distinction whether the investment transaction is a mere realisation
of the investment or an act done for making profits depends on the question
whether the excess was an enhancement of the value by realising a security or a
gain in an operation of profit making. If the transaction is in the ordinary line of
the assessee's business there would hardly be any difficulty in concluding that it
was a trading transaction but, where it is not, the facts must be properly
assessed to discover whether it was in the nature of trade. The surplus realised
on the sale of shares, for instance, would be capital if the assessee is an ordinary
investor realising his holding; but it would be revenue if he deals with them as a
trader. The test often applied is, has the assessee made his shares and
securities the stock-in-trade of a business?, as was observed in Raja Bahadur
Kamakhya Narain Singh v. CIT, 77 ITR 253(SC). There is no material before us
8 ITA no.1262/Del./2012
that shares and securities purchased in the year under consideration and
classified as investment in books were actually intended to be held as long term
investments. Profits realised by the sale of shares may be capital if the seller is
an ordinary investor changing his securities, but it may be income if the seller of
the shares is trading in shares, as held in Raja Bahadur Visheshwara Singh v.
CIT, 41 ITR 685(SC). The substantial nature of the transactions, the magnitude
of the shares purchased and sold and the ratio between the purchases and sales
and the holdings, reveals the intention of the assessee as a trader in shares and
not as an investor.. In the instant case, the assessee had opening investment of
``1 crore in shares while shares worth ``4.10 crore have been sold and shares of
the value of ``4.9 crore were purchased. The fact that few shares were held for
only a day or two reflects the dominant or even sole intention to resell, which is a
relevant factor and raises a strong presumption, but by itself is not conclusive
proof, of trade. The intention to resell would, in conjunction with the conduct of
the assessee and other circumstances, point to the business character of the
transactions. [Sutlej Cotton Mills Supply Agency Ltd,100 ITR 706(SC) and
Venkataswami Naidu & Co., 35 ITR 594(SC)].Where a purchase is made with the
intention of resale, it depends upon the conduct of the assessee and the
circumstances of the case whether the venture is on capital account or in the
nature of trade. A transaction is not necessarily in the nature of trade because
the purchase was made with the intention of resale. Whether shares of a
company held by a person constitute his capital or his stock-in-trade is not a pure
question of law but essentially one of fact. [CIT v. Ram Kumar Aggarwal and
Bros., 205 ITR 251(SC)].The various authorities have laid down certain
guidelines on the basis of which the intention of the assessee can be inferred. In
the case of M/s Sarnath Infrastructure Pvt. Ltd., 120 TTJ 216 ,the ITAT culled out
various parameters, which may be applied to determine whether the transaction
of purchase and sale of share is in the nature of trade or investment. The
relevant observations of the ITAT read as under:
"The following principles 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
purposes:
9 ITA no.1262/Del./2012
(1) What is the intention of the assessee at the time of purchase of the
shares. This can be found out from the treatment 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 purchase and paid interest
thereon. Normally, money is borrowed to purchase goods for the purposes of
trade and not for investing in an asset for retaining.
(3) What is the frequency of such purchases and disposal in that particular item ?
If purchases and sales 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 whether 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 are for realizing profit or purchases are made for
retention and appreciation in its value? Former will indicate intention of trade
and latter, an investment. In the 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 essential ingredient of trade.
(5) How the value of the items has been taken in the 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 realizable value (whichever
is less), it will indicate that items in question are treated as stock-in-trade.
(6) How the company (assessee) is authorized in memorandum of
association/articles of association ? Whether for trade or for investment ? 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 show that his holding is for
investment or for trading and what distinction he has kept to the records or
otherwise, between two types of holdings: if the assessee is able to discharge the
primary onus and could prima facie show 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.
10 ITA no.1262/Del./2012
(8) The mere fact of credit of sale proceeds of shares (or for that matter any
other item in question) in a particular account or much frequency of sale and
purchase will alone will not be sufficient to say that assessee was holding the
shares (or the items in question) for investment.
(9) One has to find out what are the legal requisites for dealing as a trader in
the items in question and whether the assessee is complying 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 ? Whether
it had such an intention (to carry on illegal business in that item) since beginning
or when purchases were made ?
(10) It is permissible as per CBDT's Circular No. 4 of 2007 of 15-6-2007 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 is 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.
5.4 Even CBDT in Circular No.4/2007 dt.15.6.2007 has laid down the
principles for holding as to when profits earned from transactions in share should
be held as business or should be treated as investment. The relevant circular
reads as under:
Circular No. 4/2007, dated June 15, 2007
Sub : Distinction between shares held as stock-in-trade and shares held
as investment--Tests for such a distinction.
The Income-tax Act, 1961 makes a distinction between a capital asset and
a trading asset.
