Andhra Pradesh H.C : whether assessee had not purchased shares as an investment, but with intention to trade in such scrips

High Court Of Andhra Pradesh

PVS Raju vs. ACIT, Hyderabad

Assessment Years : 2005-06 & 2006-07

Section : 260A, 28(i), 111A

V.V.S. Rao And Ramesh Ranganathan, JJ.

I.T.T. A. No. 54 Of 2011

July 27, 2011


Ramesh Ranganathan, J. – These three appeals, under Section 260-A of the Income Tax Act, 1961 (for short the “Act”), are against the orders of the Income Tax Appellate Tribunal, Hyderabad A Bench, Hyderabad (ITAT) in I.T.A. No. 1101/Hyd/09 and batch dated 15.10.2010. The appellants herein are Sri P.V.S. Raju and his wife. While the appeals filed by Sri P.V.S. Raju relate to the assessment years 2005-06 and 2006-07, the appeal preferred by his wife relates to the assessment year 2006-07.

2. It would suffice for the disposal of these appeals, if the facts in I.T.T.A. No. 54 of 2001 are noted. Both the appellants filed their returns declaring income from investment in shares, interest on income, salary and capital gains. After issuing notices, under Sections 143(2) and 142(1) of the Act, the assessing authority passed orders of assessment holding that the appellants were traders in shares; they had classified their activities, for the assessment year 2005-06, into three categories i.e., business income, short term capital gains before 1.10.2004, and after 1.10.2004; in respect of some of the transactions, effected during the period 1.4.2004 to 31.3.2005. The assessee had admitted that it was business income; however, in view of the insertion of Section 111-A with effect from 1.10.2004, the assessee had segregated certain transactions, pertaining to “trading in shares,” into two categories i.e., trading carried on during the period 1.4.2004 to 30.9.2004, and during the period 1.10.2004 to 31.3.2005; the income-tax rates before 01.10.2004, both for business income and short term capital gains on the sale of shares, was the same; segregation of transactions relating to sale of certain shares from the business income, for the period 1.4.2004 to 30.9.2004, was accepted as it did not make any difference in terms of tax; and in view of the insertion of Section 111-A to the Act, with effect from 1.10.2004, the assessee had again segregated the transactions for the period 01.10.2004 to 31.03.2005. The appellant’s claim that these share transactions should be treated as “short term capital gains”, and taxed under Section 111-A of the Act, was rejected, and the assessing authority treated such income also as “business income”. The appeals preferred by the appellants there against were dismissed by the Commissioner of Income-tax (Appeals) (CIT(A)). The ITAT dismissed the appeals preferred by the appellants against the orders of the CIT (A).

3. Sri K. Vasant Kumar, Learned Counsel for the appellants, would contend that sale of shares, invested in companies for a period of less than 12 months, is liable to be taxed only as short term capital gains; the share transaction, relating to Continental Coffee Ltd, was an isolated transaction, that too for one assessment year; the ITAT could not treat income from the sale of shares as business income, merely on the basis of a single isolated purchase of shares of Continental Coffee Ltd; the finding of the ITAT that all the shares held by the appellants was for less than two months was perverse in as much as, in the very same order, the ITAT had recorded that certain shares were held for more than two months; the very fact that the assessee had classified certain shares in his books of accounts as investment, and certain others as stock-in-trade, was proof that it was the intention of the appellants to treat certain shares as investment, and not as stock-in-trade; and the profit which the appellants made on the sale of these shares was liable to be taxed only as “short term capital gains”, and not as “income from business”.

4. Section 2(14) of the Act defines “capital asset” to mean property of any kind held by an assessee, whether or not connected with his business or profession. The definition of “capital asset” does not, however, include “stock-in-trade” held for the purpose of business. Section 2(22) of the Act defines “dividend” to include any distribution by a company of accumulated profits, whether capitalized or not. Section 2(42-A) defines “short-term capital asset” to mean a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer. Section 2(42-B) defines “short term capital gain” to mean capital gain arising from the transfer of a short term capital asset. Under Section 28(i) of the Act, the profits and gains of any business carried on by the assessee, at any time during the previous year, is chargeable to income tax under the head “profits and gains of business or profession”. Under Section 45(1) of the Act any profits or gains, arising from the transfer of a capital asset effected in the previous year, is deemed to be income of the previous year in which the transfer took place. Section 111-A, inserted by Finance Act, 2004, relates to tax on short term capital gains in certain cases and, under sub-section (1) thereof, where the total income of an assessee includes any income chargeable under the head “capital gains”, arising from the transfer of a short term capital asset being an equity share in a company and such transaction is chargeable to securities transaction tax, the tax payable by the assessee shall be the aggregate of the amount of income tax calculated, on such short term capital gains, at the rate of fifteen per cent.

5. If the shares purchased by the appellants are held to be capital assets, sale of such shares could fall within the ambit of Section 111A of the Act, and such capital gains would be subject to tax at a lower rate. If the shares are held by the appellants as stock in trade, profit on the sale of such shares would constitute business income, and be subject to tax at a higher rate. As noted hereinabove, Section 2(14)(i) of the Act defines a capital asset as not including stock in trade. If the appellants had held the shares as “stock in trade”, and not as investment, then such shares would stand excluded from the definition of “short term capital asset”, and the profit earned on the sale of such shares would not be exigible to tax as “short term capital gain”, but as “profits and gains from business”.

6. The question which would necessitate examination is whether the shares dealt with by the appellants, which were classified as “investment” in their books of accounts, were their “investment” or their “stock-in-trade”? One of the relevant tests, in determining whether or not the shares/securities are a capital asset, is whether it is in the nature of fixed asset or constitutes the stock-in-trade of the assessee’s business. Fixed asset is what the owner turns to profit keeping the asset in his own possession, stock-in-trade is what he makes profit of by parting with it, and letting it change masters. (CIT v. Vazir Sultan & Sons [1959] 36 ITR 175 (SC). If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage, but for running the business or working it with a view to produce profits it is relatable to revenue. (Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC).

7. The meaning of ‘investment’ is not its meaning in the vernacular of the man in the street, but in the vernacular of the businessman. It is a form of income-yielding property. (Nawn Estates (P.) Ltd. v. CIT [1977] 106 ITR 45 (SC); CIT v. Tootal Broadhurst Lee Co. Ltd. [1949] 29 TC 352). In determining the question whether, after acquiring the shares, the assessee dealt with it as an investor, or carried on business with it treating it as its stock-in-trade or as a trading asset, what is relevant is that, if the case falls within the former category, receipts by way of sale of such shares will be capital receipts, but if it falls within the latter the receipts will be trading receipts, and profits therefrom business income. In deciding this question the object with which such operations are carried on assumes importance.

8. Where the owner of an “investment” chooses to realise it, and obtains a greater price for it than the price at which he originally acquired it, the enhanced value obtained from the realisation or conversion of securities may be profit from business. The simplest case is that of a person buying and selling securities speculatively in order to make gain or is dealing in such investments as a business, and is thereby seeking to make profits. (Khan Bahadur Ahmed Alladin & Sons v. CIT [1968] 68 ITR 573 (SC); Californian Copper Syndicate v. Harris [1904] 5 TC 159, CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC); and Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC). The distinction whether the investment transaction is a mere realisation of the investment or an act done for making profits depends on the question whether the excess was an enhancement of the value by realising a security or a gain in an operation of profit making. If the transaction is in the ordinary line of the assessee’s business there would hardly be any difficulty in concluding that it was a trading transaction but, where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue if he deals with them as a trader. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business? (Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC).

9. Profits realised by the sale of shares may be capital if the seller is an ordinary investor changing his securities, but it may be income if the seller of the shares is trading in shares. (Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC); Raja Bahadur Kamakshya Narain Singh (supra). If an individual invests in shares for the purpose of earning dividend he is not carrying on a business. The only way it would fall within “profit from business” is by converting the shares into stock-in-trade i.e. by carrying on business of dealing in stock and shares. (CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86 (SC); Bengal & Assam Investors Ltd. v. CIT [1966] 59 ITR 547 (SC). The dominant or even sole intention to resell is a relevant factor and raises a strong presumption, but by itself is not conclusive proof, of trade. The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction. (Sutlej Cotton Mills Supply Agency ( supra); Venkataswami Naidu & Co. (supra). A profit made by the sale of shares may not amount to capital gain if the shares were part of the trading assets of the assessee. If such be the case, the gains may amount to trading income of such an assessee. This question would depend upon whether the shares are held by the assessee as an investment, or as a trading asset, and would require examination of facts. (Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/ 132 Taxman 373 (SC).

