DCIT CIR 15(1), MUMBAI vs. AMRITA P TALWAR, MUMBAI

In all the appeals filed by the assessee, the common issue urged relates to the assessment of short term capital gain arising on sale of shares as Business income of the assessee.

In the quantum appeals filed by the revenue, the common issue urged is against the decision of Ld CIT(A) in holding that the gain arising on sale of shares held for more than 12 months is assessable as Long term capital gain instead of Business income.

In the appeal filed by the revenue in respect of penalty proceedings, the revenue is aggrieved by the decision of Ld CIT(A) in cancelling the penalty levied for AY 2007-08.

The facts relating to the case are stated in brief. The assessee is an individual and she filed her return of income for AY 2006-07 declaring Short term capital gain of Rs.177.59 lakhs and long term capital gain of Rs.14.23 lakhs, both arising on purchase and sale of shares. During that year, she was a student pursuing a course in Dermatology, Venerology and Leprosy in Government Medical College, Patiala, Punjab. The AO 4 and 6 appeals noticed that the volume of transaction was high, i.e., purchases were to the tune of Rs.417.49 lakhs and sales were to the tune of Rs.759.80 lakhs. The total number of shares dealt by her stood at 5.43 lakhs. He further noticed that holding period in respect of eight scrips was less than one month. Hence the AO took the view that the assessee is dealing in shares as trader and accordingly assessed both Long term Capital gains and Short term capital gains as business income of the assessee. 6. In assessment year 2005-06, the assessee had declared Short term capital gain arising on sale of shares at Rs.41.35 lakhs. In view of the decision taken by the assessing officer in AY 2006-07, he reopened the assessment of assessment year 2005-06 and assessed the short term capital gain as business income of the assessee.

In the year relevant to the assessment year 2007-08, the assessee had started her profession. Besides professional income of Rs.57,477/-, the assessee also declared short term capital gain of Rs.196.39 lakhs and Long term capital gain of Rs.202.65 lakhs, both arising on sale of shares. The Long term capital gain was claimed as exempt u/s 10(34) of the Act. By the time the assessment of AY 2007-08 was taken up for scrutiny, the appeal filed by the assessee challenging the assessment order of AY 2006- 07 had been disposed of by Ld CIT(A) by confirming the assessment of Short term capital gain as Business income. However, the Ld CIT(A) had directed the AO to assess the Long term capital gain as Capital gains only. However, the assessing officer chose to assess both Short term capital gain and Long term capital gains as business income of the assessee in assessment year 2007-08.

In the year relevant to the assessment year 2008-09, the assessee declared professional income of Rs.2,07,230/-, short term capital gain of Rs.275.00 lakhs. Following the assessment order passed for AY 2007-08, 5 and 6 appeals the assessing officer assessed the Short term capital gains as business income of the assessee. 9. In the appeals filed by the assessee for assessment years 2006-07 and 2007-08, the Ld CIT(A) held that the long term capital gains arising on sale of shares is assessable as Capital gains only. The revenue is aggrieved by the said decision of Ld CIT(A) in both the above said years. In all the years, the Ld CIT(A) upheld the action of the AO in assessing the Short term capital gain as business income of the assessee. Hence the assessee has filed appeals for assessment year 2005-06 to 2008-09 challenging the said decision of Ld CIT(A). 10. Thus, it can be noticed that the assessment order and appellate order passed for assessment year 2006-07 have been followed in other years. 11. The Ld A.R submitted that the assessee is a doctor by profession and she has purchased the shares to hold it as investments only. The said intention is revealed by the fact that she has held most of the shares on long term and has declared long term capital gains thereon. Even the shares, on which short term capital gain was declared, have been held by the assessee for a reasonable period. The assessee has used her own funds and interest free funds for making investments and further the shares have been shown as investments only in her books of account. Further the shares have been shown at purchase cost only in the Balance Sheet. He further submitted that the assessee has not indulged in repetitive transactions barring one or two exceptions. He further submitted that the assessee has dealt in only few scrips and since the assessee had purchased shares in high quantity, the volume appeared to be high.

