Activity of frequent buying and selling of shares over a short span of period ha

[pawansingla]

Activity of frequent buying and selling of shares over a short span of period has to be treated as business being adventure in nature of trade and income therefrom has to be treated as business income and not as capital gain

•   Whether a particular holding is by way of investment or 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 held as investments and those held as stock in trade

•   The treatment in the books of an assessee is not 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 gain.

[2010] 7 taxmann.com 40 (Mum. - ITAT)
ITAT, MUMBAI BENCH 'D', MUMBAI
Rakesh J.Sanghvi
v.
DCIT
ITA No. 4607/MUM/2008
August 31, 2010

RELEVANT EXTRACTS:
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We find from the assessment order that the Assessing Officer in the instant case considered the income from purchase and sale of shares as business income. The CIT(A) upheld the action of the Assessing  Officer by relying on the CBDT circular No. 4 of 2007 dated 15th June, 2007. We find the CBDT vide Circular No. 4/2007 dt. 15.6.2007 has accepted the principles laid down by the Hon'ble Supreme Court in the cases of CIT (Central), Calcutta v/s. Associated Industrial Development Co. (P.) Ltd., 82 ITR 586 as well as in CIT v/s. H Holsck Larzen, 160 ITR 67 (SC). In the above referred circular, the Board has issued certain guidelines to the A.O. The Board has accepted that the assessee can have two portfolios simultaneously- (1) an Investment Portfolio comprising of securities which are to be treated as a capital asset and (2) Trading portfolio comprising of stock and trade which are to be treated as trading asset.
We find, the legal principles as laid down by courts on account of treatment of an income as 'business income' or 'capital gain' can be summarised as under:
a. It is possible for an assessee to be both an investor as well as dealer in shares.
b. Whether a transaction of sale and purchase of shares is a trading or investment transaction is a mixed question of law and fact.
c. Whether a particular holding is by way of investment or 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 held as investments and those held as stock in trade.
d. The treatment in the books of an assessee is not 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 gain.
e. Purchase with intention to resell can constitute capital gain or business profit depending on circumstances like quantity of purchase and nature of activity.
f. No single fact has any decisive significance and the question must be answered depending upon selective effect of all relevant materials brought on record.

From the chart filed by the learned counsel for the assessee giving the details of shares transacted during the year, it is seen that the shares are held for a few day only and in very few cases for a few months but in no case it is exceeding 200 days. Purchase of shares during the year and selling them frequently in short period, in our opinion, do indicate that the assessee has purchased the shares with a motive to earn profit in a short period. Therefore, the facts of the instant case do not persuade us to hold that the shares were held as investment since these are not held for such a long period so as to treat the same as investment. The frequency and volume of the transactions in the instant case give an impression that the assessee did not intend to acquire the shares with business motive. In the case of an investment a person usually watches the market over a longer period of time before selling of the shares. The earning of dividend and the appreciation of the shares is the primary consideration. It is only a trader who would look for short term gains from purchase and sale of shares. Therefore, the treatment given by the assessee to the said transactions in the books of account, in our opinion, is not the only determinative factor about the nature of the transactions. The submission of the learned counsel for the assessee that the shares were disclosed as investment in the Balance Sheet, in our opinion, is certainly a factor to be reckoned with but when there are other factors or circumstances which throw some doubt on the motive of the assessee in acquiring the shares, as in the instant case, the entries in the books of account or Balance Sheet cannot override them and be taken as decisive of the assessee's intention. The submission of the learned counsel for the assessee that in the preceding year the Assessing Officer has accepted the long term capital loss on sale of shares and, therefore, the same should be followed this year is also without much force since principle of res judicata does not apply to income-tax proceedings and every assessment is independent. When there are changes in the facts and circumstances, the rule of consistency need not be applied. In this view of the matter, we are of the considered opinion that the activity of frequent buying and selling of shares over a short span of period during the impugned year has to be treated as business being adventure in the nature of trade and the income has to be treated as business income and not as capital gain as claimed by the learned counsel for the assessee. Accordingly, we uphold the order of the CIT(A) and the ground raised by the assessee is dismissed.

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[Harshavardhana Datar]

Copy of decision has been made available at following link :

http://www.mediafire.com/?atnoyck4hzj5jim

[pawansingla]

Income tax - Whether profits from sale of shares held as long-term investments are to be taxed as business income or capital gains? - It is capital gain, rules Delhi HC


By TIOL News Service

NEW DELHI, OCT 28, 2010: THE issue before the HC is - Whether profits from sale of shares held as long-term investments by an investment and finance company are to be taxed as business income or capital gains. And the HC decision rules that it is capital gains.

Facts of the case

The assessee is a company engaged in the business of sale and purchase of shares. It filed its return declaring an income of Rs.60,05,375/- in which it included short term capital gain at Rs.38,476/- and long term capital gain at NIL after set-off of long term capital loss of previous years amounting to Rs.2,08,24,174/-. In the course of assessment proceedings, the AO observed that in computation of the income filed, the assessee had shown long term capital gain at Rs.2,08,24,174/-which had been set off against the long term capital loss of the AY 1995-96 amounting to Rs.2,02,45,035/- and of the AY 1996-97 at Rs.5,79,139/-. On a query being raised by the assessing officer as to why sale of investment be not treated as business or trading receipts as the assessee is an investment company having main business of purchase and sale of shares, it was submitted by the assessee that it was registered as an investment and finance company having its main activity of investing its funds in long term securities like shares, debt and equity mutual funds, etc for generating dividend, interest and profit and loss on sale of investments and all the investments of the company are of long term nature and had not been held as stock-in-trade since the FY 1999-2000 in which year all the investments held as stock-in-trade were transferred to the investment portfolio. It was contended on behalf of the assessee that the said practice of taking all its securities under the investment head had since then been followed and the revenue had never raised any query on that score. However, the AO held that the income from the transactions of sale and purchase of shares was business income of the assessee company and were in fact purchased not for investment purposes but for the purpose of sale at a profit are liable to be taxed under the head business income and not under the head capital gain as declared by the assessee company. On the basis of aforesaid reasoning, the AO assessed the tax at Rs.3,25,82,805/- and initiated penalty proceedings u/s 271(1)(c) and directed charge of interest under Section 234B/234D accordingly.

The CIT(A) held that the profit arising on the sale of shares has to be treated as long term capital gains and, accordingly, the addition of Rs.2,65,77,430/- was deleted. The ITAT also decided the issue in favour of the assessee.

On further appeal by the Revenue, the High Court held that,


++ in the case at hand, the assessee had purchased the shares on 27th January, 1996 and the same were held for a span of 7 years and were sold during the year under consideration. The assessee had not involved himself in the business of buying and selling shares after 1st April, 1997. The assessee had not engaged itself as a dealer in debt mutual funds. Nothing has been brought on record to show that the assessee was engaged in the selling of shares. The object incorporated in the Memorandum of Association only refers to the fact that the assessee can deal in shares but, there was no regular activity on that score. The nature of activity, intention and conduct has significance. They play a pivotal role in the entire gamut of transaction;

++ as per the circular issued by the CBDT on 15th June, 2007, a tax payer can have two portfolios, that is, 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. The assessee is entitled to have income from both heads, namely, capital gains as well as business income. On a proper scanning of the facts that have been brought on record, there can be no iota of doubt that the shares that were made by the assessee as an investment gave rise to capital gains. Therefore, the concept of business income does not arise and hence, the findings recorded by the first appellate authority as well as by the Tribunal stand on terra firma.

(See 2010-TIOL-730-HC-DEL-IT in 'Income Tax')