10. Where the purchase of any article or of any capital investment, for instance – shares, is made without the intention to resell it at a profit, a resale under changed circumstances would only be a realisation of capital, and would not stamp the transaction with a business character. (CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65 (SC); Sutlej Cotton Mills Supply Agency (supra). A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made, and the possibility of enhanced values motivated the investment. (Leeming v. Jones [1930] 15 TC 333 ; Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC) ; Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC) ; Sutlej Cotton Mills Supply Agency Ltd. (supra). Where a purchase is made with the intention of resale, it depends upon the conduct of the assessee and the circumstances of the case whether the venture is on capital account or in the nature of trade. A transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale. (Jenkinson v. Freehand [1961] 39 TC 636 (CA); Radha Debi Jalan v. CIT [1951] 20 ITR 176 (Cal.) ; India Nut Co. Ltd. v. CIT [1960] 39 ITR 234 (Ker.) ; Mrs Sooniram Poddar v. CIT [1939] 7 ITR 470 (Ran.); Ajax Products Ltd. v. CIT [1961] 43 ITR 297 (Mad.) ; Gustad Dinshaw Irani v. CIT [1957] 31 ITR 92 (Bom.); and Mrs Alexander v. CIT [1952] 22 ITR 379 (Mad.) ; Sutlej Cotton Mills Supply Agency Ltd. (supra)).

11. Whether shares of a company held by a person constitute his capital or his stock-in-trade is not a pure question of law but essentially one of fact. (CIT v. Ram Kumar Aggarwal & Bros. [1993] 71 Taxman 510 /[1994] 205 ITR 251 (SC). Likewise the question whether profit, from the sale of the shares, is a revenue or a capital receipt is a mixed question of law and fact. The distinction between capital accretion and income is that, for the purpose of ascertaining whether profits made upon a sale of an article are taxable profits, the question to be asked is: “Is the article acquired for the purpose of trade?”. If it is, the profit arising from its sale must be brought into the revenue account. The profit is chargeable as capital gains if the sale is of a capital asset, and as business profit if the sale is in the course of business. (Sutlej Cotton Mills Supply Agency Ltd. (supra); Thew v. South West Africa Co. Ltd. [1924] 9 TC 141 (CA)).

12. What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being is the sum of gain that has been made a mere enhancement of value by realising a security or is it a gain made in the operation of business in carrying out a scheme for profit making?” If a transaction is in the assessee’s ordinary line of business there can be no difficulty in holding that it is in the nature of trade. If there is repetition, and continuity of transactions, the assessee would be carrying on a business. (Sutlej Cotton Mills Supply Agency Ltd 1975 100 ITR 706 (SC)).

13. In judging the character of such transactions several factors have been treated as significant. If a transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to carry on trade may readily be inferred. The magnitude, the frequency and the ratio of sales to purchases, and the total holdings is evidence from which the Tribunal can come to the conclusion as to the true nature of the activities of the appellant. (Raja Bahadur Visheshwara Singh 1961 41 ITR 685 (SC).

14. No single criterion is decisive in determining the question whether a particular receipt is capital or revenue. The answer to the question must ultimately depend on the facts of each particular case, (CIT v. Saurashtra Cement Ltd. [2010] 325 ITR 422/ 192 Taxman 300 (SC), and the conclusion of law to be drawn from those facts. (Saurashtra Cement Ltd. (supra); CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC) (Inspector of Taxes) v. Shell Co. of China Ltd. 1951 32 TC 133). This is a question of fact to be determined on an application of the broad principles and Courts would not, ordinarily, interfere with the findings of fact if they have been arrived at on a proper application of the principles. (Assam Bengal Cement Co. Ltd. (supra)).

