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 & 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:
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 500 shares and the same is executed by the electronic trading system of stock exchange into 50 smaller transactions, it does not mean that 50 transactions have been entered into. It has to be treated as one transaction only.
Intent of the Assessee can be known from the fact that despite increase in market value of shares at year end by more then 50% he haven’t sold the shares. At the end of the year, the assessee was holding shares worth Rs. 11.56 crores with a market value of Rs.17.69 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.
No delivery transactions which were settled on 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;
The assessee has not borrowed any money and he was occupied full time in the business of garments;
In identical circumstances in the case of the assessee’s sister, the Tribunal had decided in favour.
Mr. Nehal V. Shah vs. ACIT
ITA. No. 2733/Mum/2009
Assessment year 2005-2006
PER T.R. SOOD, A.M.
1. In this appeal various grounds have been raised. But only dispute before us raised by the assessee is that learned CIT(A) erred in confirming the short term capital gain of Rs. 1,07,70,524/-.
2. The assessee is engaged in the business of garments manufacturing and exporting garments and was also making investments in shares. During the assessment proceedings it was noted by the Assessing Officer that the assessee had shown short term capital gain of Rs. 1,07,70,524/-. On enquiry, it was stated before him that assessee was engaged in the business of manufacturing and exporting of garments through a firm viz., M/s. Zen Clothing Co. where assessee was a working partner. Assessee was also a Director in a company known as Chanakya International (P) Ltd. which was also engaged in the business of export of garments. It was stated that assessee is only an investor and has not borrowed any money for investing shares. Further assessee was not very much experienced in the share line. Therefore, assessee was also taking services of portfolio management service provider. Most of the investments were had for more than one year and assessee had earned dividend income also.
The Assessing Officer did not find force in the submissions and observed that assessee had entered into total 127 purchase transactions and 83 sale transactions which is a very high frequency. No investor indulged in such high frequency of transactions. It was further observed that in the following transactions assessee has not taken even the delivery and the shares was sold immediately.
|Sl No||Name of
|No. of shares/units||Purchase date||Purchase value||Sale date||Sale value||Speculative gain/loss on share
|No. of day s|
2.1. In few more cases the shares have been sold within a very short span of time and following transactions were noted where shares were sold in a short span of time.
Prior to 01-10-2004
|Sl No||Name of
|Purchase date||Purchase value||Sale date||Sale value||Short term|
lossNo. of days1MTNL2100018/5/042439150.0020/5/042390850-4830022MTNL1700006/8/042216626.3010/8/042177822.68-38803.6243GujuratAmbuja2120013/4/046647491.0026/4/047031408.6383917.6134ONGC632305/4/044742250.0020/4/045452259.67710009.67155IPCL1800020/5/042402390.4504/6/042690820288429.55156.DIC59618/3/04238400.0013/4/04301510.4463110.4426 18686307.75 20044671.391358363.6 4
shares Purchase date Purchase value Sale date Sale value Short term
gain/lossNo.of days1TELCO(Tata Motors)350004/11/0414949874.2011/11/0414726497.7-223376.5072.TELCO(Tata Motors)500028/10/041993264.2411/11/042103785.39110521.15143.Jindal Iron& Steel
Co.350018/11/041036966.8603/-not clear981776.76-55190.10154.Telco(Tata Motors)1500026/10/046250509.0211/11/046311356.1660847.14165.TCS150014/10/041647214.8504/11/041727016.5579801.80216.Jindal Iron& Steel Co.1500011/11/044425387.293/12/044207614.71-218272.58227.TCS Ltd.750013/1/0510010698.0504/2/059772161.3-238536.75228.TCS700011/10/047724603.3104/11/048059411.04334807.73249.RelianceIndustries1000003/12/045350146.0829/12/045223729.65-126416.432610.TCS20008/10/042189124.804/11/042302688.86113564.062711.TCS30007/10/043295778.134/11/043454033.3158255.1728 69079297.49 68877234.44-202063.05
