- (1.) The subject matter of challenge in the appeal is a judgment and order dated 18th October, 2010 pertaining to the assessment years 2005-06 and 2006-07. The Assessing Officer was of the opinion that the activity which, according to the assessee, was on investment account amounted to business activity and, therefore, he treated the short-term capital gains of Rs. 1,01,00,000/- approximately as business income.
(2.) Aggrieved by the order the assessee preferred an appeal. The appellate authority came to the conclusion that the claim put forward by the assessee was correct and the refusal on the part of the Assessing Officer to accept the short-term capital gains was incorrect.
(3.) To be precise, the views expressed by the C.I.T. were as follows:-- "4.1. I have gone through the assessment order and the submission of the appellant. The observations of Assessing Officer that the Managing Director of the appellant company is also a director in a share brokerage company which has acted as a share broker for the appellant company is not relevant. In fact a known broker is more convenient to carry out share transactions without putting pressure on appellant's own resources. The appellant is a certified Non-banking financial concern. Apparently the main activities of the appellant are giving loans and taking loans and investing in shares and securities. Assessing Officer has not differentiated the purpose of purchase of shares purchased and held for more than one year and shares purchased and held for less than one year. The sale of share after holding it for more than one year and sale of the same share before one year cannot change the motive of purchase from investment to trading. The motive is determined at the time of purchase and not at the time of sale. Appellant has applied its own capital and reserve funds to acquire the shares and has earned reasonable dividend on such investment even though the constituent shares of such portfolio of investment have kept changing and resulting in some times long term and some times short term capital gain or loss. Assessing Officer has shown speculation loss on Future and Options and spot market and an investor will not indulge in speculative transactions. In fact the transactions in the Future and Option are not considered as speculative even by legislature from Assessment Year 2006-07. Further, the motive of appellant is well defined by appellant in the books of account and accordingly income from shares traded under future and option or speculative cash market transactions is shown as speculative business income/loss and income from delivery based share transaction is shown as Capital Gain. It is well accepted principle that an investor can have share transactions with a motive of making investment as well as trading if they are separately shown in books of account. In fact the separate treatment of delivery based purchase and sale of shares under the Investment portfolio and sale under future and options etc. with profit motive by appellant is the only reliable evidence available to show that the transactions related to delivery based purchase and sale of shares resulting in capital gain are entered into with the intention of investment. As far as volume of transactions is concerned, it can only be an indicative factor but it cannot be a determinative factor in analyzing any transaction. In current days, change in portfolio is required on the basis of performances of the companies in various industrial and other sectors and volatile share market. The volume of purchase and sale of shares under investment is only incidental to the necessary changes required in maintaining a healthy investment portfolio of shares in a volatile share market. 4.2. In the guidelines of circular No. 4/2007 of CBDT, it is mentioned that no single principle would be decisive and the total effect of all the principles should be considered. Therefore, considering all the factors as mentioned above, I direct assessing officer to treat the income of Rs. 1,01,78,590/- as short term capital gain and apply the rate as per law.";