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income tax- short term shares- The meaning of ‘investment’ is not its meaning in the vernacular of the man in the street, but in the vernacular of the businessman. It is a form of income-yielding property. (Nawn Estates (P) Ltd. v. CIT ; Commissioners of Inland Revenue v. Tootal Broadhurst Lee Co. Ltd ). In determining the question whether, after acquiring the shares, the assessee dealt with it as an investor, or carried on business with it treating it as its stock-in-trade or as a trading asset, what is relevant is that, if the case falls within the former category, receipts by way of sale of such shares will be capital receipts, but if it falls within the latter the receipts will be trading receipts, and profits therefrom business income. In deciding this question the object with which such operations are carried on assumes importance. =As is evident from the order of the ITAT, the appellants had sold the shares of Continental Coffee Limited even before they had purchased these shares. This transaction was reflected in the appellants’ account books as “investment”. Even if the submission that this constitutes a single isolated transaction were to merit acceptance, the orders of the assessing authority, the CIT (A) and the ITAT would show that this was not the only factor which weighed with them in coming to the conclusion that the shares sold by the appellants constituted stock in trade, and was not investment. The factors which weighed with the assessing authority, the CIT (A), and the ITAT in coming to the conclusion that the shares in question constituted “stock in trade”, and not “investment”, were that:- (a) The frequency of buying and selling of shares by the appellants were high; (b) the period of holding was less; (c) the high turnover was on account of frequency of transactions, and not because of huge investment; (d) the assessees had dealt in delivery trading purely with the intention of making quick profits on a huge turnover; (e) the period of holding of a majority of the stock was between one to seven days; (f) in most of the transactions, the assessees did not even hold on to at least some part of the huge purchases, and had engaged in the same scrips frequently; (g) the intention of the assessees in buying shares was not to derive income by way of dividend on such shares, but to earn profits on the sale of the shares; (h) the assessees had indulged in multiple transactions of large quantities with very high periodicity. These periodic transactions, selecting the time of entry and exit in each scrip, called for regular direction and management which would indicate that it was in the nature of trade; (i) repeated transactions, coupled with the subsequent conduct of the assessees to re-enter the same scrip or some other scrip, in order to take advantage of market fluctuations lent the flavour of trade to such transactions; (j) the assessees were purchasing and selling the same scrips repeatedly, and were switching from one scrip to another; (k) the dominant impression left on the mind was that the assessees had not invested in shares; (l) mere classification of these share transactions as investment in the assessee’s books of accounts was not conclusive; (m) the intention of the assessees at the time of purchase was only to sell the shares immediately after purchase; (n) frequency of purchase and sale of shares showed that the assessees never intended to keep these shares as investment; and (o) it is only for the purpose of claming benefit of lower rate of tax, under Section 111A of the Act, that they had claimed certain shares to be investment, though these transactions were only in the nature of trade.

President's Advisory Panel for Federal Tax Reform

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THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI RAMESH RANGANATHAN 
I.T.T.A. No.54 of 2011 and bt

27-07-2011 

P.V.S.Raju 

The Addl. Commissioner of Income Tax, Hyderabad 

Counsel for the Appellant: Sri K.Vasantkumar

Counsel for respondent : Sri B.Narasimha Sarma 

:COMMON ORDER: (Per Hon'ble Sri Justice Ramesh Ranganathan) 

 These three appeals, under Section 260-A of the Income
Tax Act, 1961 (for short the "Act"), are against the orders of
the Income Tax Appellate Tribunal, Hyderabad A Bench, 
Hyderabad (ITAT) in I.T.A.No.1101/Hyd/09 and batch dated 
15.10.2010. The appellants herein are Sri P.V.S. Raju and
his wife. While the appeals filed by Sri P.V.S. Raju relate to
the assessment years 2005-06 and 2006-07, the appeal 
preferred by his wife relates to the assessment year 2006-07.