2.3. It was also noted that in almost 88% sales of shares, the same were purchased during the year only. This high ratio of sales within a year indicates that assessee was only a trader in the shares. It was also observed that capital account of the assessee as on 3 1-3- 2004 shows that the assessee has shares worth Rs.59,98,0717/- and cash at bank Rs.30,00,000/-. Out of the above share holdings the assessee had sold shares worth Rs.2,45,48,256/- for Rs.4,02,20,902. The sale proceeds so received can be deemed to be utilised to buy the shares at cost of Rs.80,23,25,869/- which he continues to hold as on 3 1-3-2005. That leaves the initial cash available of Rs.30,00,000 for trading in share. The assessee utilised this amount by way of turning over and circulating in such a pattern to make total purchases of Rs.23,33,93,616/- in the year and to make sale of Rs.296532998 of shares purchased during the year. This is almost 85 times the capital available. This shows that assessee was frequently turning over his capital and circulating stock-in-trade to maximise the turnover and profit. In this back ground, Assessing Officer after discussing the submissions in detail, rejected the claim of assessee and held that in respect of these shares assessee was only a trader and therefore, the short term capital gain declared by the assessee, was treated as business income. On an appeal, the learned CIT(A) confirmed the order of the Assessing Officer.
3. Before us, the learned Counsel for the assessee reiterated the submissions made before the Assessing Officer and CIT(A) and emphasised that assessee was hardly engaged in the business of garment exports through M/s. Zen Clothing Co. wherein more than 100 workers were employed. Therefore, assessee was fully busy in his garments business. He further submitted that assessee was investing in shares from a long time and in earlier years such transactions were accepted by the department. Assessee had not made any borrowings. Assessee had never entered into the derivative transactions. Two transactions quoted by the Assessing Officer happened because of the mistake of broker and assessee had suffered loss in both the transactions which assessee had not contested in any case. He argued that in this year, Government had already introduced the security transaction tax and the idea was that no share transaction should go without tax. He therefore, referred to pages 18 of the paper book which is copy of the list of the shares held as on 31st March, 2005 and pointed out that assessee was holding shares in only 15 companies cost of which was Rs. 11,56,65,048/- whereas the market value of the same was Rs. 17,69,58,313/-. This clearly shows that despite of gain of almost Rs. 6 crores in the shares which were carried on for next year by the assessee, assessee preferred to hold these shares than to sell the shares. This clearly shows that assessee was an investor. Then he referred to page 19 of the paper book and pointed out that total purchase transactions in the year was only 31 and total sale transactions were 25. Therefore, it is not correct to state that assessee had a very high volume of connections. In fact, he explained that what happened some time that when he made an order say 1000 shares of DX’ company, it is not necessary that whole lot of 1000 shares would be transacted in one transaction. The transaction in stock exchange happened through computer trading and the computer would match the trades and then execute the same, which means that transaction for 1000 shares may consist of many smaller lots. Then he referred to the Order of the Tribunal in the case of Mr. Vineet M. Shah vs. Addl. CIT ITA. No. 273 1/Mum/2009 (copy of which is placed at pages 126 to 136 of paper book) which the case of the assessee’s father wherein under similar circumstances, the transactions were held to be in the nature of investment. Similarly in the case of assessee’s sister MS. Karishma Shah vs. Addl. CIT ITA. No. 2735/Mum/2009 (copy of which is placed at pages 136a to 136-v of the paper book) wherein again the transactions were held to be investment in nature. Then he referred to pages 157 to 159 of the book which is the chart showing comparison of assessee’s case with that of his father and sister and he pointed out how the facts are almost similar. He also relied on the decision of Mumbai bench of Tribunal in the case of Gopal Purohit vs. JCIT 29 SOT 117 wherein it was held that such share transactions will not be held to be business transactions when in the earlier years same were accepted as investment transactions on the principle of consistency.
