Delhi High Court
Cit vs Vinay Mittal on 27 April, 2012
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, R.V. Easwar
$~7
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 27th April, 2012.
+ ITA 1172/2011
CIT ..... Appellant
Through Mr. Kamal Sawhney, sr. standing
counsel with Mr. Amit Shrivastava, Adv.
versus
VINAY MITTAL ..... Respondent
Through Mr. Ajay Vohra, Ms. Kavita Jha and
Mr. Somnath Shukla, Advs.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
We have heard counsel for the parties. We frame the following
substantial question of law :
"Whether the Income Tax Appellate Tribunal was right in
holding that the gains from sale and purchase of various
securities should be treated as long term capital gains or
short term capital gains and not business income?"
2. The respondent Vinay Mittal is an individual and for the
assessment year 2007-08 had filed his return of income on 31.10.2007
ITA 1172/2011 Page 1 of 13
declaring total income of `6,00,62,080/-. Long term capital gains of
`2,59,52,165/- which was claimed as exempt and this included short
term capital gains of `5,53,32,591/- from sale and purchase of various
securities.
3. The Assessing Officer held that the two amounts should be
treated as business income and not income from capital gains and an
addition of `8,12,84,756/- was made. The said addition was deleted
by the first appellate authority and the Tribunal by the impugned order
has affirmed the said deletion.
4. The appellant before us has filed a chart giving the details of the
sale purchase transactions which are subject matter of the assessment
year 2007-08. The chart reads as under :
Short Term Capital Gains
Sl. Name of No. of Purchase Date of Date of Months Selling Gains/Loss
No. Company Shares Price Purchase Sale Price
1. Amtek Auto 15000 4590887 02/09/2005 09/05/2005 8 5350247 759360
2. Unitek 267500 29633058 28/04/2006 24/11/2006 7 81648641 52015583
3. Zee 24000 8363126 2.5 5761635 2601491
Entertainment
4. WWTL 12000 4 1342946 1342946
5. Zee News 10850 11 402557 402557
Ltd.
ITA 1172/2011 Page 2 of 13
6. D.S.Kulkari 15000 2281543 06/09/2005 19/05/2006 8.5 4852211 2570668
7. Ansal 47500 43271579 01/12/2006 09/02/2007 2.4 44114547 842968
Property
Total 55332591
Long Term Capital Gains
Sl. Name of No. of Purchase Date of Date of Years Selling Gains/Loss
No. Company Shares Price Purchase Sale Price
1. Kesoram 9000 233100 2002-03 18/05/2006 4 2330053 2096953
Inds
2. Neyveli 32100 1243923 13/11/2003 18/05/2006 2.5 2587356 1343433
Lignite
3. Welspun 5405 425048 07/09/2003 18/05/2006 2.6 593543 168495
India
4. Shaw 258619 5444612 21/01/2005 19/05/2006 1.5 5745539 300927
Wallace
5. Lumax 53178 1409217 2002-03 22/05/2006 4 70594473 5650256
Industries
6. Arvind 30000 1637609 23/10/2003 09/05/2006 2.5 2878042 1240433
Mills
7. Rico 48920 2965417 09/07/2005 14/09/2006 1.2 3566727 601310
Auato
8. Lumax 26489 529780 2002-03 09/10/2006 4 1533396 1003616
Auto
9. Mahindra 12590 2677277 10/08/2005 22/062006 1.1 10285855 7608578
Gesco (sic.)
10. J.P. 15000 416250 2002-03 09/09/2006 4.5 6354414 5938164
Associates
ITA 1172/2011 Page 3 of 13
Total 25952165
5. During the course of hearing ld. counsel for the Revenue has
stated that as far as long term capital gains is concerned the findings
recorded by the CIT(Appeals) and the Tribunal are correct and
Revenue cannot really contest the same. He however, submits that as
far as short term capital gains is concerned, the Revenue is right as the
assessee had earned substantial amount of `5,53,32,591/- and he has
also drawn our attention to the findings recorded by the Assessing
Officer, which are as under :
a) The sole and exclusive purpose/motive of the assessee
is to earn profit from sale and purchase of securities
and not to earn dividend/interest income, as is evident
from the fact that the assessee has earned profit of
Rs.8,12,84,756/- and dividend of only Rs.36,63,100/-
from its activity of sale and purchase of securities.
b) The assessee is mainly dealing in shares in which
always there is an element of risk or uncertainty is
involved, which is a basic prerequisite to consider an
activity to be in the nature of trade/adventure in the
nature of trade.
c) The holding period of most of the securities is usually
very short.
d) The Ratio of sales to purchases is 1.77
(18,64,07,182/10,51,22,426), again pointing that the
ITA 1172/2011 Page 4 of 13
assessee is engaged in the business of sale and
purchase of securities.
e) The assessee is indulging in the sale and purchase of
securities frequently and regularly during the F.Y.
2006-07.
f) The scale of the activity of sale and purchase of
securities by the assessee is substantial."
6. Whether a person dealing with shares has made an investment
or has treated them as stock-in-trade, has been the subject matter of
considerable debate. It is a matter of intention of the assessee, which
has to be gathered from his conduct and surrounding circumstances.
Various parameter/criteria have been elucidated and explained. A
pragmatic and common sense approach has to be adopted, when we
determine and decide the question always keeping in mind
commercial considerations.
7. The Assessing Officer in this regard referred to the circular
issued by the Central Board of Direct Taxes through Instruction
No.4/2007 dated 15.6.2007, which reads as under :
"Distinction between shares held as stock-in-trade and
shares held as investment--Tests for such a
distinction.
1. The Income-tax Act, 1961 makes a distinction between
a "capital asset" and a "trading asset".
ITA 1172/2011 Page 5 of 13
2. Capital asset is defined in section 2(14) of the Act.
Long-term capital assets and gains are dealt with under
section 2(29A) and section 2(29B). Short-term capital
assets and gains are dealt with under section 2(42A) and
section 2(42B).
3. Trading asset is dealt with under section 28 of the Act.
4. The Central Board of Direct Taxes (CBDT) through
Instruction No. 1827 dated August 31, 1989, had brought
to the notice of the Assessing Officers that there is a
distinction between shares held as investment (capital
asset) and shares held as stock-in-trade (trading asset). In
the light of a number of judicial decisions pronounced
after the issue of the above instructions, it is proposed to
update the above instructions for the information of the
assessees as well as for guidance of the Assessing
Officers.
5. In the case of CIT (Central), Calcutta v. Associated
Industrial Development Co. (P) Ltd. [1971] 82 ITR 586,
the Supreme Court observed that :
"Whether a particular holding of shares is by way of
investment or forms part of the stock-in-trade is a matter
which is within the knowledge of the assessee who holds
the shares and it should, in normal circumstances, be in a
position to produce evidence from his records as to
whether it has maintained any distinction between those
shares which are its stock-in-trade and those which are
held by way of investment."
6. In the case of CIT, Bombay v. H. Holck Larsen [1986]
160 ITR 67, the Supreme Court observed :
ITA 1172/2011 Page 6 of 13
"The High Court, in our opinion, made a mistake in
observing whether transactions of sale and purchase of
shares were trading transactions or whether these were in
the nature of investment was a question of law. This was a
mixed question of law and fact."
7. The principles laid down by the Supreme Court in the
above two cases afford adequate guidance to the
Assessing Officers.
8. The Authority for Advance Rulings (AAR) (288 ITR
641), referring to the decisions of the Supreme Court in
several cases, has culled out the following principles :
"(i) Where a company purchases and sells shares, it must
be shown that they were held as stock-in-trade and that
existence of the power to purchase and sell shares in the
memorandum of association is not decisive of the nature
of transaction ;
(ii) the substantial nature of transactions, the manner of
maintaining books of account, the magnitude of purchases
and sales and the ratio between purchases and sales and
the holding would furnish a good guide to determine the
nature of transactions ;
(iii) ordinarily the purchase and sale of shares with the
motive of earning a profit, would result in the transaction
being in the nature of trade/adventure in the nature of
trade ; but where the object of the investment in shares of
a company is to derive income by way of dividend, etc.,
then the profits accruing by change in such investment (by
sale of shares) will yield capital gain and not revenue
receipt".
ITA 1172/2011 Page 7 of 13
9. Dealing with the above three principles, the AAR has
observed in the case of Fidelity group as under :
"We shall revert to the aforementioned principles. The
first principle requires us to ascertain whether the
purchase of shares by a FII in exercise of the power in the
memorandum of association/trust deed was as stock-in-
trade as the mere existence of the power to purchase and
sell shares will not by itself be decisive of the nature of
transaction. We have to verify as to how the shares were
valued/held in the books of account i.e., whether they
were valued as stock-in-trade at the end of the financial
year for the purpose of arriving at business income or held
as investment in capital assets. The second principle
furnishes a guide for determining the nature of transaction
by verifying whether there are substantial transactions,
their magnitude, etc., maintenance of books of account
and finding the ratio between purchases and sales. It will
not be out of place to mention that regulation 18 of the
SEBI Regulations enjoins upon every FII to keep and
maintain books of account containing true and fair
accounts relating to remittance of initial corpus of buying
and selling and realizing capital gains on investments and
accounts of remittance to India for investment in India and
realizing capital gains on investment from such
remittances. The third principle suggests that ordinarily
purchases and sales of shares with the motive of realizing
profit would lead to inference of trade/adventure in the
nature of trade; where the object of the investment in
shares of companies is to derive income by way of
dividends etc., the transactions of purchases and sales of
shares would yield capital gains and not business profits".
ITA 1172/2011 Page 8 of 13
10. CBDT also wishes to emphasise that it is possible for
a tax payer 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.
11. The Assessing Officers are advised that the above
principles should guide them in determining whether, in a
given case, the shares are held by the assessee as
investment (and therefore giving rise to capital gains) or
as stock-in-trade (and therefore giving rise to business
profits). The Assessing Officers are further advised that
no single principle would be decisive and the total effect
of all the principles should be considered to determine
whether, in a given case, the shares are held by the
assessee as investment or stock-in-trade.
