Whether if a person sells his investment on an enhanced price, excess over his purchase price is to be considered as profit assessable to tax as income in every case - YES: HC

THE issues before the Bench are - Whether if a person sells his investment on an enhanced price, the excess over his purchase price is to be considered as profit assessable to tax as income in every case and Whether when the main line of business or commercial activity of the assesse is not share trading and the assessee did not have a separate infrastructure or expenditure to support such trade, it can be prsesumed that the intention behind these transactions is to derive business income or profit, and not to invest the amounts. And the verdict goes against the assessee.

Facts of the case

The assessee is an individual. In the return of income filed, it had claimed that Rs. 65,45,321/- had to be treated as short term capital gain, on account of sale of shares. During assessment, AO had noted that the assessee provided the funds to M/s Vimgi Investments Pvt. Ltd to trade in shares on his behalf, which was supported by the brokers notes and confirmed copy of the account of the broker filed by the assessee. Since the broker had traded on behalf of the assessee, practically on day-to-day basis, AO observed that the assessee was engaged in the activity of sale/purchase of share. Therefore, the AO show caused the assessee why the profit of Rs. 65,45,321/- should not be assessed as business income against the income shown as short term capital gain. By reply dated 13.11.2009 the assessee contended that the income was shown as short term capital gain because of transfer of short term capital asset as per section 111A, and that all the shares were received and transferred through DEMAT account and that STT was paid on all such transaction of sale and purchase of shares. The assessee’s contention was not acceptable to the AO on the ground that section 111A prescribes the mode of computation of tax liability and had no relevance in deciding the nature of share transactions, i.e. whether they were taken for investment purpose or for business purpose. Thereafter, following Instruction No.1827 dated 31.6.1989 and supplemented by another Circular No.4/2007. dated 15.6.2007, the AO determined that the amount was business income, and treated it as such in the assessment order. On appeal, CIT (A) allowed the appeal and AO was directed to recompute the income under the head capital gains and not under the head business income and pass a consequential order accordingly.

On further appeal before Tribunal, Revenue had contended that a proper application of the law to the facts of the case revealed that the sums used to derive the income in question were not investments but clearly for business purposes and therefore they had to be treated as such. The Tribunal had allowed the revenue’s appeal, held that the character of a transaction cannot be determined solely on the application of any abstract test or rule and the cumulative factors affecting the transactions have to be seen. Habitual dealing in a particular item is indicative of the assessee's intention of trading. Merely for taking benefit of provisions of sec. 111A of the Act applicable from the AY 2005·06, the assessee cannot be categorised as an investor especially when the aforesaid facts speak otherwise and lead us to the conclusion that the assessee is indulging in activities of a trader in shares. As observed in Sutlej Cotton Mills Supply Agency Ltd- (supra), it is a manner of first impression with the Court whether a particular transaction is in the nature of trade or not. ; it is not even the assessee's case that they had held all the shares for a long duration. The facts and circumstances of the case before us, when viewed in the light of principles laid down in the various decisions referred to above, lead us to the conclusion that the voluminous share transactions were in the nature of the 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 the assessee 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 assessee had not purchased the shares as an investment, but with the intention to trade in such scrips. In the light of view taken in the aforesaid decisions, we are of the opinion that the ld. CIT(A) was not justified in accepting the claim of the assessee as investor in shares. Accordingly, we vacate the findings of the Ld. CIT(A) and restore the order of the AO.

Before HC, the assessee's counsel had argued that ITAT erred in interfering with the findings of fact arrived at by the Appellate Commissioner. It was submitted that as one possessed of means, it was certainly open to the assessee to seek growth of its funds; to achieve that object it invested through two brokers. A proper application of all tests showed that the income was derived through short term capital gains. The funds belonged to the assessee; its business was not in shares or investments, it kept separate investment accounts. Urging that in view of these circumstances, the findings of the CIT (A) were reasonable, counsel stated that the ITAT should not have interfered with his order, as it was based on plausible reasoning.

Held that,

++ in CIT v. Associated Industrial Development Co.(Ltd.) 2002-TIOL-558-SC-IT, the Supreme Court observed that it was open to the assessee to contend that even on the assumption that it had become a dealer and was no longer an investor in shares the particular holdings which had been cleared and the sales of which had resulted in the profit in question had always been treated by it as an investment. It can hardly be disputed that there was no bar to a dealer investing in shares. But then the matter does hot rest purely on the technical question of onus which undoubtedly is initially on the revenue to prove that a particular item of receipt is taxable. Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge, of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment;

++ in case of P.M. Mohammed Meerakhan v. CIT, Kerala, 2002-TIOL-780-SC-IT SC reiterated that it is not possible to evolve any single legal test or formula which could be applied in determining whether a transaction was an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. Likewise, in Raja Bahadur Kamakhya Narain Singh v. CIT, Bihar and Orissa 2002-TIOL-838-SC-IT, the question of adventure in the nature of trade was again considered by the SC and which reiterated that since the expression "adventure in the nature of trade" implied the existence of certain element in the transactions which in law would invest these with the character of trade or business and the question on that account became a mixed question of law and fact, the court could review the Tribunal's findings if it had misdirected itself in law. It was fairly clear that where a person in selling his investment realised an enhanced price, the excess over his purchase price was not profit assessable to tax as income, but it would be so, if what was done was not a mere realisation of the investment but an act done for making profit. The distinction between the two types of transactions is not easily discernable. Whether the transaction is of one kind or the other depends on the question whether the excess is an enhancement of the value by realising a security or a gain in an operation of profit-making. The assessee might invest his capital in shares with the intention to resell these if in future their sale results in a higher price. Though motivated by a possibility of enhanced value, such investment does not necessarily render the transaction in the nature of trade.

++ in the present case, the Tribunal considered all the relevant decisions, and indicated the tests applicable, correctly. It took note of the Circular (No. 4 of 2007) which, in turn encapsulates the law on the subject, and after analysing the nature of the transactions, i.e the duration of holding, the proportion of income derived as dividend, to the investment made, found that the income was by way of business or trade in shares. This court is of opinion that there is nothing perverse or unreasonable in the finding of the ITAT. The turnover of the shares was about Rs. 1 crore; the dividend earned for the period was only Rs. 21,952/-. The income or profits gained from sale of shares was to the tune of Rs. 65,45,321/-. Granted that the main line of business or commercial activity of the assesse was not share trading and he did not have a separate infrastructure or expenditure to support such trade; yet the volume of transaction in even the 25 scrips that were sold and purchased, coupled with the duration of holding – both commented upon by the AO and the ITAT, went a long way in establishing that the intention behind these transactions was to derive business income or profit, and not to invest the amounts. Having regard to the above facts, this Court is of opinion that there is no infirmity with the findings and order of the ITAT, impugned in the present appeal. The question of law framed is answered against the assessee/appellant and in favour of the revenue. The appeal consequently fails and is dismissed. The pending applications are disposed off as infructuous.