Income Tax Appellate Tribunal - Mumbai
Synthetic Fibres Trading Co., Mumbai vs Department Of Income Tax on 26 March, 2009
1
ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "E"
BEFORE SHRI P.M. JAGTAP, A.M. AND SHRI V. DURGA RAO, JM
ITA No. 3022/Mum/2009
Assessment Year 2006-07
M/s Synthetic Fibres Trading A.C.I.T. - 21(2),
Co., Mumbai.
505, Rajniketan,
Bapubhai Vashi Road, Vs.
Vile Parle (W),
Mumbai 400 056.
PAN AAJFS 9831 L
Appellant Respondent
ITA No. 3444/Mum/2009
Assessment Year 2006-07
A.C.I.T. - 21(2), M/s Synthetic Fibres Trading Co.,
5th Floor, 505, Rajniketan,
C-10 Bandra Kurla Complex, Bapubhai Vashi Road,
Bandra, Vs. Vile Parle (W),
Mumbai.51 Mumbai 400 056.
PAN AAJFS 9831 L
Appellant Respondent
Assessee by Shri Sanjeev Shah
Department by Shri D. Songate
ORDER
PER P.M. JAGTAP, A.M.
These two appeals, one by the assessee being ITA No 3022/Mum/09 and other by the Revenue being ITA No. 3444/Mum/09 are cross appeals which are directed against the order of ld. CIT(A), XXI Mumbai dated 26.3.2009.
2ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
2. The assessee in the present case is a partnership firm which is engaged in the business of trading in shares, securities and investment. It is also engaged in the business of trading in options and derivatives of shares securities and commodity products. The return of income for the year under consideration was filed by it on 31.10.06 declaring total income of ` 1,14,83,050/-. In the said return, speculation loss arising from options and derivative transactions was declared by the assessee at ` 9,07,253/- and business income was declared at ` 8,87,249/-. Income from short term capital gain arising from sale of shares amounting to ` 1,06,25,612/- was offered to tax at lower rate of 10% u/s 111-A whereas long term capital gain arising from sale of shares amounting to ` 1,23,52,566/- was claimed to be exempt. The dividend income of ` 2,00,819/- was also claimed to be exempt. In the audit report filed along with the return of income, the nature of business of the assessee was shown as of trading in shares, mutual funds, options and derivative products and commodity trading. It was noted by the A.O. that the assessee firm was carrying on the share transactions in the year under consideration as well as in the immediately preceding two years and substantial profit arising from the said transactions was classified and declared as speculation profit, business profit, short term capital gain and long term capital gain. He also noted that the assessee was very actively involved in the futures and options transactions right from the introduction of such transactions to the Indian markets. He also noted that the activities of speculation trading in futures and options and purchase and sale of delivery based shares were being carried on by the assessee simultaneously. He, therefore, required the assessee to justify the different treatment given by it to different receipts from the transactions carried out simultaneously which were credited to the P&L account. In reply, it was submitted by the assessee that all F&O transactions in commodity were treated as speculative transactions whereas futures and options transaction in shares were treated as regular business transaction as per amendment made in section 43(5). It was submitted that all the delivery based purchases of shares were taken to the investment account and the profit/loss arising from the sale thereof was treated as long term and short term capital gain depending on the period of holding. This justification offered by the assessee was 3 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
not found acceptable by the A.O. According to him, a business activity was separate from investment activity in the sense that business is a systematic and regular course of activity with a purpose and the same is characterized by the frequency and repetition of the activity. The business activity carries a profit motive and there is continuity of such activity over a period of time may be running into years. He held that even if the shares were treated by the assessee as investment in its books of account, the nature and character of the said shares whether stock-in-trade or investment has to be ascertained from the intention of the assessee behind acquisition thereof and such intention has to be gathered from the facts and circumstances involved in each case. He, therefore, proceeded to examine the facts and circumstances involved in the case of the assessee in this context and recorded the following findings/observations:-
a) The assessee is already into speculation activity in the shares for the past several years including the year under discussion.
b) There is no other activity in the firm apart from purchase & sale of shares (whether disclosed as speculation or as capital gains) and speculation in commodities marker.
c) The Tax Audit Report clearly states that the nature of business of the firm is "dealing in shares and securities and commodities".
d) The accounts of the assessee are audited as per the provisions of section 44AB of the Act.
e) The code mentioned in the Tax Audit Report is 0204, which is for the trading concerns.
f) The assessee has an audited P&L A/c. to which all the receipts are credited against which the various establishment expenses are claimed.
This signifies an organized and systematic activity.
g) There is a clear profit motive in the transactions resulting in substantial incomes generated as can be seen from the returns filed.
h) The dividend income credited to the P & L A/c. is only from few of the companies. It is seen that the assessee had exited from several counters even before the dividend is disclosed. From the details filed of the SHORT TERM CAPITAL GAIN and the dividend details, it is seen that 4 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
no dividend is received from Alstom Ltd., Bajaj Hindustan, Flextronics, Grieves Cotton, Lupin Chemicals, Mphasis BFL Ltd., Rajratan Gas, Ratnamani Metals, Sesa Industries Ltd., Shaw Wallace, Shiv Vani Universal Ltd. and Yes Bank Ltd. As against this, the assessee disclosed dividend only from six scrips. Therefore, it is evident that the assessee is more interested in profit maximization than retaining the shares over a period of time for deriving the benefits of investment. It is noteworthy that the assessee has not received a single bonus issue or a rights issue on any of the shares, reflecting his attitude of a short time holding and quick exit of scrips.
i) It is seen from most of the scrips that the assessee transacted, the holding period was too very less. The details are presented in the chart form:
Name of the scrip Date of Date of Sale Period of holding
purchase
Alstom Ltd. 11.05.05 26.07.05 2 months 15 days
Bajaj Hindustan 11.10.05 13.12.05 2 months 2 days
Century Textiles 16.06.05 29.07.05 1 month 13 days
Control Print I Ltd. 26.08.05 06.10.05 1 month 10 days
Flextronics Ltd. 01.09.05 08.09.05 7 days
Grieves Cotton 30.06.05 22.07.05 22 days
Grieves Cotton 30.06.05 02.08.05 2 months 2 days
Ind Finance Corp 03.01.06 17.02.06 1 month 14 days
Karnataka Bank 05.05.05 15.07.05 2 months 10 days
Mphasis BFL Ltd. 10.05.05 05.07.05 2 months 5 days
Ratnamani Metal 27.05.05 30.06.05 1 month 3 days
Sesa Industries 12.05.05 15.06.05 1 month 3 days
Shiv Vani Universal 13.07.05 23.09.05 2 months 10 days
Templeton India 23.08.05 24.08.05 1 day
Templeton India 03.10.05 16.11.05 1 month 13 days
26.10.05 16.11.05 20 days
Yes Bank 15.07.05 01.08.05 15 days
From the above details of the share transactions, which constitute a majority of the entire transactions, it can be seen that the assessee did not hold the scrips beyond two months period. This again speaks of a profit maximization approach as compared to an investment approach."
