ORDER

Deepak R. Shah, Accountant Member. - Both these appeals by the revenue are directed against the orders of the learned Commissioner of Income-tax (Appeals)-XXVI, New Delhi, dated 25-2-2009 in an appeal against assessment framed under section 143(3) of the Income-tax Act, 1961 ('the Act').

2. The only issue raised in both the appeals is against the treatment of profit on sale of shares treated by the assessee as capital gain but assessed by the Assessing Officer as business income.

3. In the case of Shri Rohit Anand (Individual), the assessee declared income from business, income from speculation business, short-term and long-term capital gain. The Assessing Officer noted that the assessee is engaged in the business of trading in gold and gold ornaments and also in investment in shares and mutual funds. The Assessing Officer held that the transaction in shares will amount to business of dealing in shares and hence be taxed accordingly. For this purpose, he referred to the following:—

(1) He observed that income from business of jewellery is only Rs. 2,60,025 whereas the short-term capital loss declared is Rs. 59,90,569 and long-term capital gain declared is Rs. 3,01,34,600.
(2) The total transaction in respect of short-term gain declared is Rs. 11,11,50,910. Therefore, these transactions are for making profit and not for earning dividend or interest.
(3) The total transaction in purchase and sale of shares is Rs. 15,95,75,381.
(4) The transactions have been entered into from 1-5-2005 to 31-3-2006. There is continuous purchase and sale of shares. It is not one time investment but continuous series of operation.
(5) The purchases are made out of own funds and not borrowed funds.
(6) The period of holding varies from 360 days to 20 days.
(7) There is regular pattern of purchase and sale.
(8) Looking to the volume of transaction, the assessee is devoting substantial time for purchase and sale of shares.
(9) The shares are shown as investment in the accounts.
(10) The Securities are listed securities.
(11) The investment is in independent companies and not in sister or related companies or in which the assessee is a promoter.
(12) The amounts are received and paid and are not merely book entries.

The Assessing Officer issued a show-cause notice as to why the transactions should not be treated as business income and not as capital gain. The assessee submitted as under:—

"1. All investments have been clearly mentioned in the personal balance sheet and books of account as capital assets. The details of closing investment as of 31st March of respective year had also been appended as annexure in the respective ITR.
2. The investments are in the nature of independent activity.
3. The investments have always been made with a view towards capital appreciation and earning dividend income from them. During the course of the year certain investments may be bought and sold with a view to enhancing long-term appreciation prospects. Dividend earned in current and earlier years is as under:—

4. The scale of activity is not substantial. We also submit that the magnitude of transactions does not change the nature of the transactions.
5. Transactions regarding these investments are only entered into based on specific advice from market advisors with a view to maintain an ideal and balanced portfolio that is geared towards growth. Sometimes capital market crisis due to political/global conditions along with investment climate may warrant a transaction decision to be made.
6. All investments are from own funds.
7. As these are capital assets the typical holding period of these investments are long-term, i.e., more than 1 year. The investments are with an aim towards capital appreciation. Short-term investments are typically more risky and would easily erode capital.
8. The ratio of sales to holding and purchases is very low. Sales have always been lower than the holding and purchases.
9. I do not devote much time towards these investments. The portfolio needs realignment/adjustment from time to time, depending on the ever changing capital market conditions. The incomes derived from these investments are not the primary means of livelihood. The income is more by way of preserving capital and trying to beat inflationary impact of the economy. I am trying to derive income from exploitation of my own assets.
10. The holdings have been clearly mentioned in the personal balance sheet as investment in capital assets. This has been the case consistently over a period of many years now.
11. All the investments are mutual funds and securities that are listed on the recognized stock exchanges in the country like National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)."

The Assessing Officer held that just by mentioning the closing stock as investment, it cannot alter the nature of business transaction. The volume of transaction and time devoted towards the activity is not as an investment activity. The scale of activity is substantial considering the transaction to the tune of over Rs. 15.95 crores as holding period for shares bought and sold is not much. Therefore, the inference can be drawn that the nature of transaction is in the course of business and not by way of investment. Accordingly, the short-term and long-term capital gain declared by the assessee is to be assessed as business income.

4. The learned CIT(A) held that the assessee has earned dividend income of over Rs. 31 lakh from the investment. Dividend income is directly related to investments and a trader in share would not ordinarily received dividend to that extent. Average holding period in respect of long-term capital gain comes to more than 2 years 9 months and in respect of short-term capital gain, the period of holding is of 5 months. Thus considering the period of holding it does not amount to trading in shares. He also held that the investment is out of the own funds and not borrowed funds which is relevant to consider the intention of the assessee. He also held that no expenses have been made for carrying out share purchase and sale activity and are also not claimed. The shares are treated as investment in the books of account. The assessee in his individual capacity is carrying on independent jewellery business from which he is deriving his business income. The assessee has invested only in few scrips contrary to the trading pattern where the trading is done in large number of shares with frequent transactions which are settled intraday or within a week itself. The assessee has not even rotated his stock number of times which normally a businessman does. Taking all these factors into consideration, the learned CIT(A) held that the assessee's income is to be assessed under the head "Capital gains" and not under the head "Profits and gains of business".

5. As regards income in the hands of HUF, the Assessing Officer noted that the long-term capital gain earned by the assessee is Rs. 1,89,00,735. Total value of transaction is Rs. 3,20,36,544 in respect of short-term transaction and total volume of the shares purchased and sold is Rs. 5,13,14,009. These transactions are substantial and hence to be treated as business transactions and not giving rise to capital gain.

6. The learned CIT(A) apart from the facts as noted in the case of individual, also noted that short-term capital gain declared by the assessee is Rs. 2,35,434 and long-term capital gain is Rs. 1,89,00,735. Considering the fact that the shares are held as investment and not out of borrowed funds and being on the same line as in the case of individual, the amount is to be assessed as capital gain.

7. The revenue is in further appeal before us challenging the action of the learned CIT(A) treating the income as capital gain and not as business income.

8. Whereas the learned DR Shri Stephan George sought to rely upon the finding of the Assessing Officer, the learned counsel for the assessees Shri Sanat Kapoor reiterated the submissions made before the CIT(A) and his findings thereon.

9. We have carefully considered the relevant facts and the findings of both the authorities below. The assessee in his individual capacity carries on business of jewellery. Apart from said business, the assessee invested in shares and treats shares as investment in his books of account. This itself manifests the intention of the assessee as to whether he proposed into dealing in shares or earn dividend and profit out of such investment. The Assessing Officer was guided more because of the total amount involved rather than the actual intention and the way of carrying on share transaction. There is no doubt that even a single transaction can be in the nature of trade but the assessee has demonstrated that his intention was never to trade in shares. The intention is manifested by treatment given to such investment that the investment is out of own funds and not borrowed funds; that the investment is not rotated frequently; that the total number of transactions are very few; that all the shares purchased are not sold and rather held for quite number of days. It is to be noted that the Income-tax Act itself has provided that when the shares are held for a period of one year or more will be treated as long-term capital asset contrary to other assets where the holding period to treat such asset as long-term is more than 36 months. Thus even after holding the shares for more than 12 months and showing such intention from the conduct, the Assessing Officer cannot replace his opinion for that of the assessee in holding that the shares are held as stock-in-trade and profit from which is to be assessed as business income. In all such cases the intention is manifested by the assessee himself by his conduct and other relevant factors as considered by the learned CIT(A). It is also seen that the shares were treated as investment in earlier year and which fact has been accepted by the Assessing Officer. The assessee has also earned huge dividend income from such shares. The Assessing Officer merely because of the total volume of transaction is substantial, is guided to hold the income as business income. However, he failed to recognize that the volume of transaction includes the appreciation in shares also and such appreciation has been offered for tax. If volume of transaction is the criteria, what is to be examined is how frequently the transaction is done, whether the transaction is settled in the course of the day of trading itself or in the settlement period itself so as to avoid payment of full purchase price. Here the assessee has been holding the shares by taking delivery and making full payment for such investment. In such circumstances, the transactions are to be treated as giving rise to the capital gain and cannot be branded as trading in shares. What is relevant is the intention of the assessee himself at the time of making investment so as to determine whether the transaction was for dealing in shares or making investment for earning dividend and appreciation from such investment. The total number of shares dealt in respect of long-term portfolio is only 5. This cannot be considered as voluminous transaction. Therefore, this transaction in shares cannot be said to be with intention to deal in such shares. Rather the transactions were with intention of earning appreciation from such shares. Therefore, the same are assessable as capital gain and not as profits and gains of business. We, therefore, uphold the orders of the learned CIT(A).

10. In the result, both the appeals are dismissed.