Holding period for purposes of computation of capital gain is relevant only in relation to shares held as investment
CASE LAWS DETAILS
DECIDED BY: ITAT, `G’ BENCH, MUMBAI, IN THE CASE OF: Walfort Financial Services Ltd. v. Addl. CIT , APPEAL NO: ITA No. 847/M/2009, DECIDED ON June 30, 2010
PER RAJENDRA SINGH (AM)
These crOss appeals are directed against the order dated 20.11.2009 of CIT(A) for the assessment year 2005-06. As these appeals which relate to the same year were heard together, these are being disposed off by a single consolidated order for the sake of convenience.
2. We first taken up the appeal of the assessee in ITA No. 847/M/2009. The only dispute raised by the assessee in this appeal is whether on the facts and in the circumstances of the case the income from delivery based sales and purchases of shares should be assessed as business income as done by the AO or it should be assessed as short term capital gain as declared by the assessee.
2.1 Briefly stated the facts of the case are that the assessee who was a member of BSE and NSE had, in addition to brokerage income of Rs.1,75,57,916/- declared business profit of Rs.18,09,37,887/- in trading of shares and short term capital gain of Rs. 16,33,22,167/- from sale and purchase of shares. The AO during the assessment proceedings noted that in the preceding assessment year i.e. A.Y.2004-05, the assessee had not shown any capital gain from investment in shares. The assessee in the earlier years had been declaring business income from both delivery based and non delivery based purchase and sale of shares in the proprietary concern, in addition to brokerage income from share transactions undertaken on behalf of others including FII’s. However, from 1.4.2004, all delivery based purchases and sales of shares were declared as investment and income there from as capital gain. The business income was shown only in respect of non delivery based transactions in shares i.e. income from intra day trading and future and option trading. The income from sale of shares appearing in the opening stock as on 1.4.2004 which were on trading account in the earlier year, was however shown as business income and the shares in the opening stock which remained unsold as on 1.10.2004, amounting to Rs.31,99,018/-, were converted into investment in stock from that date.
2.2 The AO observed that the assessee had treated the delivery based transactions from 1.4.2004 as investment activity only to take advantage of change in legal position introduced by section 111A as per which short term capital gain arising from sale of shares or units of equity oriented funds after 1.10.2004, on which share transaction tax (STT) was chargeable to tax, was to be charged at lower rate of 10%. In the earlier year when the short term capital gain was chargeable @ 30% the assessee was showing the income as business income. The AO further observed that there was no change in the nature of activity in the shares during the year which continued with the same frequency and in the same manner. The nature of activity thus remained the same. The AO observed that the assessee could not classify the same transactions as investment only by change of nomenclature. The AO therefore asked the assessee to explain as to why the delivery based transactions undertaken by it during the year should not be treated as business activity.
2.2. The assessee explained that it was already carrying on investment activity in the shares of unlisted companies in the earlier year and from this year the board of directors decided to make investment in the listed shares also. It was also submitted that investment activity was one of the objects as per the memorandum and articles of association of the assessee company. The assessee further submitted that magnitude and frequency of transactions was not decisive in understanding the true nature of transactions. The intention of the assessee to make investment or to trade has to be decided by the nature of entry made in the books at the time of purchase. In this case the assessee had made the entry as investment purchase. Similarly the holding period was also not conclusive in understanding the true nature of transaction. It was pointed out that the Act itself provided in section 2(42A) that income from sale of shares held for less than 12 months irrespective period of holding has to be treated as short term capital gain. It was also submitted that in respect of investment transactions, tax is indirectly collected in the form of STT which is not allowed as a deduction while computing the income from capital gain. The assessee further submitted that it was possible for an assessee to have two portfolios i.e. an investment portfolio and trading portfolio as was clarified by the CBDT in its circular No.4/2007 dated 15.06.2007. Therefore the assessee could also make investment in shares in addition to trading in shares. Further in case of FIIs, the income from frequent purchase and sale of shares on large scale was already being accepted as capital gain treating the same as investment activity and therefore there was no reason that in case of the assessee it should be treated as a business activity.
2.4. The AO however did not accept the explanation given by the assessee. It was observed by him that the objects in the memorandum and articles of association of the assessee company or the fact that the memorandum authorized a particular type of activity was not conclusive in deciding the true nature of transactions. Reliance for this proposition was placed on the judgment of Hon’ble Supreme Court in case of P.K.N. Co Ltd. (60 ITR 65). Similarly the nomenclature given to a particular transaction or the entry in the books of accounts were also not a decisive factor to know the true nature of transactions as held by Hon’ble Supreme Court in case of Canara Bank (63 ITR 728). AO further observed that, ordinarily, the purchase and sale of shares with a motive of earning profit results in the transaction being in the nature of trade/ adventure in the nature of trade but where the object behind purchase of shares is to derive income by way of dividend etc., the profit accruing by appreciation in such investments will be capital gain and not revenue receipt. The AO also observed that generally the magnitude and frequency of transaction the manner of maintaining the books of accounts and holding period would be a good guide to determine the true nature of transaction. But no single factor can be considered as conclusive.
2.5. The AO noted that the assessee company had only one main object which was to carry on the business as share and stock broker and dealing in shares and securities. Though there were some other objects also such as making investments in shares, these were incidental objects. The assessee was not an investment company. About 90% of the activity of the assessee company was in the proprietary account which was trading in shares. A comparative position from financial year 2002-03 to 2005-06 was given as mentioned in table below.
