Full Judgment Text
* IN THE HIGH COURT OF DELHI AT NEW DELHI
RESERVED ON: 01.04.2014
PRONOUNCED ON: 16.04.2014
+ ITA 180/2013
COMMISSIONER OF INCOME TAX-II .….APPELLANT
Through : Mr. Kamal Sawhney, Sr. Standing
Counsel with Mr. Raghvendra Singh,
Advocate.
Versus
ASHOK WADIA .…RESPONDENT
Through : Mr. G.C. Srivastava, Advocate.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE R.V. EASWAR
MR. JUSTICE S.RAVINDRA BHAT
1. The Revenue today impugns concurrent findings of the
Commissioner of Income Tax (Appeals) (“CIT(A)”) and the
Income Tax Appellate Tribunal (“ITAT”). They had reversed the
findings of the Assessing Officer (“AO”), who treated the
assessee’s income from sale of shares as business income, as
opposed to Sort Term Capital Gain (“STCG”), as was original
claimed in assessment proceedings. The assessee appealed the
order of the AO on various grounds to the CIT(A), of which only
ITA 180/2013 Page 1
the issue of income from sale of shares arises in this appeal. The
following question of law arises for decision:
Did the ITAT fall into error in upholding the assessee’s contention
that the latter earned Short Term Capital Gain on account of sale of
shares.
2. During the course of assessment proceedings, the assessee
had made a claim of STCG for Rs. 3,10,62,544. On the basis of
details of the sale and purchase transactions, the AO reached the
prima facie opinion that the income was business income, and so,
th
on 18 October, 2010, the assessee was asked to explain reasons
th
for claiming STCG. The assessee supplied reasons on 13
December, 2010, which were rejected by the final assessment order
nd
made on 2 August, 2012. The AO relied on various judgments of
the Supreme Court to recount (a) whether the holding of shares is
by way of investment or forms part of stock in trade is a matter
within the knowledge of the assessee and depends on how it is
shown in its accounts; (b) that res judicata does not apply to these
proceedings and assessments in previous years as STCG is not
conclusive; (c) there is no universal standard to determine whether
the income is from business or STCG; this depends on the nature,
frequency, volume of the transactions, ratio between sales and
purchases, period for which shares are held, and whether dividend
was earned before the sale; (d) nothing prevents the assessee from
maintaining two portfolios, one for business and the other for
investment. Based on these aspects, the AO recorded that the
income in this case was business income:
ITA 180/2013 Page 2
“ Viewed even against the above back drop the
assessee is not fulfilling majority of the above
principles and thus cannot be treated as a investor
for the short term capital gains so claimed at Rs.
3,10,62,544/-
a) In the case of assessee it is seen that he is dealing
in stock on continuous and aggressive basis.
b) The frequency of trades and the time gap between
buying and selling of various scrips does not
warrant investment for appreciation but a cautious
decision to earn from price movement of stocks on
regular basis.
c) The account indicates a cautious activity on
persistent basis.
d) The pattern of account, indicates a level of
volume that would engage considerable time and
attention of the assessee.
Conclusion
a) The assessee has chosen to take undue benefit of
the amended provisions of the act vis-à-vis the
quantum of activity to the period prior to
amendment.
b) The treatment given to the shares transaction by
the assessee company is quiet arbitrary and is just to
suit its convenience with an eye to reduce tax
liability. The assessee has parked shares
accordingly and there is no plausible logic for such
action.
c) Majority of the shares have been acquired, have
disposed off in a very short period of time and by
any yard-stick they cannot be considered to be as
investment. The frequency and volume of transaction
in the instant case give an impression and is a strait
pointer to the fact that the assessee did not intend to
ITA 180/2013 Page 3
acquire the share with investment motive. In the
case of an investment a person usually watches the
market over a longer period of time before selling of
the shares purchases were completed on the very
same day.
Virtually there is no dividend income earned on
holding of such shares on which the short term
capital gain is claimed from which it is very clear
that apart from other consideration to this limited
issue the assessee is a trader and not an investor as
the assessee is not having an eye on the capital
appreciation and that of earning a dividend. The
earning of dividend and appreciation of the shares
is the primary consideration. It is only a trader who
would look for short term gains from the purchase
and sell of shares and the entries I the books of
accounts or balance sheet can not over ride them
and be taken as decisive of the assesse’s intentions.
The examination of computation of income along
with profit and loss account has shown that on
massive turnover on which the so called Rs. 2,88,
801/- has been shown which also pertains to
investment in shares on which long term capital
gain has been shown Even out of nominal dividend
income shown substantial divided income pertains
to long term capital gain from which it is crystal
clear that the shares which have been claimed to
have been investments are in fact the stock in trade
only when viewed examined and analyzed against
the parameter of dividend income alone, though in
the instant case this is only one of the factors apart
from others which have been discussed in the body
of others.
Thus in nutshell given the present situation of the
assessee, I find that he is dealing in stocks on
ITA 180/2013 Page 4
continuous and aggressive basis. The frequency of
trades and the time gap between buying and selling
of various scrips does not warrant investment for
appreciation but a cautious decision to earn from
price movement of stocks on regular basis. Further
the account indicates a cautious activity on
persistent basis. Further the pattern of account
indicates a level of volume that would engage
considerable time and attention of the assessee.
In view of the above discussion the claim of the
assessee regarding short term capital gain on sale
of shares at Rs. 3,10,62,544/- in not a short term
capital gain but a business income having been
earned on account of share trading though the same
of share trading particular of income penalty
proceedings u/s 271(l)(c) are separately initiated for
furnishing of inaccurate particulars, by showing the
income under wrong head though it pertain to a
different head .”
3. The CIT (A) reversed this decision, at the assesses’ behest,
holding that (a) the AO confused the guidance provided by the
Central Board of Direct Taxes (“CBDT”) in Circular No. 4/2007
th
dated 15 June, 2007 with an amendment in the provisions of the
Income Tax Act (“the Act”); (b) the fact that the assessee had
always shown the shares as investment in his accounts; (c) while
the volume of transactions of transactions is an important indicator
of the intention of the assessee, it is not the sole criterion; (d) the
AO’s conclusion that that since sale and purchase has been
determined by the volatility of the market, it cannot be classified as
investment is incorrect, as there is no bar in law to liquidating
investment based on market factors; (e) dividend income is always
ITA 180/2013 Page 5
based on the holding of shares on the record date, and thus, will not
arise in case of shares sold before the record date or purchased after
the record date. Absence of dividend income thus does not lead to
any conclusive findings.
4. On appeal, the ITAT sustained findings, holding that in more
than 90% of the cases there has been only one transaction of sale
and purchase. Further, the share of dividend income to investment
income was considered to be insufficient, by itself, to bracket the
income as business income. On the basis of the frequency and
volume of transactions, thus, the ITAT held that the income was
STCG.
5. Impugning this decision of the ITAT, learned counsel for the
Revenue argues that a closer look at the accounts indicates that the
dealing in shares in this case was not as investment, but rather, to
transact in them as business. Though the shares were listed as
investment, the frequency and volume in which they were dealt
strongly supports their characterization as a business income.
Further, it is argued that the dividend earned on the shares, which
is important in order to hold that they are an investment, is
extremely low compared to the profits earned through the sale of
these shares. Learned counsel argues that while even shares held
for investment may be sold, the manner in which the shares have
been dealt with in this case, and the routine transactions, are not in
response to market volatility, but rather, to earn an income through
the business of trading in these shares. Thus, learned counsel
ITA 180/2013 Page 6
argues that such an aggressive pattern of sale/purchase transactions
cannot go along with their characterization as investment.
6. The short issue that arises in this case is whether the income
is business income or STCG. It is important to extract the accounts,
as presented before the CIT(A) and the ITAT, on the basis of
which the decisions were made. It is important to note here that the
assessee is claiming that STCG only in respect of the sale of 13
scrips, and the Court will confine its observations to the accounts
relating to these scrips.
ITA 180/2013 Page 7
ITA 180/2013 Page 8
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7. The legal standards concerning whether income is to be
treated as business income or STCG have been the subject-matter
of various decisions of the Supreme Court and this Court. They
have also been recounted at length in the orders of the AO, CIT(A)
and the ITAT, and the Court does not wish to repeat them. Suffice
it to say that there is no single, universal standard to distinguish
between the two. The Court must instead look into the nature of the
shares, the volume and frequency of the transactions, the manner in
which the shares have been shown by the assessee in its own books
of account, dividend earned on the shares, if any. Rarely will any
one factor be conclusive; the purpose of the exercise is to ascertain
the true intention through a composite test. In some cases, volume
ITA 180/2013 Page 10
becomes determinative; in others the duration of time it is held; at
times it can be the manner it is shown in the books whereas in still,
the use of borrowed funds could be decisive.
8. On a reading of the above accounts, the Court agrees with
the concurrent findings of the ITAT and CIT(A). The shares were
shown as investments by the assessee, and not as stock in trade.
This is an important (though not conclusive) factor. Further, of the
13 scrips in question, 8 were transacted only once; two have been
transacted twice; one each has been transacted thrice and four
times, and only one has been transacted regularly, i.e. ten times.
The frequency of transactions speaks greatly to whether the shares
were traded, i.e. whether the income earned was business income,
or held for investment. The fact that in this case the shares were
traded irregularly is a strong pointer that they were held as
investment, lest there be a new category of static trading or
business. The fact that there was a limited dividend drawn from
these shares, though relevant, does not displace this conclusion,
since dividend earned depends on whether the shares were held on
the record date, and does not directly correlate to the time for
which they have been held. The other factors, considered
cumulatively, carry greater weight in this case. Trading
contemplates a frequent sale and purchase of the commodity being
traded. Infrequence, as in this case, as the general trend
(notwithstanding only one share) cannot color the entire portfolio
as business.
ITA 180/2013 Page 11
9. The fluctuation in the number of shares held, and also the
companies in which shares are held, is minimal. The accounts
extracted above indicate that the same scrips were held throughout
the entire period, with the (limited) change occurring within the
shares already held. Even the sale/purchase transactions that have
taken place as a ratio of the total shares held for that company is
low, thus indicating the volume of shares held has not varied much.
Just as aggressive and constant behavior as regards the portfolio
suggests business activity, its absence suggests that the
shareholding was as an investment. In fact, four of the
shareholdings benefited from a subsequent bonus issue of shares,
which again supports this characterization. In such circumstances,
to hold that the portfolio is to be treated as business would deny the
possibility of selling an investment based on a market factors, or
dealing in them it at all. Indeed, the category of STCG, as opposed
to a long term capital gain at one extreme and business at the other,
precisely fits the bill in this case.
10. The fact that the assessee has transacted in shares does not
necessarily mean that it is a trading activity; shares held as
investment may also be sold and purchased, the crucial factor being
the frequency and volume of the trades to determine the true
intention for which they are held. Considering the limited activity
surrounding the shareholding of the assessee in relation to the 13
scrips, as discussed, the Court is not inclined to interfere with the
concurrent findings of the CIT(A) and the ITAT. It is held,
therefore, that the amount reported by the assesse is to be treated as
ITA 180/2013 Page 12
STCG. The question of law is answered against the revenue and in
favour of the assessee.
For the above reasons, the Court finds that the appeal has no merit,
and is accordingly dismissed. No order as to costs.
S. RAVINDRA BHAT
(JUDGE)
R.V. EASWAR
(JUDGE)
APRIL 16, 2014
ITA 180/2013 Page 13