DECIDED BY: ITAT `H’ BENCH, MUMBAI,
IN THE CASE OF: Harsha N. Mehta Vs. DCIT,
APPEAL NO: ITA NO. 1859/Mum/2009,
DECIDED ON July 16, 2010
PER R.K. PANDA, AM:
These are cross appeals, the first one filed by the assessee and the second one filed by the Revenue and are directed against the order dated 19th January, 2009 of the CIT(A)-XIX, Mumbai relating to assessment year 2005-06. For the sake of convenience, both the appeals were heard together and are being disposed of by this common order.
2. Facts of the case, in brief, are that the assessee earned salary income from M/s. Twin Earth Securities Private Limited, who were stock brokers and members of the Bombay Stock Exchange. The assessee’s husband is a director in the said company. The assessee has shown income from short term capital gains amounting to Rs.28,89,668 on account of sale of shares of 35 companies out of which short term capital gains pertaining to the period 01.04.2004 to 30.09.2004 was Rs.2,95,953. The Assessing Officer did not agree with the treatment given by the assessee and treated the income as business income. While doing so, he followed the Circular No. 4/2007 dated 05.06.2007, which lays down some of the guiding principles in deciding this issue. The principles, which the Assessing Officer applied were:
(a) Volume and frequency of transactions: The Assessing Officer noted that the assessee has sold shares to the tune of Rs.2,99,83,303 and the cost of their purchases was Rs.2,70,93,635. The total number of scrips involved were 35 and the total transactions came to 70.
(b) Average holding period of various scrips: The Assessing Officer noted that 70% of the transactions have a holding period of one month or less and none of the shares have been held for more than 200 days i.e., seven months. The investment in shares other than those of the related concern, M/s. Twin Earth Securities Pvt. Ltd., was to the tune of Rs. 61 lakhs, which was 22% of the cost of shares sold implying thereby that 78% of portfolio was sold. The magnitude of purchase and sale and the ratio between them indicated to the Assessing Officer that the assessee was dealing in share business.
(c) Motive of the assessee: The Assessing Officer rejected the contention of the assessee that there is no profit motive as most of the shares were sold at a profit.
(d) Surrounding facts and circumstances: The assessee is earning salary from a private company, which is a broker and member of Bombay Stock Exchange. Thus, there is obvious nexus between her employment, her investment pattern and family background.
(e) Nature of deployment of funds: The Assessing Officer was fair enough to state that the assessee has utilised her own funds for investing in shares but the fact remains that she had an active facility of loan against shares of Wipro, which have been pledged with HDFC Bank.
(f) Treatment in the previous years: The Assessing Officer held that the principle of res judicata does not operate in this matter and a particular accounting practice adopted in the preceding year cannot preclude the authorities from holding that transactions this year amounted to dealings.
The Assessing Officer accordingly treated the short term capital gain shown by the assessee at Rs.28,89,668 as business income.
3. Before CIT(A) it was submitted that the majority of the tests relied on by the Assessing Officer have not been satisfied for the following reasons:
(i) The assessee did not carry out the transactions with any profit motive and as is evident it had also incurred a loss of Rs.26,000 in respect of scrips held between 4-7 days.
(ii) The frequency of transactions was three per month on an average.
(iii) The holding period of shares in a few cases was within 15 days whereas in other cases, it was fairly long.
(iv) All the transactions were made on her own capital, which as on 31.03.2005 was Rs.6,98,00,000.
(v) That the assessee’s investments have regularly been shown in the Balance Sheet under the investment column and, therefore, valued at cost.
4. However, the CIT(A) did not agree fully by the submissions made before him. He referred to CBDT circular No. 1827 of 1989 which was followed by draft instruction of 2006 enlisting 18 parameters for determining the true nature of income which were never brought into effect. Thereafter, he referred to circular No. 4 of 2007 and noted that as per the circular, the assessee can have two portfolios – he may have income from both the heads i.e., capital gains and business income. He noted that the CBDT circular clearly lays down that it is permissible that an assessee can divide his shares partly as investment and partly as stock-in-trade by giving suitable treatment in the accounts. Merely because an assessee was dealer for some shares and securities, he does not cease to be an investor for ever. Based on the circular of CBDT and various judicial decisions, he noted that some of the parameters or guidelines favor the assessee whereas certain other parameters and guidelines go against the assessee.
4.1 The parameters or guidelines which according to the CIT(A) favor the assessee are as under:
(a) In its Balance Sheet regularly shows some amounts of shares under the investments column and valued at cost. Thus for the year ending 31.03.2005, the assessee’s investment was shown at Rs.4,65,71,697 while at the beginning of the year it was Rs.5,09,03,846.
