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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.

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 … Continue reading

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