Income Tax Appellate Tribunal - Delhi
Charanjit Kaur Sawhney,, New Delhi vs Acit, New Delhi on 25 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'B', NEW DELHI
BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER
AND
SH. O.P. KANT, ACCOUNTANT MEMBER
ITA No. 4230/Del/2009
Assessment Year: 2006-07
Ms. Charanjit Kaur Sawhney, Vs. ACIT,
G-22, Naraina Vihar, New Circle 27(1), Vikash Bhawan,
Delhi New Delhi
PAN : ABLPS9864N
(Appellant) (Respondent)
Appellant by Ms. Mamta Shukla, Adv.
Respondent by Sh. B.R. Mishra, Sr.DR
Date of hearing 12.04.2018
Date of pronouncement 25.04.2018
ORDER
PER O.P. KANT, A.M.:
The assessee has preferred this appeal against the order dated 14/01/2009 passed by the Ld. Commissioner of Income- tax (Appeals)-XXIV, New Delhi [in short 'the CIT(A)'] for assessment year 2006-07 raising following grounds:
"1. The Ld. CIT(Appeals) has grossly erred in law and on the facts of the case in confirming the assessee as dealer in shares and not an investor and thus treating the Long Term Capital Gains of Rs.8,40,233/- & Short Term Capital Gains of Rs.9,39,050/- on sale of equity shares as business income and not Capital Gains and then wrongly made an 2 ITA No. 4230/Del/2009 addition of Rs.17,79,303/- (8,40,253 + 9,38,050) in income from Business and Profession (without appreciating the evidences submitted by the assessee during assessment proceedings.
2. The appellant craves leave to add, alter, demand, supplement or raise fresh grounds of appeal, if considered expedient and advisable at the time of hearing of appeal."
2. Briefly stated facts of the case are that the assessee, an individual, is partner in a firm with her husband. For the year under consideration, the assessee filed return of income on 30/10/2006 declaring total income of Rs.25,56,046/- including short-term capital gain of Rs.9,39,050/- and long-term capital gain of Rs.8,40,252/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. In scrutiny proceedings, the Assessing Officer in view of frequent purchases and sales of various shares during the year, issued show cause to assessee, as why the capital gain claimed from sale of the shares should not be treated as business income in view of the Central Board of Direct Taxes (CBDT) circular No. 4/2007 dated 15/06/2007. 2.1 The assessee submitted that investment in shares was done through Kotak Mahindra Securities, i.e., Portfolio Management Service (PMS). According to the assessee, the purchases and sales of the shares was not in the nature of business, because firstly, the purchase and sale of the shares were made with the object of investment and, thus, eligible for capital gains. However, according to the Assessing Officer, securities were held for relatively short periods bought on various dates, in differing 3 ITA No. 4230/Del/2009 amounts and sold on various dates in differing amounts, and, thus, motive of the assessee was of trading in shares. He also gave an example of sale of share of "Housing Development & Finance Corporation" to show the short period of holding of shares.
2.2 The second contention of the assessee was that in the case of the assessee there was no intention to carry on share business but to invest the surplus money to earn the dividend, however, the Assessing Officer observed that as against the gain earned on sale of shares, the amount of dividend was a very small sum of Rs.85,252/-, and, thus, the investment was not for earning dividend.
2.3 According to the Assessing Officer, the portfolio management service is akin to an investment in a mutual fund and a portfolio manager acts like an agent, who buys and sells shares on behalf of the individual, and the assessee chose a 'PMS' because she felt that it would give maximum returns.
2.3 The Assessing Officer rejected contention of the assessee and in view of the CBDT Circular (supra), held the transactions of purchase and sales of shares by the assessee were adventure in the nature of trade and accordingly, assessed the amount of Rs.17,79,303/- as business income of the assessee as against the claim of the assessee for short-term capital gain of Rs.9,39,050/- taxable at the rate of 10% and long-term capital gain of Rs.8,40,252/-exempted from tax.
4 ITA No. 4230/Del/20092.4 On further appeal, the Ld. CIT(A), upheld the order of the Assessing Officer. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
3. Before us, the Ld. counsel of the assessee submitted following points regarding the activity of purchase and sale of shares:
1) She does not maintain any books of account for investment activities in shares.
2) The assessee's main business in Partnership in a Firm trading in rubber and chemicals. Her business is not to trade in shares.