12. These instructions shall supplement the earlier
Instruction No. 1827 dated August 31, 1989-Circular
No.4/2007, dated 15-6-2007."
8. In Commissioner of Income Tax Vs. Rewashanker A. Kothari
(2006) 283 ITR 338, the Gujarat High Court, after considering its
earlier decision in the case of Pari Mangaldas Girdhardas Vs. CIT
(1977) 6 CTR 647 (Guj.), has formulated the following tests to
determine whether the assessee can be said to be carrying on business
of sale and purchase of various securities or holding them as an
investment. The tests are as under:
ITA 1172/2011 Page 9 of 13
"(a) The first test is whether the initial acquisition of the
subject-matter of transaction was with the intention of
dealing in the item, or with a view to finding an
investment. If the transaction, since the inception, appears
to be impressed with the character of a commercial
transaction entered into with a view to earn profit, it
would furnish a valuable guideline.
(b) The second test that is often applied is as to why and
how and for what purpose the sale was effected
subsequently.
(c) The third test, which is frequently applied, is as to how
the assessee dealt with the subject-matter of transaction
during the time the asset was with the assessee. Has it
been treated as stock-in-trade, or has it been shown in the
books of account and balance sheet as an investment. This
inquiry, though relevant, is not conclusive.
(d) The fourth test is as to how the assessee himself has
returned the income from such activities and how the
Department has dealt with the same in the course of
preceding and succeeding assessments. This factor,
though not conclusive, can afford good and cogent
evidence to judge the nature of transaction and would be a
relevant circumstance to be considered in absence of any
satisfactory explanation.
(e) The fifth test, normally applied in cases of partnership
firms and companies, is whether the deed of partnership or
the memorandum of association, as the case may be,
authorises such an activity.
ITA 1172/2011 Page 10 of 13
(f) The last but not the least, rather the most important
test, is as to the volume, frequency, continuity and
regularity of transactions of purchase and sale of the
goods concerned. In a case where there is repetition and
continuity, coupled with the magnitude of the transaction,
bearing reasonable proportion to the strength of holding,
then an inference can readily be drawn that the activity is
in the nature of business."
9. In the present case, the assessee is an employee and is in service
of a company. He has salaried income. The assessee had also made
purchases and had sold securities. He is maintaining two separate
portfolios i.e. investment portfolio and trading portfolio. The
Assessing Officer has admitted the said position in the assessment
order. It is pointed out that the shares in question which are subject
matter of short term capital gains form part of the investment portfolio
and were not part of the trading portfolio. We are not concerned with
the trading portfolio in the present case as profits and gains from the
trading portfolio have to be treated as business income/loss. As far as
seven shares/transactions subject matter of short term capital gains are
concerned it is noticeable that in four cases, the shares were held for a
period of more than 7 months, 8 months, 8.5 months and 11 months.
In three cases shares were held for 2.4 months, 2.5 months and 4
months. Quantum or total number shares is substantial but the
transactions in question are only seven in number and the period of
ITA 1172/2011 Page 11 of 13
holding as mentioned above cannot be treated as insignificant and
small. Quantum or total number may not be determinative but in a
given case keeping in view period of holding may indicate intention to
make investment. The Tribunal applying the aforesaid tests in the
present case has accepted the position of the assessee that these shares
which are subject matter of short term capital gains were rightly held
by the assessee and treated by the assessee an investment portfolio and
not a trading portfolio. We also notice that the Tribunal has
mentioned that the assessee has received substantial dividend income
of more than `19 lakhs and `27 lakhs in the assessment year 2005-06
and 2006-07. The Assessing Officer as noticed above was influenced
to a large extent of the fact that the assessee had earned huge profits
during the year in question from the sale of the said shares. This can
happen even in case of investment portfolio because when investment
is liquidated to earn gains and change their portfolio. Element of
uncertainty and risk is always there when a person deals in securities
but this factor cannot be determinative factor whether the assessee is
trading in shares or is an investor. Some investors do take risk. The
Assessing Officer has recorded that during the financial year 2006-07,
the assessee had indulged in frequent and regular trade in securities.
The Assessing Officer did not refer to and specifically dealt with the
transactions in question though the chart and the figures noted above
ITA 1172/2011 Page 12 of 13
in this order were available and on record at the time of original
assessment. He has not mentioned whether the assessee had indulged
in frequent transactions in the previous period or subsequently.
Merely because the assessee had sold the said shares in the relevant
year and made substantial gains and could not show basically the
objective for acquiring the shares was not as an investor but as a trade.
The ratio of sales and purchase may be relevant in a particular case
but when an assessee liquidates any investment, the said ratio will
always be in favour of sales.
10. The Tribunal in the facts of the present case has examined and
correctly applied test/criteria, which has to be applied. We may note
that in the earlier assessment years, transactions in the investment
portfolio by the assessee were accepted by the Assessing Officer.
11. In view of the aforesaid position we answer the question of law
mentioned above in negative i.e. in favour of the assessee and against
the Revenue. No costs.
SANJIV KHANNA, J.
R.V.EASWAR, J. APRIL 27, 2012 vld ITA 1172/2011 Page 13 of 13