Income Tax Appellate Tribunal - Mumbai
Vilas B. Shah, Mumbai vs Assessee on 28 November, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "F", MUMBAI
BEFORE SHRI DINESH KUMAR AGARWAL (J.M.)
AND SHRI D. KARUNAKARA RAO (A.M.)
ITA No. 7511/Mum/2011
Assessment Year : 2006-07
Mrs. Vilas. B. Shah, The Income Tax Officer - Ward
Kusum Kunj, Ist floor, 19(1)(2),
Corner of 9th and 10th Road, Piramal Chambers,
Khar (West), Vs. Mumbai.
Mumbai - 400 052.
PAN AAPPS6153B
(Appellant) (Respondent)
Assessee by: Shri Paresh Shaparia
Department by : Shri Rajarshi Dwivedy
Date of hearing 16-10-2012
Date of pronouncement 19-10-2012
ORDER
PER DINESH KUMAR AGARWAL, J.M.
This appeal preferred by the assessee is directed against the order dtd. 26-08-2011 passed by the ld. CIT(A) - 22, Mumbai for the A.Y. 2006-07.
2. Briefly stated facts of the case are that the assessee is a Partner in Avon Exports & Ampex Trading Co. and derives income from other sources and capital gains. The return was filed declaring total income of Rs. 8,51,715/-. During the course of assessment proceedings it was inter alia observed by the A.O. that the assessee has claimed short term capital gain of Rs. 8,44,666/- on sale of shares. Perusal of the working 2 ITA No. 7511/MUM/2011 of the capital gain indicates that the assessee was engaged in the activity of buying and selling of shares, the total sale of shares during the year being to the extent of Rs. 1,03,11,112/- and the cost corresponding to these shares was Rs. 94,66,543/- on which short term capital gain of Rs. 8,44,666/- was offered after adjusting loss of Rs. 48,841/-. He further observed that one transaction is speculative in nature viz. purchase and sale of Madras Cement Ltd. has been affected on the same day i.e. 13-07-2005. He further observed that the assessee has held shares for periods ranging minimum 2 days to a maximum of 232 days. The assessee was asked to show cause as to why the income declared under the head short term capital gain on sale of shares be not assessed as business income. In reply, the authorised representative of the assessee has submitted as under (page 2 of the assessment order):-
"Letter dated 28/11/2008
1. The assessee is a partner in M/s Ampex trading Co. & M/S Avon Exports.
2. The assessee makes investments in shares and mutual funds with the exclusive intention of earning dividend and appreciation in the value of investments from the surplus funds of the assessee and family members.
3. The investments in shares are made through Initial Public Offer (IPO) or purchases through registered & recognized stock broker either on BSE or NSE.
4. All the shares, securities and mutual funds are reflected in the Balance Sheet under the head Investments.
5. All the shares purchased or sold are delivery based.3 ITA No. 7511/MUM/2011
6. All the shares are duly reflected in the demat account maintained by the assessee.
7. All transaction with the broker either for purchase or sale of shares, the payments and receipts are made with the settlement period as per NSE or BSE by cheque.
8. On the share transactions Securities Transaction Tax (STT) has also been paid which has been excluded in determining the Capital Gains nor the same has been claimed as rebate u/s 88E.
9. The assessee does not have any F & 0 (Derivative) transactions.
10. The assessee does not have any speculative transactions in shares.
11. No expenses are claimed against the earning of dividend or Capital Gains on sale of shares except the stamp duty on shares.
12. During the year the assessee has Short Term Capital Gains of Rs.8.44 lacs and has earned dividend income of Rs. 1.39 lacs.
13. There is no adventure in the nature of trade, and also the assessee does not claim any expenses.
14. Based on the above facts the assessee is an investor and not a trader in shares and securities. The income offered is required to be taxed as Capital Gains.
15. Further in all the earlier scrutiny assessment the gains from sale of shares and mutual funds have been offered as capital gains income.
In view of the above facts income from sale of shares and mutual funds requires to be treated as capital Gains income."
In view of the above and on the basis of the CBDT Circular No. 4/2007 dtd. 15-6-2007 and Instruction No. 1827 dtd. 31-8-1989 the assessee has also justified her case that the gain arising from the sale of shares is short term capital gain and not business income. The reliance was also placed on various decisions. The A.O. after considering the assessee's submission observed that during the year under consideration, the 4 ITA No. 7511/MUM/2011 assessee has purchased shares to the tune of Rs. 94,66,543/- and the assessee has sold shares for Rs. 1,03,11,112/-. The A.O. further observed that the total number of sale transactions was 30 and out of the total 30 transactions of sale in the year, 9 transactions are such that the sale and purchase have been affected in a month, 7 transactions are such that the average period of holding though more than a month does not exceed 3 months. The A.O. after considering the CBDT Circular No. 4/2007 dtd. 15-6-2007 and guiding principles on the basis of ratio laid down by the Hon'ble Supreme Court/High Court/AAR has drawn the following conclusion:-
"(i) The assessee's dealing in shares continued throughout the year.
The fact of regular buy and sell activity earning surplus makes it clear that the profit motive was the main reason of purchase of shares, at the time of purchase itself. Assessee' s method of accounting treating the transactions in shares as investment is done at the sole discretion of the assessee. These shares are thus only stock in trade of the assessee and hence accounting them as investments has helped the assesee in presenting the realization, on sale of ostensible investment as capital gains.
(ii) The primary characteristic of an investment asset is the feeling of security. The secondary aspect is capital accretion. The next aspect is the incremental periodical income accruing on it. In the case of assessee who is not substantial shareholder in any companies whose shares were held by the assessee, the feeling of guarantee and security in share investment is not beyond doubt. The capital accretion is also a probability only. As regards the periodical return, a look into the shares held and the dividend earned show that the earning is around 1.4% per annum. The same is always below market rate of interest return.
(iii) Only because assessee has taken possession either physically or through depository, purchase of shares does not become investment leading to 'capital asset'. Shares held for larger period also show the longevity of stock. Had the assessee not taken possession of shares the 5 ITA No. 7511/MUM/2011 activity would become speculation as per provisions of section 43(5) and would otherwise also become speculation business activity chargeable s Business income uls.28 of the Act.
(iv) Mere showing of the same as investment and invoking method of accounting to show it as investments, is a mere camouflage of assessee's real interest in trading in shares. Effecting transaction through the Investment a/c is solely based on the intention of the assessee to treat it as investment activity. Opening of investment account and accounting the transactions in the same does not give income from share trading as capital gains a statutory recognition as such income if chargeable as 'business income' is covered by section 145. Debiting or crediting an account opened at the discretion of the assessee as share investment account would not change the character of real activity of purchase and sale of shares. The assessee cannot rely on its own discretionary head of account and nomenclature as proof to show that the share investment made by the assessee yielded capital assets. The practice of the assessee would result in violation of the accounting principles in view of the intention of the assessee or trading in shares. The computation of capital gains does not recognize any method of accounting. The test of application for stock in trade in assessee's case is not relevant as assessee has shown it as investment in stock and not as stock in trade.
(v) During the year, the assessee has taken unsecured loans amounting to Rs.35,77,421/- which shows that funds have been borrowed for purchase of shares. The assessee' s claim that the transactions were in the nature of investment is hollow and devoid of merit.
(vi) Deploying borrowed funds in commodities which are likely to appreciate regularly shows assessee's business interest. Utilization of borrowed funds for purchase of shares shows the resourcefulness of the assessee and acumen of identifying correct stock for future sale and trading. Making frequent investment in similar commodities and selling it at profit or divesting at loss when holding it is likely to result in further loss is a continuous activity and is nothing but a business.
(vii) The entire transactions were made with profit motive is thus loud and clear. The assessee is conveniently forgetting the difference between investment and trading lies on the profit motive. Profit motive, though deliberate and intentional, is uncertain in latter and whereas in investment it is the guarantee which is attractive and accretion thereon is an incentive.
(viii) If not trading, assessee' s activity is an adventure in the nature of trade even though in assessee's case the frequency is indicative of adventure. In a nutshell, the transactions of assessee in shares 6 ITA No. 7511/MUM/2011 constitute nothing but business activity. Thus, assessee can carry on trading in shares and stocks as business activity. Commercially the income there from will be business income. Hence, assessee's activity of trading in shares is business activity. This has judicial support from the decision of Hon. SC cited in 160 ITR 67 CIT Vs. H.Holck Larsen which distinguishes and analyses all cases on the topic of chargeability of taxation on share trading and in the case of M/s. Dalhousie Invt. Trust Co. Ltd Vs. CIT (C), Calcutta 68 ITR 486.
(ix) If not business as trade or adventure in the nature of trade, the transactions are realization of trade investments held in the form of shares, the income of which is otherwise also taxable as 'profit and gains of business income'. Since section 45 and 28 are mutually exclusive, anything which come u/s.28 cannot be brought u/s.45". Accordingly the A.O. assessed the income shown as short term capital gain as business income.
3. On appeal, the ld. CIT(A) while agreeing with the views of the A.O. held that the A.O. was justified in holding the short term capital gain as business income.
4. Being aggrieved by the order of the ld. CIT(A) the assessee is in appeal before us challenging in all the grounds in treating the short term capital gain as business income.