3) She has no experience of trading in shares.
4) She has only invested a sum of Rs.50,00,000/- with Kotak leaving the decision of sale and purchase to it according to the Portfolio Management Scheme.
5) The assessee does not maintain any separate business set up for dealing in shares. She has no office or establishment for this activity.
6) They are not treated as stock in trade by the Department as no profit and loss account or trade account has been prepared, or directed to be prepared.
7) She does not have discretion as to when shares to be purchased or sold.
8) She has no choice whether transactions to be delivery based or not.
9) Shares are held even for more than two years and many times, for more than one year. Her holding period of share is often high.
10) The assessee has no direct dealing with any broker or any other trader dealing in shares.
11) She has been claiming he profit arising from sale of shares as capital
12) No single criteria are decisive as to whether the profit on sale of shares is capital gains or business income.
13) The assessee is not habitual of dealing in shares. She had never dealt with in shares.5 ITA No. 4230/Del/2009
14) Mere frequency of transaction is not enough to infer that the assessee is dealing in shares, as it has been the decision of the Portfolio Manager.
3.1 Further, the Ld. Counsel relied on the decision of the Hon'ble Delhi High Court in the case of Radials International Vs. ACIT (ITA 485/2012) dated 25/04/2014 and submitted that in said case also the assessee took the services of M/s Kotak Mahindra Securities for managing the portfolio of shares and Hon'ble High Court after taking into account facts and circumstances, reversed the finding of the Tribunal that income from transactions of purchase and sale of shares was business income.
3.1.1 The Ld. counsel also submitted that in subsequent assessment year 2007-08, the Ld. CIT(A) has also upheld the transaction of purchase in shares of the sales liable for tax and capital gains and not as business profit.
3.1.2 In view of the above arguments, she submitted that gain arising from purchase and sale of the shares during the year under consideration should be taxed under the head capital gains only.
3.3 On the contrary, the Ld. DR relying on the order of the lower authorities, submitted that the CBDT in its circular No. 4/2007 dated 15/06/2007 has laid down criteria for holding whether the transactions of purchase and sale of the shares would fall under business profit or under Capital Gains. According to him, the assessee has availed the services of portfolio manager with the motive of earning profit. The portfolio manager in the capacity of 6 ITA No. 4230/Del/2009 the agent has carried out trading transactions of shares through two portfolios, namely, 'Sigma' and 'Fortune'. He referred to list of transactions reproduced by the Assessing Officer on page 2 to 10 of the assessment order and submitted that the assessee has traded in particular scrip frequently in huge volume, which indicated the hunger of the assessee for earning profit rather than dividend. He submitted that in the decision of Radiant International (supra) cited by the Ld. counsel of the assessee also the Hon'ble High Court has held that merely dealing through PMS cannot be determinative of the motive of the assessee and it has to be seen from the conduct, the circumstances of the transaction etc. Accordingly, he requested to uphold the finding of the Ld. CIT(A) on the issue in dispute.
3.4 We have heard the rival submissions and perused the relevant material on record including the written submissions filed by the Ld. counsel of the assessee. The Ld. CIT(A) examined the share transaction purchases and sales in the light of guidelines laid in the report of Royal Commission on taxation of profits and income of England, which was presented to the Parliament of the United Kingdom in June 1955 . The conclusion of the Ld. CIT(A) are reproduced as under :
"5.10 In case of the appellant the shares have been acquired and sold. They are not in nature of property which yielded to its owner an income or personal enjoyment merely by virtue of its ownership as the fee paid to Kotak is more than the return on property excluding return on account of trading of the property. Therefore, such shares are more likely to have been acquired with the object of a deal. Then there is sale of 7 ITA No. 4230/Del/2009 large number of shares in less than 12 months. A list of all such sale of shares is contained in the assessment order. All this clearly shows that appellant is engaged in business of dealing in shares. Since shares are not perishable items, therefore, in some cases the holding period is still longer, as in other trading goods, looking into for favourable market situation.
5.11 As regards the third badge of trade which consists of frequency of number of similar transactions by the same person, if this test is applied to scripts which are enumerated in the impugned order, it would be clear that the appellant is a dealer in shares. Though the AR of the appellant has tried to paint a picture; in the context of computerized functioning of the share-market mechanism, that after submitting a single bid to purchase a certain amount of shares of a particular company at a certain price, the numerous transactions and number of shares purchased in a day tend to display of enormous transactions whereas a single attempt to purchase was made in the form of a bid. The contention is baseless in so far as the fact remains that every transaction is identical and distinguishable from the other one. This is, in a layman's language, at par with a situation where a prudent businessmen desiring to buy a certain quantity of a particular goods, with the intention of purchasing the particular goods at or below a set price only, enters into many different transactions with different persons who are ready to sell that particular goods at or lesser than the price he set to buy the same. So this situation nowhere undermines the very fact that there were actually a lot of transactions. A computerized system only makes the whole procedure automatic and interactively easy. But it in no way can undermine the fact that the appellant entered into enormous and frequent transactions on regular basis to carry out his trading venture.
5.12 As regards the 5th test that were responsible for the realization of the profit, it may be mentioned that the assessee has sold these shares and made fresh investment in shares out of sale proceeds of the share 8 ITA No. 4230/Del/2009 sold. In fact, during the course of appellate proceedings, as per the submissions of the appellant, a segregated portfolio (fortune) for investments with a long term intention and another 'sigma' portfolio to enjoy the fruits of instant profit by regular sale-purchase of securities have been created. This clearly shows that appellant was in urgent need of making profit/money. Therefore, the purchase and sale of shares are solely from the profit making motive, which is the basic ingredient of any business.
5.13 As regards the 6th badge of trade which is motive, it is clearly mentioned in the report of the Royal Commission reproduced hereinbefore that motive can be inferred from surrounding circumstances in the absence of direct evidence of seller's intention and even, if necessary, in the face of its own evidence. Here, in case of appellant, the claim of the appellant as motive being investment is found to be wrong if totality of facts and circumstances in present case are seen in correct perspective. As mentioned hereinbefore, the appellant is engaged in purchase and sale of shares in a systematic and organized way and all the dealings in shares are conclusively proved to be part of profit making scheme and therefore, the motive of the appellant can be inferred to make profit which is typical of a business activity."
3.4.1 The Ld. CIT(A) also examined the transaction in the light of Hon'ble Supreme Court decision in the case of H. Holk Larsen reported in 160 ITR 67 and concluded that transactions of the assessee falls under the head profit and gains from the business or profession. The relevant part of the order of the Ld. CIT(A) is reproduced as under:
9 ITA No. 4230/Del/2009"5.14 As mentioned hereinbefore, the case of the appellant is different on facts as compared to the reported cases mentioned hereinbefore and also enumerated in decision of the Hon'ble Supreme Court in case of H. Hoick Larsen reported in 160 ITR page 67 in as much as in case before the Hon'ble Supreme Court and other courts, one or two transactions of shares were involved which required determination of the fact whether a transaction was an adventure in the nature of trade or not. As against this, in case of appellant a large number of transactions of purchase and sale of shares in a systematic and organized manner has taken place. Therefore, the appellant is clearly engaged in business of purchase and sale of shares and there is no question of an adventure in nature of trade. Having said that, it must be said that whether the activity of the appellant is an investment activity or in nature of business requires to be decided on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of transaction. If the totality of facts and circumstances in the present case is seen as mentioned in the assessment order, through the same is not repeated here for the sake of convenience, it is absolutely clear that the appellant is engaged in purchase and sale of shares in an organized and systematic manner and such an activity on part of the appellant was in nature of trading transaction and constituted business as inclusively defined in sub-section (13) of section 2 of the Income Tax Act, 1961. On given facts, which, inter-alia, include the frequency of purchase and sale of shares, utilization of sale proceeds in acquiring further shares ( there being no withdrawal or nominal withdrawal of funds from business of purchase and sale of shares in the assessment year under appeal and subsequent assessment years in case of transactions and regularity of transactions of purchase and sale and further keeping in view the dominant motive of the assessee of making profit in an operation of business in carrying out a scheme for profit making, it is absolutely clear that the appellant is engaged in business of purchase and sale of shares. On given facts, no other view is possible.10 ITA No. 4230/Del/2009
5.15 In view of the foregoing discussion and for the reasons given by the learned Assessing Officer, it is held that the purchase and sale of shares enumerated in the impugned order and sale of derivatives as enumerated in the report supplied by M/s Kotak Securities to the appellant and submitted during the course of appellate proceedings, constitute an organic whole of carrying on dealing in shares, derivatives and units in a systematic and organized manner. Therefore, the conclusion of the Assessing Officer that income from sale of shares and units requires to be taxed as 'Income under the head Business or Profession' is held to be justified on facts because it is based on proper application of law on given facts. The action of the Assessing Officer in this regard is upheld subject to allowability of business expenditure as discussed in para 5.16. Grounds No. 1 of the appeal is held to have no merit and thus fails.
