‘Initial intention’ of assessee to decide whether an activity amounts to ‘trading activity’ or ‘investment activity’

ITO Vs. M/s Nupur Carpets Pvt. Ltd. (ITAT Kolkata)

We note that the AO treated net ‘surplus’ as business income instead of capital gains on the ground that the assessee carried out business of share trading as evident from large volume of transactions and systematic, organized, repeated and regular activity in shares with a clear intention to earn huge profits. But the facts suggests that the assessee- company was holding shares as investment all along and that the initial intention was evident by way the entries made in books and valuation of shares at ‘cost’ and that the volume of transactions was low and that substantial dividend income earned reflecting the intention. Thus, according to assessee the net surplus was not a business income but on account of capital gain. To decide whether a transaction is in the nature of ‘investment’ or ‘trading’ the crucial test that laid down by various courts is that the ‘intention’ of the assessee at the time of purchase of shares. The AO on the other hand, was on the conduct of the business of the assessee which according to him carried out in a systematic and organized manner involving large volumes of transactions in shares. As seen from the principles laid down by various courts, the main test prescribed is the ‘initial intention’ of the assessee to decide whether an activity amounts to ‘trading activity’ or ‘investment activity’. As seen from the above facts, the assessee is justified in its argument that its original initial intention is to hold the shares as ‘investments’ and not as ‘stock-in-trade’. The intention of the assessee as is evident from the circumstances at the time of purchase of shares/units, is a relevant factor and often a conclusive factor in determining whether a transaction is in the nature of trade or in the nature of investment. The assessee had been keeping its holdings in certain companies from a few months to a few years, which clearly indicates that the motive and intention of the assessee is to earn returns in the form of capital gain apart from dividend income. We note that the sources for acquisition of shares are from share capital, reserves and surplus funds. The assessee has been an investor and not a trader as seen from the intention of the assessee. The treatment given in the books under the head ‘investment’ clearly shows that the assessee’s intention to deal in shares as investment. The conversion of investment into stock-in-trade and continuing the trading under that head and again converting the closing stock under that head into ‘investment’, under consideration amounts to a clear change of intention depending on the circumstances. The assessee maintained separate ledger accounts in respect of conversion of stock-in-trade into investment. By converting the stock-in-trade into investment, it does not alter the character, nature and intention of that particular transaction especially in the context of capital gain versus business income. Subsequent conversion and treatment given in the books of accounts do not alter the character of commercial transaction. Accordingly, the profit that has been attributable to this trading activity corresponding to conversion of stock-in-trade into investment is to be treated as ‘business income’ and accordingly to be taxed. In view of the above findings of CIT(A) that the income from investment is to be taken as ‘capital gains’ and conversion of stock-in-trade to investment is to be taken as ‘trading income’, which is based on facts of the case and need no disturbance. In addition to this, the assessee`s case under consideration is fully covered by the Jurisdictional ITAT Kolkata, in ITA No. 783/Kol/2009, A.Y 2005-06 (supra). Thus, respectfully following the decision of the Coordinate Bench in assessee`s own case, vide ITA No.783/Kol/2009, A.Y 2005-06 (supra),in the assessment year 2005-06, whereby the issues were decided in favor of the assessee company, as set out above, therefore we confirm the findings of CIT(A).