Income earned by assessee from purchase and sales of shares through PMS operation is to be assessed as “capital gains”.




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Income earned by assessee from purchase and sales of shares through PMS operation is to be assessed as “capital gains”.

 

 

 

Issue as to whether shares transactions in particular case should be treated as investment activity or trading activity had been highly debatable issue. Here is an interesting case on the issue before Mumbai ITAT wherein it has been concluded that Income earned by assessee from purchase and sales of shares through PMS operation is to be assessed as “capital gains”.

Short Overview of the case of Nalin Pravin Shah Vs. Addl CIT:

Capital gain OR Business income?

Assessee filed return showing interalia income under head “Capital Gain” on account of shares transaction of Rs.2,98,36,506/- as LTCG and Rs.36,08,276/- as STCG?

AO considered said dealings of assessee in shares in nature of business and considered profit and gains arising there from under head “Profits from business” instead of treating same as “capital gains”?

Thus, AO concluded that entire gamut of transactions by assessee in shares and mutual funds were business transactions and were not his investments.

CIT(A) confirmed action of AO.

Held, assessee in earlier A.Ys. had also carried out transactions of purchase and sales of shares directly as well as through PMS.

Department accepted transactions made by assessee of his own for purchase and sale of shares as investment i.e. for A.Ys. 2003-04, 2004-05, 2005-06 and 2006-07 in assessment made u/s. 143(3).

However, in A.Y. under consideration AO had taken contrary view to earlier A.Ys. stating that assessee was carrying on of his own purchase and sale of shares activities in systematic and organized way which partake character of business.

AO as well as CIT(A) had mentioned CBDT circular and cases but had not discussed as to how those cases were relevant to facts of present case.

Apex Court held in case of Holck Larsen that whether transactions of sale and purchase of shares were trading transactions or were in nature of investment is mixed question of law and facts and therefore, each case is required to be examined to ascertain true nature on basis of facts.

In present case assessee had not borrowed any funds to undertake activities of purchase and sale of shares.

Assessee had used his own funds in said transactions of purchase and sale of shares.

In respect of LTCG claimed by assessee, maximum amount of LTCG, was on account of sale of shares of Financial Technologies and Henkel Spic which were acquired in 2003.

Finding of CIT(A) had no merits.

LTCG had accrued to assessee, where period of holding was more than 24 months.

Therefore, order of CIT(A) to treat said LTCG accrued to assessee as business income was not supported by facts particularly when there was no purchase of shares by assessee in A.Y. under consideration.

 Said shares were held by assessee for period of more than 24 months and had already been considered in preceding A.Y. as investment in assessment completed u/s 143(3)?Hence, order of CIT(A) to consider gain of Rs.2,98,36,506/- as business income was not based on facts.

Therefore, impugned order reversed and directed same to be considered as LTCG.

Conclusion:

  1. Where, in preceding A.Ys., similar kind of transactions have been considered by AO as investment activity of assessee and profit had been considered as STCG same applies to A.Y. under consideration.
  2. Shares held by assessee for period of more than 24 months and had already been considered in preceding A.Y. as investment in assessment completed u/s 143(3) is to be considered as LTCG.
  3. Income earned by assessee from purchase and sales of shares through PMS operation is to be assessed as “capital gains”.

The complete order is as under:

 

NALIN PRAVIN SHAH vs. ADDITIONAL COMMISSIONER OF INCOME TAX

ITAT, BOMBAY TRIBUNAL (B)

  1. R. MITTAL JM & RAJENDRA, AM.

ITA Nos. 1575/Mum/2012 & 1594/Mum/2012

10th January, 2014

(2014) 39 CCH 0084 MumTrib

(2014) 160 TTJ (mum) 0680 : (2014) 98 DTR 0420 (Mumbai) : (2014) 66 SOT 0058 (Mumbai) ((URO))

Legislation Referred to

Section143(3)

Case pertains to

Asst. Year 2007-08

Decision in favour of:

Assessee

Case referred to

Smt.Harsha N Mehta vs. DCIT (2011) 43 SOT 332 (Mum)

Sadhana Nabera (2010) 41 DTR 393

Immortal Financial Services (P) Ltd vs. DCIT (2011) 44 SOT 88 (Mum)