2. It would suffice for the disposal of these appeals, if the
facts in I.T.T.A.No.54 of 2001 are noted. Both the appellants
filed their returns declaring income from investment in
shares, interest on income, salary and capital gains. After
issuing notices, under Sections 143(2) and 142(1) of the Act,
the assessing authority passed orders of assessment holding
that the appellants were traders in shares; they had classified
their activities, for the assessment year 2005-06, into three
categories i.e., business income, short term capital gains
before 1.10.2004, and after 1.10.2004; in respect of some of
the transactions, effected during the period 1.4.2004 to
31.3.2005, the assessee had admitted that it was business
income; however, in view of the insertion of Section 111-A
with effect from 1.10.2004, the assessee had segregated
certain transactions, pertaining to "trading in shares," into two
categories i.e., trading carried on during the period 1.4.2004
to 30.9.2004, and during the period 1.10.2004 to 31.3.2005;
the income-tax rates before 01.10.2004, both for business
income and short term capital gains on the sale of shares,
was the same; segregation of transactions relating to sale of
certain shares from the business income, for the period
1.4.2004 to 30.9.2004, was accepted as it did not make any
difference in terms of tax; and in view of the insertion of
Section 111-A to the Act, with effect from 1.10.2004, the
assessee had again segregated the transactions for the period
01.10.2004 to 31.03.2005. The appellant's claim that these
share transactions should be treated as "short term capital
gains", and taxed under Section 111-A of the Act, was
rejected, and the assessing authority treated such income
also as "business income". The appeals preferred by the
appellants thereagainst were dismissed by the Commissioner 
of Income-tax (Appeals) (CIT(A)). The ITAT dismissed the
appeals preferred by the appellants against the orders of the
CIT (A).

3. Sri K. Vasant Kumar, Learned Counsel for the
appellants, would contend that sale of shares, invested in
companies for a period of less than 12 months, is liable to be
taxed only as short term capital gains; the share transaction,
relating to Continental Coffee Ltd, was an isolated
transaction, that too for one assessment year; the ITAT could
not treat income from the sale of shares as business income,
merely on the basis of a single isolated purchase of shares of
Continental Coffee Ltd; the finding of the ITAT that all the
shares held by the appellants was for less than two months
was perverse in as much as, in the very same order, the ITAT
had recorded that certain shares were held for more than two
months; the very fact that the assessee had classified certain
shares in his books of accounts as investment, and certain
others as stock-in-trade, was proof that it was the intention of
the appellants to treat certain shares as investment, and not
as stock-in-trade; and the profit which the appellants made
on the sale of these shares was liable to be taxed only as
"short term capital gains", and not as "income from business".
        
4. Section 2(14) of the Act defines "capital asset" to mean
property of any kind held by an assessee, whether or not
connected with his business or profession. The definition of
"capital asset" does not, however, include "stock-in-trade" held for
the purpose of business. Section 2(22) of the Act defines
"dividend" to include any distribution by a company of
accumulated profits, whether capitalized or not. Section
2(42-A) defines "short-term capital asset" to mean a capital asset
held by an assessee for not more than thirty six months
immediately preceding the date of its transfer. Section 2(42-
B) defines "short term capital gain" to mean capital gain arising
from the transfer of a short term capital asset. Under Section
28(i) of the Act, the profits and gains of any business carried
on by the assessee, at any time during the previous year, is
chargeable to income tax under the head "profits and gains of
business or profession". Under Section 45(1) of the Act any
profits or gains, arising from the transfer of a capital asset
effected in the previous year, is deemed to be income of the
previous year in which the transfer took place. Section 111-A,
inserted by Finance Act, 2004, relates to tax on short term
capital gains in certain cases and, under sub-section (1)
thereof, where the total income of an assessee includes any
income chargeable under the head "capital gains", arising from
the transfer of a short term capital asset being an equity
share in a company and such transaction is chargeable to
securities transaction tax, the tax payable by the assessee
shall be the aggregate of the amount of income tax calculated,
on such short term capital gains, at the rate of fifteen per
cent.

5. If the shares purchased by the appellants are held to be
capital assets, sale of such shares could fall within the ambit
of Section 111A of the Act, and such capital gains would be
subject to tax at a lower rate. If the shares are held by the
appellants as stock in trade, profit on the sale of such shares
would constitute business income, and be subject to tax at a
higher rate. As noted hereinabove, Section 2(14) (i) of the Act
defines a capital asset as not including stock in trade. If the
appellants had held the shares as "stock in trade", and not as
investment, then such shares would stand excluded from the
definition of "short term capital asset", and the profit earned on
the sale of such shares would not be exigible to tax as "short
term capital gain", but as "profits and gains from business".

