Activity of frequent buying and selling of shares over a short span of period has to be treated as business being adventure in nature of trade and income therefrom has to be treated as business income and not as capital gain
Whether a particular holding is by way of investment or of stock in trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares held as investments and those held as stock in trade
The treatment in the books of an assessee is not conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive, then it becomes business profit and not capital gain.
ITAT, MUMBAI BENCH ‘D’, MUMBAI
Rakesh J.Sanghvi
v.
DCIT
ITA No. 4607/MUM/2008
August 31, 2010
RELEVANT EXTRACTS:
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We find from the assessment order that the Assessing Officer in the instant case considered the income from purchase and sale of shares as business income. The CIT(A) upheld the action of the Assessing Officer by relying on the CBDT circular No. 4 of 2007 dated 15th June, 2007. We find the CBDT vide Circular No. 4/2007 dt. 15.6.2007 has accepted the principles laid down by the Hon'ble Supreme Court in the cases of CIT (Central), Calcutta v/s. Associated Industrial Development Co. (P.) Ltd., 82 ITR 586 as well as in CIT v/s. H Holsck Larzen, 160 ITR 67 (SC). In the above referred circular, the Board has issued certain guidelines to the A.O. The Board has accepted that the assessee can have two portfolios simultaneously- (1) an Investment Portfolio comprising of securities which are to be treated as a capital asset and (2) Trading portfolio comprising of stock and trade which are to be treated as trading asset.
We find, the legal principles as laid down by courts on account of treatment of an income as ‘business income’ or ‘capital gain’ can be summarised as under:
a. It is possible for an assessee to be both an investor as well as dealer in shares.
b. Whether a transaction of sale and purchase of shares is a trading or investment transaction is a mixed question of law and fact.
c. Whether a particular holding is by way of investment or of stock in trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares held as investments and those held as stock in trade.
d. The treatment in the books of an assessee is not conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive, then it becomes business profit and not capital gain.
e. Purchase with intention to resell can constitute capital gain or business profit depending on circumstances like quantity of purchase and nature of activity.
f. No single fact has any decisive significance and the question must be answered depending upon selective effect of all relevant materials brought on record.
From the chart filed by the learned counsel for the assessee giving the details of shares transacted during the year, it is seen that the shares are held for a few day only and in very few cases for a few months but in no case it is exceeding 200 days. Purchase of shares during the year and selling them frequently in short period, in our opinion, do indicate that the assessee has purchased the shares with a motive to earn profit in a short period. Therefore, the facts of the instant case do not persuade us to hold that the shares were held as investment since these are not held for such a long period so as to treat the same as investment. The frequency and volume of the transactions in the instant case give an impression that the assessee did not intend to acquire the shares with business motive. In the case of an investment a person usually watches the market over a longer period of time before selling of the shares. The earning of dividend and the appreciation of the shares is the primary consideration. It is only a trader who would look for short term gains from purchase and sale of shares. Therefore, the treatment given by the assessee to the said transactions in the books of account, in our opinion, is not the only determinative factor about the nature of the transactions. The submission of the learned counsel for the assessee that the shares were disclosed as investment in the Balance Sheet, in our opinion, is certainly a factor to be reckoned with but when there are other factors or circumstances which throw some doubt on the motive of the assessee in acquiring the shares, as in the instant case, the entries in the books of account or Balance Sheet cannot override them and be taken as decisive of the assessee’s intention. The submission of the learned counsel for the assessee that in the preceding year the Assessing Officer has accepted the long term capital loss on sale of shares and, therefore, the same should be followed this year is also without much force since principle of res judicata does not apply to income-tax proceedings and every assessment is independent. When there are changes in the facts and circumstances, the rule of consistency need not be applied. In this view of the matter, we are of the considered opinion that the activity of frequent buying and selling of shares over a short span of period during the impugned year has to be treated as business being adventure in the nature of trade and the income has to be treated as business income and not as capital gain as claimed by the learned counsel for the assessee. Accordingly, we uphold the order of the CIT(A) and the ground raised by the assessee is dismissed.
