CAPITAL GAINS BUSINESS PROFITS?

Transcription

1 CAPITAL GAINS OR BUSINESS PROFITS? Compiled by: CA. Pankaj Ghanshyam Shah G.J. Shah & Company Indore

2 Dear Readers FOREWORD There is no provision in the statute regarding the question as to when can a transaction in shares and securities be regarded as a trading transaction and as investment transaction. The law on the subject can only be culled out from various decided cases on the subject. The question as to whether shares and securities (or any other asset, for that matter) are held as capital asset or as stock-in-trade is a question that has been taxing the brains of the tax professionals and of the judiciary for more than a century. One of the earliest known decisions is that of the English Court of Appeals pronounced in the year 1904 (See Californian Copper syndicate V. Harris (5 TC 159)). The earliest known Indian Supreme Court decision was the one pronounced in the year 1959 ( See G.Venkata Swami Naidu & Co. V. CIT (35 ITR 594)). Yet we find, in the year 2012, the same issue being debated and there is substance in that debate. This is because, in so far as capital gains on listed shares and equity oriented units of mutual funds are concerned, if the same are held as capital assets (in other words, as investments ) then the profits are considered as capital gains. In such circumstances, short term gains would be taxed at the concessional rate of 15% and the long term gains would be completely exempt. On the other hand, if shares and securities are regarded as stock-in-trade, the profits are treated as business profits. In such circumstances, the profits would be taxed at the normal rate of tax as any other income. Tests laid down by Courts The Courts have, over a period of time, laid down various tests to be applied in order to arrive at a decision, on the given facts, on the question as to whether an asset is held as capital asset or as stock-in-trade. A single largest test, which comes out from various court rulings, is the intention at the time of purchase (See G.Venkata Swami Naidu & Co. V. CIT (35 ITR 594) & Rmanarain Sons Ltd Vs. CIT (41 ITR 534)). In cases when the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the securities for himself, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive: and it is conceivable that, on considering all the facts and circumstances in the case, the transaction may be regarded as that of investment and not as a business venture. 2 Page By CA.Pankaj G. Shah

3 The other tests laid down by Courts from time to time are:- Whether purchaser was a trader and the purchase of the securities and its resale were allied to his usual trade or business or incidental to it; The quantity of the securities purchased and re-sold (the volume of transactions); Any act subsequent to the purchase to show that the intention is to retain and earn dividends and other corporate benefits out of it; Any act prior to purchase showing a design or purpose; The similarity of the transaction to those that are usually associated with trade or business; and The repetition of the transactions etc. Whether the activity of investment is a business or not may be examined having regard to the principle that business connotes some real, substantive and systematic or organized course of activity or conduct with a set purpose (See Narain Swadeshi V CEPT (26 ITR 765,773 SC) & Mazgoan Dock V. CIT (34 ITR 368, 377)(SC)). In one of the cases before the Supreme Court, for several years, the assessee who made investments in shares and securities out of his cash surplus was not assessed on the profits arising from shares and securities and the Tax Department accepted that such shares and securities were held by him not as stock-in-trade but as investments. (In those years, capital gains were not taxable). However, in July 1940, the assessee borrowed huge sums and made further purchases and sales of shares / securities and earned substantial profits in coming 4 to 5 years out of number of transactions of purchase and sale. The Supreme Court held that having regard to the evidence before the lower authority, namely, the substantial nature of transactions, the manner in which books had been maintained, the magnitude of the shares purchased and sold and the ratio between the purchases and sales and the holdings all indicated that the assessee was dealing in shares as business and such conclusion by the lower authority could not be interfered with. It also held that merely because in the past the assessee was not regarded as a dealer in shares could not, by itself, preclude the Tax Department from holding that he was dealer in shares for the years under consideration. It is also worth noting that, if borrowings are made for the purpose of making investments in shares and securities, that would give rise to a strong presumption that the purpose of acquisition is that of dealing in shares; the logic being that a person normally makes investments from his surplus fund and not from borrowed capital. In one case, the factors which influenced the Supreme Court to come to the conclusion that the profits on sale of shares was business profits were: 3 Page By CA.Pankaj G. Shah

4 authority in the Memorandum to buy and sale shares; past dealing in shares of other companies; specific resolutions of the company authorising Directors to purchase and sale of shares; purchase of shares from borrowed funds etc. Recently, the Madras High Court in CIT V. S.Ramaamirtham (306 ITR 239) held that even in case of a registered share and stock broker, if on facts, it was found that separate books of account were maintained for trading in shares and investments in shares, shares in investment portfolio were held for a long period and out of surplus funds, etc, there is nothing in law to prohibit a trade in shares to also invest in shares, and accordingly, profit on sale of shares held in investment portfolio were assessable as capital gains. The CBDT, in its Instruction No.1827 dated August 31, 1989 has reiterated the principles discussed above and has laid down in para 10 thereof that, although the tests laid down by the courts may help determine the issue in particular cases the decision will ultimately turn on the facts of each case. The instructions are, therefore, merely in the nature of guidelines to be followed by the Assessing Officers. These guidelines have been reiterated and elucidated once again in a Circular No.4 dated June 15, However inspite of so many decisions on the subject there is no precise law on the issue and litigations are continuously raised by the Department. I am confident that this publication compiling precedents on this litigious issue will be of great help to all those practicing in the field of Tax Laws. INDORE June 18, 2012 CA. Pankaj G. Shah 4 Page By CA.Pankaj G. Shah

