Income Tax Appellate Tribunal - Mumbai
Rajan R. Bahl, Mumbai vs Assessee on 15 October, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" Bench, Mumbai
Before Shri D. Manmohan, Vice President
and Shri B. Ramakotaiah, Accountant Member
ITA No. 36/Mum/2010
(Assessment Year: 2006-07)
Shri Rajan R. Bahl Addl. CIT, Range 20(2)
Saket, Plot No. 84, MIDC Vs. Piramal Chambers, 6th Floor
15th Road, Andheri (E) Lalbaug, Parel
Mumbai 400013 Mumbai 400013
PAN - AABPB 9614 L
Appellant Respondent
ITA No. 328/Mum/2010
(Assessment Year: 2006-07)
Addl. CIT, Range 20(2) Shri Rajan R. Bahl
Piramal Chambers, 6th Floor Vs. Saket, Plot No. 84, MIDC
Lalbaug, Parel 15th Road, Andheri (E)
Mumbai 400013 Mumbai 400013
PAN - AABPB 9614 L
Appellant Respondent
Appellant by: Shri Rajan R. Bahl
Respondent by: Smt. Vandana Sagar
ORDER
Per B. Ramakotaiah, A.M.
These are cross appeals by assessee and the Revenue against the order of the CIT(A) XXXI, Mumbai dated 15.10.2009.
2. The issue in the cross appeals is whether the income derived by the assessee from the transactions in the share market is to be treated as capital gains or business income. The A.O. treated the entire short term capital gains as business income whereas the CIT(A), after analysing the transactions, treated partly as business income and partly as capital gains. Therefore both assessee and the Revenue are aggrieved on the order of the CIT(A). The grounds are raised accordingly by respective parties.
2 ITA Nos. 36 & 328/Mum/2010Shri Rajan R. Bahl
3. Briefly stated, assessee, an individual, has declared income of `6,53,13,220. In addition to the income earned in F&O trading offered as business income at `5,48,26,933/-, assessee also offered short term capital gains of `1,17,82,521/- in the return of income. The A.O. noticed that assessee has involved himself fully in trading of F&O and also stock market and related activities and analysed the purchases and sales of shares during the year and came to a conclusion that assessee was involved in large number of purchases of more than `40 crores in stock market, have repeated transactions in same company's shares and the average holding period is very less. In his order, the A.O. has analysed and came to a conclusion that the holding period of 26 scrips running across 84 transactions was less than 30 days having purchase value of `22.5 crores. There were transactions with the period of holding of 1 day even. He also analysed the frequency of transactions, source of investment, portfolio maintained by the assessee and other related aspects and came to a conclusion that assessee is indulging in share trading activity as a business venture and therefore, the capital gains disclosed as short term capital gains is nothing but business income or alternatively surplus from the adventure/enterprise in the nature of trade or business. While doing so he also disallowed amounts under section 14A on the basis of Rule 8D totalling to `23,435/-. Apart from these two issues the A.O. also disallowed 1/4th of the motor car expenses of `3,26,074/- and telephone expenses of `34,261/-. As against the business income of `5,38,26,933/- returned by the assessee the A.O. computed the income from business at `6,89,17,795/-. Aggrieved on the said order the matter was carried to the CIT(A). The CIT(A) vide his detailed order running to 31 pages analysed assessee's transactions, legal principles and determined the amount at `76,94,812/- as business income on the basis that the extent of gains or profits realised on account of repetitive share transactions undertaken for more than four times during the year are to be considered as business income. He confirmed the action of the A.O. to that extent while deleting the balance amount with a direction to rework out the short term capital gains accordingly. He also confirmed the addition made under section 14A and restricted the expenditure on motor 3 ITA Nos. 36 & 328/Mum/2010 Shri Rajan R. Bahl car and telephone expenses to 20% as against 25% disallowed by the A.O. on adhoc basis. Aggrieved on the order of the CIT(A) assessee raised one ground on the issue of treatment of income of `76,94,812/- as business income which, according to the assessee has no basis or legal authority for treating repetitive share transactions as business income. The Revenue in its appeal has relied on various case laws in ground Nos. 2 & 3 mainly supporting ground No. 1 on deletion of the balance amount and direction to be treat as short term capital gains. The grounds in cross appeals are inter- related.
