|CORAM:||I. P. Bansal (JM), Sanjay Arora (AM)|
|SECTION(S):||2(42A), 2(42C), 45, 48|
|CATCH WORDS:||shares, short-term capital gains|
|COUNSEL:||Natasha Mangat, S. C. Tiwari|
|DATE:||October 17, 2014 (Date of pronouncement)|
|DATE:||October 24, 2014 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Law on the tests to distinguish whether gains on sale of shares is short-term or business profits explained|
(i) The assessee wonders as to why should she be not allowed her claim of the delivery-based transactions as being not trade, which stands admitted by her qua non-delivery based transactions? However, that precisely defines the controversy which is to be resolved (with reference to and on the basis of the facts), so that nothing turns on the said argument. If anything, it only raises a presumption of the assessee being well versed with the share market, devoting considerable time and resources toward the same, so that there is no reason why she would not extend it to the delivery-based segment (which is in fact the traditional, less sophisticated and, in fact, predate the derivative by decades) as well, or limit her engagement to only investment. It is no doubt open to the assessee to show, on facts, to be engaged only in investments, but we are only meeting the argument, having in fact observed the assessee’s case as de hors any reference to facts.
(ii) The second argument is that the Revenue having acceded to the assessee being an investor, in-as-much as it allows her claim of LTCG, acts contradictorily when a capital asset is sold within the minimum holding period prescribed for the same to be a LTCA. That is, a capital asset would not, for being classified as such, depend on the time of its sale, which determines its’ holding period, but would be so since inception, i.e., acquisition. True. But then it is only for the assessee to establish her intention through her conduct, or explain why, despite the intention for retention, the shares were not so, and which we find as completely missing. Intent, being a state of mind, would find manifestation in conduct and, thus, can only be inferred there-from. If not by conduct, how else, one may ask, would the same be inferred and, thus, determined? Toward this, the argument, fact based, that the shares have been held by her for not weeks or months, but for years, so that the opening stock includes shares being held for years prior to the current year, endorses the Revenue’s and not the assessee’s stand. It firstly emphasizes the paramount significance of conduct, even as discussed earlier. Two, it clearly states of a marked difference characterizing the two behaviors, i.e., the investment behavior and the trading behavior, which reflects the trading sentiment or responses to trading impulses. There are in the present case not one or two or, given the volume, even a few, but scores, nay, over a hundred transactions where the shares are sold immediately or within days of purchase (PB pgs. 132-146). An investor, on the other hand, having entered the market with a long term horizon or perspective, seeking accretion to capital, would ordinarily be almost oblivious to the market volatility, giving, as it were, time for the investment to mature, without which no investment would normally bear fruit. There could be no doubt cases of a decision, sound at the relevant time (so that it could be shown to be so in terms of fundamentals), proves or turns bad (which would again be possible to be exhibited on the basis of the some vital statistics or information, or with reference to the subsequent, unanticipated events), so that an exit decision is made sooner or even much sooner. Such cases would not only be few, but also established on some objective basis/facts; investment decision making being informed and based on defined (investment) criterion. In the instant case, however, as afore-noted, sale within a short period is a norm rather than an exception. We observed that in many cases shares are sold within a week or even a day. In fact, the holding period is even negative in some cases, which only implies speculative trade. The frequent intervention is not without purpose. The whole basis being to earn profit, i.e., in terms of return on capital employed, which is a function of time, a more frequent – implying a constant watch of the market and formulating a response in light of the market developments, allows the assessee to exit at a much lower margin. An exit also forecloses the exposure and, thus, risk. A short term positioning or strategy, thus, plays on market volatility with a view to generate positive return on the basis of the market sentiment