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Sugamchand C. Shah v. Assistant Commissioner of Income-tax

Income Tax Appellate Tribunal
Jan 29, 2010
Smart Summary (Beta)

Structured Summary of the Tribunal Opinion (Surat Bench) — Assessment Years 2005-06 & 2006-07

Factual and Procedural Background

These are four cross-appeals before the Tribunal (two filed by the assessee and two by the Revenue) against orders of the learned CIT(A)-II, Surat dated 15th September 2008 and 30th April 2009 for assessment years 2005-06 and 2006-07 respectively. The appeals concern the tax treatment of gains arising from sale of shares i.e., whether they should be taxed as "business income" or as "capital gains" (short‑term and/or long‑term).

Brief relevant facts (as stated in the opinion): the assessee (proprietary concern M/s Swati Synthetics) is engaged in weaving job work and is also a sub-broker. For AY 2005-06 the assessee filed a return declaring short‑term capital gain of Rs. 55,40,879 and long‑term capital gain of Rs. 37,52,281 from sale of shares. The AO treated the entire sum (approx. Rs. 96.76 lakhs) as business income. The CIT(A) partially agreed with AO but held that gains on shares held for more than 366 days (aggregate Rs. 37,52,281) were long‑term capital gains and the remaining profits should be treated as business income.

For AY 2006-07 the CIT(A) similarly classified part of the total profit as long‑term capital gains (Rs. 95,46,273) and part as business income (Rs. 76,48,757). The Tribunal heard cross‑appeals together because the issues were common and issued orders remitting computations and setting a criterion for distinguishing trading from investment for some transactions.

Legal Issues Presented

  1. Whether profit earned by the assessee on sale of shares should be assessed as "capital gains" (short‑term or long‑term) or as "business income" (jobbing/trading) for AY 2005‑06 and AY 2006‑07.
  2. If there is a mixed character (some transactions being investment and others trading), what objective criterion should be applied to demarcate transactions taxable as business income from those taxable as short‑term capital gains?

Arguments of the Parties

Assessee's Arguments (summarised)

  • The primary motive behind purchases was long‑term investment for dividends and capital appreciation rather than trading to earn profit on sale.
  • The assessee's investment in shares increased from Rs. 1,13,14,043 (31‑03‑2004) to Rs. 2,07,83,000 (31‑03‑2005), indicating an investment portfolio rather than trading inventory.
  • When long‑term capital gains are excluded, the ratio of dividend to residual profit improves (assessed by the assessee to 1:5), supporting investment motive.
  • Frequency of transactions must be considered in relation to the size of the investment portfolio; mere volume does not change their nature.
  • Expenditure (staff salary, telephone, electricity) cited by authorities is primarily incurred for the weaving job‑work business, not for share trading; use of multiple brokers is normal for a large portfolio and does not prove trading intent.
  • The assessee had not borrowed new funds specifically for investing in shares; borrowings were not indicative of trading finance deployment.
  • Shares and securities were consistently recorded as "investments" (not stock‑in‑trade) in books and valued at cost year after year; revenue had previously accepted such treatment in past scrutiny assessments.
  • Delivery‑based transactions were the norm (securities transaction tax paid), supporting capital gains treatment for many transactions.
  • Cited authorities (Arjun Kapur, Janak Rangwalla, Gopal Purohit, Sarnath Infrastructure) to support the characterisation of long‑held shares as capital assets and to show that volume alone does not convert investments into trading stock.

Revenue's (Departmental) Arguments (summarised)