6. The question which would necessitate examination is
whether the shares dealt with by the appellants, which were
classified as "investment" in their books of accounts, were their
"investment" or their "stock-in-trade"? One of the relevant tests, in
determining whether or not the shares/securities are a
capital asset, is whether it is in the nature of fixed asset or
constitutes the stock-in-trade of the assessee's business.
Fixed asset is what the owner turns to profit keeping the
asset in his own possession, stock-in-trade is what he makes
profit of by parting with it, and letting it change masters.
(CIT v. Vazir Sultan & Sons ). If the expenditure is made for
acquiring or bringing into existence an asset or advantage for
the enduring benefit of the business it is properly attributable
to capital. If, on the other hand, it is made not for the purpose
of bringing into existence any such asset or advantage, but
for running the business or working it with a view to produce
profits it is relatable to revenue. (Assam Bengal Cement Co.
Ltd. v. CIT ).

7. The meaning of 'investment' is not its meaning in the
vernacular of the man in the street, but in the vernacular of
the businessman. It is a form of income-yielding property.
(Nawn Estates (P) Ltd. v. CIT ; Commissioners of Inland
Revenue v. Tootal Broadhurst Lee Co. Ltd ). In determining
the question whether, after acquiring the shares, the assessee
dealt with it as an investor, or carried on business with it
treating it as its stock-in-trade or as a trading asset, what is
relevant is that, if the case falls within the former category,
receipts by way of sale of such shares will be capital receipts,
but if it falls within the latter the receipts will be trading
receipts, and profits therefrom business income. In deciding
this question the object with which such operations are
carried on assumes importance. 

8. Where the owner of an "investment" chooses to realise it,
and obtains a greater price for it than the price at which he
originally acquired it, the enhanced value obtained from the
realisation or conversion of securities may be profit from
business. The simplest case is that of a person buying and
selling securities speculatively in order to make gain or is
dealing in such investments as a business, and is thereby
seeking to make profits. (Khan Bahadur Ahmed Alladin and 
Sons v. CIT ; Californian Copper Syndicate v. Harris ; CIT
v. Sutlej Cotton Mills Supply Agency Ltd ; Venkataswami
Naidu and Co. v. CIT ). The distinction whether the
investment transaction is a mere realisation of the investment
or an act done for making profits depends on the question
whether the excess was an enhancement of the value by 
realising a security or a gain in an operation of profit making.
If the transaction is in the ordinary line of the assessee's
business there would hardly be any difficulty in concluding
that it was a trading transaction but, where it is not, the facts
must be properly assessed to discover whether it was in the
nature of trade. The surplus realised on the sale of shares, for
instance, would be capital if the assessee is an ordinary
investor realising his holding; but it would be revenue if he
deals with them as a trader. The test often applied is, has the
assessee made his shares and securities the stock-in-trade of
a business? (Raja Bahadur Kamakhya Narain Singh v. 
CIT ).
9. Profits realised by the sale of shares may be capital if
the seller is an ordinary investor changing his securities, but
it may be income if the seller of the shares is trading in
shares. (Raja Bahadur Visheshwara Singh v. CIT ; Raja
Bahadur Kamakshya Narain Singh9). If an individual invests
in shares for the purpose of earning dividend he is not
carrying on a business. The only way it would fall within
"profit from business" is by converting the shares into stock-in-
trade i.e. by carrying on business of dealing in stock and
shares. (CIT v. Bai Shirinbai K. Kooka ; Bengal & Assam
Investors Ltd. v. CIT ). The dominant or even sole intention
to resell is a relevant factor and raises a strong presumption,
but by itself is not conclusive proof, of trade. The intention to
resell would, in conjunction with the conduct of the assessee
and other circumstances, point to the business character of
the transaction. (Sutlej Cotton Mills Supply Agency Ltd7;
Venkataswami Naidu & Co.8). A profit made by the sale of
shares may not amount to capital gain if the shares were part
of the trading assets of the assessee. If such be the case, the
gains may amount to trading income of such an assessee. 
This question would depend upon whether the shares are 
held by the assessee as an investment, or as a trading asset,
and would require examination of facts. (Union of India v.
Azadi Bachao Andolan ). 