(b) It has a capital base of Rs. 6.98 crores and so majority of investments in shares are out of its surplus funds.
(c) It has also dividend income at Rs. 8,99,438.
4.2 Similarly, the parameters or principles which are against the assessee according to the CIT(A) are as under:
(i) The average holding period of various scrips is very low and 70% of the transactions have a holding period of one month or less.
(ii) The assessee has throughout earned profits in share transactions except for a miniscule loss of Rs. 26,000 as highlighted before.
(iii) The assessee is working in a company, which is a member of the Bombay Stock Exchange and her husband is the Managing Director.
5. He noted that both the assessee and the Assessing Officer have taken extreme positions. While the assessee is not prepared to suo moto offer any income as business income despite the frequency, the Assessing Officer has ignored para 10 of the CBDT circular and treated all the share transactions as business. According to him since the fact that the holding period of its investments are very short, it implies that the assessee was regularly engaged in the business of booking profits and in a hurry to sell its holdings as and when the opportunity arose. This conduct cannot be lost sight of. As such, it will not be fair to treat all the gains arising from such short period of holding as capital gains. From the details filed by the assessee, the CIT (A) noted that for the transactions which had a period of holding of less than 31 days (one month) should be treated as business income and the balance be allowed as that from investments. According to him, a transaction to qualify as investment, should have at least a one month holding period. He noted that the assessee has both the portfolios but has treated all its transactions as an investment one whereas the Assessing Officer went to the other extreme and treated all the transactions as business. Therefore, according to him a middle path will have to be adopted. Giving weightage to the period of holding and after working out the gain and loss he worked out the business income at Rs.7,95,900 which related to 70% of the transactions, which was held for less than one month. He directed the balance to be treated as short term capital gains.
6. Aggrieved with such order of the CIT(A) giving part relief, both the assessee and the Revenue are in appeal before us with the following grounds of appeal:
Assessee’s ground of appeal:
1. On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in holding that the income arising from the sale of shares wherein the holding period is less than 31 days be treated as business income as opposed to short term capital gains as claimed by your appellant. Your appellant respectfully submits that the same be considered income from short term capital gains.
Revenue’s grounds of appeal:
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that for the transaction which has a period of holding more than (31 days) one month should be treated as from investments as short term capital gains.
2. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the AO be restored.
7. The learned counsel for the assessee while arguing for both the appeals submitted that all purchases and sales by the assessee are delivery based and that at no point of time the purchase and sale of shares had been effected or squared off on the same day. He submitted that all purchases are shown and treated as investment in the books and not as stock-in-trade. He submitted that the investments made by the assessee are not out of borrowed funds and the entire investment was out of the own funds of the assessee. Referring to the decision of Hyderabad Bench of the Tribunal in the case of Shah-La Investment & Financial Consultants Pvt. Ltd. reported in 2 SOT 371, he submitted that the voluminous transactions is not the determining factor for deciding the income as `business income’ or `capital gain’. He submitted that frequency, quantum or magnitude have no bearing to the issue of determination of short term capital gain. Referring to the decision of the Tribunal in the case of Gopal Purohit vs. JCIT reported in 20 DTR 99 which has since been upheld by the jurisdictional High Court, he submitted that when shares treated as investment by the assessee has been accepted by the Department, following the rule of consistency, the Revenue cannot treat the assessee as a trader in subsequent years. He submitted that the sale or purchase of shares as capital asset is not doubted nor the payments thereto are in doubt. Referring to the copy of the assessment order for the A.Y. 2004-05, copy of which is placed at Paper Book page 28 and 29, he submitted that the Revenue in the past has accepted the capital gain declared by the assessee. Referring to the copies of the Balance Sheet for the year ending 31st March, 2003 and the Balance Sheet as on 31st March, 2005, he submitted that all sales and purchases are reflected as investment in the Balance Sheet of the assessee. He submitted that the assessee has received an amount of Rs.8,94,438 as dividend and such earning of dividend is incidental accretion. He submitted that a trader would not normally block his/her money for substantial period whereas an investor can do so. If an assessee intermittently sells as per the mood of the market and to safeguard his investment, he could not be labelled as a trader. He submitted that it is not the case where the assessee has earned the difference in prices without taking delivery and nor is the case that all dealings are not delivery based. Referring to the decision of the Hon’ble Madras High Court in the case of CIT vs. NSS Investments Pvt. Ltd., reported in 277 ITR 149, he submitted that when the assessee is holding shares for the purpose of earning dividend and not as stock-in-trade, the profit on sale of such shares has to be treated as capital gain and not as business income. He also relied on the following decisions and submitted that in the instant case, the entire profits on sale of shares has to be treated as short term capital gain as against partly business income and partly short term capital gain held by the CIT(A).
