I-T - Whether when individual assessee maintains no books but undertakes huge number of share transactions in a year, inference based on conduct of assessee that it was a case of business profit is legally sustainable - YES, rules ITAT

THE issue before the Bench is - Whether when individual-assessee maintains no books but undertakes huge number of share transactions in a year, the inference based on conduct of the assessee that it was a case of business profit is legally sustainable. And the verdict goes in favour of the Revenue.

Facts of the case

These are three years appeals both by assessee and the Revenue and all are decided together since the issue involved is interlinked. The assessee is an individual and derives income from salary, house property and capital gains. In one year the assessee earns capital gains from share transactions relating to 52 companies; and in other years, the transactions are lesser. The assessee being individual maintains no books of account. In this backdrop, the AO formed an opinion that the income declared by the assessee under the head STCG and LTCG was taxable as business income. The CIT(A) allowed the appeal of the assessee in parts.

On appeal, the ITAT held that,

++ the assessee does not maintain any books and he has transacted in a large number of shares and units. In the case of Rohit Anand, the assessee was dealing in jewellery, and investment was made in a few shares which were not even rotated. The inference was drawn from classification of the shares in the books. It is also seen that the shares had not been rotated. The facts of this case are to the contrary as shares have been sold ostensibly to safeguard investments. In the case of Om Prakash Arora, the bulk of profit arose on sale of shares of Unitech Ltd. received as bonus shares. A reference was made to the decision in the case of CIT Vs. Madan Gopal Radhey Lal (1969) 73 ITR 652 (SC), in which it was mentioned that the court is unable to agree with the judgment of Bombay High Court in the case of CIT Vs. Maniklal Chunnilal & Sons Ltd. that bonus shares received by a shareholder who carries on a business in shares and securities ipso facto become accretion to his stock-in-trade. Bonus shares would normally be deemed to be distributed by the company as capital and the shareholders receive the shares as capital;

++ we find that an investor would not enter into purchase and sale transactions of shares of 52 companies and units of 10 mutual funds in a single year. The transactions are numerous and period of holding is small. Transactions of this magnitude can be undertaken only after devoting substantial time to the study of movements in the market. Any one who undertakes such large number of transactions keeping the market conditions in view would obviously assume the character of a dealer. It may be mentioned here that dealing in a commodity can also be done with own funds. Past record in this connection is not material. As the assessee has not maintained books of account, therefore, the intention can be ascertained only from the conduct. When we look to the transactions as a whole, the impression we get is that he has dealt in shares and units and has not acted as investor in shares and units. Accordingly, it is held that the AO rightly taxed the surplus arising from the transactions under the head “profits and gains of business”;

++ the sale of 74,000 bonus shares of Unitech Ltd. may stand on a different footing even if the assessee is held to be a dealer in shares. In the aforesaid case, it has also been mentioned that after having received bonus shares, the assessee could have converted them into stock-in-trade or retained as capital asset. However, the facts in this behalf have not been examined by the Tribunal and even in the supplementary statement no attempt has been made to set out the facts on which the conclusion was drawn. In view of this position, the matter was decided in favour of the assessee and against the revenue. Thus, this decision lays down that bonus shares will ordinarily be treated as the capital asset, which can be retained as capital asset or converted into stock-in-trade. The lower authorities have not recorded any finding that the bonus shares were converted into stock-intrade. Therefore, in absence of any evidence to the contrary, the conclusion is that they were held as capital asset. Consequently, profit on sale of bonus shares would be in the nature of capital gain. Respectfully following this decision, it is held that the transactions classified as LTCG and STCG, except sale of bonus shares, are in the nature of business transactions. Income therefrom is rightly assessable as business profits.