Turnover in Prop. A.c.
Turnover of related parties
2.6. Referring to the table above the AO observed that the main activity of the assessee was in the proprietary account which was purchase and sale of shares. The AO pointed out that the assessee had made delivery based transactions during the year in 300 scrip with the turnover of Rs.3500 crores in assessment year 2005-06 and the opening stock as on 1.4.2004 was only 18.72 crores. The stock as on 30.09.2004 was worth Rs.25.14 crore. Further the purchase to sale ratio was 1 : 1 showing that for every purchase there was sale which meant high frequency. The high frequency, high volume and large number of scrip dealt with clearly showed that the assessee was trading in shares. The assessee was also making repetitive transactions in the same scrip. After selling the shares of a particular scrip bought earlier the assessee was buying the same scrip again which also indicated that the assessee was trading and was not an investor as in that case the assessee would have been holding the shares and not sell and buy it again. Referring to the argument of the assessee that the assessee had made the entry at the time of purchase as investment, the AO observed that the same was not conclusive and the assessee even did not produce the books of accounts for verification. The argument of the assessee that the assessee was holding majority of scrip for more than three months which indicated investment activity was also not accepted. The AO observed that in certain scrip in which there was no movement in prices, the assessee was likely to hold for longer period to reap trading profit and therefore this alone will not prove that the activity was investment. The substantial increase in the dividend income received by the assessee also did not establish that the assessee was investor as the dividend would depend upon the number of scrip being bought before the record date. The quantum of dividend is therefore likely fluctuate in trading transaction. Moreover the dividend yield was too low on the turnover of Rs.3500 crores. As regards the treatment of transactions in case of FIIs, the AO observed that FIIs were not permitted by SEBI to trade in shares as per the terms and conditions of their registrations. Therefore the same will not apply in case of other individuals and entities. The AO further observed that no doubt it was true that the assessee could convert the stock-in-trade into investment but mere change of nomenclature would not make the transaction as investment activity when the nature of transactions remained the same.
2.7. The AO referred to auditor’s note 8(a) in Form No.3CA in which the auditor had mentioned the nature of business as stock broking, trading and investment in shares and in Note 8(b) it was stated that there was no change in nature of business or profession carried on by the assessee during the year compared to last year. Thus auditors had also stated that nature of activities during the year were the same as in the previous year. Further, in Form No.lODB relating to security transaction tax rebate, the assessee had declared the entire transactions in the col. Nos. 5 & 6 which related to transactions entered into during the course of business clearly showing that all transactions done by the assessee during the year were business transactions.
2.8. The AO also noted that the assessee had made borrowings which had increased to Rs.29.08 crores on 31.3.2005 compared to Rs.14.95 crores as on 31.3.2004 and the interest paid during the year was Rs.1.24 crore. It was observed by him that the assessee had stock broking activities on behalf of others not requiring loans and therefore entire loan was utilized for own activities. It was not possible that the assessee would make investments out of borrowed funds as held by Hon’ble Supreme Court in case of Satlej Cotton Mills Pvt. Ltd. (100 ITR 706). This also indicated that the assessee was trading in shares and was not an investor.
2.9. The AO also observed that the assessee company and the Directors were engaged whole time in purchase and sale of shares, the broking activity had taken a back seat and over 90% of the transactions were on trading account. The assessee had regular dealings in a systematic manner in a commodity i.e. shares which were heavily traded. All these activities were with profit motive and not to enjoy income from the investments. The dividend income was only incidental. The high frequency volume and regularity of transactions clearly showed that the assessee was in trading of shares. The transactions were similar as in earlier years and there was no change in attitude of the assessee compared to earlier year. In such a situation, the assessee could not declare similar transactions of delivery based shares as investment activity. The nature of activity remained the same. The AO accordingly held that the said transactions were not investment activity of the assessee and assessed income as income from business in place of capital gain declared by the assessee.
2.10. The assessee disputed the decision of the AO and submitted before CIT(A) that frequency and magnitude was not decisive factor in understanding the true nature of transactions and that the fact that assessee was a trader earlier was no bar on assessee to become an investor. It was pointed out that the very fact that delivery of the shares was taken showed the intention of the assessee at the time of purchase to hold the shares as investments. The decision to make investment was a conscious decision of the board for which a resolution had been passed. The assessee further submitted that the AO had not brought any material on record to prove the nexus between the borrowed funds and the investments. In case the borrowed funds were spread proportionately, only 37.56% of the investments could be attributed to borrowings. CIT(A) however was not convinced by the explanation given. It was observed by him that the AO had examined the matter in great detail. The assessee did not hold the shares purchased and in majority of the cases had sold them within short time and in all cases obviously within 12 months as the income had been shown only as short term capital gain. The assessee had made transactions in more than 300 scrip during the year and the turnover was Rs.7449 crores. The turnover in the immediate preceding year was Rs.6854 cores. The frequency of transactions was high with purchase to sale ratio being 1:1 The assessee had itself admitted that borrowings to the tune of 37.56% could be attributed to purchase of shares. The transaction in shares therefore had all the attributes of trading activities. Dividends received were only incidental/ There had been no change in nature of share transaction during the period October 2004 to March 2005 compared to the earlier period. The only change which had taken place was the levy of STT and the resolution of the board to make investment in shares. This could not change the nature of transactions which remained the same. CIT(A) therefore upheld the decision of AO treating the share transactions as trading transactions and assessing the income as business income. Aggrieved by the said decision the assessee is in appeal before the Tribunal.
