Income Tax Appellate Tribunal - Delhi
Ajay Srivastava, New Delhi vs Assessee on 25 January, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'A' NEW DELHI.
BEFORE SHRI I.P. BANSAL AND SHRI K.G. BANSAL
I.T.A. Nos. 5619 & 5620(Del)/2010
Assessment years: 2006-07 & 2007-08
Shri Ajay Srivastava, Assistant Commissioner of
C-1/109, Janakpuri, Vs. Income-tax, Circle 26(1),
New Delhi. New Delhi.
PAN: AATPS0694M
ITA No. 4089(Del)/2011
Assessment year: 2008-09
Deputy Commissioner of Shri Ajay Srivastava,
Income-tax, Circle 26(1), Vs. C-1/109, Janakpuri, New Delhi.
New Delhi.
(Applicant) (Respondent)
Assessee by : Shri Pradeep Dinodia, C.A. &
Shri V.P. Gupta, Advocate
Department by: Mrs. Geetmala Mohananey, CIT, DR&
Mrs. Anusha Khurana, Sr. DR
Date of Hearing: 25.01.2012
Date of Pronouncement: 22.02.2012.
ORDER
PER K.G. BANSAL : A.M These two appeals of the assessee and one appeal of the revenue involve a common ground regarding determination of the appropriate head of income for taxing the surplus realized on sale of shares. In assessment year 2007-08, similar question has been raised by the assessee in respect of surplus realized on redemption of units of the mutual funds 2 ('MF' for short) also. The CIT(Appeals)-XXIV, New Delhi, has decided these matters in favour of the revenue by holding that the surplus represents profits and gains of business. However, in assessment year 2008-09, his successor has decided the matter against the revenue. Therefore, appeals in respect of assessment years 2006-07 and 2007-08 have been filed by the assessee and the appeal for assessment year 2008-09 has been filed by the revenue.
1.1 In assessment year 2006-07, the assessee has taken up only one ground that the ld. CIT(Appeals) erred in upholding the finding of the AO that the gain of Rs. 10,54,870/- is in the nature of business income as against the claim of the assessee that it is short-term capital gain ('STCG' for short). In assessment year 2007-08, the assessee has taken up a general ground no. 1 that the ld. CIT(A) has erred in upholding the finding of the AO that the gain is chargeable as business income. Thereafter, three separate grounds numbered 2, 3 and 4 furnish the details of gains in terms of long-term capital gain ('LTCG' for short) and STCG of Rs. 19,99,360/- and Rs. 3,90,21,672/- in respect of shares, and Rs. 1,92,078/- in respect of units of the MF. In ground no. 3 it is also mentioned that out of STCG of Rs. 3,90,21,672/-, a sum of Rs. 3,84,36,249/- is the surplus on sale of shares 3 of only one company, Unitech Ltd., which had allotted substantial bonus shares. In assessment year 2008-09, the revenue has taken only one ground that the ld. CIT(A) erred in taxing the surplus realized on sale of shares as LTCG and STCG instead of treating it as business income. It is mentioned that in doing so, he failed to appreciate the provision contained in section 2(13) of the Income-tax Act, 1961. As the appeals involve a common ground, we think it fit to dispose them off by way of a common order.
1.2 The ld. counsel for the assessee made his submissions based upon the impugned order for assessment year 2007-08, which has been followed in assessment year 2006-07. On the other hand, the ld. CIT, DR made separate submissions for all the three years in chronological order. We proceed to describe the facts etc. in the order in which they have been presented by the rival parties.
2. The ld. counsel furnished the details of gains for these three years and also for assessment year 2009-10 in a tabular form. This table is reproduced below:-
A.Y. Shares Unitech Others
2006-07 STCG 10,54,870 10,54,870
2007-08 STCG 3,90,21,672 3,84,36,248 5,85,424
LTCG 19,99,360 - 19,99,360
4
MF 1,92,078 1,92,078
2008-09 STCG 83,45,853 49,75,295 33,70,558
MF 33,339 - 33,339
LTCG 7,81,93,362 7,78,57,579 3,35,783
MF 2,04,098 2,04,098
2009-10 STCG (4,82,131) - (4,82,131)
MF (9,96,356) - (9,96,356)
LTCG 64,20,823 60,69,336 3,51,487
MF (52,188) - (52,188)
2.1 He also pointed out that assessment order for assessment year
2009-10 has been passed by the AO in which the surplus has been taxed as capital gains. A copy of the order dated 30.12.2011 has been placed on record.
