We notice that assessee company is engaged in the business of trading in securities. During the year assessee has shown the sale of securities as business receipts at Rs. 73,91,026/-. We also observe that assessee has entered into as many as 7000 transactions of purchase and sale of around 4 lacs equity shares of a single company namely Suraj Stainless Steel Ltd. and the total value of shares sold is Rs. 8,58,03,298/-. We also find from the perusal of page 9 of assessment order depicting the transactions of purchase and sale carried on by the assessee in which even on a single day i.e. 14.11.2006 almost 63 transactions have been entered into of the same scrip. We also observe that the total share capital of the company was Rs. 2,42,000/- and the unsecured loan stood at Rs. 45 lacs which proves the fact that assessee has borrowed funds for entering into the share transactions. We also find that assessee has not controverted the fact during the assessment proceedings that the purchase and sale transactions of the very same scrip i.e. Suraj Stainless Steel Ltd. was entered into in preceding financial year also and sale value was treated as business turnover and unsold shares were shown as stock in trade. We therefore find that assessee is regularly in the business of purchase-sale of equity shares, share transactions entered during the year were in large number, funds were borrowed for the purpose of trading, no separate account has been maintained for the investment portfolio and all the transactions of purchase sale raised are only for one scrip namely Suraj Stainless Steel Ltd. In these facts and circumstances, assessee cannot take shelter of the CBDT Circular no. 4/2007 dated 15.06.2007. As far as the decision of co-ordinate bench in the case of Sugamchand C. Shah vs. ACIT (supra) is concerned there have been various decisions thereafter by the Jurisdictional High Court wherein it has been held that transactions cannot be bifurcated by the period of holding and actual nature of transactions with surrounding circumstances are to be seen and therefore the directions of ld. CIT(A) given to Assessing Officer will not stand for.
In the totality of facts and circumstances and our discussions above, we are of the considered opinion that the alleged short term capital gain shown by the assessee for A.Y. 2007-08 & 2008-09 at Rs. 1,13,05,165/- and Rs. 1,17,22,092/- should be treated as business income.
FULL TEXT OF ITAT ORDER
These two appeals of Revenue for A.Y. 2007-08 & 2008-09 are directed against the consolidated order of CIT(A)-VIII, Ahmedabad, dated 07.07.2011vide appeal nos.CIT(A)-VIII/ Addl. CIT. R. 4/682/09-10 & CIT(A)- VIII/ITO.Wd.4(4)/557/10-11, arising out of the separate orders u/s. 143(3) of the Act 22.12.2009 framed by ACIT, Range-4, Ahmedabad and ITO, Ward 4(4), Ahmedabad; respectively. During course of hearing none appeared on behalf of assessee. From the perusal of the order sheet, we observe that on various dates fixed for hearing since 10th March, 2015 neither assessee nor any counsel authorized on behalf of the assessee has ever appeared in these cases. On 09.02.2016, learned Departmental Representative was instructed to serve the notice to assessee. In compliance thereto notice was served through Income Tax Department to assessee on 09.02.2016. Even thereafter none appeared on behalf of assessee. In these circumstances, we have no option other than to proceed ahead to adjudicate the issues in this appeal with the assistance of learned Departmental Representative and the records
available.
2. Common issue raised by Revenue in both the years is against the order of ld. CIT(A) directing the Assessing Officer to treat the major part of its income from transactions in securities under the head of “capital gains” without appreciating the fact that the assessee was engaged in trading of shares and securities. As the issues are common, we will take up ITA No. 2338/Ahd/2011 for A.Y. 2007-08 as the lead case to adjudicate the issue.
3. Briefly stated facts as culled out from the records are that the assessee is a Limited Company engaged in trading in securities. It filed its return of income on 31.10.2007 declaring income at Rs. 1,05,89,629/- which inter alia includes short term capital gain from sale of equity shares at Rs. 1,13,05,165/-. Case was picked up for scrutiny assessment and notice u/s.143(2) of the Act and 142(1) of the Act were issued along with questionnaire. Ld. Assessing Officer observed that assessee had no investment in equity shares as on 31.03.2006 as well as 31.03.2007 except an unquoted investment of Rs. 35,15,954/- as on 31.03.2007. It was also observed that assessee has entered into more than 7000 transactions of purchase and sale of around 4 lacs equity shares of Suraj Stainless Steel Ltd. These transactions were carried out regularly round the year. Assessee has shown the result of these transactions of purchase and sale of shares as short term capital gain whereas ld. Assessing Officer was of the view that such pattern of transactions by no stretch of imagination can be described as an investment activity and it surely comes under the trading activities liable to be assessed as business income. Ld. Assessing Officer also observed that funds were borrowed during the year for the purpose of purchase of shares of Suraj Stainless Steel Ltd. He accordingly held that the alleged profit of Rs. 1,13,05,165/- shown as short term capital gain should be treated as income from share trading taxable as business income by observing as follows:
“3.6.8 In order to analyse the transaction of the assessee in light of the above observation, the following trend is found in respect of transactions of suraj stainless script.
