JAY MAHENDRA SHAH, MUMBAI V. ACIT 16(3), MUMBAI

CO 156/MUM/2012

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7694 (ITAT-MUMBAI)
• Duration Of Justice: 1 month(s) 25 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 31-08-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Next Hearing Date: 25-07-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 06-07-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K G KUTTY
• Assessee Lawyers: PRADIP N KAPASI
• Keywords: Capital asset; Business income; Speculative transactions
• Section: 45(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J, MUMBAI BEFORE SHRI G.E. VEERABHADRAPPA, PRESIDENT AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A. NO. 6093/M/2011 ASSESSMENT YEAR 2008-2009 ASSTT. COMMISSIONER OF INCOME TAX- 16(3), MATRU MANDIR, 2 ND FLOOR, R. NO. 206, TARDEO ROAD, MUMBAI 400 007. VS. SHRI JAY MAHENDRA SHAH, 06, 1 ST FLOOR, PRATIK ARCADE, TATA ROAD NO.1, OPERA HOUSE, MUMBAI 400 004. PAN:AAHPS8804P (APPELLANT) (RESPONDENT) C.O. NO.156/M/2012 (ARISING OUT OF ITA NO.6093/M/2011) SHRI JAY MAHENDRA SHAH, 06, 1 ST FLOOR, PRATIK ARCADE, TATA ROAD NO.1, OPERA HOUSE, MUMBAI 400 004. PAN:AAHPS8804P VS. ASSTT. COMMISSIONER OF INCOME TAX-16(3), MATRU MANDIR, 2 ND FLOOR, R. NO. 206, TARDEO ROAD, MUMBAI 400 007. (CROSS OBJECTOR) (RESPONDENT) ASSESSEE BY : SHRI PRADIP N KAPASI REVENUE BY : SHRI K.G. KUTTY, DR DATE OF HEARING:25.7 .2012 DATE OF ORDER: 31.08.2012 O R D E R PER VIJAY PAL RAO, JM: THIS APPEAL BY THE REVENUE AND CROSS OBJECTION BY T HE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 25.5.2011 OF CIT (A)-27, MU MBAI FOR THE ASSESSMENT YEAR 2008-2009. 2. THE ONLY EFFECTIVE GROUND RAISED BY THE REVENUE IN THIS APPEAL IS AS UNDER: 2 I.T.A. NO. 6093/M/2011 C.O. NO.156/M/2012 THE LD. CIT (A) HAS ERRED IN DIRECTING THE AO TO TR EAT RS. 2,57,59,291/- AS INCOME UNDER THE HEAD SHORT TERM CAPITAL GAINS INSTEAD OF TREATING IT AS BUSINESS INCOME. 3. THE ASSESSEE IS AN INDIVIDUAL AND A CHARTERED AC COUNTANT BY PROFESSION. APART INCOME FROM BUSINESS AND PROFESSION AND INCOM E FROM OTHER SOURCES, THE ASSESSEE ALSO ADMITTED INCOME FROM LONG TERM CAPIT AL GAIN AND SHORT TERM CAPITAL GAIN ARISING FROM PURCHASE AND SALE OF SHARES AS U NDER: I) LONG TERM CAPITAL GAIN : RS. 20,37,515/- (EXEMPT U/S 10(38) OF INCOME TAX ACT 1961) II) SHORT TERM CAPITAL GAIN : RS.2,57,59,292/- IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO ASKE D THE ASSESSEE AS TO WHY THE SHORT TERM CAPITAL GAIN OF RS. 2,57,59,292/- SHOULD NOT BE TREATED AS BUSINESS INCOME. IN RESPONSE TO THE SAID QUERY, THE ASSESS EE SUBMITTED HIS EXPLANATION VIDE LETTER DATED 28.12.2010 AND MAINLY CONTENDED THAT T HERE IS SUBSTANTIAL HOLDING PERIOD AND TREATMENT IN BOOKS HAVE BEEN GIVEN TO TH ESE SHARES AS INVESTMENT. HOWEVER, THE ASSESSING OFFICER DID NOT AGREE WITH T HE EXPLANATION AND CONTENTION OF THE ASSESSEE AND TREATED THE INCOME ADMITTED BY WAY OF SHORT TERM CAPITAL GAIN OF RS. 2,57,59,292/- AS BUSINESS INCOME. ON APPEAL, THE CIT (A) HAS HELD THAT THE INCOME FROM SHORT TERM CAPITAL GAIN OFFERED TO TAX REQUIRED NO DISTURBANCE AND CANNOT BE TREATED AS BUSINESS INCOME. 