Income Tax Appellate Tribunal - Mumbai
Datta Mahendra Shah, Mumbai vs Department Of Income Tax on 20 February, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" Bench, Mumbai
Before Shri B. Ramakotaiah, Accountant Member
and Shri Sanjay Garg, Judicial Member
ITA No. 6094/Mum/2011
(Assessment Year: 2008-09)
A C I T 16(3) Smt. Datta Mahendra Shah
Matru Mandir, 2nd Floor Vs. 303, Shirin Apartment, 3rd Floor
Room No. 206, Tardeo Road Opp. Ganga Jamuna Cinema
Mumbai 400007 211-219 Tardeo Road
Mumbai 400007
PAN - AAQPS 4007 F
Appellant Respondent
CO No. 155/M/2012
(Assessment Year: 2008-09)
Smt. Datta Mahendra Shah A C I T 16(3)
303, Shirin Apartment, 3rd Floor Vs. Matru Mandir, 2nd Floor
Opp. Ganga Jamuna Cinema Room No. 206, Tardeo Road
211-219 Tardeo Road Mumbai 400007
Mumbai 400007
PAN - AAQPS 4007 F
Cross Objector Appellant in Appeal
Revenue by: Mrs. Rupinder Brar
Assessee by: Shri Pradip Kapasi
Date of Hearing: 20.02.2013
Date of Pronouncement: 27.02.2013
ORDER
Per B. Ramakotaiah, A.M.
This is an appeal by Revenue against the order of the CIT(A)-27, Mumbai dated 27.05.2011 on the issue whether gains shown by the assessee under the short term capital gains can be treated under the head "Business Income". The cross objection is on alternate contention by the assessee that in case the income to be considered as business income, there should be a P & L Account, allowance of fall in market value of shares as deduction and claim of S.T.T. which may arise if the incomes are considered 2 ITA No. 6094/M/2011 & CO 155/M/2011 Smt. Datta Mahendra Shah as Business Income. The cross objection was filed with a delay of six days and considering the prayer, the delay is condoned and the cross objection is admitted.
2. Briefly stated, the assessee is a senior citizen individual having come mainly from capital gains, small amount of business income and income from other sources. The income from capital gain earned by the assessee consists of long term capital gain as well the short term capital gains on sale of shares as under: -
i. Long Term Capital Gain `1,73,43,980/-
(exempt u/s. 10(38) of Income Tax Act)
ii. Short Term Capital gain `9,24,38,619/-
The AO has taxed short term capita gain of `9,24,38,619/- as business income and accordingly levied tax on the same at normal rate.
3. The reasons for considering the short term capital gains as business income by the AO are as under: -
a) The assessee dealt with more than 60 companies during the year.
b) Holding period of shares is less than 30 days in more than 30% cases.
c) ¼ of the transactions involving 1/5th of the turnover was done in one month only.
d) There are five speculative transactions and the assessee filed 3CD report accepting the nature of transactions as 'trading in shares".
e) The assessee is a Director in M/s. Jayanand Securities Ltd. which is engaged in share business.
f) Dividend income is very small compared to gains earned.
The AO held that assessee is a dealer in shares and is engaged in the said activity on continuous and regular basis in a systematic manner and she is satisfying all ingredients of carrying out business activity.
4. The assessee filed detailed notes on each of the issue raised by the AO and also how she is covered by the Board circular by furnishing the details and past records and making detailed submissions of the issue.
3 ITA No. 6094/M/2011 & CO 155/M/2011Smt. Datta Mahendra Shah
5. The CIT(A) after considering the facts and law on the issue held as under on facts: -
"7.1. The appellant has been an investor in shares all along. Over the years she has consistently treated the entire investment in shares as an "investment" and not as "stock-in-trade". The income from transfer of shares was always offered to tax as capital gain. Shares held as Investments were valued at cost and no mark to market loss was provided for. The portfolio held by the appellant over the years when considered in the light of No. of scripts held/purchased/sold and the corresponding no. of transactions, investment being made from own funds and the fact of receiving dividend over the years as can be seen from table No. 1 above would undoubtedly establish the appellant as an investor and not a trader. It is worthwhile to note that even in the subsequent years despite registering losses from sale of shares, the appellant has consistently followed the practice of treating them as Capital Gains.
