Nehal V. Shah vs. ACIT (ITAT Mumbai)

Multiple orders for purchase/ sale of shares may constitute one transaction

The assessee offered short term capital gain (STCG) of Rs.1.07 crores on sale of shares. The AO held the assessee to be a trader in shares & assessed the gains as business profits on the ground that (a) there was high frequency of 127 purchase & 83 sale transactions, (b) there were instances where delivery was not taken and shares were sold within a short period, (c) 88% of the shares sold were purchased during the year and (d) the available capital was turned over 85 times to make purchases of Rs.23 crores & sales of Rs. 29 crores. This was confirmed by the CIT (A). On appeal by the assessee, HELD allowing the appeal:

(i) The AO had not correctly calculated the number of transactions because sometimes a single transaction is split by the computers trading of the stock exchanges into many smaller transactions but that does not mean that assessee has carried so many transactions. If someone places an order for purchase of 1000 shares and the same is executed by the electronic trading system of stock exchange into 100 smaller transactions, it does not mean that 100 transactions have been entered into. The assessee had carried out only 31 purchase and 25 sale transactions which cannot be said to be a great volume of transactions;

(ii) At the end of the year, the assessee was holding shares worth Rs. 11.56 crores with a market value of Rs.17.69 crores. If assessee was a trader, he would have definitely realized the huge profit of almost Rs. 6 crores immediately and not carried out the stock to the next year;

(iii) The transactions in which no delivery was taken and it was settled in the same day appear to be cases where the particulars were wrongly carried out on behalf of the assessee by the broker & that’s why assessee got them settled on the same day;

(iv) The assessee has not borrowed any money and he was occupied full time in the business of garments;

(v) In identical circumstances in the case of the assessee’s sister, the Tribunal had decided in favour on the ground that (a) the assessee’s background did not indicate she was familiar with the share business, (b) there was no borrowing for the shares, (c) the shares were shown as a capital asset in the balance sheet, (d) the AO had accepted the LTCG, (e) the average investment in one scrip is taken was about Rs.45.00 lakhs which appeared to be too high for an individual to hold as stock-in-trade, (f) the portfolio contained many shares of blue chip companies, (g) there were no dealings in futures and options and (h) about 30 scrips were sold and there were 49 purchases & 43 sales (treating multiple lots on the same day as one transaction).