  • Recording as "investment" in books does not conclusively determine the true nature of transactions; substance should prevail over form.
  • The assessee transacted at a large scale (1,833+ transactions in 205 scripts), used prominent brokers, maintained multiple bank accounts and incurred establishment expenses; this infrastructure and frequency indicate profit‑oriented trading activity rather than passive investment.
  • Borrowings (approx. Rs. 41,02,914 mentioned) and the magnitude of transactions led the AO to consider the activity as trading; Explanation to s.73 (IT Act) and related authorities were invoked to support revenue treatment where dealing in shares yields much higher profits than "other sources" such as dividend or interest.
  • Relied on judicial authorities (e.g., Patnaik & Co. Ltd. and subsequent High Court decisions) to argue that losses/gains in investment transactions may be revenue in nature where the activity is effectively trading/investment carried on as a business.
  • After dematerialisation of shares, delivery alone cannot be decisive for investment character; the Tribunal should adopt clear criteria to distinguish trading from investment.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court in this Opinion
Karam Chand Thapar & Bros. (P.) Ltd. v. CIT [1971] 82 ITR 899 (SC) Recorded by the assessee as supporting proposition that treatment in books as "investment" is a relevant factor. Noted by the Tribunal as a case relied upon by the assessee to support the significance of books of account in determining intention.
Arjun Kapur v. Dy. CIT [1999] 70 ITD 161 (Delhi) Authority for treating shares held for one year or more as long‑term capital assets when sold. Relied upon by the assessee and noted by the Tribunal in support of classifying long‑held shares as long‑term capital gains.
Janak S. Rangwalla v. Asstt. CIT [2007] 11 SOT 627 (Mumbai) Proposition that mere volume of transactions does not automatically alter the nature of holdings from investment to trading. Assessee relied on it; Tribunal considered this principle in the overall weighing of factors.
Gopal Purohit v. Jt. CIT [2009] 29 SOT 117 (Mumbai) Held that delivery‑based transactions point towards capital gains treatment and set out factual analysis relevant to trader vs investor distinction. Tribunal reproduced and relied on the reasoning of Gopal Purohit as one of the authorities laying down criteria for differentiating trading from investment and used it to frame its analysis.
Sarnath Infrastructure (P.) Ltd. v. Asstt. CIT [2010] 124 ITD 1 (Lucknow) Considered CBDT Circular No.4/2007 and various decisions; culled out a multi‑factor test (11 principles) to decide trade vs investment in shares. Tribunal expressly adopted the Sarnath Infrastructure principles (the multi‑factor test) as the governing analytical framework for deciding the appeals and applied those principles to the facts.
Patnaik & Co. Ltd. v. CIT [1986] 161 ITR 365 / 27 Taxman 287 (SC) Authority for the proposition (as relied upon by Revenue) that in certain contexts losses on sale of investments can be revenue losses; used to determine whether dealing constitutes business activity. Invoked by the Revenue to support classifying gains/losses on investments as revenue in nature where investments are effectively traded in the business; Tribunal recorded the submission but proceeded to apply the multi‑factor test.
Commissioner Of Income‑Tax v. Dhampur Sugar Mills Ltd. [1988] 171 ITR 675 (All.) One of the High Court decisions cited as following or applying principles similar to Patnaik & Co. Recorded as part of Revenue's supporting case; Tribunal noted these authorities as authorities relied upon by the Department.
CIT v. S.B. Sugar Mills [1991] 187 ITR 441 / [1992] 63 Taxman 37 (All.) Another High Court decision cited in support of Revenue's position following similar principle(s). Noted by the Tribunal as cited by the Department in support of revenue treatment arguments.
Mohamed I. Unjawala v. Asstt. CIT [1995] 213 ITR 190 / 83 Taxman 106 (Mad.) Cited by Revenue as part of the judicial support for treating some investment transactions as business in certain circumstances. Noted by the Tribunal as among decisions relied upon by the Department; the Tribunal applied the multi‑factor assessment rather than adopt a single precedent.
CIT v. D.S. Bist & Sons [2000] 243 ITR 179 / [2001] 117 Taxman 642 (Delhi) Listed among cases invoked by the Department to support revenue characterisation. Recorded by the Tribunal as part of Department's cited authorities; Tribunal nonetheless applied the Sarnath/Gopal Purohit factors to the facts.
CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC) One of the cases examined in Sarnath Infrastructure when culling principles to decide trade v. investment. Listed as one of the authorities considered in the Sarnath Infrastructure reasoning which the Tribunal adopted as part of its analytical framework.
CIT v. H. Holck Larsen [1986] 160 ITR 67 / 26 Taxman 305 (SC) Another authority considered in the body of precedents referenced in Sarnath Infrastructure. Noted as part of the fabric of authorities forming the multi‑factor approach the Tribunal used.
Fidelity Northstar Fund, In re [2007] 288 ITR 641 / 158 Taxman 372 (AAR‑New Delhi) Authority considered in Sarnath Infrastructure's review of investment/trading distinctions. Included among decisions relied on by Sarnath Infrastructure; Tribunal referenced Sarnath's synthesis which included this authority.
Fidelity Advisor Series VIII, In re [2004] 271 ITR 1 / [2005] 142 Taxman 111 (AAR‑New Delhi) Considered in the set of authorities examined by Sarnath Infrastructure. Part of the body of decisions from which Sarnath culled guiding principles adopted by the Tribunal.
J.P. Harrison (Watford) Ltd. v. Griffith (H.M. Inspector of Taxes) [1962] 40 TC 281 (HL) A foreign authority referred to in Sarnath Infrastructure when formulating principles about trade v. investment. Included in the authorities considered by Sarnath Infrastructure; Tribunal relied on Sarnath's distilled factors.
Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC) Listed among precedents considered by Sarnath Infrastructure in culling principles. Referenced indirectly through Sarnath Infrastructure's analysis which the Tribunal adopted.
Central India Agencies (P.) Ltd. v. CIT [1970] 77 ITR 959 (All.) Included in the compendium of cases reviewed in Sarnath Infrastructure. Part of the jurisprudence forming the multi‑factor test applied by the Tribunal.
Mrs. Sarojini Rajah v. Commissioner Of Income‑Tax, Madras [1969] 71 ITR 504 (Mad.) Listed among authorities examined by Sarnath Infrastructure. Noted by the Tribunal as one of the authorities from which Sarnath derived guiding principles.
Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486 (SC) Another authority considered in Sarnath Infrastructure's review of trade v. investment jurisprudence. Formed part of the case law matrix that Sarnath Infrastructure distilled into the Tribunal's working factors.
CIT, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC) Included in the set of Supreme Court authorities considered in Sarnath Infrastructure. Referenced indirectly through Sarnath Infrastructure's synthesis which the Tribunal adopted to test facts.

Court's Reasoning and Analysis

The Tribunal proceeded by adopting a multi‑factor analytical framework culled from the Tribunal decision in Sarnath Infrastructure (P.) Ltd. and the Bombay Bench decision in Gopal Purohit. The Tribunal emphasised that no single factor is decisive and the cumulative effect of several factors must be examined on the facts of each case.