2.11. Before us the Learned AR for the assessee reiterated the stand taken before lower authorities that during the year the assessee had decided by passing a board resolution, to make investment in shares in delivery based segment and that there was no legal bar on the assessee as a trader or stock broker to make investment in shares. The assessee had maintained separate accounts for trading and investment activities. The entries made in the books showed the intention of the assessee towards making investments. It was also submitted that magnitude and frequency of the transactions was not decisive in knowing the true nature of transaction. For this proposition reliance was placed on the judgment of Hon’ble High Court of Mumbai in case of H. Hoick Larsen Vs CIT (85 ITR 252) and the decision of Hyderabad Bench of Tribunal in case of Shahla Investments and Financial Consultants Pvt. Ltd. (2 SOT 371). He also referred to several decisions of the Tribunal in which transactions in shares had been accepted as investments. Though the Learned AR admitted that in those cases the investment accounts were held since earlier years, he argued that no adverse inference could be drawn in case of the assessee only on the ground that it was the first year in which the assessee had started making investments. The intention of the assessee was clear from the board resolution and entry in the books that the nature of transactions were investments. The assessee had also received huge dividend income from the investments which increased to Rs.94,31,290/- in the relevant year compared to Rs.44,51,213/- in the immediate preceding year. It was pointed out that the assessee had held the shares for a considerable period of time and in a significant number of cases holding period exceeded four months. It was pointed out that only 22.44 % of capital gain came from shares held for less than a month and balance from the shares held for longer period and 36% of the capital gain came from shares sold after four months. The details in the regard were given as mentioned in the table below:
Period of holding
Short-term capital gain Rs.
Percentage of total short term capital gain (%)
Less than 30 days
30 days to 60 days
61 days to 90 days
91 days to 120 days
121 days to 180 days
181 days to 240 days
241 days and above
2.12. The Learned AR also argued that mainly because there were profits from sale of shares could not be the decisive test for classifying the transaction as business transaction. Reliance was placed on the judgment of Hon’ble Supreme Court in case of H. Hoick Larsen (160 ITR 81) in which it was held that merely because the asset was acquired with expectation of profit on sale did not make the income from sale as business income. He also referred to the judgment of Hon’ble Supreme Court in case of Rajabahadur Komkhya Narayan Singh (77 ITR 253) in which it was held that an assessee might invest with intention to sell at high price in future but such investments even if motivated by enhanced value does not necessarily make the investment a trading transaction.
2.13. In regard to the observation of AO that borrowed funds had been used for making purchase of delivery based shares, the Learned AR submitted that investment in shares were to the tune of Rs.51.86 crores. The assessee had own capital and free reserve of Rs.48.52 crores. The investments in fixed assets were to the tune of Rs.3.45 crores. It was submitted that almost entire investments were made out of own funds and borrowed funds were used for business purposes. It was pointed out that investment had increased by Rs.20 crores between October 2004 and March 2005 but borrowings had increased only by Rs.3.99 crores. In November, the investments had increased by Rs.16.11 crores but borrowings had increased by only Rs.31 lacs. There was no nexus between the borrowings and investments. Moreover it was further pointed out that borrowings were temporary over drafts which could not be used for making investments. Even if, it was argued, that investments were made out of borrowed funds, it was perfectly legal as there was no bar for making investments from borrowed funds. Reliance was placed on the judgment of Hon’ble Supreme Court in case of Rajendra Prasad Moody (115 ITR 519) in which interest on borrowed funds used for making investments was held allowable as deduction under section 57(iii). It was also argued that by showing the shares as investments the assessee had lost Rs.2.76 crores on account of valuation of shares and Rs.22,83,358/- on account of transaction tax which was not claimed as rebate because the transactions were shown as investments. These factors also showed the genuine intention of the assessee to make investments in shares.
2.14. In relation to the audit note regarding nature of business being same as earlier year as highlighted by the AO, it was submitted that there was no discrepancy in the audit report. It was argued that the assessee continued its business of stock broking, trading and investments in shares and securities even after it started investments in delivery based segments. The Learned AR also submitted that the change in accounting policy of the assessee had been duly highlighted by the auditors. He referred to point 1(d) of Schedule IN which clearly mentioned the change in accounting policy as per which out of stock of shares of Rs.18.72 crores, the certain scrip with value of Rs. 0.32 crores had been converted into investments. Thus the investment activity was properly reported. As regards the observation of the AO that all the transactions were reported as business transactions in the Form No.lODB, it was submitted that STT was chargeable in respect of all transactions and accordingly all the transactions were shown therein. However, no rebate was claimed in respect of investment transactions.
2.15. The Learned counsel for the assessee further argued that the decision to treat the delivery based purchases as investment was not a device to evade tax. The decision of the assessee to make investment was permissible under law and if in the process the assessee had taken advantage of reduced rate of tax, the action cannot be held invalid. Reference was made to the judgment of Hon’ble Supreme Court in case of Union of India Vs Azadi Bachhao Andolan (263 ITR 706) in which it was held that an act which is otherwise allowed in law could not be treated as non-est merely on the basis of some underlying motives supposedly resulting in some economy detriment or prejudice to the national interests. It was pointed out that the Supreme Court in the said case had to a large extent watered down the ratio laid down by the court in case of McDowell and Co. Vs Commercial Tax Officer (154 ITR 148) He also referred to the judgment of Hon’ble High Court of Gujarat in case of Banyan and Berry Vs CIT (222 ITR 831) in which the court observed that the ratio of any decision has to be understood in the context in which it has been rendered. The court also observed that the principle enunciated in the judgment in case of Macdowell & Co (supra) has not affected the freedom of the citizen to act in a manner according to his requirement, his wishes in the manner of doing any trade activity or planning his affairs with circumspection within the frame work of law unless the same falls in the category of a colourable device which may properly be called a device or a dubious method or a subterfuse clothed with apparent dignity.
2.16. It was further argued that the Income Tax Act provided different heads for assessing different types of income. An income falling under a particular head has to be assessed under that head only. The charge under the specific head is not only proper but obligatory on the part of the department. Reference in this regard was made to the judgment of Hon’ble Supreme Court in case of United Commercial Bank Ltd. Vs. CIT (32 ITR 688) and the judgment in case of (20 ITR 579). It was pointed out that Hon’ble Supreme Court in case of United Commercial Bank Ltd. (supra) have held that interest on securities could not be charged as profit of business even if the security was held as a trading asset. In case of the assessee, share transactions had been undertaken as an investment activity and therefore the income had to be computed under the heard ‘capital gain’ specifically provided for assessment of such income.
2.17. The Learned counsel also referred to the decision of Tribunal in case of Gopal Purohit (29 SOT 117) in which income from share transactions has been held assessable as capital gain. It was pointed out that the said decision of the Tribunal has been upheld by the Hon’ble High Court of Mumbai as reported in (228 CTR 582). He placed reliance on the said judgment in support of the case.
2.18. The Learned DR on the other hand strongly supported the orders of authorities below. It was submitted that all the aspects of the issue had been discussed in detail in the orders of AO and CIT(A) on which he placed reliance. It was pointed out that nature of share transactions was the same as in the earlier year and therefore it could not be classified as investment only to take advantage of concessional rate of tax. He placed reliance on the following decisions of the Tribunal in support of the case of the revenue.
(i) ITA No.3991 & 3992/M/2008 in case of Shailesh 1_. Shah HUF Vs DCIT (ii) ITA No.5410/M/2008 in case of ACIT Vs Mr. V.Nagesh
(iii) ITA No.2586/M/2009 in case of Smt. Sadhana Nabera Vs ACIT
2.19 We have perused the records and considered the rival contentions carefully. The dispute is regarding nature of income from share transactions in delivery based shares entered into by the assessee during the year. The assessee is a share broker. In addition to the business as share broker from which the assessee has received brokerage income, the assessee has also been undertaking transactions in shares in his proprietary capacity. The transactions in shares fall in two categories. The transaction falling in the first category are those which have been squired up during the same day or within the same settlement period without taking any delivery and the transactions in future and option. The second category transactions were those in which the assessee had taken/ given delivery of shares. In other words the assessee had dealt in both delivery based and non delivery based share transactions in quoted shares. Similar delivery and non delivery based share transactions had been undertaken by the assessee in the earlier years also and income from both the types of transactions have been declared as business income. However from this assessment year i.e. from 1.4.2004 delivery based purchases had been shown as investment activity and income from the sale of such delivery based purchases had been shown as short term capital gain. Income from sale of shares appearing in the opening stock as on 1.4.2004 has been shown as business income and the shares in this category which remained unsold as on 30.9.2004 were converted into investment account from 1.10.2004. As regards the income from non delivery based transactions is concerned, the same has been declared as business income as in the earlier years.
2.20 The assessing officer has not accepted the approach of the assessee in treating the transactions in delivery based shares from 1.4.2004 as investment activity. The case of the revenue is that the assessee has regularly made purchases and sales of shares with high frequency and volume. There is continuity in transactions. The assessee has dealt in large number of scrips totalling about 300 shares with a turnover in delivery based transactions of Rs.3500 crores with opening stock of only Rs.18.72 crores. The AO has observed that the fact that objects of the company authorized investment in shares or the entry in the books as investment or the board resolution are not conclusive in ascertaining the true nature of transactions. It has been held that nature of transaction in delivery based shares in this year is the same as in the earlier year and therefore the assessee could not declare the income as short term capital gain. This has been done only to take advantage of the change in law from 1.10.2004 as per which tax in respect of short term capital gain is leviable at concessional rate of 10%.
2.21 The assessee on the other hand has argued that it is perfectly legal to show the transactions as investment activity and that the assessee has really changed the approach towards delivery based shares from this year. The various arguments advanced by the Learned counsel of the assessee in support of the claim can be summarized as under :
(i) There is no legal bar on a trader in shares to convert into an investor in shares in the subsequent period. The assessee can be both a trader and investor at the same time and the only requirement is that separate account should be maintained which had been done by the assessee. Reference has been made to the circular of CBDT No.4 of 2007 dated 15.6.2007 and several other decisions of Tribunal and courts in support of this proposition. The assessee was free to show the transactions as investment in the subsequent year which was legal and therefore claim cannot be allowed. (ii)The nature of transaction can be understood from the intention of the assessee at the time of purchase of shares. The intention of the assessee to make investment in delivery based shares is clear from the entry in the books in which delivery based purchase and sales have been shown as investment and such shares have also been declared in the balance sheet as investment.