4. The learned counsel for the assessee while contesting the CIT(A)'s order submitted the details of share transactions under taken by the assessee and how the CIT(A) erred in treating the repetitive transactions as in the nature of trading. Referring to the statement of the short term profit or loss it was submitted that in the case of GLEENMARK most of the shares sold are bonus shares on which there was a profit of about `30,00,000/- whereas there was a loss on some transactions. It was submitted that sale of bonus shares cannot be considered as trading transaction. He also referred to the transactions in Birla Cash Plus, which accordingly to him is a mutual fund investment and not share transactions on which only a profits of `3,076/- was earned on a total transaction of `2.56 crores. It was submitted that these are not trading transactions but investment transactions for the purpose of earning dividend. He also submitted that treating artificially repetitive transactions of more than four times alone as business transactions is not correct ignoring the fact that there are number of shares which are held for more than 300 days which are also treated as business transactions whereas the assessee has invariably maintained investment portfolio and trading portfolio separately and consistently over a period of time and the CIT(A) erred in ignoring the factual position and treating part of the income as business income on an artificial bifurcation. It was his submission that assessee maintained consistently separate transactions of investment and trading. In the investment transactions assessee has not claimed any benefit of increase or decrease in the closing stock valuation and maintained separate books of account for these transactions. It was 4 ITA Nos. 36 & 328/Mum/2010 Shri Rajan R. Bahl further submitted that the A.O. in A.Y. 2004-05 has accepted speculation loss, short term capital gains and loss as returned by the assessee and on consistency principle alone the issue is to be decided in favour of the assessee. He relied on various case laws, which are already considered by the A.O. and the CIT(A) in their detailed orders.
5. The learned D.R. in reply submitted that the assessee is involved in share market transactions and the profits earned on F&O was five times more than the so called short term capital gains and there is no distinction between the investment in shares and transactions of F&O as assessee is involved very much in share market transactions. The entire income offered under short term capital gains has to be treated as business income and, therefore, the CIT(A) erred in deleting part of the income as short term capital gains. He also relied on the details of transactions submitted to submit that the frequency, volume and holding period do indicate that assessee is involved in business transactions. He also referred to various orders of the ITAT which are in favour of the Revenue.
6. We have considered the issue and examined the record. The undisputed facts as reported by the CIT(A) in para 2.3 of his order were that the assessee had disclosed income from share transactions carried out in F&O (in which no delivery was taken place) as his business income and gains on purchase and sale of shares (in which delivery is taken) as his capital gains. In other words assessee has shown business income in respect of his non-delivery based shares or derivative transactions whereas he has shown capital gains on the delivery based share transactions. It is also a fact that assessee has maintained separate ledger accounts of the respective share transactions in his books of account. It is also on record that assessee has maintained separate portfolios of shares held as investment which are valued at cost price whereas shares held in stock-in- trade are valued as at cost or market price, whichever is lower. The following are the details as available in para 2.3 of the CIT(A)'s order regarding transactions/investment undertaken by the assessee in the earlier years -
5 ITA Nos. 36 & 328/Mum/2010
Shri Rajan R. Bahl
Speculative Business
A.Y. STCG LTCG
income/loss income/loss
01-02 (-)1,68,98,734 (-)17,65,675 - -
02-03 (-)13,96,521 (-)15,76,972 (-)4,41,232 -
03-04 (-)9,38,562 (-)21,33,956 22,71,077 -
04-05 1,62,94,593 (-)39,31,327 33,15,710 -
05-06 50,18,238 95,32,403 - 33,06,013
06-07 1,17,82,521 29,46,135 - 5,38,26,933
7. It is also on record that frequency and volume of shares purchased and sold are found to be substantially higher in the relevant year in comparison to the earlier assessment year. Therefore the CIT(A) was of the opinion that the facts available on the case, eventhough are identical to the facts raised in the case of Shri Gopal Purohit in ITA No. 4854/Mum/2008 dated 10.02.2009 (which was subsequently confirmed by the hon'ble High Court), he differed from the consistency principle holding that assessee has entered into transactions repeatedly and frequently, i.e. assessee has purchased a particular share, sold it and again purchased and sold thereby indicating that the transaction is of trading in nature. The CIT(A) also analysed various case laws/Board circulars and ultimately came to a conclusion that on the facts of the case, since assessee is having mixed/consolidated bank accounts through which both nature of transactions are carried out and also as assessee failed to prove that borrowed funds are exclusively used in his F&O business, he came to the conclusion that repetitive share transactions fall under the category of business.
8. We find that the artificial categorization made by the CIT(A) cannot be sustained as; (a) as pointed out by the learned counsel the shares of GLENMARK allotted to the assessee as bonus shares on 20th April 2005 to an extent of 10,000 shares on which assessee got `30,00,000/- profit cannot be considered as business transaction. Naturally the sale of bonus shares cannot yield business income unless the shares are purchased as stock-in- trade. On the given facts of the case the findings of the CIT(A) treating the 6 ITA Nos. 36 & 328/Mum/2010 Shri Rajan R. Bahl gains from the transactions of GLENMARK as business income cannot be upheld. Likewise the transactions in Birla Cash Plus units. These transactions are mutual fund transactions, not generally undertaken in Stock Exchanges. Eventhough there are repetitive transactions with much frequency mutual fund transactions by very nature are not traded in the Stock Exchanges and cannot be considered as business transactions. Whether the assessee is indulging in cash market transactions or only purchasing units and redeem them for short term capital gains with the surplus money has not been examined as both the A.O. and the CIT(A) treated these transactions on par with share transactions. It is also noticed that the assessee had other transactions like Bajaj Hindustan where number of shares were purchased over a period of time and sold on similar way. Another set of transaction in the case of Morpen Hotels Ltd. undertaken by the assessee do indicate that assessee purchased number of shares on 2nd August and 3rd August and sold them immediately between 19th August and 11th November with a holding period of 17 days to 33 days. Why these transactions are considered as investment transactions by the CIT(A) cannot be understood as he has gone by the repetitive nature of transaction while at the same time ignoring many such other transactions. Therefore, we are of the opinion that the CIT(A) erred in artificially segregating the income as business income and capital gains and therefore there is valid grievance from both assessee and Revenue.
9. We also find that the assessee has not placed on record its computation of income nor placed the nature of income earned on F&O transactions. A good indicator to know whether assessee is indulging in share transactions as business or as investment is to correlate with reference to the F&O dealings. If assessee is indulging in same shares both in physical delivery as well as in F&O on the same day this may indicate that the nature of transaction is that of business as an adventure. Investment in a particular scrip both in physical delivery and in speculation transaction of F&O cannot be considered different when undertaken at the same time and same nature of transaction on the same day. Therefore one way of analysing the intention of the assessee of trading or investment in a 7 ITA Nos. 36 & 328/Mum/2010 Shri Rajan R. Bahl particular scrip is to correlate with the F&O transactions. As noticed earlier the profit in F&O transactions is 5 times the gains earned in share transactions. Therefore in the interest of justice, since complete details are not placed on record to analyse whether the assessee's share transactions are in the nature of business transaction or investment transaction, we are of the opinion that the matter can be restored back to the file of the A.O. to examine the facts and analyse the intention.
10. The frequency of transactions, volume of transactions, holding period of shares are only indicative in nature to analyse whether assessee is trading or investing. No single parameter can be considered to determine one way or the other. There are various orders of the ITAT, both in favour of the assessee and against the assessee depending on the facts of each case. Therefore, relying alone on judicial principles is not a healthy practice to analyse the intention of the assessee of knowing whether the transactions are trading in nature or investment in nature. Not only that, the A.O. gives a finding that assessee has no other work except share related transactions whereas before the CIT(A) it was contended that assessee's main activity is that of manufacturing and export of garments in which he is associated as Director/partner in various concerns and only in this year share market transactions are more compared to earlier years. Since these facts are not examined by the A.O. in its correct perspective, we are of the opinion that the A.O. should analyse the transactions afresh vis-à-vis the income earned in F&O section. Not only that, as seen from the statement of income in earlier years there were also speculation transactions. If assessee is having speculation transactions in share market (other than F&O) that can be an indication of indulging in business transactions. The A.O. is directed to keep in mind the facts of the case, analyse the issue, examine the source of income vis-à-vis the record of the assessee in earlier and later years and also the transactions undertaken in speculation and F&O trading so as to come to a conclusion whether assessee is an investor or a trader. In case assessee is both an investor and a trader, the extent of transactions can be analysed depending on the facts. With these directions the orders of the CIT(A) and are set aside and the issue of treatment of gains on share transactions as 8 ITA Nos. 36 & 328/Mum/2010 Shri Rajan R. Bahl business income or capital gains is restored to the file of the A.O. to decide it afresh. Needless to say that assessee should be given an opportunity and A.O. is directed to keep various legal principles on this issue while deciding the matter.
11. Related issue with reference to disallowance under section 14A and disallowance of other expenditures confirmed by the CIT(A) are not contested by the assessee. Therefore, only the issue with reference to treatment to be given to the gain on share transactions is restored to the file of the A.O.
12. In the result, appeals are considered allowed for statistical purposes.
Order pronounced in the open court on 20th May 2011.
Sd/- Sd/-
(D. Manmohan) (B. Ramakotaiah)
Vice President Accountant Member
Mumbai, Dated: 20th May 2011
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - XXXI, Mumbai
4. The CIT- XX, Mumbai City
5. The DR, "D" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.