Key steps in the Tribunal's reasoning (as stated in the opinion):

  1. Adopted the multi‑factor test (enumerated in Sarnath Infrastructure) which includes: intention at purchase as evidenced by book treatment (investment v. stock‑in‑trade); borrowing to purchase; frequency of purchases and sales; motive (profit by sale v. retention for dividend/appreciation); valuation method in balance sheet; compliance with legal/authorisation formalities (where relevant); evidential burden (assessee's primary onus); and the permissibility of maintaining separate portfolios for trading and investment (CBDT Circular No.4/2007).
  2. Examined the assessee's books and past conduct: the assessee consistently recorded shares as "investments" and valued them at cost; such treatment had been accepted by Revenue in previous years. The Tribunal found no evidence that the accounting treatment in the current year was different from earlier years.
  3. On the facts, the Tribunal accepted that a substantial portion of the shares sold in the year had been held for more than 366 days (shortest holding in that long‑term group being 366 days, longest 6,832 days). For gains on such long‑held shares (aggregate Rs. 37,52,281 in AY 2005‑06 and Rs. 95,46,273 in AY 2006‑07), the Tribunal confirmed treatment as long‑term capital gains in line with precedent and the assessee's position.
  4. For the remaining gains (those on shares held for short periods), the Tribunal found a mixed picture: the assessee had both long holdings and many transactions with short holding periods (from 0 to a few days). The Tribunal noted that the assessee had discharged its primary onus of showing an investment intent (books, valuation at cost, acceptance in prior years), but Revenue demonstrated that in several instances frequency and short holding periods indicated trading.
  5. The Tribunal declined to accept delivery alone as determinative after dematerialisation of shares: delivery in demat account is not always decisive and, by itself, cannot convert a transaction to investment treatment in every case.
  6. Because the case involved a mixture of investment and trading characteristics, the Tribunal considered it necessary to adopt a practical, objective demarcation rule for the purposes of these appeals: it prescribed a time‑based criterion — shares held for less than one month (i.e., under about 30 days) should be treated as trading (business income), while shares held for more than one month should be treated as investment for the purpose of charging short‑term capital gains on sale. The Tribunal explained this by observing that an investor would require a minimum period (estimated at one month) to watch market fluctuations and thus justify holding as investment rather than rapid turnover to reap short‑term profit.
  7. The Tribunal remitted to the Assessing Officer to recompute the split between short‑term capital gains and business income for the short‑held transactions in accordance with the above holding; the long‑term capital gain determinations of the CIT(A) were confirmed.

Holding and Implications

Holding (core rulings):

  • Confirmed that gains of Rs. 37,52,281 (AY 2005‑06) and Rs. 95,46,273 (AY 2006‑07) arising on sale of shares held for more than 366 days are to be treated as long‑term capital gains.
  • Directed that for shares sold after being held for more than one month, gains should be treated as short‑term capital gains; shares held for less than one month should be treated as trading (business) income. The Tribunal therefore set an objective demarcation rule for these appeals: holding period of one month as the threshold between trading and investment for the short‑term segment of transactions in the facts of this case.
  • Remitted to the Assessing Officer to recompute the amount chargeable as short‑term capital gains and the amount taxable as business income in accordance with the Tribunal's criterion; the AO to carry out necessary computation.
  • Resulted in the assessee's appeals being treated as partly allowed (for statistical purposes) and the Revenue's appeals being dismissed to the extent indicated (i.e., the long‑term capital gain findings by CIT(A) were confirmed and the short‑term/business split remitted to AO).

Implications (direct effects):

  • The direct consequence for the parties is reclassification and recomputation of certain gains: long‑term gains on shares held >366 days stand as capital gains; transactions held <1 month will be treated as trading income and taxed accordingly; transactions held >1 month (but <=365 days) will be considered short‑term capital gains.
  • The Tribunal applied and affirmed a cumulative, factor‑based test (as set out in Sarnath Infrastructure and Gopal Purohit) rather than relying on any single decisive factor; it also provided a practical one‑month threshold for distinguishing trading from investment for the short‑term segment in these appeals. The Tribunal ordered AO to recompute amounts as per this approach.
  • The opinion does not purport to lay down an immutable rule for all cases; it applies the multi‑factor test to the facts and prescribes the one‑month demarcation for the present facts and appeals before it. The decision's practical effect is to require fact‑specific application of the multi‑factor approach, with the Tribunal's one‑month guideline used for remand computations in these matters.

Note: This summary is strictly confined to the content and reasoning contained in the provided Tribunal opinion. No external facts or inferences beyond the text of the opinion have been introduced.

Show all summary ...

D.C. Agrawal, Accountant Member - These are four cross-appeals; two by the assessee and the other two by the Revenue against the orders of the learned CIT(A)-II, Surat dt. 15th Sept., 2008 and 30th April, 2009 passed for asst. yrs. 2005-06 and 2006-07 respectively. Since the issues involved in these appeals are common, they are taken up together for the sake of convenience. The following grounds have been raised by the respective parties in their appeals :

(A) Assessee's appeal - ITA No. 3554/Ahd/2008 for asst. yr. 2005-06

1. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in partly confirming the action of the AO in treating income of Rs. 55,40,879 from sale of shares as business income instead of capital gains shown by assessee.

