NAILESH P. DALAL, MUMBAI V. ACIT CIR 21(1), MUMBAI

CO 235/MUM/2009

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8959 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 8 month(s) 10 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 28-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 18-07-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 18-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P SINGH B
• Assessee Lawyers: YOGESH THAR B C
• Keywords: Capital asset; Business income; Salary income; Rule of consistency; Source of fund
• Section: 143(3)

Judgement Text

I IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI .. , !'# $ $ $ $ ! %, & !'# !' BEFORE SHRI P.M. JAGTAP, AM AND SHRI SANJAY GARG, J M !./ I.T.A. NO. 3337 /MUM/2009 ( &) % $*% &) % $*% &) % $*% &) % $*% / / / / ASSESSMENT YEAR : 2006-07) ASSTT. COMMISSIONER OF INCOME TAX RG. 21(1), 6 TH FLOOR, R.NO. 601, PRATYAKSHAKAR BHAVAN, BANDRA-KURLA COMPLEX, BANDRA (E), MUMBAI 400 051. ) ) ) ) / VS. SHRI NAILESH P. DALAL, 5-6, VIKRAM, 62, HATKESH SOCIETY, JVPD SCHEME, N.S. ROAD NO. 8, VILE PARLE (W), MUMBAI 400 049. #+ !./ PAN : AACPD9844N ( +, / // / APPELLANT ) .. ( -.+, / RESPONDENT ) -.' !/C.O. NO. 235 /MUM/20 09 ARISING OUT OF ITA NO. 3337 /MUM/20 09 ( &) % $*% &) % $*% &) % $*% &) % $*% / / / / ASSESSMENT YEAR : 2006-07) SHRI NAILESH P. DALAL, 5-6, VIKRAM, 62, HATKESH SOCIETY, JVPD SCHEME, N.S. ROAD NO. 8, VILE PARLE (W), MUMBAI 400 049. ) ) ) ) / VS. ASSTT. COMMISSIONER OF INCOME TAX RG. 21(1), 6 TH FLOOR, R.NO. 601, PRATYAKSHAKAR BHAVAN, BANDRA-KURLA COMPLEX, BANDRA (E), MUMBAI 400 051. #+ !./ PAN : AACPD9844N CROSS OBJECTOR .. ( -.+, / RESPONDENT ) +, B C ! / ASSESSEE BY : SHRI YOGESH THAR -.+, B C ! / DEPARTMENT BY : SHRI O.P. SINGH !)$ B / // / DATE OF HEARING : 18-07-2013 DE* B / DATE OF PRONOUNCEMENT : 28-08-2013 ITA 3337/M/09 CO NO. 235/M/09 2 'F / O R D E R PER P.M. JAGTAP, A.M. : .. , !'# THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A) - XXI, MUMBAI DATED 20-03-2009 FOR ASSESSMENT YEAR 20 06-07 AND THE SAME IS BEING DISPOSED OF ALONG WITH THE CROSS OBJECTION FI LED BY THE ASSESSEE. 2. THE SOLITARY COMMON ISSUE ARISING OUT OF THE APP EAL OF THE REVENUE AND THE C.O. OF THE ASSESSEE RELATES TO THE DETERMINATI ON OF HEAD OF INCOME UNDER WHICH THE PROFIT EARNED BY THE ASSESSEE FROM THE TR ANSACTIONS ON SHARES IS CHARGEABLE TO TAX. 3. THE ASSESSEE IN THE PRESENT CASE IS AN INDIVIDUA L WHO FILED HIS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION ON 30-10-20 06 DECLARING TOTAL INCOME OF RS. 58,04,003/- WHICH COMPRISED OF INCOME FROM BUSINESS, SHORT TERM CAPITAL GAINS AND OTHER SOURCES. THE SHORT TE RM CAPITAL GAINS WAS EARNED BY THE ASSESSEE FROM THE TRANSACTIONS IN SHA RES AND THE DETAILS OF THE SAME AS FURNISHED BY THE ASSESSEE BEFORE THE A.O. W ERE AS UNDER:- SHORT TERM CAPITAL GAINS FROM 01-04-2004 TO 30-09-2005 NO OF SHARES BOUGHT AND SOLD 2,51,604 PURCHASE AMOUNT 1,06,04,746/- SALES AMOUNT 1,63,73,121/- NO. OF SCRIPS 31 TOTAL GAINS 57,68,375 SHORT TERM CAPITAL GAINS FROM 01-10-2005 TO 31-03-2006 NO OF SHARES BOUGHT AND SOLD 1,72,608 PURCHASE AMOUNT 1,90,72,340/- SALES AMOUNT 2,16,52,571/- NO. OF SCRIPS 18 TOTAL GAINS 25,80,231 ITA 3337/M/09 CO NO. 235/M/09 3 TOTAL SUMMARY OF SHORT TERM CAPITAL GAINS FROM 01-04-2005 TO 31-03-2006 NO OF SHARES BOUGHT AND SOLD 4,24,212 PURCHASE AMOUNT 2,96,77,086 SALES AMOUNT 3,80,25,692 NO. OF SCRIPS 49 TOTAL GAINS 83,48,606 ON PERUSAL OF THE ABOVE DETAILS FURNISHED BY THE AS SESSEE, THE A.O. WAS OF THE VIEW THAT KEEPING IN VIEW THE BACK GROUND OF THE AS SESSEE, REGULARITY, VOLUME, TURNOVER OF THE TRANSACTIONS AND THE PERIOD OF HOLD ING OF SHARES, THE PROFIT EARNED BY THE ASSESSEE FROM THE TRANSACTIONS IN SHA RES CONSTITUTED BUSINESS INCOME OF THE ASSESSEE AND NOT THE CAPITAL GAINS AS CLAIMED IN THE RETURN OF INCOME. HE, THEREFORE, REQUIRED THE ASSESSEE TO OF FER HIS EXPLANATION IN THE MATTER WHICH THE ASSESSEE FURNISHED VIDE HIS LETTER DATED 6-10-2008 AS UNDER:- I HAVE BEEN AN INVESTOR FOR THE LAST 30 YEARS AND H AVE BEEN FILING MY RETURNS REGULARLY AS AN INVESTOR. SINCE THE VERY F IRST RETURN I HAVE BEEN DECLARING ALL THE INVESTMENTS IN DETAIL INCLUDING P URCHASES, SALES AND HOLDINGS AS AT THE BEGINNING AS WELL AS AT THE END OF THE FINANCIAL YEAR. I HAVE TAKEN ALL THE SHARES AT ORIGINAL RATES AND H AVE NEVER CLAIMED