THE issues before the Bench are - Whether the gain arising to
the assessee on sale and purchase of shares through PMS is to be considered as
business income – Whether where the intention of the assessee was with long term
goal of earning income from the investment and investment was made out of own
funds and the revenue has accepted the investment in the preceding years, the
gain on the same cannot be considered as business income. And the verdict goes
against the Revenue.
A)
Assessee is partner in a firm of Indenting Agent and Director in a
pharmaceutical company and is also deriving income from dealing in shares and
mutual funds. Assessee offered Long term capital gains and short term capital
gains on shares and securities through Portfolio Management Services and through
transactions done himself. Assessee also declared income from speculation on
shares as his business income.
AO assessed the entire income declared by the assessee under the head “capital gains” as income under the head “profits and gains of business or profession”. CIT (A) confirmed the order of AO.
Assessee contended that in preceding assessment year, the ITAT in assessee’s own case held that the very nature of PMS is such that investments made by assessee cannot be said to be scheme of trading of shares and stocks and therefore, the profit is to be assessed under the head “capital gains”.
Revenue contended that the assessee had taken derivatives/future and options transactions. Therefore, the assessee is not an investor and is a trader in shares by doing the trading in shares directly as well as through PMS. The assessee has also shown profit from speculation activity, therefore, activity of the assessee is considered as a whole. Hence, the assessee is a trader and not an investor.
B) AO observed that the assessee has frequently indulged in dealing in shares and therefore, intention of the assessee is to make profit. Assessee has utilized considerable amount of time and also has shown proper application of mind, collection of informations and utilizing the same in decision making in respect of purchase and sale of shares and securities. The total purchases are 289 and sales are 329 in the year. This shows that the assessee is having intention and capacity to incur risk to make profit. The holding period ranges from 1 day to 3 months. Thus, AO concluded that entire gamut of the transactions by assessee in shares and mutual funds are business transactions and are not his investments and thus treated the capital gain as business income.
CIT (A) confirmed the order of AO observing that assessee has disclosed profit as income from speculation from derivative transactions. It proves that the assessee was not an investor. During the year the entire shares were not sold in one go but had been sold in lots during the year relevant to assessment year under consideration as well as in the next year. The shares of these companies were capital assets in past but during the year the same got converted into stock-in-trade. It is a fact that the assessee has not borrowed funds for dealing in shares, but that by itself will not change the inference that the assessee was in the business of dealing in shares and mutual funds. There were high frequency of transaction of buying and selling, purchase-sale turnover ratio and the value of the volumes transacted showed that the assessee did not intend to acquire shares to keep as investments for the purpose of earning dividend and appreciation in value of shares. The assessee was carrying on activity in a systematic manner of purchase and sale of shares and mutual fund which partake the character of business.
After hearing both the parties, the ITAT held that,
A) ++ the ITAT has observed in assessee own case that assessee has been making investments in shares and units of mutual funds for the last several years which had been declared as investment in the books and income from which was being declared as capital gain and was also being accepted by the department. Assessees started making investment through PMS by placing certain funds with the PMS Managers who were authorized to purchase, acquire, obtain, take, hold, sell, transfer, substitute or change all or any of the investments made on behalf of the assessee and were also authorized to hold all or any of such investment in his name or at his discretion on behalf of the assessee and make every effort to maximize the value of investment. The assessee had not taken any borrowed funds for placing money with the PMS Manager. The average holding period of the shares was more than two months. Thus, the income earned from PMS has to be assessed as capital gain. Since the facts are similar for the impugned assessment year, the LTCG and STCG earned by assessee on sale/purchase of shares and securities through PMS is to be assessed under the head “capital gains” and not as business income of the assessee;
B) ++ there are various factors such frequency, volume, and entries in the books of account, nature of fund used, holding period etc which are relevant in deciding true nature of transaction and no single factor is conclusive. It is possible that the assessee to be both an investor as well as dealer in shares. Whether a particular holding is by way of investment or form part of stock-in- trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares which are held as investment and those held as stock-in-trade. Therefore, the important factor is the intention of the assessee at the time of purchase, which has to be gathered from the actual conduct of the assessee while dealing with the shares subsequently and not only on the basis of entry in the books of account. Therefore, to decide the nature of transaction as to whether it is in the nature of trade or an investment, no single fact has any decisive significance and the question has to be answered depending on the collective effect of all relevant material brought on record;
++ an investor makes purchases with long term goal of earning income from the investment and he is not tempted to sell the shares on every rise and fall in the market which are the attributes of a trader. There may be situations when the investor may also sell the shares after short holding in order to reshuffle portfolio when prices are falling or to encash investment in case of exceptional gain or for some other personal exigencies. Since income from investment in shares which is in the form of dividend is received annually, normally an investor is expected to hold the shares for more than a year. Therefore, each case is required to be examined carefully to ascertain the true nature of transactions;
++ the assessee in the earlier assessment years had also carried out the transactions of purchase and sales of shares directly as well as through PMS. The department accepted the transactions made by assessee of his own for purchase and sale of shares as investment in the assessment made u/s 143(3) of the Act as is evident from the copies of the assessment order. However, in the assessment year under consideration the AO has taken a contrary view to the earlier assessment years stating that the assessee is carrying on of his own purchase and sale of shares activities in a systematic and organized way which partake the character of business. AO as well as CIT(A) have mentioned CBDT circular and the cases but have not discussed as to how those cases are relevant to the facts of the case of the assessee before us. It is observed that the assessee has not borrowed any funds to undertake the activities of purchase and sale of shares. That the assessee has used his own funds in the said transactions of purchase and sale of shares. AO has stated that the assessee has frequently indulged in dealing in shares and the period of holding is also short. However, it is observed that in respect of LTCG claimed by assessee, the maximum amount of LTCG, is on account of sale of shares which were acquired in 2003. LTCG had accrued to the assessee, where the period of holding is more than 24 months and therefore, the order of CIT(A) to treat the said LTCG accrued to the assessee as business income is not supported by facts particularly when there is no purchase of shares by assessee in the assessment year under consideration and said shares were held by assessee for a period of more than 24 months and had already been considered in the preceding assessment year as investment in the assessment completed u/s 143(3);
++ in case of short term capital gain, there is no transaction of purchase and sale of shares where the holding period is less than 15 days. There are no repeated sales and purchases of shares in respect of the same script. Considering the above facts and the facts that in the preceding assessment years the similar kind of transactions had been considered by the AO as an investment activity of the assessee and the profit has been considered as STCG, the gain is considered as short term capital gain and not as business income.
AO assessed the entire income declared by the assessee under the head “capital gains” as income under the head “profits and gains of business or profession”. CIT (A) confirmed the order of AO.
Assessee contended that in preceding assessment year, the ITAT in assessee’s own case held that the very nature of PMS is such that investments made by assessee cannot be said to be scheme of trading of shares and stocks and therefore, the profit is to be assessed under the head “capital gains”.
Revenue contended that the assessee had taken derivatives/future and options transactions. Therefore, the assessee is not an investor and is a trader in shares by doing the trading in shares directly as well as through PMS. The assessee has also shown profit from speculation activity, therefore, activity of the assessee is considered as a whole. Hence, the assessee is a trader and not an investor.
B) AO observed that the assessee has frequently indulged in dealing in shares and therefore, intention of the assessee is to make profit. Assessee has utilized considerable amount of time and also has shown proper application of mind, collection of informations and utilizing the same in decision making in respect of purchase and sale of shares and securities. The total purchases are 289 and sales are 329 in the year. This shows that the assessee is having intention and capacity to incur risk to make profit. The holding period ranges from 1 day to 3 months. Thus, AO concluded that entire gamut of the transactions by assessee in shares and mutual funds are business transactions and are not his investments and thus treated the capital gain as business income.
CIT (A) confirmed the order of AO observing that assessee has disclosed profit as income from speculation from derivative transactions. It proves that the assessee was not an investor. During the year the entire shares were not sold in one go but had been sold in lots during the year relevant to assessment year under consideration as well as in the next year. The shares of these companies were capital assets in past but during the year the same got converted into stock-in-trade. It is a fact that the assessee has not borrowed funds for dealing in shares, but that by itself will not change the inference that the assessee was in the business of dealing in shares and mutual funds. There were high frequency of transaction of buying and selling, purchase-sale turnover ratio and the value of the volumes transacted showed that the assessee did not intend to acquire shares to keep as investments for the purpose of earning dividend and appreciation in value of shares. The assessee was carrying on activity in a systematic manner of purchase and sale of shares and mutual fund which partake the character of business.
After hearing both the parties, the ITAT held that,
A) ++ the ITAT has observed in assessee own case that assessee has been making investments in shares and units of mutual funds for the last several years which had been declared as investment in the books and income from which was being declared as capital gain and was also being accepted by the department. Assessees started making investment through PMS by placing certain funds with the PMS Managers who were authorized to purchase, acquire, obtain, take, hold, sell, transfer, substitute or change all or any of the investments made on behalf of the assessee and were also authorized to hold all or any of such investment in his name or at his discretion on behalf of the assessee and make every effort to maximize the value of investment. The assessee had not taken any borrowed funds for placing money with the PMS Manager. The average holding period of the shares was more than two months. Thus, the income earned from PMS has to be assessed as capital gain. Since the facts are similar for the impugned assessment year, the LTCG and STCG earned by assessee on sale/purchase of shares and securities through PMS is to be assessed under the head “capital gains” and not as business income of the assessee;
B) ++ there are various factors such frequency, volume, and entries in the books of account, nature of fund used, holding period etc which are relevant in deciding true nature of transaction and no single factor is conclusive. It is possible that the assessee to be both an investor as well as dealer in shares. Whether a particular holding is by way of investment or form part of stock-in- trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares which are held as investment and those held as stock-in-trade. Therefore, the important factor is the intention of the assessee at the time of purchase, which has to be gathered from the actual conduct of the assessee while dealing with the shares subsequently and not only on the basis of entry in the books of account. Therefore, to decide the nature of transaction as to whether it is in the nature of trade or an investment, no single fact has any decisive significance and the question has to be answered depending on the collective effect of all relevant material brought on record;
++ an investor makes purchases with long term goal of earning income from the investment and he is not tempted to sell the shares on every rise and fall in the market which are the attributes of a trader. There may be situations when the investor may also sell the shares after short holding in order to reshuffle portfolio when prices are falling or to encash investment in case of exceptional gain or for some other personal exigencies. Since income from investment in shares which is in the form of dividend is received annually, normally an investor is expected to hold the shares for more than a year. Therefore, each case is required to be examined carefully to ascertain the true nature of transactions;
++ the assessee in the earlier assessment years had also carried out the transactions of purchase and sales of shares directly as well as through PMS. The department accepted the transactions made by assessee of his own for purchase and sale of shares as investment in the assessment made u/s 143(3) of the Act as is evident from the copies of the assessment order. However, in the assessment year under consideration the AO has taken a contrary view to the earlier assessment years stating that the assessee is carrying on of his own purchase and sale of shares activities in a systematic and organized way which partake the character of business. AO as well as CIT(A) have mentioned CBDT circular and the cases but have not discussed as to how those cases are relevant to the facts of the case of the assessee before us. It is observed that the assessee has not borrowed any funds to undertake the activities of purchase and sale of shares. That the assessee has used his own funds in the said transactions of purchase and sale of shares. AO has stated that the assessee has frequently indulged in dealing in shares and the period of holding is also short. However, it is observed that in respect of LTCG claimed by assessee, the maximum amount of LTCG, is on account of sale of shares which were acquired in 2003. LTCG had accrued to the assessee, where the period of holding is more than 24 months and therefore, the order of CIT(A) to treat the said LTCG accrued to the assessee as business income is not supported by facts particularly when there is no purchase of shares by assessee in the assessment year under consideration and said shares were held by assessee for a period of more than 24 months and had already been considered in the preceding assessment year as investment in the assessment completed u/s 143(3);
++ in case of short term capital gain, there is no transaction of purchase and sale of shares where the holding period is less than 15 days. There are no repeated sales and purchases of shares in respect of the same script. Considering the above facts and the facts that in the preceding assessment years the similar kind of transactions had been considered by the AO as an investment activity of the assessee and the profit has been considered as STCG, the gain is considered as short term capital gain and not as business income.
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