ORDER
V.K. Gupta, Accountant Member. - This appeal, filed by the assessee, is directed against the order of CIT(A) — XXV Mumbai, dated 30-6-2008 for assessment year 2005-06.
2. The grounds raised by the assessee read as under :—
"1.
On the facts and in the circumstances of the appellant's case and in law the Learned CIT(A) has erred in upholding the assessment of the sum of Rs. 5,731,274 as business profits as against short-term capital gains shown in the return of income filed by the appellant.
2.
On the facts and in the circumstances of the appellant's case and in law the Learned CIT(A) has erred in upholding the assessment of the sum of Rs. 6,000,166 as business profits as against long-term capital gains on sale of shares prior to 1-10-2004 shown in the return of income filed by the appellant.
3.
On the facts and in the circumstances of the appellant's case and in law the Learned CIT(A) has erred in upholding the assessment of the sum of Rs. 11,268,796 as business profits as against long-term capital gains on sale of shares after 1-10-2004 and, accordingly, exempt from tax under section 10(38)."
3. The facts, in brief, are that the assessee filed its return of income declaring total income at Rs. 1,55,40,840 which was taken for scrutiny assessment. In the course of assessment proceedings, the Assessing Officer noted that the assessee's income comprised of the following :—
| Net profit i.e., profit from trading in shares (equity) & (F&O) |
33,70,232 |
| Agricultural Income |
68,000 |
| Short-term capital gains taxable at the rate of 10% |
57,31,52,267 |
| Long-term capital gains exempt |
1,12,68,79,577 |
| Long-term capital gains taxable at the rate of 10% |
60,00,16,649 |
| Bank interest |
8,60,463 |
| Dividend on shares |
14,81,33,915 |
| Interest on PPF |
68,055 |
| Profit on sale of plot at Jodhpur |
3,12,500 |
| Refund from LIC |
24,810 |
| Total |
2,84,46,868 |
4. The Assessing Officer, thereafter, having regard to the nature of incomes shown by the assessee, framed a question as to whether the short-term and long-term capital gains offered by the assessee fell in the category of capital gains or whether these were of the nature of business income of the assessee. The Assessing Officer proceeded to find out the answer by examining the number of companies in respect of which assessee sold or purchased shares, frequency of sale/purchase transactions and volume thereof. The assessee submitted the details of transactions resulting into business profits, short-term capital and long-term capital gain. Based upon these details, the Assessing Officer held that frequency of the transactions carried out by the assessee was very high with large volume of shares. The Assessing Officer also observed that the assessee had borrowed funds which were also utilized for carrying out share transactions. The Assessing Officer also observed that assessee had full office infrastructure for carrying out business of share trading and had claimed an expenditure of Rs. 6,41,895 under various heads. The Assessing Officer also found that transaction, where no delivery had been taken, had been squared up on the same day and the profit/loss resulting from was shown as business income/loss. In respect of delivery based transactions, the Assessing Officer found that as per statement of capital gains filed by the assessee, the period of holding of most of the shares was few days only. In view of above facts, the Assessing Officer required the assessee to explain as to why the share transactions should not be treated as business income. The assessee submitted that he was carrying both activities i.e., business of share trading as well as investment in stocks and the income earned from share transactions squared off on daily basis had been shown as business income and income earned from shares held for a longer period was shown either as short-term capital gain or long-term capital gain depending upon the period of holding which was the criteria as prescribed in law and nature/volume of shares had no bearing on such treatment. The assessee also referred to the CBDT Circular No. 4/2007, dated 13-6-2007 to establish the intention of the assessee in regard to activities undertaken by the assessee. The assessee also submitted details of investment portfolio and dividend income earned by him to show that the treatment given by the assessee in respect of share transactions undertaken by the assessee was in consonance even by the interpretation of the impugned circular. The Assessing Officer did not accept the claim of the assessee for the following reasons :—
(i)
that the treatment given by the assessee in the books of account by shares as investment was not determinative factor to decide the real nature of transactions and relied on the following judicial decisions in this regard :—
(i)
Tuticorin Alkali Chemicals & Fertilizers Ltd. v.
CIT [1997] 227 ITR 172 (SC);
(ii)
Chowringhee Sales Bureau (P.) Ltd. [1973] 87 ITR 542 (SC);
(iii)
Punjab Distilling Industries Ltd. v.