5. At the time of hearing the ld. Counsel for the assessee submits that the assessee is partner in two firms. The assessee has made investment in shares with the exclusive intention of appreciating in the value of investment and the investment in shares and securities are reflected in the balance sheet as investment. He further submits that during the year the assessee has made all purchases and sales on 7 ITA No. 7511/MUM/2011 delivery basis and claimed as short term capital gain. The ld. Counsel for the assessee while referring to script-wise statement of short term capital gains appearing at page 2 of the paper book further submits that the period of holding as under:-
"Statement of period of holding for Short Term Capital Gains Particulars No. of No. of Short Term scripts transactions Capital Gains.
0-30 days 8 8 90,532
30-90 days 5 5 200,877
90-180 days 8 8 385,640
180-290 days 2 2 167,618
290-365 days Nil Nil Nil
23 23 8,44,666
Less : Stamp Duty 2,121
8,42,545"
He further submits that month-wise transactions of purchase and sale of scripts are 15 & 20 respectively. He further submits that neither in the preceding assessment years nor in the subsequent assessment years the A.O. has treated the gains arising from purchase and sale of shares as business income. In other words, the A.O. has accepted the said gain as short term capital gain/long term capital gain and in support he also placed on record copy of the assessment order for the A.Y. 2003-04 passed u/s 143(3) of the Act. He further submits that the assessee has 8 ITA No. 7511/MUM/2011 not taken any loan for the investment in shares and moreover the assessee's own capital as on 31-3-2006 was Rs. 14,604,715.98. As regards the observation of the A.O. that the assessee has taken unsecured loan of Rs. 35,77,421/-, the ld. Counsel for the assessee submits that the said loan was taken for the investment in debentures in group companies as appearing in the balance sheet at page 14 of the assessee's paper book. As regards the observation of the A.O. that one transaction relating to Madras Cement Ltd. was effected on the same day i.e. 13-7-2005, the ld. Counsel for the assessee submits that due to wrong punching, it has been done which has been cancelled on the same day. He, therefore, submits that the ld. CIT(A) was not justified in upholding the order of the A.O. in treating the short term capital gain as business income.
6. On the other hand, the ld. D.R. supports the order of the A.O. and the ld. CIT(A).
7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the nature of the assessee's business is partner in two firms. It is also not in dispute that the assessee has shown the investment in shares as investment and not as a stock-in-trade, the value of which has also been accepted by the A.O. as disclosed by the assessee. It is also not in dispute that the gain 9 ITA No. 7511/MUM/2011 arising as a result of purchase and sale of shares is on delivery based transactions. It is also not in dispute that in past and in subsequent assessment years, the A.O. has treated the gain arising from the purchase and sale of shares as short term /long term capital gain. The issue before us is as to whether the income earned from the activity of purchase and sale of shares should be treated as income from business or in the nature of short term capital gain.
8. It is desirable to consider various judicial pronouncements in this regard. To begin with it is apt to take note of the decision of the Hon'ble Apex Court in Bengal and Assam Investors Ltd. vs. CIT (1996) 59 ITR 547 wherein it has been held (Headnote) : Page 547 :-
"For a dividend on shares to be assessed under section 10 of the Indian Income-tax Act, 1922, the assessee, be it an individual or a company or any other entity, must carry on business in respect of shares, that is to say, the assessee must deal in those shares. An individual, who merely invests in shares for the purpose of earning dividend, does not carry on a business. The only way he can come under section 10 is by converting the shares into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares. If a company merely acquires and holds shares with the object of receiving dividends, it does not carry on business within section 10.
The mere fact that a company is incorporated to carry on investment does not show that it is carrying on business."
9. In Commissioner of Income-Tax (Central) Calcutta v. Associated Industrial Development Company (P) Limited, (1971) 82 ITR 586 (SC) it has observed as under :-
"Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as 10 ITA No. 7511/MUM/2011 to whether it has maintained any distinction between those shares which are stock-in-trade and those which are held by way of investment."
10. The Hon'ble Apex Court in another decision in Commissioner of Income Tax, Bombay v. H. Holck Larsen, (1986)160 ITR 67 (SC), has held as under (head note page 69) :-
"In order to determine whether one was a dealer in shares or an investor, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step-the purchase of the shares- was not taken as, or in the course of, a trading transaction. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these. If all the relevant factors have been taken into consideration and there has been no misapplication of the principles of law, then the conclusion arrived at by the Tribunal cannot be interfered with because the inference is a question of law, if such an inference was a possible one, subject, however, that all the relevant factors have been duly weighed and considered by the Tribunal, the inference reached by the Tribunal should not be interfered with."
11. In CIT vs. Gopal Purohit (2011) 336 ITR 287 (Bom) it has been held as under (Headnote) :
"Held, dismissing the appeal, (i) that it was open to the assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions, namely, those by way of investment and those for the purposes of business, and this warranted no interference.
(ii) That there should be uniformity in treatment and consistency when facts and circumstances for different years were identical particularly in the case of the same assessee.
(iii) That entries in the books of account alone are not conclusive in determining the nature of income."
12. Recently the Hon'ble Gujarat High Court in CIT vs. Vaibhav J Shah (HUF) in Tax Appeal No. 77 of 2010 with Tax Appeal No. 78 of 2010 dtd. 27-6-2012 has held as under:-
"9. In view of the aforesaid decisions of the Apex Court as well as of this Court, it is clear that where number of transactions of sale and purchase 11 ITA No. 7511/MUM/2011 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.
10. For the aforesaid reasons, we are of the considered opinion that the income earned by the assessee from trading in the shares under the head long term capital gain / short term capital gain was correctly shown. We do not find that in the Assessment Year 2005-2006 and 2006-2007, the transaction of sale of shares and volume were substantial. We do not find any error or irregularity in the impugned order passed by the Tribunal. The substantial question of law framed by this Court as mentioned above is answered in the affirmative and against the revenue. Both these Tax Appeals are accordingly dismissed."
13. In ACIT V/s Shri Satpal Singh Sethi in ITA No.3650/Mum/2010 (AY: 2006-2007) dated 30.9.2011, the co-ordinate bench of the Tribunal after following the ratio of the decision of the Hon'ble Jurisdictional High Court in the case of CIT V/s Darius Pandole (2011) 330 ITR 485 (Bom.) and CIT V/s Gopal Purohit (2011) 336 ITR 287 (Bom) has held that "...Since in the earlier years the Department has accepted the income from shares as falling under the head 'Capital gains', in our considered opinion and respectfully following the above judgments, that the ld. CIT(A) was justified in upholding the assessee's stand."
14. In Hitesh Satischandra Doshi V/s JCIT (2011) 46 SOT 336(Mum), the Tribunal while observing that there is no indication of holding period of 30 days finds place either in the statute or in the circular/instructions as well as judicial pronouncements held that the ld. CIT(A) was not 12 ITA No. 7511/MUM/2011 justified in treating the share transaction as business transactions in the case where the holding period is less than 30 days and further held that the income arisen from purchase and sale of shares held by the assessee is investment, cannot be treated as business income.
15. The judgments thus referred to above point out the principle that the question as to whether the assessee is engaged in dealing in shares as a course of business activity or not, rests on appreciation of materials, the starting point being the purchase of shares as an investment or stock-in-trade. If the purchase is a mere investment, then the result on the sale must necessarily be taken to the logical end to treat it as an asset yielding to capital gains. However, when investment itself is for the purpose of making it as a business then the income earned on dealing with such shares is to be treated as business income only.
16. In the backgrounds of the above decisions, when we analyse the facts of the present case we find that there is no dispute that the assessee has shown the investment in shares as investment and not as a trading portfolio. The A.O. has admitted the position consistently in past and in subsequent years. The ld. D.R. from the records, could not demonstrate that there were large number of transactions which had frequency, volume and continuity. On the other hand the assessee has proved that in the month of April, 2005 there were only 2 purchases and 1 sale, in May 3 purchases and 3 sales, in June 3 purchases and 3 sales, 13 ITA No. 7511/MUM/2011 in July 4 purchases and 5 sales, in August 2 purchases and 3 sales, in September 1 purchase and 1 sale, in October 1 purchase and 1 sale, in November and December no purchase and sale, in January 1 purchase and 2 sales and in February no purchase and 2 sales and March, 2006 no purchase and sales. Thus there were very few transactions and there was no continuity and regularity inasmuch as the investment in share was made out of own capital without taking any interest bearing loan and, hence, it is not a case of business. In this view of the matter, we are of the view that the ld. CIT(A) was not justified in upholding the order of the A.O. in treating the short term capital gain as business income. The A.O. is directed to treat the gain arising from purchase and sale of shares as short term capital. The grounds taken by the assessee are, therefore, allowed.
17. In the result, assessee's appeal stands allowed.
Order pronounced on 19-10-2012.
Sd/- Sd/-
(D. KARUNAKARA RAO ) (DINESH KUMAR AGARWAL)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated : 19-10-2012.
RK
14 ITA No. 7511/MUM/2011
Copy to:
1. The Appellant
2. The Respondent
3. Commissioner of Income Tax (Appeals)- 2, Mumbai
4. Commissioner of Income Tax - 1 Mumbai
5. Departmental Representative, Bench 'C', Mumbai //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI