Income Tax Appellate Tribunal - Indore
Shri Mukesh Jhaweri, Indore vs The Addl.Cit R-1, Indore on 28 February, 2018
Mukesh Jhaveri
ITA 516/Ind/2013
IN THE INCOME TAX APPELLATE TRIBUNAL
INDORE BENCH, INDORE
Before Shri Kul Bharat, Hon'ble Judicial Member and
Shri Manish Borad, Hon'ble Accountant Member
ITA No. 516/Ind/2013
A.Y. 2005-06
Shri Mukesh Jhaweri
Indore ::: Appellant
Vs
Addl. CIT
Range-1, Indore ::: Respondent
Appellant by Shri C.P. Rawka
Respondent by Shri K.G.Goyal
Date of hearing 16.1.2018
Date of pronouncement 28.2.2018
O R D E R
PER SHRI MANISH BORAD, AM
This appeal of the assessee relating to the assessment year 2005-06 is directed against the order of the Commissioner of Income Tax (Appeals)-III, Baroda having concurrent jurisdiction over CIT(A)-I, Indore) dated 1 Mukesh Jhaveri ITA 516/Ind/2013 30.4.2013 which is arising out of the order u/s 143(3) of the Act dated 24.12.2007 framed by the Addl. CIT, Range-I, Indore.
2. The assessee has taken the following grounds of appeal :-
"1. Ld. Commissioner of Income Tax (A) erred in confirming the disallowance u/s 14A without appreciating that no expenses have been booked which are directly related to the exempt income and no interest has been debited to profit and loss account.
ii. (a) Ld. Commissioner of Income Tax (A) erred in enhancing the tax liability by treating Rs. 4140403 as business income which was rightly accepted by the Assessing Officer as short term capital gain. 2 Mukesh Jhaveri ITA 516/Ind/2013
(b) Ld. Commissioner of Income Tax (A) erred in on the facts of the case and confirmed the treatment of short term capital gain as business income at Rs.38,35,595/- made by Assessing Officer."
3. Briefly stated, the facts, as culled out from record, are that the assessee is an Individual dealing in shares. Total taxable income of Rs. 93,34,650/- is declared in the return of income filed on 29.10.2005. The assessee has also shown income from speculative share trading, house property income, long term and short term capital gain and dividend income. The case selected through CASS. Notice u/s 143(2) was served on the assessee. Necessary details, as called for, were submitted. The Assessing Officer observed that the assessee has earned dividend income of Rs. 13,51,268/- and also had invested in shares buyt there was no disallowance suo moto made by the assessee u/s 14A of the Act and, therefore, the Assessing Officer made 3 Mukesh Jhaveri ITA 516/Ind/2013 disallowance of Rs. 2,39,108/-. The addition for low household expenses was also made at Rs. 50,000/-. Further, the Assessing Officer while examining the income from short term capital gains and trading of shares observed that the assessee was indulged in trading of shares, investing in short term and long term investment in shares and the transactions were not clearly defined as to whether they are business in nature or investment in nature. However, the Learned Assessing Officer keeping in view CBDT Circular No. 4/2007 dated 15.6.2007 treated the short term capital gains of Rs.8,35,595/- as business income. The income was assessed at Rs.96,35,756/-. Aggrieved, the assessee preferred appeal before the Commissioner of Income Tax (Appeals) on various grounds but failed to succeed on any of them. Even the Commissioner of Income Tax (Appeals) enhanced the addition by treating total short term capital gain of Rs. 4 Mukesh Jhaveri ITA 516/Ind/2013 76,30,666/- as business income. Now the assessee is in appeal before the Tribunal.
4. Apropos ground no. 1 challenging the order of the Commissioner of Income Tax (Appeals) confirming the disallowance u/s 14A of the Act, we have heard rival contentions and perused the record placed before us. We find that the assessee has earned dividend income of Rs. 13,51,268/-. There is an investment in equity shares of Rs.3,80,35,247/-. Further there have been regular transactions of purchase and sale of shares and no specific expenditure has been disallowed suo moto in the return of income. It is beyond imagination that the assessee has not incurred any expenditure. Even through the method provided in Rule 8D read with rule 14A has been brought into effect from the assessment year 2008-09 but still, in our view, minor disallowance of Rs. 2,39,108/- is justified at the end of the Assessing Officer. We find no infirmity in 5 Mukesh Jhaveri ITA 516/Ind/2013 the findings of the Commissioner of Income Tax (Appeals) confirming the impugned disallowances. This ground of the assessee is dismissed.
