Delhi High Court
Cit vs Amit Jain on 3 March, 2015
Author: S.Ravindra Bhat
$~11
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% DECIDED ON: 03.03.2015
+ ITA 517/2012
C.M. No.15387/2012
CIT ..... Appellant
Through: Mr. Rohit Madan, Sr. Standing Counsel.
versus
AMIT JAIN ..... Respondent
Through: Mr. Ajay Vohra, Sr. Advocate with
Ms. Kavita Jha and Mr. Vaibhav Kulkarni,
Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE R.K. GAUBA
S.RAVINDRA BHAT, J. (OPEN COURT)
1. By an order dated 25.09.2013, the following question of law
was framed: -
Whether the transaction in question was rightly held by the
Tribunal in the nature of investment and not in the nature of
trade?
2. The facts of the case are that for assessment year (AY)
2006-07, the assessee had reported an amount of `2.61 crores as short
term capital gain as against a total assessed income of `2.63 crores.
Besides short term capital gain, the assessee had also reported a sum
of `47.14 lakhs as long term capital gains which was accepted. In the
ITA517-12 Page 1
scrutiny assessment, the AO formed an opinion that the assessee's
claim of `2.61 crores being short term capital gains was not
admissible having regard to the nature of the transaction. The
assessee had during the relevant assessment year traded in 329 scripts
(as against the 1833 scripts held by him). Having regard to the
frequency and volume of the transaction and the further circumstance
that the assessee did not report any other form of income in his
returns, the AO felt that short term capital gain as claimed was
inadmissible and brought the sum of Rs.2.61 crores to tax under the
head "business income".
3. The assessee's appeal was rejected by the CIT (Appeals) by a
reasoned order. On further appeal to the Income Tax Appellate
Tribunal (ITAT), the Tribunal accepted the assessee's contentions.
4. The basis of the ITAT's findings may be found from the
following extracts: -
"10. Let us consider the facts discussed by the learned
revenue authorities below in the impugned orders. According
to the assessee, the primary intention for making investment in
shares is to earn dividend income, to keep the capital funds
available with the assessee intact, to ensure that the capital
invested in the shares grow over a period of time on account of
the capital appreciation and to be part of growth of the investee
company. He demonstrated on the record that he has been
making investment from the last two decades as an investor.
The past history available on page Nos.223, 234, 379 and 420
of the paper book depicts the following position in respect to
his investment:
Assessment In the return of Assessment
year income
2003-04 LTCG & STCG Intimation u/s 143 (1)
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of the Income-tax Act,
1961 („the Act‟)
2004-05 LTCG & STCG Intimation u/s 143 (1)
of the Act.
2005-06 LTCG & STCG Assessment u/s 143
(3) of the Act,
accepting the
appellant as investor
if and the gains as
capital gains.
2006-07 LTCG & STCG LTCG= Accepted by
the Assessing Officer
STCG=In dispute.
2007-08 LTCG & STCG Intimation u/s 143 of
the Act.
2008-09 LTCG & STCG Assessment u/s 143
(3) of the Act,
accepting the long
term capital gains
declared in the
return.
11. It also emerges out from the record that assessee being
investor has not been maintaining any office established or
keeping any staff. He is also not registered with any authority
or body such as stock exchange and SEBI etc. He is not
maintaining regular books of account but submitted the details
in respect of the investment before the Assessing Officer. He
has not classified the shares held by him as stock-in-trade.
The entire portfolio is valued at cost and not at cost or market
price whichever is lower because that can only be applied if the
shares were held as stock-in-trade. He is not having any
current account and is only maintain S/B Account. The entire
investment has been made out of his own fund and not out of
borrowed funds. The entire investment has been held by the
assessee in his own name and not in the name of any business
ITA517-12 Page 3
entity i.e. firm etc. According to the assessee, he has received
substantial dividend income of Rs.10.10 lacs. The learned
counsel for the assessee at the time of hearing pointed out that
dividend yield on investment was around 2.10% which is much
higher than normal expected yield of 1.5% on the shares
invested. For buttressing this aspect, he drew our attention
towards indices of the sensex. He placed on record these
details."
5. It is contended on behalf of the Revenue that regardless of how
the assessee considered the nature of the transactions, a proper
application of the legal tests, would result in the treatment of sum of
`2.61 crores as business income. Learned counsel relied upon the
judgment of Gujarat High Court in Commissioner of Income Tax v.
Rewashanker A. Kothari, (2006) 283 ITR 338 which had formulated
the following tests to decide whether the nature and character of sums
reported as income are truly business income or on account of capital
gains:
"(a) The first test is whether the initial acquisition of the
subject matter of transaction was with the intention of dealing
in the item, or with a view to finding an investment. If the
transaction, since the inception, appears to be impressed with
the character of a commercial transaction entered into with a
view to earn profit, it would furnish a valuable guideline.
(b) The second test that is often applied is as to why and how
and for what purpose the sale was effected subsequently.
(c) The third test, which is frequently applied, is as to how the
assessee dealt with the subject matter of transaction during the
time the asset was with the assessee. Has it been treated as
stock-in-trade, or has it been shown in the books of account
and balance sheet as an investment. This inquiry, though
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relevant, is not conclusive.
(d) The fourth test is as to how the assessee himself has
returned the income from such activities and how the
Department has dealt with the same in the course of preceding
and succeeding assessments. This factor, though not
conclusive, can afford good and cogent evidence to judge the
nature of transaction and would be a relevant circumstance to
be considered in absence of any satisfactory explanation.
(e) The fifth test, normally applied in cases of partnership firms
and companies, is whether the deed of partnership or the
memorandum of association, as the case may be, authorises
such an activity.
(f) The last but not the least, rather the most important test, is
as to the volume, frequently, continuity and regularity of
transactions of purchase and sale of the goods concerned. In a
case where there is repetition and continuity, coupled with the
magnitude of the transaction, bearing reasonable proportion to
the strength of holding, then an inference can readily be drawn
that the activity is in the nature of business."
The above ruling was approved and applied in the judgment of this
Court in Commissioner of Income Tax v. Central News Agency Pvt.
Ltd., (ITA 1032/2011, decided on 9.9.2014).
6. Learned senior counsel for the assessee contended that the
record clearly indicates that as against 1833 shares held by the
assessee, only 329 were traded at the relevant time. Of the Rs.2.61
crores claimed as short term capital gain, Rs.1.72 crores were derived
from the sale of 35 scripts; the counsel emphasises that this denoted
65% of the short term capital gain reported during the assessment
year. It was further submitted that for all relevant past years up to
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2005-06 and even subsequently - including periods when scrutiny
assessments were made, the Revenue uniformly accepted the
assessee's arguments that such income was on account of short term
capital gain and had no occasion to doubt it, or treat the amounts as
derived from business income. Emphasising the need for consistency,
learned counsel for the assessee submitted that for the current
assessment year i.e. AY 2006-07, for the Revenue to successfully
state that the character of income is otherwise, some unique facts or
evidence had to be placed on record - both of which were absent.
7. Learned counsel lastly submitted that the conclusions of the AO
and the CIT (A) were largely based on the fact that the volume and
transaction was considerable and yielded substantial income.
8. The factors which Courts and Tribunals have to take into
consideration whilst deciding whether income gained during a
particular period is business income through purchase and sale of
shares or other tradable capital assets, or capital gains on account of
sale of such assets, has been spelt out and reiterated in a number of
decisions. These include Raja Bahadur Visheshwar Singh v. CIT,
(1961) 41 ITR 685 (SC); Commissioner of Income Tax, U.P v. Madan
Gopal Radhey Lal, [1969] 73 ITR 652 (SC); Commissioner of Income
Tax v Associated Industrial Development Company 82 ITR 586 (SC);
P.M. Mohammed Meerakhan v. Commissioner of Income- tax,
Kerala, 73 ITR 735 (S.C.) and Commissioner of Income Tax v NSS
Investments Ltd 2007 (277) ITR 149 (Mad). It was in the light of these
decisions that the CBDT Circular No. 4/2007, was issued, indicating
the principles applicable in this regard. These criteria are:
ITA517-12 Page 6
(1) Intention of the assessee at the time of purchase of the
shares. This can be found out from the treatment given to the
purchase in the assessee's books of account.
(2) Did the assessee borrow money to purchase the shares, and
paid interest for it. Money is generally borrowed to purchase
goods for the purposes of trade and not for investing in an asset
for retaining.
(3) Volume and frequency of the purchases and sale/disposals.
If purchase and sales are frequent, or there are substantial
transactions in an item, that can indicate trade. Habitual dealing
in a particular item is indicative of intention of trade. Likewise,
ratio between the purchases and sales and the holdings may
show whether the assessee is trading or investing (high
transactions and low holdings indicate trade whereas low
transactions and high holdings indicate investment). Another
related factor is the duration for which the shares are held.
(4) Was the purchase and sale made for realizing profit, or for
retention and appreciation in its value. The former indicates the
purchases being part of trade; and the latter is indicative of the
purchases being an investment. Furthermore, it would be
relevant to ask whether the intention behind the purchase was to
enjoy dividend, or merely to earn profit on sale of shares.
Importantly, a commercial motive is an essential ingredient of
trade in this context.
(5) Whether the items in question were valued at cost. If so, it
would indicate that they were investments. Where they were
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valued at cost or market value or net realizable value,
whichever is less, it will indicate that items were treated as
stock-in-trade.
(6) Finally, it would be relevant to consider how the assessee is
authorized in its Memorandum / Articles.
In the present case, there is no dispute that the opening investment
cost for the relevant year AY 2006-07 was Rs.2.60 crores; the
corresponding closing value was Rs.4.70 crores. Furthermore, the
Court notices that the assessee derived, in addition to the short term
capital gains, dividend income to the tune of nearly Rs.10 lakhs. The
authorities have all emphasised that even while seeing the cumulative
effect of the tests, in the given facts of a case, one test might be
determinative or conclusive. At the same time, no single test having
regard to the facts of a case and a cumulative effect thereof, need be
determinative or conclusive. In the present instance what is apparent
is that the assessee, an individual, did not borrow any funds; the share
scripts traded were only from amongst what were held by him.
Significantly, dividend income amounting to about 4% of the value of
the investment was earned by the assessee. What appears to have
weighed almost conclusively with the tax authorities in the first and
second instance is the value and frequency of the transactions. As
underlined by us, that factor alone cannot be conclusive and would
have to be weighed along with the totality of facts. An important
detail which cannot be overlooked by the Court is that in all past
periods and even subsequent periods, similar income reported by the
assessee was accepted by the Revenue as short term capital gain. In
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fact for AY 2005-06, the scrutiny assessment under Section 143 (3)
accepted the sum of Rs.1.02 crores as short term capital gain. In the
circumstances, it was all the more necessary for the Revenue to point
to some unique feature or distinctive material to differentiate the
assessee's activities for the subject assessment year, since they
fundamentally remained the same and unchanged.
9. On an appropriate application of the authorities, this Court is of
the opinion that the ITAT's findings and view cannot be faulted in the
circumstances of the case. The question of law is, therefore,
answered in favour of the assessee and against the Revenue. The
appeal is accordingly rejected.
S. RAVINDRA BHAT
(JUDGE)
R.K. GAUBA
(JUDGE)
MARCH 03, 2015
/vikas/
ITA517-12 Page 9