5.16. However, since no business can be carried out without incurring any expenditure relating to business. Therefore, the AO is directed to verify the business expenditure such as fee paid to Kotak, share transaction tax, etc. relating to the above referred business as mentioned above and allow these out of business receipts, while computing the business income in consequence to this order as the appellant has not claimed business expenditure on the fact that she has not done any business."
3.4.2 In the case of Radials International (supra), relied upon by the Ld. counsel of the assessee, the Hon'ble Delhi High Court observed that intention of the assessee cannot be ascertained at the time of depositing the money in the investment, because actual sale and purchase of the securities happens subsequently at the hands of the portfolio manager and, thus, the transactions subsequent to the deposit need to be evaluated for ascertaining 11 ITA No. 4230/Del/2009 the intention or motive of the assessee of earning profit or making investment. The Hon'ble High Court also held that transactions through portfolio management scheme or investment, is not determinative of business or investment and all circumstances need to be considered. The Hon'ble High Court also considered the CBT Circular No. 4 of 2007. The relevant finding of the Hon'ble High Court is reproduced as under:
".................................
The assessee can only show that the holdings in question were always treated as an investment (despite having made a profit on clearing them) post the fact of investment. It would also be necessary to acknowledge that the characterization of a transaction, i.e as a portfolio management scheme or investment, itself is not determinative. It is settled law that nomenclature of a document or deed is not conclusive of what it seeks to achieve; the court has to consider all parts of it, and arrive at a finding in regard to its true effect (Ref. Puzhakkal Kuttappu v. C. Bhargavi & Ors AIR 1977 SC 105 and Faqir Chand Gulati, Appellant(s) V. Uppal Agencies Pvt. Ltd 2008 (10) SCC 345). In the income tax law, the position is no different, as can be seen from the judgment of the Supreme Court in CIT Vs. Motors & General Stores (P) Ltd. (1967) 66 ITR 692 (SC), following Duke of Westminister (1935) 19 Tax Cas. 490 and Commissioner of Inland Revenue Vs. Wesleyan & General Assurance Society (1948) 16 ITR (Supp.) 101.
14. Lastly, the way in which the tests are to be applied was made clear in the CBDT Circular no. 4 of 2007, which states:
"8. The Authority for Advance Rulings(AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :-12 ITA No. 4230/Del/2009
(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;
(ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;
(iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade;but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. ...
11. Assessing Officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The Assessing Officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade.
15. It was also held in P.M. Mohammed Meerakhan v CIT- Kerala, (1969)2SCC25 = (1969) 73 ITR 735 (SC) :
"...it is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction."
3.4.3 In view of the above observations, the Hon'ble High Court concluded as under:
13 ITA No. 4230/Del/2009"16. Therefore, it is legally untenable to focus singularly on the intention or motive of the assessee without looking at the substantial nature of the transactions, in terms of their frequency, volume, etc.
17. This Court thus concludes that:
a. The PMS Agreement in this case was a mere agreement of agency and cannot be used to infer any intention to make profit b. The intention of an assessee must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing the money c. Along with the intention of the assessee, other crucial factors like the substantial nature of the transactions, frequency, volume etc. must be taken into account to evaluate whether the transactions are adventure in the nature of trade."
3.4.4 In the above case, the Hon'ble High Court observed that sources of funds of the assessee were its own surplus fund and not borrowed funds. The Hon'ble High Court also observed that 71% of the total shares were held for a period longer than 6 months and only 18% of the shares were held for a period less than 90 days, which shows that large volume of the shares purchased were intended towards the end of the investment. In view of the above facts, the Hon'ble High Court reversed the finding of the Tribunal that income from transaction of purchase and sale of shares to be income from business and profession. 3.5 We find that in the instant case also, the assessee has utilized its own surplus funds of Rs.50 Lacs for giving to the 14 ITA No. 4230/Del/2009 portfolio manager. This fact has not been disputed by the Revenue. Further, the assessee contended that she does not maintain any books of account, which justified that the transactions were business transactions. However, in our opinion, recording of transactions in the books of account cannot decide, whether the transaction is business transaction or investment transaction, as entries in books of account are not conclusive as to the nature of transactions. Further, as held by the Hon'ble High Court (supra), the depositing money with portfolio manager in itself cannot decided whether the motive or intention of the assessee was to earn profit and one must look at conduct and other circumstances of the transactions including substantial nature of the transactions, frequency, volume etc. During the course of hearing, Ld. counsel of the assessee was asked to submit percentage wise distribution of shares held less than 90 days, between 90 days to 180 days, between >180 days & 365 days, and more than 365 days, but no such information was provided.