15. As is evident from the order of the ITAT, the appellants had sold the shares of Continental Coffee Limited even before they had purchased these shares. This transaction was reflected in the appellants’ account books as “investment”. Even if the submission that this constitutes a single isolated transaction were to merit acceptance, the orders of the assessing authority, the CIT(A) and the ITAT would show that this was not the only factor which weighed with them in coming to the conclusion that the shares sold by the appellants constituted stock in trade, and was not investment. The factors which weighed with the assessing authority, the CIT(A), and the ITAT in coming to the conclusion that the shares in question constituted “stock in trade”, and not “investment”, were that:-

(a) The frequency of buying and selling of shares by the appellants were high;

(b) the period of holding was less;

(c) the high turnover was on account of frequency of transactions, and not because of huge investment;

(d) the assessees had dealt in delivery trading purely with the intention of making quick profits on a huge turnover;

(e) the period of holding of a majority of the stock was between one to seven days;

(f) in most of the transactions, the assessees did not even hold on to at least some part of the huge purchases, and had engaged in the same scrips frequently;

(g) the intention of the assessees in buying shares was not to derive income by way of dividend on such shares, but to earn profits on the sale of the shares;

(h) the assessees had indulged in multiple transactions of large quantities with very high periodicity. These periodic transactions, selecting the time of entry and exit in each scrip, called for regular direction and management which would indicate that it was in the nature of trade;

(i) repeated transactions, coupled with the subsequent conduct of the assessees to re-enter the same scrip or some other scrip, in order to take advantage of market fluctuations lent the flavour of trade to such transactions;

(j) the assessees were purchasing and selling the same scrips repeatedly, and were switching from one scrip to another;

(k) the dominant impression left on the mind was that the assessees had not invested in shares;

(l) mere classification of these share transactions as investment in the assessee’s books of accounts was not conclusive;

(m) the intention of the assessees at the time of purchase was only to sell the shares immediately after purchase;

(n) frequency of purchase and sale of shares showed that the assessees never intended to keep these shares as investment; and

(o) it is only for the purpose of claming benefit of lower rate of tax, under Section 111A of the Act, that they had claimed certain shares to be investment, though these transactions were only in the nature of trade.

16. The character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. Ultimately, it is a matter of first impression with the Court whether a particular transaction is in the nature of trade or not. (Sutlej Cotton Mills Supply Agency Ltd. (supra)). If, on the material on record, the Tribunal has come to the conclusion that the appellant was dealing in shares as a business, it cannot be interfered with by the High Court. (Raja Bahadur Visheshwara Singh (supra)). The Tribunal is the final fact-finding body. Its findings on questions of fact are not liable to be interfered with unless it has taken into consideration irrelevant material or has failed to take into consideration relevant material or the conclusion arrived at by it is perverse in the sense that no reasonable person, on the basis of the facts before the Tribunal, could have come to the conclusion to which the Tribunal has come. The decision of the Tribunal has not to be scrutinised sentence by sentence merely to find out whether all facts have been set out in detail by the Tribunal or whether some incidental fact which appears on record has not been noticed by the Tribunal in its judgment. If the Court, on a fair reading of the judgment of the Tribunal, finds that it has taken into account all relevant material, and has not taken into account irrelevant material in basing its conclusions, the decision of the Tribunal is not liable to be interfered with unless, of course, the conclusions arrived at by the Tribunal are perverse. (CIT v. Karam Chand Thapar & Bros. (P.) Ltd. [1989] 176 ITR 535 (SC)).

17. The order of the ITAT ought not to be microscopically scrutinized only to locate some insignificant errors. When viewed in the light of the several findings recorded by them in coming to the conclusion that the shares were held by the appellants as stock in trade and not an investment, the erroneous finding of the ITAT that the appellants had held all the shares for less than two months pales into insignificance. Even otherwise, it is not even the appellants’ case that they had held all the shares for a long duration. It is evident from the order of the ITAT that the voluminous share transactions were in the ordinary line of the appellants business; purchase of shares by them was not for the purpose of earning dividend, but with the dominant intention of resale in order to earn profits; the profit made by them is not of mere enhancement of value of the shares, but is a profit made in the carrying on of a business scheme of profit making; huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of “trade”; the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the appellants had not purchased the shares as an investment, but with the intention to trade in such scrips.

18. The orders of the ITAT, the CIT(A), and the assessing authority are all well considered and reasoned orders. We see no reason, therefore, to interfere with the order of the ITAT or to entertain the appeals under Section 260A of the Act. The appeals fail and are, accordingly, dismissed.

[Citation : 340 ITR 75]

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