Income Tax Appellate Tribunal - Ahmedabad
Karan Discretionary Family Trust, ... vs Department Of Income Tax on 23 January, 2014
आयकर अपीलीय अिधकरण,
अिधकरण, अहमदाबाद Ûयायपीठ 'बी
बी'
बी अहमदाबाद।
अहमदाबाद।
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH, AHMEDABAD
BEFORE SHRI N. S. SAINI, ACCOUNTANT MEMBER AND
SHRI KUL BHARAT, JUDICIAL MEMBER
ITA NO. Assessment Appellant Respondent
Year
Karan Discretionary JCIT, Range-6,
Family Trust, Ahmedabad
ITA No.3497/Ahd/2010 2006-07
Ahmedabad
PAN: AAATK3208N
ACIT, Circle-6,
ITA No. 98/Ahd/2011 2006-07 Assessee
Ahmedabad
ACIT,Circle-6,
ITA No. 661/Ahd/2011 2007-08 Assessee Ahmedabad
ACIT, Circle-6,
ITA No. 848/Ahd/2011 2007-08 Assessee
Ahmedabad
ACIT, Circle-6,
ITA No. 527/Ahd/2012 2008-09 Assessee
Ahmedabad
ACIT, Circle-6,
ITA No. 2373/Ahd/2012 2009-10 Assessee
Ahmedabad
Revenue by : Sh. O.P. Vaishnav, Sr. D.R.
Assessee(s) by : Sh. S.N. Soparkar with
Smt. Urvashi Shodhan
सुनवाई कȧ तारȣख/
/ Date of Hearing : 23/ 01/2014
घोषणा कȧ तारȣख /Date of P ronouncement : 31/ 01/2014
आदे श/O R D E R
PER SHRI N.S. SAINI, ACCOUNTANT MEMBER:
ITA Nos. 3497/A/2011 and 98/A/2011 are the cross appeals filed
by the assessee and Revenue against the order of CIT(A)-XI dated 02.11.2010. ITA Nos. 661/A/2011 and 848/A/21011 are the cross appeals filed by the assessee and Revenue against the order of the CIT(A)-XI dated 12.01.2011. ITA Nos. 527/A/2012 is the appeal filed by the Revenue against the order of the CIT(A)-XI dated 21.12.2011 for ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10 -2- Assessment Year 2008-09 and ITA No. 2373/A/2012 is the appeal filed by the Revenue against the order of the CIT(A)-XI dated 28.08.2012 for Assessment Year 2009-10.
2. In all the appeals of the assessee for Assessment Years 2006-07 and 2007-08, the only common ground of appeal is that the Ld. CIT(A) erred in upholding the assessment of short term capital gains of Rs 19,98,704/- in the Assessment Year 2006-07 and Rs 2,66,570/- in the Assessment Year 2007-08 as business income.
3. The brief facts of the case are that the Assessing Officer observed that the assessee is dealing in the share business. The assessee admitted that the business of future and segment was started from 14.09.2005 and that the same business is running during later period of year under consideration. This business was of the nature of trading business and it was accepted by the assessee that the shares of the two scripts were purchased in January'2005 and after a small period, those were sold. The Assessing Officer, however, observed that it appears that actual trading of the shares started from June'2005 and that initial purchase were the script Kotak Liquidity Growth Fund and Infrastructure Development Finance Corporation Limited and that action of the assessee to declare the profit on purchase and sale of the above scripts under the head 'short term capital gains' was to avoid tax liability, otherwise the assessee should have declared the nature of business as trading business. Accordingly, he held that the gains from purchase and sale of the following shares should be treated as ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10 -3- income from trading business against income shown from short term capital gains.
Assessment Year 2006-07
S. Particulars Sale Date Sale Value Cost Date Cost Book
No. Vlalue gain
1 Kotak Liquid Intnl 24.06.2005 280043,538 23.06.2005 280000,000 43,538
2 Kotak Liquid Intnl 28.06.2005 280122,283 24.06.2005 280000,000 122,283
3 Kotak Liquid Intnl 04.07.2005 30026,636 28.06.2005 30000,000 26,636
4 Infrastructure Dev. 12.08.2005 3678,015 08.08.2005 1871,768 1806,247
Finance Co. Ltd.