or information for the time being. The holding period is rendered of no or little relevance in this scheme of things, which may also, being inherently riskier, entail losses. In other words, the investment and the trading behavior, which may overlap in some cases, are in general opposed to each other. The average margin on STCG, at 8.98% of turnover (i.e., Rs.132.66 lacs on Rs.1477.11 lacs) is, accordingly, much lower than the average yield of 44.38% (Rs.139.43 lacs/Rs.314.35 lacs) realized on LTCG. That is, vary by a factor of 5.5.4 The assessee’s third argument is that the indicia of volume, regularity, continuity, frequency, holding period, etc. being relative, do not amount by themselves amount to much, i.e., in understanding the nature of the transactions undertaken, whether as constituting trade/business or not. The argument, in one brush, sets aside the settled law in the matter, toward which case law is legion, with we having also referred to some decisions, noticeably by the apex court, besides several by the Revenue authorities, which have not been controverted in any manner, which we may cite: a) Ramnarain Sons (P.) Ltd. vs. CIT  41 ITR 534 (SC); b) Raja Bahadur Visheshwar Singh vs. CIT  41 ITR 685 (SC); c) Rajputana Textiles (Agencies) Ltd. vs. CIT  42 ITR 743 (SC); d) Dalhousie Investment Trust Co. Ltd. vs. CIT  68 ITR 473 (SC); e) New Era Agencies (Pvt.) Ltd. vs. CIT  68 ITR 585 (SC); f) Juggilal Kamlapat vs. CIT  75 ITR 186 (SC); g) Raja Bahadur Kamakhya Narain Singh vs. CIT  77 ITR 253 (SC); h) CIT vs. Associated Industrial Development Co. Pvt. Ltd.  82 ITR 586 (*); i) CIT vs. Sutlej Cotton Mills Supply Agency Ltd.  100 ITR 706 (SC); and j) CIT vs. H. Holck Larsen  160 ITR 67 (SC) (*)
(iii) The argument in fact runs counter to the judgments referred to by the Board in its Circular (No.4/2007 dated 15/6/2007, at pages 1-3 of the Compilation-I of case law furnished by the assessee), which the assessee itself seeks reliance on. The Board has, in our view, correctly enlisted the relevant principles to be considered in determining the issue, i.e., whether a particular share or security (asset) is the assessee’s stock-in-trade or a capital asset, further cautioning that no one principle, but the totality of the facts and circumstances, including the assessee’s explanation/s, are to be taken into account in arriving at the decision.
(iv) The argument is also without basis on facts. Regularity, frequency, continuity, etc. are in fact parameters that are amenable to mathematical treatment and, consequently, an accurate measurement and, thus, subject to an objective assessment. The assessee has transacted business on most of the 240 trading days available on the market, so that we wonder why she cannot be said to be regular or, rather, a regular, which in fact she would qualify for even on a much lower, say by ½ or 1/3, trading days. The continuity is again admitted, with the assessee stating to be undertaking the same since 1988-89. The holding period is in fact a measure of frequency, so that the two indicate the same. Toward this, we had observed the shares to have been off loaded at very short intervals of time, which also reveal an engagement on a continuous basis. The whole premise of examining these indices, which have to be considered and applied together, is toward an assessment of the conduct, the devotion of time, effort and resources to the activity, so that where with a view to earn profit, would be business by definition, particularly where carried on in an organized and systematic manner. True, volume by itself is a relative measure, but then, as explained, the parameters are to be viewed together and not in isolation – the purport being to assess behavior. Two, volume is to be seen in relation to turnover (of capital), so that what is relevant is not the volume per se, but the capital turnover ratio; each person being limited by the capital available, with the investment and the trading behavior, as afore-stated, being marked by very different tendencies. There is another aspect to volume, i.e., the number of transactions. Toward this, it is the aggregate of the purchase and sale transactions, which are separate and distinct, representing in fact opposite functions of a trade, which is to be considered. The A.O. observes the sale transactions during the year to be at 1900. The purchase transactions, reckoning them to be even at half that number, or even lesser, would make for aggregate transactions in the range of 2500. Even a fraction of this number would in our view make for a healthy volume, which of-course is to be considered along with the other parameters.