3 I.T.A. NO. 6093/M/2011 C.O. NO.156/M/2012 4. BEFORE US, THE LEARNED DR HAS MAINLY RELIED UPON THE ORDER OF AO AND SUBMITTED THAT THE ASSESSEE HAS A HUGE TURNOVER OF SHARES AROUND RS. 32.13 CRORES DURING THE YEAR WITH LARGE NUMBER OF TRANSACTIONS. HE HAS FURTHER SUBMITTED THAT IN SOME OF THE SCRIPS THE HOLDING PERIOD IS 3 DAYS, 5 DAYS AND 7 DAYS AS POINTED OUT BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. BESIDE THE TOTAL TURNOVER OF THE ASSESSEE IS TO THE TUNE OF RS. 14.61 CRORES BY WAY OF PURCHASE AND RS. 17.52 CRORES BY WAY OF SALES ONLY. THE LEARNED DR FURTHER CONTE NDED THAT THE ASSESSEE HAS ALSO CARRIED OUT THE TRANSACTION IN SPECULATION. THE LEA RNED DR HAS THUS CONTENDED THAT IT IS CLEAR THAT THE ASSESSEE IS DEVOTING ITS TIME AND ENERGY IN SHARE BUSINESS ONLY AND ALSO HUGE BORROWED FUNDS OF RS. 3.20 CRORES FOR THE PURPOSE OF PURCHASE OF SHARES. THE LEARNED DR HAS PLEADED THAT THE ORDER OF THE AS SESSING OFFICER MAY BE REVIVED. 5. ON THE OTHER HAND, THE LEARNED AR OF THE ASSESSE E HAS SUBMITTED THAT AO HAS REFERRED THREE COMPANIES NAMELY M/S. VIDEOCON INDUS TRIES, ANDHRA BANK AND M/S. DEEP INDUSTRIES WHICH ARE NOT REPRESENTATIVE TRANSAC TIONS FOR THE ASSESSEE BECAUSE TWO OF THESE TRANSACTIONS WERE NOT AS A RESULT OF A CTION OF THE ASSESSEE, ONE RELATED TO CLOSE OUT OF SHARE BY THE EXCHANGE (VIDEOCON INDU STRIES FOR ONLY ONE SHARE VALUED AT JUST RS. 590/- AND THE OTHER ANDHRA BANK TRANSACTION AMOUNTING TO ONLY RS. 8,817/-) PERTAINED DUE TO PUNCHING ERROR BY THE STOCK BROKER. IN CASE OF M/S. DEEP INDUSTRIES, LOSS WAS BOOKED WITHIN 7 DAYS SO A S TO STOP FURTHER EROSION OF CAPITAL AND THEREFORE, IT CANNOT BE TREATED AS A TR ADING TRANSACTION. HE HAS FURTHER POINTED OUT THAT THE WEIGHTED AVERAGE FOR THE SHARE S IN WHICH THE CAPITAL GAIN EARNED WAS 113 DAYS. MAJORITY OF THE SHARES WERE P URCHASED IN THE EARLIER YEAR 4 I.T.A. NO. 6093/M/2011 C.O. NO.156/M/2012 AND SHOWN AS INVESTMENT AND THE SAME CONTINUE TO BE HELD AS INVESTMENT AT THE END OF THE YEAR. ABOUT 99% OF THE TOTAL SHORT TERM CAPITAL GAIN HAS BEEN REGISTERED FROM THE SHARES BOUGHT IN EARLIER YEARS AND WERE TREATED AS INVESTMENT; THEREFORE, THE SAME CANNOT BE TREATED AS BUSINESS I NCOME DURING THE YEAR UNDER CONSIDERATION. THE LEARNED AR HAS FURTHER SUBMITTE D THAT THE ASSESSEE HAD CLASSIFIED ALL SHARE TRANSACTIONS WHERE THE DELIVER Y HAS TAKEN PLACE AS INVESTMENT AND ONLY IN THREE SUCH TRANSACTIONS WERE THE DELIVE RY WAS NOT RESULTED AS SPECULATION PROFIT OR LOSS. HE HAS POINTED OUT THAT DURING ENT IRE YEAR, ONLY THREE OF SUCH TRANSACTIONS WERE HAPPENED DUE TO THE RESULT OF PUN CHING ERROR ON THE