(iii) The frequency and volume of transaction is not conclusive in understanding the true nature of transaction. The holding period is also not conclusive. In fact section 2(42A) clearly provides that shares sold with holding period of less than a year have to be treated as short term capital gain. There is no minimum holding period prescribed for treatment of a particular transaction in shares as investment.
(iv) The investment activity is authorized by the objects as per memorandum and articles of association of the assessee company and decision to make investment in quoted shares from 1.4.2004 was supported by the board resolution.
(v)The dividend income from shares held has more than doubled to Rs.94,31,290/- compared to Rs.44,51,213/- in the immediate preceding year which also shows the intention of the assessee to make investment in shares.
(vi) The profit motive is also not conclusive in treating the income
from sale of shares has business income. Merely because of the shares were acquired with expectation of profit cannot make the income as business income. Even in case of investment there is expectation of profit in the form of appreciation in value. Reliance has been placed on the judgment of Hon’ble Supreme Court in case of Rajabahadur Kamakhya Narayan Singh (77 ITR 253) and the judgment in case of H. Hoik Larsen (160 ITR 81)
(vii) There is no evidence of borrowed funds being used in purchase of delivery based shares. Even if some borrowed funds have been used. This alone cannot make the transaction as business transaction as there is no legal bar on borrowed funds being used for investment.
(viii) It has been pointed out that in case of FIIs who frequently purchase and sell shares on large scale the transactions are being treated as investment activity and therefore the assessee should not be denied this benefit. In large number of cases shares have been sold after four months and 36% of the capital gain came from such transactions. Only 22.44% of capital gain was from shares held for less than a month.
2.22 We have carefully considered the various aspects of the issue raised before us. Whether a particular transaction is a trading activity or an investment activity will depend upon facts and circumstances of each case. There are several judgments of the courts and tribunal some of which have been quoted before us each turning on its own facts. Though trading and investment transactions have their own distinctive features difficulty arises in borderline cases in understanding the true nature of transaction. A trader in a commodity is basically motivated by profit in selling the commodity on each and every rise in value. He aims to earn profit by generating volume by frequently turning over the stocks in which he is dealing. 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 true nature of transaction can be understood from the intention of the assessee at the time of purchase. The various factors which need to be considered in understanding the intention or the nature of transaction are : frequency and volume of transactions, nature of entry in the books of account, the object clause in the memorandum of association authorizing such transaction, circumstances such as organized efforts made to earn income as well as loans and borrowings which are normally associated with a business activity, profit motive, etc. However no single factor is conclusive and totality of the facts and circumstances have to be considered in arriving at a fair conclusion in the matter.
2.23 Though frequency and volume are indicative of a trading transaction, the same are not conclusive. The volume will depend upon funds deployed by the assessee and therefore the same could be high even in case of investment. Frequency is also not conclusive because even an investor may be frequently buying and selling shares and still he may remain an investor because the shares he is buying he may not be selling during the year and the shares sold may be those purchased more than a year ago. Therefore even if the number of transaction are large and volume is high, the assessee may still be an investor. Crucial factor is the period of holding which will be very short in case of a trader and long in case of an investor 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 he 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.
2.24 The Learned AR for the assessee has argued that intention at the time of purchase has to be gathered from nature of entry in the books of accounts. It has been submitted that from 1.4.2004 the assessee had entered into the delivery based transaction as an investment transaction and therefore such transactions have automatically to be treated as an investment activity. We are unable to agree with such a proposition. It is a settled legal position that entries in the books of account or object in the memorandum of association are not conclusive in understanding the intention or the true nature of transaction. No doubt, these are relevant factors but the same are not conclusive. The intention at the time of purchase has to be gathered from the conduct of the assessee in his dealings with the commodity subsequently as held by Hon’ble Supreme Court in case of CIT Vs Madangopal Radheylal (73 ITR 642). Even in case of H.Hoick Larsen on which the Learned AR for the assessee relied. The Hon’ble Supreme Court held as under :
“In order to determine whether one was the deafer in shares or an investor, the reai 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 operation shows that the first step – purchases of 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.”
2.25 Thus it is the subsequent conduct of the assessee in dealing with
the shares which is important in understanding the intention at the time of purchase or true nature of activity. Reverting back to the case of the assessee, we find that in this case the assessee had dealt in more than 300 scrips during the year and the turnover of delivery based transactions is about Rs.3500 crores as brought on record by the AO which has not been controverted before us. This has been done with opening stock of Rs. 18.72 crores only. Even if we consider the closing stock of Rs.45.12 crore, the turnover to stock ratio is very high (about 80) which clearly shows the trading nature of transaction. In case of investment, turnover to stock ratio will normally be less than one as the assessee would be accumulating the purchases for investment and not for sale. The assessee has regularly dealt in purchase and sales of shares with high frequency and volume. The AO has brought on record several cases in which the assessee had made repetitive purchases and sales in the same scrip which also shows trading activity. An investor in a scrip will hold the shares and not indulge in buying and selling in the same scrip. Shares purchased have been sold mostly during the year. No shares sold have been held for more than one year as the entire capital gain has been shown as short term capital gain. Further about 64% of capital gain is from sale of shares held for less than four months and about 22% of capital gain is from sale of shares held for less than a month. About 88% of gain is from sale of shares held for less than six months. Profit motive is also clearly evident in making the transaction. The total delivery based purchases is about Rs.3500 crore and total gain is about Rs. 16 crore. Thus the assessee has been selling the share on average profit of about .5% which can happen only in a trading transaction and not in investments. The high frequency, volume, low holding period and profit motive clearly show the intention of the assessee to trade in shares.