5 INDEX 1. CBDT CIRCULAR NO. 4/2007, DATED TESTS FOR DECIDING WHETHER SHARES HELD AS STOCK-IN-TRADE OR INVESTMENT ACIT VS. MRS. RAJPAL SETHI (ITAT MUMBAI) 10 ASSESSEE CANNOT BE HELD TO BE A TRADER IN SHARES WITH RESPECT TO DELIVERY BASIS TRANSACTION CIT VS. GOPAL PUROHIT (BOMBAY HIGH COURT) 10 SHARES ACTIVITY TREATED AS INVESTMENT IN EARLIER YEARS CANNOT BE TREATED AS BUSINESS IN SUBSEQUENT YEARS IF FACTS ARE THE SAME ACIT V. OM PRAKASH SURI (M.P. HIGH COURT) DCIT VS. SMK SHARES & STOCK BROKING (ITAT MUMBAI) 11 LARGE VOLUME OF PURCHASE & SALE OF SHARES DOES NOT PER SE MEAN ACTIVITY IS BUSINESS JANAK S. RANGWALLA V. ACIT (ITAT MUMBAI) 12 MERE VOLUME OF TRANSACTION TRANSACTED BY THE ASSESSEE WOULD NOT ALTER THE NATURE OF TRANSACTION MANAGEMENT STRUCTURE & SYSTEMS VS. ITO (ITAT MUMBAI) 12 TESTS LAID DOWN TO DETERMINE WHETHER INCOME FROM SHARES IS BUSINESS INCOME OR CAPITAL GAINS J. M. SHARE & STOCK BROKERS VS. JCIT (ITAT MUMBAI) 13 TESTS TO DISTINGUISH SHARES HELD AS STOCK-IN-TRADE AND AS INVESTMENTS BOMBAY GYMKHANA LTD. V. ITO (ITAT MUMBAI) 13 MERELY HIGH NUMBER OF TRANSACTIONS NOT DETERMINANT CIT V. S.RAMAAMIRTHAM (MAD HC) 14 BROKER CAN HAVE SEPARATE ACCOUNTS FOR TRADING AND INVESTMENT NEHAL V. SHAH VS. ACIT (ITAT MUMBAI) 14 MULTIPLE ORDERS FOR PURCHASE/ SALE OF SHARES MAY CONSTITUTE ONE TRANSACTION ACIT VS. VINOD K. NEVATIA (ITAT MUMBAI) 15 SHORT PERIOD OF HOLDING SHARES DOES NOT PER SE SUGGEST BUSINESS ACTIVITY CIT V/S. H. HOLSCK LARZEN (SC) 16 TESTS TO DISTINGUISH SHARES HELD AS STOCK-IN-TRADE AND AS INVESTMENTS FIDELITY NORTHSTAR FUNDS & OTHERS, 16 TESTS TO DISTINGUISH SHARES HELD AS STOCK-IN-TRADE AND AS INVESTMENTS CIT VS. PNB FINANCE & INDUSTRIES (DELHI HIGH COURT) 17 THOUGH MAIN OBJECT IN MEMORANDUM OF ASSOCIATION IS TO DO BUSINESS IN SHARES, SHARES CAN BE HELD AS A CAPITAL ASSET & NOT STOCK-IN-TRADE JCIT V. DINESH KUMAR GUPTA 18 PROFIT MOTIVE ALONE WOULD NOT DISTINGUISH A TRANSACTION OF INVESTMENT FROM A TRADING TRANSACTION BECAUSE EVEN IN CASE OF INVESTMENT THERE MAY BE MOTIVE THAT AN ASSESSEE SHOULD BE ABLE TO SELL SUCH INVESTMENT AT A PREMIUM Page By CA.Pankaj G. Shah