CIT [1959] 35 ITR 519 (SC);
(iv)
Commissioner Of Income-Tax, West Bengal-Iii v. Provincial Farmers (Pvt.) Ltd. [1977] 108 ITR 219 (Cal.);
(v)
CIT v.
J.D. Italia [1983] 141 ITR 948 (AP);
(vi)
CIT v.
Bazpur Co-op. Sugar Factory Ltd. (
sic)
(vii)
G. Venkataswami Naidu & Co. v.
CIT [1959] 35 ITR 594 (SC);
(ii)
that whether the question that an activity amounted to business or investment activity would depend on the facts of each case and there were number of decided cases on the subject which provided guidance having regard to decision of the Hon'ble Supreme Court in the case of
G. Venketaswami Naidu & Co. (
supra) and the impugned circular No. 4/2007 and if the principles/guidelines given in the above decision and the circular were applied to the facts of the present case, then, it was clear that assessee had, during the year repeatedly bought and sold shares after holding them for few days or for short duration only with one intention
i.e., profit making, hence, there was no intention of holding the shares for purposes of investment.
The Assessing Officer also drew support from the decision of the Tribunal in the case of Dy. CIT v. Smt. Deepaben Amitbhai Shah [2006] 99 ITD 219 (Ahd.) to hold that assessee was engaged in only one activity i.e., activity of earning profit through sale and purchase of shares or purchase and sale within short period or long period and the expenses incurred thereon were also inseparable, hence, the entire profits arising out of such transactions were to be assessed as income from business and profession and consequently, the benefit of indexation on shares claimed as long term investment was also not allowable. The Assessing Officer, accordingly, completed the assessment at total income of Rs. 2,74,66,784. Aggrieved by this, the assessee carried the matter in appeal before the ld. CIT(A) wherein assessee assailed the order of Assessing Officer on all counts and also made various submissions in support of its claim. The ld. CIT(A) held that the transactions carried on by the assessee could be divided into two categories i.e., the share transactions where delivery was not taken/given and shares with delivery where the holding period was mainly few days. Thereafter, the ld. CIT(A) observed that during the period from 1-4-2004 to 30-9-2004, the appellant had purchased 5,40,413 shares of 46 companies amounting to Rs. 2,81,93,861 resulting into loss (final) of Rs. 249. In the period from 1-10-2004 to 31-3-2005, the assessee had purchased 6,88,003 number of shares of 85 companies for a consideration of Rs. 3,99,61,858 which resulted into a profit of Rs. 57,89,425 on sale thereof and the assessee had further sold 7,59,003 shares worth Rs. 5,00,12,879 resulting into a short-term capital gain of Rs. 57,31,274. The ld. CIT(A) also held that assessee was only SSC passed and was attached to a broker namely Shri R.S. Damani and the assessee used to go with him and was dealing in shares for 20 years. He was also attached to some other share brokers and was also using software to understand the trend of shares and the market and was also reading newspapers, hence, the share trading was not a side activity but a full fledged activity particularly when no other business activity was done by the assessee, and, therefore, merely because some shares were held for a year, the same did not become an investment. The ld. CIT(A), thereafter, also relied on various decisions to determine the real nature of transaction and for the proposition that mere entries in the books of account showing shares as investment were not determinative factor. The ld. CIT(A) also referred to the Circular No. 4 of 2007 and to various other judicial decisions including ruling of Authority for Advance Rulings in Fidelity North Star Fund, In re [2007] 288 ITR 641 and held that to decide the nature of transaction, three parameters were important namely; magnitude of purchase and sale, period of holding and motive behind it. He, thereafter, analysed the facts of the case and found that the volume of shares in hundred crores, number of shares transacted was also very high and the trading activities were carried on day-to-day basis. The assessee was also having borrowed loans to the tune of Rs. 3.39 crores, hence, he held that the assessee was engaged in adventure in the nature of trade. The ld. CIT(A) also analysed the transaction of last 5 years to further support his view. Thereafter, the ld. CIT(A) also drew support from the decision of Smt. Deepaben Amitbhai Shah's case (supra) to hold that assessee was engaged in the nature of trading on full scale and he had shown purchases of shares as investment in the books of account to evade tax which were, in fact, stock-in-trade. Finally, he confirmed the action of Assessing Officer. Aggrieved by this, the assessee is in appeal before us.
5. The learned counsel, initiated his arguments by stating that assessee was both trader and investor and entered into transactions of sale and purchase of shares in two forms i.e., delivery based transaction and non-delivery based transaction. The assessee entered into delivery based transaction only with the intention of investment, hence, showed profits as long-term capital gain or short-term capital gain thereon. The assessee squared up non-delivery based transactions on the same day and showed the profit or loss/such transactions as business profit or business loss; hence, on the basis of these factual details only, the assessee's case was liable to be accepted. The ld. Counsel further submitted that the assessee had also earned dividend to the tune of Rs. 15 lakhs on the shares purchased on delivery basis which also supported the claim of the assessee that those shares were held as capital asset and not as a trading asset.
5.1 Thereafter, the ld. Counsel referred to para 4.3 of the assessment order to show that all the particulars mentioned therein referred to volume but the Assessing Officer drew the influence about the frequency of the transaction which were too entirely different aspects, hence, the Assessing Officer's finding relating to frequency of transactions was not based on any material at all or based on grossly in-adequate material.
5.2 The ld. Counsel further contended that total borrowings of the assessee on the first day of the financial year were Rs. 16,75,000 which were reduced to Rs. 5,25,000 and these borrowings had by and large, been utilized for other purposes, hence, findings of Revenue Authorities, in this regard, were not correct. He further contended that if it was assumed for a moment that these funds were utilized in respect of share transactions even then, having regard to the quantum of investment, it could not be a decisive factor to determine the nature of transactions.
5.3 The ld. Counsel, thereafter, contended that frequency had to be seen scrip-wise and not on the basis of shares of various companies, being treated to be a single commodity and on this basis there was little frequency in the transactions of purchase and sale of shares by the assessee.
5.4 The ld. Counsel also contended that whether a particular person was an investor in shares or dealer in shares was not a question of volume and if that test was applied, then the LIC would also become a trader.
5.5 The ld. Counsel contended that, in fact, the assessee worked with brokers and had been a jobber could not be a decisive factor to hold that assessee was not at all an investor and was purely a trader in shares and, rather, the fact that assessee was a broker was irrelevant. In this regard, he placed reliance on the following judicial decisions :—
(i)
Hon'ble Kerala High Court in the case of
Assistant Commissioner Of Income-Tax v. Kethan Kumar A. Shah [2000] 242 ITR 83.
(ii)
Tribunal decisions in the case of
Arjun Kapur v.
Dy. CIT [1999] 70 ITD 161 (Delhi) and in the case of
Addl. CIT v.
Sunder Iyer [IT Appeal No. 295 (Mum.) of 2001] and in the case of
Motilal Oswal v.
Addl. CIT [2006] 8 SOT 771 (Mum.).
5.6 The Learned Counsel also contended that there was some erroneous presentation of the facts of the case both in the orders of Assessing Officer as well as that of ld. CIT(A) and contended that main factual mistake in both the orders was that for most of the scrips, the assessee had purchased and sold shares within few days whereas the fact was that for most of the scrip , the period of holding was of several months and years and the transactions where the share of a particular company were sold within a few days from the date of purchase were very few and far between, and drew our attention to page 145 to show the period of holding in respect of transactions resulting into short-term capital gain or loss from 1-4-2004 to 30-9-2004 which is reproduced as under :—
| Period of holding of shares |
Amount of short term capital gain (Rs.) |
| 0-3 months |
(3,96,922) |
| 4-6 months |
(1,37,544) |
| 7-9 months |
2,31,610 |
| More than 9 months |
3,92,606 |
5.7 Thereafter, he referred to page 147 to show the period of holding in respect of transactions resulting into short-term capital gain from 1-10-2004 to 31-3-2005, which is reproduced as under :—
| Period of holding of shares |
Amount of short term capital gain (Rs.) |
| 1-3 months |
2,85,575 |
| 3-6 months |
32,62,005 |
| 6-9 months |
16,62,760 |
| 9-12 months |
5,79,086 |
5.8 He, thereafter, drew our attention to page 152 to show the period of holding in respect of transactions resulting into long-term capital gain for assessment year 2004-05, which is reproduced as under :—
| Period of holding of shares |
Amount of long term capital gain (Rs.) |
| 13-18 months |
37,13,444 |
| More than 18 months |
28,00,889 |
5.9 He, thereafter, referred to pages 155 and 157 to show the period of holding resulting into long-term capital gains to the assessee during the financial year relevant to the assessment year under consideration prior to 1-10-2004 and post-1-10-2004, which are reproduced as under :—
| Period of holding of shares |
Amount of long term capital gain (Rs.) |
| |
Total |
| 13-18 months |
36,01,145 |
| More than 18 months |
23,99,021 |
| Period of holding of shares |
Amount of long term capital gain (Rs.) |
| |
Total |
| 13 months to 18 months |
26,64,350 |
| 18 months - 24 months |
26,42,585 |
| 25 months - 36 months |
47,24,754 |
| More than 60 months |
13,23,161 |
5.10 He, also referred to the details of purchase and sales of shares from assessment year 2001-02 till assessment year 2003-04 at pages 98 to 144 to further establish the fact that period of holding was not as short as pointed out by the ld. CIT(A), both in respect of short-term capital gain/loss and long-term capital gain/loss.
5.11 The ld. Counsel also contended that both the Revenue Authorities committed a fundamental error in sense that they approached the issue from the point of view that an assessee could either be a dealer in shares or an investor in shares. However, the Courts had recognized for long that the same person could be a dealer in shares as well as an investor in shares. For this proposition, the ld. Counsel relied on the following judicial decisions and also on the para 10 of Circular No. 4 of 2007 of CBDT :
(i)
Hon'ble Supreme Court in the case of
Ram Narain Sons (P.) Ltd. v.
CIT [1961] 41 ITR 534;
(ii)
Dwarkadas Kesardeo Morarka v. Commissioner Of Income Tax, Central, Bombay [1962] 44 ITR 529 (SC);
(iii)
CIT v.
Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC);
(iv)
CIT v.
Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC).
Accordingly, he contended that, it could not be either/or situation as held by the Revenue Authorities.
5.12 The ld. Counsel, thereafter, contended that in the impugned circular, the CBDT had stated that the principle laid down in the case of Associated Industrial Development Co. (P.) Ltd. (supra) and in the case of Commissioner Of Income Tax, Bombay v. H. Holck Larsen [1986] 160 ITR 67 (SC) afforded adequate guidance to the Assessing Officer, hence, these decisions required elaborate consideration.
5.13 The ld. Counsel stated that in the case of Associated Industrial Development Co. (P.) Ltd. (supra), the assessee was acting as managing agent of several companies and also held shares of those companies which were sold on profit which was offered as capital gains. The Assessing Officer held the same as of business profit. Appellate Authority, Tribunal and the Hon'ble High Court also held that the profit did not arise to the assessee as a dealer in shares and on appeal by the revenue, the Hon'ble Supreme Court held that there was no bar to a dealer investing in shares, however, whether a particular holding of shares was by way of investment or formed part of the stock-in-trade was a matter which was within the knowledge of the assessee who held the shares and it should, in normal circumstances, be in a position to produce the evidence from its records as to whether it had maintained any distinction between those shares which were its stock-in-trade and those which were held by way of investment and if the ratio of this decision was applied to the facts of the present case, then, it could be found that assessee met the requirements because as a rule, the assessee had taken delivery at the time of purchase and given delivery at the time of sale in respect of all the shares in its investment portfolio and the assessee had also kept separate records to record the transactions of each category i.e., delivery based and non-delivery based.
5.14 Thereafter, the ld. Counsel, referred to the case of H. Holck Larsen (supra) contended that the Hon'ble Supreme Court after considering various English as well as Indian decisions on the subject, held that for determining whether a person was a dealer or investor in shares, the real question was whether the first step, purchase of shares was taken as in the course of a trading transaction, if that be so, the profit therefrom would be of the nature of business profit and if not so, the profit therefrom would not be treated as earned by a trader. The ld. Counsel, accordingly, contended that from the judgment, it was clear that the motive to earn profit on enhanced value at a future date would not render an investment in shares into a transaction in the nature of trade and in the present case, by treating the delivery based transaction as an investment, the assessee clearly established that it did not take the first step as a trader, hence, the result of the delivery based transaction was treated either as short-term capital gain or long-term capital gain depending upon the period of holding of such shares.
5.15 The ld. Counsel further submitted that the tests of badges of trade evolved by Royal Commission of England and approved by the Hon'ble Supreme Court were also met by the assessee. In this regard, he submitted as under :—
"(1)
An equity share of Indian Companies is not essentially a trading commodity. More often than not shares are purchased by Indian public as an investment. While held for long period the shares yield regular income in the form of dividend. It may, however, be noted that some holders buy and sell shares by way of trade and not investment.
(2)
Where shareholding is for trading, frequency of purchase and sale scrip-wise is very high and the period of holding of a particular lot is minimal. It should be noted that over the course of time equity shares have become a popular mode of investment. There is huge variety to choose from. Due to globalization and various uncertainties of modern times, there is increasing volatility in the share market. This has affected the length of period of holding in the cases of investors also. Having regard to these various issues, under the provisions of the Act where shares are held for one year and more the same qualify to be assessed as long-term capital assets. The period of less than one year results into short-term capital asset. There is no minimum period prescribed for short-term capital gains. In certain circumstances, holding of even one day may result into a short-term capital asset. It is submitted that due to large number of companies listed on stock exchange and volatility in the market even a serious investor has to frequently shuffle his portfolio that does not signify that the investor is trading. At any rate where a particular lot of shares is primarily intended for trading the same would not be held for weeks or months. In the case of the present assessee lots of shares are retained for months and years before sale.
(3)
The expression "similar transactions by the same person" and "same sort of property" needs to be emphasized. An investor may buy or sell everyday but that may not be considered such frequency as to lead to the inference of trading. It is only when particular scrip is bought and sold a number of times over a short period that an inference of trading as against investment may be drawn. In the case of the present assessee the allegation of frequency is not only unsupported but incorrect as well if scrip-wise details are analysed.
(4)
In the case of the present assessee, there is bare minimum infrastructure in the form of office, employees, equipments etc. The assessee does not indulge in advertising or canvassing of any kind whatsoever. There is no organized effort to obtain profit except that shares are purchased cautiously and if it becomes necessary they are sold promptly. Therefore, it cannot be said that the assessee has dressed up in such way so as to wear the badge of trading.
(5)
Whenever there is premature sale
i.e., the sale within a few days or weeks from purchase, there is always some specific reason such as downtrend in market sentiments over a particular scrip or industry. Such transactions, however, in the case of the assessee are few and far between. The effort in respect of delivery based transaction is always to hold the shares purchased for as long as it may be sensible to hold them.
(6)
As already explained, the motive of the assessee in delivery- based transactions is always investment. Surrounding circumstances of the assessee's transactions support the view that in delivery- based transactions the assessee has been acting as an investor. These shares are always transferred in the name of the assessee. Generally the shares are not sold until it becomes necessary to exist or otherwise due to long holding, the shares have become ripe for realization of profit. In all cases, deliveries are invariably taken and given; full price is paid and collected. There is hardly any involvement of borrowed capital."
The ld. Counsel also referred to the decision of AAR referred by the CBDT in the impugned circular.
5.16 Based upon these, the ld. Counsel summed up his arguments by stating that there was no presumption that a transaction in shares was for a trade and the correct position was that ordinarily equity shares were capital assets in which people invested money and if a particular acquisition of shares was treated as stock-in-trade, the burden of proof was on the party who asserted it to be stock-in-trade and in the present case, there was no material brought on record by the Revenue Authorities to suggest that assessee's intention at the time of purchase was trading and not investment, hence, the action of Revenue Authorities was not justified in law for this reason also.
5.17 The ld. Counsel further contended that there was a recent decision of Lucknow Bench of the Tribunal in the case of Sarnath Infrastructure (P.) Ltd. v. Asstt. CIT [2009] 120 TTJ 216 wherein a view had been taken in favour of the assessee after fully considering the CBDT circular and the facts of the present case were more or less same as in that case and, therefore, the ratio of that decision was squarely applicable to the present case.
5.18 The ld. Counsel also contended that the Revenue Authorities merely changed the nomenclature of capital gains to profits, however, was is imperative that income should have been computed in accordance with the provisions of these different heads and by not doing so, the Revenue Authorities committed an incurable defect and for this reason alone the assessment was liable to be quashed. For this proposition, the ld. Counsel relied upon the decision of Hon'ble Supreme Court in the case of Nalinikant Ambalal Mody v. SAL Narayan Row, CIT [1966] 61 ITR 428 and the decisions in Commissioner Of Income-Tax, Delhi v. Dr. Rameshwar Lal Pahwa. [1980] 123 ITR 681 (Delhi) and CIT v. P.R. Thakkar [1988] 170 ITR 224 (Bom.).
5.19 The ld. counsel, thereafter, contended that from assessment years 2001-02 to 2004-05, in the identical facts, the assessment had been completed by accepting the claims of the assessee and for assessment years 2001-02, 2003-04 and 2004-05, the assessment had been completed under section 143(3) of the Act; hence, on the basis of principle of consistency and in the absence of any fresh material in the possession of the Assessing Officer suggesting something or a change in the facts or law, the same treatment should have been given by the Department. For this proposition, the ld. Counsel relied on the following judicial decisions :
(i)
Radhasoami Satsang v.
CIT [1992] 193 ITR 321 (SC);
(ii)
CIT v.
Belpahar Refractories Ltd. [1981] 128 ITR 610 (Ori.);
(iii)
M.A Namazie Endowment v. Commissioner Of Income-Tax [1988] 174 ITR 58 (Mad.);
(iv)
CIT v.
Shree Nirmal Commercial Ltd. [1995] 213 ITR 361 (Bom.) (FB);
(v)
Sardar Kehar Singh v.
CIT [1992] 195 ITR 769 (Raj.);
(vi)
Taraben Ramanbhai Patel v.
ITO [1995] 215 ITR 323 (Guj.);
(vii)
Dhansiram Agarwalla v.
CIT [1996] 217 ITR 4 (Gau.).
5.20 The ld. Counsel further submitted that the Bench should take into consideration the written submissions dated 17-6-2000 filed before the ld. CIT(A) which were placed at pages 1 to 15 of the compilation rather than depending upon the version of ld. CIT(A) in the appellate order.
6. The learned D.R., on the other hand, contended that if the contentions of the assessee were to be accepted, then, every delivery based transaction would be treated as short-term capital gain and in that situation; there was no need to issue a circular as was done by the CBDT. She further contended that the Assessing Officer did not intermingled the volume by frequency as contended by the ld. Counsel and referred to para 4 which is relevant to the observations to show that the Assessing Officer was quite aware of difference between the two. The ld. D.R. further contended that the assessee had not furnished the details of activities/purposes wherein the borrowed funds had been utilized, hence, in the absence of such details, it was logical to presume that these had been utilized in sale and purchase of shares. She also contended that no separate books of account had been maintained by the assessee in the present case; hence, the intention of the assessee was not established. She further contended that the facts of the present case were closely identical to the facts of the case of Deepaben Amitbhai Shah (supra), hence, the orders of the Revenue Authorities were liable to be upheld. She also contended that the decisions relied on by the assessee were factually different, hence, the ratio of those decisions was not applicable. She further placed reliance on the orders of Revenue Authorities.
7. The ld. Counsel for the assessee, in the rejoinder, contended that the assessee had not contended that delivery was the basic criteria to determine the nature of transaction as contended by the ld. D.R., but in the present case, assessee had stated that it was carrying both types of transactions i.e., delivery based transactions and non-delivery based transactions and delivery based transactions were entered into by the assessee for the purposes of investment, hence, the said contention of the ld. D.R. was not contextually correct.
8. We have considered the submissions made by both sides, material on record and orders of authorities below. It is noted that assessee is engaged in the activity of sale and purchase of shares for a quite long period. It is also noted that non-delivery based transactions have been treated by the assessee as business activity and delivery based transactions have been treated as an investment activity and, accordingly, the assessee has claimed himself both dealer as well as investor and has offered income for taxation accordingly, which has been claimed to have been accepted by the Revenue Authorities in earlier years, hence, it becomes important for us to analyse the facts of few earlier years. In this process, from the P&L account and balance sheet for the financial year as on 31-3-2001, it is noted that the assessee had business profit in the nature of speculation profit and also short-term capital gain and long-term capital loss which were shown as such and accepted by the Department. From the perusal of the balance sheet on the same date, it is revealed that the assessee showed investment in shares in the balance sheet. It is also noted that no stock-in-trade has been shown as on that date which shows that assessee in case of jobbing transactions does not take delivery and squares up transactions on the same date. It is also noted that assessee was having borrowings to the tune of Rs. 11.50 lakhs approx. and loans and advances given to the tune of Rs. 12,80,000 approx. The investment in shares stood at Rs. 2,11,32,389. Apart from this, the assessee was also having various fixed assets, roughly, to the tune of Rs. 25 lakhs. In that year tax audit was done and details of records maintained by the assessee were also furnished. The assessment in that year was completed under section 143(3) of the Act wherein, on a query from Assessing Officer regarding allowability of interest on borrowed capital, the assessee stated that assessee was doing business of share trading transactions and he had taken the loans on interest so as to not to miss any opportunity of earning income due to up-ward movement of prices, hence, interest on borrowed funds was allowable as business expenditure. The Assessing Officer, however, treated the utilization of such loans towards granting interest-free loans to his wife and disallowed the interest claimed by the assessee. The ld. CIT(A), however, deleted this disallowance which appears to have become final in the absence of any order of the Tribunal, being brought on record. Thus, such interest expenditure was claimed by the assessee as business expenditure against the business profits resulting from share trading transactions. The fact for assessment year 2002-03 are similar except that the assessment in this year was completed under section 143(1) of the Act. Similar is the situation for assessment year 2003-04, except the fact that, in this year, the assessee has suffered loss in share trading transactions which has been shown as business loss and there has been an increase in the borrowed funds. In this year, the assessee has also entered into transactions in F&O segment to the tune of Rs. 6,91,169 and which has been carried forward under section 72 of the Act. The assessment in this year has been completed under section 143(3) of the Act wherein interest paid on bank over draft has been disallowed as it was treated as pertaining to speculation loss. It is, however, noteworthy, that no interest on loan taken from other parties was claimed. In assessment year 2004-05, the assessee was having same nature of incomes and claimed interest on other loans at Rs. 93,750 and there is a decrease in the loans as compared to previous year. The quantum of investment in shares has increased. The assessee, in this year, earned substantial income from share trading transactions amounting to Rs. 97,05,967 and also had substantial long-term capital gain amounting to Rs. 65,14,333. The assessment in this year has been completed under section 143(3) of the Act wherein interest expenditure has been allowed as incurred towards earning of business income and the long-term capital gain and short-term capital gain have been accepted as such. The assessee has also submitted details of shares purchased and taken delivery from assessment year 2001-02 till assessment year 2005-06 to show the period of holding as well as to substantiate its claim that in respect of delivery transactions, the assessee always showed the profit therefrom either as long-term capital gain and short-term capital gain depending upon the period of holding. 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 exist 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 section 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 section 10(38) and/or has paid tax under section 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 Assessing Officer to accept the claims of assessee in regard to short-term capital gain and long-term capital gain.
8.2 Having stated so, on merits also, we find that in the case of Sarnath Infrastructure (P.) Ltd. (supra), the Tribunal has considered almost all the important judicial decisions laying down legal principles to determine the nature of transaction i.e., trading the transaction or investment, which have also been cited before us. The Tribunal has also considered the CBDT Circular No 4 of 2007.The Tribunal has summarized these principles in para 13 of the said order. For the sake of ready reference, we re-produce the same as under:—
"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 later, 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."
Thereafter, the Tribunal analysed the facts of that case in the light of above principles and came to the conclusion that surplus earned by the assessee was chargeable to capital gains. The relevant findings in paras 14 and 15 are as under—
"When we examine the facts of the present case, we find that the assessee is dealing in shares both as a trader as well as investor. It has kept separate accounts for both types of dealings. Valuation of holdings has been done at cost (for investment portfolio). At least there is no allegation or material to come to the conclusion that valuation of investment portfolio has been done on cost or net realizable value whichever is low. The shares which are sold out of investment portfolio, this year, were purchased two to three years ago showing that assessee had intention, while purchasing them, to hold them. They were reflected in the balance sheet as investment. The assessee has enjoyed dividend income and declared the same in return of income. The frequency of such purchase or sale in this portfolio is not large enough to doubt that this portfolio is only a device to pay lesser taxes by parking some stock-in-trade in investment portfolio. We notice that in trading portfolio the assessee had purchased during the year shares worth Rs. 21,38,353 and same shares were sold for Rs. 23,89,805. There was neither opening stock nor closing stock. In investment portfolio, opening stock of shares was Rs. 19,22,203 and closing stock was Rs. 46,23,274 whereas sales out of investment portfolio were Rs. 31,80,423. It shows that turnover to stock ratio in investment portfolio is very low as compared to that in trading portfolio.
Further, there is no material to show that these shares in the investment portfolio were also traded in the same and like manner as those which were in stock-in-trade portfolio. The board of directors has passed resolutions for making investment whereas memorandum of association has only authorized to carry out trade in shares. It clearly shows intention of the assessee to maintain a separate investment portfolio. All the sales out of this portfolio are identifiable to purchases made in this portfolio. In our considered view the assessee has discharged its primary onus by showing that it is maintaining separate account for two portfolios and there is no intermingling. The onus now shifted on the Revenue to show that apparent is not real. There is no material brought in by the Revenue to show that separate accounts of two portfolios are only a smoke screen and there is no real distinction between two types of holdings. This could have been done by showing that there is intermingling of shares and transactions and the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present (as culled out above on the basis of authorities described), we hold that the surplus is chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolio. As result, this ground of the assessee is allowed."
8.3 When we compare the facts of this case with that case, we find that facts of both are almost identical. In the present case, the assessee is also maintaining separate records for both types of transactions. Further, in the present case, it is important to notice that the assessee has entered into two different types of transactions where both activities are entirely different in nature i.e., one activity is of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery), which puts assessee's case on a more strong footing. Hence, in our view, the ratio of this decision is squarely applies to the facts of the present case. Accordingly, we hold that the delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short-term capital gain or long-term capital gain depending upon the period of holding.
8.4 The Revenue has also held that presentation in the books of account was not conclusive which may be true to some extent, but it is the most crucial source of gathering intention of the assessee as regard to the nature of transaction and in law, it is also so i.e., such presentation reflects, prima facie, a view of the assessee on a particular subject and this principle is effectively applicable in a situation like this as compared to a situation where nature of expenditure or income is different in the books of account and in the return of income filed by the assessee wherein the specific provisions of Income-tax Act have to be considered over such presentation and if there exist no specific provisions, it is the commercial profits which have to be taxed and even in that situation, the assessee may be found to be justified in giving different treatment in the books of account as compared to return of income because of commercial considerations or accounting requirements. In the case of Karam Chand Thappar & Bros. (P.) Ltd. v. CIT [1971] 82 ITR 899 , the Hon'ble Supreme Court held that circumstances that the assessee had shown certain shares as investment in its books as well as its balance sheet was by itself might not be a conclusive circumstance but it was irrelevant circumstance. Hence, we do not find much substance in this finding of the Revenue Authorities in the facts of the present case. The Revenue Authorities have also held that borrowed funds were utilized for making such investments whereas in earlier years, interest on such loans has been allowed as business expenditure against profit on share trading transactions shown as business income and in the year under consideration also, no nexus between the interest bearing funds and investment has been established, hence, for this reason also, we find no merit in treating the long-term capital gain and short-term capital gain as business profits.
8.5 The ld. Counsel for the assessee has also contended that investment could be an organized activity also and we find some substance in this contention because now the stakes are high and nobody wants to loose money as there are great chances of capital loss in respect of shares as compared to fixed interest earning securities where the principal money remain secured and also everyone wants to maximize wealth and minimize risk, hence, a person investing in shares is bound to study the news papers, business magazines, watch the business channels and use websites and other tools to keep a track of the developments which are happening on day-to-day basis and which may happen in the near future and for this, he may have assistance of the financial planner or investment consultant or may by his own expertise and capabilities do it on his own, hence, in our view, employment of such infrastructure cannot turn an investment activity into a business activity. We may also add that assessee has also raised various other contentions, which, in our opinion, need not be adjudicated at this stage in view of our decision for the above reasons, hence, we refrain ourselves from deliberating on those contentions.
9. To conclude, we hold that, in the facts and circumstances of the present case, the assessee's claim of short-term capital gain and long-term capital on share transactions where the delivery has been taken or given and securities transaction tax has been paid is liable to be accepted. Accordingly, we reverse the orders of Revenue Authorities.
10. In the result, appeal filed by the assessee stands allowed.