2.26 The Learned AR for the assessee has argued that there is no minimum holding period prescribed in case of the investment as is clear from section 2(42A) as per which shares sold with holding period of less than a year has to be treated as short term capital gain. Therefore even if the shares are held for a few months or even for less than a. month, the income has to be assessed as capital gain. We are unable to accept such arguments. The holding period for the purposes of computation of capital gain is relevant only in relation to the shares as held as investment. Therefore only in respect of shares held as investment income from sale of shares with holding period of less than one year has to be treated as short term capital gain and not in respect of any purchase and sale of shares. Therefore what is required to be ascertained first is whether the assessee is a trader or investor and this has to be gathered from the intention of the assessee which in turn has to be found from the conduct in dealing with the shares. The conduct of the assessee as pointed out earlier makes it quite clear that he was trading in shares.
2.27 It has also been argued that the assessee had received increased dividend of Rs.94,31,290/- compared to Rs.44,51,213/- in the immediate preceding year which shows that the assessee was making investment in shares from this year. In our view the dividend received does not establish the investment activity. The assessee had made total purchase in delivery based shares of the order of about Rs.3500 crores and in case the purchases were with the investment in mind the dividend earned during the year which was the only return on investment comes to only about .03% of the total purchases. Nobody will make investment to earn only return of .03% when the interest rate in the saving bank account is about 4%. The dividend is an incidental income even in trading transaction because the assessee will receive dividend in case of purchases made before the record date even if the purchases are held for a short period. In this case considering the assessee had made purchases worth about Rs.3500 crores the dividend is negligible and is only an incidental income relating to the trading activity.
2.28 The Learned AR has also argued that there is no legal bar on a trader converting into an investor in subsequent period and that a person can be both a trader as well as an investor. There is no dispute about this proposition. A trader in the previous year can become an investor in the subsequent year or he can do both trading and investment activity and maintain separate accounts for these activities but whether a trader had converted into an investor in subsequent period has to be gathered from his conduct and the way he has dealt with the shares in the subsequent period. The argument of the Learned AR that the entry in books conclusively prove that the assessee had changed its attitude towards shares from 1.4.04 cannot be accepted as entry in the books of account as held earlier is not conclusive. Reliance has been placed on the judgment of Hon’ble Supreme Court in case of New Era Agencies Pvt. Ltd. Vs. CIT (68 ITR 585) in support of the said proposition. The said judgment in our view is distinguishable. In that case, from 1942 to 1948, the assessee had dealt in shares including those of E-Mills income from which had been declared as business income. From 1949 onwards there were slump in the prices of E-Mills and the assesse had not affected any sales but purchased some more shares of E-Mills. In 1953 the assessee sold all the shares of E-Mills and profit of Rs.2,34,231/- was declared as capital gain. The Hon’ble Supreme Court held that these shares were held as trading stock in the earlier year and there was nothing in the books to show that the assessee had treated the shares of E-Mills as investment. Merely because the assessee had not sold shares for few years did not change the character of the shares from trading into investment. The case would be relevant when the shares have been held as trading investment in earlier year and the same shares are shown as investment without converting them into investment stock. Therefore even when the shares had characteristics of investment in subsequent period, it was not accepted as the assessee continued to hold them in the books as trading assets. The Supreme Court did not hold that even if the shares did not have the characteristics of investment, these can be accepted as investment based only on the entry in the books. In the present case, the assessee has shown the fresh delivery based purchases during the year as investment purchases but such purchases cannot be accepted as investment activity only by making entry in the books when dealing in shares during the year clearly shows that these were trading activities. There is no law that the assessee can declare transactions in the manner he likes. The nature of transactions has to be gathered from the facts and circumstances of each case.
