Large volume of purchase & sale of shares does not per se mean activity is business
The assessee, a broker in the BSE, disclosed short-term capital gains and long-term capital gains on sale of shares. The AO accepted the LTCG as such though he held that the STCG was assessable as “business profits” on the ground that the assessee was a stock broker & there was large volume and frequency (more than 300) transactions. On appeal, the CIT (A) reversed the AO. On appeal by the department to the Tribunal, HELD dismissing the appeal:
(i) It is no more res integra that a person can be both “Investor” as well as “Trader” in shares. (Draft Instruction No. 2005, Instruction No. 1827 dated 31.8.1989 & Circular No. 4/2007 dated 15.6.2007 referred). The assessee has to maintain the distinction between shares held as stock and those held as investments in its records;
(ii) While volume of transactions is an important indicator of the intention of the assessee whether to deal in shares as trading asset or to hold the shares as investor, it is certainly not the sole criterion. The AO’s conclusion that since sale and purchase had been determined by the volatility in the market, the same is against the basic feature of investor is not based on sound rational reasoning. A prudent investor always keeps a watch on the market trends and, therefore, is not barred under law from liquidating his investments in shares. The law itself has recognized this fact by taxing these transactions under the head “Short Term Capital Gains”. If the AO’s reasoning is accepted, then it would be against the legislative intent itself;
(iii) The fact that the assessee did not borrow funds for investment in shares is an important aspect which cannot be lost sight off while deciding the true intention of the assessee;
(iv) The fact that the AO accepted the assessee’s claim in earlier years that it was an investor is material because though the principles of res judicata do not strictly apply to income tax proceedings it is well settled law that the principles of consistency should not be ignored. Uniformity in treatment and consistency under the same facts and circumstances is one of the fundamentals of the judicial principles which cannot be brushed aside without proper reason;
(v) The fact that the AO accepted the offering of LTCG also showed that the assessee’s status as investor was accepted by him;
(vi) Some part of the STCG had arisen out the earlier investment which had been accepted as being on investment account. As the modus operandi of the assessee remained the same in regard to other shares purchased during the year, the assessee’s claim could not be negated only on the basis of frequency of the transaction (Gopal Purohit 228 CTR 582 (Bom), Sadhana Nabera 41 DTR 393 & Jayshree Pradip Shah considered).