6 17. ITO V. WATERLOO EXPORTS PVT. LTD.(ITAT KOL.) 18 DISCLOSURE IN BALANCE SHEET JCIT V. DEO KUMAR SARAF (ITAT KOL.) 18 DISCLOSURE IN BALANCE SHEET COMMISSIONER OF INCOME-TAX V. MADAN GOPAL RADHEY LAL (SC) 18 INTENTION TO BE GATHERED FROM THE EVIDENCE OF CONDUCT AND DEALINGS BY THE ACQUIRER WITH THE COMMODITY DCIT V. RELIANCE TRADING ENTERPRISES LTD. (ITAT KOL.) 19 DISCLOSURE IN BALANCE SHEET ACIT VS. NAISHADH V. VACHHARAJANI (BOMBAY HC) 19 DESPITE HIGH VOLUME & SHORT HOLDING PERIOD, SHARES GAIN IS STCG NAGINDAS P. SHETH (HUF) VS. ACIT (ITAT MUMBAI) 20 DESPITE LARGE NUMBER OF TRANSACTIONS IN SHARES, PROFIT ASSESSABLE AS CAPITAL GAINS. EVEN LESS THAN 30 DAYS WAS CAPITAL GAINS RAMESH BABU RAO VS. ACIT (ITAT MUMBAI) 20 LARGE VOLUME IN SHARES NOT DECIDING FACTOR TO HOLD ASSESSEE TRADER SHANTILAL M. JAIN VS. ACIT (ITAT MUMBAI) 21 DESPITE LARGE VOLUME ETC OF SHARE TRANSACTIONS, AO BOUND BY RULE OF CONSISTENCY TO TREAT SHARE GAINS AS STCG HITESH SATISHCHANDRA DOSHI VS. JCIT (ITAT MUMBAI) 21 EVEN GAINS ON SHARES HELD FOR 30 DAYS & LESS IS STCG & NOT BUSINESS PROFITS SHRI DEV ASHOK KARVAT VS. DCIT (ITAT MUMBAI) 22 UNITS OF MUTUAL FUNDS ARE NOT GENERALLY TRADING INSTRUMENT DEVENDRA MOTILAL KOTHARI V. DCIT (ITAT MUMBAI) 23 PMS FEES NOT ALLOWABLE ARA TRADING & INVESTMENTS PVT LTD VS. DCIT (ITAT PUNE) 24 SHARES PMS TRANSACTION GAINS ARE STCG AND NOT BUSINESS PROFITS KRA HOLDING & TRADING PVT LTD VS. DCIT (ITAT PUNE) 24 SHARES PMS FEE, EVEN IF NAV BASED, IS DEDUCTIBLE IN COMPUTING PMS CAPITAL GAINS PMS TRANSACTION ASSESSABLE AS CAPITAL GAINS SHRI HOMI K. BHABHA VS. ITO (ITAT MUMBAI) 25 PMS FEES NOT DEDUCTIBLE AGAINST CAPITAL GAINS. DESPITE DISSENTING ORDERS, REFERENCE TO SPECIAL BENCH NOT NECESSARY ITO VS. RADHA BIRJU PATEL (ITAT MUMBAI) 25 GAINS ARISING FROM PMS TRANSACTIONS ARE CAPITAL GAINS & NOT BUSINESS PROFITS M/S. RADIALS INTERNATIONAL VS. ACIT (ITAT DELHI) 26 LONG-TERM & SHORT-TERM GAINS FROM PMS TRANSACTIONS TAXABLE AS BUSINESS PROFITS CIT VS. VINAY MITTAL (DELHI HIGH COURT) 26 6 Page By CA.Pankaj G. Shah

7 TESTS TO DETERMINE WHERE SHARES GAIN IS CAPITAL GAINS OR BUSINESS PROFITS CIT VS. SAHARA INDIA HOUSING CORPORATION LTD (DELHI HIGH COURT) 27 OBJECTIVE TESTS TO CLASSIFY SHARES GAINS AS STCG VS. BIZ PROFITS LAID DOWN CIT V. NIRAJ SURTI (GUJ HC) 27 DESPITE LOAN AT HIGH RATE OF INTEREST, SHARE CAPITAL GAIN CAN NOT BE TREATED AS BUSINESS PROFIT Page By CA.Pankaj G. Shah

8 CBDT CIRCULAR NO. 4/2007, DATED Tests for deciding whether shares held as stock-in-trade or investment 1. 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). 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 assessees as well as for guidance of the assessing officers. 5. In the case of Commissioner of Income Tax (Central), Calcutta Vs Associated Industrial Development Company (P) Ltd (82 ITR 586), the Supreme Court observed that: 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 it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. 6. In the case of Commissioner of Income Tax, Bombay Vs H. Holck Larsen (160 ITR 67), the Supreme Court observed : 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 was 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) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :- (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 accounts, the magnitude of purchases and sales and the 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 8 Page By CA.Pankaj G. Shah

9 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:- 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 stockin-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. CBDT 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. 11. 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 stockin-trade. 12. These instructions shall supplement the earlier Instruction no dated August 31, (F.No.149/287/2005-TPL) 9 Page By CA.Pankaj G. Shah

