vs. SMK Shares & Stock Broking (ITAT Mumbai)
Friday, November 26th, 2010
(135.1 KiB, 534 DLs)
Large volume of purchase & sale of shares does not per se mean activity is business
The assessee, a broker in the BSE, disclosed short-term capital gains and long-term capital gains on sale of shares. The AO accepted the LTCG as such though he held that the STCG was assessable as “business profits” on the ground that the assessee was a stock broker & there was large volume and frequency (more than 300) transactions. On appeal, the CIT (A) reversed the AO. On appeal by the department to the Tribunal, HELD dismissing the appeal:
(i) It is no more res integra that a person can be both “Investor” as well as “Trader” in shares. (Draft Instruction No. 2005, Instruction No. 1827 dated 31.8.1989 & Circular No. 4/2007 dated 15.6.2007 referred). The assessee has to maintain the distinction between shares held as stock and those held as investments in its records;
(ii) While volume of transactions is an important indicator of the intention of the assessee whether to deal in shares as trading asset or to hold the shares as investor, it is certainly not the sole criterion. The AO’s conclusion that since sale and purchase had been determined by the volatility in the market, the same is against the basic feature of investor is not based on sound rational reasoning. A prudent investor always keeps a watch on the market trends and, therefore, is not barred under law from liquidating his investments in shares. The law itself has recognized this fact by taxing these transactions under the head “Short Term Capital Gains”. If the AO’s reasoning is accepted, then it would be against the legislative intent itself;
(iii) The fact that the assessee did not borrow funds for investment in shares is an important aspect which cannot be lost sight off while deciding the true intention of the assessee;
(iv) The fact that the AO accepted the assessee’s claim in earlier years that it was an investor is material because though the principles of res judicata do not strictly apply to income tax proceedings it is well settled law that the principles of consistency should not be ignored. Uniformity in treatment and consistency under the same facts and circumstances is one of the fundamentals of the judicial principles which cannot be brushed aside without proper reason;
(v) The fact that the AO accepted the offering of LTCG also showed that the assessee’s status as investor was accepted by him;
(vi) Some part of the STCG had arisen out the earlier investment which had been accepted as being on investment account. As the modus operandi of the assessee remained the same in regard to other shares purchased during the year, the assessee’s claim could not be negated only on the basis of frequency of the transaction (Gopal Purohit 228 CTR 582 (Bom), Sadhana Nabera 41 DTR 393 & Jayshree Pradip Shah considered).
Tuesday, November 30, 2010
Wednesday, November 17, 2010
Income tax - Whether profits from sale of shares held as long-term investments are to be taxed as business income or capital gains? - It is capital ga
Income tax - Whether profits from sale of shares held as long-term investments are to be taxed as business income or capital gains? - It is capital gain, rules Delhi HC
By TIOL News Service
NEW DELHI, OCT 28, 2010: THE issue before the HC is - Whether profits from sale of shares held as long-term investments by an investment and finance company are to be taxed as business income or capital gains. And the HC decision rules that it is capital gains.
Facts of the case
The assessee is a company engaged in the business of sale and purchase of shares. It filed its return declaring an income of Rs.60,05,375/- in which it included short term capital gain at Rs.38,476/- and long term capital gain at NIL after set-off of long term capital loss of previous years amounting to Rs.2,08,24,174/-. In the course of assessment proceedings, the AO observed that in computation of the income filed, the assessee had shown long term capital gain at Rs.2,08,24,174/-which had been set off against the long term capital loss of the AY 1995-96 amounting to Rs.2,02,45,035/- and of the AY 1996-97 at Rs.5,79,139/-. On a query being raised by the assessing officer as to why sale of investment be not treated as business or trading receipts as the assessee is an investment company having main business of purchase and sale of shares, it was submitted by the assessee that it was registered as an investment and finance company having its main activity of investing its funds in long term securities like shares, debt and equity mutual funds, etc for generating dividend, interest and profit and loss on sale of investments and all the investments of the company are of long term nature and had not been held as stock-in-trade since the FY 1999-2000 in which year all the investments held as stock-in-trade were transferred to the investment portfolio. It was contended on behalf of the assessee that the said practice of taking all its securities under the investment head had since then been followed and the revenue had never raised any query on that score. However, the AO held that the income from the transactions of sale and purchase of shares was business income of the assessee company and were in fact purchased not for investment purposes but for the purpose of sale at a profit are liable to be taxed under the head business income and not under the head capital gain as declared by the assessee company. On the basis of aforesaid reasoning, the AO assessed the tax at Rs.3,25,82,805/- and initiated penalty proceedings u/s 271(1)(c) and directed charge of interest under Section 234B/234D accordingly.
The CIT(A) held that the profit arising on the sale of shares has to be treated as long term capital gains and, accordingly, the addition of Rs.2,65,77,430/- was deleted. The ITAT also decided the issue in favour of the assessee.
On further appeal by the Revenue, the High Court held that,
++ in the case at hand, the assessee had purchased the shares on 27th January, 1996 and the same were held for a span of 7 years and were sold during the year under consideration. The assessee had not involved himself in the business of buying and selling shares after 1st April, 1997. The assessee had not engaged itself as a dealer in debt mutual funds. Nothing has been brought on record to show that the assessee was engaged in the selling of shares. The object incorporated in the Memorandum of Association only refers to the fact that the assessee can deal in shares but, there was no regular activity on that score. The nature of activity, intention and conduct has significance. They play a pivotal role in the entire gamut of transaction;
++ as per the circular issued by the CBDT on 15th June, 2007, a tax payer can have two portfolios, that is, an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. The assessee is entitled to have income from both heads, namely, capital gains as well as business income. On a proper scanning of the facts that have been brought on record, there can be no iota of doubt that the shares that were made by the assessee as an investment gave rise to capital gains. Therefore, the concept of business income does not arise and hence, the findings recorded by the first appellate authority as well as by the Tribunal stand on terra firma.
By TIOL News Service
NEW DELHI, OCT 28, 2010: THE issue before the HC is - Whether profits from sale of shares held as long-term investments by an investment and finance company are to be taxed as business income or capital gains. And the HC decision rules that it is capital gains.
Facts of the case
The assessee is a company engaged in the business of sale and purchase of shares. It filed its return declaring an income of Rs.60,05,375/- in which it included short term capital gain at Rs.38,476/- and long term capital gain at NIL after set-off of long term capital loss of previous years amounting to Rs.2,08,24,174/-. In the course of assessment proceedings, the AO observed that in computation of the income filed, the assessee had shown long term capital gain at Rs.2,08,24,174/-which had been set off against the long term capital loss of the AY 1995-96 amounting to Rs.2,02,45,035/- and of the AY 1996-97 at Rs.5,79,139/-. On a query being raised by the assessing officer as to why sale of investment be not treated as business or trading receipts as the assessee is an investment company having main business of purchase and sale of shares, it was submitted by the assessee that it was registered as an investment and finance company having its main activity of investing its funds in long term securities like shares, debt and equity mutual funds, etc for generating dividend, interest and profit and loss on sale of investments and all the investments of the company are of long term nature and had not been held as stock-in-trade since the FY 1999-2000 in which year all the investments held as stock-in-trade were transferred to the investment portfolio. It was contended on behalf of the assessee that the said practice of taking all its securities under the investment head had since then been followed and the revenue had never raised any query on that score. However, the AO held that the income from the transactions of sale and purchase of shares was business income of the assessee company and were in fact purchased not for investment purposes but for the purpose of sale at a profit are liable to be taxed under the head business income and not under the head capital gain as declared by the assessee company. On the basis of aforesaid reasoning, the AO assessed the tax at Rs.3,25,82,805/- and initiated penalty proceedings u/s 271(1)(c) and directed charge of interest under Section 234B/234D accordingly.
The CIT(A) held that the profit arising on the sale of shares has to be treated as long term capital gains and, accordingly, the addition of Rs.2,65,77,430/- was deleted. The ITAT also decided the issue in favour of the assessee.
On further appeal by the Revenue, the High Court held that,
++ in the case at hand, the assessee had purchased the shares on 27th January, 1996 and the same were held for a span of 7 years and were sold during the year under consideration. The assessee had not involved himself in the business of buying and selling shares after 1st April, 1997. The assessee had not engaged itself as a dealer in debt mutual funds. Nothing has been brought on record to show that the assessee was engaged in the selling of shares. The object incorporated in the Memorandum of Association only refers to the fact that the assessee can deal in shares but, there was no regular activity on that score. The nature of activity, intention and conduct has significance. They play a pivotal role in the entire gamut of transaction;
++ as per the circular issued by the CBDT on 15th June, 2007, a tax payer can have two portfolios, that is, an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. The assessee is entitled to have income from both heads, namely, capital gains as well as business income. On a proper scanning of the facts that have been brought on record, there can be no iota of doubt that the shares that were made by the assessee as an investment gave rise to capital gains. Therefore, the concept of business income does not arise and hence, the findings recorded by the first appellate authority as well as by the Tribunal stand on terra firma.
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