Case Law Details
Swatiben Anilbhai Shah Vs DCIT (ITAT Ahmedabad)
The solitary issue for adjudication on merits is whether gains arising on sale of certain quantity of shares of a company, namely, Pyramid Siamira Theatre Ltd. (PSTL) by the assessee in the relevant assessment order is required to be taxed under the head ‘capital gains’ as offered by the assessee or is to be treated as ‘business income’ of the assessee. The issue involved is essentially factual in nature. As regards the justification on the claim of short term capital gain (STCG), it is the case of the assessee that the gains in question have arisen on sale of only one share i.e. PSTL. The assessee has purchased 215802 shares and sold 167000 shares during the year. The total number of transactions of purchase is barely 5 and that of corresponding sale is only 7. The principal argument on behalf of the Revenue in the first round of proceedings is that transactions have been entered within a short period of less than one month and the assessee does not have sufficient own funds at its disposal and has employed borrowed funds from outsiders on which interest has been paid. It was further observed by the AO that the assessee has also dealt in other shares which are reported as share trading business by the assessee. In this background, the benefit of concessional rate of tax on STCG was denied to the asses see.
When the matter travelled to the ITAT, in the absence of proper facts available before the ITAT, the matter was set aside and remanded back to the file of AO for re-determination of the issue afresh after ascertaining the deployment of borrowed funds and the manner of maintenance of demat account etc. The co-ordinate bench inter alia observed that the order of the AO is cryptic without any proper verification of books of accounts. The AO merely deemed the borrowed funds to have been utilized for investment purposes. In para 11 of the order of the co-ordinate bench, it was observed that it was upon the assessee to demonstrate that his intention for earning investment income and share trading income are well differentiated and certainly the case of the assessee gets more strong if he is able to prove that no borrowed funds have been taken specifically for buying the shares when he intends to show as investment income. Thus, all the facts and circumstances of the case are required to be weighed cumulatively for proper determination of nature of income arising from sale of share.
The law has considerably evolved on the point and continuing. The Courts have laid down several tests for ascertaining the nature of transaction. The CBDT itself has also laid down parameters by way of circular no. 4 dated 15.06.2007. In the instant case, we note few peculiar facts from the financial statements placed in the paper book. The assessee has claimed profits arising on sale of a solitary share (PSTL). The frequency of purchase and sale instances are quite few as noted above. The sale of the shares of part quantity has happened within a period of one month and thus claimed as STCG. A part utilization of borrowed capital, if any, in this peculiar background would not necessarily overwhelm the low frequency having regard to the decision of Hon’ble Gujarat High Court in the case of Neeraj Amidhar Sur (supra). The cumulative effect of all factors need to be weighed and a mere involvement of borrowed funds in some instances would not per se denude the transactions of its character of capital assets. The issue is essentially factual and depends of peculiar facts of each case. In the absence of any straight jacket formula available despite plethora of judgments, the lack of regularity and isolated instances of capital transactions would vindicate the stand of assessee that income/loss from seven transactions have been rightly regarded as capital gains. As stated, the assessee has taken delivery of shares before sale. While maintenance of capital and trading transactions as a separate category in books can be insisted upon in practice to ascertain the underlying intentions, the maintenance of separate D-mat account separately is not necessarily in conformity with usage of share trade and thus cannot be insisted upon.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
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