Income Tax Appellate Tribunal - Mumbai
Prakash Amrutlal Shah , Mumbai vs Department Of Income Tax on 10 December, 2012
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई Ûयायपीठ 'सी ' मुंबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL " C " BENCH, MUMBAI
सव[ौी बी.आर.िमƣल, Ûया.स.एवं नरे Ûि कुमार ǒबãलैáया, लेखा सदःय के सम¢
BEFORE SHRI B.R. MITTAL, JM AND SHRI N.K. BILLAIYA, AM
आयकर अपील सं./I.T.A. No. 6396/Mum/2009
( िनधा[रण वष[ / Assessment Year :2006-07
Shri Prakash Amritlal Shah, बनाम/
बनाम The ACIT 20(2),
A-101, Mota Nagar, Vs. Piramal Chambers,
Andheri Kurla Road, Mumbai
Chakala,
Andheri (East),
Mumbai-400 099
आयकर अपील सं./I.T.A. Nos. 329 & 6555/Mum/2010
( िनधा[रण वष[ / Assessment Years :2006-07 & 2007-08
The ACIT 20(2), बनाम/
बनाम Shri Prakash Amritlal Shah,
Piramal Chambers, Vs. A-101, Mota Nagar,
Mumbai Andheri Kurla Road,
Chakala,
Andheri (East),
Mumbai-400 099
ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : ABVPS 5671F
(अपीलाथȸ /Appellant) .. (ू×यथȸ / Respondent)
अपीलाथȸ ओर से/ Assessee by: Shri Vijay Kothari
ू×यथȸ कȧ ओर से/Revenue by : Shri Rajarshi
सुनवाई कȧ तारȣख / Date of Hearing : 10.12.2012
घोषणा कȧ तारȣख /Date of Pronouncement :
आदे श / O R D E R
PER N.K. BILLAIYA, AM:
The appeal is filed by the assessee and the cross appeals are filed by the Revenue are directed against the orders of the Ld. CIT(A)-31, Mumbai pertaining to A.Yrs. 2006-07 & 2007-08. Since all the appeals 2 ITA No. 6396/M/09 & ITA Nos. ,329 & 6555/M/10 being directed against the very same order have common issues, therefore all these appeals are disposed off by this common order for the sake of convenience and brevity.
ITA No. 6396/Mum/2009- A.Y. 2006-072. The assessee is in the business as investment consultant, money lenders, sub-brokers and dealing in shares. Return for the year under consideration was filed on 31.10.2006 declaring total income at Rs. 71,04,780/-. The return was selected for scrutiny assessment and accordingly statutory notices u/s. 143(2) and 142(1) were duly issued and served upon the assessee. The assessee has returned income under the heads Short Term Capital gains at Rs. 72,04,778/-, net profit for futures and Options at Rs. 23,95,361/- and speculation income at Rs. 11,38,242/- . Further, the assessee has also shown net loss from proprietary concern which is also engaged in the business of trading in shares and also income from bank interest, interest on loans and debentures etc. The assessee has also shown capital loss on sale of shares.
2.1 During the course of the assessment proceedings, the Assessing Officer observed that the so called Short Term capital gain is nothing but business income as appears from the facts of the case that the assessee is engaged in the trading of shares in the disguise of being an investor. Thereafter, the AO analyzed shares as exhibited at pages 7 to 10 of the assessment order and found that the assessee is engaged in multiple trades in the same shares, the operation is systematic and regular. Drawing support from the Circular No. 4 of CBDT dt. 15.6.2007 wherein the guidelines have been issued to the AO on the question whether transactions of purchase and sale of shares are to be treated as trading 3 ITA No. 6396/M/09 & ITA Nos. ,329 & 6555/M/10 transaction or to be treated as mere investment. The AO observed that the time devoted by the assessee is exclusively for trading in futures and options, shares in the stock market. The assessee is not engaged in any other activity even the concern in which the assessee is a proprietor is also dealing in shares and securities. The AO further pointed out that as the assessee is engaged in F&O trading in stock market which in any case is a business income, therefore dealing in shares is an integral part of the same activity done in the stock market. The AO further noted that for the year under consideration, the assessee has borrowed funds at Rs. 69.06 lakhs. Further, the holding period of 123 scrips running across 618 transactions is less than 30 days. It is also mentioned by the AO that out of the total transactions, 54 transactions are such that the period of holding is only one day. 332 transactions are such where holding period is upto one week. 478 transactions have holding period of 15 days, 616 transactions have been squared off in a month and in the case of 745 transactions, the purchase and sale have been completed within 90 days. The frequency of transaction is not only very high but also very regular. On these factual background, the assessee was asked to substantiate his claim that the gain arising from shares and securities is Short Term Capital gains. In response to the said query, the assessee filed a detailed reply as under:
4.2 In response to the above show cause notice, the authorised representative of the assessee vide his letter dtd. has submitted as under:
In response to your show cause notice No: ACIT 20(2)/Scrutiny/2008-09 dated 08.12.2008, Sir, I have to state that I have already given my detailed submissions vide my letters dated 23.02.2008, 10.03.2008, 01. 04.2008, 15.09.2008, 08.10.2008 and 05.11.2008.4 ITA No. 6396/M/09 &
ITA Nos. ,329 & 6555/M/10 Without prejudice to anything and/or any submissions made by me in this regard, in case you treat me as a Trader in shares now, as against an Investor in shares as stated by me, you may kindly take the following into consideration, prior to the making of the Final Assessment Order for the A. Y. 2006-07:
1. Please take into consideration, the enclosed statement of Tax working, which has been prepared by me, to give you a correct picture of my income for the A. Y. 2006-200 7 in case I am treated as a Trader in Shares by you and not as an Investor and as per which an amount of Rs.9,42,607.00 is due to me, by way of refund of tax please.
2. You may kindly take into account, the value of the Closing Stock at Rs. 55,79,211.93, as against my Investment (at cost) Value of Rs.81,02,756.91 shown by me, in my Balance Sheet as at 31.03.2006 (the revised working in this connection is enclosed herewith for your ready reference please). This is in view of the fact that if I am treated as a Trader, then the closing stock should be valued at cost or market price, whichever is lower, as on 31.03.2006 (a xerox copy of the official Shares Price List of BSE as on 31.03.2006 is also enclosed herewith for your ready reference please. You may also get the same on BSE site at www.bseindia.com please). This would reduce my business income by Rs.25,23,544.98, due to the loss in the value of shares held by me, if my investments are treated as closing stock and the valuation of same is done as mentioned above please.
3. Also, shares having Nil value have been written off to the extent of Rs,3,17,116.00, during the year, (already disclosed in my return) which may be allowed .as a bu1ness loss, in case I am treated as a Trader in Shares by you and not as an Investor (a statement of these shares has been also enclosed herewith please).
4. Since I have filed my Return of Income as an Investor, I have not taken the benefit of the Security 5 ITA No. 6396/M/09 & ITA Nos. ,329 & 6555/M/10 Transaction Tax paid by me. In case I am treated as a Trader in Shares by you and not as an Investor, you may kindly give me the credit for the Security Transaction Tax paid by me please, while finalizing my Assessment Order for the A. Y.2006-2007. I am also enclosing herewith Original certificates of Security Transaction Tax for an amount of Rs 4,18,566.00.
In case you are in disagreement with whatever is stated by me above, Sir, may I request you to kindly give me an opportunity to explain the same to you please.
2.3 In continuation to his earlier submissions, the assessee filed another detailed submission as under:
Further, the assessee submitted one more submission on 24.12.2008, the same is reproduced hereunder:
"With reference to the above, the undersigned came and met you on 23.12.2008 and submitted a reply to your Show cause Notice dated 08.12.2008.
During the discussions, your good selves have asked for the certain additional details pertaining to the opening stock of shares and the valuation of the same.
Without prejudice to anything and/or any submissions made by me, earlier in this regard, I am submitting herewith the Opening Stock statement, as desired by you. In case you want to treat me as a Trader in shares now, the same opening stock statement may please be considered by you.
You may note from the enclosed statement of Stock that my investment at cost, as on 31.03.2005 was Rs.1,31,35,058.34. Now, if you treat me as a Trader in shares, my Investments would get converted into Stock-in-Trade as on 01.04.2005 and the market value 6 ITA No. 6396/M/09 & ITA Nos. ,329 & 6555/M/10 (valuation at cost or market value, whichever is lower) of the same would be Rs.94,93,750.65.