i) Jt. CIT vs. Dinesh Kumar Gupta, 2 SOT (14) Delhi
ii) Janak S. Rangwala vs. ACIT, 11 SOT 627 (Mum)
iii) Bombay Gymkhana vs. JCIT, 115 TTJ 639 (Mum)
iv) N.A. Modi vs. S.A.L. Narayan Row, 61 ITR 428
8. The learned DR, on the other hand, while supporting the order of the Assessing Officer submitted that considering the frequency and volume of transactions in purchase and sale of shares by the assessee it can be fairly concluded that the assessee was engaged in the business of trading in shares. As regards the contention of the assessee that the Revenue has accepted the profit from sale and purchase of shares as capital gain in the preceding year, he submitted that the principle of res judicata does not apply to Income-tax proceedings since each assessment year is separate and independent. He accordingly submitted that the order of the CIT(A) be reversed and the order of the Assessing Officer be restored.
9. We have considered the rival submissions made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the assessee during the impugned assessment year has shown income from short term capital gain at Rs.28,29,668 on account of sale of shares of 35 companies for a total consideration of Rs.2,99,86,303 as against their purchase cost at Rs.2,70,93,635. According to the Assessing Officer the nature of activity, the frequency and magnitude suggest that the profit declared by the assessee on account of transactions in purchase and sale of shares is business income. According to the CIT(A), the sale of shares where the period of holding is less than one month should be treated as business income and where the period of holding is more than 31 days, it should be treated as capital gain. Therefore, the only dispute in the impugned appeal is as to whether the income from sale of such shares has to be treated as `short term capital gain’ as declared by the assessee or as `business income’ as computed by the Assessing Officer or partly as `short term capital gain’ and partly as `business income’ as held by the CIT(A).
10. We find the Assessing Officer in the instant case considered the income from purchase and sale of shares as business income by relying on the CBDT circular No. 4 of 2007 dated 15th June, 2007. We find the CBDT vide Circular No. 4/2007 dt. 15.6.2007 has accepted the principles laid down by the Hon’ble Supreme Court in the cases of CIT (Central), Calcutta v/s. Associated Industrial Development Co. (P.) Ltd., 82 ITR 586 as well as in CIT v/s. H Holsck Larzen, 160 ITR 67 (SC). In the above referred circular, the Board has issued certain guidelines to the A.O. The Board has accepted that the assessee can have two portfolios simultaneously- (1) an Investment Portfolio comprising of securities which are to be treated as a capital asset and (2) Trading portfolio comprising of stock and trade which are to be treated as trading asset.
11. We find the operative part of the Circular No. 4/2007 dt. 15.6.2007 reads as under :
“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 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.
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. We find, the legal principles as laid down by courts on account of treatment of an income as `business income’ or `capital gain’ can be summarised as under:
(a) It is possible for an assessee to be both an investor as well as dealer in shares.
(b) Whether a transaction of sale and purchase of shares is a trading or investment transaction is a mixed question of law and fact.
(c) Whether a particular holding is by way of investment or of stock in trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares held as investments and those held as stock in trade.
(d) The treatment in the books of an assessee is not conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive, then it becomes business profit and not capital gain.
(e) Purchase with intention to resell can constitute capital gain or business profit depending on circumstances like quantity of purchase and nature of activity.
(f) No single fact has any decisive significance and the question must be answered depending upon selective effect of all relevant materials brought on record.
13. In the instant case, we find the assessee during the year has transacted in 35 scrips. We find the Assessing Officer has given a finding that the assessee has made investment in shares out of her own funds. The submission of the assessee before the Assessing Officer that she does not have the infrastructure to carry on share trading activity has not been doubted by the Assessing Officer.
14. From the various details filed in Paper Book, we find the Assessing Officer in the A.Y. 2004-05 has accepted the short term capital gain of Rs.11,86,461 and long term capital gain of Rs.72,17,635 declared by the assessee in the order passed u/s. 143(3) of the Act. The submission of the learned counsel for the assessee that all investments are strictly delivery based and the assessee has all along been showing the shares as investment and not as stock-in-trade, has not been controverted by the learned DR. Further the submission of the assessee before the lower authorities that no borrowed funds were used for purchase of shares and that the investments are out of own surplus funds has not been controverted by the Revenue.
15. We find the assessee is employed in Twin Earth Securities Pvt. Ltd. which is a stock broking company and member of the Bombay Stock Exchange Ltd. Further the husband of the assessee is also a director of the said company. Therefore, keeping all the above in mind it requires very strong evidence to prove that the shares sold were held as investment not merely in the books of account or in the Balance Sheet but also in reality and truth.
16. From the various details filed by the assessee, we find the assessee has made 37 transactions in 35 scrips and the period of holding is as under:
No. of trans-actions
Period of holding (days)
% Total trans-actions
Purchase cost (Rs.)
Sale price (Rs.)
1 to 3
4 to 7
8 to 10
11 to 15
16 to 30
31 to 60
61 to 90
91 to 200
17. From the above chart it is seen that the shares are held for a few day only and in very few cases for a few months but in no case it is exceeding 200 days. Purchase of shares during the year and selling them frequently in short period, in our opinion, do indicate that the assessee has purchased the shares with a motive to earn profit in a short period. Therefore, the facts of the instant case do not persuade us to hold that the shares were held as investment since these are not held for such a long period so as to treat the same as investment. The frequency and volume of the transactions in the instant case give an impression that the assessee did not intend to acquire the shares with business motive. In the case of an investment a person usually watches the market over a longer period of time before selling of the shares. The earning of dividend and the appreciation of the shares is the primary consideration. It is only a trader who would look for short term gains from purchase and sale of shares. Therefore, the treatment given by the assessee to the said transactions in the books of account, in our opinion, is not the only determinative factor about the nature of the transactions. The submission of the learned counsel for the assessee that the shares were disclosed as investment in the Balance Sheet, in our opinion, is certainly a factor to be reckoned with but when there are other factors or circumstances which throw some doubt on the motive of the assessee in acquiring the shares, as in the instant case, the entries in the books of account or Balance Sheet cannot override them and be taken as decisive of the assessee’s intention. The submission of the learned counsel for the assessee that in the preceding year the Assessing Officer has accepted the short term and long term capital gain on sale of shares and, therefore, the same should be followed this year is also without much force since principle of res judicata does not apply to income-tax proceedings and every assessment is independent. In this view of the matter, we are of the considered opinion that the activity of frequent buying and selling of shares over a short span of period during the impugned year has to be treated as business being adventure in the nature of trade and the income has to be treated as business income and not as capital gain as claimed by the learned counsel for the assessee. We, therefore, do not find any merit in the findings given by the CIT(A) that the shares which were held for more than 30 days has to treated as long term capital gain and the shares which were held for less than 30 days has to be treated as business income. The entire profit on sale of shares in the instant case, in our opinion, has to be considered as `business income’ being in the nature of adventure in the nature of trade.
18. As regards the decision of the Tribunal in the case of Gopal Purohit (supra) which has since been upheld by the jurisdictional High Court and as relied on by the learned counsel for the assessee, we find the same is not applicable to the facts of the present case. In that case the Tribunal has given a finding that the assessee was consistently investing in shares and the ratio of sales to investment was very less. The assessee was investing for a long period and offering the long term capital gain which is more than short term capital gain and the shareholdings varied from one year to five years. However, no such facts exist in the present case. In fact there are no long term capital gain in the case of the assessee and the holding of shares vary between one day to 200 days. Therefore, the decision in the case of Gopal Purohit (supra) is not applicable to the facts of the present case.
19. As regards the decision of the Madras High Court in the case of NSS Investments Pvt. Ltd. (supra) relied on by the learned counsel for the assessee, a finding has been given in that case that the shares were held for earning dividend only. Therefore, it was held that the profit on sale of shares in the facts and circumstances of that case was to be treated as capital gain. However, in the instant case the shares were purchased and sold within a short period of a few days. Therefore, the said decision, in our opinion, is not applicable to the facts of the present case.
20. As regards, the various other decisions relied on by the learned counsel for the assessee we find the same are also not applicable to the facts of the present case. In our opinion, each case has to be decided on the basis of its own set of facts. In this view of the matter, we hold that the profit on account of purchase and sale of shares by the assessee in the instant case has to be treated as `income from business’ as held by the Assessing Officer. We, therefore, set aside the order of the CIT(A) and restore the order of the Assessing Officer.
21. In the result, the appeal of the Revenue is allowed and the appeal of the assessee dismissed.
Order pronounced on 16th July, 2010.