2.29 The Learned AR has also placed reliance on the judgment of Hon’ble High Court of Mumbai in case of CIT Vs Gopal Purohit (228 CTR 562). In the said case the assessee had declared income from delivery based purchase and sale of shares as capital gain as done in the earlier years in which such treatment had been accepted by the department. However in the current year department treated the same transactions as business transactions and assessed the income as business income. The Tribunal held that there had to be uniformity in treatment and consistency in approach of the revenue in various years when the facts and circumstances were identical. Accordingly the Tribunal accepted the claim of the assessee that income from sale of shares was capital gain and this was upheld by the High Court. We do not see how this case is going to help the assessee. In fact this only supports the stand of the revenue. The authorities below have given a clear finding that nature of transactions entered into by the assessee in the delivery based shares was identical as in earlier years in which income from such transactions had been declared by the assessee as business income. There is nothing produced before us to controvert the finding of revenue authorities. Though the assessee has filed the holding period wise details of shares transacted during the year as mention in para 2.11 earlier, it has not been shown how the transactions this year are different from those in earlier year. Therefore following the principle of uniformity and consistency, the approach of the revenue to assess the income this year also as business income has to be upheld. Even on merit, considering the holding periods given by the assessee for this year, frequency, volume and other factors as mentioned earlier the transactions have all the attributes of trading activity. The case of Gopal Purohit is quite different. In that case the Tribunal has decided on merit mainly because the decision of the Tribunal in case of Sharnath Infrastructure Pvt. Ltd. Vs. ACIT (120 TTJ 216) holding that facts in case of Gopal Purohit was identical. In case of Sharnath Infrastructure Pvt. Ltd. the shares sold out of investment account had been held for 2 to 3 years. The revenue could not show any shares sold which had been purchased during the year or in the immediate preceding year. In the present case no shares had been held by the assessee for more than one year. Shares have been sold mostly within four months and in several cases within a month. The case of the assessee is thus totally distinguishable. The Learned AR also argued that, in that case, it was held that transactions in delivery based shares have to be treated as investment and since the decision has been upheld by High Court, all delivery based transactions have to be treated as investment activity. But we find that there is no universal finding in the said case that transactions in delivery based shares in all circumstances have to be treated as investment. The transactions in delivery based shares have been treated as investment activity on facts of that case which are radically different from facts of this case. Even before the High Court, there was no question raised that all delivery based transactions have always to be treated as investment activity. The High Court has upheld the view taken by the Tribunal on the facts of that case holding that no substantial question of law was involved.
2.30 It has been argued that even an investor make some time have to make frequent purchase and sale of shares. It is true but in order to hold that the assessee remained an investor it has to be shown from the circumstances of the case that the assessee was not purchasing and selling as a trader to make profit. In case of H. Hoick Larsen (supra) on which reliance has been placed, the assessee had duly explained the frequent purchases and sales and on the facts of the case it was held that the assessee was not a trader. In that case, purchases and sales of shares by the assessee upto 1953 were few and far between. Thereafter the transactions in shares became large in number and at close intervals. During F.Y 55-56 to 59-60, the assessee had acquired 29969 shares and sold 37366 shares resulting in profit of Rs.1,65,581/-. The assessee claimed that it was not a trader. The High Court noted that the assessee had acquired all the shares in right issues. The assessee had renounced some right shares and also sold some new shares. It was held that the dominant object for acquiring right shares and renouncing of some shares and selling of some new shares was to prevent eroding the value of capital as after the right issue the value of original shares was bound to depreciate. The assessee needed money to acquire the right shares which was the reason for sales and renouncing. The purchase and sale was to prevent erosion of capital and accordingly it was held that the assessee was not a trader. The judgment of the High Court was upheld by the Supreme Court. In this case there are no such special circumstances necessitating frequent purchase and sales of shares by the assessee. The assessee had not acquired the
shares sold in right issues Shares have been freely purchased and sold from open market at short intervals generating very high volume running into Rs.3500 crores involving 300 scrips with funds deployed of less than Rs.50 crores. Considering the entirety of facts and circumstances we have no difficulty in arriving at the conclusion that the assessee during the year had traded in delivery based shares as in earlier year and accordingly the order of CIT(A) is upheld.
3. The appeal of the revenue in ITA NO.2468/M/2009. In this appeal the revenue has raised disputes on three different grounds.
3.1. The first dispute is regarding disallowance of depreciation on membership card of BSE. The assessee for the relevant year had claimed depreciation @ 25% amounting to Rs. 15,33,087/- on BSE card. The AO following the decision in the earlier year held that BSE card was not a capital asset and therefore depreciation was not allowable. The AO also observed that though ITAT, Mumbai in case of Technoshares and Stock Ltd. (101 TTJ 349) had held that BSE card was a capital asset entitled for depreciation, the department had not accepted the said decision of the Tribunal. The AO accordingly disallowed the claim of depreciation. In appeal CIT(A) however following the decision of Tribunal in assessee’s own case in assessment year 2002-03 allowed the claim of the assessee aggrieved by which the revenue is in appeal before the Tribunal.
3.1.1 After hearing both the parties, we find that the issue raised is covered against the assessee by the judgment of Hon’ble High Court of Mumbai in case of Technoshares and Stock Ltd. (184 Taxman 103). The assessee in that case had claimed that BSE card was an intangible asset and therefore depreciation was allowable in view of the provision of section 32(l)(ii) as per which depreciation was allowable in respect of intangible assets from 1.4.1998. The Hon’ble High Court held that provisions of section 32(l)(ii) would apply only to assets relating to intellectual property rights such as technical know-how, patent etc. The BSE card was not a business or commercial asset relating to intellectual property right and therefore it was not entitled for depreciation. Respectfully following the said judgment we set aside the order of CIT(A) and confirm the disallowance made by the AO.
3.2 The second dispute is regarding disallowance of interest paid on arrear of SEBI turnover fees. As per the SEBI regulations 1992, the brokers were required to pay the fees based on annual turnover. This levy was disputed by the brokers and ultimately the levy was upheld by the Supreme Court vide judgment dated 1.2.2001. Earlier the SEBI (broker and sub broker) Regulations 1992 was amended on 16.12.1996 in terms of which interest @ 15% per month in respect of any delay/ failure of the payment of turnover fees was chargeable. In the year 2004, the SEBI came out with Interest Liability Regulation Scheme whereby one time waiver was given to the brokers who paid 20% of the interest accrued so far for in full and final settlement of their dues. The assessee under the said scheme paid a sum of Rs. 10,84,919/- in full and final settlement of its arrear which included interest of Rs.10,72,161/- till the date of payment which was claimed as deduction under section 43B. The assessee argued that the interest had the same character as the fees itself in view of the judgment of Hon’ble Supreme Court in case of Mahalaxmi Sugar Mills Co. Ltd. (123 ITR 429). The AO however held that the said judgment was distinguishable as in that case issue was allowability of interest on cess as revenue expenditure and the court was not concerned with the provision of section 43B. The AO observed that section 43B referred to payment by way of tax, duty, cess or fees and it did not talk about interest which was covered only by clause (d) and clause (e) of section 43B which relate to payment of interest on loan. The AO referred to the judgment of Hon’ble High Court of Kolkata in case of Padmavati Rajiv Cotton Mills Ltd. (239 ITR 355) in which it was held that interest was neither a tax under the Income-Tax Act nor it was known as tax under the common parlance. The AO therefore held that the interest was not covered under section 43B and as the same related to earlier year it could not be allowed in the current year. Accordingly he disallowed the claim. In appeal CIT(A), following the judgment of Hon’ble Supreme Court in case of Mahalaxmi Sugar Mills Co. (123 ITR 429) held that interest on SEBI turnover fees was of the same character as SEBI fees itself and therefore it was covered under section 43B. Accordingly he deleted the addition made by the AO aggrieved by which the revenue is in appeal before the Tribunal.
3.2.1 Before us the Learned AR for the assessee submitted that the issue was covered by the decision of Tribunal in case of Wallfort Shares and Stock Brokers Pvt. Ltd. in ITA No.5984/M/2008 in which interest on SEBI turnover fees has been allowed as deduction under section 43B.The Learned DR placed reliance on the order of AO.
3.2.2 We have perused the records and considered the matter carefully. The issue is regarding allowability of interest on turnover fees levied by the SEBI, under section 43B of the Income-Tax Act. We find the same issue had been considered by the Tribunal in case of Wallfort Shares and Stock Brokers Pvt. Ltd. (supra). The Tribunal in the said case referred to the decision of Tribunal in case of Sureshchand Jain (284 ITR (AT) 160) in which the Tribunal held that where a particular percentage of turnover is charged as turnover charge, the latter was of the nature of tax, duty, cess or fees which come within the purview of section 43B. The Tribunal also referred to other decision of the Tribunal in which the same view had been taken. The interest on turnover charges was held to be of the same nature as tax, duty, cess or fees and Tribunal accordingly allowed the claim of deduction on account of interest. Facts this year are identical as the nature of claim in the case of the assessee is identical. We therefore respectfully following the decision of Tribunal (supra) see no infirmity in the order of CIT(A) and the same is upheld.
3.3 The third dispute is regarding disallowance of V-SAT charges and lease line charges. The AO noted that the assessee had claimed deduction of Rs.2,13,084/- and Rs.22,67,170 on account of Lease line charges /V-SAT charges/ and transaction charges. The AO referred to provision of section 40(a)(ia) as per which any deduction on account of interest, commission, brokerage, rent, royalty fees for professional services or fees for technical services payable to a resident, is not allowable as deduction unless tax had been deducted at source and paid to the government. The fees for technical services has been defined as any consideration for rendering of any managerial, technical or consultancy services. AO held that V-SAT and lease line charges were fees for technical services and thus liable for deduction of tax at source. Since the assessee had not deducted tax at source, claim was disallowed. In appeal CIT(A) observed that department of telecommunication had granted license to stock exchanges for installation and setting up of Close Use Group Telecommunication Network based on V-SAT and lease lines and the stock exchanges were to collect V-SAT and lease line charges from members and pay the same to the service provider. CIT(A) held that V-SAT and lease line charges were the reimbursement charges paid by the members to stock exchanges in lieu of infrastructure and trading facilities provided by the stock exchanges and these were not fees for technical services. Accordingly he held that tax was not required to be deducted. The addition made by the AO was thus deleted aggrieved by which the revenue is in appeal before the Tribunal.
3.3.1 Before us the Learned AR for the assessee submitted that the issue was covered in favour of the assessee by the decision of Tribunal in case of Kotak Securities Ltd. (24 DTR 214). The Learned DR on the other hand placed reliance on the order of AO.
3.3.2 We have perused the records and considered the matter carefully. The same issue regarding allowability of transaction charges has been considered by the Tribunal in case of Kotak Securities Ltd. (supra) in which the Tribunal held that stock exchanges do not render any managerial services nor any technical consultancy services. The transaction charges paid by the brokers to the stock exchange were not for any services provided by the stock exchange. The payment was for use of the facilities provided by the stock exchange to the members. The Tribunal accordingly held that the provisions of section 40(a)(ia) were not attracted as no tax was required to be deducted. We therefore following the said decision of the Tribunal see no infirmity in the order of CIT(A) deleting the addition and the same is upheld.
4. In the result the appeal of the assessee is dismissed and that of the revenue is partly allowed.
The order was pronounced in open court on 30.06.2010.