3. In addition to the above findings/observations, the A.O. also noted that even in the cases where assessee had disclosed long term capital gains, holding period was just few months above the one year period. He, therefore, confronted all these findings to the 5 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
assessee as well as the relevant case laws which he sought to rely upon and asked the assessee to offer its explanation as to why the entire transactions of purchase and sale of shares should not be treated as its business activity. In reply, a written submission was filed by the assessee vide its letter dtd. 29.12.08, the main points of which as summarized by the A.O. in his order, are extracted below:-
"1. The assessee is carrying on investment in share trading activity since its inception from 17th January, 1993. it has also commenced business in derivative segment of shares and commodity.
2. The profit and loss from derivatives of shares is offered as business income whereas the profits from investment activity have been continued to be offered as STCG and LTCG.
3. There are no borrowings by the assessee for its investment activity.
4. All the transactions are through the broker and proper delivery. The transactions are not merely by a book entry.
5. The assessee has surplus own funds which it deploys in securities / shares to have appreciation and dividend over a period of time. The partners apply their mind for proper investment in securities.
6. The investment in shares is made for capital appreciation and also for earning dividend income.
7. The average holding period in most of the cases is more than 2 months which clearly falls under the definition of short term capital assets. Whenever the holding period exceeds 12 months, its investments are eligible to be treated as LTCG.
8. The assessee also derives capital gains from investments in units of mutual funds.6
ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
9. As per section 111A, whenever STT is paid then the amount of income tax calculated on such STCG is at the rate of 10%.
10. The shares are all along and continuously reflected in its accounts as "investments" in the balance-sheet. The shares in trading are regularly shown as "stock-in-trade".
1.
11. None of the investments are in sister or related concerns and all investments are in independent companies.
12. The assessee's books clearly show the demarcation of shares held in stock as well as shares held in investments. The purchases are debited to Investments A/c. and sale is credited to Investment A/c. The purchase/sales are bunched under the head "Investments" in balance-sheet. The gain/loss on sale from the said bunch is shown as "short term" or "long term" capital gain, depending upon its holding period.
13. The CBDT circular dated 15.06.2007 stipulates that it is possible for a taxpayer to have two portfolios i.e. an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e. capital gains as well as business income.
14. In the past, all the assessments which are scrutinized and completed u/s. 143(3) had accepted the position of short term and long term capital gains and never been treated as business.
4. The A.O. did not find merit in the above submissions made by the assessee for the following reasons given point-wise in his order:-
(1) The assessee's submission that he is carrying on the activity of purchase and sale of shares since its inception from 17th January, 2993 and that he has also commenced the business in derivative segment goes to prove the case of the Revenue. If an activity could be carried out with a set purpose, continuity and regularity for 15 years, then it amounts to a business activity. It is worth noting here that there are no other receipts in the firm apart from purchase & sale of shares (delivery and non-delivery based) and trading in commodities. If this does not constitute business, then perhaps nothing else would constitute a business.7
ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
(2) The assessee stated that the profits and loss of derivatives is offered as business income whereas the profits from investment activity are offered as STCG and LTCG. This submission at best can be taken as the description of the heads under which incomes generated from different activities are to be offered for tax. Merely because assessee has classified them on its own, it does not mean that they should be assessed in the same way. In fact, the case of the Revenue is that the entire activity itself constitutes business. Therefore, the way he has been offering incomes, has no relevance.
(3) The assessee stated that there are no borrowings for the investment activity. This is a matter of facts. Though business activity may generally involve raising of loans etc, it is not hard and fast nor is it compulsory that every business should invariably have borrowed funds. In fact, in the terminology of corporate world, "a zero-debt company" is a term existing from ages. Several companies across the world operate on a "zero-debt philosophy" and they are well appreciated. Therefore, at best, this submission of the assessee speaks of its sources of funding the transactions but it cannot in any way disqualify the transactions to be treated as business in nature.
(4) The next submission is that all the transactions are through the broker and by proper delivery. The transactions are stated to be not merely by book entries. This submission also does not help the case of the assessee. As per the SEBI guidelines, every person purchasing or selling shares has to compulsorily take delivery. The non-delivery transactions are to be squared off within the same day. Further, such purchase & sales can be made only through proper brokerage firms. Therefore, if the assessee is conducting his transactions through a broker and taking/giving proper deliveries, then it is merely because he is subjected to the rules of SEBI. This, in no way, supports the case of the assessee. What is being done by compulsion cannot be stretched to mean in any other way.
(5) The next point is that the surplus funds are deployed to have appreciation and dividend over a period of time. The partners apply their mind for proper investments in securities. In any business, the surplus funds are ploughed back for furthering the business interests. So, this submission at best supports the case of the Revenue. Further, the fact that the partners apply their mind, only goes to prove that the partners are fully involved and fully occupied in the said activity. This again supports the case for treating the activity as business.
8ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
(6) The next submission is that the investment is made for capital appreciation and also for earning dividend income. This submission of the assessee is incorrect. It is already mentioned at para 12 of this order that in the case of several of the shares which have been bought and sold during the year, the assessee has not disclosed any dividend. Further, these shares were disposed off in less than 2 months time. Therefore, if the assessee could not hold the shares for receiving at least one dividend during the year (many companies declare several dividends during any year), the only reason for disposal of shares is price appreciate. Therefore, if the assessee's intention is maximization of its profits, it cannot be said that the transactions are investment in nature for earning dividend incomes.
(7) The next submission is that the average holding is more than 2 months.
However, at para 12 of this order, it has already been discussed that in several of the scrips the period of investment is less than 2 months and in many cases it is for few days. Therefore, the assessee's submission is incorrect.
(8) The next submission is that the assessee also derives capital gains from investments in units of mutual funds.
It is worth mentioning here that in the case of STCG declared from mutual fund units, it is seen that the assessee acquired units of the same scheme whose units it sold few days before. That is, it is not an acquisition at one go and disposing of the same but repeated purchases and sales in the same units. The details are provided in the chart form:
Name of the Mutual Fund and scheme : Templeton India STIP (Quarterly) Date of purchase Date of Sale 28.03.05 24.08.05 23.08.05 24.08.05 23.08.05 16.11.05 03.10.05 16.11.05 11.10.05 16.11.05 26.10.05 16.11.05 26.10.06 05.12.05 9 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
From the above chart, it may be seen that the assessee acquired certain units on 28.03.05 and 23.08.05 which were sold on 24.08.05. Thereafter, the assessee again purchased the same units from 03.10.05 onwards till 26.10.05 which were all sold in the month of November. Therefore, the assessee is repeatedly entering the same units which it has already disposed off. This again speaks of profit maximization and not an investment temper.
(9) The next submission is that as per the provision of section 111A, whenever STT is paid, then the amount of income tax calculated on the STCG is at the rate of 10%. The assessee's submission is totally misplaced.
The provision of section 111A(1) are reproduced below:
"Where the total income of an assessee includes any income chargeable under the head "Capital Gains" arising from a transfer of short term capital asset, being an equity share in a company or a unit of an equity oriented fund and-
(a) A 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 aggregate of-
(i) the amount of income tax calculated on such short term capital gains @ 10% and
(ii) the amount of income tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee."
From a careful perusal of the provisions of the section reproduced above, we understand that this section is for determination of tax payable in certain special cases. In fact, Chapter XII has the heading "DETERMINATION OF TAX IN CERTAIN SPECIAL CASES". So, section 111A which is a part of Chapter XII is essentially for determining the tax payable in certain category of cases. In the instant case, the tax payable is 10% on the short term capital gains. However, the eligible transactions are referred in the preceding part of the section, which begins as follows:
10ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
"Where the total income of an assessee includes any income chargeable under the head "Capital Gains" arising from a transfer of a capital asset...........
Therefore, the eligible transaction should be, in the first place, classified as "Capital Gains". Then it should be in the nature of short term capital asset, and then such transaction is to be chargeable to Securities Transaction Tax under Chapter VII of the Finance Act, 2004. what it implies is that when all these conditions are sequentially followed, then the tax determined for such transactions is 10%. The assessee's submission is on bottom-up logic. Since he is paying 10% tax, he opines that the transactions are in the nature of capital gains. This is an incorrect interpretation of the provisions leading to wrong conclusion. When a transaction is first classified under capital gains and when it falls under the clauses (a) & (b) mentioned above, then the tax payable is 10%. This provision cannot be distorted or wrongly stretched to imply that whenever tax is paid at 10% then it should be invariable treated as capital gains. Hence the assessee's submission is not acceptable.
(10) The next point of the assessee is that the shares are all along reflected under investments in the balance-sheet and the shares in trading are regularly shown as stock-in-trade.
The assessee's mention of the shares as investment in its balance-sheet does not in any way deter the way the asset has to be treated. Since the assessee is of the opinion that the transactions yield capital receipts, it classified the assets as investments. However, when the transactions are proposed to be assessed as business incomes (revenue receipts), then the assets will be classified as business assets.
(11) The next submission is that one of the investments are in sister or related concerns and all investments are in independent companies.
This submission is a matter of records. It does not help the case of the assessee. On the contrary, it strengthens the case of the Revenue. In various judgments, it has been held that whenever the shares 11 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
are purchased of the sister companies with dominant purpose for retaining the control and not to earn income, then the interest expenditure cannot allowed since such acquisition did not constitute business. Reference is invited to the Hon'ble Gujarat High Court decision in the case of Sarabhai Sons Pvt. Ltd. Vs. CIT [201 ITR 464]. This implies that had the assessee acquired the shares of the sister concerns, he would have been given the benefit of treating the same as investments. However, in the case of the assessee, the facts are contrary.
(12) The next submission of the assessee is that the book clearly has demarcation of shares held in stock as well as shares held in investment. This point is already discussed at length at point 10 above. The assessee's classification is not material. In fact, an asset is classified depending on whether it is business or investment. It would be wrong to hold that since the assessee classified it as a capital asset in his books, the activity must be treated as investment. The nature of activity determines the asset. The classification of the asset does not determine the nature of activity. This relation between activity vs asset classification should be properly appreciated.
(13) The next point is that in the past all the assessments were scrutinized and completed u/s. 143(3) accepted the position of short term and long term capital gains and never been treated as business.
It is seen from the past records that for the A.Y. 2005-06 and A.Y. 2004-05, the assessments have been completed u/s.143(1)(a). there was no scrutiny assessment u/s. 143(3) for either of the years. As per the provisions of the Act, only some minor adjustments can be made while completing the assessment u/s.143(1)(a). Therefore, the incomes could not have been recomputed in those years, as is being done now. The assessee cannot make out a case for itself on this basis. In any case, it is now settled that the concepts of "estopple" and "resjudicate" are not applicable for the tax administration.
(14) The last submission of the assessee is that the CBDT circular stipulates that it is possible for a taxpayer to have two portfolios i.e. an investment portfolio and a trading portfolio. Where an assessee has two portfolios, the assessee may have income under both heads i.e. capital gains as well as business income.
12ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
This submission of the assessee is nothing but the clarification which the Hon'ble CBDT intended to make. The circular says there is a possibility of an assessee having incomes from both the heads i.e. business as well as capital gains. This clarification is not being challenged; on the contrary, it is being fully followed. However, to give effect to this clarification, it must first be established that the incomes are definitely classifiable under two different heads. In the instant case, the entire transactions are being put to test for arriving at the conclusion as to whether they can be treated as business or not" therefore, the CBDT circular cited by the assessee is being fully complied with and not controverted.
5. The A.O. also referred to the CBDT Instruction No. 1827 dtd. 31.8.89 wherein various factors were given for deciding the issue as to whether the shares are held by the assessee as "stock-in-trade or as "investment". He, therefore, considered the facts of the assessee's case on the touchtone of these relevant factors and arrived at the following conclusions:-
(i) Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or an occasional independent activity.
The purchase & sale of shares for the year under consideration is allied to his business of speculation in shares and futures & options. The assessee has nil receipts from any other activity. Hence, the involvement in the share and commodity transaction is not occasional, but the only activity of the assessee.
(ii) Whether the purchase is made solely with the intention of "resale at a profit" or for "long term appreciation and/ or for earning dividends and interest".
In the case of the assessee, it was solely with the intention of selling at profit. From the very short period of holding shares (in some cases held only for few days), there seems absolutely no intention of holding on for long term appreciation or for earning dividends etc.
(iii) Whether the scale of activity is substantial.
It is mentioned earlier that purchase & sale of shares and trading in futures & options is the only activity of the assessee. If there were to be any other incomes, then it could have been commented upon as to whether it is substantial or not.
(iv) Whether the transactions were entered into continuously and regularly during the assessment year.
13ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
Yes.
(v) Holding period It is already illustrated that the holding period is very less. In most of the cases, it is less than 3 months.
(vi) Ratio of sales to purchases and holding:
Substantial. The total purchases during the year of shares from which STCG are disclosed is Rs.7.52 crores while the total sale transactions are at Rs.8.58 crores. In the case of LTCG, the total purchase (of the shares sold during the year) is at Rs.39.48 lakhs and the sale proceeds are at Rs.1.63 crores. As against such huge purchase of Rs.7.91 crores (LTCG + STCG), the value of the balance shares at the end of the year is only Rs.47.19 lakhs. Therefore, the ration of purchase & sales is very high and the ratio of purchase to closing stocks is very less at 5.94%, implying that almost all the shares acquired during the year have been sold. This again reflects a trading approach and not an investment approach.
(vii) The time devoted to the activity and the extent to which it is the means of livelihood.
The assessee is involved full time in the share transaction and the commodity transactions. Apart from the receipts from them, the assessee has not a single receipt from any other activity. His day-to-day occupation is that of purchase & sale of shares either on delivery-basis or non-delivery basis. While the receipts from sale of shares is at Rs.2.29 crores, the receipts from F&O transactions in shares is at Rs.43.5 lakhs and the receipts from F&O transaction sin commodity items is at Rs.13.18 lakhs. Therefore, it is evident that the receipts and income from purchase and sale of shares is substantial as compared to the F & O transactions. However, since the substantial part of F & O transaction is again in shares, the assessee's major activity can be held to the share transactions. Therefore, it squarely qualifies to be business in nature.
(viii) Whether the securities purchased and sold are listed or unlisted.
All the trading is in listed shares. Purchase of unlisted shares (generally done with investment motive) would have given a benefit of doubt to the assessee.
(ix) Whether investment is in sister/related companies.
Assessee being individual, investment is in public listed companies.
(x) Whether money has been paid or received or whether these are only book entries.
14ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
The assessee had paid and received the amounts. However, the payments and receipts are not bill-wise rather they are settled periodically. The assessee vide his submission mentioned as follows:
"The assessee has account with his share--broker M/s. Emkay Share & Stock Broker Pvt. Ltd. Normally the payments are made for purchased and payments received for sale. Sometimes because of certain transactions of actual delivery as well as speculative take place on same day, the combined bills for transactions are received and net payments are made or net payments are received from the broker."
From the above, it becomes that the assessee carries out on the same day, both the speculative and delivery - based transactions. The amounts are intermingling and there are no separate accounts. This goes to prove that the assessee's approach is the same, be it speculative or delivery-based transactions. In fact, even in the case of the investments, the assessee has categorically submitted as follows:
"All the delivery-based purchases are put in one bunch of investment only. Depending on the period of holding, the proceeds are classified as short term and long term."
This implies that the assessee is unsure as to whether it will square-up a transaction or take delivery when the scrip is purchased. Even if it takes deliver, it is unsure as to whether it would quickly exit the scrip or hold for a reasonable period of time. The entire classification is made after the scrip is sold and calculating the period for which the scrip was held. It amounts to link the transactions backwards. This cannot be held as an investment attitude where the assessee is totally at lack of knowledge of its expected period of holding the shares.
6. For the reasons give above as well as the findings/observations recorded by him and relying on the various judicial pronouncements discussed in his order, the A.O. ultimately held that the assessee firm was doing all the share transactions as a 'trader' and not as 'investor' and the entire profits arising from the said transactions was chargeable to tax in its hands under the head "profits and gains of business/profession". Accordingly, the entire profit earned by the assessee from the purchase and sale of shares including that declared by the assessee as long term capital gain and short term capital gain was brought to tax by him in the hands of the assessee under the head "profits and gains of 15 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
business or profession" in the assessment completed u/s 143(3) vide an order dated 31.12.08.
7. Against the order passed by the A.O. u/s 143(3), an appeal was filed by the assessee before the ld. CIT(A) and the following facts were highlighted on its behalf at the time of hearing before the ld. CIT(A) stating the same to be relevant to decide the issue in dispute:-
(i) The Appellant is a partnership firm in existence since 01.01.1976 and it was reconstituted vide deed of partnership dated 1st December, 2003.
(ii) The object of the partnership firm as per clause 4 of Deed of partnership is as under:-
Clause 4 : NATURE OF BUSINESS That the partnership firm shall continue to carry on the business of dealing in rayon, yarn, nylon-yarn, cotton-yarn, synthetic fibre, cement, paper, iron and steel, paper chemicals, investment in shares and securities (emphasis supplied) and to act as commission agent or agents or to do any other business or businesses as the parties hereto may from time to time.
(iii) From the above object clause it is absolutely clear that "Investment in shares and securities" is one of the object of the Appellant.
(iv) The appellant had been carrying Investment and share trading activity from its incorporation. It has also commenced business in derivative segment of shares and commodities.
(v) The appellant has computed income in accordance with the legal from work of Income Tax Act, 1961 under various heads as provided u/s.14.
Nature of Income / Loss Section of I.T. Act
a) Profit or loss from Derivative trading in shares Provisio (d) to Section 43(5)
b) Profit or loss from trading in shares and commodities Section 43(5)
c) Short Term Capital Gains Sec.2(42 A/ 42B) r.w.s. 111A
d) Long Term Capital Gains Sec.2 (29A/ 29B)
R.w.s. 10 (36) / (38)
(vi) (a) Holding period wise break-up of Short term capital gain:-
16
ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
Holding Period Amount %
0-30 days 15,72,330.76 14.80
>31<60 days 13,82,461.84 13.01
>61<90 days 42,96,061.85 40.43
>91<100 days (-)3,62,586.79 (-)3.41
>121<150 days 15,89,212.46 14.95
>151 days <180 days 25,346.02 0.24
>181 days and < 1 year 21,22,786.68 19.98
Total 1,06,25,612.82 100
(b) The above table establishes that in majority of cases resulting into short term capital gain, the holding period is more than 60 days.
(vii) The total numbers of transactions of sale of shares resulting into long term capital gains are 7 only and resulting into short term capital gains are 33 only in the whole year.
(viii) (a) The assessee firm had capital as on 1st April, 2005 of Rs.2.31 Crores and investment in shares of Rs.1.86 Crores. As on 31st March, 2006 the capital is of Rs.0.68 Crores and investment in shares is Rs.0.47 Crores. It means that all the investments are from its own capital.
(b) There are no borrowings by the appellant for its investment activity.
(ix) The long term gains resulted fromt eh sale of shares held since last year. Further, the short term gains resulted partly from the sale of shares held since last year and partly from the investments of current year.
(x) All the transactions done on account of share purchases through broker is purely on delivery basis and cheques are paid by assessees from its own account i.e. not from borrowed funds on pay in date and delivery is transferred to its demat account accordingly by the broker vice versa at the time of sale of the shares. The appellant generally and regularly makes payment for investment by way of purchase in shares and receives payment on sale of investment in shares. All the transactions are executed through a recognised stock broker. These transactions are not merely by a book entry.
17ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
(xi) In the short term capital gain list, the volume of transactions are few. But because of splitting the purchases corresponding to sale seems to be more because the software picks up each trade wise date instead of bill wise.
(xii) (a) The appellant has its own surplus fund which it deploys in securities/ shares to have appreciation and dividend over a period of time. The intention at the time of acquisition of shares is always to make investments.
(b) The decision to acquire a particular stock for investment is taken by appellant based on fundamental analysis of the company / sector.
(xiii) The average holding period in most of the cases is more than two months.
(xiv) The appellant also derives capital gains from investments in units of mutual funds.
(xv) The shares are all along and continuously reflected in its accounts as "Investments" in the balance sheet. The shares in trading are regularly shown as "Stock in trade."
(xvi) The appellant firm also satisfies the provisions of Section 111A inserted by Finance (No.2) Act, 2004 and has paid STT on all the transactions that took place on the Stock Exchanges.
(xvii) In the past, all the assessments which were scrutinized and completed u/s.143(3) had accepted the position of short term and long term capital gains and never been treated as business.
8. The various findings/conclusions recorded by the A.O. in his order were also attempted to be counted by the assessee by making the following point-wise submission:-
"(1)Point NO.5 Page No.3 of oder AO's Remark Mentioning of nature of business in tax audit report as "Trading in shares etc."18
ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
Appellant's Submissions Kindly note that accounts of the appellant were required to be audited u/s.44AB of the Income Tax Act, 1961 not because of capital gains but for "sale, turnover or gross receipt" in excess of forty lakhs rupees from activities like derivatives in shares and commodities, etc. and therefore, full accounts needs to be audited covering even capital gains which forms part of Profit & Loss Account. Hence, the mention of "shares / securities investment" under clause 8(a) of Form No.3CD was made to correctly reflect the appellant's activities.
Kindly refer the computation of income filed along with the return of income which clearly indicates the nature of business "DEALING IN SHARES & SECURITIES & INV." While the A.O. took the shelter of Tax Audit Report but at the same time he conveniently ignored the computation which is also available on record.
(2) Point NO.6 on Page NO.3 of order AO's remark Mentioning of mercantile system of accounting in tax audit report.
Appellant's Submissions The full accounts of the appellant were subjected to audit u/s.44AB of the Income Tax Act,1961. the appellant for all of its income and expenses has followed mercantile system of accounting as stated in column 11(a).
(3) Point No.7 on Page No.3 of order AO's Remark Code no. for nature of business in tax audit report.
Appellant's submissions We are attaching herewith a full list of codes (page 1 to 2) From the perusal of the same, your honour will appreciate that the ONLY code where business activities of the Appellant like derivatives in shares and commodities, trading in shares are covered is "0204- Trading - Others". Investment activities are not business activities and further there is no code relevant to investment activities prescribed in the list of codes.
(4) Point No.8 and 9 on Page No.4 of order AO's Remark 19 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
Nature of business mentioned in earlier year in tax audit report and break up of income of earlier year.
Appellant's submissions It does not have any effect on nature of income since it was specified on computation of income.
In the table of year-wise income given by the A.O., the Assessing Officer has for reasons best known to him totally ignored to state that business income mentioned in the last column also includes income from purchase and sales of shares not acquired with the intention of investment in addition to trading in derivatives in shares. However, the incomes in the table reiterates that the assessee continuously have the LTCG and STCG resulting from its investment activity.
Therefore, it is submitted that it is a matter of fact that the Appellant is engaged in trading in shares and securities, F & O transactions in shares, derivatives in commodities. Further, acquisition of shares with the intention of investment is treated as investment. Also, none of the derivative position in shares is taken to hedge acquisition of shares as investment.
Hence, it is submitted that the appellant's active engagement in F & O transactions, derivatives in commodities etc. doesn't in any way prohibit or bar it from doing investment. This position is amply clarified by Para 10 of circular 4 of 2007 dated 15th June, 2007 issued by CBDT whereby an assessee can have two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income. The appellant has made proper distinction based on nature of transaction in its books of account.
(5) Point No. 10, 11, 12 and 13 on Page No.4 to 7 of order Point No.10 and 11 AO's Remark Assessee engaged in shares and commodities transaction only in past several years. AO referred to "Laxminarayan Ramgopal Vs. Govt. of Hyderabad [25 ITR 449 (SC)", "CIT Vs. Motilal Hirabhai Spinning & Weaving Co. Ltd. [113 ITR 173 (Guj)"] and "Bharat Development Pvt. Ltd. Vs. CIT [4 Taxman 58 (Del)]" for judicial support.
Appellant's Submissions The appellant is actively engaged in trading in shares, derivatives in shares and commodities. These activities are being carried by it for past several years in a 20 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
systematic and regular manner with a purpose and characterized by the frequency and repetition of the activity. Accordingly, these activities have been classified by the appellant as its OWN business activities.
However, it does not prohibit or bar the appellant from acquiring shares with the intention of investments as and when deemed fit and to account for the same accordingly.
Therefore, the activities of the appellant which bears the characteristics mentioned in the judicial pronouncements referred to by Assessing Officer has already been classified by the appellant as business activities at its OWN. The AO is attempting to give the same colour to the transactions involving acquisition of shares intended for investment by the appellant.
Point No.12 (a) to (i) AO's Remark AO repeated and summarized in points remarks made under above points and mentioned details of certain transactions.
Appellant's Submissions The appellant is carrying on business of trading in shares, derivatives in shares and commodities in an organized and synthetic manner. It also make investment in shares.
As per generally accepted accounting practice universally applied if a concern is engaged in various activities, it shall prepare only one profit and loss account for all its activities. All its receipts/incomes shall be credited to it and all expenses shall be debited to it. Further due to any legal requirement if account are to be audited than automatically full profit and loss account shall be audited. Because of this, investment activities does not become business activity. Further in todays context when everything is very fast changing and vibrant, even investment activities need to be carried in an organized and systematic manner.
The appellant's motive in business activities like share trading, derivatives in shares and commodities was definitely profit. In case of acquisition of shares with the intention of investment, the motive was capital appreciation / dividend.
Further, substantial income generation is not a sin. Neither it is in the hands or control of the appellant. Reverse could also happen.
The appellant has received dividend in case of 8 companies. Further AO's remark that the appellant has not received a single bonus share or right issue is 21 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
totally wrong and incorrect. The appellant has received following bonus shares during the year :-
Name of company Ratio No. of bonus shares
allotted
Mphasis BFL Ltd 1:1 15200
Further it is not in the hands of the appellant to receive bonus or right shares. It is for the management of the company to decide when to give bonus or rights. The reasoning given by A.O. in support of his contention for treating capital gain as business for non receipt of bonus or right shares is ridiculous and baseless and unwarranted.
The AO has chosen only above said transactions to support and highlight his point of view and altogether ignored all other transaction for the reasons best known to him. The real facts are totally opposite to AO findings.
Point No. 13AO's Remark Under this point AO has given details of long term capital gains and stated that there holding period was very less.
Appellant's Submissions As submitted earlier one invests in scrip of a company based on some perception about return from dividend/capital appreciation. If POST investment the return is achieved earlier than perceived due to subsequent happenings than one will never wait for dividend because dividend yield on shares is now a days is very thin/meager and would rather exit from that investment. The assessee's holding is more than 12 months to make the investment a long term capital asset. Consequently the gain on sale will also be long term capital gains. The details of gains is as follows :-
Name of Company Capital Gain (Rs.)
Tata Motors Limited 4629317.50
Templeton India Mutual Fund 89.76
Vimta Laboratories 7723159.10
Total 12352566.36
22
ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
9. In addition to the above submission made by the assessee before the ld. CIT(A), the assessee also made an attempt to distinguish all the judicial pronouncements relied upon by the A.O. in support of his decision. After considering all these submissions made on behalf of the assessee before him as the as well as the material available on record, the ld. CIT(A) decided the issue in dispute vide para No. 3.7 to 3.9 of his impugned order as under:-
"I have perused the assessment order and have carefully considered the findings and the conclusions of the Assessing Officer. I have also carefully considered the submissions of the appellant. I have considered the facts of the case and various judicial pronouncements referred by Assessing Officer as well as by appellant. I have also perused the accounts of the assessee and computation of income of the appellant for last three years. I found that the appellant has properly reflected the business income and capital gains in the accounts and has also reflected in accordance with the provisions of section 14 in computation. I am of the considered opinion that the Assessing Officer has taken an extreme view. The Assessing Officer has treated the appellant as a trader and has treated all the transactions of the appellant inclusive of long term also as Business Income. In my considered opinion this view of Assessing Officer does not seems to be a correct view. The Assessing Officer should have given due consideration to the facts of the year under consideration as well as it is necessary to consider the facts of the past years to ascertain the true nature of activities of appellant.
From the analysis of the period-wise break up of capital gains, it is clear that capital gains resulting from transactions on the basis of period of holding of less than 30 days is mere ` 15.72 lacs. Out of this there are 2 transactions of less than 20 days resulting in gain of ` 4.87 Lacs. By the appellant's own admission also he has engaged himself in the business of trading in shares and securities. Thus, though the claim of the appellant that he is an investor is absolutely correct, it cannot be denied that at times he also tires his hands at trading in shares. It is a well known fact that the person who is a full time investor would be in a position to understand and take advantage of short term opportunities that are present in the market. The fact that the a person can be both an investor as well as a trader is also recognized by the CBDT and the CBDT has stated that a tax payer can have both portfolios, an investment portfolios as well as trading portfolio. Various factors which makes the appellant an investor are that the appellant had made investments and valued at cost, the appellant did not have any office and/or administrative set up, there are no fixed assets, the source of acquisition of shares was out of won funds and family funds, the ratio of investments to sale and purchases is very high and the fact that there was not a single instance where the appellant had squared off the transaction on the same day without taking delivery of shares.23
ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
While the factors listed above makes it clear that the appellant is mainly an investor the factors like lack of dividend income, turnover of shares in less than 30 days etc. , points to the fact that the appellant is also a trader. I therefore hold that the appellant is both an investor as well as trader. I direct the A.O. to treat the surplus/loss on sale of shares held for less than 30 days as business income/loss and the to treat the surplus/loss on sale of shares held for more than 30 days as Capital gains/Loss. This will have an impact of taking only a sum of ` 15.72 lakhs as business income in place of short term capital gain."
10. The ld. CIT(A) thus held that the assessee has entered into share transactions both as investor as well as trader. He held that the period of holding of shares was crucial to decide whether assessee had entered into particular transaction in shares as investor or trader. According to him, where the shares were sold by the assessee after holding the same for less than 30 days, the transactions of sale of such shares could be treated as business transactions of the assessee giving rise to business income. As regards the sale of transactions of shares which were hold for more than 30 days, he held that the profit/loss arising from such transactions was chargeable to tax under the head "capital gain" either as short term or long term capital gain depending on the period of holding. The ld. CIT(A) thus allowed a part relief to the assessee on this issue by his appellate order dated 26.3.09 and aggrieved by the same, the Revenue and assessee both are in appeal before the Tribunal.
11. The grounds raised by the Revenue and assessee in their respective appeals read as under:-
Grounds raised by the assessee:
"1. The learned Commissioner of income Tax Act (Appeals) has grossly erred in holding that the appellant is both an Investor and Partially Trader in shares.
2. The learned Commissioner of Income Tax (Appeal) has further grossly erred in confirming the treatment of Short Term Capital Gains of ` 15,72,331/- being shares held for less than 30 days "as transaction of business nature" and the reasons assigned by him are wrong and are contrary to the facts and provisions of Income Tax Act 1961 and Rules made there under.24
ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
3. The Learned Commissioner of Income Tax (Appeal) having treated the Short Term Capital Gain as business partially, has further erred in not directing the Assessing Officer to:-
(i) Allow deduction u/s 80G of `. 88,725/- as against ` 44,362/-
allowed in assessment order.
(ii) Allow rebate for STT paid on the gain of ` 15,72,331/-.
Instead treating the Ground No. 4 of appeal before him as redundant."