2. Capital asset is defined in section 2(14) of the Act. Long-term capital
assets and gains are dealt with under section 2(29A) and section 2(29B).
11 ITA no.1262/Del./2012
Short-term capital assets and gains are dealt with under section 2(42A)
and section 2(42B).
3. Trading asset is dealt with under section 28 of the Act.
4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827
dated August 31, 1989, had brought to the notice of the Assessing
Officers that there is a distinction between shares held as investment
(capital asset) and shares held as stock-in-trade (trading asset). In the
light of a number of judicial decisions pronounced after the issue of the
above instructions, it is proposed to update the above instructions for the
information of the assessees as well as for guidance of the Assessing
Officers.
5. In the case of CIT v. Associated Industrial Development Company (P)
Ltd. [1971] 82 ITR 586, the Supreme Court observed that (headnote) :
Whether a particular holding of shares is by way of investment or forms
part of the stock-in-trade is a matter which is within the knowledge of the
assessee who holds the shares and he should, in normal circumstances,
be in a position to produce evidence from his records as to whether he
has maintained any distinction between those shares which are his stock-
in-trade and those which are held by way of investment.
6. In the case of CIT v. H. Holck Larsen [1986] 160 ITR 67, the Supreme
Court observed (page 87) :
The High Court, in our opinion, made a mistake in observing whether
transactions of sale and purchase of shares were trading transactions or
whether these were in the nature of investment was a question of law.
This is a mixed question of law and fact.
7. The principles laid down by the Supreme Court in the above two cases
afford adequate guidance to the Assessing Officers.
8. The Authority for Advance Rulings (AAR) [2007] 288 ITR 641, referring
to the decisions of the Supreme Court in several cases, has 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 to purchase and sell shares in the memorandum of
association is not decisive of the nature of transaction ;
(ii) the substantial nature of transactions, the manner of maintaining
books of account, the magnitude of purchases and sales and the
12 ITA no.1262/Del./2012
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 with 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 shares of a company is to derive income by way
of dividend etc. then the profits accruing 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. The first principle
requires us to ascertain whether the purchase of shares by a FII in
exercise of the power in the memorandum of association/trust deed was
as stock-in-trade as the mere existence of the power to purchase and sell
shares will not by itself 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 substantial
transactions, their magnitude, etc., maintenance of books of account and
finding the 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 of account containing true and fair accounts
relating to remittance of initial corpus 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 purchases and
sales of shares with the motive of realizing profit would lead to inference of
trade/adventure in the nature of trade ; where the object of the investment
in shares of companies is to derive income by way of dividends etc., the
transactions of purchases and sales of shares would yield capital gains
and not business profits.
10. The Central Board of Direct Taxes also wishes to emphasise that it is
possible for a tax payer to have two portfolios, i.e., an investment portfolio
comprising of securities which are to be treated as capital assets and a
trading portfolio comprising of stock-in-trade which are to be treated as
trading assets. Where an assessee has two portfolios, the assessee may
have income under both heads i.e., capital gains as well as business
income.
13 ITA no.1262/Del./2012
11. The Assessing Officers are advised that the above principles should
guide them in determining whether, in a given case, the shares are held
by the assessee as investment (and therefore giving rise to capital gains)
or as stock-in-trade (and therefore giving rise to business profits). The
Assessing 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 given case, the shares are held by the assessee
as investment or stock-in-trade.
12. These instructions shall supplement the earlier Instruction No. 1827
dated August 31, 1989.
[F. No. 149/287/2005-TPL]
5.5 . We may point out that the Hon'ble Gujrat High Court in CIT vs.
Reva Shanker A. Kothari 283 ITR 338 (Gujarat ) laid down the following
guidelines in order to determine whether profits arising on sale is business
income:-
"The tests laid down by various decisions of the apex court indicate that, in
each case, it is the total effect of all relevant factors and circumstances that
determines the character of the transaction. Each case has to be determined on
the total impression created on the mind of the court by all the facts and
circumstances disclosed in a particular case. One of the principal tests is whether
the transaction is related to the business normally carried on by an assessee.
The nature of the commodity would also be a relevant factor. It is equally well
settled that, merely because the original purchase was made with the intention to
resell, if an enhanced price could be obtained, that by itself is not enough to infer
that an assessee is carrying on business. However, though profit motive in
entering into a transaction is not decisive, if the facts and circumstances indicate
that the purchase of the asset was made solely and exclusively with an intention
to resell the asset at a profit, it would be a strong factor for inferring that the
transaction was in the nature of business.
In the case of Pari Mangaldas Girdhardas v. CIT [1977] CTR 647 (Guj), after
analysing various decisions of the apex court, this court has formulated certain
tests to determine as to whether an assessee can be said to be carrying on
business.