PART OF THE SHARE BROKER RELATING TO THE CODE OF CLIENTS / SCRI PS / QUANTITY / PRICE AND DID NOT TANTAMOUNT TO CONDUCTING BUSINESS BY THE ASSESSEE A S OBSERVED BY THE AO. HE HAS FURTHER SUBMITTED THAT THE ERROR OF THE PUNCHING HA S BEEN CONFIRMED BY THE STOCK BROKER. HE HAS REFERRED THE ORDER OF THE CIT (A) A ND SUBMITTED THAT THE CIT (A) HAS ANALYZED ALL THE FACTS AND FOUND THE OBJECTIONS RAI SED BY THE AO ARE BASELESS. HE HAS RELIED UPON A SERIES OF DECISIONS OF HONBLE HI GH COURT AS WELL AS THIS TRIBUNAL IN SUPPORT OF HIS CONTENTION. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND REL EVANT MATERIAL AVAILABLE ON RECORD. THE FINDING OF THE AO BASED BROADLY ON THE OBSERVATIONS VIZ., (I) HUGE TURNOVER WITH LARGE NUMBER OF TRANSACTIONS (II) SHO RT PERIOD OF HOLDING IN RESPECT OF THREE SCRIPS (III) SPECULATIVE TRANSACTIONS ON THRE E OCCASIONS AND (IV) BORROWED FUNDS. THE VOLUME OF TRANSACTION ITSELF CANNOT BE A SOLE C RITERIA WHEN THE FREQUENCY OF THE TRANSACTIONS WERE NOT SO HIGH. IN THE CASE IN HAND, THE NUMBER OF DAYS DURING 5 I.T.A. NO. 6093/M/2011 C.O. NO.156/M/2012 WHICH EITHER THE PURCHASE OR SALE TRANSACTIONS CARR IED 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 TE RM CAPITAL GAIN ARE ONLY 27. THEREFORE, THIS FACT SUPPORTS THE CASE OF THE ASSES SEE. 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 JUSTIF IED WHEN THE OVERALL TRANSACTIONS AND HOLDING PERIOD IS TAKEN INTO CONSIDERATION. MO REOVER, IT WAS EXPLAINED BY THE ASSESSEE THAT DUE TO THE WRONG PUNCHING AND IN CASE OF M/S. VIDEOCON INDUSTRIES 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 T HE SHARE, THE LOSS WAS BOOKED WITH 7 DAYS. SO FAR AS THE SPECULATION TRANSACTION S IN THREE SCRIPS ARE CONCERNED, THE ASSESSEE HAS EXPLAINED THAT THIS HAPPENED BECAU SE 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 UND ER: 7.7. THERE WAS NO TRANSACTIONS WITHOUT DELIVERY EX CEPT FOR THREE ODD TRANSACTIONS DURING THE ENTIRE YEAR, WHICH WERE PRI MARILY DUE TO ERRORS OR CONFUSION WITH THE BROKER RELATING TO PUNCHING E RRORS BY BROKER RELATING TO CODE OF CLIENTS, NO-DELIVERY PERIOD, ET C. WHICH ARE SUFFICIENTLY EXPLAINED AT TABLE NO.3. SIMILARLY, T HE 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 B ROKER AS EXPLAINED AT 6 I.T.A. NO. 6093/M/2011 C.O. NO.156/M/2012 TABLE NO.8, AND NOT DUE TO ANY ORGANIZED OR SYSTEMA TIC 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 CON FIRMED THE PUNCHING ERROR FOR THESE THREE TRANSACTIONS AND WERE SCORED OFF AND RE VERSED IMMEDIATELY ON THE SAME DAY, IT CANNOT BE SAID THAT THE ASSESSEE WAS ENGAGE D IN THE SPECULATIVE TRANSACTIONS. TURNING TO THE NEXT OBJECTION OF THE ASSESSING OFFICER REGARDING BORROWED FUNDS, IT HAS BEEN EXPLAINED BY THE ASSESS EE THAT THE FUNDS WERE TAKEN FROM THE ASSESSEES HUF WHICH ARE NON-INTEREST BEAR ING FUNDS. THIS FACT HAS BEEN DULY CONSIDERED BY THE CIT (A) IN PARA 7.8 OF