Wallfort Financial Services vs. ACIT 134 TTJ 656

Ramanarain Sons Ltd vs. CIT (41 ITR 534) (SC)

Dwarkadas Kesardeo Morarka. Vs. CIT (1962) 44 ITR 529 (SC)

CIT vs. Associated Industrial Development Co. (P.) Ltd. (1971) 82 ITR 586 (SC)

Counsel appeared:

S.C. Tiwari & Natasha Mangatfor the Appellant.: Ganesh Bare (DR)for the Respondent

ORDER

B.R.MITTAL, JM. :

  1. These appeals are filed by two above named assessees against separate orders of ld. CIT(A), both dated 31.01.2012 relating to assessment year 2007-08. Since facts and issues involved in these appeals are common, we have heard these appeals together and are being decided by this consolidated order for the sake of convenience.

ITA No. 1575/M/2012

  1. Grounds of appeal taken by the assessee in this appeal are as under :

” 1. Learned Commissioner of Income Tax (Appeals)} has erred in confirming the action of the Assessing Officer (AO) in assessing short term capital gains of Rs.83,14,515/- & long term capital gain of Rs.70,39,652/- earned by the appellant on sale of shares and securities through Portfolio Management Services under the head “Income from Business or Profession”. On the facts and in circumstances of the case, the aforesaid sum ought to be assessed as “Capital Gains”.

  1. Learned CIT(A) has erred in confirming the action of the AO in assessing short term capital gains of Rs.36,08,276/- & long term capital gain of Rs.2,98,36,506/- earned by the appellant on sale of shares and securities carried out independently under the head “Income from Business or Profession”. On the facts and in the circumstances of the case, the aforesaid sum ought to be assessed as Capital Gains.
  2. While confirming the action of the AO in treating the income in respect of amount invested under the PMS Scheme as Business Income, Learned CIT(A) has erred in holding/observing that:
  3. The portfolio manager is keeping the record of the assessee in his books of accounts as stock in trade.
  4. Transaction in F&O Scheme is shown by the assessee as investment.
  5. Investment in surplus funds by PMS Manager in liquid fund results in activity of PMS being treated as “business activity”

Confirmation of the action of the AO on the basis of above observation being contrary to facts of the case ought to be deleted.

  1. While confirming the action of the AO in treating the income in respect of amount invested directly the assessee as business income, Learned CIT(A) has erred in holding/observing that:
  2. the appellant has converted shares of Financial Technologies and Henkel Spic from ‘investments’ to ‘stock in trade’

Confirmation of the action of the AO on the basis of above observation being contrary to facts of the case ought to be deleted”

ITA NO.1594/M/2012

Grounds of appeal taken by the assessee are as under :

  1. Ld.CIT(A) has erred in confirming the action of the Assessing Officer (AO) in assessing short term capital gains of Rs.72,37,836/- & long term capital gain of Rs.66,22,923/- earned by the appellant on sale of shares and securities through Portfolio Management Services(PMS Scheme) under the head “Income from Business or Profession”. On the facts and in circumstances of the case, the aforesaid sum ought to be assessed as “Capital Gains”.
  2. Learned CIT(A) has erred in confirming the action of the AO in assessing short term capital gains of Rs.54,22,834/- & long term capital gain of Rs.1,04,97,199/- earned by the appellant on sale of shares and securities under the head “Income from Business or profession”. On the facts and in the circumstances of the case, the aforesaid sum ought to be assessed as “Capital Gains”.
  3. While confirming the action of the AO in treating the income in respect of amount invested under the PMS Scheme as Business Income, Learned CIT(A) has erred in holding/observing that:
  4. The portfolio manager is keeping the records of the assessee in his books of accounts as stock in trade.
  5. Transaction in F&O Scheme is shown by the assessee as investment.
  6. Investment in surplus funds by PMS Manager in liquid fund results in activity of PMS being treated as “business activity”

Confirmation of the action of the AO on the basis of above observation being contrary to facts of the case ought to be deleted.