10. Where the purchase of any article or of any capital
investment, for instance - shares, is made without the
intention to resell it at a profit, a resale under changed
circumstances would only be a realisation of capital, and
would not stamp the transaction with a business character.
(CIT v. P.K.N. Co. Ltd. ; Sutlej Cotton Mills Supply
Agency Ltd7). A capital investment and resale do not lose
their capital nature merely because the resale was foreseen
and contemplated when the investment was made, and the 
possibility of enhanced values motivated the investment.
(Leeming v. Jones ; Saroj Kumar Mazumdar v. CIT ; 
Janki Ram Bahadur Ram v. CIT ; Sutlej Cotton Mills
Supply Agency Ltd7). Where a purchase is made with the 
intention of resale, it depends upon the conduct of the
assessee and the circumstances of the case whether the 
venture is on capital account or in the nature of trade. A
transaction is not necessarily in the nature of trade because
the purchase was made with the intention of resale.
(Jenkinson v. Freehand ; Radha Debi Jalan v. CIT ;
India Nut Co. Ltd. v. CIT ; Mrs Sooniram Poddar v. CIT ;
Ajax Products Ltd. v. CIT ; Gustad Irani v. CIT ; and Mrs
Alexander v. CIT ; Sutlej Cotton Mills Supply Agency
Ltd7).

11. Whether shares of a company held by a person 
constitute his capital or his stock-in-trade is not a pure
question of law but essentially one of fact. (CIT v. Ram
Kumar Aggarwal and Bros. ). Likewise the question
whether profit, from the sale of the shares, is a revenue or a
capital receipt is a mixed question of law and fact. The
distinction between capital accretion and income is that, for
the purpose of ascertaining whether profits made upon a sale
of an article are taxable profits, the question to be asked is:
"Is the article acquired for the purpose of trade?". If it is, the
profit arising from its sale must be brought into the revenue
account. The profit is chargeable as capital gains if the sale
is of a capital asset, and as business profit if the sale is in the
course of business. (Sutlej Cotton Mills Supply Agency
Ltd7; Thew v. South West Africa Co. Ltd. ).

12. What is the line which separates the two classes of
cases may be difficult to define, and each case must be
considered according to its facts; the question to be
determined being is the sum of gain that has been made a 
mere enhancement of value by realising a security or is it a
gain made in the operation of business in carrying out a
scheme for profit making?" If a transaction is in the
assessee's ordinary line of business there can be no difficulty
in holding that it is in the nature of trade. If there is
repetition, and continuity of transactions, the assessee would
be carrying on a business. (Sutlej Cotton Mills Supply
Agency Ltd7). 

13. In judging the character of such transactions several
factors have been treated as significant. If a transaction is
related to the business which is normally carried on by the
assessee, though not directly part of it, an intention to carry
on trade may readily be inferred. The magnitude, the
frequency and the ratio of sales to purchases, and the total
holdings is evidence from which the Tribunal can come to the
conclusion as to the true nature of the activities of the
appellant. (Raja Bahadur Visheshwara Singh10). 

14. No single criterion is decisive in determining the
question whether a particular receipt is capital or revenue.
The answer to the question must ultimately depend on the
facts of each particular case, (Commissioner of Income
Tax, Gujarat v. Saurashtra Cement Limited ), and the
conclusion of law to be drawn from those facts. (Saurashtra
Cement Limited27; CIT v. Rai Bahadur Jairam Valji ;
Davies (Inspector of Taxes) v. Shell Co. of China Ltd ).
This is a question of fact to be determined on an application
of the broad principles and Courts would not, ordinarily,
interfere with the findings of fact if they have been arrived at
on a proper application of the principles. (Assam Bengal
Cement Co. Ltd. v. CIT ).

15. As is evident from the order of the ITAT, the appellants
had sold the shares of Continental Coffee Limited even before
they had purchased these shares. This transaction was
reflected in the appellants' account books as "investment".
Even if the submission that this constitutes a single isolated
transaction were to merit acceptance, the orders of the
assessing authority, the CIT (A) and the ITAT would show that
this was not the only factor which weighed with them in
coming to the conclusion that the shares sold by the
appellants constituted stock in trade, and was not
investment. The factors which weighed with the assessing
authority, the CIT (A), and the ITAT in coming to the
conclusion that the shares in question constituted "stock in
trade", and not "investment", were that:-
(a) The frequency of buying and selling of shares by the
appellants were high;
(b) the period of holding was less;
(c) the high turnover was on account of frequency of
transactions, and not because of huge investment;
(d) the assessees had dealt in delivery trading purely
with the intention of making quick profits on a huge
turnover;
(e) the period of holding of a majority of the stock was
between one to seven days; 
(f) in most of the transactions, the assessees did not
even hold on to at least some part of the huge
purchases, and had engaged in the same scrips 
frequently;
(g) the intention of the assessees in buying shares was
not to derive income by way of dividend on such
shares, but to earn profits on the sale of the shares;
(h) the assessees had indulged in multiple transactions
of large quantities with very high periodicity. These
periodic transactions, selecting the time of entry
and exit in each scrip, called for regular direction
and management which would indicate that it was 
in the nature of trade;
(i) repeated transactions, coupled with the subsequent
conduct of the assessees to re-enter the same scrip
or some other scrip, in order to take advantage of
market fluctuations lent the flavour of trade to such
transactions;
(j) the assessees were purchasing and selling the same 
scrips repeatedly, and were switching from one
scrip to another;
(k) the dominant impression left on the mind was that
the assessees had not invested in shares;
(l) mere classification of these share transactions as
investment in the assessee's books of accounts was 
not conclusive;
(m) the intention of the assessees at the time of
purchase was only to sell the shares immediately
after purchase;
(n) frequency of purchase and sale of shares showed 
that the assessees never intended to keep these
shares as investment; and
(o) it is only for the purpose of claming benefit of lower
rate of tax, under Section 111A of the Act, that they
had claimed certain shares to be investment,
though these transactions were only in the nature
of trade.