10 ACIT Vs. Mrs. Rajpal Sethi (ITAT Mumbai) Assessee cannot be held to be a trader in shares with respect to delivery basis transaction ITA No.4325/Mum/2010 AO in the case of assessee while making the assessment for the assessment year has accepted the short term capital gain and the long term capital gain on sale of shares vide order dated passed u/s 143(3) of the Act, therefore, we are of the view that the assessee s case is squarely covered in favour of the assessee by the decision of the Tribunal in the case of Shri Satpal Singh Sethi (supra). This being so and in the absence of any distinguishing features or contrary material brought on record by the Revenue, we respectfully following the consistent view of the Tribunal and the ratio of the decision of the Hon ble Jurisdictional High Court in the aforementioned cases, hold that the ld. CIT(A) was fully justified in directing the AO to accept the appellant s claim of short term capital gain and long term capital gain on share transactions, where the delivery has been taken or given and Security Transaction Tax has been paid. CIT vs. Gopal Purohit (Bombay High Court) Shares activity treated as investment in earlier years cannot be treated as business in subsequent years if facts are the same [188 Taxman 140] The assessee was engaged in two different activities of sale and purchase of shares. The first set of transactions involved investment in shares in which the assessee took delivery of the shares. The second set of transactions involved dealing in shares for business purposes. The assessee was accordingly an investor as well as a dealer. The income from investment activity was offered as capital gains while the income from dealing activity was offered as business income. This position was accepted by the AO in the earlier years. In AY , the AO took a different view and held that even the shares held on investment account had to be assessed as business income. The Tribunal allowed the assessee s appeal (see 122 TTJ (Mum) 87). On appeal by the Revenue, HELD dismissing the appeal: (a) The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. Delivery based transactions were rightly treated as being in the nature of investment transactions giving rise to capital gains. (b) The Tribunal correctly accepted the position that though the principle of res judicata is not attracted, there ought to be uniformity in treatment and consistency when the facts and circumstances are identical. The Tribunal has noted that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year in all the years and there is no justification for a different view being taken by the AO. (c) The Tribunal applied the correct principle in holding that while entries in the books of account alone are not conclusive in determining the nature of income, it does have a bearing. Note: SLP dismissed by Supreme Court 10 Page By CA.Pankaj G. Shah

11 ACIT v. Om Prakash Suri (M.P. High Court) (16 ITJ 185 ITAT DECISION) Following Gopal Purohit (Bom HC) DCIT vs. SMK Shares & Stock Broking (ITAT Mumbai) Large volume of purchase & sale of shares does not per se mean activity is business (ITA No.799/Mum./2009) The assessee, a broker in the BSE, disclosed short-term capital gains and long-term capital gains on sale of shares. The AO accepted the LTCG as such though he held that the STCG was assessable as business profits on the ground that the assessee was a stock broker & there was large volume and frequency (more than 300) transactions. On appeal, the CIT (A) reversed the AO. On appeal by the department to the Tribunal, HELD dismissing the appeal: (i) It is no more res integra that a person can be both Investor as well as Trader in shares. (Draft Instruction No. 2005, Instruction No dated & Circular No. 4/2007 dated referred). The assessee has to maintain the distinction between shares held as stock and those held as investments in its records; (ii) While volume of transactions is an important indicator of the intention of the assessee whether to deal in shares as trading asset or to hold the shares as investor, it is certainly not the sole criterion. The AO s conclusion that since sale and purchase had been determined by the volatility in the market, the same is against the basic feature of investor is not based on sound rational reasoning. A prudent investor always keeps a watch on the market trends and, therefore, is not barred under law from liquidating his investments in shares. The law itself has recognized this fact by taxing these transactions under the head Short Term Capital Gains. If the AO s reasoning is accepted, then it would be against the legislative intent itself; (iii) The fact that the assessee did not borrow funds for investment in shares is an important aspect which cannot be lost sight off while deciding the true intention of the assessee; (iv) The fact that the AO accepted the assessee s claim in earlier years that it was an investor is material because though the principles of res judicata do not strictly apply to income tax proceedings it is well settled law that the principles of consistency should not be ignored. Uniformity in treatment and consistency under the same facts and circumstances is one of the fundamentals of the judicial principles which cannot be brushed aside without proper reason; (v) The fact that the AO accepted the offering of LTCG also showed that the assessee s status as investor was accepted by him; (vi) Some part of the STCG had arisen out the earlier investment which had been accepted as being on investment account. As the modus operandi of the assessee remained the same in regard to other shares purchased during the year, the assessee s claim could not be negated only on the basis of frequency of the transaction 11 Page By CA.Pankaj G. Shah

12 Janak S. Rangwalla v. ACIT (ITAT Mumbai) Mere volume of transaction transacted by the assessee would not alter the nature of transaction (11 SOT 627 Mum) The mere volume of transaction transacted by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not alter the nature of transaction. Though the principle of res judicata does not apply to the Income-tax proceedings as each year is an independent year of the assessment but in order to maintain consistency, it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts. [Para 6] In the facts of the instant case, the assessee was holding the shares as investment from year to year. It was the intention of the assessee which was to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares was on a large magnitude but the same would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income from capital gains both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding years and the same was to be accepted as short-term capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock-in-trade. The mere magnitude of the transaction does not change the nature of transaction, which are being assessed as income from capital gains in the past several years. The Assessing Officer was to be directed to set off the long-term capital loss against the short-term capital gain of the year under consideration. [Para 7] Management Structure & Systems vs. ITO (ITAT Mumbai) Tests laid down to determine whether income from shares is business income or capital gains ( ITA No.6966/Mum/2007) The assessee, engaged in management consultancy, offered profits of Rs crores earned by it on sale of shares as long-term and short-term capital gains depending on the period of holding. The AO took the view that as the assessee was regularly dealing in shares throughout the year, the assessee was engaged in the business of trading in shares and that the profits were assessable as business income. This was confirmed by the CIT (A). On appeal by the assessee, HELD allowing the appeal: (i) Though there is no fixed formula to determine whether the activity of purchasing and selling shares can be treated as a trading activity or as investment activity, certain guiding principles have been laid down in CBDT s Circular No. 4/2007 dated as well as in Gopal Purohit 122 TTJ 87 (Mum) (affirmed in 228 CTR 582 (Bom)), Saranath Infrastructure 120 TTJ 216 (Luck) and other judgements. These principles of law have to be applied to the following facts: As per the books of account, the assessee has treated the entire investment in shares as an investment and not as stock-in-trade ; The assessee is not a share broker nor he is having a registration with any Stock Exchange; Almost 83% of the capital gain is from shares that were held for a long period of time; There were no derivative transactions by the assessee; There were no transactions without delivery; 12 Page By CA.Pankaj G. Shah

13 The assessee used his own surplus funds for investing in shares and not borrowed any money; In the preceding years, the assessee consistently declared the gain/profit on the sale of the shares as Capital Gains and the same has been accepted by the A.O. Though the rule of res judicata is not applicable to income-tax proceedings, in the absence of change in facts, there should be consistency in the approach of the Revenue; The assessee received substantial dividend on the investments. (ii) The intention of the assessee cannot be read from his mind but it reflects in his conduct and the way he treats the transactions. Considering the totality of the facts, the transactions of sale and purchase of shares cannot be treated to be trading in shares nor as an adventure in the nature of the trade but is assessable as capital gain. J. M. Share & Stock Brokers vs. JCIT (ITAT Mumbai) Tests to distinguish shares held as stock-in-trade and as investments (ITA 2801/M/2000) Where the assessee was a stock broker but it was consistently following the practice of holding some shaes as stock in trade and other shares as investments and the question arose whether the profits on the sale of shares held as investments constituted a capital gain or business profits, HELD: (i) (ii) The assessee had been consistent in its practice of treating some shares as stock and others as a capital asset. While the shares held as capital asset were valued at cost in the accounts, the shares held as stock-in-trade were valued at the lower of cost or market value; There is no bar on a stock broker holding shares as an investment. The mere fact that the assessee is an expert in share trading does not mean that he cannot hold shares as a capital asset. The magnitude of the transaction does not change the nature of the transaction. Bombay Gymkhana Ltd. v. ITO (ITAT Mumbai) Merely High Number of transactions not determinant. (27 SOT 508 Mum) In the instant case, the real question came up for consideration was as to whether the first step, i.e., purchase of shares was in the course of trading transaction or in the course of investment. It was seen that the purchase of units was made as investment and the same was shown by the assessee in its books of account as investment and in earlier years, said stand of the assessee was accepted by the department. If the purchase of units was accepted as purchase in course of investment, at the time of sale thereof, income arising on sale had to be assessed as capital gain and it could not be assessed as business income merely for the reason that quantum was high or the number of transactions were high. As regards revenue s contention that entries in books were not conclusive, it is a settled legal position that entries in books are not conclusive but there should be a firm basis to take a different view from entries in books of account. In the instant case, the Assessing Officer had taken a different view contrary to books of account on the basis of magnitude and number of transactions without bringing anything else on record that purchases of units of mutual fund were made on account of dealing in shares and not on account of investment. Therefore, the income on sale of units of mutual funds had to be assessed as capital gain as declared by assessee and set-off of brought forward capital loss had to be allowed against long-term capital gain as claimed by the assessee. 13 Page By CA.Pankaj G. Shah