  1. While confirming the action of the AO in treating the income in respect of amount invested directly the assessee as business income, Learned CIT(A) has erred in holding/observing that:
  2. the appellant has converted shares of Financial Technologies and Henkel Spic from ‘investments’ to ‘stock in trade’

Confirmation of the action of the AO on the basis of above observation being contrary to facts of the case ought to be deleted”

  1. At the time of hearing, ld. Representatives of the parties submitted that the facts and issues involved in both these appeals of above named assessees are common; save and except the amount involved; and accordingly the detailed submissions were made by representatives of both the parties in ITA No. 1575/M/2012 in the case of Shri Nalin Pravin Shah. It was submitted that whatever view is taken in this appeal will ipso fact apply to the case of other assessee viz Shri Manan Nalin Shah in ITA No.1594/Mum/2012.
  2. In view of above, we discuss the facts in detail relating to ITA No.1575/Mum/2012.
  3. The assessee is a partner in firm of Indenting Agent and Director in pharmaceutical companies and is also deriving income from dealing in shares and mutual funds. The assessee filed return declaring total income of Rs.1,50,04,404/-. The assessee has shown business income, income from other sources, long term capital gains (LTCG) and short term capital gains (STCG) on shares and securities both through Portfolio Management Services (hereinafter referred to as PMS) and through transactions done himself. The assessee declared the following incomes under the head capital gains :

“A” (i) LTCG }                                                             Rs.2,98,36,506/-

} on Direct sale

(ii) STCG }                                                                    Rs.36,08,276/-

“B” Through PMS

(i) LTCG                                                             Rs. 70,39,652/-

(ii) STCG                                                           Rs. 83,14,515/-

In addition to above, the assessee also declared income from speculation on shares at Rs.5,65,178/- as his business income.

  1. AO completed the assessment on 29.12.2009 u/s 143(3) of the Income Tax Act, 1961 (the Act) and assessed the entire income declared by the assessee under the head “capital gains” as income under the head “profits and gains of business or profession” and thus, assessed the income of the assessee at Rs.5,18,80,560/- (rounded off). Being aggrieved, the assessee filed appeal before the First Appellate Authority. The First Appellate Authority by the impugned order dated 31.1.2012 has confirmed the action of the AO. Hence the assessee is in further appeal before the Tribunal.
  2. In respect of Ground Nos.1 and 3 of the appeal, the issue is as to whether the income earned by assessee from purchase and sales of shares through PMS operation is to be assessed as business income or as “capital gains”.

7.1 At the time of hearing, the ld. AR submitted that the same very issue has been considered by the Tribunal in assessees’ case in ITA No.5635/Mum/2009 and ITA No. 5642/Mum/2009 for the assessment years 2005-06 and 2006-07, vide order dated 23.1.2013 and the Tribunal by relying on its own decision in the case of Manan Nalin Shah V/s DCIT in ITA No.6166/Mum/2008 for assessment year 2003-04, ITA No.2125/Mum/2008 for assessment year 2004-05 and ITA No.4126/Mum/2008 for assessment year 2005-06 vide common order dated 6.7.2012 allowed the claim of the assessee stating that the very nature of PMS is such that investments made by assessee cannot be said to be scheme of trading of shares and stocks and therefore, the profit is to be assessed under the head “capital gains”. Ld. AR furnished a copy of the said orders of the Tribunal dated 6.7.2012 (supra) and order dated 23.1.2013 to substantiate his submissions. Ld. DR, however, supported the orders of authorities below. He submitted that the assessee had taken derivatives/future and options transactions. Therefore, the assessee is not an investor and is a trader in shares by doing the trading in shares directly as well as through PMS. He submitted that the assessee has also shown profit from speculation activity, therefore, activity of the assessee are considered as a whole. Hence, the assessee is a trader and not an investor. He submitted that the order of the ld. CIT(A) be confirmed.

  1. We have carefully considered the submissions of the ld. Representatives of the parties and the orders of authorities below as well as earlier orders of the Tribunal dated 6.7.2012 (supra) and the order dated 23.1.2013 (supra). We consider it prudent to reproduce para 5 of the order of Tribunal dated 23.1.2013 which reads as under :

“5. We have perused the records and considered the matter carefully. The identical dispute raised in these appeals is regarding the nature of income earned by the assessees from purchase and sale of shares through PMS . All these assessees have been making investments in shares and units of mutual funds for the last several years which had been declared as investment in the books and income from which was being declared as capital gain and was also being accepted by the department. From assessment year 2003-04 all these assessees started making investment through PMS by placing certain funds with the PMS Managers. In assessment year 2003-04, the AO had assessed the income as business income which had been upheld by the CIT(A). In further appeal, the Tribunal in case of Manan Nalin Shah in ITA No.6166/Mum/2008 for assessment year 2003-04 noted on examination of PMS that PMS Manager was authorized to purchase, acquire, obtain, take, hold, sell, transfer, substitute or change all or any of the investments made on behalf of the assessee. PMS Manager was also authorized to hold all or any of such investment in his name or at his discretion on behalf of the assessee and make every effort to maximize the value of investment. The PMS Manager was required to provide the assessee with quarterly statement ofinvestment. The Tribunal noted that the PMSManager had sole and absolute discretion to make investment for and on behalf of the assessee and the assessee had no role to play. The assessee had not taken any borrowed funds for placing money with the PMS Manager. It was also noted by the Tribunal that the average holding period of the shares was more than two months. The Tribunal accordingly concluded that the income earned from PMS has to be assessed as capital gain. The decision of the Tribunal in case of Manan Nalin Shah in assessment year 2003-04 was followed by the Tribunal in assessment years 2004-05 & 2005-06 in ITA Nos.2125/M/2008 and 4126/Mum/2008.The said decision was again followed by the Tribunal in case of Nalin P. Shah in assessment year 2004-05 in ITA No.2122/Mum/2008. Similarly the same issue was decided by the Tribunal in case of Nalin P. Shah (HUF) in assessment year 2004-05 and 2005-06 in ITA Nos.2126/Mum/2008 and 4125/Mum/2008 in which the decision in case of Manan Nalin Shah (supra), was followed. Thus, issue raised in these appeals is covered by the decision of the Tribunal in assessees own case for the earlier years. No distinguishing feature have been brought to our notice by the ld. DR in these years with respect to factual position in the earlier years decided by the Tribunal. We, therefore, agree with the ld. AR that the issue raised is covered in favour of the assessee by the decision of the Tribunal in earlier years. We, therefore, respectfully following the decision in earlier years set aside the order of CIT(A) and allow the appeals of the assessee.”

Since the Tribunal has considered the similar issue on identical facts in the case of assessee and the earlier decisions have also been decided by a Bench of the Tribunal to which both of us were parties, and in the absence of any distinguishing features brought out to our notice by ld. DR in respect of assessment year under consideration, we agree with the ld. AR that the issue is covered in favour of the assessee by the decision of the earlier orders. Respectfully following the orders of the Tribunal for the earlier assessment years (supra), we hold that STCG Rs.83,14,515/- earned by assessee and LTCG of Rs.70,39,652/- earned by assessee on sale/purchase of shares and securities through PMS is to be assessed under the head “capital gains” and not as business income of the assessee. Hence, we allow ground Nos.1 and 3 of the appeal taken by the assessee by reversing the orders of authorities below.

  1. In respect of Ground Nos.2 and 4 of the appeal the issue is as to whether STCG of Rs.36,08,276/- and LTCG of Rs.2,98,36,506/- is to be assessed under the head “capital gains” or under the head “Income from Business or Profession”.

9.1 Facts relating to Ground No.2 and 4 are that the assessee filed the return of income showing interalia the income under the head “Capital Gain” on account of shares transaction of Rs.2,98,36,506/- as LTCG and Rs.36,08,276/- as STCG. The AO considered the said dealings of the assessee in shares in the nature of business and considered the profit and gains arising there from under the head “Profits from business” instead of treating the same as “capital gains”. In this regard, the AO referred the Board Instruction No.1827 dated 31.8.1989 and stated that assessee has also shown income from speculation on shares at Rs.5,65,178/- as his business income. The AO in para 18 has stated that the assessee has frequently indulged in dealing in shares and therefore, intention of the assessee is to make profit. He has stated that assessee has utilized considerable amount of time and also has shown proper application of mind, collection of informations and utilizing the same in decision making in respect of purchase and sale of shares and securities. He has further stated that the total purchases are 289 and sales are 329 in the year. Therefore, the persons making so many frequent transactions cannot claim that he has not applied mind or do not have knowledge etc. This also shows that the assessee is having intention and capacity to incur risk to make profit. He has further stated that holding period ranges from 1 day to 3 months. AO further referred CBDT circular No.4 of 2007 dated 15.6.2007. He has stated that the said circular lay down the guidelines to distinguish between the share holding as stock-in-trade and shares held as investment. The AO has concluded that the principles and ratios laid down in the CBDT circular and also cases, which he has stated at page 14 and 15 of the assessment order, stated that the same squarely apply to the case of the assessee. Thus, AO concluded that entire gamut of the transactions by assessee in shares and mutual funds are business transactions and are not his investments. Being aggrieved, assessee filed appeal before the First Appellate Authority.