7.2 Coming to the year under consideration, at the outset, apparently the A.O. ha arrived at a conclusion of high volume and frequency of transactions by relying on the number of 60 scrips (i.e., opening investment + Purchases + sales + closing Investments) as against 35 scrips actually sold where STCG has been earned during the year. By no stretch of imagination, dealing in 35 scrips, involving 59 transactions for the entire year can be considered as high volume when viewed in the background of the daily transactions carried out in BSE/NSE.
7.3 A can be seen from the data at tables 4 & 5 above, transactions were not entered into continuously and regularly throughout the year. The appellant has not transacted at all during 188 days out of 250 working days during the year. This suggests that the appellant has not transacted during 75% of the total working days during the year. There were very few transactions in the 1st four months of the year with the appellant having sale transactions for only 3 days in the first four month. Further, during the period of eight months, there were transfer transactions on only 15 days. The absence of regular transactions in shares for eight months in the year clearly highlights that the transactions were not entered into frequently, continuously and regularly by the appellant. 7.4 The appellant has earned 75% of the total Short Term Capital Gains with a holding period more than 9 months. In other word, only 25% of the overall capital gain for the appellant has accrued from stocks where the weighted average holding duration for scripts was up to 9 months. In respect of sale of shares within a month of holding it was explained to be triggered by an unprecedented volatility in the market between Nov'07 to Jan'08, that the appellant sold off shares within a short period of holding at loss in fear of further large fall in market.4 ITA No. 6094/M/2011 & CO 155/M/2011
Smt. Datta Mahendra Shah 7.5 The weighted average holding duration of all the stocks (short term & long term) sold under capital gains during the year amounted to 182 days or 6 months. For the stocks resulting in short term capital gains the weighted average holding is for 140 days and for the stocks earning STCG out of opening investments the weighted average holding period stands at 329 days. This suggested that the average holding period of stocks sold by the appellant during the year was reasonably long.
7.6 56% of STCG during the year resulted from shares held in opening Investment on 1st April' 07. The appellant registered STCG of Rs.514.62 lacs from shares bought in the earlier years that were treated as Investments as on March 31, 2007. Consequently, gains arising from shares purchased in earlier years and treated as Investments cannot be suddenly considered as Business Income in the year of sale.
7.6 The appellant was not transacting frequently for smaller gains as was reflected from total Capital Gains on cost of Investment sold being more than 50% during the year as can be seen from table no. 3. 7.7 The average capital appreciation was a huge for the top four scrips (Jai Corp, Sahara Housing, Flat Product & Essar Oil), which together accounted for 110% of the total capital gains. This clearly reflects that the intention was clearly not to frequently trade or churn for smaller returns that are normally traits of traders in business. 7.8 The shares of Jai Corp Ltd., which accounted for 75% of the entire short term capital gains, were held for duration of around 10 months - most of the shares were brought in Dec'06 and sold in end Oct-Nov'07. Notably, the Appellant held these shares during the entire process when the Company undertook issue of Bonus Shares and Split the shares. Further, 45,407 shares of Jai Corp Ltd. which were purchased in July 2007 were not sold during the year and formed part of the closing balance of Investments as on Mar'08. This reflects the orientation of the Appellant towards holding investments for longer period.
7.9 The appellant has not resorted to churning of shares of repetitive transactions of the same Company that could have otherwise resulted in increased transactions.
7.10 Out of the total long term Capital Gains of Rs.73 Lacs, the shares of one Company viz. Flat Products Equipment Ltd. contributed to Rs.167 Lacs where the appellant's average holding duration has been for 764 days or 25 months with some part of holding for a period of more than 3 years and there was an overall appreciation of 250% in the stock. Further, the appellant had significant unbooked and unrealized capital gain of Rs.356 lakhs in the scrips of Flat Products Equipments and Jai Corp as on March 31, 2008 having an average holding period of 13 months. A trader would have definitely realized the huge profit immediately and not carried out profits to the next year. Besides, there was a substantial long term capital gain of 5 ITA No. 6094/M/2011 & CO 155/M/2011 Smt. Datta Mahendra Shah Rs.1.34 Cr in A.Y. 2009-10 apart from a huge quantum of unrealized Long Term Capitla Gains lying in the closing Investment for A.Y. 2010-11. Presence of such huge unrealised capital gains having longer holding period clearly indicates intention of the appellant of trying to seek longer term capital appreciation. That apart, the Quantum and Value of transactions of the appellant in the subsequent years were significantly lower compared to Assessment Year 2008-09. Had the appellant been a trader in shares, transactions in shares would have increased further in the subsequent years instead of witnessing a sharp contraction. 7.11 The appellant has derived significant long term capital gains over the years. In A.Y. 2005-06 and 2006-07, long term capital gains amounted to 93% and 63% respectively of the total capital gains earned during the said years. The stand of the appellant as an Investor has been accepted by the A.O. in the earlier year under section 143(3). The assessment for A.Y. 2007-08 was completed u/s. 143(3) by DCIT-16(3) and the capital gains on sale of shares and securities were accepted and taxed as short term at Rs.3,65,04,660/- and long term capital loss (after indexation) assessed at Rs.31,966/-. Besides, shares were accepted as Investments in the Balance Sheet. Apparently the facts of the case are similar in A.Y. 2007-08 & 2008- 09 and no fresh material has been brought on record by the A.O. at present. Further, appellant's claim regarding long term capital gains has not been distributed by the A.O. for the year under consideration and thus, the A.O. himself has accepted that the appellant was investor in shares also. In such circumstances, there is no reason for the A.O. to treat the investment in shares by the Appellant as trading in shares for A.Y. 2008-09. The uniformity in treatment and consistency under the same fact and circumstances is one of the fundamentals of the judicial principles which cannot be brushed aside without proper reason.
7.12 The appellant used her own surplus funds for investing in shares. She has neither borrowed any money from external sources nor paid interest thereon. The loans appearing in the Balance Sheet of the appellant as on March 2004, 2005 and 2006 are explained to be in the nature of temporary personal family transfers from her sons and do not carry any interest. There are no outstanding loans including from any family members as on March 2007 and 2008. 7.13 The appellant earned Rs.8,54,790/- by way of dividend which gives a yield of 1.4$ on average holding of her investment as at March 2007. The ratio of dividend needs to be seen only as a% of Investment and not as a % to total capital gains referred by the AO. That apart income from other sources consisting of bank interest, interest from recurring deposits with postal authorities, KVP interest etc., as noted at table no. 8 would go to show that the appellant is acting as a pure investor in view of her advanced age and there being a need for financial security at that age.6 ITA No. 6094/M/2011 & CO 155/M/2011
Smt. Datta Mahendra Shah 7.14 There were no derivative transactions undertaken by the appellant during the Assessment Year as well as in any of the past years. Further, there were no transactions without delivery during any of the past years. The appellant has sufficiently explained the back ground of the speculation loss reported during the year and it's presentation in the accounts, supported by the audited accounts. There is no other contrary material brought on record to dispute the appellant's claim in this regard.
7.15 The appellant has sufficiently explained the nature of work carried on by her, resulting in the processional come offered to tax, and therefore, the appellant's substantive activity cannot be held to be that of share trading in the sense that the investment activity can be regarded as ancillary to such share trading."
6. On considering the legal aspects of the case the CIT(A) held in paras 8.3, 9 and 10 as under: -
"8.3 Further, having regard to the facts noted at paras 7 to 7.16 above, there is a substantial compliance on the part of the appellant in terms of Instruction No. 1827 dated 31st August 1989 and Draft Instruction dated 16th May 2006 of the Central Board of Direct Taxes in respect of tests laid down therein to distinguish between shares held as stock-in-trade and shares held as investment that the appellant's case falls in the category of investor.
9. That apart there are a plethora of decisions by the various benches of Hon. High Courts and ITAT holding the issue in favour of appellant involving similar facts, and for the sake of brevity, even if they are taken into consideration for arriving at the conclusion that the appellant is an investor the same are not reproduced. However, to name a few Janak S. Rangwalla vs. ACIT (11 SOT 627), CIT Vs. Gopal Purohit 228 CTR 582 (Bom.) (2010), CIT Vs. Rohit Anand (2010) 327 ITR 445 (Del), DCIT Vs. SMK Shares & Stock Broking Pvt. Ltd.ITA No. 799/Mum/2009, Vinod K. Nevatia ITA No. 6556/Mum/2009
& 181/Mum/2010 and Naishadh V. Vachharajani ITA No. 6429/Mum/2009.
10. In view of the detailed discussion of the facts and the legal position and the back ground of the amended provisions of taxation of capital gains on sale of shares, I have no hesitation to hold that the income from short term capital gains offered to tax require no disturbance and cannot be treated as business income. Accordingly, the appeal is allowed in favour of the appellant on this issue."
7. The learned D.R. relied on the observations of the AO whereas the learned counsel relied on the order of the CIT(A) and also furnished the fact sheet and submissions made to the CIT(A). The learned counsel also placed 7 ITA No. 6094/M/2011 & CO 155/M/2011 Smt. Datta Mahendra Shah on record the Coordinate Bench decision in Sri Jai Mahendra Shah in ITA No. 6093/Mum/2011 dated 31.08.12 on similar facts in the case of assessee's son.
8. After considering the rival submissions and perusing the record and orders of authorities, we agree with the findings of the learned CIT(A) who dealt with the facts and law very clearly. We do not have to repeat the same findings here as the same fact sheet was placed before us also. Suffice to say that arguments of the learned AO were countered on facts by the assessee and considering the past record and action of the AO in later years and also the fact that no benefit of reduction in value of stock and payment of STT was obtained by the assessee in any of the years indicate that the assessee is only an investor and not a trader. The reason for offering the five transactions as business income was also properly explained as punching errors by broker and sale during non-delivery period of stock exchange which have been considered as speculative in nature.
9. Coordinate Bench in the case of Jay Mahendera Shah in ITA No. 6093/Mum/2011 & CO No. 156/2012 dated 31-08-12 considered similar facts and dismissed Revenue appeal by holding as under: -
"6. We have considered the rival submissions and relevant material available on record. The finding of the AO based broadly on the observations viz., (i) huge turnover with large number of transactions
(ii) short period of holding in respect of three scrips (iii) speculative transactions on three occasions and (iv) borrowed funds. The volume of transaction itself cannot be a sole criteria when the frequency of the transactions were not so high. In the case in hand, the number of days during which either the purchase or sale transactions carried out were 64 days in the entire year which shows that the frequency is not high in comparison to the volume of transaction. Further, the total number of scrips in which the sale and purchase done giving raise to Short Term Capital Gain and Long Term Capital Gain are only
27. Therefore, this fact supports the case of the assessee. As regards the holding period, the weighted average period of shares of 27 scrips was 113 days. Therefore, selecting only three scrips by the AO is not justified when the overall transactions and holding period is taken into consideration. Moreover, it was explained by the assessee that due to the wrong punching and in case of M/s. Videocon Industries 8 ITA No. 6094/M/2011 & CO 155/M/2011 Smt. Datta Mahendra Shah only one share was transacted for a short period of three days, in case of M/s. Deep Industries, because of the erosion in the value of the share, the loss was booked with 7 days. So far as the speculation transactions in three scrips are concerned, the assessee has explained that this happened because of wrong punching on the part of the stock broker and, therefore, these were immediately scored off by selling by the broker. The assessee filed the confirmation of the broker in this respect. The CIT (A) has considered the issue in para 7.7 as under:
"7.7. There was no transactions without delivery except for three odd transactions during the entire year, which were primarily due to errors or confusion with the Broker relating to punching errors by Broker relating to code of clients, No-delivery period, etc. which are sufficiently explained at table no.3. Similarly, the volume of transactions classified as speculation amounted to only 0.07% of the overall share sale volumes indicating negligibility of such transactions that resulted by default due to the errors of the Broker as explained at table no.8, and not due to any organized or systematic activity of the appellant requiring time and efforts."
Noting has been brought before us to controvert the finding of the CIT (A) on this point. In view of the fact that the Broker has confirmed the punching error for these three transactions and were scored off and reversed immediately on the same day, it cannot be said that the assessee was engaged in the speculative transactions. Turning to the next objection of the Assessing Officer regarding borrowed funds, it has been explained by the assessee that the funds were taken from the assessee's HUF which are non-interest bearing funds. This fact has been duly considered by the CIT (A) in para 7.8 of the impugned order and the AO has not contradicted the same. Accordingly, when the funds arranged by the assessee were not from outside but within the family and that too without any interest, then it cannot be taken as a factor against the assessee while determining the nature of transactions as investment or trading in shares.
7. It is pertinent to note that in the earlier years as well as in the subsequent years, the AO has accepted the capital gain offered by the assessee. When the assessee has treated the shares as investment in the books of account and valued at cost, then the explanation of the assessee is clear that the shares were retained as investment. Further 99% of the Short Term Capital Gain is from the sale of shares which were purchased in the earlier year and accepted by the AO in the said year as investment. Therefore, these transactions cannot be treated differently in the year under consideration. Even otherwise, if the investment in the earlier year is treated as stock in trade in this year then in view of the provisions of section 45(2), the difference in the market price and the cost as shown in the books of account would be treated as capital gain.
8. Thus, the facts and circumstances of the case clearly demonstrate that the intention of the assessee to hold the shares as investment and not stock in trade. The motive of the transaction of 9 ITA No. 6094/M/2011 & CO 155/M/2011 Smt. Datta Mahendra Shah sale and purchase was not to realize the profit at the earliest possible occasion but to retain share for appreciation of the value. It is evident from the fact that the unrealized gain in respect of shares which are held by the assessee at the end of the financial year is more than the capital gain offered by the assessee. If the motive of the assessee was to realize the profit in the volatile conditions of the market, then the assessee would have sold the shares instead of retaining the same at the end of the year."
10. In view of the above, we do not find any reason to interfere with the order of the learned CIT(A) in holding the gains arising from sale and purchase of shares as capital gain. It is also to be noted that the AO treated only short term capital gains as business income where as long term capital gains on the same portfolio was accepted as such. There is no merit in Revenue grounds. Accordingly, they are dismissed.
11. In the cross objection, assessee has raised the following grounds:-
"1. The ld. AO and the ld. CIT (A) erred in law and on facts in not applying the provisions of section 45(2) for computing the capital gains in respect of the shares held as capital asset which by the action of the ld. AO were treated as stock in trade and further erred in law and on facts in taxing such income as business income instead of capital gains. Your appellant prays that full effect be given to the provisions of section 45(2) in assessing the total income.
2. The ld. AO and the ld. CIT (A) erred in law and on facts in not allowing the business loss that arose on valuation of shares held at the yearend by applying the principle of 'lower of the cost or market value' in as much as the transactions in shares were held to be business transactions by the ld. AO and as a consequence thereof such shares were required to be treated as stock in trade and be valued as per the accounting practices and principles that are accepted in tax laws. Your appellant prays that the business loss representing the valuation of shares held as stock in trade be allowed in assessing the total income."
12. These are alternate contentions by assessees in case incomes were to be treated as business income. In view of our finding in the above appeal of 10 ITA No. 6094/M/2011 & CO 155/M/2011 Smt. Datta Mahendra Shah the Revenue, the cross objection becomes infructuous and accordingly dismissed.
13. In the result, appeals filed by Revenue and cross objection by assessee are dismissed.
Order pronounced in the open court on 27th February, 2013.
Sd/- Sd/-
(Sanjay Garg) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, Dated: 27th February, 2013
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - 27, Mumbai
4. The CIT- IX, Mumbai City
5. The DR, "B" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.