593870,472 591871,768 1998,704
Assessment Year 2007-08
S.N Particulars No. of Purchase Dt. Sale Dt. Difference
shares Amount Amount
1 Lanco Infratech Ltd. 10,000 27.11.06 29.11.06 2,62,315
(Allotment of shars) 24,00,000 26,62,315
2 Zee Telefilms Ltd. 300 04.01.07 08.02.07 17,658
87,226 1,04,884
3 Global Broadcast 200 08.02.07 08.02.07 4,155
News 89,791 93,946
25,77,017 2,84,128
4. On appeal, the CIT(A) observed that the Ahmedabad Bench of the Tribunal vide order dated 29.01.2010 in the case of Shri Sugamchandra C. Shah Vs. ACIT in ITA Nos. 3554/Ahd/2008, 4024/Ahd/2008, 2219/Ahd/2009 and 1932/Ahd/2009 has held that where shares are not held even for a month then the intention is clearly to reap profit by acting as a trader and the assessee did not intend to hold them in investment portfolio. If a person intends to hold his purchases of shares as investment, he would watch the fluctuation of rates in the market for which a minimum time is ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10 -4- necessary which the Tribunal estimated at one month. The Tribunal held where shares are held for more than one month, they should be treated as investment and on their sale, short term capital gains should be charged, otherwise the profit should be treated as business profit. The CIT(A) following the same confirmed the order of the Assessing Officer.
5. The Ld. AR of the assessee relied on the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Bankim Jayantilal Shah (2013) 218 taxman 310 (Guj.) and submitted that the Hon'ble jurisdictional High Court has held that merely because the share was held only for a day would not be sufficient to hold that the assessee was in the business of trading in shares. He also relied on the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Vaibhav J. Shah (HUF) in Tax Appeal No. 77 & 78 of 2010 order dated 27.06.2012 and submitted that where the assessee had very few transactions in very few scripts, then it cannot be held that the assessee was in the business of purchase and sale of shares. It was therefore the submission of the Ld. AR that the finding of the CIT(A) relying on the order of the Ahmedabad Bench of the Tribunal in the case of Sugmchandra (supra) and confirming the action of the Assessing Officer was not justified.
6. Further, it was his argument that the Mumbai Bench of the Tribunal in the case of M/s Trinetram Consultants Private Limited Vs. DCIT vide order dated 05.04.2013 in ITA Nos. 3063/Mum/2011 for Assessment Year 2006-07 and ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10 -5- 3064/Mum/2011 in Assessment Year 2007-08 by consolidated order held that where the gain arose from sale of mutual funds which cannot be traded in stock exchange, the same cannot be treated as business income of the assessee as it can be concluded that the intention of the assessee was to purchase and hold the same as an investor.
7. On the other hand, the Ld. DR relied on the order of the Assessing Officer.
8. We have heard the rival submissions, perused the orders of lower authorities and the material available on record. In the instant case, the assessee trust has earned Rs 19,98,7047/- on 4 transactions of purchase and sale of unit of mutual funds during the Assessment Year 2006-07 and earned Rs 2,66,570/- in Assessment Year 2007- 08 on 3 transactions of purchase and sale of shares. The assessee claimed both the above income as short term capital gains in the return of income. The Assessing Officer treated the above income as business income on the ground that the period of holding of units and shares was of 1 day or 2 days and that the purchase/sale is frequent.
9. The Ld. AR of the assessee contended before us that the assessee was engaged in the business of dealing in futures and options and was not engaged in the business of dealing in units and shares. He contended that it is not in dispute that the assessee had first made investment in units and shares and received actual delivery of units ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10 -6- and shares and thereafter sold those units and shares. The number of transactions were only 4 and 3 respectively in the Assessment Years 2006-07 and 2007-08. It is in the case of the Revenue that borrowed funds were used for making investments in units and shares. On the above facts, the assessee relied upon the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Vaibhav J. Shah (HUF) (supra), the decision of the Hon'ble Gujarat High Court in the case of Bankim Jayantilal Shah (supra) and the order of the Mumbai Bench of the Tribunal in the case of M/s Trinetram Consultants Private Limited Vs. DCIT (supra).
10. On the other hand, the Ld. DR supported the orders of lower authorities and placed reliance on the decision of the Ahmedabad Bench of the Tribunal in the case of Sh. Sugamchandra C. Shah Vs. ACIT (supra).