(a) The first test is whether the initial acquisition of the subject-matter of
transaction was with the intention of dealing in the item, or with a view to finding
an investment. If the transaction, since the inception, appears to be impressed
with the character of a commercial transaction entered into with a view to earn
profit, it would furnish a valuable guideline.
(b) The second test that is often applied is as to why and how and for what
purpose the sale was effected subsequently.
14 ITA no.1262/Del./2012
(c) The third test, which is frequently applied, is as to how the assessee dealt
with the subject-matter of transaction during the time the asset was with the
assessee. Has it been treated as stock-in-trade, or has it been shown in the
books of account and balance sheet as an investment. This inquiry, though
relevant, is not conclusive.
(d) The fourth test is as to how the assessee himself has returned the income
from such activities and how the Department has dealt with the same in the
course of preceding and succeeding assessments. This factor, though not
conclusive, can afford good and cogent evidence to judge the nature of the
transaction and would be a relevant circumstance to be considered in the
absence of any satisfactory explanation.
(e) The fifth test, normally applied in cases of partnership firms and companies, is
whether the deed of partnership or the memorandum of association, as the case
may be, authorises such an activity.
(f) The last but not the least, rather the most important test, is as to the volume,
frequency, continuity and regularity of transactions of purchase and sale of the
goods concerned. In a case where there is repetition and continuity, coupled with
the magnitude of the transaction, bearing reasonable proportion to the strength of
holding, then an inference can readily be drawn that the activity is in the nature of
business.
5.6 In the instant case, the assessee has been habitually trading in quoted
shares and the frequency of such purchases and disposal as also the fact that
with the investment of ``1 crore in shares, the assessee had turnover of over `4
crores , indicates nothing but intention of trade. It may be pointed out that the
assessee earned only a meager amount of dividend of `21,952/- in the year
under consideration. A trader in a commodity is basically motivated by profit in
selling the commodity on each and every rise in value, which is apparent in the
instant case. High frequency, high volume and regularity of transactions are
therefore the basic features of a trading transaction. An investor on the other
hand makes purchases with a view to earning income from the investments. He
is not tempted to sell the commodity to earn quick profit on each and every rise in
the value and holds the commodity for a longer period so as to have income as
well as appreciation in value. The ld. CIT(A) pointed out that the assessee has
not borrowed any funds for carrying the shares transactions. In our opinion, this
is not the crucial factor to ascertain as to whether or not the assessee was an
investor in shares or trader. Though the number of scrips is less than 25 as
pointed out by the ld. CIT(A) but the period of holding and the ratio of turnover
15 ITA no.1262/Del./2012
and stock reflects that the assessee had the predominant intention of trading in
shares. As already stated, the true nature of transaction can be understood from
the intention of the assessee at the time of purchase. Crucial factor is the period
of holding which is very short in case of a trader, as is in the instant case,
because a trader buys the commodity not for holding it in contrast to an investor
who buys the commodity for holding it so as to earn some income from
investment and have decent appreciation. In case of shares, income is in the
form of annual dividend and therefore, an investor in shares will normally be
holding shares for more than a year and any sale before one year has to be
explained from the circumstances of the case. The profit motive is also relevant
but this is also not conclusive because even an investor may earn profit by way
of appreciation. As is apparent from the aforesaid facts, the transactions of
purchase of shares, and thereafter selling it with in few days and most of the
time within a month, with a view to earn profit, reflects motive of the assessee as
a trader and not an investor. In the instant case, purchases as well as turnover
are continually increasing and the assessee has regularly dealt in purchase and
sales of shares. Profit motive is also clearly evident in making the transaction. In
Gopal Purohit(supra), the assessee has been continually holding the shares as
investment from year to year. This is not the situation in the instant case. In the
case of CIT (Central), Calcutta vs Associated Industrial Development Company
(P) Ltd.,82-ITR-586, the Hon'ble Supreme Court held as under:
"Whether a particular holding of shares is by way of investment or forms part of
the stock-in-trade is a matter which is within the knowledge of the assessee who
holds the shares and he should, in normal circumstances, be in a position to
produce evidence from his records as to whether he has maintained any
distinction between those shares which are his stock-in-trade and those which
are held by way of investment."
5.7 In the case of CIT, Bombay vs H Holck Larsen (160-ITR-67), the Hon'ble
Supreme Court has held as under:
"In order to determine whether one was a dealer in shares or an investor, the
real question was not whether the transaction of buying and selling the shares
lacks the element of trading, but whether the later stages of the whole
16 ITA no.1262/Del./2012
operation show that the first step the purchase of the shares was not taken
as, or in the course of, a trading transaction. 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 factors have been taken into consideration and there has been no
misapplication of the principles of law, then the conclusion arrived at by the
Tribunal cannot be interfered with because the inference is a question of law, if
such an inference was a possible one, subject, however, that all the relevant
factors have been duly weighed and considered by the Tribunal, the inference
reached by the Tribunal should not be interfered with."
