SHRI. K.T. SANATH,BANGALORE vs. ADDL..C.I.T., BANGALORE

Per Vijay Pal Rao, Judicial Member

This appeal by the assessee is directed against the order dated 31.7.2012 of the CIT(Appeals)-III, Bangalore for the assessment year 2006-07.

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process and export of coffee. The assessee is also engaged in the activity

of purchase and sale of shares and securities. In its return of income, the

assessee declared total income of Rs.2,21,31,800 and agricultural income

of Rs.7,59,579. The total income of the assessee comprises income from

house property, income from business, income from short term capital gain

and long term capital gain. The assessee has shown loss from trading in

shares and derivatives of Rs.15,56,600; short term capital gain on sale of

shares of Rs.2,35,49,225 and long term capital gain on sale of shares of

Rs.2,87,57,549. The AO accepted the long term capital gain on sale of

shares. However, in the scrutiny assessment, the AO proposed to treat the

short term capital gain on sale of shares as business income. The AO

noted that the short term capital gain arises from the shares held by the

assessee for a very short period ranging from 20 days to 180 days.

Accordingly, the AO doubted that assessee has purchased the shares for

earning dividend income, but the shares were purchased and sold for

earning the profit. The AO further observed that 90% of shares have been

purchased within the financial year and even sold within the financial year,

rather within couple of months. These were not investment of the

assessee or investment therein was not with a view to earn dividend

income. Since the assessee is also engaged in the trading of shares and

securities being derivative transaction, the AO has held that the purchase

and sale of shares giving rise to the short term capital gain are trading

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activity and therefore the profit arising from this purchase and sale is

business income and not capital gain.

the CIT(Appeals), but could not succeed.

short term capital gain of Rs.2.35 crores, capital gain of Rs.1,12,85,681

was earned on the shares held by the assessee for a period of 100 days to

365 days. Thus, the ld. AR has submitted that about 50% of short term

capital gain has been earned by the assessee in respect of the shares held

for a period of 100 to 365 days. Further, short term capital gain of

Rs.76,88,322 was earned in respect of shares held for a period of 60 to

100 days and the remaining small amount of about Rs.45 lakhs of short

term capital gain was earned by the assessee in respect of the shares,

which were held upto 60 days. Thus, the ld. AR has submitted that majority

of shares held by the assessee was for more than 2 months and upto 365

days, which has resulted in maximum short term capital gain in question.

He has further contended that assessee is primarily an investor in shares

and securities. Investments of the assessee are managed by the

professional managers of various banks. He has referred to the details

regarding the investment of assessee which are managed by Professional

Managers (PMS). Thus, assessee has invested money in the stock market

through PMS services, who are managing the portfolio and the

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investment/wealth of the assessee. The investment made through PMS is

not directly controlled by the assessee, as buying and selling of shares is

controlled by PMS, who will take an appropriate decision as what to do with

the investment of assessee. Therefore, PMS have managed the assets of

portfolio of assessee to maximize investments. Assessee has declared

short term capital gain as well as long term capital gain on sale of shares

since A.Y. 2001-02. The Department has accepted the investment in

shares and short term capital gain in the earlier assessment years and only

during the year under consideration, the AO has taken a different view

because of amendment in the relevant provisions of the Act wherein a

differential tax treatment has been given to the short term capital gain.

Thus, the ld. AR has submitted that when the same transactions were

accepted as investment in the earlier assessment year, then the AO cannot

take a different view without pointing out the change in the nature of

transactions merely because there is a differential tax chargeable on short

term capital gain. He has further contended that out of the entire short term

capital gain, a sum of Rs.84,08,390 resulted as sale of shares held and

purchased in the previous year and shown as investment in the balance

sheet at the end of the earlier year. Therefore, the shares which are held

as an investment and shown in the books of account as investment

accepted by the AO cannot be treated as stock-in-trade in the subsequent

year, when the same were sold by the assessee.

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(1) ACIT v. P. Bhaskar Rao, ITA No.1284/Hyd/2010 dated 4.3.2015. (2) DCIT v. Kapur Investments (P) Ltd., ITA Nos. 1188 & 1189/Bang/2012 dated 29.11.2013.

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(3) Vinod K. Nevatia V. ACIT, ITA No.6556/Mum/2009 dated 3.12.2010. (4) Nehal V. Shah v. ACIT, ITA No.2733/Mum/2009 dated 15.12.2010. 9. On the other hand, the ld. DR has submitted that the assessee has carried out huge number of transactions over 245 transactions involving more than 25,000 shares of different companies. Further, the volume of the transactions and consideration is also very high which is more than Rs.16.68 crores. The holding period of the shares resulting in short term capital gains is very less as it is not disputed that the holding period is 22 to 60 days in most of the cases and majority of the transactions of purchase and sale have been carried out within the financial year. Therefore, the intention of the assessee is manifest from the short term holding period of the shares that the assessee has purchased and sold the shares with the intention of earning the profit on these transactions instead of holding the same as investment and earning the dividend income. He has relied on the orders of authorities below and submitted that the AO as well as CIT(A) have analysed the peculiar facts of the case and arrived at the conclusion that the transactions in question cannot be held as investment, but the same are in the nature of trading.

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holding period is very short ranging from 20 to 180 days, therefore the

assessee has not earned any dividend income on these shares and hence

the motive for purchase of shares in question was not to earn dividend

income, but to earn the profit from sale of shares. It is pertinent to note that

earning of dividend income is not the sole motive for making investment in

shares because the dividend income is not certain on the shares, as it

depends on the performance of the company and also the policy of the

company to declare dividend or not. Therefore, dividend alone cannot be

the criterion for deciding the nature of transaction of purchase of share.

Further, even if a share is held for few days, one can earn dividend if it is

purchased just prior to the record date and then sold after the record date.

Therefore, dividend cannot be considered as determinative criterion for the

nature of transaction. There is no dispute that out of the total short term

capital gain of Rs.2.35 crores, an amount of short term capital gains of

Rs.84 lakhs was earned from the shares which were purchased in earlier

year and shown in the balance sheet as investment. The AO has accepted

the investment in the balance sheet in the earlier year as there is no

disallowance of any claim of short term capital gain. Therefore, the shares

which were purchased in the earlier year and accepted by the AO as

investment cannot be treated as stock-in-trade in the subsequent year,

when these shares were sold. In other words, the AO is not permitted to

treat the investment accepted in the earlier year as stock-in-trade in the

subsequent year, when the assessee has been showing the shares in the

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books of account as investment. Further, all the transactions in the investment portfolio are delivery based and the assessee has shown the same as investment in the books of account and particularly in the balance sheet as on 31st March of each year. The AO has not disputed that the holding period is ranging from 20 to 180 days. The assessee has given the details regarding holding period of the shares which has resulted in short term capital gains as under:-

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which are held less than one year fall under the category of short term

capital asset. Accordingly, the holding period alone cannot be a criterion or

parameter to decide the nature of transaction, when the statute does not

prescribe any minimum period of holding for an asset. In order to

determine the nature of transaction of purchase and sale of shares,

whether trading or investment, there are number of criteria or parameters

which are required to be considered. These criteria includes the intention

of assessee, frequency of transaction, volume of the transaction, whether

investment is made from assessee’s own fund or from borrowed fund,

holding period, treatment in books of account, valuation, source of fund,

etc. In the case in hand, there is no dispute that that assessee has used its

own fund and investments are made through PMS as well as by assessee

himself. The details of investment made through PMS and by the

assessee are as under:-

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(i) In the case of ITO v. Radha Birju Patel reported in A(2011) 11 Taxmann.com 293(Mum), the Hon’ble Mumbai Tribunal has held, on a similar issue, as under: “It was apparent from the record that the share transactions in question were carried out by the assessee’s PMS Manager. Therefore, these transactions were clearly in the nature of transactions meant for maximization of wealth rather encashing the profits on appreciation in value of shares. The very nature of Portfolio Management Scheme is such that the investment made by an assessee is protected and enhanced and in such a circumstance, it cannot be said that it is scheme of trading in shares and stock. Whether, an assessee is engaged in the business of dealing in shares or investment in shares is essentially a question of fact and it has to be determined with regard to the entirety of the circumstances. In circumstance, in which the assessee was engaged in a systematic activities of holding portfolio through the PMS Manager, it could not by any stretch of imagination, be said that the main object of holding the portfolio was to make profit by sale of shares during the course of maintaining the portfolio investment over the period. Therefore, the Commissioner (Appeals) was justified in accepting the gain on sale of shares as short-term capital gain as claimed by the assessee.”

(ii) Yet another finding, the Hon’ble ‘H’ Bench of Mumbai Tribunal in the case of Mahendra C Shah v. Addl. CIT reported in (2012) 19 taxmann.com 350 (Mum) has held that ‘prima facie there was enough evidence to show that the assessee was an investor in shares and, therefore, the surplus arising on the sale of shares should be assessed as short-term or long-term capital gains, depending on the period of holding and not as business income.’

(iii) The Hon’ble Gujarat High Court in the CIT v. Niraj Amidhar Surti reported in (2012) 20 taxmann.com 579 (Guj) has ruled as under:

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“that in the light of the findings recorded by Commissioner (Appeals) that the assessee had held the shares in question for fourteen months which is along period for the purpose of long-term capital gain, the intention of the assessee had always been that of making investment in shares and not dealing in shares, which was also apparent from the fact that the shares had not been treated as stock in trade by the assessee; even after the sale, the assessee had made investment in bonds of NABARD, indicating that he had treated the same as long- term capital gain; as well as the fact that the assessee had not split the shares in lots but had sold the same in one lot; it was not possible to agree with the contention raised on behalf of the revenue that the transaction in question was an ‘adventure in the nature of trade’ and, therefore, income derived by the assessee from the said transaction was a business income and could not be treated as capital gains.”

6.2. Taking into account all the facts and circumstances of the issue as discussed above and also in conformity with the ratios laid down by the Hon’ble High Court of Gujarat and also the Hon’ble Mumbai Tribunal (supra), we are of the view that the CIT (A) was justified in coming to right conclusion which does not warrant any interference. In essence, the findings of the CIT (A) for both the assessment years under dispute are upheld.”

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the shares in books of acocunt and valuation of the same at cost, instead of cost or realisation, whichever is less in the case of stock-in-trade.

“3. Insofar as Question (b) is concerned, the Tribunal has observed in para 8.1 of its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The Revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position that the principle of res judicata is not

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attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question. Question (b), therefore, does not also raise any substantial question. 4. Insofar as Question (c) is concerned, again there cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under s. 260A. No substantial question of law is raised. The appeal is accordingly dismissed.”

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Pronounced in the open court on this 31st day of March, 2016.

Sd/- Sd/-

( INTURI RAMA RAO ) (VIJAY PAL RAO ) Accountant Member Judicial Member

Bangalore, Dated, the 31st March, 2016.

/D S/

Copy to:

By order

Assistant Registrar, ITAT, Bangalore.