11. We find that the Tribunal in the case of Shri Sugamchandra C. Shah (supra) held as under:
"19. ...............We hold that if shares are not held even say for a month, then the intention is clearly to reap profit by acting as a trader and he did not intend to hold them in investment port-folio. We believe that if a person intends to hold his purchases of shares as investment, we would watch the fluctuation of rates in the market for which a minimum time is necessary, which we estimate at one month. Where shares are held for more than a month, they should be treated as investment and on their sale short term capital gain should be charged. When shares are held for less than a month, gain on them should be treated as profit from business."
ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10 -7-
12. We find that the Mumbai Bench of the Tribunal in the case of Hitesh Satishchandra Doshi Vs. JCIT (2011) 12 taxmann.com 79 (Mum.) held as under:
"9. We have considered the rival contentions and perused the relevant records. The Assessing Officer took the ratio of purchase and sale to the opening and closing balance to support his view of treatment of the transaction including the transaction resulting long term capital gains as trading activity and consequently assessed income has business income. The CIT(A), though, admitted long term capital gains and the transaction of purchase and sale resulting long term capital gains as investment; however, he has bifurcated the transactions of sale and purchase resulting short term capital gains on the basis of holding period on the criteria of more than 30 days and less than 30 days. It is pertinent to note that there is a criteria provided under section 2(42A) which defines the shorter capital asset as capital asset held by an assessee for not more than 12 months in the case of shares and other securities. Section 2(42B) further defines the short term capital gain means capital gain arising from the transfer of short term capital asset. Thus, statute prescribed criteria for treating the capital asset either as long term capital asset or short term capital asset on the basis of the holding period but no such criteria of treating the short term capital asset and treating the asset has been prescribed under the statute. Even, there is no indication of holding period of 30 days find place either in the statute or in the circular/instructions as well as judicial pronouncements on the issue. Even otherwise, holding period is one of the various criteria and principles to determine the nature of the transaction i.e. trading or investment, no single formula or principle can be the determinative factor for deciding the nature of the transaction i.e. as 'trading transaction' or 'investment'. A bundle of criteria/ factors/principles are to be taken into account in order to determine the nature of transaction.
ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10 -8-
10. The Hon'ble Supreme Court in the case of CIT v. Associated Industrial Development Co (P.) Ltd. [1971] 82 ITR 586 as well as in the case of CIT v. H Holck Larzen [1986] 160 ITR 67 / 26 Taxman 305 has laid down various principles, which has been considered by the CBDT for issuing the Circular No. 4/2007, dated 15-6-2007. In short, the principles laid down in those cases for deciding the question of nature of the transaction as trading or investment, mainly/broadly are;- what is the intention of the assessee at the time of purchase of shares; whether the assessee has borrowed money to purchase and paid interest thereon; what is the frequency of such purchase and disposal in that particular item; whether the purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value; how the value of items has been taken in the balance sheet. Thus, no single factor can be said to be decisive factor and no single principle can be laid down to determine the nature of the transaction i.e., trading activity or investment. Each case has to be decided based on the particular facts of the said case. Therefore, there cannot be any precedent in the matter of adjudication of the issue of nature of transaction with regard to purchase and sale of shares and securities. The issue can be determined only by taking into account all the relevant facts and principles as laid down by the Hon'ble Supreme Court and other High Courts. Thus, principles are taken as guidelines to be applied in the facts of each case and cannot be taken as strict jacket/formula. Therefore, the bifurcation of the short term capital gain and treating the transaction as investment in the cases where the holding period of more than 30 days and as business transaction in the case where the holding period is less than 30 days, in our considered opinion, is not justified on the part of the CIT(A). Since there cannot be a single criteria for judging the transaction as capital asset or trading asset; the CIT(A) adopted only holding period as a sole criteria for bifurcating the transactions relating to the short term capital gain, which is neither proper and nor justified.
ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10 -9- 10.1 Moreover, when the assessee has treated the investment transaction in the books of account, which includes the long term capital gains as well as short term capital gains, then after accepting the long term capital gains, the transaction representing short term capital gains as claimed by the assessee can be neither treated as an investment or trading in nature. There cannot be a sub-division of transaction relating to short term capital gain. Hence, in our considered opinion, in the case in hand, the CIT(A) has committed an error in bifurcating the transactions of purchase and sale of shares on the basis of holding period of 30 days and the income arising from the same claimed by the assessee as short term capital gain has been sub- divided as short term capital gains and business income.