ANY MARK TO MARKET PROFITS OR LOSSES AGAINST MY INVESTM ENT SHOWN UNDER STCG AND LTCG. I HAVE MADE THIS INVESTMENT OUT OF MY OWN FUNDS AND I HAVE NOT AVAILED OF ANY CREDIT FACILITIES FROM ANY BANKS. I HAVE TAKEN DELIVERY OF ALL THE SHARES FOR WHICH I HAVE BOOKED SHORT TERM CAPITAL GAINS. THIS CAN BE VERIFIED FROM THE COPIES OF THE ENCLOSED DEMAT STATEMENTS. THERE WERE TRANSACTIONS IN ONLY 51 SCRIPS DECLARED UNDER STCG. THESE WERE CARRIED OUT THROUGH RECOGNIZED STOCK EXCHANGES . THE SECURITIES TRANSACTION TAX HAS BEEN DULY PAID ON ALL THE TRANS ACTIONS. IT WAS FURTHER SUBMITTED BEFORE THE A.O. THAT THE A SSESSEE WAS WORKING AS FULL TIME DIRECTOR OF M/S DALAL BROACHA STOCK BROKING PV T. LTD. EARNING A SALARY OF RS. 52 LACS AND HE WAS NOT IN A POSITION TO DEVO TE ANY TIME TO CARRY ON THE ITA 3337/M/09 CO NO. 235/M/09 4 BUSINESS OF TRADING IN SHARES. IT WAS SUBMITTED THA T THE TRANSACTIONS IN PURCHASE AND SALE OF SHARES WERE BEING DONE BY THE ASSESSEE AS AN INVESTOR AND THE PROFIT EARNED FROM SUCH TRANSACTIONS OFFERE D TO TAX UNDER CAPITAL GAIN WAS ACCEPTED BY THE DEPARTMENT IN THE PAST. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD MADE THE ENTIRE INVESTMENT IN SHARES O UT OF HIS OWN FUNDS AND THERE WAS NO AMOUNT BORROWED FOR THE PURPOSE OF MAK ING THE SAID INVESTMENT. IT WAS POINTED OUT THAT THE ASSESSEE H AD ENTERED IN TO PURCHASE AND SALE TRANSACTIONS IN ONLY 39 SCRIPS OUT OF WHIC H 16 SCRIPS WERE HELD IN THE FORM OF OPENING INVESTMENT. IT WAS CONTENDED TH AT THE SCALE OF THIS ACTIVITY COULD NOT BE SAID TO BE SUBSTANTIAL AND TH E TRANSACTIONS WERE ALSO NOT ENTERED INTO CONTINUOUSLY AND REGULARLY DURING THE YEAR UNDER CONSIDERATION. IT WAS ALSO POINTED OUT THAT THE TYPICAL HOLDING PE RIOD OF THE SHARES AS GIVEN IN THE STATEMENT OF LONG TERM CAPITAL GAIN WAS BETW EEN TWO TO TEN YEARS WHILE THE SAID IN THE CASE OF SHORT TERM CAPITAL GAIN WAS MORE THAN SIX MONTHS. IT WAS CONTENDED THAT THE INTENTION OF THE ASSESSEE TH US WAS ALWAYS TO STAY INVESTED AND EARN DIVIDEND INCOME OVER A PERIOD. R ELYING ON THE VARIOUS JUDICIAL PRONOUNCEMENTS CITED BEFORE THE A.O. AS WE LL AS REFERRING TO THE CBDT CIRCULAR NO. 4/2007 ISSUED ON 15-6-2007, IT WA S CONTENDED ON BEHALF OF THE ASSESSEE THAT ALL THE RELEVANT FACTS AND CIR CUMSTANCES OF THE CASE SHOULD BE TAKEN INTO CONSIDERATION TO DECIDE THE IN TENTION OF THE ASSESSEE TO ACQUIRE AND HOLD THE SHARES AND IF SUCH INTENTION I S FOUND TO BE THAT OF MAKING INVESTMENT IN SHARES RATHER THAN TRADING IN SHARES, THE PROFITS ARISING FROM THE TRANSACTIONS IN SHARES SHOULD BE ASSESSED AS CAPITAL GAIN. 4. THE SUBMISSIONS MADE BY THE ASSESSEE WERE CONSID ERED BY THE A.O. IN THE LIGHT OF CERTAIN TESTS LAID DOWN IN VARIOUS JUD ICIAL PRONOUNCEMENTS AS WELL AS IN THE CIRCULAR ISSUED BY THE CBDT IN ORDER TO D ISTINGUISH BETWEEN SHARES HELD AS STOCK-IN- TRADE AND SHARES HELD AS INVESTME NT. IN THIS REGARD, HE RECORDED HIS FINDINGS/OBSERVATIONS AS UNDER:- ITA 3337/M/09 CO NO. 235/M/09 5 (1) WHETHER THE PURCHASE AND SALE OF SECURITIES WA S ALLIED TO HIS USUAL TRADE OR BUSINESS/ WAS INCIDENTAL TO IT OR WA S AN OCCASIONAL INDEPENDENT ACTIVITY. THE ASSESSEE IS HAVING PREDOM INANT ACTIVITY OF BUYING AND SELLING OF SHARES WHERE THE TRANSACTIONS WERE ENTERED INTO CONTINUOUSLY, REGULARLY AND SYSTEMATICALLY DURING T HE ASSESSMENT YEAR UNDER CONSIDERATION. (II) TIME DEVOTED TO THE ACTIVITY AND THE EXTENT TO WHICH IT IS THE MEANS OF LIVELIHOOD. IN THE GIVEN CASE THE SHARE TRADING ACTIVITY IS THE ONLY ACTIVITY BEING UNDERTAKEN B THE ASSESSEE AND IS A WHOLE TIME OCCUP ATION FOR THE ASSESSEE. THIS IS STRENGTHENED BY THE FACT THAT THE SALARY INCOME FROM THE COMPANY IS IN LIEU OF THE SHARE TRADING ACTIVIT Y OF THE COMPANY. THE NATURE OF THE BUSINESS OF COMPANY AND INDIVIDUAL IS THE SAME. (III) WHETHER SCALE OF ACTIVITY IS SUBSTANTIAL. THE SCALE OF ACTIVITY IS DEFINITELY SUBSTANTIAL IN THE CASE OF THE ASSESSEE. THE NUMBER OF TRANSACTIONS AND THE QUANTUM OF SALE AND PURCHASE OF SHARES HAVE BEEN ELABORATED IN THE EARLIER PARAS OF THIS ASSESSMENT ORDER FROM WHERE IT IS CLEAR THAT BOTH THE NUMBER A ND QUANTUM OF TRANSACTIONS ARE SUBSTANTIAL. HOLDING PERIOD OF SECURITIES BOUGHT AND SOLD AND FR EQUENCY OF TRANSACTIONS. IT WILL NOT BE OUT OF PLACE TO MENTION EVEN AT THE COST OF REPETITION THAT TAXABILITY OF TRANSACTIONS WILL NOT DEPEND ON PRESE NTATION OF ACCOUNTS OR BY SHOWING THE SHARES AS INVESTMENT. IT WILL DEPEND ON THE FACTS OF THE CASE. THE VOLUME, FREQUENCY AND REGULARITY OF SHARE TRANSACTIONS DONE IN ORGANIZED MANNER INDICATE BUSINESS ACTIVITY. ON THE BASIS OF ABOVE FINDINGS/OBSERVATIONS RECORDE D BY HIM AS WELL AS RELYING ON VARIOUS JUDICIAL PRONOUNCEMENTS EXPLAINI NG THE MEANING OF THE WORD BUSINESS, THE A.O. HELD THAT THE ASSESSEE WA S MAINLY ENGAGED IN THE ACTIVITY OF EARNING PROFIT THROUGH PURCHASE AND SAL E OF SHARES AND SUCH PROFITS THEREFORE WAS CHARGEABLE TO TAX IN HIS HANDS AS BUS INESS INCOME AND NOT CAPITAL GAIN. ACCORDINGLY, SUCH PROFIT DECLARED BY THE ASSESSEE AS SHORT TERM CAPITAL GAINS AND LONG TERM CAPITAL GAINS WAS ENTIR ELY BROUGHT TO TAX BY THE A.O. IN THE HANDS OF THE ASSESSEE AS BUSINESS INCOM E IN THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME TAX ACT, 1961 VI DE AN ORDER DATED 21-11- 2008. ITA 3337/M/09 CO NO. 235/M/09 6 5. AGAINST THE ORDER PASSED BY THE A.O. U/S 143(3) OF THE ACT, APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LD. CIT(A) AND THE FOLLOWING SUBMISSIONS WERE MADE ON BEHALF OF THE ASSESSEE BEFORE THE LD. CIT(A) IN SUPPORT OF HIS CASE THAT THE TRANSACTIONS IN SHARES WERE ENTERED I NTO AS INVESTOR AND NOT AS TRADER AND THE PROFIT ARISING FROM SHARES WAS CHARG EABLE TO TAX AS CAPITAL GAIN AND NOT BUSINESS INCOME:- THAT THE GENERAL PRINCIPLES OF LAW APPLICABLE, FOR DETERMINING WHEN CERTAIN ACTIVITIES CONSTITUTE A BUSINESS OR ARE ON CAPITAL OR INVESTMENT ACCOUNT, WOULD HAVE TO BE APPLIED TO THE ACTIVITIES OF SHARE INVESTING IN ORDER TO DETERMINE WHETHER THE TRANSACTIONS RESULT IN A BUSINESS INCOME OR CAPITAL GAINS. THERE IS NO EXPRESS PROVIS ION IN THE LAW TO DETERMINE WHEN AN ACTIVITY IS ONE OF INVESTMENT AND WHEN IT CONSTITUTES A BUSINESS. THE GUIDANCE THAT IS AVAILABLE IN THE I NCOME TAX ACT IS BASICALLY IN THE FORM OF THE INCLUSIVE DEFINITION O F THE TERM BUSINESS UNDER SECTION 2(13). THIS DEFINITION DOES NOT PROVI DE MUCH GUIDANCE SO FAR AS DETERMINING WHETHER SHARE TRANSACTIONS CONST ITUTE A BUSINESS OR NOT, SINCE THE DEFINITION IS INCLUSIVE DEFINITION A ND THEREFORE MERELY ILLUSTRATIVE AND NOT ALL-EMBRACING. (II) THAT THE APPELLANT IS THE DIRECTOR OF M/S DALA L & BROACHA STOCK BROKING PVT LTD., SINCE MORE THAN 10 YEARS. THE APP ELLANT HAS RECEIVED RS,52,00,000/- AS SALARIES FROM THIS COMPANY. FOR T HIS PURPOSE THE APPELLANT IS REQUIRED TO DEVOTE HIS FULL TIME AND ENERGY TOWARDS THE ACTIVITY OF THE COMPANY. THEREFO RE, THERE CANNOT BE ANY OTHER SYSTEMATIC BUSINESS ACTIVITIES CARRIED BY THE APPELLANT EXCEPT AS THE EMPLOYEE OF THE COMPANY. THE APPELLANT IS RE QUIRED TO ATTEND TO THE CLIENTS OF THE COMPANY BETWEEN 9.00 AM TO 4.00 PM RELATED TO SECURITIES TRANSACTION OF BSE & NSE. THEREAFTER, HE IS REQUIRED T LOOK INTO THE COLLECTION OF DUES FROM HE CLIENTS AND SET TLEMENT OF ACCOUNT WITH THE STOCK EXCHANGES THE NEXT DAY. A TYPICAL WO RKING DAY EXTENDS FROM 8.00 AM TO 8 PM DEVOTED WHOLLY TO THE AFFAIRS OF THE COMPANY. THEREFORE, THE APPELLANT CANNOT CARRY OUT THIS ACTI VITY AS A PRIMARY OCCUPATION. (III) THAT THE LIVELIHOOD OF THE APPELLANT DOES NET DEPEND UPON THE RETURNS ON INVESTMENT AS INCOME FROM SALARY IS MUCH HIGHER THAN THE RETURNS OF THE INVESTMENT IN MOST NUMBER OF YEARS. THEREFORE IT CANNOT BE SAID THAT THE APPELLANT S IN THE BUSINESS OF TRA DING OF SHARES / SECURITIES. (IV) THAT, AS THE COMPANY IN WHICH THE APPELLANT IS AN EMPLOYEE IS IN THE BUSINESS OF BROKERAGE ON BSE OR NSE, THE APPELL ANT CARRIES OUT OCCASIONAL TRANSACTION ON PERSONAL ACCOUNT. THU INV ESTMENTS IN ITA 3337/M/09 CO NO. 235/M/09 7 SHARES, UNITS OF MUTUAL FUNDS, GOVERNMENT SECURITI ES, DEBENTURES, UNLISTED COMPANIES AND LISTED EQUITY SHARES ARE IND EPENDENT OF ACTIVITIES OF THE COMPANY. IF A COMPANY CAN BE BOTH A TRADER AS WELL AN INVEST OR, THEN WHY AN INDIVIDUAL CANNOT BE ATTACHED TO A BROKING FIRM AND STILL HE AN INVESTOR IN INDIVIDUAL CAPACITY. V) THAT THE APPELLANT HAS BEEN FILLING HIS RETURN O F INCOME FROM YEAR TO YEAR FOR THE PAST MORE THAN 25 YEARS ALONG WITH COM PUTATION OF INCOME WHEREIN SIMILAR TRANSACTION IN SALE AND PURCHASE OF SHARES ON BOTH LONG TERM AND SHORT TERM BASIS HAVE BEEN DULY ACCEP TED BY THE DEPARTMENT AS AN INVESTOR. THOUGH THE PRINCIPLE OF RES JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS AS EACH YEAR IS INDEPENDENT YEAR OF ASSESSMENT, HOWEVER, IN ORDER TO MAINTAIN THE CONSI STENCY, IT IS JUDICIALLY ACCEPTED PRINCIPLE THAT SAME VIEW SHOULD HE ADOPTED FOR THE SUBSEQUENT YEAR, UNLESS THERE IS A MATERIAL CHANGE IN THE FACTS. THIS PRINCIPLE HAS BEEN FOLLOWED BY MUMBAI ITAT IN JANAK S RANGWALA V ACIT 2007 - 11 SOT 627 (MUM.) (PG.58-60 OF APB). VI) THAT SIMILAR ISSUE CAME UP FOR CONSIDERATION BY THE BOMBAY BENCH OF ITAT BOMBAY GYMKHANA VS. ITO (IT APPEAL NO. 249 OF 2005 PRONOUNCED ON 31.10.2007). IT WAS HELD THAT IN THE INSTANT CASE, THE REAL QUESTION THAT CAME UP FOR CONSIDERATION WAS AS TO WHETHER THE FIRST STEP, I.E. PURCHASE OF SHARES WAS IN THE COURSE OF TRADING TRANSACTION OR IN THE COURSE OF INVESTMENT. IT WAS SEEN THAT THE P URCHASE OF UNITS WAS MADE AS INVESTMENT AND THE SAME WAS SHOWN BY THE AP PELLANT IN ITS BOOKS OF ACCOUNT AS INVESTMENT AND IN EARLIER YEARS , SAID STAND OF THE APPELLANT WAS ACCEPTED BY THE DEPARTMENT. IF THE PU RCHASE OF UNITS WAS ACCEPTED AS PURCHASE IN COURSE OF INVESTMENT, AT TH E TIME OF SALE THEREOF, INCOME ARISING ON SALE HAD TO BE ASSESSED AS CAPITAL GAIN AND IT COULD NOT BE ASSESSED AS BUSINESS INCOME MERELY FOR THE REASON THAT QUANTUM WAS HIGH OR THE NUMBER OF TRANSACTIONS WAS HIGH. FOLLOWING MORE JUDGMENTS ALONG WITH COPIES OF THE O RDERS WERE FURNISHED BY THE LD. A.R. OF THE APPELLANT. A) CIT VS. LAGAN KALA UPAVAN : (2003) 259 ITR 489(D EL) PG 70-71 B) CIT VS. A.R.J.SECURITY PRINTERS : (2003) 264 IT R 276 (DEL) PG72-73 .. C) DIT VS. LOVELY BAL SHIKSHA : (2004) 236 ITR(DEL ) PG 74-75 D) CIT VS. H.P.COTTON TEXTILE MILLS LTD : IT APPEA L NO. 264 OF 2007 PG 76.77 E) DIT VS. ESCORTS CARDIAC DISEASES HOSPITAL SOCIE TY IT APPEAL NO.28/2006 PG 78-79 ITA 3337/M/09 CO NO. 235/M/09 8 F) CIT VS. DALMIA PROMOTERS DEVELOPERS: ITAPPEAL.NO.755 OF 2005 PG 8041 G) CWT VS: ALLIED FINANCE (P) LTD. (2007) 289 ITR 318(DEL) PG 82- 83 H) CIT VS. SOOD HARVESTER (2008) 304 ITR 279 PG 84-85 I) PUKHRAJ RIKHABDASS VS. CWT: (1995) 203 ITR 770 (RAJ) PG 86-87 J) CIT V INDIA FORGE & DROP STAMPING LTD. (1999) 24 0 ITR (MAD) PG 88-89 VI) THAT THE APPELLANT HA BEEN ASSESSED TO TAX U/S 143(3) IN THE PROCEEDING ASSESSMENT YEAR I.E. ASSESSMENT YEARS 20 04-05 WHEREIN THE SHARES /MF UNITS SOLD DURING THE PREVIOUS YEAR HAVE BEEN ACCEPTED AS CAPITAL GAINS / LOSS FURTHER THE APPELLANT HAS BEEN FILLING INCOME TAX RETURNS SINCE LAST 25 YEARS ALONG WITH BALANCE SHE ET AND DETAIL GROUPINGS OF CAPITAL ACCOUNT, CASH AND BANK BALANCE S, INVESTMENTS, OTHER ASSETS IN LIABILITIES. THE I.T DEPARTMENT HAS ACCEPTED THE CLASSIFICATION OF ASSETS AS WELL AS THE HEADS OF IN COME IN THE COMPUTATION FILED WITH THE RETURN OF INCOME. IT APP EARS THAT JUST BECAUSE THE APPELLANT HAS EARNED RELATIVELY HIGH AM OUNT OF PROFIT ON SALE OF SHARES DURING THE YEAR, THE A.O. HAS OVERTU RNED THE CLASSIFICATION OF ASSETS ACCEPTED ALL THROUGH THE P AST 25 YEARS, WHICH SHOULD NOT BE PERMITTED. VII) THAT THE APPELLANT HAS MADE ALL THE INVESTMENT OUT OF HIS OWN FUNDS/ CAPITAL AND THAT NOT BORROWED ANY AMOUNT FOR THE PURPOSE OF INVESTMENT IN SHARES/SECURITIES. THIS INDICATES THA T THE APPELLANT NEVER INTENDED TO LEVERAGE HIS ASSETS BY OBTAINING LOANS BASED AN THE ASSETS AND MAKING INVESTMENTS IN SHARES BASED ON LOAN FUND S, WHICH EVEN THE APPELLANT UNDERSTANDS THAT IT WOULD BE LIABLE TO BE TREATED AS BUSINESS AS THE DIVIDENDS ARE MUCH SMALLER COMPARED TO THE I NTEREST LIABILITY THAT MAY BE INCURRED. VIII) THAT THE APPELLANT HAS ENTERED INTO PURCHASE/ SHARES TRANSACTION RESULTING INTO CAPITAL GAINS IN 39 SCRIPS, OF WHICH PURCHASES PERTAINING TO 16 SCRIPS WERE IN THE FORM OF OPENING INVESTMENT S. THE PURCHASES RELATING TO THESE INVESTMENTS WERE SHOWR3 AS CLOSIN G INVESTMENT IN PRECEDING PREVIOUS YEAR AND SAME HAS BEEN ACCEPTED AS INVESTMENT. THEREFORE TOTAL NUMBER OF STOCK DEALT IN BY THE APP ELLANT CAN NOT BE CALLED SUBSTANTIAL NUMBER OF STOCK AS THE NUMBER OF SCRIPS LISTED ON BOTH THE STOCK EXCHANGES ARE IN EXCESS OF 10,000 CO MPANIES THEREFORE, THE SCALE OF ACTIVITY CANNOT BE SAID TO BE SUBSTANT IAL AND THE TRANSACTIONS ARE ALSO NOT ENTERED INTO CONTINUOUSLY AND REGULARLY DURING THE PREVIOUS YEAR. ITA 3337/M/09 CO NO. 235/M/09 9 ON THE BASIS OF THE DECISION OF JURISDICTIONAL TRIB UNAL IN THE CASE OF BOMBAY GYMKHANA V ITO (ITA NO. 249 OF 2005) DATED 3 1.10.2007, IT MUST BE HELD THAT WHATEVER HAS ALREADY BEEN SHOWN A ND ACCEPTED PURCHASE IN COURSE OF INVESTMENT IN THE EARLIER YEA R CANNOT BE TREATED AS BUSINESS / TRADING ACTIVITY AT THE TIME OF SALE EVEN IF QUANTUM AND/ OR THE FREQUENCY OF TRANSACTION IS HIGH. IX) THAT, AS REGARDS THE RATIO OF SALES TO PURCHASE S AND HOLDING, IT IS STATED THAT THE APPELLANT HAS SOLD INVESTMENT WORTH RS.529 AS AGAINST OPENING STOCK AND PURCHASE WORTH RS. 818 LACS. THIS WORKS OUT TO SALE PURCHASE RATIO OF 0.64 1. IN A TYPICAL TRADING SITU ATION THIS WOULD BE MUCH HIGHER AS THE TRADER MAXIMIZES HIS RETURNS AS HIS TURNOVER INCREASES. X) THAT TYPICAL HOLDING PERIOD OF THE INVESTMENT BY THE APPELLANT IS NORMALLY BETWEEN 2-10 YEARS. THIS IS EVIDENT FROM T HE STATEMENT OF LONG TERM CAPITAL GAIN AMOUNTING TO 31,18,439 SUBMITTED HEREIN. EVEN IN THE SHORT TERM CAPITAL GAIN THE AVERAGE PERIOD EXCE EDS 6 MONTHS. THE INTENTION OF 1IE APPELLANT HAS ALWAYS, BEEN TO STAY INVESTED AND EARN DIVIDENDS OVER A SUBSTANTIAL PERIOD OF TIME. HOWEVE R, DURING THE PREVIOUS YEAR THERE WAS UNPRECEDENTED BOOM ON THE S TOCK MARKET WHICH LED TO AMENDMENT IN THE HOLDING PERIOD OF THE APPELLANT. FURTHER, THE APPELLANT HAS EARNED DIVIDENDS OF RS. 3.50 LACS DURING THE YEAR WHICH INDICATES THAT THE PREDOMINANT MOTIVE WA S TO EARN DIVIDENDS AND NOT TO TRADE IN THE SECURITIES. XI) THAT THE TRANSACTIONS HAVE ALL BEEN PAID OR REC EIVED FOR AND IS NOT MERELY REFLECTED BY BOOK ENTRIES. THE ASSESSEE HAS TAKEN DELIVERY IN CASE OF PURCHASES AND GIVE DELIVERY FOR SALES. THES E ARE NOT MERELY BOOK ENTRIES. EVEN THE PAYMENTS HAVE BEEN MADE OUT OF OW N FUNDS AT EVERY STAGE. XII) THAT THE DOMINANT OBJECT OF THE APPELLANT W AS TO GET OUT OF THE VOLATILE EQUITY INVESTMENT TO MORE STABLE MUTUAL FU NDS / RBI RELIEF BONDS INVESTMENTS. THIS IS EVIDENT FROM THE FACT TH AT OUT OF PROCEEDS OF SALE OF EQUITY, THE APPELLANT HAS BOUGHT MF UNITS W ORTH 74,96,000 AND RBI RELIEF BONDS WORTH RS. 14,46,000 THEREBY HANDIN G OVER THE INVESTMENTS TO PROFESSIONAL FINANCIAL ADVISORS AND THE RBI FOT EARNING DIVIDENDS / TAX FREE INTEREST RATHER THAN THE EQUIT Y MARKETS WHERE THE RISK TO RETURNS ARE VERY HIGH. 6. THE LD. CIT(A) FOUND SUBSTANCE IN THE SUBMISSION S MADE ON BEHALF OF THE ASSESSEE. ACCORDING TO HIM, THE FOLLOWING SUBMI SSIONS MADE BY THE ASSESSEE WERE SUFFICIENT TO SUCCESSFULLY REBUT ALL THE OBJECTIONS RAISED BY THE A.O. IN HIS IMPUGNED ORDER:- ITA 3337/M/09 CO NO. 235/M/09 10 THE APPELLANTS ACTIVITY MAY BE CALLED REGULAR, BU T NOT SYSTEMATIC. FURTHER, THE LARGE NUMBER OF TRANSACTION ARE SMALL IN QUANTUM AND VALUE AND SCALE OF ACTIVITY DOES NOT JUSTIFY SUCH C ONCLUSION. FURTHER, THE APPEL1ANT WOULD NOT REQUIRE MUCH INFRASTRUCTURE TO CARRY OUT THESE LITANY TRANSACTIONS AS IN PRESENT TIMES THE TRAISAC TION3 ARE MADE EITHER ONLINE THROUGH WEB OR ON TELEPHONE LINES WHICH INVO ICES MEAGER INVESTMENT. II) THE APPELLANT IS A FULL TIME EMPLOYEE DRAWING A SALARY OF RS.51,90,000 AND EXPECTED TO DEVOTE FULL TIME AND E NERGY TO THE BUSINESS OF COMPANY. HENCE, THE AOS CONTENTION THA T THE APPELLANT IS IN FULL TIME ACTIVITY OF TRADING IS NOT TENABLE. IN ANY CASE, IT HAS BEEN HELD BY VARIOUS JUDICIAL AUTHORITIES AND CBDTS CIR CULAR NO.4.2007 THAT A PERSON CAN HAVE BOTH ACTIVITIES I.E TRADING AS WE LL AS INVESTMENTS. THEREFORE, A PERSON WORKING IN A SHARE MARKET RELAT ED FIRM CAN ALSO BE AN INVEST IN HIS PERSONAL CAPACITY. III) THE APPELLANT HAS BEEN HELD TO BE AN INVESTOR IN THE PAST MANY YEARS AND AN ASSESSMENT ORDER FOR A/Y 2004-05 PASSE D U/S 143(3) CLEARLY INDICATES THAT HE HAS BEEN ACCEPTED AS AN I NVESTOR THROUGHOUT THE PERIOD. THE APPELLANT HAS ALSO BEEN FILING A DE TAILED BALANCE SHEET ALONGWITH THE RETURN OF INCOME CLEARLY SHOWING THE SHARES AS INVESTMENT AND AS NOT AS INVENTORY. IV) THAT THE APPELLANTS FINANCIAL POSITION IS NOT AT LEVERAGED AND THE ENTIRE INVESTMENT IS COMING OUT OF HIS OWN FUNDS. T HIS KIND OF SITUATION IS VERY RARE IN CASE OF BUSINESS ACTIVITY US THE BU SINESS IS ALWAYS LOOKING TO INCREASE ITS TURNOVER WITH SOMEONE ELSE S MONEY. V) CIRCULAR NO. 4/2007 DATED 15.06.2001, WHILE DEAL ING WITH THE RATIOS LAID DOWN BY THE HONBLE SUPREME COURT, LAYS DOWN T HREE PRINCIPLES WHICH ARE REQUIRED TO BE ASCERTAINED. FIRST PRINCIPLE IS REGARDING MEMORANDUM & ARTICLES OF ASSOCIATION, WHICH IS NOT APPLICABLE TO THE APPELLANT, BEING AN INDIVIDUAL. THE SECOND PART OF THIS PRINCIPLE REQUIRES THAT A VERIF ICATION BE DONE WHETHER THE SHARES WERE SHOWN AS STOCK-IN- TRADE OR WERE SHOWN AS INVESTMENT IN CAPITAL ASSETS. THE APPELLANT CLEARLY FULFILLS THIS REQUIREMENT AS HE HAS OVER NUMBER OF YEARS BEEN SHO WING HIS SHARES / SECURITIES AS INVESTMENTS WHICH IS NOT EVEN DISPUTE D BY THE AO. SECOND PRINCIPLE IS O ASCERTAIN THAT NATURE OF TRAN SACTIONS, ITS MAGNITUDE AND RATIO BETWEEN PURCHASE AND SALES AND THE HOLDING. THE APPELLANT HAS BROUGHT THE FACT THAT THE MAGNITUDE O F THE TRANSACTION IS NOT LARGE BY ANY STANDARD AS THERE ARE ONLY 64 SCRI PS IN THE WHOLE YEAR. FURTHER, EVEN THE RATIOS OF PURCHASE TO SALE (COST) IS APPROXIMATELY 0. 90 : 1 I.E. PURCHASE ARE ALMOST AS MUCH AS THAT OF SALES ANOTHER RATIO ITA 3337/M/09 CO NO. 235/M/09 11 ON OPENING STOCK + PURCHASES TO SALES 1.97: THEREFO RE, THIS PRINCIPLE ALSO IS MET. THIRD PRINCIPLE IS ABOUT THE MOTIVE. TO THIS THE AP PELLANT HAS PROVIDED A DETAILED ANALYSIS OF VARIOUS SOURCES OF INCOME FOR PAST 5 YEARS AND CONTENDS THAT DIVIDENDS AND INTEREST FROM BONDS CON STITUTES A MAJOR SOURCE OF INS INCOME AND IT IS HIGHER THAN EVEN CAP ITAL GAINS IN 2 OUT OF 5 YEARS. DURING THE YEAR ALSO THE APPELLANT HAS EAR NED RS. 9,93,438/- AS DIVIDENDS. IN ADDITION TO THE ABOVE THE APPELLAN T CONTENDS THAT EVEN FOR SALE OF SHARES THE DOMINANT OBJECTIVE WAS TO GE T OUT OF THE VOLATILE SHARE INVESTMENTS AND GET INTO DEBT / EQUITY MUTUAL FUND WHICH ARE MUCH MORE STABLE AND MANAGED BY PROFESSIONAL FUND M ANAGERS. THIS IS EVIDENT FROM THE FACT THAT HE HAS PURCHASED MF UNIT S WORTH RS.89.42 LACS OUT OF TOE TOTAL PURCHASE OF RS.217.36 LACS. T HIS SUFFICIENTLY EXPLAINS THE MOTIVE OF INVESTMENTS AS WELL AS THE S ALE OF SHARE DURING THE PREVIOUS YEAR. VI). THE CIRCULAR FURTHER STATES THAT IT IS POSSIBL E FOR AN ASSESSEE TO HAVE BOTH TRADING AS WELL AS INVESTMENT PORTFOLIO. IT GO ES ON TO SAY THAT ASSESSING OFFICER ARE ADVISE THAT NO SINGLE PRINCIP LE WOULD BE DECISIVE AND TOTAL EFFECT OF ALL THE PRINCIPLE SHOULD BE CON SIDERED TO DETERMINE WHETHER IN A GIVEN CASE THE SHARES HELD BY THE ASSE SSEE ARE INVESTMENT OR STOCK IN TRADE. THIS MEANS THAT THE AO SHOULD N OT BASE HIS ASSESSMENT ON ONE SINGLE CRITERIA BUT MUST BRING OU T TOTALITY OF FACTS BEFORE MAKING AN ASSESSMENT CONTRARY TO THE CLAIM O F THE ASSESSEE. VII) LAST BUT NOT THE LEAST, THE APPELLANT CONTENDE D THAT HIS AVERAGE HOLDING PERIOD FOR LTCG HAS BEEN 2 TO 10 YEARS AND THAT OF STCG IS 6 MONTHS. ON THE BASIS OF THE ABOVE DISCUSSION, THE LD. CIT(A ) HELD THAT THE TRANSACTIONS IN SHARES ENTERED INTO BY THE ASSESSEE GIVING RISE TO LONG TERM CAPITAL GAINS WERE ENTIRELY MADE AS INVESTOR. ACCORDINGLY, HE DI RECTED THE A.O. TO ALLOW THE CLAIM OF THE ASSESSEE FOR LONG TERM CAPITAL GAINS O F RS. 31,18,439/-. AS REGARDS THE CLAIM OF THE ASSESSEE FOR SHORT TERM CA PITAL GAINS, THE LD. CIT(A) HELD THAT THE SAME WAS ACCEPTABLE TO THE EXTENT IT WAS RELATING TO THE TRANSACTIONS IN SHARES HELD BY THE ASSESSEE FOR MOR E THAN ONE MONTH AND THE BALANCE PROFIT EARNED BY THE ASSESSEE ON SALE OF SH ARES HELD FOR MORE THAN ONE MONTH WAS CHARGEABLE TO TAX AS BUSINESS INCOME OF THE ASSESSEE. ACCORDINGLY, HE DIRECTED THE A.O. TO ACCEPT THE CLA IM OF THE ASSESSEE FOR SHORT TERM CAPITAL GAIN TO THE EXTENT OF RS. 76,34,570/- OUT OF SHORT TERM CAPITAL ITA 3337/M/09 CO NO. 235/M/09 12 GAIN OF RS. 83,60,088/- OFFERED BY THE ASSESSEE. TH E ACTION OF THE A.O. IN TREATING THE BALANCE SHORT TERM CAPITAL GAIN OF RS. 7,25,518/- AS BUSINESS INCOME OF THE ASSESSEE WAS UPHELD BY THE LD. CIT(A) . 7. AGGRIEVED BY THE ORDER OF THE LD. CIT(A) ACCEPTI NG THE CLAIM OF THE ASSESSEE FOR LONG TERM CAPITAL GAINS AND SHORT TERM CAPITAL GAINS, THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL WHILE THE ASSESSEE HAS ALSO FILED HIS C.O. CHALLENGING THE ORDER OF THE LD. CIT(A) CO NFIRMING THE ACTION OF THE A.O. IN TREATING THE SHORT TERM CAPITAL GAINS TO TH E EXTENT OF RS. 7,25,518/- AS BUSINESS INCOME. 8. THE LD. D.R. STRONGLY RELIED ON THE ORDER OF THE A.O. IN SUPPORT OF THE REVENUES CASE ON THE ISSUE. HE SUBMITTED THAT ALT HOUGH THE ASSESSEE WAS A FULL TIME DIRECTOR OF M/S DALAL BROACHA STOCK BROKI NG PVT. LTD., THE SAID COMPANY WAS ALSO ENGAGED MAINLY IN THE BUSINESS OF TRADING IN SHARES. HE CONTENDED THAT THE PRIME ACTIVITY OF THE ASSESSEE T HUS WAS BUYING AND SELLING OF SHARES WHICH WAS CLEARLY EVIDENT FROM THE CONTIN UOUS, REGULAR AND SYSTEMATIC TRANSACTIONS ENTERED INTO BY THE ASSESSE E IN SHARES ON PERSONAL ACCOUNT TOO. HE SUBMITTED THAT THE MOTIVE OF THE A SSESSEE, AS CLEARLY POINTED OUT BY THE A.O., BEHIND PURCHASE OF SHARES WAS TO S ELL THEM SUBSEQUENTLY AFTER LAPSE OF SOME TIME TO MAKE PROFIT AND THIS MO TIVE WAS SUFFICIENT TO ESTABLISH THAT THE TRANSACTIONS IN SHARES WERE MADE BY THE ASSESSEE AS TRADER AND NOT AS INVESTOR. HE CONTENDED THAT THE PROFIT E ARNED BY THE ASSESSEE ON THE TRANSACTIONS IN SHARES THUS WAS CHARGEABLE TO T AX AS BUSINESS INCOME AS RIGHTLY HELD BY THE A.O. AND THE LD. CIT(A) WAS NOT JUSTIFIED IN TREATING THE SAME AS CAPITAL GAIN. 9. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER H AND, STRONGLY SUPPORTED THE IMPUGNED ORDER OF THE LD. CIT(A) TO THE EXTENT THE CLAIM OF THE ASSESSEE FOR CAPITAL GAIN WAS ACCEPTED BY HIM. HE POINTED OUT F ROM THE COPIES OF RELEVANT DOCUMENTS PLACED IN THE PAPER BOOK THAT THERE WERE NO BORROWED FUNDS ITA 3337/M/09 CO NO. 235/M/09 13 UTILIZED BY THE ASSESSEE FOR MAKING INVESTMENT IN S HARES AND THE SAID INVESTMENT WAS ENTIRELY MADE OUT OF ASSESSEES OWN FUNDS. HE ALSO POINTED OUT THAT THE SHARES WERE CONSISTENTLY TREATED BY TH E ASSESSEE AS INVESTMENT IN HIS BOOKS OF ACCOUNT IN THE EARLIER YEARS AS WELL A S IN THE PRECEDING YEARS. HE SUBMITTED THAT THE INVESTMENT IN SHARES OF THE ASSE SSEE WAS TO THE EXTENT OF RS. 4.23 CRORES WHEREAS THE TOTAL SALE OF SHARES DU RING THE YEAR UNDER CONSIDERATION WAS ONLY RS. 1.63 CRORES WHICH CLEARL Y SHOWS THAT THE ASSESSEE WAS INVESTOR IN SHARES AND NOT A TRADER. HE INVITED OUR ATTENTION TO THE DETAILS OF INVESTMENT OF THE ASSESSEE PLACED AT PAGE 39 OF HIS PAPER BOOK TO POINT OUT THAT THE INVESTMENT PORTFOLIO HELD BY THE ASSESSEE WAS COMPRISING OF MUTUAL FUNDS AS WELL AS UNLISTED COMPANIES ETC. HE CONTEN DED THAT THIS COMPOSITION OF THE PORTFOLIO OF THE ASSESSEE AS WELL AS THE FAC T THAT INVESTMENT WAS VALUED BY THE ASSESSEE AT COST WAS SUFFICIENT TO SHOW THAT THE SHARES WERE HELD BY THE ASSESSEE AS INVESTMENT AND NOT STOCK-IN-TRADE. HE INVITED OUR ATTENTION TO THE COPY OF THE ASSESSMENT ORDER PASSED IN ASSES SEES OWN CASE FOR A.Y. 2004-05 U/S 143(3) OF THE ACT PLACED AT PAGE 42 AND 43 OF HIS PAPER BOOK TO SHOW THAT THE PROFIT ARISING FROM SALE OF SHARES DE CLARED BY THE ASSESSEE IN THE SAID YEAR UNDER THE HEAD CAPITAL GAIN WAS ACCEP TED BY THE A.O. HE ALSO INVITED OUR ATTENTION TO THE RELEVANT DETAILS FURNI SHED BY THE ASSESSEE AT PAGE 57 OF HIS PAPER BOOK TO SHOW THAT THE AVERAGE PERIO D OF HOLDING IN THE CASE OF SHARES GIVING LONG TERM CAPITAL GAIN WAS 1214 DAYS WHILE IT WAS 129 DAYS IN THE CASE OF SHORT TERM CAPITAL GAIN. HE ALSO INVIT ED OUR ATTENTION TO THE DETAILS OF TOTAL INCOME EARNED BY THE ASSESSEE DURING THE I MMEDIATELY PRECEDING FIVE YEARS GIVEN AT PAGE 51 OF HIS PAPER BOOK TO SHOW TH AT THE MAJOR SOURCE OF INCOME OF THE ASSESSEE WAS NOT CAPITAL GAIN. HE CO NTENDED THAT THE ASSESSEE WAS TREATED AS INVESTOR IN SHARES IN ALL THE EARLIE R YEARS BY THE DEPARTMENT AND THERE WAS NO JUSTIFIABLE REASON FOR THE A.O. TO CHANGE THE SAID TREATMENT. HE CONTENDED THAT THE LD. CIT(A), ON THE OTHER HAND , HAS RIGHTLY CONSIDERED ALL THE RELEVANT FACTS OF THE ASSESSEES CASE TO TREAT HIM AS INVESTOR IN HIS ORDER. IN SUPPORT OF HIS CONTENTION, THE LD. COUNSEL FOR T HE ASSESSEE RELIED ON VARIOUS ITA 3337/M/09 CO NO. 235/M/09 14 JUDICIAL PRONOUNCEMENTS INCLUDING THE DECISION OF T HE TRIBUNAL IN THE CASE OF ASSESSEES SON HRIDAY NAILESH DALAL RENDERED VIDE O RDER DATED 30-4-2010 PASSED IN ITA NO. 3469/MUM/09 WHEREIN THE ORDER OF THE LD. CIT(A) TREATING THE PROFIT ARISING FROM THE TRANSACTIONS IN SHARES AS CAPITAL GAIN WAS UPHELD BY THE TRIBUNAL IN THE SIMILAR FACTS AND CIRCUMSTAN CES. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE ISSUE AS TO WHETH ER THE PROFITS ON SALE OF SHARES CONSTITUTES BUSINESS INCOME OF THE ASSESSEE OR LONG TERM CAPITAL GAINS DEPENDS ON WHETHER THE SAID SHARES WERE PURCHASED B Y THE ASSESSEE AS INVESTMENT OR STOCK IN TRADE. IN ORDER TO ASCERTAIN AS TO WHETHER THE SHARES WERE PURCHASED BY THE ASSESSEE AS INVESTMENT OR STO CK-IN-TRADE, THE MOST RELEVANT ASPECT WHICH IS TO BE SEEN IS THE INTENTIO N OF THE ASSESSEE BEHIND THE PURCHASE OF SHARES AND SUCH INTENTION HAS TO BE GAT HERED FROM THE FACTS OF THE CASE INCLUDING THE CONDUCT OF THE ASSESSEE. IN THE CASE OF SARNATH INFRASTRUCTURE P. LTD. 313 ITR (AT) 13, THE COORDIN ATE BENCH OF THIS TRIBUNAL