IN THE ITAT HYDERABAD BENCH ‘B’
Swarnim Multiventures (P.) Ltd.
versus
Deputy Commissioner of Income-tax, Circle 3(3), Hyderabad
IT APPEAL NOS. 803 (HYD.) of 2011, 452 & 453 (HYD.) OF 2012
s.a. nos. 88 & 89 (hyd.) of 2012
[ASSESSMENT YEARs 2006-07 TO 2008-09]
SEPTEMBER 21, 2012
ORDER
Chandra Poojari, Accountant Member
The two appeals by the assessee are directed against separate orders of the Commissioner of Income-tax(Appeals) IV, Hyderabad, both dated 29.2.2012 for the assessment years 2007-08 and 2008-09. Assessee has also filed applications seeking stay of recovery of outstanding demand for those two years, till the hearing and disposal of those appeals. Similarly, the appeal of the Revenue is directed against the order of the CIT(A) Guntur, dated 28.2.2011 for the assessment year 2006-07. Since all these matters involve a common issue, these appeals are clubbed and heard together and are being disposed off with this common order for the sake of convenience.
2. In the appeal of the Revenue for the assessment year 2006-07, ITA No.803/Hyd/2011, the grievance of the Revenue is against the direction of the CIT(A) to treat the income arising out of the assessee/s transactions of buying and selling shares as long term capital gains. Similarly, in the assessee’s appeals for the assessment years 2007-08 and 2008-09, the common grievance of the assessee is against the direction of the CIT(A) to treat the income arising out of the assessee’s activities in buying and selling of shares as income from business, instead of as long term capital gains exempt from income-tax, as claimed by the assessee.
3. Brief facts of the case are that the assessee is engaged in the business of investment and dealing in securities. Assessee treated the income from the share transactions as capital gains and thereby claimed exemption under S.10(38) of the Income-tax Act. Besides, the assessee has shown income from short term capital gains as taxable at special rates. For the assessment year 2006-07, the CIT(A) has given a direction to the assessing officer to treat the income from out of buying and selling of shares as capital gains, and also directed granting of exemption of the same from tax under S.10(38) of the Act. Against this direction of the CIT(A), Revenue is in appeal before us.
4. However, for the assessment years 2007-08 and 2008-09, the CIT(A) has held that the income arising out of buying and selling of shares by the assessee should be assessed as income from business, and accordingly upheld the view taken by the assessing officer in this behalf for those years. Aggrieved by this finding of the CIT(A), assessee is in appeal.
5. The learned counsel for the assessee submitted that the assessee has not employed any person to carry on any business for the years under appeal. He further submitted that the assessee has not borrowed any funds from outside agency in the years under consideration for the purchase of the shares. It is further submitted that the assessee has in fact not purchased any shares during the years under appeal, and has only dealt in the shares already purchased and brought forwarded from earlier years. He also relied on the Circular of the CBDT No.4 of 2007 dated 15th June, 2007, which reads as under-
“Income Tax Circular No. 4/2007, DATED 15-6-2007
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 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 stock-in-trade.
12. These instructions shall supplement the earlier Instruction no. 1827 dated August 31, 1989.
(F.No.149/287/2005-TPL)”
Further, he submitted that the assessee never treated its shares as stock in trade and it always treated the same as investment in the books of accounts and disclosed the income therefrom as income from investment. They learned authorized representative relied on the decision of Mumbai Bench of the Tribunal in the case of Hitesh Satishchandra Doshi v. Jt. CIT [2011] 46 SOT 336 for assessment years 2003-04 and 2006-07 respectively and others, wherein the Mumbai Bench of the Tribunal after referring in detail to the case-law on the point, observing that the nature of income received on sale of shares depends on the facts and circumstances of each case, held that the assessee in that case held the shares as investment and the income on the sale of the same cannot be treated as business income. He submitted that the ratio of the said decision clearly applies to the facts of the present case.
6. On the other hand, the Learned Departmental Representative submitted that the assessee has consistently engaged in the business of buying and selling of shares and it cannot be said that the assessee has only made investments in shares and has not carried any business. He relied on the decision of the Tribunal in the case of Spectra Shares Scrips [ITA No748/Hyd/2011 for the assessment year 2006-07 dated 5th August, 2011], wherein it has been held as under-
“Assessee company, having carried on the activity of buying and selling of shares in a systematic and regular manner with high frequency and volumes, repetitive purchases and sales of the same scrips throughout the year, it has to be held that it was engaged in trading in shares to earn profits and not buying shares for the purpose of investments and, therefore, income earned by the assessee falls under the head ‘profit and gains of business or profession’ and not ‘capital gains’.”
7. We heard both the parties and perused materials on record. The contention of the assessee is that it always treated the shares ass investment, and there is no business activity whatsoever carried on by the assessee with reference to shares. He further submitted that the principle of consistency has to be followed and there is no purchase made during the years under appeal, and all that the assessee has dealt with are in the shares brought forward from earlier years.
8. Coming to the facts of the present case, we consider the facts relating to the assessment year 2008-09, as the facts for all the three years are similar. For the assessment year 2008-09, the figures are as follows-
