Prem Jain vs. ITO (ITAT Delhi)

(i) The assessee purchased 6,00,000 shares of M/s J.T. Agro Good Pvt. Ltd. at the rate of 0.50 paise per share from M/s Banwari Exim P. Ltd. and M/s Prabhash Motor Finance P. Ltd.. The assessee subsequently sold these shares for Rs.60,00,000/- to Shri Raj Kumar Gupta and Shri Ram Lal Gupta for Rs.30,00,000/- each totaling to Rs.60,00,000/-.

(ii) The Assessing Officer on the basis of the various documents filed and the statement recorded did not doubt the genuineness of the transactions. However, in absence of such business income declared on account of sale of shares in the preceding year and in absence of any opening or closing stock of shares, the Assessing Officer treated the profit from sale of shares as short term capital gain as against business income declared by the assessee. According to the Assessing Officer, the so-called purchase of shares are manipulated only to claim the deduction u/s 35 of the I.T. Act out of the donation made of Rs.31,00,000/- and evade the tax.

(iii) The CIT(A) upheld the action of the Assessing Officer in considering the profit from sale of shares as short term capital gain. He, however, allowed the alternate claim of the assessee regarding the deduction u/s 80GGA of the I.T. Act and allowed such deduction at Rs.31,00,000/- for which the Revenue is not in appeal.

(iv) The ld. counsel for the assessee submitted that a single transaction of purchase and sale of shares outside the assessee’s line of business may constitute ‘adventure in nature of trade’. According to him, when the purchase has been made solely and exclusively with the intention to resell it at a profit and the assessee has no intention of holding the property for herself for a long period or otherwise enjoying and using it, the presence of such an intention is a relevant factor and may constitute an adventure in nature of trade. He submitted that the reason for treating the profit from sale of such shares as short term capital gain as against the business income declared by the assessee was to deny the benefit of deduction u/s 35 of the I.T. Act.

(v) We find some force in the arguments advanced by the ld. counsel for the assessee. It is an undisputed fact that the Assessing Officer has not disbelieved the purchase and sale of shares on the basis of the various documents filed before him since ultimately he has treated the profit from sale of shares as short term capital gain. His grievance is that the assessee has manipulated the so-called shares and so-called transaction of shares of one private company is just to claim the deduction u/s 35 of the I.T. Act on the donation of Rs.31,00,000/-. The donation has also not been disbelieved.

(vi) Under these circumstances, we have to consider as to whether the profit on sale of such shares will constitute an adventure in nature of trade as claimed by the assessee or short term capital gain as treated by the Assessing Officer and upheld by the ld. CIT(A).

(vii) We find the Hon’ble Supreme Court in the case of CIT vs. Sutlej Cotton Mills Supply Agency Ltd. reported in 100 ITR 706, has held as under (short notes):-

“It is not necessary to constitute trade that there should be a series of transactions, both of purchase and of sale. A single transaction of purchase and sale outside the assessee’s line of business may constitute an adventure in the nature of trade. Neither repetition nor continuity of similar transactions is necessary to constitute a transaction an adventure in the nature of trade. If there is repletion and continuity, the assessee would be carrying on a business and the question whether the activity is an adventure in the nature of trade can hardly arise. A transaction may be regarded as isolated although a similar transaction may have taken place a fairly long time before.”

(viii) We find the Hon’ble Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT reported in 35 ITR 594 has held as under (short notes):-

“In cases where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factory and unless it is offset by the present of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade.”

(ix) We find the Hon’ble Delhi High Court in the case of CIT vs. D & M Components Ltd. reported in 364 ITR 179 while deciding a somewhat identical issue has held that where there was short duration of holding of shares and lack of clarity in account books, sale and purchase of shares would lead to business income and not short term capital gains.

(x) The various other decisions relied by the ld. counsel for the assessee also supports his case that the profits in the instant case of purchase and sale of shares would amount to business income and not short term capital gain as held by the Assessing Officer.

(xi) In this view of the matter, we set-aside the order of the ld. CIT(A) and direct the Assessing Officer to allow the claim of business income on account of profit on sale of such shares. Since the assessee succeeds on this issue, the claim of the assessee regarding the deduction u/s 35 of the I.T. Act is also allowed subject to verification of other conditions if any by the Assessing Officer.