Grounds raised by the Revenue:
1. (i) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the assessee is both an investor as well as trader in shares and securities.
(iii) The ld. CIT(A) has further erred in treating the profit/loss on sale of shares held for less than 30 days as business income/loss and directing to treat the profit/loss on sale of shares held for more than 30 days as capital gains/loss."
12. The learned D.R. at the time of hearing before us strongly supported the order of the A.O. treating that the entire profit earned by the assessee from business transactions as its business income. He invited our attention to the specific findings recorded by the A.O. at page No. 6 of the assessment order to show that the assessee was carrying out the share transactions as 'trader' and not as 'investor'. He also invited our attention to para No. 15 of the assessment order and took us through the various observations/inferences recorded by the A.O. while rebutting of the submissions made on behalf of the assessee in support of its case. He submitted that even the guidelines laid down by the CBDT were applied by the A.O. to the facts of the assessee's case which clearly revealed that the assessee was a trader in shares and not the investor. In this regard, he took us through the relevant findings/observations given by the A.O. on page No. 17 of the assessment order and strongly relied on the same. He contended that all these findings/conclusions recorded by the A.O. in the assessment order in support of his action in treating all the transactions in shares made by the assessee as business transactions and bringing to tax the profit arising from such transactions under the head "profits and gains of business/profession" have been completely overlooked/ignored by the ld. CIT(A) who 25 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
has decided the issue as to whether the shares were held by the assessee as stock-in- trade/investment merely going by the holding period of such shares. He contended that this issue has to be decided on the basis of intention of the assessee to hold the shares and such intention has to be gathered from all the relevant facts and circumstances of the case. He contended that the approach adopted by the ld. CIT(A) while deciding the said issue merely on the basis of holding period of the shares thus is not correct and the A.O's order on this issue which has been passed after taking into consideration all the relevant facts and circumstances of the assessee's case deserves to be upheld. In support of this contention, the ld. D.R. relied on the following decisions of the Tribunal:-
1. ITA 5410/Mum/08
2. ITA 4667/Mum/08
3. ITA 785/Mum/09
4. 2586/Mum/09
13. The learned counsel for the assessee, on the other hand, submitted that the relevant facts of the case are sufficient to show that the share transactions were entered into by the assessee mainly as 'investor' and not as 'trader'. He highlighted the fact that investment in shares was made by the assessee out of its own funds and there were no funds borrowed by it for purchase of shares. He also submitted that all the transactions in shares were done by the assessee on delivery basis executed through a registered broker and it was not a case where only entries were made. He submitted that most of the shares were held by the assessee for fairly long duration of more than one month and there were some shares which were held for even more than twelve months before they were finally sold giving rise to long term capital gain. He submitted that the assessee, no doubt, has entered into derivative transactions also in respect of shares, but the profit from such transactions was offered by it as business income. He submitted that all the delivery based shares purchased by the assessee were treated as 'investment' in the books of account of the assessee and the profit arising from sale thereof was offered to tax as capital gain even in 26 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
the earlier years which was accepted by the department. He contended that this treatment given by the assessee to the relevant shares as 'investment' in its books of account was sufficient to show its intention to purchase and hold the said shares as investment and the department having accepted the same in the earlier years, there was no justification for the A.O. to take a different view in the year under consideration. He contended that even the fact that the assessee had earned a sizeable dividend amounting to ` 200819/- was sufficient to demonstrate that the shares were held by the assessee as investment. He contended that there was a change or realignment or variation made by the assessee in investment made in the form of shares just to ensure better returns. He contended that the burden to prove that the transactions in shares made by the assessee were on trading account was on the Revenue which they have failed to discharge satisfactorily. He contended that the transactions in shares thus were carried out by the assessee as investor and not as trader and the profit arising from the said transaction was rightly offered by it under the head 'capital gains' as short term and long term depending on the period of holding. In support of his contention, the learned counsel for the assessee relied, inter alia, on the decision of ITAT in the case of Gopal Purohit vs. JCIT 122 TTJ 87 and submitted that the same has already been affirmed by the Hon'ble Bombay High Court in 228 CTR 582.
14. We have considered the rival submissions and also perused the relevant material on record. As regards the first contention raised by the learned counsel for the assessee relying on the Rule of Consistency that the assessee having treated as investor in shares in earlier years and the profit arising from sale of shares having been accepted as capital gains in the earlier years, there was no reason for the Revenue authorities to take a different stand in the year under consideration, we find it difficult to accept the same in view of the decision of Hon'ble Supreme Court in the case of New Jehangir Vakil Mills Ltd. vs. CIT 49 ITR 137. The Hon'ble Apex Court has held in the said judgment that the circumstances that in the earlier assessment year the assessee was treated as an investor would not stop the assessing authority from considering for the purpose of computation 27 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
of profits for the succeeding year as to when the trading activities of the assessee began. As regards the merits of the case, the learned counsel for the assessee has, inter alia, relied on the decision of co-ordinate Bench of this Tribunal in the case of Gopal Purohit vs. JCIT (supra) stating that the said decision rendered by the Tribunal in favour of the assessee on a similar issue has been upheld by the Hon'ble Bombay High Court. A perusal of the order of the Tribunal passed in the said case shows that a similar issue involved in the said case was decided in favour of the assessee by the Tribunal on merits relying mainly on the decision of Lucknow Bench of the Tribunal in the case of Sarnath Infrastructure P. Ltd. vs. ACIT 120 TTJ 216 observing that the facts involved in the said case were similar to the case of the assessee before it.
15. A perusal of the order passed by the Lucknow Bench of the Tribunal in the case of Sarnath Infrastructure Pvt. Ltd. (supra), however, shows that the facts involved in the said case were materially different from the facts involved in the present case. As noted by the Tribunal, the shares which were sold during the relevant period out of investment portfolios had been held by the assessee in that case for more than two to three years. The shares which were sold out of investment portfolios during the relevant year and on which capital gains had been offered by the assessee thus were found to be held by it for more than two years and in some cases even for more than three years and the Revenue could not point out any instance where the shares sold by the assessee during that year from investment portfolios were acquired during that year itself or even during the immediately preceding year. On the other hand, the shares which were sold by the assessee in the present case during the year under consideration and on which capital gain was offered, were held by the assessee only for short period of less than three months in most of the cases except three transactions wherein shares were held by the assessee for more than one year and that to by a couple of months. The average period of holding thus was very short. In the case of Sarnath Infrastructure Ltd. (supra), the assessee had enjoyed dividend income and such income received on shares held by it as investment was duly declared by the assessee in the return of income. As noted by the A.O., the 28 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
dividend income was received by the assessee in the present case only from six scrips and the assessee had exited from several counters even before the dividend was declared. The A.O. has also given in his order several names of the companies the shares of which held by the assessee did not receive any dividend income. As further noted by the A.O., the assessee had not received even a single bonus issue or a rights issue on any of the shares held by it. In the case of Sarnath Infrastructure Ltd. (supra) , the opening stock of shares held in investment portfolio was ` 19,22,203/- and closing stock was ` 46,23,274/- whereas sales out of investment portfolio was ` 31,18,423/- showing a very low turnover to stock ratio in investment portfolio. In the case of the assessee, the total purchases and sale of shares during the year under consideration were to the tune of ` 7.91 crores and 10.21 crores as against the value of balance shares at the end of the year amounting to ` 47.19 lakhs giving a very high turnover to stock ratio. The relevant facts involved in the present case thus are materially different from the facts involved in the case of Sarnath Infrastructure Ltd. (supra) relied upon by the Tribunal in the case of Gopal Purohit (supra) and the decision of the Tribunal in the case of Gopal Purohit, in our opinion, cannot support the assessee's case being distinguishable on facts.
16. As rightly contended by the learned D.R., the issue as to whether the assessee has carried out the transactions in shares as 'trader' or 'investor' mainly depends on the intention of the assessee to purchase and hold the shares and such intention has to be gathered from the facts and circumstances involved in its case. There are several aspects which need to be taken into consideration collectively and the issue cannot be decided merely on the basis of some factual aspects of the case which may be in favour of the assessee as sought to be contended by the learned counsel for the assessee relying on various judicial pronouncements. In the case of Sarnath Infrastucture Ltd. (supra), the Tribunal has laid down certain guidelines which could be applied to the facts of the given case to ascertain whether the transactions in shares are in the nature of trade or are for merely investment purposes. The CBDT also has issued guidelines on the similar lines in Instruction No. 1827 dtd. 31.8.89 which may be helpful to the A.O. to decide the issue as 29 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
to whether the shares are held by the assessee as stock-in-trade or investment. A perusal of the assessment order passed by the A.O. in the present case shows that after applying these guidelines to the facts of the assessee's case, it was inferred by the A.O. that the transactions in shares entered into by the assessee were in the nature of trade. The relevant portion of the A.O.'s order analyzing the relevant factual position of the assessee's case in the light of various criterias and guidelines has already been reproduced by us in the forgoing portion of this order and as is clearly evident from the findings/conclusions recorded by the A.O. in this context, the assessee was found to be entered in to the transactions of shares as a 'trader' irrespective of the treatment given by it in the books of account which are otherwise is not conclusive. As noted by the A.O. in this context, apart from the transactions in delivery based shares, the assessee was indulging in F&O transactions in shares and commodities simultaneously and there was no other activity whatsoever carried on by the assessee in the year under consideration as well as in the past several years. All the receipts from the transactions in shares and F&O transactions were credited by the assessee to the P&L account and various establishment expenses were debited in the said P&L account indicating that an organized and systematic activity was being carried on by the assessee. Income in the form of dividend was earned by the assessee only in respect of few scrips which gave a very low rate of return as compared to the value of shares held by the assessee. In majority of the transactions in shares, the assessee did not hold the scrips beyond a period of two months. Although there were no funds borrowed by the assessee for purchase of shares, we agree with the A.O. that it was not a mandatory requirement to hold the activity of purchase and sale of shares as business of the assessee. As rightly observed by the A.O. in this regard, there is a concept of 'zero-debt company' which is well known in the corporate world. The assessee was also found to have entered repeatedly in the same scrips which it had already disposed of which again goes to show that the motive of the assessee was to maximize the profit from the share transactions and not to remain invested for longer period which generally happens in the case of an investor. The involvement of the assessee in share transactions was not an occasional one but it was the only activity of the 30 ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
assessee which was carried on regularly in a systematic and organized manner. The short period of holding of shares clearly revealed that there was no intention of the assessee to hold the same for long term for earning dividend income. As already noted, the ratio of turnover to stock in the case of share transaction was very high. Having regard to all these facts of the case which have been clearly brought out on record by the A.O., we are of the view that if the principles laid down by the Tribunal in the case of Sarnath Infrastructure Ltd. (supra) as well as the guidelines issued by the CBDT are applied to the facts of the present case, it clearly emerges that the transactions of purchase and sale of shares entered into by the assessee were in the nature of trade and the ld. CIT(A) was not justified in treating the said transactions as made by the assessee in the capacity of investor and trader merely on the basis of holding period. In that view of the matter, we set aside the impugned order of the ld. CIT(A) on this issue and restore that of the A.O. Ground No. (i) & (ii) of the Revenue's appeal is accordingly allowed whereas ground No. 1 & 2 of the assessee's appeal are dismissed.
17. The only ground which survives now for our consideration is ground no. 3 of the assessee's appeal which relates to assessee's claim for deduction on account of donations and rebate for STT paid when the income from share transactions is held to be its business income.
18. Since we have already held that the entire profit arising from transactions of shares is chargeable to tax in the hands of the assessee under the head 'profits and gains of business/profession', we direct the A.O. to allow consequential relief to the assessee on account of donations and STT paid after necessary verification. Ground No. 3 of the assessee's appeal is accordingly treated as allowed.
31ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
19. In the result, appeal of the Revenue is allowed and appeal of the assessee is treated as partly allowed.
Order pronounced on 14th January, 2011.
Sd/- sd/-
(V. DURGA RAO) (P.M. JAGTAP)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, dated 14th January , 2011.
RK
Copy to...
1. The appellant
2. The Respondent
3. The CIT(A) XXI, - Mumbai
4. The CIT, City -21, Mumbai
5. The DR Bench, E
6. Master File
// Tue copy//
BY ORDER
DY/ASSTT. REGISTRAR
ITAT, MUMBAI
32
ITA 3444/M/09 & 3022/M/09, M/s Synthetic Fibres Trading Co.
Date Initials
1 Draft dictated on 7.1.11, Sr. PS
10.1.11,13.1.11
2 Draft placed before the Author 12.1.11, Sr. PS
13.1.11
3 Draft placed before the second
Member
4 Approved draft comes to the Sr. PS Sr. PS
5 Kept for pronouncement on Sr. PS
6 File sent to the Bench Clerk Sr. PS
7 Date on which file goes to the Head
Clerk
8 Date on which file goes to the AR
9 Date of dispatch of order