Now, the difference between my cost of Investments and the value of Stock converted as on 01.04.2005 should be treated as Short Term Capital Gains u/s 45(2) of the Income Tax Act, 1961. Such Short Term Capital Gains in my case would amount to a Short Term Capital Loss of Rs.36,41,307.69.
This Short Term Capital Loss of Rs.36,41,307.69 should also be taken into account, while computing my Business Income, because you propose to treat my Short Term Capital Gains of the year, as Business Income. Therefore, this benefit of Short Term Capital Loss of Rs. 36,41,307.69 should also be allowed by treating as a Business Loss of the year.
I hope, Sir, you would find the above in order please. I also hope that you would kindly treat my income, under the head "Short Term capital Gains only as stated by me earlier. However, in case you want to treat my income under the head "Business Income", I would request you to kindly give me all the benefits of a Businessman (Trader in shares) under the Income Tax Act. 1961 please.
In case you need any further details, I would surely provide the same, as and when called for please."
2.4 After considering the facts and the submissions made by the assessee, the AO did not accept the contention of the assessee. The AO was of the opinion that considering the volume and the frequency of the transaction alongwith the holding period added with borrowed funds, there is no doubt that the assessee is actually engaged in the business of purchase of sale of shares and cannot be said to be an investor. The AO relied upon the decision of the Tribunal Ahmedabad Bench in the case of DCIT Vs. Smt. Deepaben Amitbhai Shah (2006) 100 TTJ 1065 wherein it was held that whether or not a person carries on business in a particular 7 ITA No. 6396/M/09 & ITA Nos. ,329 & 6555/M/10 commodity can be inferred from the volume, frequency, continuity and regularity of the transactions and the motive involved. The AO further rejected the submission of the assessee that in the preceding years the gains have been assessed as STCG/LTCG stating that the principles of res-judicata do not apply to income tax proceedings. Thereafter, the AO went on to treat STCG as business income and added Rs. 72,04,778/- under the head business income.
3. The assessee questioned this before the Ld. CIT(A) and reiterated his submission that he is an investor and not a trader in shares. Further, wherever he has done transaction as a trader has been shown under the head 'business income'. It was explained by the assessee that he is maintaining separate books of account, bank accounts and Demat accounts for scrips shown under the head investments and stock in trade. It was further explained that whenever a scrip was purchased with an intention of investment, it is shown under the head 'investment' otherwise the same is shown under the head stock-in-trade. The assessee further claimed that on similar pattern and identical facts, the AO has accepted the STCG and LTCG as shown by the assessee in the preceding assessment years.
3.1. After considering the facts and the submissions of the assessee, the Ld. CIT(A) was of the opinion that the facts of assessee's case is more or less identical to the facts of the case of Sh. Gopal Purohit Vs JCIT except that in assessee's case for the year under consideration , the share transaction in certain scrips were high, frequent, consistent and repeated. The Ld. CIT(A) further found that in certain scrips, the purchase and sale is more than four times in the same shares during the year. This feature or the factual aspects has also not been denied by the assessee, is related 8 ITA No. 6396/M/09 & ITA Nos. ,329 & 6555/M/10 to his business carried out in these shares and the loss or profit realized through these transactions cannot be held as STCG/LTCG. The Ld. CIT(A) has exhibited such scrips as Annexure 'A' to his order. Accordingly, out of the total addition of Rs. 72,04,778/- from gains in shares under the head 'business income , the Ld. CIT(A) confirmed the addition only to the extent of Rs. 64,02,991/- and directed the AO to treat Rs. 8,01,787/- under the head STCG.
4. The assessee and Revenue being aggrieved by this finding of the Ld. CIT(A) are before us. The Ld. Counsel for the assessee strongly submitted that the assessee is maintaining separate books of account for investment and trading purposes. Not only that the assessee is also maintaining separate Demat account and bank accounts for the transactions undertaken in these two categories. The Ld. Counsel further argued that on similar set of facts, the assessee has been assessed as an investor and the gains have been accepted as STCG/LTCG in not only preceding assessment years but also in subsequent assessment years. To substantiate his claim, the Ld. Counsel filed copies of the assessment order for A.Y. 2008-09 and to further substantiate his submission, the Ld. Counsel relied upon the decision of the Tribunal in ITA No. 961 & 1836/Mum/2010 emphasizing on his point that rule of consistency should be followed. The Ld. Counsel further placed reliance on the decision of the Tribunal in ITA No. 2690/Mum/2010.