5. Apropos ground no. 2 relating to treatment of short term capital gain as business income, the learned counsel for the assessee submitted that the assessee has been carrying on trading of shares and making investment in shares from last several years. Since the rate of taxation on income arising from trading as well as short term capital gain was same upto A.Y. 2004-05, the assessee had not bifurcated the holding of shares under two different heads upto31/03/2004. Section 111A was introduced in the Income Tax Act by Finance Act 2004 with effect from 2005. Resultantly, the rate of taxation in respect of short term capital gain on sale of shares was reduced with the introduction of Security Transaction Tax. The learned counsel for the assessee further submitted that the 6 Mukesh Jhaveri ITA 516/Ind/2013 assessee, however, continued to keep complete record of shares holding that is quantity purchase, date of purchase, cost of purchase, date of sale and sales consideration. The details of share held during the year relevant to the Assessment year 2005-06 are depicted in a chart annexed at Page 9 to 14. He submitted that from the said chart it is evident that the holding of shares ranges from 88 days and above except in one strip in which the assessee has suffered the loss. Therefore, the holding period itself demonstrates that none of the transaction recorded in the chart could be treated as trading in shares. He submitted that the assessee has disclosed income from trading in shares which pertains to intraday trading as well as future and option. The above income is duly accounted for in the profit & Loss account as income from business. The learned counsel for the assessee also submitted that the Assessing Officer has assessed Rs 38, 35,595 as income 7 Mukesh Jhaveri ITA 516/Ind/2013 from business from out of the income shown by the assessee under the head of short term capital gain at Rs.65,53,325/-. The Assessing Officer's opinion is based on frequency and volume of transactions. It was also submitted by the learned counsel for the assessee that the observation made by the Ld Assessing Officer is not in the lines of principals laid down by various Judicial Pronouncements. The four ingredients necessary for terming a transaction in the nature of trade are volume, frequency, regularity, and continuity. It may kindly be appreciated in the instant case, there is only one ingredient of volume. He submitted that there is neither the frequency nor the continuity and regularity. Even the aspect of frequency noted by the Ld Assessing Officer does not find place in our case. The total transaction as per the chart annexed clearly suggests that the prime motive of the assessee was all along that of investment. There is no iota 8 Mukesh Jhaveri ITA 516/Ind/2013 of trade in any of the transaction listed in the annexed chart. The learned counsel for the assessee also submitted that the learned Commissioner of Income Tax (Appeal) has referred to the assessee's computation of Income for Assessment year 2004-05. In his own wisdom the Ld Commissioner of Income Tax (Appeal) has taken note of Income from business in the Assessment year 2004-05 and made observation in which share held in stock were reflected on the basis of above observation. Ld Commissioner of Income Tax appeal has held that like Assessment year 2004-05,the assessee was carrying on Income from business from share trading and enhanced the income of Rs. 27,17,730/- from Short Term Capital Gain to Income from Business. The learned counsel for the assessee also submitted that the Ld Commissioner of Income Tax (Appeal) erred in jumping to the conclusion on the basis of earlier year Balance Sheet. Since accounting of 9 Mukesh Jhaveri ITA 516/Ind/2013 share holding was immaterial factor up to 31/03/2004; the accounting of aggregate share holding under one head was inconsequential. However, the real character of a particular share did always exist. The chart annexed at Page 26-29 clarifies these aspects. The learned counsel for the assessee also invited our attention to DMAT account filed in the paper book Pages 59 to 67. He, therefore, submitted that the intention of investment is apparent from date of purchase, dividend earned, share recorded in the DMAT account and the voucher of the sales.
6. On the other hand, the learned DR vehemently argued supporting the order of the Commissioner of Income Tax (Appeals).
7. We have heard the rival submissions. The issue before us relates to short term capital gain of Rs. 76,30,666/- which has been treated as business income by the Commissioner of Income Tax (Appeals) whereas the 10 Mukesh Jhaveri ITA 516/Ind/2013 Assessing Officer treated only Rs. 38,35,595/- as business income. During the course of hearing, the learned counsel for the assessee apart from relying various judgments also referred to Circular No. 6/2016 dated 29.2.2016 issued by CBDT which dealt with the issue of taxability of surplus sale of shares and securities as to whether they are to be taxed as capital gains or business income. The learned counsel for the assessee referred to clause (b) of para 3 of this Circular contending that "in respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as capital gain, the same shall not be put to dispute by the Assessing Officer." The learned counsel for the assessee submitted that the assessee has rightly shown the income from purchase and sale of shares under 11 Mukesh Jhaveri ITA 516/Ind/2013 the head 'long term capital gain and short term capital gain'.
8. In order to appreciate the submissions of the learned counsel for the assessee, we look to the financial statements provided by the assessee for the assessment years 2004-05 and 2005-06. From the perusal of the profit and loss account for the F.Y. 2003-04 placed at page 22 of the paper book we find that the assessee has shown purchase and sale of shares as business. In the profit and loss account there appears opening stock, purchases, sales and closing stock. In the balance sheet also the assessee has shown closing stock of equity shares of Rs. 1,96,43,532/-. In the computation of income for the assessment year 2004-05, the assessee has shown profit from purchase and sale of shares under the head 'business income' and has also set off brought forward losses of Rs.33,20,098/-. So there cannot be any dispute at the end 12 Mukesh Jhaveri ITA 516/Ind/2013 of the assessee that for the assessment year 2004-05 the assessee has shown purchase and sale of shares as business income. Now coming to the year, under appeal, we observe that in the profit and loss account the assessee has not shown the closing stock of preceding financial year as opening stock. It has only shown income from share trading at Rs.9,58,920/- and the remaining gain from purchase and sale of shares has been shifted under capital gains head. In the stock market for the assessment year under appeal, the assessee has dealt with in around 100 scripts of equity shares and the total quantity of shares as on 1.4.2004 was 369381, purchase - 2911916, sales - 1795817 and closing quantity 14,85,480. The value of equity shares held by the assessee as on 31.3.2004 has surged from Rs. 2,10,29,258/- (as on 31.3.2004) to Rs.4,80,35,247/-. As regards the borrowing of fund is concerned, we find that on the liability side the capital 13 Mukesh Jhaveri ITA 516/Ind/2013 account shows the balance of Rs.4,80,84,299/- and sum of Rs.1,68,39,268/- are unsecured loans and petty creditors. So the financial statement proves that the assessee has borrowed funds during the year and the value of shares held on 31.3.2005 has also increased in comparison to preceding year and the assessee has dealt with in multiple scripts round the year.