6 and 6 appeals 12. He further submitted that the assessing officer has chosen to assess the gains arising on sale of shares as business income only by considering the gains declared by the assessee without making a proper case to support his view. He submitted that the assessing officer, after holding the activity as business activity, did not prepare any profit and loss account, did not value the stock. He further submitted that the Ld CIT(A) was fair enough to hold that the long term capital gains is assessable under the head Capital gains only. However, the Ld CIT(A) was also persuaded by the view taken by the assessing officer in respect of Short term capital gains and accordingly upheld the view of the AO in respect of Short term capital gain, which is not justified. He further submitted that the assessing officer has accepted the loss arising on sale of shares as Short term capital loss in assessment year 2009-10. He further submitted that the assessing officer did not consider various criterias in favour of the assessee.

On the contrary, the ld D.R submitted that the frequency and volume of share transactions were very high and the assessee has held the shares for a short period only in many cases. Hence the intention of the assessee was to deal in shares as trader only. Accordingly he submitted that both short term capital gains and long term capital gains should be assessed as business income of the assessee. The Ld D.R placed his strong reliance on the orders passed by the assessing officer.

We heard the parties and perused the record. It is well settled proposition that the question as to whether the gains arising on sale of shares constitute business income or capital gains has to be decided on the basis of various criteria, which have been given as illustration by the Courts and also by CBDT in its circular. Some of the main criterias are the intention of the party at the time of purchasing of shares, his conduct thereafter, the manner of funding, holding period of shares, dividend 7 and 6 appeals received, other activities of the assessee etc. One has to examine various factors and should take a holistic view of the matter. Considering the various factors, we shall examine the facts prevailing in the instant case.

We have earlier noticed that the assessee is a medical doctor by profession specializing in dermatology. Hence it cannot be considered that her main activity is dealing in shares. Next we have examined the Balance Sheet of the assessee for all the years under consideration. We notice that the assessee has used her capital and also interest free funds obtained from her father for purchasing the shares, i.e., the assessee has not borrowed interest bearing funds for purchasing shares. We further notice that the shares have been shown as “investments” in the Balance Sheet. The fall, if any, in the value of shares has not been recognized. Further, the profit or loss arising on intra day transactions have been declared as speculation profit. The assessee has taken delivery of all shares.

We notice that the number of scrips dealt by the assessee was around 26 in all the years under consideration. The assessee is seen to have purchased shares in huge quantities and hence the volume of the purchase and sale transactions looked high. However, the frequency of transactions cannot be considered to be very frequent, since the assessee has held many shares for more than one year and has declared long term capital gains thereon. In respect of short term capital gains, we notice that the assessee has generally held the shares for more than a month, some times for more than six months. There are few instances, where the assessee has held the shares for a week only, but otherwise the shares have been held for a reasonable period. We notice that the assessee has declared dividend income in all the years except AY 2005-06. We further notice that there are only one or two cases of repetitive transactions and hence generally the shares purchased by the shares have been sold after 8 and 6 appeals holding the same for a reasonable period and repurchase of same shares are very minimal.

The assessee has not prepared any profit and loss account and all her revenue transactions have been routed through her Capital account. A perusal of the same shows that the assessee did not employ any staff or established any set up for carrying out the activity of purchase and sale of shares.

We have earlier noticed that the decision taken by the assessing office in AY 2006-07 was followed in other years. In assessment year, the assessing officer has considered following points to hold that the assessee has dealt in the shares as a trader:- (a) The holding period in majority of shares was less than a month. (b) Volume of transactions is high. However a critical analysis of the transactions of the assessee would show that the assessee has dealt with 24 scrips, 27 scrips, 26 scrips and 17 scrips respectively in the years relevant to the assessment years 2005-06, 2006-07, 2008-09 and 2009-10. We have earlier noticed that the assessee has purchased each shares in high quantities and hence the volume of transactions was seen at higher figure. With regard to holding period, we have seen that the assessee has held shares in varying periods ranging from one week to nine months. Hence the average holding period was reasonably good. The repetition of transactions were very minimal, i.e, upto a maximum of four transactions only. The assessee has not borrowed funds for purchasing the shares. The assessee has held major shares for more than one year and has declared long term capital gains. We notice that the assessing officer has ignored all other factors, which are in favour of the assessee and has decided the issue against the assessee by considering only two factors. We have seen that even the