Shares cannot be treated as stock instead of investment for mere non-receipt of dividend

The respondent-assessee had submitted that their total turnover was Rs.4697.23 crores, as against investment in shares of Rs.2.95 crores. In the previous assessment years they were maintaining dual portfolio of investment (capital asset) and stock-in-trade (trading asset). The gains from investment were shown as “short-term capital gains”, whereas the profits earned from sale of shares were shown and treated as “business income” in the earlier years.

The Tribunal, in view of the reasons given in paragraph 6 of their order dated 13^th May, 2011, accepted the submission of the respondent-assessee. We deem it appropriate to reproduce the said paragraph:-

“6. We have heard both the parties and gone through the material available on record. The assessee had filed minutes of the meeting of Board of Directors of the CNB Fi nwiz Ltd. held on 1 2^th October, 2004 and 1 9^th October, 2004. In meeting dated 12^th October, 2004 it was resolved that an application for purchase of 20,25,000 shares at the rate of Rs.62/- in the Initial Public Offer of equity shares of NTPC should be made for the purpose of investment. Shri Chand Rattan Bagri, the Director of the company was authorized for applying for shares of NTPC by opening depository account in the name of IL & FS services. In Board meeting dated 19^th October, 2004 it was resolved that equity shares of State Bank of India may be purchased from    secondary market for a sum not exceeding Rs.1,50,00,000/- for the purpose of investment. Again as per minutes of the meeting held on 28^th January, 2005 it was resolved to purchase 25,00,000 shares of Dena Bank for the purpose of investment in the Initial Public Offer. The assessee had filed photo-copy of investment register for the relevant period. On perusal of register of investment it is seen that the assessee has acquired shares of NTPC as per Board resolution dated 12^th October, 2004 and shares of State Bank of India on different dates from secondary market. The shares of Dena Bank has been purchases by making application in public offer as per Board^‟s resolution. The acquisition of these shares in the investment register has been shown out of surplus funds. These shares were credited in Demat account and have been sold during the year except 25,000 shares of NTPC. Therefore, from the Board resolutions and entries in the books of accounts it is proved that these shares were held as investments and not as stock-in-trade. The assessee had also received dividend from the shares which were held as stock-in-trade. Merely because the dividend has not been received from shares held as investments, the nature of such shares cannot be treated as stock-in-trade. The assessee has maintained investment portfolio as well as trading portfolio. The shares in the investment portfolio have been held in Demat account. Therefore, profit on sale of shares will be assessable under the head ^„short term capital gain^‟ and not as business income. The assessee^‟s case is squarely covered by the decision of Hon^‟ble Bombay High Court in the case of Gopal Purohit Vs. JCIT (supra). In view of the above discussion, it is held that the profits earned on sale of shares held as investment will be assessable under the head ^„short term capital gains^‟ and not as ^„business income^‟. We, therefore, decide this issue in favour of the assessee.”

Respondent­ assessee, though a member of Bombay Stock Exchange and National Stock Exchange, had maintained two portfolios. One relating to investments and other relating to stock-in-trade. Profits and losses from investments were shown as “capital gains” either long-term or short-term and profits and losses from “stock-in-trade” were shown as “business income”.  This position was also accepted in earlier assessment years i .e. 2002-03 onwards. The respondent-assessee had turnover of more than Rs.4697.23 crores, whereas investment in shares in comparison was a small amount of Rs.2.95 crores. The assessee had declared “business income” of Rs.63.77 crores in respect of transactions as a member of the stock exchanges and as a result of carrying on trade in shares. The shares held as investment were kept in a separate portfolio. The said shares related to only three companies. Shares of Dena Bank and NTPC were purchased in the initial public offer as has been recorded in paragraph 6 above. This was the stand of the respondent-assessee before the lower authorities. Shares of State Bank of India were also purchased and kept in the investment portfolio account and not treated as stock in trade. These shares were sold after a gap of 4 months or more.

 In view of the facts stated above, we do not think that the order passed by the Tribunal requires any interference. The question of law is accordingly answered in favour of the respondent-assessee and against the appellant-Revenue. The appeal is dismissed. No costs.

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