14 CIT V. S.Ramaamirtham (Mad HC) Broker can have separate accounts for trading and investment (306 ITR 239) Held that even in case of a registered share and stock broker, if on facts, it was found that separate books of account were maintained for trading in shares and investments in shares, shares in investment portfolio were held for a long period and out of surplus funds, etc, there is nothing in law to prohibit a trade in shares to also invest in shares, and accordingly, profit on sale of shares held in investment portfolio were assessable as capital gains. Nehal V. Shah vs. ACIT (ITAT Mumbai) Multiple orders for purchase/ sale of shares may constitute one transaction (ITA. No. 2733/Mum/2009) The assessee offered short term capital gain (STCG) of Rs.1.07 crores on sale of shares. The AO held the assessee to be a trader in shares & assessed the gains as business profits on the ground that (a) there was high frequency of 127 purchase & 83 sale transactions, (b) there were instances where delivery was not taken and shares were sold within a short period, (c) 88% of the shares sold were purchased during the year and (d) the available capital was turned over 85 times to make purchases of Rs.23 crores & sales of Rs. 29 crores. This was confirmed by the CIT (A). On appeal by the assessee, HELD allowing the appeal: (i) The AO had not correctly calculated the number of transactions because sometimes a single transaction is split by the computers trading of the stock exchanges into many smaller transactions but that does not mean that assessee has carried so many transactions. If someone places an order for purchase of 1000 shares and the same is executed by the electronic trading system of stock exchange into 100 smaller transactions, it does not mean that 100 transactions have been entered into. The assessee had carried out only 31 purchase and 25 sale transactions which cannot be said to be a great volume of transactions; (ii) At the end of the year, the assessee was holding shares worth Rs crores with a market value of Rs crores. If assessee was a trader, he would have definitely realized the huge profit of almost Rs. 6 crores immediately and not carried out the stock to the next year; (iii) The transactions in which no delivery was taken and it was settled in the same day appear to be cases where the particulars were wrongly carried out on behalf of the assessee by the broker & that s why assessee got them settled on the same day; (iv) The assessee has not borrowed any money and he was occupied full time in the business of garments; (v) In identical circumstances in the case of the assessee s sister, the Tribunal had decided in favour on the ground that (a) the assessee s background did not indicate she was familiar with the share business, (b) there was no borrowing for the shares, (c) the shares were shown as a capital asset in the balance sheet, (d) the AO had accepted the LTCG, (e) the average investment in one scrip is taken was about Rs lakhs which appeared to be too high for an individual to hold as stock-in-trade, (f) the portfolio contained many shares of blue chip companies, (g) there were no dealings in futures and options and (h) about 30 scrips were sold and there were 49 purchases & 43 sales (treating multiple lots on the same day as one transaction). 14 Page By CA.Pankaj G. Shah

15 ACIT vs. Vinod K. Nevatia (ITAT Mumbai) Short period of holding shares does not per se suggest business activity (ITA No. 6556/Mum/2009) The assessee, a stock broker with NSE, offered short-term capital gains ( STCG ) of Rs lakhs. The AO assessed the STCG as business profit on the ground that (a) the purchase to sale ratio was higher than the ratio in the earlier year and (b) the assessee had borrowed funds of Rs crores which were mixed with common funds and not segregated and (c) the assessee had not been able to show his intent to hold the scrips. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal: (i) In Circular No. 4/2007 dated the CBDT has emphasized that it is possible for a tax payer to have two portfolios, i.e. an investment portfolio and a trading portfolio; (ii) The assessee had maintained separate books of account as well as separate demat accounts in respect of his trading & investment activity. The manner in which books are kept is an important piece of evidence as per Raja Bahadur Visheshwar Singh vs. CIT 41 ITR 685 (SC); (iii) Whether the assessee s conduct is that of an investor or a trader depends on the facts and circumstances of the case. No single fact is decisive nor has any acid test been laid down in any judgment; (iv) Primarily, the intention with which an assessee starts his activity is the most important factor. If shares are purchased from own funds, with a view to keep the funds in equity shares to earn considerable return on account of enhancement in the value of share over a period then merely because the assessee liquidates its investment within six months or eight months would not lead to the conclusion that the assessee had no intention to keep the funds as invested in equity shares but was actually intended to trade in shares. Mere intention to liquidate the investment at higher value does not imply that the intention was only to trade in security. However, it cannot be held that in all circumstances if assessee has used its own funds for share activity then it would only lead to inference of investment being the sole intention. In such circumstances, frequency of transactions will have to be considered to arrive at proper conclusion regarding the true intention of the assessee. However, if the assessee, on the other hand, borrows funds for making investment in shares then definitely it is a very important indicator of its intention to trade in shares; (v) On facts, the AO proceeded on the assumption that borrowed funds had been utilized for buying shares on the ground that funds were common and could not be segregated. However, it was categorically pointed out before the CIT (A) that no part of the borrowed funds was utilized for acquisition of shares on investment account. Nothing was brought on record by the department to controvert this fact; (vi) Further, the AO accepted the assessee s claim of LTCG to the extent of Rs. 2 crores which implies that he has accepted the assessee s claim regarding holding investment portfolio. 15 Page By CA.Pankaj G. Shah