5.8 The ld. AR on behalf of the assessee relied on the decision in the case of
Gopal Purohit (supra) where in it was held that income from all delivery based
transactions has to be assessed as income under the head capital gains..We
have carefully perused the order of the Tribunal in the case of Gopal Purohit
(supra), but we find that there is no universal finding in that case that all delivery
based transactions have to be treated as investment. The Tribunal in case of
Gopal Purohit (supra), decided the issue, following the decision of Tribunal in
case of Sarnath Infrastructure(P.) Ltd v. Asstt. CIT [2010] 124 ITD 71 (Luck)
holding that facts in the case of Sarnath Infrastructure(P.) Ltd. (supra), were
identical. However, it is noted that in Sarnath Infrastructure (P.) Ltd (supra), the
shares sold out of investment account had been held for 23 years and Revenue
could not show any shares sold which had been purchased during the year or in
the immediately preceding year. Therefore, only in respect of such cases, the
decision in case of Gopal Purohit (supra), could be applied. The Hon'ble High
Court of Bombay upheld the decision of the Tribunal in the case of Gopal Purohit
(supra), on the ground that there was no substantial question of law involved.
Even before Hon'ble High Court, there was no question raised that all delivery
based transactions have necessarily to be treated as investment activity. Thus,
the decision of the Tribunal as well as the Hon'ble High court in case of Gopal
Purohit (supra),cannot be considered as a precedent for the proposition that all
delivery based shares have to be treated as investment activity. The assessee
can also be a trader in case of delivery based purchases and sales, which is a
normal feature of any trading activity. Therefore, reliance placed by the ld. AR on
the decision in the case of Gopal Purohit is totally misplaced.
17 ITA no.1262/Del./2012
6. In view of the foregoing ,we are of the opinion that the character of a
transaction cannot be determined solely on the application of any abstract test or
rule and the cumulative factors affecting the transactions have to be seen.
Habitual dealing in a particular item is indicative of the assessee's intention of
trading. Merely for taking benefit of provisions of sec. 111A of the Act applicable
from the AY 2005-06, the assessee can not be categorised as an investor,
especially when the aforesaid facts speak otherwise and lead us to the
conclusion that the assessee is indulging in activities of a trader in shares. .As
observed in Sutlej Cotton Mills Supply Agency Ltd. (supra), it is a matter of first
impression with the Court whether a particular transaction is in the nature of
trade or not. ; it is not even the assessee's case that they had held all the shares
for a long duration. The facts and circumstances of the case before us, when
viewed in the light of principles laid down in the various decisions referred to
above, lead us to the conclusion that the voluminous share transactions were in
the nature of the business; purchase of shares by them was not for the purpose
of earning dividend, but with the dominant intention of resale in order to earn
profits; the profit made by the assessee is not of mere enhancement of value of
the shares, but is a profit made in the carrying on of a business scheme of profit
making; huge volume of share transactions, the repetition and continuity of the
transactions, give them a flavour of "trade"; the magnitude, frequency and the
ratio of sales to purchases on the total holdings is evidence that the assessee
had not purchased the shares as an investment, but with the intention to trade in
such scrips. In the light of view taken in the aforesaid decisions, we are of the
opinion that the ld. CIT(A) was not justified in accepting the claim of the
assessee as investor in shares .Accordingly, we vacate the findings of the ld.
CIT(A) and restore the order of the AO. Therefore, ground no.1 in the appeal is
allowed. For our aforesaid view ,we are also supported by decisions in Mafatlal
Fabrics P. Ltd.(supra) & & M/s Diligent Services Pvt. Ltd.(supra) ,relied upon by
the ld. DR.
18 ITA no.1262/Del./2012
7. No additional ground having been raised before us in terms of the residuary
ground no.2 in these the appeal, accordingly, this ground is dismissed.
8. No other argument or plea was made before us.
9. In the result, appeal is allowed.
Order pronounced in open Court
Sd/- Sd/-
(I.C. SUDHIR) (A.N. PAHUJA)
(Judicial Member) (Accountant Member)
NS
Copy of the Order forwarded to:-
1. Assessee
2. Asstt. CIT,Circle 31(1), Room no.185A, C.R. Building,I.P. Estate,
New Delhi
3. CIT concerned
4. CIT(A)-XXVI, Delhi.
5. The DR, ITAT, 'E' Bench, New Delhi
6. Guard File.
By Order,
Deputy/Asstt.Registrar
ITAT, Delhi
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