2.2 It is submitted that the assessee has been earning dividend income and surplus on transfer of shares etc. right from assessment year 1995-96, the details of which have been placed in the paper book on page no. 15 for assessment years 1995-96 to 2005-06. In all these years, the position of the assessee, in so far as head of taxation of the surplus is concerned, has been accepted by the AO. It is clarified that the returns for all these years have been processed u/s 143(1) and no assessment has been made u/s 143(3) or
144. The details are reproduced as under:-
S. No. Asstt. Year Dividends LTCG STCG 1 1995-96 10253 41018 -2840 2 1996-97 1527 11089 0 5 3 1997-98 8964 0 0 4 1998-99 5 1999-00 11397 0 0 6 2000-01 22859 0 -33244 7 2001-02 336057 0 -250682 8 2002-03 1628935 -41339 -1094 9 2003-04 12698 186690 0 10 2004-05 67920 48992 44 11 2005-06 79565 1010966 32787 2.3 Referring to the paper book for assessment year 2007-08, it is submitted that the assessee is the managing director of Dimension
Consulting Pvt. Ltd. from which he derives salary income. Apart from this, income is derived from the business of an insurance agency, in which commission received from Birla Sun Life Insurance Co. Ltd. He does not maintain any books of account. In the year under consideration surplus of Rs. 19,99,360/- was earned after payment of securities transaction tax ('STT' for short). This income was shown as LTCG. It was claimed that the amount is not includible in the total income of the assessee u/s 10(38) of the Act. The assessee also realized surplus on sale of shares and redemption of units of MF. This surplus was shown in the return as STCG. STT was paid in respect of the share transactions. Therefore, the tax was paid in accordance with section 111(A) of the Act. The details of 6 the gains have been mentioned on page nos. 4 and 5 of the paper book. These details show that the STT was paid in respect of transactions in shares resulting in surpluses which are offered for tax as LTCG and STCG, but the STT is not paid in respect of redemption of units of the MF. These details are reproduced below:-
Long-term Capital Gain on which STT paid Share name Date of Investment No. of Date of Sale Price Long-
purchase shares sale term Gain
with STT
Suzlon Oct.-05 56225 110 Oct.-05 141556 85331
Energy
Steel Autho. Feb.05 138740 2000 Aug.06 157600 18860
Of India
Simplex April 05 156163 1500 Sept.& 507633 351469
Infrastructures Nov. 06
Petronet Lng. March 04 75000 5000 Nov. 06 261684 186684
Ltd.
Kotak Bank Aug-05 311934 700 Aug- 06 218074 -93860
Indo Asian April 05 340484 3500 April 05 524062 183578
Fuse & July 06
Indiabulls & March 04 605130 3750 Jan.07 1041787 436657
Financial
Services
Hindustan March 05 230815 5000 May & 728202 497387
Const. Aug. 06
Geojit July 05 288886 3000 July 05 512558 223672
Finance
Elecon Engg. May-05 41289 550 Oct- 06 150871 109582
Long-Term 2244666 4244026 1999360
Capital gain
for the year
7
Short Term Capital Gain- MF
MF Name Date of Investment No. of Date of Sale Price Profit
purchase Units sale
UTI PSU April-06 500000 32894.737 May 06 433998 -66002
Fund
Franklin Feb & May 1903949 76746.033 May & 2028929 125080
Pharma 06 Nov-06
Plus
SBI Blue Feb. 06 1000000 100000.000 Nov.-06 1133000 133000
Chip Fund
3403849 3595927 192078
Short Term Capital Gain- Shares
Share Name Purchase Investment No. of Sale Sale Profit
Month shares Month Price
IDFC Aug 05 622043 15910 May06 1155967 533924
Indiabulls & May-06 760528 2250 Jan-07 615998 -144529
Financial
Service
HDFC Bank Aug-05 325974 500 Apr.-06 405855 79881
Unitech Nov-05 3664641 25960 May/July- 12656491 8991851
06
Unitech July-06 0 74000 Oct/Nov- 29444398 29444398
(Bonus) 06
Morgan Jan-06 340700 10000 Aug-06 372990 32290
Stanley
Dalmia July-06 417660 1500 Feb-07 583965 166305
Cement
Venus May-06 545266 1180 Nov-06 449007 -96260
Remedies
UP Hotels Apr-06 376572 1224 Sept-06 256941 -119631
BHEL July-06 191044 100 Oct-06 243091 52047
Tube Mar-06 95789 750 June-06 51030 -44758
Investment
Crompton May-06 617223 550 July-06 505034 -112190
Greaves
J.P.Associates Nov-06 522854 800 Jan.-07 579326 56471
Kirloskar Oil Nov-06 474711 1700 Jan.-07 446261 -28450
Mphasisbtl Aug-06 904471 5000 Oct-06 1160605 30938
Jindal Steel & Mar-06 368920 200 May-06 399858 32329
Power
8
Rajesh Expo Jan-07 472659 1250 Feb-07 504988 -31998
Gujrat Coke Mar-06 302834 3000 Apr-06 270836 -80324
Viyaya Bank Oct-06 857050 15000 Nov-06 776727 -36772
Punjab Feb-07 269767 750 Mar-07 232995 46024
Tractors
Gateway Oct-06 827050 5000 Oct.-06 873074 39021672
Distriparks
STCG for the 15843002 54864674 39021672
year
2.4 In the course of assessment proceedings, the AO raised questions regarding source of investment in various securities, average period of holding, purpose of investment and the realization of the surplus. It has been submitted that investment has always been made from savings, which have been accumulated from his earnings over the years. The average period of holding in respect of short-term securities is about four and half months. In calculating this average period, the date of acquisition of bonus shares has been taken to be the date of allotment. However, if the date is taken to be the date of acquisition of original shares, the period will be about nine months. The objective is to earn return on surplus funds and consolidate the savings so that immovable properties may be purchased in future. The assessee has adopted a balanced approach by investing surplus funds in bank deposits, shares, mutual fund etc. The gain realized on sale of short-term assets was used primarily for purchase of immovable property, infusing fund in the new business, fixed deposits 9 with bank and purchase of capital assets. Tax obligation was also met out of the gain. It has been clarified that there was abnormal increase in the price of shares of Unitech Ltd. This company initially divided one share of face value of Rs. 10/- into five shares of face value of Rs. 2/- and thereafter allotted 12 bonus shares for every share held by a shareholder.