3.5.1 We find that the Assessing Officer has reproduced all the transactions carried out by the portfolio manager of the assessee on pages 2 to 10 of the assessment order. On perusal, we find that the assessee has purchased shares of companies in various lots and sold after retaining for a small period. There are substantial transactions where holding is for less than 90 days. The transaction of sale of the shares are spread over 9 sheets of the assessment order and each sheet having approximately 45 transactions. This list does not include pure purchase 15 ITA No. 4230/Del/2009 transactions. The total transaction during the year may be more. Value of the transactions carried out is in the range of rupees thousands. The Assessing Officer has produced sale transaction of shares of Housing Development Corporations Ltd. in the assessment order, which are reproduced as under for ready reference:
Purchase Period Purchase Sale Gain Gain
sale date of Quantity Name of security Dividend
Date Amount Amount (st) Lt
holding
2/9/2005 7/11/2005 66 14 Housing Development Finance Co Ltd 11,514.30 12,948.32 1,434 -
2/9/2005 7/11/2005 66 32 Housing Development Finance Co Ltd 26,359.36 29,596.16 3,237 -
2/10/2005 8/10/2005 6 22 Housing Development Finance Co Ltd 17,696.14 19,692.20 1,996 -
2/9/2005 8/10/2005 36 24 Housing Development Finance Co Ltd 19,738.80 21,482.40 1,744 -
2/10/2005 13/9/2005 -19 53 Housing Development Finance Co Ltd 42,631.61 49,469.67 6,838 -
2/11/2005 13/9/2005 -50 43 Housing Development Finance Co Ltd 33,742.10 40,135.77 6,394 -
14/2/2005 13/9/2005 211 3 Housing Development Finance Co Ltd 2,352.87 2,800.17 447 -
15/2/2005 13/9/2005 210 25 Housing Development Finance Co Ltd 19,607.25 23,334.75 3,728 -
23/3/2005 13/9/2005 174 26 Housing Development Finance Co Ltd 18,699.46 24,268.14 5,569 -
23/3/2005 19/9/2005 180 2 Housing Development Finance Co Ltd 1,438.42 2,096.58 658 -
29/3/2005 19/9/2005 174 1 Housing Development Finance Co Ltd 708,88 1,048.29 339 -
4/8/2005 19/9/2005 46 6 4,309.38 -
Housing Development Finance Co, Ltd 6,289.74 1,980
4/8/2005 26/11/2005 114 12 Housing Development Finance Co Ltd 8,618.76 13,276.20 4,657 5000
TOTAL 37,021 5000
3.5.2 Similar frequency and volume of sale transaction has been
observed in other shares also. Thus, it is evident that the assessee has transacted frequently in purchase and sale of the shares involving very high volume of transactions. When we see entire facts and circumstances in totality, the claim of the assessee of investment activity cannot be justified and balance of scale tilt toward adventure in the nature of trade, to be assessed as business profit.
3.5.3 Further, the claim of the Ld. Counsel of the assessee that in subsequent year the Ld. CIT(A) has held that transactions of 16 ITA No. 4230/Del/2009 purchase and sales as capital gain, is also of no assistance, as facts and circumstances of subsequent year might be different from the year under consideration and further, no documentary evidence are filed before us to establish that the finding of the Ld. CIT(A) has been accepted by the Department.
3.6. In view of the above discussion, we uphold the finding of the Ld. CIT(A) on the issue in dispute.
4. In result, the appeal filed by the assessee is dismissed.
The decision is pronounced in the open court on 25th April, 2018.
Sd/- Sd/-
(H.S. SIDHU) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 25th April, 2018.
RK/-(D.T.D)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi