Income Tax Appellate Tribunal (ITAT) Chandigarh in a recent judgment has held that high frequency of transactions of sale/purchase of shares or amount of dividend received can not be a criterion for determining whether it is relating to business or investment.

Case Details:
ITA No. 906/Chd/2013 A.Y. 2006-07
Smt.Shikha Gupta (Appellant) vs DCIT (Respondent)
Date of Order: 15-10-2015

Brief Facts of the Case:
The appellant assessee filed return of income declaring income of Rs.11,95,283/- on 31.10.2006. During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had shown income under the head ‘short term capital gain’ (STCG) amounting to Rs.10,99,268/- and under the head ‘Long Term Capital Gain’ (LTCG) amounting to Rs.20,133/- on account of sale and purchase of shares. The AO was of the view that the sale and purchase of shares was regular business of the assessee and therefore, the income from the same was liable to be assessed under the head ‘income from business and profession’ and not under the head STCG. The assessee submitted that he was not a trader in shares but had made investments in shares. It was also submitted that she had invested in only 83 scrips out of which 33 scrips had been purchased in the earlier year thus implying that the transactions of sales and purchases were of small quantity and small amount. However, AO referring to the CBDT Instruction No.1827 dated 31.8.1989 and Circular No.4 of 2007 dated 15.6.2007 held the profit from purchase and sale of shares both STCG and LTCG were business income and taxed it accordingly. The major observation of AO were as under:
(a) The frequency of transactions was very high as there were 121 transactions of purchases and sales of shares.
(b) Assessee had not invested the amount in a few selected dividend yielding scrips and then kept holding them long with a view to earn dividend income therefrom but she swiftly purchasing and selling the shares.
(c) During the year the assessee had earned a meagre dividend income. Therefore, the objective cannot be held to be to earn dividend income
(d) The assessee held a share on an average for four months only. Therefore, she cannot be said to have made investment for earning dividend but is certainly doing business of trading in shares because dividends are not declared every thi rd month.
(e) It was the duty of the assessee to prove that her intention was to earn dividend, which she had not proved.
(f) The assessee had spent a lot of time, energy and application of mind in studying the possible ups and downs in large number of scrips.
(g) The assessee had dealt in purchase and sale of shares throughout the year. Therefore, it was a regular business activity of the assessee
(h) If the shares were not held as stock- in-trade but as investment, then they could not be valued at cost or realizable value, whichever is lower as done by the assessee.

Excerpts from the ITAT Order:
For holding a transaction relating to sale and purchase of shares to be relating to business or that of investment, the most important criteria is to see the intention of the assessee while making these transactions.

However , the crux of the matter is always the intent ion of the assessee which we have to figure out on the facts and circumstances of each case. Even the CBDT Circular relied upon by the Assessing Officer has just given the authorities certain parameters on the basis of which the intent ion of the assessee has to be made out .

Only the transact ions relating to sale and purchase of shares on delivery basis are treated as investment by the assessee...... it is seen that the trading account on account of long term and short term sale and purchase of share have been maintained separately while that relating to commodity and derivative have been maintained separately. The income/loss of trading on commodity and derivative have been added in the Prof t & Loss Account relating to business and income from trading of long term and short term shares is treated as capital gain in computation of income.

It is a trite law by now that the assessee can maintain two portfolios, one for regular business and other for sale and purchase of shares as has been held by the Hon'ble Bombay High Court in the case of CIT Vs. Gopal Prohit (2011) 336 ITR 257 ( the SLP filed by the Department having been dismissed by the Hon'ble Supreme Court). It is also undisputed that the assessee has earned an amount of Rs.12,824/- as dividend during the year. On the basis of these undisputed facts, now we proceed to analyze the issues raised by the Assessing Officer to determine whether the assessee was engaged in the business of sale and purchase of shares or investment:

(i) As per the Assessing Officer, there were very high frequent transactions of sale and purchase of shares. It was brought to our notice through the help of chart filed by the assessee that in total 117 transact ions were entered into during the year in 83 number of scrips. Out of these 83 scrips, 33 scrips were bought during the earlier years while 50 scrips were bought during the relevant assessment year.

(ii) On the issue of swift purchase and sale of shares, it was brought to our notice again with the help of the chart that the transactions were entered into within a span of one day to more than seven hundred days. There was only one transact ion which was entered into wi thin a span of one day. There were only 28 transactions which were done with the span of 15 days and there were around 50 transactions which were held within a span of more than 180 days. There was no intra-day transaction.

(iii) As per the Assessing Officer, the assessee has received only an amount of Rs.12,825/- as dividend during the year. As per our understanding, the amount of dividend received during the year cannot be the one of the criteria for deciding the issue.

(iv) As regards the analysis of the Assessing Officer that the assessee is holding a share for four months only. This analysis made by the Assessing Officer is not relevant and also not appropriate to decide the issue concluding that no company declare dividend every three months is a very weird conclusion drawn on an equally weird analysis made by the Assessing Officer.

(v) As regards the intent ion of the assessee, it has to be come out from the facts and circumstances of the case and no direct evidence as such, can be given by the assessee.

(vi) As regards large number of scrips, it has already been stated in point No. (i) above that there were only 83 scrips, out of 33 were from the earlier years.

(vii) Making purchase and sale throughout the year does not make an activity a business activity. As a wise investor assessee can make purchase and sale of shares throughout the year.

(viii) As regards the treatment of shares in the books of account , the finding of the Assessing Officer that the shares have been shown at cost or realizable value in the books of account is factually incorrect

The Assessing Officer has observed in his order that the assessee has used borrowed funds for the purpose of making these investments. However, during the course of hearing, as shown to us by the learned counsel for the assessee with the help of the balance sheet of the assessee filed in the Paper Book, the assessee has utilized her owned funds to make investment in shares. This fact also supports the contention of the assessee that these transactions relating to purchase and sale of shares are for the purpose of investment and not for the purpose of business.

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