By TIOL News Service

KOLKATA, MAR 19, 2018: THE issue is - Whether resultant profit out of investments made in shares with a view to earn dividend income, has to be treated as capital gains, when the intention of investor is not solely to earn profit. YES IS THE ANSWER.

Facts of the case:

The Assessee company, engaged in the business of finance, trading and investment in shares since last several years, had disclosed profit on sale of shares as business income and profit on sale of investments as capital gains in its return of income. The shares purchased by Assessee from various parties, were sold after holding the same for a reasonable period, and thus the benefit derived thereon were declared by assessee as short term capital gains. This was done apart from the fact that the assessee had already reported more business income in respect of trading in shares and derivatives. Thus, the intention of assessee was to treat the subject mentioned scrips as investments right from the inception. Infact in A.Ys 2007-08 and 2008-09, the assessee had also earned long term capital gains on sale of certain shares held as investments and had claimed exemption for the same u/s 10(38), which was accepted by the AO in scrutiny assessments framed thereon. The AO had been disputing only the short term capital gains declared by assessee in all the four years. The distinctive feature in A.Y 2006-07 alone was that the assessee had converted certain shares from stock in trade into investments by passing an independent board resolution by explaining the reasons for the said conversion to be in line with the economic policies of the country and the growth of the capital markets. In the meanwhile, a survey was conducted in the business premises of assessee, wherein the draft trial balance was found and the same was impounded by the survey team. In the said trial balance for the F.Y 2004-05, the accountant of the assessee had reported the entire gains arising from sale of shares as trading profits and had not bifurcated the shares into stock in trade and investments. The assessee pleaded that the said trial balance was only draft and the accountant of the assessee was not aware of the intentions of the management of the assessee company to treat certain shares as investments which were duly supported by board resolutions stating that the same were invested for earning dividend and to reap the benefits of capital appreciation. It was pleaded that the entire investment in shares held as stock in trade as well as investments, were made out of own funds and no borrowed funds were utilized for the same. The AO also mentioned in his assessment order that the assessee had maintained regular books of accounts which are computerized, which included transactions in respect of purchase and sale of shares, securities and units. He however placed complete reliance on the draft trial balance and sauda book which only reflected the combined purchase and sale of shares without any bifurcation into stock in trade and investments, and treated the short term capital gains as business income. On appeal, the CIT(A) upheld the action of AO.

On appeal, the Tribunal held that,

++ the entire allegations raised by the revenue such as frequency of transactions, volume of transactions, period of holding, intention of the assessee, conduct of the assessee, etc, for treating the gains as business income has been duly addressed by this tribunal in the case of ITO vs Lyons & Roses Pvt Ltd for A.Ys 2005-06 & 2006-07 wherein it was held that, just because the assessee had made profits out of its investment activities, it cannot be concluded that assessee had carried on with an intention to do business. For that matter, every assessee would only try to make profits out of their activities be it investment or business. What is to be seen is whether the assessee intended to make only profits from dealing in shares or whether the shares were purchased with a view to earn dividend income which is also profit. The gains arising in the former case would be in the nature of trade and hence business income and the latter would be for the purpose of investment and hence resultant gain would be capital gains;

++ in the present case, the assessee had maintained dual portfolio and had received dividend income of Rs 21,07,894, Rs 12,63,710/-, Rs 13,73,472/- and Rs 17,47,070/- for A.Ys 2005-06, 2006-07, 2007-08 and 2008-09 respectively. The assessee had declared long term capital gains for the Asst Years 2007-08 and 2008-09 in the sums of Rs 5,18,754/- and Rs 44,01,695/- which has been accepted by the revenue and this goes to prove that the AO had accepted the stand of the assessee to be an investor. Having done so, the revenue cannot take a different stand as far as the short term capital gains alone is concerned by not treating the assessee as an investor. It is not in dispute that the assessee had also reported business income from several transactions as tabulated hereinabove, in addition to reporting of short term capital gains for the asst years under dispute before this Tribunal. Moreover, the assessee had been consistently maintaining dual portfolio commencing from A.Y 2005-06 onwards and had reported short term capital gain and long term capital gains, as the case may be, depending upon the period of holding of shares, and the same has been accepted by the revenue in subsequent assessment years i.e Asst Years 2009-10, 2010-11, 2011-12 and 2013-14 under scrutiny assessment proceedings. The AO had even granted benefit of set off of brought forward short term capital loss of Asst Year 2009-10 to be set off with short term capital gain of Asst Year 2010-11. These actions of the revenue clearly prove that it had accepted the assessee to be an investor as well as trader in shares. There is absolutely no reason to take a divergent stand in A.Ys under dispute;

++ moreover, the revenue had placed heavy reliance on the impounded documents during survey. It would be pertinent to note that the impounded draft trial balance and sauda book was only for the A.Y 2005-06 wherein no bifurcation of trading and investment profits were made by the assessee. This has been properly explained by the assessee that the accountant of the assessee was not made aware of the top management decisions to treat 5 scrips that were purchased during the A.Y 2005-06 as investment purposes and that he had treated all profits on sale of shares as trading profits. Moreover, this sauda book and draft trial balance had been duly modified by rectifying the errors contained therein, and audited books of accounts with audited financial statements were presented before the AO at the time of scrutiny proceedings. He also proceeded with the entire assessment by placing reliance on the said audited books of accounts and the audited financial statements as far as other transactions are concerned. Only in respect of share transactions, the AO had resorted to place reliance on the sauda book impounded during survey, which is not to be appreciated. Admittedly, the assessee had submitted the computerized and audited books of accounts before the AO which fact has been duly acknowledged by him in his order itself. Therefore, the treatment given by the assessee in respect of share transactions by separately offering business income and short term capital gains/long term capital gains does not warrant any disturbance.

(See 2018-TIOL-401-ITAT-KOL)