4. On the other hand, learned DR strongly supported the Orders of the Assessing Officer and learned CIT(A).
5. We have considered the rival submissions and carefully perused the record and find force in the submissions of the learned Counsel for the assessee. It seems that number of transactions have not been calculated properly by the Assessing Officer because it may happen some time that a single transaction would be 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. Let us say, if some one places an order for purchase of 1000 shares of X’ company and the same is executed by the electronic trading system of stock exchange into 100 smaller transactions, it does not mean that this person has entered into 100 transactions. Assessee has carried out only 31 purchase transactions and 25 sale transactions which cannot be said to be a great volume of transactions. Further, assessee was holding shares worth Rs. 11.56 crores at the end of the year and market value of the same was about Rs. 17.69 crores. If assessee was a trader, he would have definitely realised this huge profit of almost Rs. 6 crores immediately and not carried out the stock to the next year. As far as the two transactions narrated by the Assessing Officer in which no delivery was taken and transaction was settled in the same day we agree with the submission of the learned Counsel for the assessee that perhaps these particulars were wrongly carried out on behalf of the assessee by the broker that’s why assessee got them settled on the same day and has not contested these two transactions. Assessee has also not borrowed any money and he already occupied full time business for garments through the firm M/s. Zen Clotyhing. He further find that in identical circumstances in the case of sister, the Tribunal had held as under:
11. “We have carefully considered the facts and the rival contentions. It seems to us that on the facts of the case it is difficult to hold that the assessee was carrying on a business in shares, with the shares as her stock-in-trade. As already noted, the assessee’s background does not indicate that she was familiar with the share business. She was a working partner in a partnership firm which was engaged in the garment business and was a Director in a company which was also engaged in a similar business. It would appear therefore that she hardly had any knowledge about the nuances of share trading. She also did not borrow any monies for the purpose of acquiring the shares and this fact is not disputed on behalf of the Revenue. The shares have been acquired out of the surplus funds left with the assessee. She has disclosed the shares in the Balance Sheet as shares only and not as stock-in-trade.
This fact has also been recognized by the Departmental authorities. In paragraph 15 of his order the CIT(A) has observed that the assessee has considered all the purchase of shares only as investments and that they were classified as such in the Balance Sheet. He has also gone on to observe that the assessee had two portfolios, a trade portfolio and an investment portfolio. From the Balance Sheet as on 3 1.03.2005 it is difficult to find any shares held in the trade portfolio and to this extent the CIT(A) appears to be wrong – i.e., in saying that the assessee had two portfolios. According to the Balance Sheet as on 3 1.03.2005 the shares costing Rs. 12,59,85,603/- were shown as shares and the Balance Sheet also contained the list of the shares of the 26 companies held by the assessee. The Balance Sheet also disclosed Rs.3, 79,80,707/- as “other investments” which consisted mainly of bonds and mutual funds. There were no shares which were shown in the Balance Sheet or the Profit and Loss Account as stock-in-trade. Surplus received on the shares sold during the year were shown as either short term capital gains or as long term capital gains. So far as the long term capital gains is concerned, we have already seen that the AO did not dispute the nature of the gains and made no attempt to treat them as business profits. It is only with regard to the short term capital gains that he has taken a view that they represent business profits apparently because of the period of holding. If the average investment made by the assessee in one scrip is taken, it comes to around Rs.45.00 lakhs as pointed out by the assessee, which appears to be too high for an individual to hold as stock-in-trade. The portfolio of the shares shows that many of the scrips are of blue chip companies, their shares in which are normally considered to be safe and sound investments. The list is attached to the Balance Sheet as on 3 1.03.2005 and it includes the shares of Madras Cements Ltd., Colgate Ltd., Lumax Industries, Bharat Electronics, Reliance Industries, Finolex, Mahindra & Mahindra, Appolo Tyre, TCS Ltd., NTPC, TISCO, Polaris, etc. The details of the short term capital gains also attached to the balance Sheet shows sale of shares of several blue chip companies besides the aforesaid companies. The assessee has not indulged in any dealings in futures and options and the instances of share transactions involving no delivery are only two and the loss therein was only Rs.474/-. The AO appears to have