11. Now, we will analysis the fact of the present case in the light of the principles laid down by the judicial pronouncements for determining the nature of the transaction of sale and purchase of shares.
Intention of the assessee at the time of purchase of shares
12. Undisputedly, the assessee has treated the transaction as investment by recording in the books of account being investment and not as stock-in-trade. The assessee has shown investment in shares in the beginning and closing of the year only an investment and not as stock-in-trade. Further, the assessee has been maintaining separate portfolios for investment and trading transactions. It is now settled proposition of law that an assessee can have two separate portfolios one for investment and other for trading transactions and the income from these two portfolios is assessable under the different heads i.e., 'capital gain' and ' business'. The claim of the assessee is further strengthen by the fact that even prior to the differential tax effect with effect from 1-10-2004, the assessee has been treating the investment separately and admitting capital gain as well as capital loss. This consistent treatment of the assessee has not been disputed ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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rather has been accepted by the revenue prior to the assessment year under consideration. Thus, from the facts and materials on records, it is clearly established that the intention of the assessee, at the time of acquiring the shares, which are claimed as investment was for investment and not for trading so far as representing the long term capital gains and short term capital gains.
Own funds or borrowed funds used for purchase of shares and payment of interest
13. As per the balance sheet of the assessee at page 22 of the paper book, for the assessment year 2003-04, the assessee is having its own funds of Rs. 3.71 crores and investment of Rs. 3.91 crores, which clearly shows that the assessee was having its own funds to the extent of 95 per cent of the investment. Therefore, we do not find any substance in the contention of the ld. DR that the assessee has used borrowed funds for the purpose of investment. The position is almost the same in the subsequent years. Moreover, the CIT(A) in para 4.3.1(a) has recorded the finding that the source of acquisition are out of own funds and family funds.
13.2 Similarly in the case of sale, the same may be divided as per the requirement of the purchaser and in this way; single transaction is reflected as number of transactions. For instance, the shares of Jindal Scrip purchased by the assessee on 3-6-2002, the order was for 10,000 shares, which was completed by 4 different lots of shares of 4000, 2500, 2500 and 1000. Therefore, the said order of purchase of Jindhal scrips on 3-6-2002 has been reported as four transactions of purchases, which is otherwise one transaction. Thus, it appears that the numbers of transactions are taken as per the different lots available for execution of the one order and accordingly, it gives unrealistic figure of the number of transactions.
ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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Motive of purchase and sale of share 13.3 From the details of the short term capital gains, we find that the total short term capital gains arising from the shares sold within 30 days of purchase is Rs. 15,19,938 and a total amount of short term capital gains from the shares sold after 30 days but before one year is Rs. 37,76,143, which shows that the assessee's intention was to hold the shares for a longer period and to earn income of appreciation of the value of the shares and not earn the profit in the short period change in the price of the shares. Apart from the above, the assessee has been regularly earning dividend income. Profit motive is inherently embedded in the transaction of purchase and sale. The important aspect is the intention to earn profit from appreciation of value of capita asset or by way of transfer of trading asset.
15.1 In the case in hand, the assessee has treated the shares as investment in the books of account and values the same at cost in the balance sheet and not at the market value or realizable value. Therefore, when the assessee is maintaining the distinction between the shares, which are held as investment from the shares, which are held as stock-in-trade then, keeping in view of the other facts and applying the principles as discussed above, we have no hesitation to say that the assessee has been maintaining two separate distinct portfolios right from the beginning and the revenue has failed to brought out any material to show that any change in the practice of accounting method of the assessee as well as in the activity of the assessee in purchase and shares of sharers under two separate and distinct portfolio. It is an accepted fact and practice that in order to reduce the risk of loss of capital or income, the investor may try to diversify the investment; therefore, there may be a case of reshuffling portfolios by selling of some scrips and buying of some other scrips to mitigate the scope of loss of capital or income. Therefore, the reshuffling in a short period is not necessary be taken as an activity of trading when the intention was to reduce the risk of loss of capital.
ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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15. In the present case the commodity in question is shares which are generally traded. But that is not conclusive because it is common knowledge that shares are also held as investment particularly shares of blue chip companies which may yield consistent dividend and may also appreciate in value over a period of years, the appreciation being similar to the appreciation in the value of other investments such as fixed deposits with banks, real estate, gold and other precious metals, etc. It is a fact that in the present case the assessee has shown the shares as investment in his Balance Sheets. The relevant details are given in para 2.2(c) of the order of the CIT(A) for the assessment year 2006-07. The same is set out below :
F.Y. ending on No. of Companies No. of shares Value 31-3-2003 147 143323 98,22,424 31-3-2004 159 302243 1,69,96, 403 31-3-2005 149 490237 3,24,59, 391 31-3-2006 131 541377 3,32,72, 973 One aspect which is thrown up by the above table is that though the investment value increased substantially from year to year, the number of companies whose shares were held by the assessee remained more or less constant and in fact as on 31-3-2006 it actually fell to 131 from the earlier high of 159. It appears to us that basically the number of shares of a particular company purchased by the assessee had increased which substantially contributed to the increase in the value of the investment. The above analysis prima facie shows that the assessee is basically an investor more than a share dealer. The stand of the assessee has been accepted by the revenue authorities in the assessment years 2001-02 and 2004-05 in assessment orders passed under section 143(3) of the Act. The assessment order for the assessment year 2001-02 is at pages 34-35 of the paper book. It is seen therefrom that the Assessing Officer has accepted the short term ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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capital loss and the long term capital gains shown by the assessee on sale of shares. The assessment order for the assessment year 2004-05 is at pages 61 and 62 of the paper book. In this year also the short term capital gains of Rs. 13,94,013 has been accepted by the Assessing Officer. There is also no dispute that the assessee has been declaring the cost of the shares as investment in his balance sheets in all the years.
16. For the assessment year 2005-06, the assessee has furnished the details of the sale of shares for two periods i.e., from 1-4-2004 to 30- 9-2004 and from 1-10-2004 to 31-3-2005. It is seen that in respect of the first period the shares sold are those of Bharat Earth Movers Ltd., Balaji Telefilm Ltd., Century Textiles India Ltd., Cipla Ltd., Gail India Ltd., Pennar Aluminium Co. Ltd., Reliance Capital Ltd., Tata Steel Ltd., and Visual Software Ltd. The holding period in respect of these shares ranges from 533 days to 3981 days. The details of sale of shares in respect of the second period show shares of Avery India Ltd., Ballarpur Industries Ltd., Colgate Palmolive (India) Ltd., HDFC Bank Ltd., ICICI Bank Ltd., Larsen & Toubro Ltd., CEAT Ltd., Tata Steel, Voltas Ltd. The holding period ranges from 387 days to 9016 days. It is seen thus that the assessee has held the shares for quite a long period. For example, the shares of Greaves Cotton Ltd., were held for almost 27 years (9016 days). The shares of Avery India Ltd., were held for 7493 days. The shares of PCS Industries Ltd., were held for 5674 days. Many of the shares were held for 3000 to 4000 days (9 years to 12 years). Similar details have been filed for the assessment year 2006-07 also. For this year in respect of substantial number of sale of shares the holding period was more than one month and in respect of shares which were held for less than a period of twelve months, the surplus was shown as short term capital gains. In respect of the surplus shown as long term capital gains, the period of holding in all the share transactions was several years. It is significant that the revenue has not filed any appeal against the finding of the CIT(A) that ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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the long term capital gains declared by the assessee for the assessment year 2006-07 should be assessed as such and not under the head "business".
The Hon'ble Gujarat High Court in the case of Vaibhav J. Shah (supra) has held as under:
"8. A Division Bench of this Court in Commissioner of Income-tax v. Rcwashanker A, Kothari (2006) 283 ITR 338 (Cuj.) has laid down the following test for determining the question as to whether an assessee can be said to be carrying on business. Such tests laid down by this Court are reproduced below;
"[a] The first lest is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. II the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with 3 view to earn profit, it would furnish a valuable guideline.
[b] The second test that is often applied is as to why and how and for what purpose the safe was effected subsequently. [c] The third test, which is frequently applied, is as lo how the assessee dealt with the subject matter of transaction during the lime the asset was with the assessee, Has it been treated as stock-in-trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive. [d] The fourth test is as to how the assessee himself has returned the income from such activities and how the department has dealt with the same in the course of proceeding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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judge the nature of transaction and would be a relevant circumstance to be considered in absence of any satisfactory explanation. [e] The fifth test, normally applied in cases of partnership firms and companies, is whether the Deed of Partnership or the Memorandum of Association as the case may be, authorizes such an activity. [f] The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity coupled with the magnitude of the transaction, hearing reasonable proportion to the strength of holding, then an inference can readily be drawn that the activity is in the nature of business."
9. In view of the aforesaid decisions of the Apex Court as well as of this Court, it is clear that where the number of transactions of sale and purchase of shares takes place, the most important test is the volume, frequency, continuity and regularity of transactions of purchase and sale of the shares. However, where there is repetition and continuity coupled with magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can be drawn that activity is in the nature of business. Learned Counsel for the revenue from the records could not demonstrate that there were large number of transactions which had frequency, volume, continuity and regularity and fell within the tests laid down by the Division Bench of this Court."
The Hon'ble Gujarat High Court in the case of Bankim Jayantilal Shah held as under:
"3. Having perused the documents with the assistance of the learned counsel for the Revenue, in the present case, the Tribunal noted that the assessee had held three scrips for period of 1380 days which were then sold for a gain of Rs.61.11 lacs. Other lone ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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transaction during the year under consideration was sale of one scrip valued at Rs.672/-. The Tribunal was of the opinion that merely this scrip was held only for one day would not be sufficient to hold that the assessee was in the business of trading in shares.
4. The entire issue having been examined by the Tribunal on the basis of peculiar facts, in our opinion, no question of law arises in this appeal. To reiterate, during the entire year under consideration the assessee had sold only three scrips which were previously held by the assessee for 1380 days. One more transaction of solitary nature in addition to the above sale of three scrips was entered by the assessee. To our mind, the Tribunal was, therefore, justified in repelling the Revenue's stand that the assessee was engaged in the business of trading in shares.
Tax Appeal is, therefore, dismissed."
13. In our considered view, the assessee may be a dealer in respect of certain shares and simultaneously can also be investor in respect of other shares. The intention of the assessee at the time of the acquisition of shares and units is of paramount importance to decide whether the units and shares were acquired for dealing in shares resulting in business income or making investment in units and shares, profits on resale of which gives rise to capital gains. The intention of the assessee is to be gathered on consideration of entire facts and circumstances of the case. The several factors like the way in which acquisition of units and shares are reflected in the financial statements, the volume and frequency of transactions, use of borrowed funds, period of holding etc. are to be taken into consideration for evaluating the intention of the assessee. No ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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single factor alone can be conclusive guidance for ascertaining the intention of the assessee. Therefore, in our considered opinion, merely because the period of holding was short, it cannot be concluded that the assessee acquired the units and shares with an intention of dealing in those units and shares. Therefore, in our considered view, the lower authorities were not justified in concluding that the profit derived by the assessee on sale of shares and units are assessable as business income only because the period of holding of units and shares was very short. In the instant case, keeping in view that there were only 3 or 4 transactions of purchase and sale of units and shares during the entire year, investment in shares and units were made from own funds and not out of borrowed funds, the assessee was engaged in the business of dealing in futures and auctions, in our considered view, the claim of the assessee that acquisition of units and shares were for investment cannot be held to be incorrect. Therefore, in our considered view, the profit on sale of such investment will give rise to income which is assessable under the head 'capital gains'. We, therefore, set aside the orders of the lower authorities on this issue and direct the Assessing Officer to accept profit on sale of units and shares as assessable under the head 'capital gains' for both the years under consideration. Thus, the grounds of appeal of the assessee for both the years are allowed.
14. The only other ground of appeal raised by the assessee in Assessment Year 2006-07 is with regard to charging of interest u/s 234B and 234C of the Act.
ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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15. At the time of hearing, the Ld. AR of the assessee did not make any submissions on this ground of appeal. Therefore, the same is dismissed for want of prosecution.
16. In the result, the assessee's appeal is partly allowed for Assessment Year 2006-07 and allowed for Assessment Year 2007-
08.
17. In the Revenue's appeal for Assessment Years 2006-07, 2007-08, 2008-09 and 2009-10, the only issue involved is that the Ld. CIT(A) erred in law and on facts in deleting the addition of Rs 55,90,328/- in Assessment Year 2006-07, Rs 2,97,365/- in Assessment Year 2007-08, Rs 1,61,99,267/- in Assessment Year 2008-09 and Rs 39,14,134/- in Assessment Year 2009-10 on account of interest on accrual basis.