  1. The ld. CIT(A) has confirmed the action of the AO. He has stated that the assessee has disclosed profit of Rs.5,65,178/- as income from speculation from derivative transactions. It proves that the assessee was not an investor. The ld. CIT(A) has stated that maximum LTCG is shown by the assessee on account of sale of shares of Financial Tech and Henkel Spic which were acquired in 2003. He has stated that during the year the entire shares were not sold in one go but had been sold in lots during the year relevant to assessment year under consideration as well as in the next year. He has stated that the shares of these companies were capital assets in past but during the year the same got converted into stock-in-trade. He has further stated that dividend earned by assessee is of Rs.2,22,897/- which gives a yield of 0.8% per annum on the amount involved of Rs.2.25 crores. The ld. CIT(A) has stated that it is a fact that the assessee has not borrowed funds for dealing in shares, but that by itself will not change the inference that the assessee was in the business of dealing in shares and mutual funds. The ld. CIT(A) has stated that considering the fact that there were high frequency of transaction of buying and selling, purchase-sale turnover ratio and the value of the volumes transacted showed that the assessee did not intend to acquire shares to keep as investments for the purpose of earning dividend and appreciation in value of shares. The assessee was carrying on activity in a systematic manner of purchase and sale of shares and mutual fund which partake the character of business. The ld. CIT(A) has also referred the decisions of Smt.Harsha N Mehta V/s DCIT (2011) 43 SOT 332 (Mum), Sadhana Nabera (2010) 41 DTR 393, Immortal Financial Services (P) Ltd V/s DCIT (2011) 44 SOT 88 (Mum), Wallfort Financial Services V/s ACIT 134 TTJ 656 and has concluded that the AO has rightly treated LTCG as well as STCG arising from dealing in shares and mutual fund as business income of the assessee. Hence, the assessee is in further appeal before the Tribunal.
  2. The ld. AR submitted that the assessee is engaged in the business of pharmaceutical related activities and has made investment of his spare funds in shares and securities. The assessee is not a share-broker or otherwise maintaining his presence in share market. Ld. AR submitted that the AO as well as CIT(A) have laid emphasis on the facts that the assessee has disclosed income of Rs.5,65,178/- from derivatives which has been offered to tax by assessee as business income. He further referred the order of ld. CIT(A) and stated that the ld. CIT(A) was influenced and assumed that the assessee must be devoting considerable amount of time in the process of decision making regarding purchases and sale of shares and the assessee must have gone through research and holding meetings with experts and had been buying and selling shares for last several years. Therefore, it could be stated that the assessee was carrying on his activity in an organized and systematic way which partook the character of business. The ld. AR submitted that the above observations of ld. CIT(A) are wrong assumption of law. Ld. AR submitted that the assessee can be a dealer in shares as well as investor in shares. To substantiate his submissions, ld. AR relied on the decision of Ramanarain Sons Ltd v. CIT(41 ITR 534) (SC), Dwarkadas Kesardeo Morarka. V/s CIT (1962) 44 ITR 529 (SC). He further submitted that the same view is reiterated by the Hon’ble Apex Court in the case of CIT V/s Associated Industrial Development Co. (P.) Ltd. (1971) 82 ITR 586 (SC) and the said judgment has been held to be one of the two most important judgments in CBDT Circular No.4 of 2007.

“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.”