(v) Next, the assessee argues that it should, if at all, be considered as in the business of investments, rather than in the business of trading. The said argument can be seriously considered only after the assessee is able to show, on facts, of not being a trader in shares in-as-much as it becomes otherwise hypothetical or academic. Raising of pleas, de hors and without reference to facts, is of little consequence. The law in the matter is also well settled. As explained by the apex court in Bengal & Assam Investors Ltd. (supra), if a company merely acquires and holds shares with the object of receiving dividend, it does not carry on business within section 10 (of the 1922 Act). In the facts of that said case, the apex court was deciding on whether dividend could be assessed as ‘business income’. It found as not so unless the shares represent the stock-in-trade of the assessee’s business and, further, that investment for income could not be considered as business. The head note of the decision runs thus: ‘For a dividend on shares to be assessed under section 10 of the Indian Income-tax Act, 1922, the assessee, be it an individual or a company or any other entity, must carry on business in respect of shares, that is to say, the assessee must deal in those shares. An individual, who merely invests in shares for the purpose of earning dividend, does not carry on a business. The only way he can come under section 10 is by converting the shares into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares. If a company merely acquires and holds shares with the object of receiving dividends, it does not carry on business within section 10. The mere fact that a company is incorporated to carry on investment does not show that it is carrying on business.’ The decision would apply equally under the extant law in-as-much as the apex court has clarified that investment per se cannot be considered as a business. Further still, how we wonder would it assist the assessee’s case. Even accepting of being in the business of investment, the ‘investments’ would then constitute the stock-in-trade thereof, which also enables an appreciation of the afore-stated decision.
(vi) The assessee has engaged the services of a PM. In our considered view, the cooption of or taking on board a PM, and availing its services, is at best a neutral fact – the service provider only acting for and on behalf of the assessee. The matter thus has to be considered in light of and on the basis of the primary facts. That is, the shares would warrant being considered as investments or as trading assets depending on whether they reveal an investment behavior or trading behavior, i.e., wear the badges of trade or a profit making scheme, rather than whether the assessee undertakes them herself or engages the services of the professional for the same. Realizing that share market, while offering a good potential for profit, being market driven, which may not be efficient at all times and is in any case not perfect, is inherently riskier, chooses to avail the services of an expert to manage her affairs for a consideration. The said fact is thus, to our mind, of no moment. If anything, it only shows the seriousness of intent with which the assessee regards her resources, carrying it in an organized manner (also refer para 5.9). Needless to add, the Revenue does not dispute the claim of PMS charges as business expense.
(vii) Next, the assessee argues that the shares, in-as-much as they are not the stock-intrade of its business, are capital assets in terms of section 2(14) of the Act. The argument, if anything, is amusing to say the least. The stock-in-trade is only the stock of the trade, i.e., the good or commodity or chattel, etc. which is acquired for the purposes of the assessee’s trade. The trade, assuming so, in the instant case, being of purchase and sale of shares, how we wonder are the shares not to be regarded as stock-in-trade, even if the shares of any company are to be treated as a separate item, which would only be of the stock-in-trade. Rather, in-as-much as the shares in a company or a particular scrip is sold to buy another, it only shows that they are treated by the assessee as one class of goods /commodity. That the first scrip may or may not be bought again, which we have found to be so in many cases, is, in this scheme of things, only incidental. Continuing further, in the assessee’s case, the shares are bought and sold regularly, across companies of different sizes, industries and sectors, so that these only represent the stock-in-trade of its business. Further, the assessee maintaining one set of books, the capital is shifted regularly, not only across different scrips, but also across different segments, i.e., delivery based and non-delivery based, so that the state of finances also reveals the two as constituting different forms of business of dealing in shares. Here it may be relevant to mention that the share-holding, which is at Rs.9.66 crs. at the beginning of the year, declines to Rs.5.69 crs. at its end, so that there is a reduction in or flight of capital by almost Rs.4 crs. The same, presumably and understandably, is in the derivative business.
(viii) A capital asset, on the other hand, is held either for the purposes of carrying on trade itself, in which case it is also a business asset, or for its’ own sake, as for personal purposes. Financial security is a human need. Given the inflationary condition of the economy, one may invest in, inter alia, shares and securities, which, on account of the underlying economic activity, are a good hedge against inflation, also providing scope for appreciation. The growth hinges critically on the quality of the asset, and the period over which it is held. What capital gain attempts to capture is the accretion to capital. It is on account of this fact, i.e., being essentially the value of one’s capital, since realized, that preferential treatment is accorded to capital gains under the tax statutes, as by way of indexation and lower (or nil) tax incidence. There is as such hardly any need to mark the assets to market, or at least frequently; the whole premise of growth or capital accretion, which, being only on account of an underlying economic activity, would require time to fructify. The difference between the shares held as capital assets and stock-in-trade is both critical and marked. We are, therefore, completely unable to, given the transactions, appreciate the assessee’s stand of the stocks and shares as representing capital assets.