Thus, the shareholding increased 60 times in number. 98.5% of the gain in this year has been earned from sale of shares of this company. The assessee held 5112 shares of this company on the record date, 30.06.2006, which became 3,32,280 shares of Rs. 2/- each on the sub- division of original shares of Rs. 10/- each and allotment of bonus shares. 2.5 The assessee has also furnished a chart regarding frequency of purchase and sale of shares in a tabular form which shows that 21 transactions of purchase were made and 22 transactions of sale were made in this year. This chart is reproduced below:-
Purchase Sold
Month Number of Month Number of
transactions transaction
April 1 September 1
May 1+1+1 January, November 3
& July
June Nil
July 1+1+1 October, November, 4
February & October
10
August 1+1+1 May, April & 3
October
September Nil
October 1+1 November & 2
October
November 1+1+1 May, July & June 3
December Nil
January 1+1 August & Feb. 2
February 1 March 1
March 1+1+1 June, May &April 3
Total number of 21 Total of all the 22
transactions in the transactions
year
2.6 It is further submitted that the AO has furnished the details of
STCG and LTCG as shown in the return on page 2 of the assessment order. It has been mentioned by him that the transactions of purchase and sale are spread throughout the year. These transactions have been made industriously and with enterprise which raise the assumption that they are in the nature of business or at least adventure in the nature of business. It is further mentioned that even sale of long-term asset is followed by purchase of share. This is true both in respect of sale of shares and redemption of units. The dividend earned is a petty amount of Rs. 3,25,603/- compared with surplus realized on sale of shares etc., which amounts to about Rs. 4.00 crore. The average holding period is small, which contradicts the assertion that the shares were held as investments. It is further mentioned that apart from salary, the assessee earns business 11 income by way of commission and the agency is run through employees and consultants. It has also been mentioned that business can also be carried on through own funds. The fact that a part of the profit is utilized for purchase of immovable property or investment in another venture does not lead to inference that the shares were held on investment account because even from the normal business withdrawals are made for such purposes. The infrastructure of the agency business is available to the assessee for carrying on the business of purchase and sale of shares and units. Thus, all the arguments raised by the assessee in support of the return have been rebutted by the AO in so far as head of taxation is concerned.
2.7 The ld. counsel also referred to the findings of the ld. CIT(Appeals), mentioned in various sub-paragraphs of paragraph no. 5. His findings are that -(a) the assessee had undertaken transactions in shares etc. in earlier years, this year and in subsequent years. In this year, he has dealt in shares of more than 20 companies; (b) the assessee had commercial motive while undertaking the transactions in shares etc. as in the submissions for assessment year 2006-07, it has been clearly mentioned that he kept an eye on fluctuation in quotations. Wherever loss was anticipated, he sold 12 the shares at loss to save the principal amount; (c) the intention at the time of investment was not to hold shares for long period but to earn profits in the volatile market, which can be seen from the frequency of transactions; (d) the magnitude and frequency of the transactions clearly lead to an inference that they were undertaken as a trader, and (e) earning of profit @ 346.3% in the transactions make it absolutely clear that it represents trading profit as investments cannot lead to such a high rate of profit.
2.8 He considered Board circular no. 4 of 2007 which has taken into account the decision of Hon'ble Supreme Court in the case of CIT Vs. Associated Industrial Development Co. Pvt. Ltd., (1971) 82 ITR 586, and H. Holck Larsen vs. CIT (1986) 160 ITR 67. It is mentioned that these cases afford reasonable guidelines to the AO. No single principle would be decisive test to come to a conclusion. The total effect of all facts will have to be considered as to whether the shares are investments or stock- in-trade. On the basis of the facts, it has been concluded that the transactions are in the nature of business. The facts of the case of Gopal Purihit, 12 TTJ 87 (Mum.) and Management Structure and System Pvt. Ltd. Vs. ITO, 41 DTR (Mum.) (Trib.) 426 have been distinguished by 13 mentioning that the shares have not been held for years together and the claim for assessment year 2006-07 has not been accepted, which is the first year of commercial trading.
2.9 The case of the ld. counsel is that the assessee is not a trader in shares. He had been investing savings over a period of time in shares as well as in other assets so as to have a balanced approach in the matter. Till assessment year 2005-06 nominal profits accrued, which were offered as capital gains. The assessing officer accepted the returns u/s 143(1)(a). Profit in years under consideration increased significantly on account of realization of investment in the shares of Unitech Ltd. The share was initially sub-divided into five shares and thereafter 12 bonus shares were allotted for each share held by the assessee. The investments and sale thereof was primarily for purchase of investment in immovable properties and another venture. The assessee does not have any infrastructure for trading in shares. Therefore, the ld. CIT(Appeals) erred in holding that the transactions are on trading account.
3. As mentioned earlier, the ld. senior DR started with the facts for assessment year 2006-07. She referred to the findings of the AO in respect 14 of each of the submissions made before him. It is mentioned that the dividend income is only Rs. 1,13,451/- while the capital gain amounts to Rs. 10,54,870/-. The loss incurred on sale of some shares is rather small and it cannot be said that most of the shares were sold at losses. It also cannot be said that the shares were sold to protect the existing investment. The assessee has systematically purchased and sold shares. Further, it also cannot be said that most of the time is devoted for earning the salary income as the details of purchase and sale of shares show that considerable time has been devoted to this activity. The submission that investments were made for protecting the capital and to fund purchase of immovable property at Mumbai is also not correct as sale of shares after short interval of purchase shows the profit motive. Although frequency of transactions is not even throughout the year, but it also remains the fact that the transactions have been undertaken with purpose, industry and enterprise. The submission that the value of the stock is taken at cost price is also not material as even in a case where books of account are maintained, the treatment given in the books is not conclusive of the matter. The average period of holding of about 134 days and frequency of transactions show that purchases were not made with a view to earn dividends and long-term returns. The fact that large profit has accrued 15 only in this year does not lead to the conclusion that the transactions are not in the nature of business. The assessee has also shown speculative loss on sale of shares, which shows that the assessee intended to carry out the business.
3.1 Further, she referred to the findings in assessment year 2007-08 recorded by the ld. CIT(Appeals). It is mentioned that the motive can be inferred from the submissions of the assessee made in assessment year 2006-07 that he kept an eye on fluctuation in the market and wherever loss was anticipated, the shares were sought to be disposed off even by incurring loss. This was allegedly done to save the capital. But it shows that the motive was to make profit. The focus was not on earning dividends but reaping the profit on account of volatility in the market and, therefore, the stated motive of accumulating savings for investment in house property is not acceptable. After selling shares at loss, further shares have been purchased out of the sale proceedings, which indicates the desire to make systematic transactions with a view to earn profit. The shares were stated to be held on investment account and delivery was taken in all cases. This fact is not material in deciding the issue. Actually what is to be seen is the real nature and effect of the transaction. It also 16 does not make any difference whether the transactions are carried out through a broker or sub-broker. What is really material is the intention of the assessee, namely, whether it was to make a long-term investment or to churn investments with a view to make profit. It is also clear that gain of 346.3% in a few months cannot be achieved if the motive is to hold the assets as long-term investments. Accordingly, it has been held that the assessee has undertaken business and purchases were not made with a view to hold them as investments.
3.2 In respect of assessment year 2008-09, it is mentioned that the assessee undertook regular and systematic activity of purchase and sale of shares and also speculation in share transactions. The earnings from this activity are much higher than the salary income.
3.3 It is, thus, strongly argued that the concurrent findings of the lower authorities for assessment years 2006-07 and 2007-08 may be upheld; and the order of the ld. CIT(Appeals) for assessment year 2008-09 may be reversed and the order of the AO may be restored.
4. In the rejoinder, the ld. counsel referred to the argument regarding speculation loss and it is mentioned that it occurred on account of bad 17 delivery. However, it could not be explained as to how the assessee could incur speculation loss when it is his case that all transactions are delivery based. It is also submitted that gain on transaction in units of mutual funds have been held to be business income.
5. At this stage, we may briefly examine the findings of the ld. CIT(Appeals) for assessment year 2008-09 although none of the contending parties has referred to it. The ld. counsel has derived our attention to the decision in the case of ITO Vs. Rohit Anand (2010) 127 TTJ (Del) (VO) 122, on which heavy reliance has been placed. In this case, the assessee was dealing in jewellery and share-holdings were shown as "investment" in the books. The investment was out of own funds and transactions in shares were not frequent. The shares were treated as investments in earlier years. The AO took the transactions to be on account of business because of the large amount involved therein. The Tribunal held that the intention has to be gathered from the conduct of the assessee. Showing the shares as investment in the books is a manifestation of the intention that they were held as investments. The AO only took into account the factum of appreciation in the value of shares. Therefore, the gain was held to be on capital account.
18
6. We may also consider various cases relied upon by the rival parties. In the case of CIT Vs. Associated Industrial Development Co. (P) Ltd., (1971) 82 ITR 587, the facts are that the assessee-company was carrying on the business of managing agents of various companies. In assessment year 1957-58, it sold 20000 shares of National Pipes & Tubes Co. Ltd., 14150 shares of Indian Conduit Pipes Ltd. and 10 preference shares of National Rolling Steel Ropes Ltd., resulting into net profit of Rs. 1,26,027/-. It had been acting as managing agents of all these companies. 60700 shares of National Pipes and Tubes Co. Ltd. were acquired in the years 1943 to 1953. 10,700 shares were sold in 1955 and 20000 shares in the year ending on 31.3.1957. The profit on sale of 10700 shares was not earlier subjected to tax. As a matter of fact, the assessee had never been treated as a dealer in shares in past assessments. The claim of the assessee was that the surplus of Rs. 1,26,027/- amounted to capital gain. The shares were sold to reduce bank overdraft and entire sale proceeds were deposited with the bank. The AO took note of the fact that the assessee was authorized to deal in shares, therefore, it was held that the profit was taxable as business income. The AAC took note of the fact that the purchases were made in several lots and past records show that the assessee regularly dealt in shares of 19 the company of which it was acting as the managing agents. The counsel for the assessee also pointed out before the Tribunal that the sale proceeds were credited to profit and loss account. The Judicial Member held that the assessee was dealing in shares but the Accountant Member took a contrary view that the department had failed to bring on record any evidence to show that the shares of managed companies had been purchased with the intention to sell them at profit. The Third Member, being the President of the Tribunal in this case, agreed with the Judicial Member that the assessee was a dealer in shares as its transactions were confined of shares of managed companies. The question referred to the High Court was-whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that profit of Rs. 1,26,027/- arose to the assessee in the course of its business as a dealer in shares and as such was liable to be assessed as a revenue profit? The High Court proceeded to consider the question from a totally different angle. It took into account the fact that a part of the shares were subscribed to for the purpose of acquiring managing agency of National Pipes and Tubes Co. and subsequently large block of shares were purchased and held for long period and that the assessee sold shares in big lots to reduce its liability to the bank in the overdraft account. Therefore, it was held that 20 the profit did not arise to the assessee in the course of its business as a dealer in shares. The Hon'ble Court mentioned that the High Court went beyond the subject matter of controversy which existed before revenue authorities and the Tribunal. It was never pleaded that although it was a dealer but the subject matter of sale was held as investment. Its case was that it was an investor all through. This case was not accepted because of extensive dealings and other facts. The figures of purchase for years 1954 to 1957 were taken into account and thereafter it was concluded that after a particular point of time, the assessee ceased to be an investor and became a dealer. It is further mentioned that there is no bar for a dealer to be also an investor in shares. The fact whether a part of the holding is investment or stock-in-trade is in the knowledge of the assessee, therefore, he should be in a position to produce evidence to show whether it maintained any distinction between investments and stock-in-trade. In this case, the assessee had not made such distinction. It also did not place any material on record to establish that the shares, which have been sold, were treated differently from the shares still held by it. The proceeds were credited to profit and loss account. No decision was invited by the Tribunal as to whether the shares in question had been held by way of investments, therefore, it was not open to the High 21 Court to give a finding on this question. Thus, the question was answered in favour of the revenue and against the assessee.
6.1 Further, in the case of CIT Vs. H. Holck Larsen (1986) 160 ITR 67 (SC), the question of the High Court was-whether, on the facts and in the circumstances of the case, the assessee was a dealer in shares in accounting period relevant to assessment years 1959-60 and 1960-61? The facts are that H. Holck Larsen was a partner in the firm of M/s Larsen & Tubro up to 1946. The firm was converted into a private limited company on 08.02.1946. The assessee was allotted 53486 shares of this company in lieu of the interest in the firm. He also subscribed to 1875 shares. In the next few accounting years up to financial year 1953-54, he acquired 2994 shares and sold 1550 shares. Up to this financial year the number of shares purchased and sold and the number of transactions were few and far between, but it became larger in numbers and closer in interval in the few succeeding years, the position of which has been depicted on page no. 71 of the report. Between financial years 1954-55 and 1959-60, the assessee acquired 29969 shares and sold 37360 shares and earned profit of Rs. 1,65,581/-. Further, the assessee also dealt in preference shares of this company and a few other companies. His 22 contention that he was only an investor was rejected by the ITO and the AAC. The Tribunal found that -(a) the assessee is the chairman of Board of Directors of the company, (b) the company had extended its business and made good profits, (c) its capital increased and, therefore, right shares were issued to existing shareholders, (d) the assessee had substantial holding in this company, (e) it was not obligatory for the assessee to acquire right shares, (f) in fact the assessee was indebted to the bank and was paying interest, and (g) not only right shares were sold by the assessee but he also sold some of the original shares held by him. On these facts, it was held that there was motive to earn profit and dealings in shares was a part and parcel of profit making scheme. The High Court answered the question in favour of the assessee that he was not a dealer in shares. The Hon'ble Supreme Court considered a number of cases. It is mentioned that the question is a mixed question of fact and law. The facts have been discussed by the Tribunal and the High Court. In deciding such a question all relevant facts have to be taken into account. The assessee was in need of money for reducing his overdraft in the bank. He had to remit money to Denmark for purchase of a house. The right shares were subscribed to as failure to do so would have adversely affected the value of shares in the market. Therefore, the conduct of the 23 assessee was that of a prudent investor. Accordingly, the view of the High Court was upheld.
6.2 In the case of CIT Vs. Ess Jay Enterprises (2007) 165 Taxman 465 (Del), the assessee had shown 95,000 shares of Jai Prakash Industries Ltd., purchased in 1990-91, and subsequent subscription to 20000 shares in the right issue of this company in 1993-94, as investments. All these shares were sold in two years. The Hon'ble Court came to the conclusion that there is no evidence on record to show that the investment was converted into stock-in-trade of the business of the assessee. Therefore, the finding of the Tribunal that the shares were held as investment was held to be correct on facts. In the case of CIT Vs. Gopal Purohit (2010) 228 CTR (Bom.) 582, the assessee had maintained two accounts in respect of share activities, one as investment portfolio and the other as stock-in-trade. All the transactions in investment portfolio were delivery based transactions. The Tribunal returned a finding that sale of shares from the investment portfolio led to capital gains. The Hon'ble Court upheld the decision by mentioning that a person can be a dealer and investor at the same time. In absence of any evidence to the contrary 24 brought on record by the revenue, the transactions in investment portfolio were on capital account.
6.3 In the case of Assistant CIT Vs. Om Prakash Arora, (2012) 134 ITD 217 (Del), the transactions in shares were held to be on capital account and the following finding was recorded:-
"9. As mentioned earlier, the bulk of profit is on sale of 15000 equity shares and 1,80,000 bonus shares of Unitech Ltd. Therefore, it becomes necessary to examine the nature of these holdings. As mentioned earlier, the assessee had purchased 5000 shares out of which 2000 shares were sold in the earlier year. The AO had accepted that the shares were held on investment account as the gain from sale of 2000 shares was taxed under the head "capital gains". Remaining 3000 shares were sub-divided in 15000 shares in this year. The inference would be that 3000 shares sub-divided into 15000 shares were also held on investment account. In respect of 15000 sub-divided shares, the assessee received 1,80,000 bonus shares. Bonus shares can be issued only out of accumulated profit in the form of general reserve available with the issuing company. Issuance of such shares does not enhance the value as the reserves of the issuing company get reduced on issuance of bonus shares. Therefore, the nature of bonus shares has to be taken as same as the original shares. This view finds support from the decision in the case of Madan Gopal Radhey Lal (supra). Accordingly, it has to be held that the original equity shares and the bonus shares were held on investment account.
10. This brings us to the final determination of the question. We find that the shares were treated as investments, investments were made from own funds, a large number of transactions have been undertaken but the assessee does not have his own infrastructure to carry on the business, and 25 transactions are not in the line of marketing and distribution of books and magazines. In such a situation, easy access to the infrastructure of Quantum Securities (P) Ltd., short period of holding, availability of experience and knowledge and undertaking large number of transactions do not override the original intention of investment in shares. We may mention here that no single factor is decisive in coming to a conclusion in the matter. Similarly, the number of points for and against also cannot by themselves can lead to a proper inference. What one has to do is to weigh each factor vis-à- vis the weight of other factors. We find that prior and subsequent acceptance of the assessee as investor in shares coupled with the fact that bulk of profit has been earned from sale of bonus shares of Unitech Ltd., which are taken as investment because of the history of the case, out weigh other factors. Accordingly, it is held that the ld. CIT(A) was right in holding that surplus realized on sale of shares is taxable under the head 'capital gains'."
7. We have considered the facts of the case and submissions made before us. The ld. counsel has discussed all the appeals with reference to the impugned order for assessment year 2007-08. However, the ld. DR has discussed the facts of each case separately. We have seen from the decision in the case of Gopal Purohit (supra) that a person could be an investor and a dealer in shares simultaneously. Further, as seen from the decision in the case of H. Holck Larsen (supra), an investor may convert himself into a dealer. A dealer may also convert himself into an investor with the passage of time. Therefore, we think it fit to discuss the facts of each year separately and decide the matters accordingly. 26
8. The facts in respect of assessment year 2006-07 are that the assessee has shown income from salary, house property and capital gains. A loss of Rs. 7,673/- has been shown as speculative loss in shares due to non-delivery of shares. The assessee has undertaken transactions in shares of 52 companies. The gain from these transactions has been shown as STCG amounting to Rs. 10,54,870/-. On perusal of the statement, it is seen that many a time shares of a company have been purchased in one lot on one day and thereafter sold on a piecemeal basis on different dates. To illustrate this point, shares of Andhra Sugar were purchased on 18.05.2005 and sold on 24.05.2005 and 25.05.2005. There are converse situations also, for example, shares of Amtex India were purchased on 10.05.2005 and 17.05.2005 and all these shares were sold on 18.07.2005. Thus, the transactions of purchase and sale far exceed in number than the number of companies whose shares have been purchased or sold. The assessee has also purchased and sold units of 10 different mutual funds. The assessee does not maintain books of account. The assessee has not borrowed money for purchase of shares or units. He does not have infrastructure to carry out transaction in shares on his own and, therefore, the transactions are put through a broker. In other words, the transactions are not in the line of the normal course of business. In past 27 the assessee had shown the purchase and sale on investment account and the returns filed by him were accepted u/s 143(1). However, the number of transactions in this year has increased very significantly. The reason for frequent purchase and sale is stated to be to safeguard the investment and to accumulate money for investment in property. The question is- whether, the transactions are on capital account or on revenue account? Various cases discussed above show that all factors are to be taken into account in coming to a proper conclusion and no single test is determinative of the issue. The AO has relied on the decision in the case of Karam Chand Thaper & Brothers (P) Ltd. Vs. CIT (1971) 82 ITR 899 (SC). The Hon'ble Court mentioned that locking up shares for about 14 years must be held to be an unusual feature if the shares are to be classified as trading assets of the assessee. This circumstance is more consistent with the finding that shares were held as investments. What emerges is that a long period of holding should be associated with investment. However, the converse may not always be true. In the case of Associated Industrial Development Company (P) Ltd. (supra), the assessee had purchased shares of those companies for which it acted as managing agents. No such connection has been shown between assessee on one hand and the companies of which the shares were held and sold. The 28 decision in the case of G. Venkataswamy Naidu &Co. Vs. CIT, (1959) 35 ITR 594 also shows that it was acting as managing agents of the mills and adjoining lands were purchased with a view to sell them to the mills on appreciation in value thereof. In the case of H. Holck Larsen (supra), it has been held that the question is a mixed question of fact and law. The right shares were subscribed to ensure that market value of the share did not go down. The shares were sold to reduce the debt from the banks. Therefore, the facts of this case are also distinguishable. In the case of Ess Jay Enterprises (P) Ltd., the assessee acquired the shares of only one company and showed them in the books as investment. The assessee does not maintain any books and he has transacted in a large number of shares and units. In the case of Rohit Anand (supra), the assessee was dealing in jewellery and investment was made in a few shares which were not even rotated. The inference was drawn from classification of the shares in the books. It is also seen that the shares had not been rotated. The facts of this case are to the contrary as shares have been sold ostensibly to safeguard investments. In the case of Om Prakash Arora (supra), the bulk of profit arose on sale of shares of Unitech Ltd. received as bonus shares. A reference was made to the decision in the case of CIT Vs. Madan Gopal Radhey Lal (1969) 73 ITR 652 (SC), in 29 which it was mentioned that the court is unable to agree with the judgment of Bombay High Court in the case of CIT Vs. Maniklal Chunnilal & Sons Ltd. that bonus shares received by a shareholder who carries on a business in shares and securities ipso facto become accretion to his stock-in-trade. Bonus shares would normally be deemed to be distributed by the company as capital and the shareholders receive the shares as capital. In this connection, the decision of Commissioners of Inland Revenue Vs. John Blott, (1921) 8 TC 101 and CIT Vs. Mercantile Bank of India (1936) 4 ITR 239 were referred to. From the details of the shares purchased and sold, to which we have already made a reference, it is found that the assessee has not received any bonus shares which have been sold in this year. Therefore, the ratio of this case is not applicable. Further, we find that the assessee has made substantial number of transactions not only in this year but subsequent two years also. Therefore, the facts are distinguishable. Thus, we have to decide the issue on the basis of the impression we get by looking at the dealings of the assessee and circumstances surrounding it. We find that an investor would not enter into purchase and sale transactions of shares of 52 companies and units of 10 mutual funds in a single year. The transactions are numerous and period of holding is small. Transactions of this 30 magnitude can be undertaken only after devoting substantial time to the study of movements in the market. Any one who undertakes such large number of transactions keeping the market conditions in view would obviously assume the character of a dealer. It may be mentioned here that dealing in a commodity can also be done with own funds. Past record in this connection is not material. As the assessee has not maintained books of account, therefore, the intention can be ascertained only from the conduct. When we look to the transactions as a whole, the impression we get is that he has dealt in shares and units and has not acted as investor in shares and units. Accordingly, it is held that the AO rightly taxed the surplus arising from the transactions under the head "profits and gains of business".
9. We now proceed with the facts of the case of the assessment year 2007-08. The assessee had filed his return on 31.07.2007 declaring total income of Rs. 4,34,28,744/-. This income was shown under the heads salary, house property, business, capital gain and other sources. Under the head capital gain, the LTCG was shown at Rs. 19,99,360/- and STCG at Rs. 3,90,21,672/-. While the LTCG was claimed to be not includible in the total income by dint of provision contained in section 10(36), lower 31 rate of tax was claimed to be applicable in respect of STCG. We have already reproduced the details of STCG and LTCG in paragraph no. 2.3. The STCG has been shown in respect of sale of shares of 21 companies. The LTCG has been shown in respect of sale of shares of 10 companies. The assessee has also purchased and sold units of three mutual funds. Therefore, the facts prima facie seem to be in pari-materia with the facts for assessment year 2006-07. However, the assessee has also shown STCG of Rs. 2,94,44,398/- in respect of 74,000 bonus shares of Unitech Ltd. Apart from that, the assessee also sold 25,960 sub-divided shares of Unitech Ltd. and earned profit of Rs. 89,91,851/-. We have already made a mention of the decision in the case of Madan Gopal Radhey Lal (supra), in which the Hon'ble Supreme Court had held that bonus shares would normally be deemed to be distributed by the company as capital and the shareholders receive the shares as capital. Therefore, the sale of 74,000 bonus shares of Unitech Ltd. may stand on a different footing even if the assessee is held to be a dealer in shares. In the aforesaid case, it has also been mentioned that after having received bonus shares, the assessee could have converted them into stock-in-trade or retained as capital asset. However, the facts in this behalf have not been examined by the Tribunal and even in the supplementary statement no attempt has been 32 made to set out the facts on which the conclusion was drawn. In view of this position, the matter was decided in favour of the assessee and against the revenue. Thus, this decision lays down that bonus shares will ordinarily be treated as the capital asset, which can be retained as capital asset or converted into stock-in-trade. The lower authorities have not recorded any finding that the bonus shares were converted into stock-in- trade. Therefore, in absence of any evidence to the contrary, the conclusion is that they were held as capital asset. Consequently, profit on sale of bonus shares would be in the nature of capital gain. Respectfully following this decision, it is held that the transactions classified as LTCG and STCG, except sale of bonus shares, are in the nature of business transactions. Income therefrom is rightly assessable as business profits. However, the sale of bonus shares of Unitech Ltd. lead to profit which has to be classified as STCG. In coming to the decision, we have heavily relied on the case of Madan Gopal Radhey Lal (supra). Therefore, it would be appropriate for us to reproduce the findings on page nos. 655 and 656 of the report:
"We are unable to agree with the judgment of the Bombay High Court (to which reference was made by the Tribunal) in CIT vs. Maniklal Chunnilal & Sons Ltd. (IT Ref. No. 16 of 1948) that bonus shares received by a shareholder who carries on business in shares and securities "ipso facto become accretion to his 33 stock-in-trade". Bonus shares would normally be deemed to be distributed by the company as capital and the shareholder receives the shares as capital. The bonus shares are accretions to the shares in respect of which they are issued, but on that account those shares do not become stock-in-trade of the business of the shareholder. A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business; in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity. Bonus shares having been received by the assessees in respect of their stock-in-trade did not, therefore, become part of their stock-in-trade, merely because they were accretions to the stock-in-trade. The bonus shares were received as capital; they could be converted by the assessees into their capital asset.
The Tribunal observed in paragraph 5 of its order that "the assessee deals in shares and the sales proceeds of the bonus shares was (were) received by him in the course and as part of his share dealing business. The amount received by the assessee is therefore part of his profit from the share dealing business and is liable to tax as such". Counsel for the assessees contended that the Tribunal has not referred to any evidence in support of its conclusion and has made a cryptic statement which is not capable of the interpretation that the assessees had converted the bonus shares into their stock-in- trade. If there is no presumption that the accretion to the stock-in-trade necessarily gets incorporated into the stock-in-trade, says Mr. Chagla, in the absence of evidence showing that the bonus shares were treated by the assessees as stock-in-trade the finding of the Tribunal cannot be sustained. Counsel invited our attention to the supplementary statement of case in which the Tribunal recorded that in the copies of balance-sheets filed by the assessees as of 14th Feb., 1948, 8th March, 1949, and 8th March, 1950, the shares did not find a place and that the sale proceeds of the bonus shares were credited in the capital account of the assessees for the four years in question on the last dates of the relevant accounting years.34
But the Tribunal has found that the Sale proceeds of the bonus shares were received in the course and as part of their business in shares and were on that account taxable. It is somewhat unfortunate that the Tribunal has not set out in details the facts found by it and the inference drawn therefrom. Even in the supplementary statement no attempt has been made to set out the facts on which the conclusion was based. The orders of the ITO and the AAC are also not before us. The mere circumstance that in the copies of the balance-sheets tendered by the assessees the bonus shares did not find a place has, in our judgment, no importance, and the credit entries in the capital account on the last dates of the respective accounting years in the four years in question also do not support an inference in favour of the assessees. The question posed for the opinion of the Court was not whether the conclusion of the Tribunal was founded on evidence, but whether the sale proceeds of the bonus shares were of the nature of revenue. On this question an inquiry into whether the conclusion of the Tribunal is supported by the evidence cannot be made.
In India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) this Court observed that in a reference under the IT Act the High Court must accept the findings of fact made by the Tribunal, and it is for the person who has applied for a reference to challenge those findings first by an application under s. 66(1). If he has failed to file an application under s. 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or another. The principle of that case applies here. It is not open to the assessees to contend on the question raised that the finding of the Tribunal is not supported by evidence.
The answer recorded by the High Court is discharged. The answer to the question submitted is in the affirmative. No order as to costs of the appeal to this Court and of the reference in the High Court."35
10. Finally, we take up the appeal of the revenue for assessment year 2008-09. The assessee had filed the return declaring total income of Rs. 1,62,68,906/- on 29.09.2008. The assessee declared income from salary, house property, business of insurance agency, capital gains and other sources. The dispute is only in respect of the head of income under which income from purchase and sale of shares is to be assessed. In the return the assessee declared LTCG in respect of transactions in shares of five companies and units of four mutual funds and STCG in respect of transactions of shares of 13 companies and units of three mutual funds. The details are available in the paper under four different heads. Further, it is seen that the assessee has shown LTCG on sale of bonus shares of Kotak Bank Ltd. and Unitech Ltd. He has also shown STCG on sale of bonus shares of Unitech Ltd. It is no doubt true that the volume of activity in terms of number of companies whose shares are dealt in has come down in this year, but it cannot be said that he has ceased to conduct this business. Therefore, the findings given in earlier years apply to the facts of this year also. In particular, findings furnished in the order for assessment year 2007-08 equally applicable, therefore, they are made applicable to this year also. The result is that transactions in bonus shares 36 of Kotak Bank Ltd. and Unitech Ltd. are held to be on capital account and all other transactions are held to be on business account.
11. In the result:
(i) The appeal of the assessee for assessment year 2006-07 is dismissed and the appeal for assessment year 2007-08 is partly allowed;
and
(ii) The appeal of the revenue for assessment year 2008-09 is partly allowed.
Sd/- sd/- (I.P. Bansal) (K.G. Bansal) Judicial Member Accountant Member SP Satia
Copy of the order forwarded to:-Shri Ajay Srivastava, Janakpuri, New Delhi. ACIT, Circle 26(1), New Delhi.
CIT(A) CIT, The D.R., ITAT, New Delhi. Assistant Registrar.