Short period of holding shares does not per se suggest business activity
The assessee, a stock broker with NSE, offered short-term capital gains (“STCG”) of Rs. 47.23 lakhs. The AO assessed the STCG as business profit on the ground that (a) the purchase to sale ratio was higher than the ratio in the earlier year and (b) the assessee had borrowed funds of Rs. 21.73 crores which were mixed with common funds and not segregated and (c) the assessee had not been able to show his intent to hold the scrips. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:
(i) In Circular No. 4/2007 dated 15.6.2007 the CBDT has emphasized that it is possible for a tax payer to have two portfolios, i.e. an investment portfolio and a trading portfolio;
(ii) The assessee had maintained separate books of account as well as separate demat accounts in respect of his trading & investment activity. The manner in which books are kept is an important piece of evidence as per Raja Bahadur Visheshwar Singh vs. CIT 41 ITR 685 (SC);
(iii) Whether the assessee’s conduct is that of an investor or a trader depends on the facts and circumstances of the case. No single fact is decisive nor has any acid test been laid down in any judgment;
(iv) Primarily, the intention with which an assessee starts his activity is the most important factor. If shares are purchased from own funds, with a view to keep the funds in equity shares to earn considerable return on account of enhancement in the value of share over a period then merely because the assessee liquidates its investment within six months or eight months would not lead to the conclusion that the assessee had no intention to keep the funds as invested in equity shares but was actually intended to trade in shares. Mere intention to liquidate the investment at higher value does not imply that the intention was only to trade in security. However, it cannot be held that in all circumstances if assessee has used its own funds for share activity then it would only lead to inference of investment being the sole intention. In such circumstances, frequency of transactions will have to be considered to arrive at proper conclusion regarding the true intention of the assessee. However, if the assessee, on the other hand, borrows funds for making investment in shares then definitely it is a very important indicator of its intention to trade in shares;
(v) On facts, the AO proceeded on the assumption that borrowed funds had been utilized for buying shares on the ground that funds were common and could not be segregated. However, it was categorically pointed out before the CIT (A) that no part of the borrowed funds was utilized for acquisition of shares on investment account. Nothing was brought on record by the department to controvert this fact;
(vi) Further, the AO accepted the assessee’s claim of LTCG to the extent of Rs. 2 crores which implies that he has accepted the assessee’s claim regarding holding investment portfolio.
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