16 CIT v/s. H. Holsck Larzen (SC) Tests to distinguish shares held as stock-in-trade and as investments [160 ITR 67] In the instant case effect of the issue of right shares vis-a-vis original shares had not been fully kept in proper perspective by the Tribunal in its evaluation. Further the assessee was the chairman of the company and in fact that if he did not participate in buying right shares, that would have adverse effect on the value of the shares of the company, was also not kept in view by the Tribunal. Consideration of all relevant facts involves appreciation of all the facts in their proper perspective. If that is not done, it cannot be said that there has been consideration of all relevant factors. The Tribunal fell into error in not taking into consideration properly and fully, though it noted, the fact that if the right shares were not subscribed by the assessee, his original shares would depreciate in value. The assessee was also in need of money; he had an overdraft with bank and he had to remit money to Denmark for the purchase of a house and further when right shares were issued had he not subscribed to these, there might have been adverse effect on the market so far as the shares of the company were concerned. In the background and the correlation of these factors the action of the assessee was like a prudent investor and not of a plunger in the waters of trade. The Tribunal in this case had undoubtedly noted the assessee's contention of nursing the investment. The Tribunal, however, had not considered in its order the actual position as to how the nursing of the investment was necessary. The Tribunal, thus, erred. In that view of the matter the High Court was justified in interfering with the conclusion reached by the Tribunal. Accordingly, the High Court was justified in holding that the assessee was an investor in shares and not a dealer in shares. Fidelity Northstar Funds & Others, Tests to distinguish shares held as stock-in-trade and as investments [288 ITR 641] 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; Substantial nature of transactions, manner of maintaining books of account, magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; Ordinarily purchase and sale of shares with the motive of earning a profit would result in the transaction being in the nature of trade/an 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., the profits accruing by change in such investment (by sale of shares) will yield capital gain and it is not revenue receipt. [Para 11] 16 Page By CA.Pankaj G. Shah

17 Further, the Supreme Court observed in said case that real question in the instant case is not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step-the purchase of the shares - was not taken as, or in the course of, a trading transaction. [Para 12] CIT vs. PNB Finance & Industries (Delhi High Court) Though main object in Memorandum of Association is to do business in shares, shares can be held as a capital asset & not stock-in-trade (ITA No.306/2010) The assessee, engaged in the business of sale and purchase of shares, offered long-term capital gains of Rs crores on sale of shares. The AO took the view that as the main object of the assessee was to engage in the business of purchase & sale of shares, the LTCG was assessable as business profits. This was reversed by the CIT (A) on the ground that (a) the assessee had discontinued trading in shares, (b) the shares were held for a long time, (c) the shares were shown as investment in the books, (d) the shares were not acquired from borrowings. The CIT (A) was upheld by the Tribunal. On appeal by the department, HELD dismissing the appeal: (i) There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business. A dealer may acquire a commodity as a capital asset. In each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity (Madan Gopal Radhey Lal 73 ITR 652 (SC) & Vijaya Bank 187 ITR 541 (SC) followed); (ii) If shares are shown as a capital asset in the balance sheet from the date of purchase and no objection was taken by the AO in the earlier years, he cannot hold it to be stock-in-trade without there being any change in facts (Gulmohar Finance Ltd 170 Taxman 483 (Del) followed); (iii) In Circular dated 15th June, 2007, the CBDT has emphasized that it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio and a trading portfolio and income under the head capital gains as well as business income; (iv) Though the main object is that of buying and selling shares, the nature of activity, intention and conduct has significance and play a pivotal role in the entire gamut of transaction; (v) On facts, as the shares were held for a long period and there was no evidence to show regular dealings in shares, the gains had to be assessed as LTCG. 17 Page By CA.Pankaj G. Shah

18 JCIT v. Dinesh Kumar Gupta Profit motive alone would not distinguish a transaction of investment from a trading transaction because even in case of investment there may be motive that an assessee should be able to sell such investment at a premium (2 SOT 126) It was not correct to say that profit motive alone would distinguish a transaction of investment from that of trading. Even in the case of investment there may be a motive that the assessee should be able to sell the investment at a premium. When household savings are invested in gold, etc., the profit motive is there but that does not make a householder a businessman trading in gold. In the instant case, the assessee held the shares for certain length of time before selling the same and the funds invested were entirely the assessee s own funds. On those facts, it was not possible to hold that the assessee carried on trading in shares as a continuous regular activity. Therefore, there was no reason to interfere with the order of the Commissioner (Appeals) and the same was to be upheld. [Para 7] ITO V. WATERLOO EXPORTS PVT. LTD.(ITAT Kol.) Disclosure in Balance Sheet (ITA No. 24/Kol/2010 dated ) Held that where shares and securities were purchased for the purpose of investment and accordingly declared in the balance sheet, on sale of such shares and securities, the profit will be taxable under the head capital gains and not business income JCIT v. Deo Kumar Saraf (ITAT Kol.) Disclosure in Balance Sheet (ITA No.411/Kol/2009 dated ) Held that the assessee has shown shares and securities as investments in the balance sheet and the said fact was supported by audited accounts filed with the return, the CIT(A) has rightly held that profit thereon has to be taxed as capital gains and not business income. Commissioner of Income-tax v. Madan Gopal Radhey Lal (SC) Intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity. [73 ITR 652] There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business; in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity. A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. 18 Page By CA.Pankaj G. Shah

19 DCIT v. Reliance Trading Enterprises Ltd. (ITAT Kol.) Disclosure in Balance Sheet (ITA No.944/Kol/2008 dated ) Accounts were maintained as a trader and as a investor in shares as per MOA and AOA. Accounts were maintained for trading/business shares which are held as stock-in-trade and separately for investment shares which are held and shown in Balance Sheet under the head "investment" representing capital assets. The decision used to be taken by the assessee at the time of purchase itself based on different factors whether any share & security was to be held as "investment" or "trading". When the shares are accounted for in the books as investment shares, the volume of transaction of such shares cannot alter its status from investment to trading. Profit on sale of such investment shares held as capital assets are assessable under the head capital gain. The period of holding such assets cannot determine its status or change it from investment (capital) to trading (stock-in-trade). The audited a/cs. for the A.Y and the earlier years placed in the Paper Book made it clear that every year the assessee had acquired shares for trading purpose and separately also for investment purpose with an intention to earn dividend income in addition to the prospect of making profit on sale of such investment shares at an appropriate opportune moment without making any hurry for sale ignoring dividend. The investment shares and securities purchased and held till their sale had dual purpose i.e. for earning dividend as an incidental income as well as to make profit profit on sale at appropriate time. The conclusions drawn by A.O. by treating the investment shares as trading shares was based purely on assumptions. The AO did not reject the books of accounts vis-à-vis the accounts u/s 145 of the IT Act before arriving at such a conclusion. The A.O. s finding cannot, therefore, be accepted. In view of the above, we agree with the decision of the Ld.CIT(A) that the profit on sale of investment shares, securities and mutual fund is assessable under the head '''capital gain". We hold accordingly." ACIT vs. Naishadh V. Vachharajani (Bombay HC) Despite high volume & short holding period, shares gain is STCG (I.T.A. No. 6429/Mum/2009) (Upheld by Bombay HC) The assessee, a marine consultant, offered income by way of LTCG, STCG, speculative profit & profit from futures trading. The AO held that as the volume of transactions was high (222), the period of holding of the STCG shares was short (2-5 Months) & there was speculation & F&O profit, the LTCG & STCG was assessable as business profit. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal: (i) As regards the LTCG, the shares were held for several years and so the assessee has acted as investor and not as a trader and so the gains are assessable as LTCG; (ii) As regards the STCG, the view of the CIT(A) had to be upheld because (a) there was no intra-day trading, (b) most of the shares were held for a period of 2 to 5 months, (c) In the preceding AY, the AO did not assess the STCG as business income and on the principles of consistency, a different view cannot be taken on the same facts, (d) the assessee has no borrowings and (e) merely because there was a speculative business does not mean that even delivery based transactions of shares should be assessed under the head business. 19 Page By CA.Pankaj G. Shah

20 Nagindas P. Sheth (HUF) vs. ACIT (ITAT Mumbai) Despite Large number of transactions in shares, profit assessable as capital gains. Even less than 30 days was capital gains ITA. No. 961/Mum/2010 The assessee HUF offered income from sale of shares as short-term capital gains (STCG). The AO held the income to be business profits on the ground that (i) the assessee had 158 share transactions in the year which showed the intention to trade, (ii) The regularity and frequency of transactions showed no intention to hold shares to earn dividend and (iii) Instead of one or two demat accounts, the assessee had adopted a professional approach and transacted through several brokers. On appeal, the CIT (A) held that profit on sale of shares held for less than 30 days was business profits while other profits was STCG. On appeal by the assessee and department, HELD deciding in favour of the assessee: The fact that the assessee has transacted in 158 shares should not be the sole criterion to come to the conclusion that assessee is a trader in shares. The gains earned by the assessee deserve to be assessed as capital gains because: (a) the assessee was holding the shares in its books as an investor; (b) the assessee did not have any office or administration set up; (c) the shares were acquired out of own funds and family funds and not through borrowings; (d) there was not a single instance where the assessee had squared-up transactions on the same day without taking delivery of the shares; (e) In the previous and subsequent assessment years, the AO had vide scrutiny assessments treated the assessee as an investor. Ramesh Babu Rao vs. ACIT (ITAT Mumbai) Large volume in shares not deciding factor to hold assessee trader (ITA No. 3719/Mum/2009) The assessee, a retired professor, offered gains from sale of shares as short-term capital gains (STCG). The AO assessed the gains as business profits on the ground that (a) in the earlier years, the assessee had offered similar gains as business profits and the volume of transactions was higher in the present year, (b) there were 54 scrips which were purchased and sold during the year which resulted in sales of more than Rs. 24 crores, (c) In one particular share, the assessee purchased on 54 occasions and sold on on 25 occasions within a short duration. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal: The assessee was an investor and the gains are assessable as capital gains because: (a) The assessee was a good timer of purchase and sale of shares thereby substantially increasing his gains in the stock market; (b) The large turnover was because of bulk purchases and sales in a scrip. There were very few transactions of purchase and sale, as the assessee was purchasing in block of a particular share in large volume. Accordingly, large volume cannot be a deciding factor to hold as a trader; (c) the assessee was not a broker or sub-broker and did not have any office establishment; (d) The assessee did not do any speculative activity nor indulge in any sales without delivery; (e) The shares were shown as capital assets in the books of account; (f) The assessee had not pledged any shares with any financial institutions, nor borrowed any funds 20 Page By CA.Pankaj G. Shah