i. The shares had been held as stock in trade as on the day of opening i.e, 1/4/2006. It was only when it became apparent that this script had yielded substantial profits that the assessee thought of converting the same into investment. No documentary evidence relating to such a conversion and valuation of these shares as on the day of conversion have been submitted.
ii. The volume of transaction in respect of these shares is huge. While in the preceding year, the transactions have been treated as business transactions, in the current year, they have been treated as investment. The assessee can not be allowed to switch between stock in trade and investment as per his convenience.
iii. There are multiple trades in a day. In fact, on many of these days, hundreds of sale and purchase transactions in the same script have been noted clearly evidencing a business activity and not investment for the purpose of earning dividend / long term appreciation / gain.
iv. Borrowed funds have been used for the purpose of trading. The assessee’s claim that such funds, being interest free, can be treated as quasi-capital does not hold water and can not be accepted. There is no difference between the shares traded and the so called investment shares as far as source of funds are concerned. Same source has been used for all the trading activities. Most of these funds are borrowed as the share capital is merely Rs 2.42 lakh.
v. No separate accounts have been maintained in respect of the investment portfolio. Proceeds from sale and source of funds for purchase are mixed.
vi. The assessee has wrongly presumed that the reference to “substantial” refers to maintenance of a large portfolio. The assessee has picked up a share in which it has traded heavily and on it yielding high profits, has attempted to give it a colour of investment so as to benefit from the lower rate of tax.
Hence, the assessee’s case miserably fails the test laid down in the Board’s instructions /circular referred above. In fact, putting the assessee’s transactions to the test of the above ratio, it is clear that the assessee’s transaction vis-a-vis Suraj Stainless Steel can not be held to be investment and it is outright trading activity.
3.6.9 The assessee has totally misquoted section 111A by stating that for the purpose of a transaction to fall within the provisions of that section, only two things are required i.e. (i) the transaction of sale is entered after 1/10/2004 and (ii) the transaction is chargeable to STT. Section 111 A starts as;
“111A. (1) Where the total income of an assessee includes any income chargeable under the head “Capital gains”, arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund and—
(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and
(b) such transaction is chargeable to securities transaction tax under that Chapter, the tax payable by the assessee on the total income shall be the aggregate of—
……………………………………………..”
Hence the section is applicable only if the asset under transfer is a short term capital asset. Hence it is mandatory to first determine the character of the asset which is under transfer. If it is stock in trade, the provisions of section 111A are not applicable. In the current case, it has been proved beyond doubt that the shares of Suraj Stainless Steel traded by the assessee are stock in trade and the activity engaged into by the assessee is trading activity and’ not investment activity.
3.6.10 The assessee’s claim that it has earned dividend of Rs. 1,38,166/- which has been shown in the P&L account does not, in any way, strengthen the claim of the assessee. The extent of trading income of more than Rs 1.13 crore on the transactions of the Suraj Stainless Steel as against the dividend income of Rs 1,38,166/- received from various shares held, whether as stock in trade or investment, clearly shows the intention of the assessee was to earn income from trading activity rather than hold it as investment for earning dividend.