been influenced more by the frequency of the transactions and he has cited the brokers’ contract notes which show a number of orders placed for purchase of the shares on the same day at different rates. We have already referred to the argument of the learned representative for the assessee as to how the contract notes are issued by the share broker. He has also referred to pages 74 to 79 of the Paper Book which contains the contract notes issued by Falcon Brokerage Pvt. Ltd. on 1st February 2005. Though there are several orders for purchase of the shares of Man Industries Ltd. on the same day, the assessee appears to have intended to acquire 25000 shares in this company and the contract note merely exhibited the different times on the same day at which the broker acquired the shares in the Stock Exchange at different rates. Ultimately the broker had acquired 25000 shares of the company on behalf of the assessee for a total price of Rs.26,80,890/-. Thus it is actually a single transaction for acquiring 25000 shares in a company and not several transactions of acquiring the same company’s shares on a single day as assumed by the AO. The assessee has also explained in similar fashion the details of the short term capital gains furnished in pages 17 to 19 of the Paper Book, which has been explained along with the details contained at page 30 of the Paper Book. These details show that the assessee sold 30 scrips during the year, which gave rise to the short term capital gains of Rs.2,25,47,992/-. The sales on the same day but in different lots of the shares of the same company cannot be treated, in our opinion, as separate transactions of sale in order to judge the frequency of the sales. We have already referred to the argument of the learned representative for the assessee that when the shares of Automo Cor were purchased on 25.11.2004 in three lots, they have to be treated as a single purchase transaction and similarly when the shares of the said company were sold on 29.11.2004 in three separate lots, they have to be taken as a single sale. It seems to us that this is a reasonable way of ascertaining the frequency of the transactions. This is the way in which the statement at page 30 of the Paper Book has been prepared from which it is seen that the transactions of purchases, counted month-wise, came to 49 in number during the year and transactions of sales reckoned in a similar manner came to 43 in number during the year.
12. It seems to us from the facts noted above that it is difficult to uphold the conclusion of the Departmental authorities that the assessee held the shares as her stock-in-trade. In the assessment year 2004-05 the assessee sold 30 scrips and earned capital gains of Rs. 1.05 crores, which was accepted by the AO as short term capital gains under section 143(3) of the Act. Similarly in the assessment year 2007-08 also the capital gains of Rs.0.08 crores on sale of 24 scrips was treated as short term capital gains by the AO in the assessment completed under section 143(3) of the Act. The conduct of the AO attracts the rule of consistency and this principle considered along with the other facts found in the preceding paragraph, persuade us to hold that the surplus on the sale of shares was rightly declared by the assessee as short term capital gains. In addition to the same we find that the attempt of the CIT to assess the long term capital gains for the same year as business profits under section 263 of the Act, on the footing that the assessee is a regular trader in shares and securities was ultimately dropped by order dated 19.03.2010. In the notice issued on 26.11.2009, the CIT expressed the view that if the assessee is to be treated as a regular trader in shares and securities, the holding period of the shares does not alter the character of the income. In our opinion, the approach of the CIT, with respect, reflects the correct approach to be adopted in such cases and it is of fundamental importance to first ascertain whether the assessee is a dealer in shares or investor in shares. The character or the head of income under which the surplus is to be assessed for purposes of the Income Tax Act gets determined by the answer to this fundamental question. As we have already noted there are no strong materials to hold that the assessee traded in shares, whereas there is sufficient material to hold that she invested in shares as investor and never intended to carry on a business in shares.
13. For the above reasons we accept the contentions of the assessee and hold on the facts of the present case that the short term capital gains of Rs.2,25,47,992/- on the sale of shares and mutual fund units should be assessed as short term capital gains as declared by the assessee. The appeal of the assessee is allowed with no order as to costs”.
6. In view of the above discussion and the decision of the coordinate Bench in the case of father of the assessee and sister of the assessee, we are of the view that the transaction disclosed by the assessee has to be treated as investment transaction and not as business transaction.
7. In the result, appeal of the assessee is allowed.
Pronounced in the open Court on this the 15th day of December, 2010.