Frequency, magnitude systematic manner no criteria to hold sale of shares as business activity

Frequency, magnitude of transaction in systematic manner no criteria to hold that the assessee is engaged in a business activity of shares – ITAT 

ABCAUS Case Law Citation:
ABCAUS 2721 (2019) (01) ITAT

Important Case Laws Cited/relied upon:
Sugamchand C. Shah vs. Assistant Commissioner of Income-Tax ; Gopal Purohit vs. Joint Commissioner of Income- Tax ; CIT vs. Associated Industrial Development Company (P) Ltd. 1972 CTR (SC) 239 ; CIT vs. H. Holck Larsen (1986) 58 CTR (SC) 53 : (1986) 160 ITR 67 (SC) ; Fidelity Northstar Fund & Ors., In re (2007) 207 CTR (AAR) 297 : (2007) 288 ITR 641 (AAR) ; Keshavji Ravji & Co. Vs. CIT ; Radhasaomi Satsang vs CIT reported in (1992) 193 ITR 321 (SC) ; ACIT vs. Bhanuprasad T. Trivedi HUF

The instant appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) in confirming the purchase/sale of shares completed within few days as business income as against short term capital.

The assessee was a HUF and was engaged in the business of trading in shares and securities. The AO during the assessment proceedings observed certain facts as detailed under: i. The assessee has been carrying on the investment in shares activity in a systematic manner. ii. The assessee has carried out sale purchase of shares in investment activity in 55 companies. iii. The time gap between the purchase and sale of shares is varying between few days to few months.

The Assessing Officer (AO) during the assessment proceedings observed the following facts:

(a) That the assessee had been carrying on the investment in shares activity in a systematic manner.

(b)That the assessee had carried out sale purchase of shares in investment activity in 55 companies.

(c) That the time gap between the purchase and sale of shares is varying between few days to few months.

In view of above, the AO after considering the magnitude of the transaction was of the view that the assessee was carrying out a trading activity which was wrongly being classified by the assessee as investment activity.

Accordingly, the AO was of the view that the assessee should not have shown income under the head Short Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG). Accordingly, an explanation was sought from the assessee.

The assessee submitted that it had classified delivery based transaction under the head investment activity whereas non-delivery based transactions were classified as share trading activity. The shares held as an investment were for the purpose of dividend income. As and when there was a better price available in respect of investment in shares, he used to sell shares in the market and accordingly, it was declaring Long Term & Short Term Capital Gain.

The assessee also submitted that the shares classified under the head investment were always valued at cost. Had the he been engaged in the trading activity of shares then he would have valued the investment in shares at market price or cost of acquisition whichever was lower. The basis adopting for the valuation of shares was duly accepted by the Revenue on a regular basis year after year.

The assessee further submitted that had he been doing trading in shares, he would have claimed deduction of the securities transaction tax paid u/s 88E of the Income Tax Act, 1961 (the Act).

However, the AO disagreed with the contention of the assessee by observing that the intention was to earn the profit from the sale purchase of shares which was carried out systematically.

Therefore the AO after considering the frequency and magnitude of transactions held that the assessee had carried out trading activity in the purchase and sale of shares and accordingly held the Short Term and Long Term Capital Gain income as income under the head business and profession.

Aggrieved, the assessee preferred an appeal to CIT(A). The assessee submitted that it had been allowed to maintain two portfolios one for share trading activities and another one for investment in shares activity as per the CBDT Circular No.4/2007 dated 15.06.2007.

However, the CIT(A) disregarded the contention of the assessee and confirmed the order of the Assessing Officer (AO).

The Tribunal observed that as per CBDT Circular No. 6/2016 dated 29.02.2016, the instant case fall under the residuary clause which provided that the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall to be decided as per Circular No. 4/2007 dated 15.06.2007.

The Tribunal observed that in view of the said circulars, the assessee can maintain two portfolios one for trading in the shares and the other one is for the investment in shares. The only requirement of the circular, both the activities of the assessee should be clearly demarcated in the books of accounts.

The Tribunal noted that as the assessee had not shown any activity from the trading of shares and there was also no closing stock shown in the financial statement / balance sheet of the assessee. Therefore, the Tribunal opined that the assessee was dealing only in the investment activity as evident from the classification shown by the assessee under the head investments and therefore the Circular issued by the CBDT applied to the instant facts of the case.

The Tribunal held that keeping in view the provision of the Circular issued by the CBDT, the income from the investment of share on account of sale/ purchase should be liable to tax under the head capital gain.

The Tribunal further observed that as held by the judgment of Hon’ble Supreme Court, circulars issued by the CBDT which are beneficial to the assessee are binding on the Tribunal.

The ITAT further observed that the Revenue had accepted the activity of investment in the shares in earlier years as well as subsequent years which was also not disturbed by the Revenue. Therefore, as held by the Hon’ble Supreme Court, the principles of consistency need to be followed without any deviation when there is no change in the facts and circumstances of the case from the earlier years.

The Tribunal noted that the Coordinate Bench of the ITAT had decided has decided a similar issue in favor of the assessee and the Hon’ble High Court subsequently confirmed the view taken by the Tribunal. It was further noted that the Revenue, against the order of High Court in the above case had filed a petition before the Hon’ble Supreme Court which was dismissed.

In view of above, the Tribunal held that the frequency, magnitude of the transaction in a systematic manner cannot be the criteria to hold that the assessee is engaged in a business activity of shares.

Accordingly, the Tribunal set aside the order of the CIT-A and directed the AO treat the income from the sale & purchase of shares under head capital gain.

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