3.6.10 OTHER RELEVANT PARAMETERS
In light of the various judicial pronouncements and reasoned logic, other tests through which the assessee’s transactions can be put through for determining whether they are trading or investment in securities are:
a. whether the purchase and sale of securities was allied to his usual trade or business/ was incidental to it or was an occasional independent activity- It is clear that the transaction in the security was allied to his usual trade and it was not an independent activity.
b. whether the scale of activity was substantial – as the printout of a portion of the trading activity in this script would indicate, the scale of activity was substantial.
c. Whether the transactions were entered into continuously and regularly during the assessment year– as evident from the trading log, the transactions were carried out regularly and continuously during the year, in fact a number of sale and purchase transactions were being done on a daily basis.
d. Whether the purchases were made out of own funds or borrowings– as brought out earlier, the purchases were out of borrowings as the assessee’s funds in the business were extremely low.
e. Typical holding period for securities bought and sold- In the case of the assessee, the period can hardly be specified since there was a regular buying and selling on a daily basis.
f. Time devoted to the activity– the trading log of the assessee reveals that substantial time was spent on this activity on a daily basis, the trading log shows transactions throughout the day.
3.6.10 In light of the above discussion, the claim of the assessee that its transactions vis-a-vis Suraj Stainless Steel are investment transactions, is found to be false and unacceptable. Hence, the activity is held as trading activity and the gain is treated as business income and not short term capital gain liable to concessional rate of tax as per section 111 A.”
4. Aggrieved assessee went in appeal before the CIT(A) who after adjudication directed the Assessing Officer to verify each transactions on the basis of period of holding the equity shares sold by following the decision of Co-ordinate Bench in the case of Sugamchand C. Shah vs. ACIT [2010] 37 DTR (Ahd) (Trib) 345 wherein it was held that gain from sale of equity shares held for 30 days or less than a month are to be treated as business income and the others as short term capital gain. In deciding so, ld. CIT(A) observed as follows:
“2.3 I have gone through the assessment order and the submissions of the A.R along with legal citations carefully. During assessment proceedings the A.O observed that the details of shares bought and sold by the appellant of Suraj Stainless Steel Limited (SSSL) show that the appellant has purchased and sold a Large number of shares during the relevant previous year, which indicates that the appellant is not buying and selling these shares with the motive of investment but are in the nature of adventure of trade. The A.O further observed that looking at the nature and volume of transaction s it becomes apparent that the motive of the appellant is trading in shares and not investment. It is also observed by the A.O that the shares have been purchased only a few days prior to the date of sale. The appellant has also purchased the same shares after having sold the same item. It clearly indicates that the appellant is not making investment in shares but trading in shares.
2.3.1 On the other hand, Ld. A.R. submitted that the appellant has always taken delivery of shares and has not made any transaction without delivery. It is also argued that the appellant has sufficient funds with him to make investment. The appellant has shown the shares held at the end of the year as investment and valued at “cost” in its books of account. It is only in a few cases; that the shares have been held for the period of less than 30 days. Regarding frequency of transaction the ld. A.R. submitted that floating stock of (SSSL) is very limited. For few months the appellant kept on buying the script since it was available in very small lots. Like wise for some period the appellant kept on selling the script in small lots, because an offer in bigger lot may bring down the prices or vice versa. He further submitted that
“Sir, number of instances of transaction is not fully controllable in the hands of party investing. Suppose an investor wish to invest in 10,000 equity shares of ‘X’ limited at market rate and he order the broker accordingly. If the script like Reliance industries/ Tisco etc. this transaction can be done infraction of minute and at one instance only. However, in case of script like “SSSL” this is not possible to get the shares at one to five instances and in desired quantity. lt may take 100 to 150 instances because of so many factors like floating stock., total number of shares of the company, willingness of existing shareholders with shares etc.
Thus in our view instances of transaction can not decide that the transaction is trading activity or investment activity”.
2.3.2 It is also noticed that all the observations of the A.O made in this regard in the assessment order has been satisfactorily replied by the ld. A.R. through various submissions reproduced supra.
The above facts indicate that the appellant appears to be investor in shares and the sale and purchase of shares was only to protect the value of investment. The issue regarding the fact whether the assessee should be considered as investor or a trader in shares has been the subject matter of debate.
2.3.3 Several Courts have taken divergent views on the matter.
1. In the case of Raja Bahadur Visheshwara Singh V, CIT reported in 41 ITR 685 (SC) Honourable Supreme Court has held that when an owner of an ordinary investment chooses to realise it and obtained a higher price for it than he originally acquired it the enhanced price is not the profit asses-sable to income tax, but where what is done is not merely an exercise in order to “effect change of investment but an act done in what is truly the carrying on business, the amount recovered as appreciation will be asses-sable as business profits.