THE I MPUGNED ORDER AND THE AO HAS NOT CONTRADICTED THE SAME. ACCORDINGLY, WHEN THE F UNDS ARRANGED BY THE ASSESSEE WERE NOT FROM OUTSIDE BUT WITHIN THE FAMILY AND THA T 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 TH E BOOKS OF ACCOUNT AND VALUED AT COST, THEN THE EXPLANATION OF THE ASSESSEE IS CL EAR THAT THE SHARES WERE RETAINED AS INVESTMENT. FURTHER 99% OF THE SHORT TERM CAPIT AL 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 7 I.T.A. NO. 6093/M/2011 C.O. NO.156/M/2012 THE YEAR UNDER CONSIDERATION. EVEN OTHERWISE, IF T HE INVESTMENT IN THE EARLIER YEAR IS TREATED AS STOCK IN TRADE IN THIS YEAR THEN IN V IEW OF THE PROVISIONS OF SECTION 45(2), THE DIFFERENCE IN THE MARKET PRICE AND THE C OST AS SHOWN IN THE BOOKS OF ACCOUNT WOULD BE TREATED AS CAPITAL GAIN. 8. THUS, THE FACTS AND CIRCUMSTANCES OF THE CASE CL EARLY DEMONSTRATE THAT THE INTENTION OF THE ASSESSEE TO HOLD THE SHARES AS INV ESTMENT AND NOT STOCK IN TRADE. THE MOTIVE OF THE TRANSACTION OF 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 R ESPECT OF SHARES WHICH ARE HELD BY THE ASSESSEE AT THE END OF THE FINANCIAL YEAR IS MO RE 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 H AVE SOLD THE SHARES INSTEAD OF RETAINING THE SAME AT THE END OF THE YEAR. 9. IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND A NY ERROR OR ILLEGALITY IN THE ORDER OF THE CIT (A) IN HOLDING THE INCOME ARISEN F ROM SALE AND PURCHASE OF SHARES AS CAPITAL GAIN. 10. IN THE CROSS OBJECTIONS, THE 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 COMPUT ING THE CAPITAL GAINS IN RESPECT OF THE SHARES HELD AS CAPITAL ASSET WHIC H BY THE ACTION OF THE 8 I.T.A. NO. 6093/M/2011 C.O. NO.156/M/2012 LD. AO WERE TREATED AS STOCK IN TRADE AND FURTHER E RRED IN LAW AND ON FACTS IN TAXING SUCH INCOME AS BUSINESS INCOME INST EAD OF CAPITAL GAINS. YOUR APPELLANT PRAYS THAT FULL EFFECT BE GIVEN TO T HE 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 THE REOF SUCH SHARES WERE REQUIRED TO BE TREATED AS STOCK IN TRADE AND B E VALUED AS PER THE ACCOUNTING PRACTICES AND PRINCIPLES THAT ARE ACCEPT ED IN TAX LAWS. YOUR APPELLANT PRAYS THAT THE BUSINESS LOSS REPRESENTING THE VALUATION OF SHARES HELD AS STOCK IN TRADE BE ALLOWED IN ASSESSI NG THE TOTAL INCOME. 11. IN VIEW OF OUR FINDING IN THE ABOVE APPEAL OF TH E REVENUE, THE CROSS OBJECTIONS BECOME INFRUCTUOUS AND ACCORDINGLY DISM ISSED. 12. IN THE RESULT, APPEAL OF THE REVENUE AND THE CRO SS OBJECTIONS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF AUGUST, 2012. SD/- SD/- (G.E. VEERABHADRAPPA) (VIJAY PAL RAO) PRESIDENT JUDI CIAL MEMBER DATE : 31.8.2012 AT :MUMBAI OKK 9 I.T.A. NO. 6093/M/2011 C.O. NO.156/M/2012 COPY TO : 1. ACIT-16(3), MUMBAI. 2. SHRI JAY MAHENDRA SHAH 3. THE CIT (A), CONCERNED. 4. THE CIT CONCERNED. 5. THE DR J, BENCH, ITAT, MUMBAI. 6. GUARD FILE. // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI