DCIT, CIRCLE - 10, KOLKATA, KOLKATA vs. TRISYS ON THE NET PVT. LTD., KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

-1548/Kol/2011 A.Ys 06-07 & 07-08 DCIT Cir-10 Kol v. Trisys On The Net Pvt. Ltd. Page 2 Shri A.K. Tulsian, L’d Authorized Representative appeared on behalf of assessee and Shri P.K.Chakaraborty, L’d Departmental Representative appeared on behalf of Revenue.

During the assessment proceedings, Assessing Officer sought clarification from the assessee why the income shown above as capital gains should not be treated as business income. In compliance thereto, assessee submitted that it has maintained separate records in its stock held as ‘stock-in-trade’ and held as ‘investment’ in its books of account. The main business is to make investment on long term basis in shares and securities. The assessee also claimed to have converted its stock A.Ys 06-07 & 07-08 DCIT Cir-10 Kol v. Trisys On The Net Pvt. Ltd. Page 3 into investment with effect from 01.04.2004. However, AO has disregarded the plea taken by assessee by holding that the business had been carried on its share trading business transactions in a systematic and organized manner with view to minimizing risk and maximized gain. The assessee has done numerous transactions of buying and selling shares / units of mutual funds which are running into 270 proximate for short term capital gains and about 100 approximate for long term capital gains. This regular activity of the assessee constitutes the business. The assessee has carried out large number transactions with large voluminous some of the transactions were completed within short period of time. The assessee till the assessment year 2004-05 was only in the trading of share and securities as apparent from the financial statement that there was no investment in AY 2004-05. The AO also observed that as per the memorandum of assessee its main business is to undertake the trading of shares and securities. In earlier assessment year, the Department never examined the issue on this line. Finally, AO treated the capital gains income as “business income” after having reliance in various judgments and CBDT’s Circular No.4 of 2007 and passed the assessment order accordingly.

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us. 5. Before us Ld. DR contended that the conversion of stock-in-trade into share as on 01.04.2004 has not been examined by AO. He further submitted that the condition laid down of CBDT in its Circular issued 6 of 2016 dated 29.02.2016 has not been tested therefore prayed before the Bench that matter should be restored back to the file of AO for fresh adjudication.

On the other hand, Ld. AR filed paper book which is running pages from 1 to 63 and stated that assessee can very much maintains two portfolios for investment and for stock-in-trade. The investment made by assessee is very much covered by the Notification issued by CBDT No.6 of 2016 dated 29.02.201 and he relied on the order of L’d CIT(A). -1548/Kol/2011 A.Ys 06-07 & 07-08 DCIT Cir-10 Kol v. Trisys On The Net Pvt. Ltd. Page 5 6. We have heard rival contentions and perused the materials available on record. From the foregoing discussion, we find that assessee has declared its capital gains income which AO treated as business income on the ground that numerous transactions with large voluminous were made by assessee in systematic and organized manner. So it should be treated as business income, however, L’d CIT(A) has treated the income earned by assessee as capital gains by observing that assessee has maintained two separate portfolios – for investment and – for stock-in-trade. We find that nothing prohibits assessee from holding dual portfolios (i) shares / units held as investment (ii) shares / units held for trading purposes. We find from the balance-sheet of the assessee which are placed on pages 34, 35, 48, 49, 61 & 62 of the assessee’s paper book – where assessee maintains two portfolios as discussed above. Even the CBDT Circular no. 4 of 2007 dated 15.06.2007 envisages the practice of assessee’s maintaining dual portfolios. We also find that the decision was rendered by the Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit reported in 228 CTR 582 (Bom), wherein the assessee had maintained dual portfolios and ultimately the court held that the resultant gains from investment activity would be assessable as capital gains and not business income. We also find that the CBDT in its Instruction No.1827 dated 31.08.1989 has laid down certain criteria to determine whether an activity of purchase and sale of shares is in the nature of trading activity or investment activity. One of the criteria laid down is the treatment given in the books of accounts which is indicative of assessee’s intention whether to hold the shares with a view to earn dividend and long term appreciation or with a view to carrying on as business. We further find the intention of the assessee to maintain two independent portfolios i.e. -1548/Kol/2011 A.Ys 06-07 & 07-08 DCIT Cir-10 Kol v. Trisys On The Net Pvt. Ltd. Page 6 one for investment purposes and one for trading purposes when he converted his stock in trade into investment on dated 1.4.2004. 6.1 We are putting our reliance on the judgment of Hon'ble Madras High Court in the case of CIT v. S.Ramamrithan (2008) 217 CTR 206 (Mad), while distinguishing trading and investment, observed that the intention of the assessee is relevant to determine whether an assessee is carrying on the business in shares or investments. The initial intention of the assessee in the instant case is proved beyond doubt from the manner of maintaining two separate portfolios i.e. (1) for investment purposes and (2) for trading purposes. The L’d AR further informed that the assessee had also kept separate records to record the transactions of each category i.e. delivery based and non-delivery based. It is settled law the a particular income is from business or from investment must be decided according to the general common sense view of these who deal with those matters in the particular circumstances. The most excruciating factor to be looked into at this juncture is the conduct of the assessee.

The next point to be addressed in this issue is whether the frequency of transactions would alone indicate the trading activity. In this regard, we find the coordinate bench of Mumbai Tribunal had an occasion to consider the same in the case of Janak S. Rangawalla vs. ACIT (2007) 11 SOT 627 (Mum), wherein it was held that:- “It is the intention of the assessee which is to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares is on a large magnitude but the same shall not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years have been held to be income from capital gains both on long term and short term basis. The transaction in the year under consideration on account of sale and purchase of shares is same as in the preceding years and the same merits to be accepted as short term capital gains. There is no basis for treating the assessee as a trader in shares, when his intention to hold the shares in India companies as an investment and not a stock in trade. The mere magnitude of the transaction does not change the nature of transaction, A.Ys 06-07 & 07-08 DCIT Cir-10 Kol v. Trisys On The Net Pvt. Ltd. Page 7 which are being assessed as income from capital gains in the past several years. The Assessing Officer is directed to set off the Long Term Capital Loss against the Short Term Capital gain of the year under consideration. The ground of appeal raise by the assessee are allowed.”

6.2 Further we also find the judgment of Hon'ble jurisdictional High Court in the case of CIT vs. Merlin Holding P Ltd. (2015) 375 ITR 118 (Cal) for the AY 2005-06 and 2006-07 had held as below:- “The frequency of transactions in shares along cannot show that the intention of the investor was not to make an investment. The Legislature has not made any distinction on the basis-of frequency of transactions. The benefit of short- term capital gains can be availed of for any period of retention of shares up to 12 months. Although a ceiling has been proved, there is no indication as regards the floor, which can be as little as one day. The question essentially is a question of fact.”

We are putting our reliance in the CBDT’s Circular 6 of 2016 dated 29.02.2016, the relevant extract is reproduced below:- “a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, it the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment year, shall remain applicable in subsequent Assessment years also and the taxpayer shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.”

Respectfully following the above precedent on the aforesaid judgments of Hon'ble High Courts Hon'ble Jurisdictional High Court and Circular of CBDT, we conclude that in the absence of any material to the contrary and on appreciation of cumulative factors prevent as culled out above, we hold that surplus is chargeable to capital gains only and assessee is A.Ys 06-07 & 07-08 DCIT Cir-10 Kol v. Trisys On The Net Pvt. Ltd. Page 8 not to be treated as trader in respect of sale and purchase of shares in investment portfolios. We uphold the order passed by L’d CIT(A). Accordingly, Revenue’s ground is dismissed.