Case Law Details
RELEVANT PARAGRAPHS:
8.1 Thus, the nature of activities, modus operandi of the assessee, manner of keeping records and presentation of shares as investment at the year end is same in all the years, hence; apparently, there appears no reason as to why the claims made by the assessee should not be accepted. However, the Revenue Authorities have taken a different view in the year under consideration by holding that principle of res-judicata is not applicable to the assessment proceedings. There cannot be, in our view, any dispute on this aspect but there is also another judicial thought, that there should be uniformity in treatment and consistency under the same facts and circumstances and we have already found that facts and circumstances are identical, even though a different stand has been taken by the Revenue Authorities. This action of the Revenue Authorities has led us to ask ourselves that in this year why it has been done so. In the process to find the answer, we noted that there was a change in the scheme of taxation relating to short term capital gains and long term capital gains. Through the Finance Act, 2004, the legislature imposed securities transaction tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the legislature exempted long term capital gain under section 10(28) of the Act from the levy of tax and on short term capital gain, a concessional rate of tax i.e. 10% has been levied subject to the condition that transactions resulting into this type of gain must have suffered securities transaction tax. This is the first year of such change and, having regard to the quantum of gains, this scheme of taxation only, in our view, has prompted the Revenue Authorities to take a different view on the same types of transactions entered into by the assessee in earlier years. At this stage, we consider if fit to state that there is no dispute before us that assessee has claimed exemption under section 10(38) and/or has paid tax under section 111A at concessional rate on the transactions, where securities transaction tax has not been. It is also noted that the assessee has paid tax on short term capital gains at normal rates on share transactions executed in the period prior to imposition of securities transactions tax. In our view, the legislative change of this nature, whereby no change has been made in respect of nature and modus operandi of such share transactions, resulting into any advantage cannot be taken away by the Revenue Authorities in this manner and in these circumstances, we are of the view that, principle of consistency, though it is an exception to the principle of res-judicata must be applied here. It is further so because the payment of securities transaction tax is mandatory i.e., whether an assessee earns the profit or not or suffers a loss and by imposition of such tax, the legislature has not given any benefit to a class of transactions as a whole though it may result into an apparent benefit to individual(s) entering into those transactions. Thus, in our view, in the facts and circumstances of the case, on the basis of principle of consistency alone, the action of the Revenue Authorities is liable to be quashed. We order accordingly and direct the Assessing Officer to accept the claims of assessee in regard to short term capital gain and long term capital gain.
8.2 Having stated so, on merits also, we find that in the case of Sarnath Infrastructure P. Ltd. v. ACIT (supra), the Tribunal has considered almost all the important judicial decisions laying down legal principles to determine the nature of transaction i.e. trading the transaction or investment, which have also been cited before us. The Tribunal has also considered the CBDT circular No. 4 of 2007. The Tribunal has summarized these principles in para 13 of the said order. For the sake of ready reference, we re-produce the same as under :-
“After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction( s) in question are in the nature of trade or are merely for investment purposes:
(1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset.
(2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.
(3) What is the frequency of such purchases and disposal in that particular item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Habitual dealing in that particular item is indicative of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment.)
(4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and later, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade.
(5) How the value of the items has been taken in the balance sheet? If the items 1 question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade.
(6) How the company (assessee) is authorized in memorandum of association/ articles of assocation? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice versa.
Thereafter, the Tribunal analyzed the facts of that case in the light of above principles and came to the conclusion that surplus earned by the assessee was chargeable to capital gains. The relevant findings in para 14 and 15 are as under:-
“When we examine the facts of the present case, we find tha the assessee is dealing in shares both as a trader as well as investor. It has kept separate accounts for both types of dealings. Valuation of holdings has been done at cost (for investment portfolio). At least there is no allegation or material to come to the conclusion that valuation of investment portfolio has been done on cost or net realizable value whichever is low. The shares which are sold out of investment portfolio, this year, were purchased two to three years ago showing that assessee had intention, while purchasing them, to hold them. They were reflected in the balance sheet as investment. The assessee has enjoyed dividend income and declared the same in return of income. The frequency of such purchase or sale in this portfolio is not large enough to doubt that this portfolio is only a device to pay lesser taxes by parking some stock-in-trade in investment portfolio. We notice that in trading portfolio the assessee had purchased during the year shares worth Rs. 21,38,353 and same shares were sold for Rs. 23,89,805. There was neither opening stock nor closing stock. In investment portfolio, opening stock of shares was Rs. 19,22,203 and closing stock was Rs. 46,23,274 whereas sales out of investment portfolio were Rs. 31,80,423. It shows that turnover to stock ratio in investment portfolio is very low as compared to that in trading portfolio.
Further, there is no material to show that these shares in the investment portfolio were also traded in the same and like manner as those which were in stock-in-trade portfolio. The board of directors has passed resolutions for making investment whereas memorandum of association has only authorized to carry out trade in shares. It clearly shows intention of the assessee to maintain a separate investment portfolio. All the sales out of this portfolio are identifiable to purchases made in this portfolio. In our considered view the assessee has discharged its primary onus by showing that it is maintaining separate account for two portfolios and there is no intermingling. The onus now shifted on the Revenue to show that apparent is not real. The onus now shifted on the Revenue to show that apparent is not real. There is no material brought in by the Revenue to show that separate accounts of two portfolios are only a smoke screen and there is no real distinction between two types of holdings. This could have been done by showing that there is intermingling of shares and transactions and the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present (as culled out above on the basis of authorities described), we hold that the surplus is chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolio. As result, this ground of the assessee is allowed.”
8.3 When we compare the facts of this case with that case, we find that facts of both are almost identical. In the present case, the assessee is also maintaining separate records for both types of transactions. Further, in the present case, it is important to notice that the assessee has entered into two different types of transactions where both activities are entirely different in nature i.e. one activity is of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery), which puts assessee’s case on a more strong footing. Hence, in our view, the ratio of this decision is squarely applies to the facts of the present case. Accordingly, we hold that the delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short term capital gain or long term capital gain depending upon the period of holding.
8.5 The Ld. Counsel for the assessee has also contended that investment could be an organized activity also and we find some substance in this contention because now the stakes are high and nobody wants to loose money as there are great chances of capital loss in respect of shares as compared to fixed interest earning securities where the principal money remain secured and also everyone wants to maximize wealth and minimize risk, hence, a person investing in shares in bound to study the news papers, business magazines, watch the business channels and use websites and other tools to keep a track of the developments which are happening on day- to-day basis and which may happen in the near future and for this, he may have assistance of the financial planner or investment consultant or may by his own expertise and capabilities do it on his own, hence, in our view, employment of such infrastructure cannot turn an investment activity into a business activity. We may also add that assessee has also raised various other contentions, which, in our opinion, need not be adjudicated at this stage in view of our decision for the above reasons, hence, we refrain ourselves from deliberating on those contentions.