2. In the case of Dalhusie investment Trust Co. V. CIT reported in (1968) 68 ITR 486 (SC) has held that the fact and the circumstance that the shares were purchased at the time when the prices were falling and the return on investment was not at all substantial and loan had been taken for purchase the shares strongly points to a conclusion that the shares could not have been purchased as an investment to earn income from dividends.
3. Honourable Supreme Court has held that thought the circumstance may be that the assessee has shown particular shares as investment in its books as well as in its balance sheet, but it is by itself not a conclusive circumstance, it is the relevant circumstance on which the tribunal can rely for drawing an inference that the shares relate investment portfolio [ karam Chan Thapar and brothers private td V. CIT (1971) 82 ITR 899 (SC) in the case of Ashoka Viniyoug Ltd V. CIT reported in 84 ITR 264 (SC).
4. In the case of CIT V Jagdish Pratap Sahi reported in 79 ITR 235 (All) the honourable Allahabad High Court held that the assessee had invested funds in govt. securities and debentures but later on changed the transaction of the securities and debentures etc. to purchases Tata ordinary shares the purpose of the assessee to sell the securities etc. was to change his investment and the resulting surplus was of capital nature.
5. In the case of Sarnath Infrastructure Pvt Ltd vs. ACIT reported in 313 ITR (AT) 13 decided by the Honourable ITAT Lucknow wherein it was held that if the shares are transferred and registered in the name of the assessee, the presumption is that the assessee has no intention to deal in shares. Only when the transactions are settled without delivery, it can be said to be a business activity of trading in shares. In this case, the Honourable Tribunal Lucknow Bench referred to a number of judicial pronouncements as under: –
1. Fidelity Advisor Series VIII, In (2004) 271 ITR 1(AAR)
2. Raja Bahadur Vishesware Singh v. CIT (1961) 41 ITR 685 (SC)
3. Central India Agencies Pvt Ltd vs. CIT( 1970) 77 ITR 959 (All).
4. Mrs. Sarojini Rajah vs. CIT( 1969) 71 ITR 504.
5. Dalhousie Investment Trust Co. Ltd vs. CIT( 1968) 68 ITR 486 (SC)
6. CIT vs. Associated Industrial Development Co. Pvt Ltd (1971) 82 586(SC)
7. CIT Vs. H. Hoick Larsen ( 1986 160 ITR 67(SC)
8. CIT vs. Sulatej Cotton Mills Supply Agency Ltd (1975) 100 ITR 706 (SC).
6. The Honourable Bombay High Court in the case of CIT vs. Gopal Purohit 228 CTR 582 (Bom.) held as under:-
“The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purpose of business. The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in present case, should be treated as those in nature of investment transactions and the profit received therefrom should be treated as either as short term or, as the case may be, long term capital gain, depending upon the period of holding. The Tribunal has observed in its judgement that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping record and the presentation of shares as investment at the end of the year, in all the yean. The Tribunal correctly accepted the position that the principle of res judicata is net attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. The approach of the Tribunal cannot be faulted. The Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question. There cannot be any dispute about the basic proposition that the entries in the books of account alone are not conclusive in determining the income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal u/s 260 A. No substantial question of law is raised.
2.3.4 However, the controversy relating to the tax-ability of the transactions of purchase and sale of shares and securities and the treatment to be given to such transactions has been resolved and set at rest by the Honourable Ahmedabad Tribunal in the case of Sugamchand C. Shah vs. ACIT 37 DTR (Ahd.)(Trib.) 345. The Honourable Ahmedabad Tribunal has held in the aforesaid case that:
“Considering the totality and peculiarity of the facts of this case, we find that assessee is neither fully acting as a trader nor as fully 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 -form 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 business or to be treated as short term capital gain, we held that if shares are not held even say for a month, then the intention is clearly to reap profit by acting as 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 investments 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.”
2.3.5 The facts of the case under consideration is almost similar to the case decided by jurisdictional Tribunal, reproduced supra. Considering the discussion held above and specifically following the aforesaid binding decision of the Honourable Ahmedabad Tribunal hi the case of Sugamchand C. Shah, it is held that where the holding of the shares is for a period of less than one month i.e. 30 days the purchase and sale of shares is to be treated as business of the assessee and the resultant profit/ loss is subject to tax as business income/ loss. However, where the period of holding of the shares is more than one month, the transaction of shares is to be treated as investment and the assessee will be subjected to tax on short term capital gain or long term capital gain on the sales thereof according to the period of holding of such shares.
During appellate proceedings the Ld. A.R submitted that by applying the First in First Out (FIFO), method, the working of Business profit and Capital gain, as per the ratio of IT AT Ahmedabad decision is as under:-
A.Y. 2007-08
i) STCG Rs. 1,12,77,837/-
ii) Business Loss Rs. 1,10,838/-
A.Y. 2008-09
i) STCG Rs. 1,10,81,494/-
ii) Business profit Rs. 6,40,598/-
However, the Assessing Officer is directed to verify the business income or the short term capital gains as the case may be for the A.Y. 2007-08, as well as for A.Y. 2008-09 (both the years) on the basis of period of holding of share as held by the Honourable Jurisdictional Tribunal in the case of Sugamchand C. Shah (supra). The grounds of the appeal for A.Y. 2007-08 and 2008-09 are accordingly partly allowed.”
5. Aggrieved Revenue is now in appeal against the order of CIT(A) before the tribunal. Learned Departmental Representative vehemently argued supporting the order of ld. Assessing Officer and further added that assessee company has been regularly engaged in the business of trading in shares and securities since last many years. No investments in equity shares stood as on 31.03.2006. Total profit from alleged share transactions are from purchase and sale of single scrip and it seems that assessee entered into these transactions as business dealings only but when the profit reached to a figure of Rs. 1,13,05,165/-, in order to save tax, it was decided to show the gain as short term capital gain. Learned Departmental Representative also submitted that assessee took unsecured loans for the purpose of investment which is proved by the fact that the equity share capital of the company was Rs. 2,45,000/- whereas unsecured loan taken were at Rs. 45 lacs.
6. We have heard the contention of learned Departmental Representative and gone through the orders of both the lower authorities. Revenue is aggrieved by ld. CIT(A)’s order directing the Assessing Officer to bifurcate the transactions in securities in the category of holding period of the scrips sold in the category of less than 30 days and more than 30 days without appreciating the fact that assessee was engaged in trading of shares and securities regularly.
7. On perusal of the assessment order, we notice that assessee company is engaged in the business of trading in securities. During the year assessee has shown the sale of securities as business receipts at Rs. 73,91,026/-. We also observe that assessee has entered into as many as 7000 transactions of purchase and sale of around 4lacs equity shares of a single company namely Suraj Stainless Steel Ltd. and the total value of shares sold is Rs. 8,58,03,298/-. We also find from the perusal of page 9 of assessment order depicting the transactions of purchase and sale carried on by the assessee in which even on a single day i.e. 14.11.2006 almost 63 transactions have been entered into of the same scrip. We also observe that the total share capital of the company was Rs. 2,42,000/- and the unsecured loan stood at Rs. 45 lacs which proves the fact that assessee has borrowed funds for entering into the share transactions. We also find that assessee has not controverted the fact during the assessment proceedings that the purchase and sale transactions of the very same scrip i.e. Suraj Stainless Steel Ltd. was entered into in preceding financial year also and sale value was treated as business turnover and unsold shares were shown as stock in trade. We therefore find that assessee is regularly in the business of purchase-sale of equity shares, share transactions entered during the year were in large number, funds were borrowed for the purpose of trading, no separate account has been maintained for the investment portfolio and all the transactions of purchase sale raised are only for one scrip namely Suraj Stainless Steel Ltd. In these facts and circumstances, assessee cannot take shelter of the CBDT Circular no. 4/2007 dated 15.06.2007. As far as the decision of co-ordinate bench in the case of Sugamchand C. Shah vs. ACIT (supra) is concerned there have been various decisions thereafter by the Jurisdictional High Court wherein it has been held that transactions cannot be bifurcated by the period of holding and actual nature of transactions with surrounding circumstances are to be seen and therefore the directions of ld. CIT(A) given to Assessing Officer will not stand for.
8. In the totality of facts and circumstances and our discussions above, we are of the considered opinion that the alleged short term capital gain shown by the assessee for A.Y. 2007-08 & 2008-09 at Rs. 1,13,05,165/- and Rs. 1,17,22,092/- should be treated as business income.
9. In the result, appeal of Revenue for both assessment years 2007-08 and 2008-09 are allowed.
This Order pronounced in open Court on 10th April, 2017.