18. The brief facts of the case are that the Assessing Officer observed that since the assessee has claimed the deduction of tax deducted at source, he placing reliance on the decision in the case of Shiv Prasad Ram Sahai Vs. CIT held that difference between the interest amount as per TDS certificate and interest income computed by the assessee was to be added to the income of the assessee and thereby made addition for Rs 2,97,365/- in Assessment Year 2007-08, Rs 1,61,99,267/- in Assessment Year 2008-09 and Rs 39,14,134/- in Assessment Year 2009-10.
19. On appeal, the Ld. CIT(A) deleted the addition by observing that the assessee was following the cash method of accounting and was ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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consistently having the interest income in the year of receipt, and therefore, Ld. CIT(A) was of the considered view that no addition on accrual basis could be made during the years under consideration and therefore, held that addition made on accrual basis is deleted. Simultaneously, he also directed the Assessing officer that in view of the provisions of section 199 as applicable to the Assessment Year under consideration credit for TDS is to be given in the year in which the corresponding income is offered to tax. Accordingly, the Ld. CIT(A) also directed the Assessing Officer that credit for TDS is to be given to the extent of income offered and that credit for balance TDS is to be given as and when the income is offered to tax in the subsequent years.
20. The Ld. DR relied on the orders of the Assessing Officer and the Ld. AR of the assessee supported the order of the Ld. CIT(A) and submitted that the order of the Ld. CIT(A) was not justified in deleting the addition of interest to the income of the assessee on accrual basis. He further submitted that the Ld. CIT(A) has also directed the Assessing Officer to give credit for TDS to the extent of income offered to tax by the assessee and to give credit for the balance amount of TDS as and when income was offered to tax in the subsequent years by the assessee and against which the assessee is not in appeal.
21. We have heard the rival submissions, perused the orders of the lower authorities and material available on record. In the instant case, the Assessing Officer found that the assessee has claimed ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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credit for TDS but the interest income disclosed in the return of income filed by the assessee is lesser than interest income shown in TDS certificate. Therefore, the Assessing Officer added to the income of the assessee the difference amount of interest income as compared to the interest income showing the TDS certified interest income shown by the assessee in the return of income for the years under consideration, and thereby made the addition of Rs 55,90,328/- in Assessment Year 2006-07, Rs 2,97,365/- in Assessment Year 2007-08, Rs 1,61,99,267/- in Assessment Year 2008-09 and Rs 39,14,134/- in Assessment Year 2009-10.
22. On appeal, the CIT(A) deleted the addition made by the Assessing Officer on the ground that the assessee was offering to tax interest income earned on cash basis and therefore, the addition of interest income on accrual basis was not justified and also simultaneously directed the Assessing Officer to allow credit for TDS only to the extent interest income has been offered to tax by the assessee and to allow balance amount of TDS credit in the subsequent years in which the interest income is offered to tax by the assessee.
23. We find that the Revenue has not disputed the fact that the assessee was accounting for interest income on cash basis regularly and consistently. On the above undisputed facts merely because the assessee claimed credit for TDS of interest income which is not assessable as income of the assessee of the year on the basis of consistent and regular system followed by the assessee does not empower the Assessing Officer to change the consistent ITA Nos.3497, 98,661 & 848/Ahd/2011 and ITA Nos. 527 & 2373/Ahd/2012 Karan Discretionary Family Trust Vs. JCIT, Range-6, Ahd For AYs 2006-07, 2007-08, 2008-09 & 2009-10
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system of accounting and bring to tax interest income on mercantile basis. As per provisions of section 145 of the Act, the interest income is assessable on the basis of consistent and regular system of accounting either cash or mercantile as regularly followed by the assessee. The Ld. CIT(A) was fully justified in holding that the interest income in the instant case is assessable on cash basis which is regular and consistent system of accounting followed by the assessee in respect of interest income and the assessee was entitled to credit of TDS which is relevant to that interest income during the relevant year. Therefore, this ground of appeal of the Revenue for all 4 years is dismissed.
24. In the result, the appeal of the assessee is allowed.
25. In the result, the appeal of the assessee for Assessment Year 2006- 07 is partly allowed and for Assessment Year 2007-08 is allowed whereas appeals of the Revenue for the Assessment Years 2006- 07, 2007-08, 2008-09 and 2009-10 are dismissed.
Order pronounced in the Court on Friday the 31st January, 2014 at Ahmedabad.
Sd/- Sd/-
(KUL BHARAT) ( N.S. SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 31/01/2014
Ghanshyam Maurya,
Maurya, Sr. P.
P.S.