9. Now summarising the overall facts, as discussed above, we observe that up to the assessment year 2004-05, the assessee has shown the purchase and sale of shares as business and has also set off business loss of preceding years against the business income from trading of shares. During the assessment year 2005-06 the assessee changed the modus operandi and did not disclose the closing stock of equity shares in previous financial year as opening stock during the year. The major gain from purchase and sale of shares has been shown as short term capital gain and long 14 Mukesh Jhaveri ITA 516/Ind/2013 term capital gain but the assessee has also done trading in shares during the year. Even before us, the assessee failed to demarket statements along with separate D-mat accounts which can prove that the assessee was maintaining separate records for the equity shares held as investment and the remaining held as business assets. If such details are not provided by the assessee, it becomes very difficult to accept the assessee's contention of running the business of shares as well as investment in shares side by side. It seems that the assessee in order to take benefit of exemption for long term capital gain and lower rate of tax for short term capital gain has changed the treatment of transactions of purchase and sale of shares for the assessment year 2005-06. Further even when we examine the facts of the case in the light of the CBDT Circular No. 6/2016 referred to above, we find that clause (a) of para 3 says "where the assessee itself irrespective of the period of 15 Mukesh Jhaveri ITA 516/Ind/2013 holding listed shares and securities, opts to treat them as stock in trade, the income arising from transfer of such shares/securities would be treated as its business income. In our view, this clause (a) of para 3 squarely applies to the assessee's case as it opted to show the holding of equity shares as stock in trade during the assessment year 2004- 05 and thereafter the consistency should have been maintained.
10. Even if we go through clause (b) of para 3 relied upon by the assessee, we observe that in the last four lines it reads "however, this stand, once taken by the assessee in a particular assessment year, shall remain applicable in subsequent assessment years also and the tax payer shall not be allowed to adopt a different/contrary statement in this regard in subsequent years". Even clause (b) of para 3 also does not support the contention of the assessee because the stand of showing the business has been taken 16 Mukesh Jhaveri ITA 516/Ind/2013 up to the assessment year 2004-05 then the same cannot be changed in the subsequent years just for the sake of taking benefit of lower rate of taxation/exemption. The case would have been different if the assessee had been successful to bifurcate the transactions through a separate D-mat account which would have been otherwise used one for the purpose of investment in shares and the other for the regular trading in shares. This is not the case of the assessee as apart from non-maintenance of separate D-mat account, the assessee has borrowed funds and there has been regular trading in shares.
11. Further we are also of the view that in the statute similar type of transactions can be categorised as business income as well as capital gain. The benefits are available in both the categories as in the case of business, the assessee can claim various expenditure and in case of capital gain, there is benefit of exemption for long term capital gain and 17 Mukesh Jhaveri ITA 516/Ind/2013 lower rate of tax for short term capital gain. In normal parlance if the assessee is indulged in some regular activity, which may be of providing service, earning salary, any business other than that of equity shares and along with this regular activity, if it occasionally deals in equity shares then such gain is normally shown ca capital gain but in the case of the assessee it has no other source of income and is engaged in trading of shares and securities consistently since long and major source of income is from trading in shares only and if such assessee subsequently opts to show transactions of purchase and sale of shares as capital gains and simultaneously also shows trading in shares then both the things cannot go together unless otherwise demarketed with proper records. We, therefore, in the given facts and circumstances, find no reason to interfere with the findings of the Commissioner of Income Tax (Appeals) treating Rs. 76,30,666/- as business income 18 Mukesh Jhaveri ITA 516/Ind/2013 relying on the decision of ITAT, Mumbai Bench in the case of Wallfort Financial Services (2010) 41SOT 200 (Mum) and Puran Associates Pvt. Ltd., (2012) 20 taxmann.com
147.
12. In the result, ground nos. 2, 3 and 4 of the assessee are dismissed.
13. Finally, the appeal of the assessee is dismissed.
Pronounced in open Court on 28 February, 2018.
Sd sd
(KUL BHARAT) (MANISH BORAD)
JUDICIAL MEMBER ACCOUNTANT MEMBER
28th February, 2018
Dn/-
Copy to - Appellant/Respodent/Pr.CIT/CIT(A)/DR/Guard File 19