5. Per contra the Ld. Departmental Representative strongly supported the findings of the AO and submitted that the Ld. CIT(A) having accepted that the assessee is engaged in voluminous transactions in the same scrips repeatedly , should have confirmed the assessment order instead of giving partial relief to the assessee.
9 ITA No. 6396/M/09 &ITA Nos. ,329 & 6555/M/10
6. We have considered the rival submissions and perused the orders of the lower authorities and the judicial decisions relied upon by the rival parties. The dispute is regarding the nature of income from sale and purchase of shares by the assessee. The issue, whether the income from sale and purchase of shares in a particular case should be treated as capital gain or as business income has been a debatable issue and there are conflicting decisions of the Tribunal on this issue. Each case is, therefore, to be based on its own factual situation.
7. Facts of the present case and as demonstrated by the AO in his assessment order clearly show the churning of shares repeatedly by the assessee. The volume and the frequency of transaction is enough to suggest that the assessee is definitely not an investor but a trader. It is an undisputed fact that the assessee has no other activity and is fully engaged in stock market. The holding period is also not suggestive of being an investor. In the case of the shares of Kirloskar Ferros, it is seen that in one moth the assessee has transacted 22 times and surprisingly , claiming himself to be an investor, On all 22 occasions, the assessee has sold scrips at a loss which is not justifiable for an investor ,because, commonly an investor would invest in a share and lay back and as and when the share prices rise and the investor intend to reshuffle his portfolio he would book profit and change the portfolio. But facts of the present case show that the assessee has been selling shares even at a loss. Another example is that of the shares of Encore Software. In this case, during the period from March to July, the assessee has transacted 30 times and once again on every transaction, the assessee has booked loss. The contention of the assessee that in the preceding years, the department has accepted gains as STCG/LTCG cannot be accepted because each 10 ITA No. 6396/M/09 & ITA Nos. ,329 & 6555/M/10 assessment year is considered as a separate unit and we do not know the facts of the preceding years and also the succeeding years but we do know the facts of the present case and considering the facts in totality, we have no hesitation to hold that the assessee is engaged in the business of purchase and sale of shares considering the peculiarity of the facts and circumstances in which the transaction has been done. At the same time, we find that the Ld. CIT(A) has grossly erred in directing the AO to treat Rs. 8,01,787/- as Short Term Capital Gains. Once it is established that the nature of transactions are such that the assessee is trading in shares, it does not make any difference whether he has transacted in the same shares more than four times or less than four times. To that extent, we do not agree with the findings of the Ld. CIT(A). We accordingly reverse the findings of the Ld. CIT(A) and allow Revenue's appeal on this issue and dismiss assessee's appeal on the same issue. Accordingly, we confirm the findings of the AO. Rs. 72,04,778/- is to be taxed under the head 'business income'.
8. Other grounds in Revenue's appeal in ITA Nos. 329 & 6555/Mum/2010 are directly related to ground No. 1 and are accordingly allowed.
9. Ground No. 2 in assessee's appeal relates to the claim of set off of business loss from F&O against income assessable for the year.
10. During the course of the assessment proceedings, the AO noticed that the assessee has earned income from trading in derivatives being Futures and Options to the tune of Rs. 23,95,631/- and has set off the same against the brought forward losses of Rs. 32,11,631/- and the balance is further carried forward to the subsequent assessment year. However, applying the proviso (d) to Section 43(5) of the Act r.w.
11 ITA No. 6396/M/09 &ITA Nos. ,329 & 6555/M/10 notification No. 2 of 2006, the AO opined that a transaction in derivatives being Futures & Options after 25th January, 2006 is deemed not to be a speculation transaction which means that prior to 25.1.2006 the same transaction was to be considered as a speculation transactions. In the light of the provisions of Sec. 43(5), the AO was of the opinion that only the income earned from the trading in derivatives before 25.1.2006 amounting to Rs. 17,60,728/- is allowed to be set off against the brought forward speculation loss from the activity of trading in derivatives. However, as we have held that the income from shares is to be treated as business income, we accordingly restore this issue back to the files of the AO. The AO is directed to consider the claim of loss in the light of our decision, as per provisions of the law. Ground No. 2 is allowed for statistical purposes.
