Repeated purchase and immediate sale of same scrip on daily basis was business income – ITAT

Repeated purchase of same scrip and immediate sale on daily basis to take advantage of the market fluctuations was business income not short term capital gains u/s 111A- ITAT

ABCAUS Case Law Citation:
ABCAUS 2276 (2018) (04) ITAT

Important Case Laws Cited/relied upon by the parties
CIT vs. Gopal Purohit reported in 336 ITR 287
Shri Gopal Purohit vs. Jt. CIT, reported in (2009) 122 TTJ 0087

The appellant assessee was an individual, carrying on the business of trading in shares and deriving rental income. He filed her return of income declaring inter alia Short Term Capital Gain (STCG) u/s 11A of the Income Tax Act, 1961 (the Act). However the Assessing Officer (AO) completed the assessment u/s 143(3) treating the income earned from purchase and sale of shares as “business income” as against STCG.

Repeated purchase and immediate sale of same scrip not stcg 111A

In the first round of litigation the Tribunal restored the matter to the file of the AO for re-examination of the issue.

In the remanded proceedings, the assessee was asked to furnish full and complete facts and the details and evidence in the light of the directions of the Tribunal with respect to the frequency and volume of the transactions, extent of loans used for share transactions, entries in books at the time of purchase, period of holdings, practice followed in preceding and subsequent years, comparable cases, delivery based or otherwise etc., and to justify her claim for concessional rate of taxation u/s 111A of the Act.

In reply thereto, the assessee submitted copies of the ledger a/c, bank statements, contract notes and De-mat statement for the relevant financial year and a chart showing the details of shares purchased and sold along with their holding period.

After considering the details, the AO observed that assessee had been declaring either short term capital gain or long term capital gains on sale of shares. It was also observed that during the relevant financial year, the assessee had purchased majority of shares during that year itself and that the the maximum period for which any shares were held by the assessee was 213 days and minimum period was 3 days. The AO also observed that the assessee had purchased the shares of certain companies on a daily basis and had also sold some shares on daily basis to earn maximum profit and therefore, such transactions reveal periodic pattern in selecting the time of entry and exist in each scrip giving it a flavor of trading in shares.

The AO examined the ledger a/c of the assessee and noticed that the share account was recorded as “profit (loss) on sale of shares” which after various debits (losses) and credits (profits), recorded a net profit of Rs. 4,34,79,816 in the shares account. It was also observed from the books of account that the assessee had borrowed interest free loans from a company for purchase and sale of shares during the year and that the assessee had not only returned the loan amount but also deposited Rs. 3.80 crores with the said company and therefore, the assessee had a credit balance of Rs. 1.80 crores which, in the balance sheet was shown as loans and advances given earned profit.

The AO also noticed that the ITAT, in the case of a family member of the assessee had held that such transactions cannot be considered as investments in shares; and that in another case of family member of the assessee also, it was held that the transactions partook the character of business activities.

Therefore, the AO treated the income from sale of shares as business income and taxed it accordingly.

Aggrieved, the assessee preferred an appeal before the CIT (A), who confirmed the order of the AO and the assessee was in second appeal before ITAT.

The assessee contended that she should be considered as an investor as she had been considered as investor in the earlier as well as subsequent years. Further, it was also submitted that the transactions had been record as investment in her books of account, such investments were valued at cost and not at cost on market value whichever higher as required for valuation of the stock-in-trade as per Accounting Standard-13.

It was also submitted that all the transactions of the purchase of shares were delivery based and that the frequency of the transaction cannot be the only basis for determining the nature of the transaction and that it had to be determined on the totality of the facts and circumstances of the case.

Without prejudice to the above contentions, it was also submitted that only in the case of 11 transactions where the shares were purchased and sold on the same day, the assessee can be considered as a trader and not otherwise. The assessee

The Tribunal observed that the assessee had been recording the shares as investments in its books of account and had been offering short term/long term capital gains on purchase and sale thereof. However, the assessment u/s 143(3) was done only in two years. For all other years, the assessments were completed u/s 143(1) of the Act. Therefore, it could not be said that the revenue had been accepting the assessee to be an investor in all the earlier and subsequent A.Ys. Therefore, the principle of uniformity and consistency cannot strictly be applied in the case of the assessee for the relevant A.Y.

The ITAT observed that the Coordinate Bench had held that the assessee can have both the portfolios of investments as well as trading and the frequency of the transactions alone will not determine the nature of the transactions to be trading. This decision was upheld by the Hon’ble High Court as well as the Hon’ble Supreme Court of India. In fact, the Tribunal in the assessee’s own case had also referred the matter back to the AO with a direction to consider the multiple parameters such as intention, profit motive, the turnover, volume, magnitude, frequency, source of funds-own or borrowed, day-trading delivery based or otherwise etc. for concluding whether the transactions were for investment or trading.

The Tribunal opined that the transactions of purchase and sale of shares during the relevant A.Y, within a short span of time by utilizing the borrowed but interest free fund, by the assessee should be considered as a trade. Therefore, the assessee can be considered as a trader only.

It was observed that the Coordinate Bench in the case of family members of the assessee considered similar transactions and had confirmed the findings of the AO and the CIT (A) that the assessees therein were engaged in trading of shares.

The Tribunal opined that during the relevant financial year, there were repeated purchase of same scrip and sale thereof immediately, almost on daily basis to take advantage of the market fluctuations.

Therefore, following the decisions of the Coordinate Benches the Tribunal dismiised the appeal.

Repeated purchase and immediate sale of same scrip not stcg 111A

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