16. The character of a transaction cannot be determined
solely on the application of any abstract rule, principle or test
but must depend upon all the facts and circumstances of the
case. Ultimately, it is a matter of first impression with the
Court whether a particular transaction is in the nature of
trade or not. (Sutlej Cotton Mills Supply Agency Ltd7). If,
on the material on record, the Tribunal has come to the
conclusion that the appellant was dealing in shares as a
business, it cannot be interfered with by the High Court.
(Raja Bahadur Visheshwara Singh v. CIT10). The Tribunal is
the final fact-finding body. Its findings on questions of fact
are not liable to be interfered with unless it has taken into
consideration irrelevant material or has failed to take into
consideration relevant material or the conclusion arrived at
by it is perverse in the sense that no reasonable person, on
the basis of the facts before the Tribunal, could have come to
the conclusion to which the Tribunal has come. The decision
of the Tribunal has not to be scrutinised sentence by
sentence merely to find out whether all facts have been set
out in detail by the Tribunal or whether some incidental fact
which appears on record has not been noticed by the
Tribunal in its judgment. If the Court, on a fair reading of the
judgment of the Tribunal, finds that it has taken into account
all relevant material, and has not taken into account
irrelevant material in basing its conclusions, the decision of
the Tribunal is not liable to be interfered with unless, of
course, the conclusions arrived at by the Tribunal are
perverse. (CIT v. Karam Chand Thapar and Bros. (P) Ltd. ).

17. The order of the ITAT ought not to be microscopically
scrutinized only to locate some insignificant errors. When
viewed in the light of the several findings recorded by them in
coming to the conclusion that the shares were held by the
appellants as stock in trade and not an investment, the
erroneous finding of the ITAT that the appellants had held all
the shares for less than two months pales into insignificance.
Even otherwise, it is not even the appellants' case that they
had held all the shares for a long duration. It is evident from
the order of the ITAT that the voluminous share transactions
were in the ordinary line of the appellants 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 them 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 appellants had not purchased
the shares as an investment, but with the intention to trade
in such scrips.

18. The orders of the ITAT, the CIT (A), and the assessing
authority are all well considered and reasoned orders. We see
no reason, therefore, to interfere with the order of the ITAT or
to entertain the appeals under Section 260A of the Act. The
appeals fail and are, accordingly, dismissed.

?1959 Supp (2) SCR 375 
 (1955) 1 SCR 972 
 (1977) 1 SCC 7
 (1945) 29 TC 352
 (1968) 2 SCR 439 
 5 TC 159
 (1975) 2 SCC 538 
 AIR1959 SC 359 
 (1969) 3 SCC 791 
 (1961) 3 SCR 287 
 AIR 1963 SC 477 
 (1966) 2 SCR 471 
 (2004) 10 SCC 1
 AIR 1966 SC 1256 
 15 TC 333
 (1959) 37 ITR 242
 (1965) 57 ITR 21
 (1961) 39 TC 636 (CA)
 (1951) 20 ITR 176 (CAL)
 (1960) 39 ITR 234 (Ker)
 (1939) 7 ITR 470
 (1961) 43 ITR 297
 (1957) 31 ITR 92 (Bom)
 (1952) 22 ITR 379
 (1994) 1 SCC 201 
 (1924) 9 TC 141
 (2010) 11 SCC 84 
 AIR 1959 SC 291 
 (1951) 32 TC 133
 (1955) 1 SCR 972 
 (1989) 2 SCC 31

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