11. Ground No. 3 relates to disallowance of the set off of loss disclosed under the head brought forward Long Term Capital loss. The Ld. Counsel for the assessee submitted before us that the assessee has certain brought forward Long term capital loss which should be allowed to be set off against business income of the shares as the nature of the underlying assets is the same i.e. shares. The Ld. Counsel placed reliance on the decision of the Tribunal in ITA No. 1798/Mum/2010.
12. The Ld. Departmental Representative relied on the orders of the lower authorities.
13. We have considered the submissions and the decisions relied upon by the Counsel. We find that the same is misplaced and not at all applicable on the facts of the case because in that case, the issue involved was the treatment of profits/losses from derivative market in Futures and Options. It was on that background, the Tribunal held that prior to the 12 ITA No. 6396/M/09 & ITA Nos. ,329 & 6555/M/10 amendment to Sec. 43(5), F&O transactions were treated as speculative transaction but post amendment, the same was treated as business transaction. As the underlying nature of the transaction was the same i.e. F&O, therefore brought forward losses which were erstwhile treated as speculative losses were allowed to be set off against subsequent years F&O profit. However, in the present case, the loss which the assessee claims to set off is Long Term Capital loss and there is no such amendment so far as claim of such loss is concerned. Therefore we do not find any merit in the claim of the assessee to allow set off of Long Term Capital loss against business income. Ground No. 3 is accordingly dismissed.
14. Ground Nos. 4 & 5 read as under:
"4. The Ld. CIT(A) erred in not allowing the entire loss arising of Rs. 25,23,545/- on account of valuation of closing stock as per the recognized method 'cost or market value whichever is lower.'
5. The Ld. CIT(A) erred in not allowing the loss arising of Rs. 3,17,116/- on account of the shares written off on the basis of valuation of closing stock as per the recognized method 'cost or market value whichever is lower"
15. As we have held that STCG is to be treated as business income, grievance raised by the assessee in ground Nos. 4 & 5 (supra) deserve to be reconsidered by the AO. We accordingly restore these issues back to the file of the AO. The AO is directed to examine the claim of loss of the assessee in the light of the decision that entire STCG is to be taxed under the head business income , after giving reasonable opportunity of being heard to the assessee. Ground No. 4 & 5 are allowed for statistical purposes.
13 ITA No. 6396/M/09 &ITA Nos. ,329 & 6555/M/10
16. Ground No. 6 relates to the claim of rebate u/s.88E of the Act on account of STT paid by the assessee.
17. This issue also requires verification by the AO in the light of the decision of ground No. 1. The AO is accordingly directed to consider the claim of the rebate u/s. 88E as per the provisions of the law after giving a reasonable opportunity of being heard to the assessee. Ground No. 6 is allowed for statistical purposes.
18. Ground No. 7 relates to charging of interest u/s. 234B and 234C of the Act. This grievance is consequential to the finding of ground No. 1. Therefore, the AO is directed to reconsider it while framing the assessment order in the light of the directions given hereinabove.
19. Ground No. 8 relates to the initiation of penalty u/s. 271(1)(c) of the Act. This ground is pre-mature and is accordingly dismissed.
20. In the result, the appeals of the revenue are allowed and the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 14.12.2012 . आदे श कȧ धोषणा खुले Ûयायालय मɅ Ǒदनांकः 14.12.2012 को कȧ गई ।
Sd/- Sd/-
(B.R.MITTAL) (N.K. BILLAIYA)
Ûयाियक सदःय /JUDICIAL MEMBER लेखा सदःय / ACCOUNTANT MEMBER मुंबई Mumbai; Ǒदनांक Dated 14.12.2012 व.िन.स./ RJ , Sr. PS 14 ITA No. 6396/M/09 & ITA Nos. ,329 & 6555/M/10 आदे श कȧ ूितिलǒप अमेǒषत/Copy षत of the Order forwarded to :
1. अपीलाथȸ / The Appellant
2. ू×यथȸ / The Respondent.
3. आयकर आयुƠ(अपील) / The CIT(A)-
4. आयकर आयुƠ / CIT
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai
6. गाड[ फाईल / Guard file.
आदे शानुसार/ ार BY ORDER, स×याǒपत ूित //True Copy// उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुंबई / ITAT, Mumbai