  1. Ld. AR further referred the decision of the Hon’ble Apex Court in the case of CIT V/s Holck Larsen (160 ITR 67) (SC) and submitted that accretion to capital did not become income merely because the original capital was invested in the hope and expectations that it would rise in value. Ld. AR submitted that ld. CIT(A) has only referred the cases in his order and the ratio laid down therein but has not stated as to how those cases are relevant to the case of the assessee. He submitted that the ld. CIT(A) has not considered the period of holding and merely stated volume and high frequency of sale and purchase of shares because he knew that the holding period supports the case of the assessee.
  2. Ld. AR submitted that the distinction between the trade and investment is not profit motive. What distinguishes the acquisition of stock- in- trade from the acquisition of a capital asset is whether an asset is acquired with an intention of being turned into profit or with an intention to hold it and nurse it till such time targeted profit is reached or otherwise it becomes prudent to liquidate it. He submitted that the AO quotes only para 8 of CBDT circular No.4 of 2007 and the ld. CIT(A) has based his decision on draft guidelines dated 16.5.2006 but the same were dropped in most part in the formal circular No.4 of 2007. The ld. AR submitted that the AO has relied upon the judgment which have found place in CBDT circular No.4 of 2007. The AO has enumerated the case law in abstract without matching the facts of the case with the facts of the case of the assessee. He submitted that the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Gopal Purohit (2011) 336 ITR 287 (Bom) squarely apply to the case of the assessee but the ld. CIT(A) did not consider the same and he preferred some other judgments without making any attempt to match the facts of the case of assessee with the facts of those cases. The ld. AR referred the decision of Associated Industrial Development Co. (P.) Ltd (supra) and stated that Hon’ble Supreme Court has held as under :

“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.”

He submitted that the assessee has not done any trading in shares; that the trading activity of the assessee is in derivative only; that the assessee kept separate account torecord the transactions of each category. Thus, the assessee satisfy the requirement laid down in the judgment of the Hon’ble Supreme Court in the case of Associated Industrial Development Co. (P.) Ltd (supra). He submitted that the motive to earn profit on enhanced value at a future date will not render an investment in shares into a transaction in the nature of trade. He submitted that that the allegation that there is high frequency of purchase and sale of shares is not factually correct. The ld. AR filed a written submissions and at page 25 of the said written submissions has given the analysis of LTCG and STCG as under :

Analysis of LTCG

‘Range(Months) Value of shares purchased % to total purchased Value of shares sold % to total sales Capital gain/(loss) % to total gains
12-18 2,570,229 37% 2,553,488 7% (16,741) 0%
18-24 557,456 8% 89,511 0% (467,945) -2%
More than 24 3,863,303 55% 34,184,494 93% 30,321,191 102%
Total 6,990,987 100% 36,827,493 100% 29,836,506 100%

 Analysis of STCG

‘Range(days) Value of shares purchased % to total purchased Value of shares sold % to total sales Capital gain/(loss) % to total gains
0-14 – – – 0% – 0%
15-30 635,206 – 679,639 1% 44,433 1%
31-60 4,049,155 6% 4,772,522 6% 723,367 20%
61-90 4,063,252 6% 4,247,181 6% 183,928 5%
91-180 8,366.831 12% 10,364,193 14% 1,997,362 55%
181-365 54,772,037 76% 55,431,222 73% 659,185 18%
Total 71,886,481 100% 75,494,757 100% 3,608,276 100%

The ld. AR submitted that the stock turnover ratio of the assessee was 0.92 % and to substantiate his submissions furnished following details :

PARTICULARS AMOUNT (Rs.)
Turnover on the sale of shares (both LTCG & STCG) 26,28,65,169
Opening Stock as on 01.04.2006 (A) 28,53,44,851
Closing Stock as on 31.03.2007 (B) 28,80,84,012
Average Stock (A+B)/2 28,67,14,432
Stock Turnover Ratio 0.92

Capital – Turnover Ratio

Own Capital as on 31 .03.2006 373,215,421
Own Capital as on 31.03.2007 421,424,696
Mean Capital as on 2006-07 397,320,058
Total Turnover 262,865,169
Capital — Turnover Ratio 0.66
  1. Ld. AR submitted that the assessee has been carrying out investment activities in shares for last several years. He submitted that for all the assessment years the treatment given by assessee in the books of account and return of income to declare LTCG and STCG in respect of sales and purchases made by assessee himself had been accepted by the department for assessment years 2003-04, 2004-05, 2005-06 and 2006-07 in the assessment order passed u/s 143(3) of the Act. Ld. AR submitted that the copy of assessment orders for the earlier assessment years are placed in the paper book at pages 78 to 79 for assessment year 2003-04 at pages 80 to 94 for assessment year 2004-05 at pages 95 to 104 for assessment year 2005-06 and at pages 105 to 114 for assessment year 2006-07. He submitted that the facts in the assessment year under consider are similar but the AO took contrary view ignoring the information and facts of the case of the assessee arbitrarily. He submitted that there is neither fresh material in possession of AO nor there is any change in the law or facts. Therefore it was incumbent upon the AO to respect wisdom of its predecessor who made assessments of earlier years. Ld. AR submitted that the LTCG and STCG shown by the assessee should have been accepted. On the other hand, ld. DR supported the orders of the authorities below. He submitted that the activities of the assessee are not for investment in purchase and sales and shares. That predominant motive of the assessee is to earn profit by carrying out its activity in a systematic way. Therefore, the ld. CIT(A) has rightly confirmed the action of the AO.
  2. We have carefully considered the submissions of the ld. Representatives of the parties and the orders of the authorities below. We have also gone through the written submissions filed by assessee and have perused relevant pages of the paper book. We have also considered the assessment orders of earlier assessment years, copies placed at pages 78 to 114 of the paper book (supra).
  3. The dispute is regarding the nature of income from share transactions entered into by the assessee. The issue is as to whether shares transactions in a particular case should be treated as investment activity or trading activity has been highly debatable issue. There are decisions of Tribunal on both sides. Each case depends
    on its own facts. There are various factors such frequency, volume, and entries in the books of account, nature of fund used, holding period etc which are relevant in deciding true nature of transaction and no single factor is conclusive. The Hon’ble Gujarat High Court in the case of CIT V/s Motilal Hirabhai Spg. & Wvg. Co. Ltd.. [1978] 113 ITR 173 (GUJ.) and the Hon’ble Apex Court in the case of. Raja Bahadur Visheshwara Singh. V/s CIT [1961] 41 ITR 685 (SC) have held that the treatment in the books of an assessee will not be 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 gains. The Hon’ble Apex Court in the case of CIT vs. Holck Larsen (supra) held that whether a transaction of sale and purchase of shares were trading transactions or they were in the nature of investment is a mixed question of law and facts. It is further held in the case of CIT vs. Associated Industrial Development Co. P. Ltd (supra) that it is possible that the assessee to be both an investor as well as dealer in shares. Whether a particular holding is by way of investment or form part 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 which are held as investment and those held as stock-in-trade. Therefore, the important factor is the intention of the assessee at the time of purchase, which has to be gathered from the actual conduct of the assessee while dealing with the shares subsequently and not only on the basis of entry in the books of account. In this view, we are supported by the decision of Hon’ble Supreme Court in the case of CIT vs. Madangopal Radhey Lal, 73 ITR 652(SC). Therefore, to decide the nature of transaction as to whether it is in the nature of trade or an investment, no single fact has any decisive significance and the question has to be answered depending on the collective effect of all relevant material brought on record as held by Hon’ble Apex Court in the case of Janki Ram Bahadur Ram V/s CIT, 57 ITR 21 (SC).
  4. We are also conscious of the fact that an investor makes purchases with long term goal of earning income from the investment and he is not tempted to sell the shares on every rise and fall in the market which are the attributes of a trader. There may be situations when the investor may also sell the shares after short holding in order to reshuffle portfolio when prices are falling or to encash investment in case of exceptional gain or for some other personal exigencies. Since income from investment in shares which is in the form of dividend is received annually, normally an investor is expected to hold the shares for more than a year. Therefore, each case is required to be examined carefully to ascertain the true nature of transactions.
  5. In the light of above proposition, we have considered the facts of the case of the assessee before us. We observe that the assessee in the earlier assessment years had also carried out the transactions of purchase and sales of shares directly as well as through PMS. We observe that the department accepted the transactions made by assessee of his own for purchase and sale of shares as investment i.e. for assessment years 2003-04, 2004-05, 2005-06 and 2006-07 in the assessment made under section 143(3) of the Act as is evident from the copies of the assessment order placed at pages 78 to 114 of the paper book. However, in the assessment year under consideration the AO has taken a contrary view to the earlier assessment years stating that the assessee is carrying on of his own purchase and sale of shares activities in a systematic and organized way which partake the character of business. We observe that the AO as well as ld. CIT(A) have mentioned CBDT circular and the cases but have not discussed as to how those cases are relevant to the facts of the case of the assessee before us. As mentioned hereinabove that the Hon’ble Apex Court has held in the case of Holck Larsen (supra) that whether the transactions of sale and purchase of shares were trading transactions or were in the nature of investment is a mixed question of law and facts and therefore, each case is required to be examined to ascertain the true nature on the basis of the facts. We observe that the assessee has not borrowed any funds to undertake the activities of purchase and sale of shares. That the assessee has used his own funds in the said transactions of purchase and sale of shares. We observe that the AO has stated that the assessee has frequently indulged in dealing in shares and the period of holding is also short. However, we observe that in respect of LTCG claimed by assessee, the maximum amount of LTCG, is on account of sale of shares of Financial Technologies and Henkel Spic which were acquired in 2003. We observe from para 6.1 of the order of ld. CIT(A) that he has doubted the LTCG and considered it as business income on the ground that the assessee had sold the shares of said company on a number of dates. We are of the considered view that the finding of the ld. CIT(A) has no merits and particularly when we observe from the period of holding of shares, which we have mentioned hereinabove in para 13 of this order. The LTCG had accrued to the assessee, where the period of holding is more than 24 months and therefore, the order of ld. CIT(A) to treat the said LTCG accrued to the assessee as business income is not supported by facts particularly when there is no purchase of shares by assessee in the assessment year under consideration and said shares were held by assessee for a period of more than 24 months and had already been considered in the preceding assessment year as investment in the assessment completed u/s 143(3) of the Act. Hence, the order of ld. CIT(A) to consider the gain of Rs.2,98,36,506/- as business income is not based on facts. Therefore, we reverse the order of ld CIT(A) and direct that the same should be considered as LTCG.
  6. Now coming to the issue as to whether the amount of Rs.36,08,276/- as claimed by the assessee to be STCG or is to be considered as business income of the assessee as considered by the authorities below, we observe that the amount of Rs.26,56,537/- is the profit shown by the assessee from share transactions where holding is more than 91 days out of the total profit of Rs.36,08,276/- shown by the assessee. Further, there is no transaction of purchase and sale of shares where the holding period is less than 15 days. We also observe on perusal of the details that there is no repeated sales and purchases of shares in respect of the same script. Considering the above facts and the facts that in the preceding assessment years the similar kind of transactions have been considered by the AO as an investment activity of the assessee and the profit has been considered as STCG. We are of the considered view that the said shares have been purchased by the assessee for the purpose of investment and a different view cannot be taken in the absence of any fresh material on record.
  7. Hence, we hold that on the facts and in the circumstances the sum of Rs.36,08,276/- is the STCG to the assessee. Therefore, we allow ground Nos.2 and 4 of the appeal by reversing the orders of authorities below that the profit shown by assessee is to be assessed under the head “Capital Gain” i.e. Rs.2,98,36,506/- as LTCG and Rs.36,08,276/- as STCG. In view of above, the Grounds of appeal taken by the assessee are allowed.

ITA. No.1594/Mum/2012

  1. Coming to the appeal in the case of Shri Manan Nalin Shah, the ld. Representative of both the parties submitted that facts are identical to that of ITA No.1575/Mum/2012 and whatever decision is taken therein, the same will ipso facto apply to this appeal.
  2. In view of the above submissions of the ld. Representatives of the parties and for the reasons stated hereinabove in paragraphs 7 and 8 of this order, we allow GroundNos.1 and 3 of the appeal in favour of the assessee that the STCG and LTCG on sale and purchase of shares through PMS is in the nature of investment and accordingly the profit is to be assessed under the head “capital gains”. Ground Nos. 1 and 3 of the appeal taken by assessee are allowed.
  3. In respect of Grounds No.2 and 4 of the appeal, considering the submissions of the ld. Representatives of the parties and for the reasons mentioned in above in paras 16 to 19 , we hold that the profit of Rs.1,04,97,199/- is to be assessed as LTCG and whereas the profit of Rs.54,22,834/- is to be considered as STCG, instead of considering the said profit under the head “income from Business or Profession” as confirmed by ld. CIT(A). Hence Ground Nos.2 and 4 of the appeal taken by assessee are allowed by reversing the orders of authorities below.
  4. In the result, both the appeals of the above named assessee are allowed.




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