2. It is therefore prayed that above treatment given by AO and confirmed by CIT(A) may please be reversed.

3. Appellant craves leave to add, alter or delete any ground(s) either before or in the course of hearing of the appeal.

(B) Revenue's appeal-ITA No. 4024/Ahd/2008 for asst yr. 2005-06

(1) On the facts and circumstances of the case and in law, the learned CIT(A), Surat has erred in holding that especially from the length of holding period, gain from the sale of units/shares cannot be treated as "business income", ignoring the material fact that the borrowings of Rs. 41,02,914 were made by the assessee, engagement of prominent brokers, maintenance of various bank accounts, multiple and magnitude transactions of purchase and sale of shares/securities, holding period of shares of less than 45 days and motive behind transactions in shares, only fact emerges that the assessee is a 'trader' in dealing with the shares and units.

(2) On the facts and circumstances of the case and in law, the learned CIT(A)-I, Surat has erred in treating the profit on sales of shares/units of Rs. 37,52,281 as "long-term capital gain" as against taxed under the head "Business income" by the AO.

(3) On the facts and in the circumstances of the case, the learned CIT(A) ought to have upheld the order of the AO on this issue.

(4) It is, therefore, prayed that the order of the CIT(A) be set aside and that the order of the AO be restored.

(C) Assessee's appeal—ITA No. 1932/Ahd/2009 for asst yr. 2006-07

1. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in partly confirming the action of the AO in treating income of Rs. 76,48,757 from sale of shares as business income instead of capital gain shown by assessee.

2. It is therefore prayed that above treatment given by AO and confirmed by CIT(A) may please be reversed.

3. Appellant craves leave to add, alter or delete any ground(s) either: before or in the course of hearing of the appeal.

(D) Revenue's appeal-ITA No. 2219/And/'2009 for asst. yr. 2006-07

(1) On the facts and circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to treat the profits/gains earned on the transaction of purchase and sale of shares and securities of Rs. 95,46,273 as "long-term capital gain" as against treated by the AO under the head "Business income".

(2) On the facts and in the circumstances of the case, the learned CIT(A) ought to have upheld the order of the AO.

(3) It is, therefore, prayed that the order of the CIT(A) may be set aside and that of AO may be restored to the above extent.

2. Assessee's appeal ITA No. 3554/Ahd/2008 and Revenue's appeal ITA No. 4024/Ahd/2008 for asst. yr. 2005-06.

2.1 The main issue involved is whether the profit earned by the assessee on sale of shares is to be assessed under the head "Capital gains" or under that "head business" or partial as business and partial under the head "Capital gains" ?

3. The brief facts of the case are that during the asst. yr. 2005-06, the assessee filed return of income at Rs. 56,59,780. The assessee is engaged in the business of weaving job work and grey cloth under the proprietary concern of M/s Swati Synthetics. Assessee is also a sub-broker of South Gujarat Shares & Share Brokers Ltd. During the year under consideration, assessee declared 'short-term capital gain' on sale of shares at Rs. 55,40,879 and 'long-term capital gain' on sale of shares at Rs. 37,52,281. As per discussion made by the AO in para No. 4.1, he noticed that assessee's trading in shares is at a larger scale and with a profit motive. The AO issued show-cause notice to the assessee in response to which a detailed reply was given, but the submissions of the assessee were rejected and AO treated entire sum of Rs. 96,76,402 as "business income" as against capital gains declared by the assessee. The learned CIT(A), however, conquered with AO on the basis of following reasons :

(i) The motive behind sale and purchase of shares is profit. It is evident from the fact that assessee has earned dividend of Rs. 10,55,956, whereas profit from the sale of shares is Rs. 96,76,402. Thus, the ratio of dividend to profit is 1:9. The motive therefore is clearly to earn profits from such transactions in a regular and systematic manner.

(ii) The second reason is the frequency of transactions. The assessee has entered into more than 1,833 transactions during the year in respect of 205 scripts. The scripts more than nine transactions per working day in more than 2 scripts per day. Thus, large frequency of transactions indicates that assessee is doing business rather selling investments.

(iii) The assessee has deployed infrastructure in sale and purchase of shares. It has maintained accounts with Kotak Securities NSC Ltd., M/s South Gujarat Shares & Share Brokers Ltd. and M/s Ventura Investments well known stock brokers. The assessee has maintained staff, it has paid salary of Rs. 72,000, telephone expenses of Rs. 43,000, electricity expenses of Rs. 6,300 and total expenditure in the establishment amounted to Rs. 5,85,231.

Thus, assessee has organized and established infrastructure and system for engaging in share transactions.

(iv) The assessee has taken unsecured loan amounting to Rs. 41,02,914 and has maintained account with HDFC Bank, Sarvodya Sahakari Bank, Standard Chartered Bank and ABN Amro Bank,

(v) The period of holding of shares is not more.

(vi) Majority of the scripts (70T to 80 per cent) are held for less than 45 days. The transactions have been carried out as and when there was scope to earn profits, if assessee was to hold the shares as investment, he would have retained them for a longer period.

(vii) The assessee has engaged major share brokers to confirm the transaction in shares. If he was only an ordinary investor, he should not have engaged them.

(viii) The normal household investor cannot be expected to work in a volatile market. The assessee has transacted for the peak times of market volatile and is a high risk degree who intends to reap profits from such turbulence. Assessee is not small time household investor to a person who is involved in the peak time business of share trading.

4. After giving above reasons, the learned CIT(A) however, held that the Profit of Rs. 37,52,281 on shares which were held for more than 366 days should be treated as 'long-term capital gain'. There are shares which are purchased in 1985 or before and sold during the current year. The longest holding is for 6,832 days and the shortest holding is for 366 days. Therefore/profit earned in respect of shares held for more than 366 days and above should be held as long-term capital gain' and not as "business income". In this regard, the learned CIT(A) has followed the Circular No. 4 of 2007 of CBDT [(2007) 210 CTR (St) 29]. The learned CIT(A) also made correction in respect of addition of Rs. 3,83,242 which was found to be a totalling mistake made by the AO and was duly corrected by the learned CIT(A). The learned CIT(A), however, held that share profits to Rs. 55,40,879 cannot be assessed as 'short-term capital gain', but would be a "business income".

5. Before us, learned Authorised Representative of the assessee submitted following arguments :

(i) The motive behind investment in shares is not to sell the shares to earn the profit, but to hold the shares for long-term capital appreciation. The intention was to make investment to earn good returns in the form of dividends and to generate good capital appreciation over a period of time.

(ii) Assessee's net investment in shares as on 31st March, 2004 was Rs. 1,13,14,043, whereas as on 31st March, 2005, it was Rs. 2,07,83,000.

(iii) It is incorrect on the part of the learned CIT(A) to hold that ratio of dividend to profit is 1:9 as held by him. If 'long-term capital gains' are deducted from the total profit, then what survives is Rs. 55,40,879 which is assessed as "business income" by learned CIT(A), whereas assessee is declaring it as 'short-term capital gain'. In that situation, ratio of dividend to profit would be 1:5. This also indicates that supportive motive is investment behind these transactions.

(iv) The frequency of transactions and sale and purchase of shares cannot be regarded as high, if it is compared with investment portfolio which is Rs. 2.08 crores. Mere volume of transactions by the assessee will not alter the nature of transactions.

(v) Assessee's normal business is weaving on job work basis. The turnover of weaving job-work is Rs. 13,30,302. investment in plant and machinery is Rs. 16,18,045.

(vi) It is incorrect to hold that majority of the scripts 70 per cent to 80 per cent were held for less than 45 days. No such basis for working out the date is given. In fact, out of shares on which 'short-term capital gain' was earned, gains above Rs. 45 lacs pertained to the shares which were held for more than 30 days.

(vii) It is incorrect on the part of the learned CIT(A) to hold that assessee has deployed infrastructure or that, it is working with three stock brokers. Once the assessee has investment portfolio of over Rs. 2 crores, the assessee considered is fit to use the services of sub-brokers to safeguard investment. Even otherwise for such large portfolio investment, it is quite normal to maintain accounts and take assistance. The expenditure as mentioned by the learned CIT(A) in his order was, in fact, incurred in respect of business of weaving on job work basis and not for sale and purchase of shares. Further, expenses in P&L a/c have been debited against dividend from shares, interest from banks, rental income from premises, services charges, etc.

(viii) The assessee has not borrowed any fund for deploying in investment in shares. Total amount borrowed from the bank is Rs. 17,71,395, whereas investment in shares is in crores. The other unsecured loan of Rs. 41,02,915 is very old and no new funds have been borrowed during the current year. The assessee has net capital of Rs. 2,39,64,990, whereas investment in shares is only Rs. 2,07,83,000. Thus, it is incorrect to hold that the investment in shares has been made by the assessee out of borrowed funds.

(ix) The assessee has shown the shares and securities under the head "Investment" and not as stock-in-trade. This has been accepted by the Department over the years as assessment proceedings have been done under scrutiny. Further the assessee has not converted the investment into stock-in-trade. The investment in shares has never been valued at market price or cost whichever is lesser but has been consistently valued at cost and declared accordingly in the return of income. Thus, it shows the intention of the assessee that it did not intend to carry on trade or adventure in the nature of trade. The fact that the holding in shares have been shown as investment and not as stock-in-trade is a relevant consideration as held by the Hon'ble Supreme Court in the case of Karam Chand Thapar & Bros. (P.) Ltd. v. CIT [1971] 82 ITR 899 (SC).

(x) Assessments for last several years have been made under scrutiny assessment and assessee's income from sale and purchase of shares have been accepted as either 'short-term capital gain' or 'long-term capital gain' by the Revenue without any disturbance. In those years also, the frequency and volume of transactions were at par as in the current year. All the transactions carried out in the current year and also in the past years were delivery based on which security transaction tax has been paid except in those cases were shares are sold on the same day without taking their delivery. The settlement period is three times in a week.

The delivery is received in demat account on the next day.

(xi) Most of the scripts sold were held either for more than one year or for less than one year. Thus, it shows intention of the assessee which is that when shares were purchased it intended to hold them as investment. Part of the shares were sold in short-term period, whereas other part of the shares were held for long-term.

5.1 Finally, the learned Authorised Representative of the assessee relied on the decision of Tribunal Delhi Bench in the case of Arjun Kapur v. Dy. CIT [1999] 70 ITD 161 (Delhi) wherein it has been held that shares held for a period of one year or more should be treated as long-term capital gain' when sold. He then referred to the decision of Tribunal Bombay Bench in the case of Janak S. Rangwalla v. Asstt. CIT [2007] 11 SOT 627 (Mum.) for the proposition that mere volume of transactions transacted by the assessee would not alter the nature of transactions. The transaction as a whole has to be taken into consideration.

5.2 Further, the learned Authorised Representative of the assessee referred to the decision of Tribunal Bombay Bench in the case of Gopal Purohit v Jt CIT [2009] 29 SOT 117 (Mum.) for the position that if transactions are delivery based, then it should be treated as capital gains. He also referred to the decision of Tribunal Lucknow Bench in the case of Sarnath Infrastructure (P.) Ltd. v. Asstt. CIT [2010] 124 ITD 1 (Luck.) for the similar proposition.

6. On the other hand, the learned Departmental Representative supported the orders of the authorities below. He submitted that recording in the books of account as investment will not alter the basic intention of the assessee. He have been too frequently indulging in sale and purchase of shares and has a big establishment. Out of total capital of Rs. 2.39 crores, deployment of capital in shares is Rs. 2.07 crores. There is large frequency of purchase of shares per day, there is a dealing with renowned share brokers; most of the time assessee is engaged in share business, therefore, it cannot be said that assessee is only making investments and not dealing in shares. The learned Departmental Representative submitted that if we look into Explanation to s. 73 of the IT Act, 1961, they have laid down a criteria that where income from "other sources" is less than "income from dealing in shares", then such dealing in shares will be treated as speculation. In the present case also, profit from shares is much more as compared to income from "other sources"; i.e. interest income or dividend income. He referred to the paper book of the assessee and submitted that income from "other sources" is only Rs. 1,33,096, whereas profit on sale of share is Rs. 96,76,402. He then referred to the decision of Hon'ble Supreme Court in the case of Patnaik & Co. Ltd. v. CIT [1986] 161 ITR 365 / 27 Taxman 287 (SC) for the proposition that investment in Government loans and loss incurred in sale of investment would be "revenue loss" and not "capital loss". This decision was followed by Hon'ble Allahabad, Madras and Delhi High Courts in the following cases also :

(1) Commissioner Of Income-Tax v. Dhampur Sugar Mills Ltd. [1988] 171 ITR 675 (All.)

(2) CIT v. S.B. Sugar Mills [1991] 187 ITR 441 / [1992] 63 Taxman 37 (All.)

(3) Mohamed I. Unjawala v. Asstt. CIT [1995] 213 ITR 190 / 83 Taxman 106 (Mad.)

(4) CIT v. D.S. Bist & Sons [2000] 243 ITR 179/[2001] 117 Taxman 642 (Delhi)

7. From the above, it follows that assessee always trade in investment. Once investments are daily business, then profit earned on sale of such investments would be "business income". If the way, learned Authorised Representative of the assessee is suggesting is accepted, then there will not be any case of sale and purchase of shares as trading because merely by recording holdings as investments in the books, the transaction would become that of investment and only capital gain would charged which is taxed at much lower or higher rates as compared to business income. The assessee is frequently dealing in shares at large scale. Such camouflage as recorded in the books of account should be understood and such veil should be pierced. Reality should be brought out and artificiality should be filtered. The learned Departmental Representative also submitted that after dematization of the shareholding, delivery of shares is no longer criteria to decide whether an assessee is dealing in shares as trader or as an investor. It was relevant when settlement period was more than seven days and physical delivery of shares used to take place. Further relevant factor is that share should be transferred in the name of the assessee if assessee really intended to make investment. In any case, learned Departmental Representative submitted that Tribunal should fix up the criteria for deciding which transaction should be treated as a trading and which transactions should be treated as investment.

8. In rejoinder, the learned Authorised Representative of the assessee clarified that decision of Hon'ble Supreme Court in the case of Patnaik & Co. Ltd. (supra) would be applicable only when there was a compulsion on the assessee to make investment for furthering of his business. Where investments are made at free will, they cannot be converted into trading.

9. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In our considered view, the Tribunal in the cases of Gopal Purohit (supra ) and of Sarnath Infrastructure (P.) Ltd. (supra) laid down criteria for Holding as to when transactions in shares be treated as trading and when they should be treated as investment.

10. For the sake of convenience, we reproduce hereunder the relevant portion of the order of Tribunal Bombay Bench in the case of Gopal Purohit (supra) :

"If these facts are taken into consideration, then, following conclusions emerge-

(i) The facts of the year under consideration with regard to nature of income(s) earned by the assessee and the transactions are same in all these years except transactions in F&O segment in some of the years wherein this kind of activity was started by the stock exchange.

(ii) Interest on borrowed capital has been allowed as business expenditure against the profit on jobbing activities shown by the assessee as business profit.

(iii) The assessee has shown shares purchased on delivery basis as investment at the end of the year and no stock-in-trade exists on that date and the assessee has earned both long-term and short-term capital gains which means the assessee has also held shares for a period of more than 12 months.

8.1 Thus, the nature of activities, modus operandi of the assessee, manner of keeping records and presentation of shares as investment at the year end is same in all the years, hence, apparently, there appears no reason as to why the claims made by the assessee should not be accepted. However, the Revenue authorities have taken a different view in the year under consideration by holding that principle of res judicata is not applicable to the assessment proceedings. There cannot be, in our view, any dispute on this aspect but there is also another judicial thought, that there should be uniformity in treatment and consistency under the same facts and circumstances and we have already found that facts and circumstances are identical, even though a different stand has been taken by the Revenue authorities. This action of the Revenue authorities has led us to ask ourselves that in this year why it has been done so. In the process to find the answer, we noted that there was a change in the scheme of taxation relating to short-term capital gains and long-term capital gains. Through the Finance Act, 2004, the legislature imposed securities transaction tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the legislature exempted long-term capital gain under s. 10(38) of the Act from the levy of tax and on short-term capital gain, a concessional rate of tax i.e., 10 per cent has been levied subject to the condition that transactions resulting into this type of gain must have suffered securities transaction tax. This is the first year of such change and having regard to the quantum of gains, this scheme of taxation only, in our view, has prompted the Revenue authorities to take a different view on the same types of transactions entered into by the assessee in earlier years. At this stage, we consider it fit to state that there is no dispute before us that assessee has claimed exemption under s. 10(38) and/or has paid tax under s. 111A at concessional rate on the transactions, where securities transaction tax has not been. It is also noted that the assessee has paid tax on short-term capital gains at normal rates on share transactions executed in the period prior to imposition of securities transactions tax. In our view, the legislative change of this nature, whereby no change has been made in respect of nature and modus operandi of such share transactions, resulting into any advantage cannot be taken away by the Revenue authorities in this manner and in these circumstances, we are of the view that, principle of consistency, though it is an exception to the principle of res judicata must be applied here. It is further so because the payment of securities transaction tax is mandatory i.e., whether an assessee earns the profit or not or suffers a loss and by imposition of such tax, the legislature has not given any benefit to a class of transactions as a whole though it may result into an apparent benefit to individual(s) entering into those transactions. Thus, in our view, in the facts and circumstances of the case, on the basis of principle of consistency alone, the action of the Revenue authorities is liable to be quashed. We order accordingly and direct the AO to accept the claims of assessee in regard to short-term capital gain and long-term capital gain."

10.1 In the case of Sarnath Infrastructure (P.) Ltd. (supra), the Tribunal considered the Circular No. 4 of CBDT, dt. 15th June, 2007 and various other decisions, such as, CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC), CIT v. H. Holck Larsen [1986] 160 ITR 67 / 26 Taxman 305 (SC), Fidelity Northstar Fund, In re [2007] 288 ITR 641 / 158 Taxman 372 (AAR-New Delhi), Fidelity Advisor Series VIII, In re [2004] 271 ITR 1 /[[2005] 142 Taxman 111 (AAR-New Delhi), J.P. Harrison (Watford) Ltd. v. Griffith (H.M. Inspector of Taxes) [1962] 40 Tax Cases 281 (HL), Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC), Central India Agencies (P.) Ltd. v. CIT [1970] 77 ITR 959 (All.), Mrs. Sarojini Rajah v. Commissioner Of Income-Tax, Madras.* [1969] 71 ITR 504 (Mad.), Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486 (SC), Associated Industrial Development Co. Ltd. (supra), Cit, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC) and culled out following principles which are described in para No. 13 of that order :

"13. After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes :

(1) What is the intention of the assessee at the time of purchase of the shares (or any other item) ? This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment? Whether shown in opening/closing stock or shown separately as investment or non-trading asset ?

(2) Whether assessee has borrowed money to purchase and paid interest thereon ? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.

(3) What is the frequency of such purchases and disposal in that particular item ? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).

(4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value ? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade.

(5) How the value of the items has been taken in the balance sheet ? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade.

(6) How the company (assessee) is authorized in memorandum of association/articles of association ? Whether for trade or for investment ? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity ? And vice versa.

(7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real.

(8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone not be sufficient to say that assessee was holding the shares (or the items in question) for investment.

(9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item ? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made ?

(10) It is permissible as per CBDTs Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios.

(11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen"

11. When we examine the facts of the case, we find assessee has maintained the books of account in respect of dealing in shares and assessee has shown the transactions in shares as investment and not as stock-in-trade. It has been shown consistently for several years in the past and Department has not challenged the book keeping or accounting of shares as investment. No contrary materials or facts have been pointed out by the Revenue to show that facts in the current year are different than the facts in earlier years. It is also not pointed out by the Revenue that frequency and number of transactions are abnormally high in the current year as compared to what was done in earlier years.

12. There is also no material to come to the conclusion that the valuation of investment has been done on cost or net realizable value whichever is low. The assertion of the assessee is that entire portfolio has been valued at cost as at the end of accounting year which remained unchallenged.

13. The shares which are sold out of such investment this year were mostly purchased a year or earlier showing that the assessee had intention while purchasing them to hold them and they were reflected in that balance sheet as investment. The assessee has enjoyed dividend income and declared the same in the return of income trading the transactions as investment, even if frequency of selling of shares may be more but in respect of shares held for a considerable longer period (for more than 366 days) as per finding given by the learned CIT(A). This finding remained uncontroverted. The assessee has earned gain of Rs. 37,52,281, on sale of those shares which were held for more than 366 days and upto 6,832 days. In any case, when those shares were purchased it could not be said that intention of the assessee was to deal in them and not to hold them as investment. Even in the case of investment it is for the assessee to decide when to dispose them off so that to give maximum return out of them. There is no theory that asset held on long-term basis should be sold only at the time of need or in emergency. He can very well sell the investments to reap the benefit when prices of shares are high so as to earn better gains and make investment elsewhere. In our considered view, it is the decision of the assessee to dispose of an investment, if according to him, market value thereof have reached a plateau so as to make investment in other assets which have potential of appreciation in market value. This decision to sell his investment at high market price cannot convert an otherwise investment into trading. If in the past, the Department has accepted the sale of shares of holdings of more than a year as investment and profits thereon has been assessed under the head "Capital gain", then there is no reason to hold differently this year. We accordingly confirm the order of the learned CIT (A) in respect of holding that profit of Rs. 37,52,281 should be assessed as 'long-term capital gain'.

14. In respect of profit of Rs. 55,40,679 being 'short-term capital gain' as claimed by the assessee and held as profits assessed under that business by two authorities, we find that in many cases there is delivery of shares and shares were registered in the name of the assessee. The holding period of the shares is from '0' days to '366' days. In some cases, the frequency of transactions is apparently substantial as on one day the assessee has purchased several scripts and sold several of them on the same day.

15. The question is whether therefore, merely from frequency of the transactions carried on by the assessee, he is treated as dealer in shares or still he is held as investor. As found in the case of Sarnath Infrastructure (P.) Ltd. (supra) also, assessee adduced evidence to show that his holdings are for investment as recorded in the books of account. The holdings are valued at cost, and such accounting has been accepted by the Revenue in earlier years. There .is no material to show that assessee has declared himself as a trader in shares and legal requirements therefor have been complied with. It is also a fact that, he has not borrowed any money for investing in shares. Merely because, assessee had some borrowed funds it would not by itself show that they were deployed in investment. Notwithstanding, even borrowings are required to settle payment obligations in respect of investments, like one takes loan for purchasing a house. In any case, high frequency transactions and low period holdings indicate trade, whereas low frequency transactions and high period holdings indicate investment.

16. In this case, the assessee has discharged the onus of showing that it is making investment but Revenue is able to show that there are high frequencies and low holdings in many transactions of shares indicating that assessee has some intention of purchasing and selling shares as a trader. The case of the assessee is supported by the fact that it has entered the purchases in the books as investment, shares are valued at cost and Revenue is holding such accounting treatment as investment in the past. Thus, there cannot be a fixed criteria to decide as in the present case whether assessee has traded in shares even though assessee held them as investment.

17. Though it has been held in the case of Sarnath Infrastructure (P.) Ltd. (supra) that delivery of shares is an important criteria for holding that assessee is investing in them but after dematization where shares are delivered in the demat account the next day, it cannot be held that in all such cases, it would be investment and not trading. If that is so held, then all those traders in shares in whose demat accounts shares are delivered can be said to have earned capital gains and not profits. Therefore, only one criteria, i.e. , delivery of shares alone will not be sufficient to decide the issue. Even otherwise in Sarnath Infrastructure (P.) Ltd. (supra) itself it has been held that cumulative effect of several factors will decide the issue.

18. Considering the totality and peculiarity of the facts of this case, we find that assessee is neither fully acting as a trader nor as an investor. Demarcation is quite hazy; though in the books he is showing all the purchases as investment but frequency of transaction in several cases is so large and holding period in many cases is so small from 0 to a week or so that assessee is de facto selling and purchasing shares as trader. He is also holding shares for long period indicating that they are held as investment. Therefore, a criteria has to be fixed for determining as to when he is acting as trader and when as investor. Accordingly, we decide following criteria to hold when gains are to be taxed as profit to be earned under the business or to be taxed as short-term capital gain, we hold that if shares are not held even say for a month, then the intention is clearly to reap profit by acting as a trader and he did not intend to hold them in investment portfolio. We believe that if a person intends to hold his purchases of shares as investment, he would watch the fluctuation of rates in the market for which a minimum time is necessary, which we estimate at one month. Where shares are held for more than a month, they should be treated as investment and on their sale short-term capital gain should be charged. When shares are held for less than a month, gain on them should be treated as profit from business.

19. The assessee will give the working and computing 'short-term capital gains' on the above basis. The rest of the profit will be treated as assessable under the head "Business".

20. As a result, appeal of the assessee, i.e., ITA No. 3554/Ahd/2008 for asst. yr. 2005-06 is treated as allowed but for statistical purposes.

ITA Nos. 2219 & 1932/Ahd/2000 for asst yr. 2005-06

21. The brief facts of the case are that the assessee has earned a total profit of Rs. 1,71,65,030 as 'short-term capital gain'. Out of this, the learned CIT(A) held that Rs. 76,48,757 as "income from business" and not as 'short-term capital gain'; whereas sum of Rs. 95,46,273 held as 'long-term capital gain' and Rs. 76,48,757 as 'short-term capital gain'.

22. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. Looking to the facts and circumstances of the case, for the reasoning given in asst. yr. 2005-06 in assessee's own case as above, we set aside the issue relating to 'short-term capital gains' in this year also to the file of AO for reworking out the 'short-term capital gains' and business as per criteria decided in the asst. yr. 2005-06. the AO will also carry out necessary computation. However, the decision of the learned CIT(A) in holding sum of Rs. 95,46,273 as 'long-term capital gains' is confirmed for the same reasons as given in asst. yr. 2005-06.

23. As a result, appeal of the assessee is treated as partly allowed but for statistical purposes.

24. In result, appeals of the assessee are partly allowed for statistical purposes for statistical purposes, and appeals of the Revenue are dismissed.