AT LUCKNOW HAS LAID DOWN CERTAIN PRINCIPLES/CRITERI AS WHICH CAN BE APPLIED TO THE FACTS OF THE GIVEN CASE TO ASCERTAIN WHETHER TR ANSACTIONS IN SHARES ARE IN THE NATURE OF TRADE OR ARE MERELY FOR INVESTMENT PU RPOSE. WHILE LAYING DOWN THE SAID GUIDELINES/PRINCIPLES, THE TRIBUNAL HAS TA KEN INTO CONSIDERATION THE VARIOUS JUDICIAL PRONOUNCEMENTS ON THIS ISSUE AS WE LL AS THE CIRCULAR ISSUED BY THE CBDT. THE GUIDELINES/PRINCIPLES LAID DOWN BY THE TRIBUNAL ARE ENUMERATED BELOW : (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE T IME OF PURCHASE OF THE SHARES. THIS CAN BE FOUND OUT FROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TREATED AS STOC K-IN-TRADE OR INVESTMENT? WHETHER SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEP ARATELY AS INVESTMENT OR NON-TRADING ASSET? (2) WHETHER ASSESSEE HAS BORR OWED MONEY TO PURCHASE AND PAID INTEREST THEREON. NORMALLY, MONEY IS BORRO WED TO PURCHASE GOODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN AS SET FOR RETAINING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISPOSAL IN THA T PARTICULAR ITEM? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTA NTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND ITA 3337/M/09 CO NO. 235/M/09 15 SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSE E IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT): (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PROFIT OR PURCHASES ARE MADE FOR RETENTIO N AND APPRECIATION IN ITS VALUE. FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVID END AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN THE BALANCE SHEET? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDICATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NET REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL I NDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEMORANDUM OF ASSOCIATION/ARTICLE OF ASSOCIATION? W HETHER FOR TRADE OR FOR INVESTMENT? IF AUTHORIZED ONLY FOR TRADE, THEN WHET HER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY? AND VICE VERSA. (7) IT IS FOR THE ASSESS EE TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRA DING AND WHAT DISTINCTION HE HAS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO T YPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT FOR SAY, STOCK-IN-TRADE), THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPARENT IS NO T REAL. (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES (OR FOR THAT MATT ER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICIENT TO SAY THAT ASSESSEE W AS HOLDING THE SHARES FOR THE ITEMS IN QUESTION) FOR INVESTMENT. (9) ONE HAS TO F IND OUT WHAT ARE THE LEGAL REQUISITES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF I T IS CLAIMED THAT IT IS DEALING AS A TRADER IN THAT ITEM? WHETHER IT HAD SUCH AN INTEN TION (TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM SINCE BEGINNING OR WHEN PURC HASES WERE MADE? (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15 TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT MAINTAINING SEPARATE ACCOUNT FOR EACH T YPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. (11) NOT ONE OR TWO FACTORS OUT OF ABOV E ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EF FECT OF SEVERAL FACTORS HAS TO BE SEEN. 11. IF THE ABOVE PRINCIPLES/GUIDELINES ARE APPLIED TO THE FACTS OF THE PRESENT CASE, WE FIND OURSELVES IN AGREEMENT WITH THE LEARN ED CIT(APPEALS) THAT THE TRANSACTIONS IN SHARES WERE CARRIED OUT BY THE ASSE SSEE AS AN INVESTOR AND NOT AS A TRADER AND THE PROFIT EARNED FROM THE SAID TRANSACTION WAS CHARGEABLE TO TAX IN ITS HANDS UNDER THE HEAD CAPI TAL GAINS. IT IS OBSERVED IN THIS REGARD THAT TH E SHARES WERE CONSISTENTLY TREATED BY THE ASSESSEE AS ITA 3337/M/09 CO NO. 235/M/09 16 INVESTMENT IN HIS BOOKS OF ACCOUNT IN THE YEAR UNDE R CONSIDERATION AS WELL AS IN THE IN THE EARLIER YEARS AND THE TREATMENT SO GI VEN WAS ACCEPTED BY THE DEPARTMENT IN THE EARLIER YEARS. THERE WERE NO BOR ROWED FUNDS UTILIZED BY THE ASSESSEE FOR MAKING INVESTMENT IN SHARES AND TH E ENTIRE INVESTMENT IN SHARES WAS MADE BY THE ASSESSEE OUT OF HIS OWN FUND S. THE TOTAL INVESTMENT OF THE ASSESSEE IN SHARES DURING THE YEAR UNDER CON SIDERATION WAS TO THE EXTENT OF RS. 4.23 CRORES WHILE THE TOTAL SALE OF S HARES WAS ONLY TO THE EXTENT OF RS. 1.63 CRORES SHOWING A VERY LOW TURNOVER WHIC H COULD HAPPEN ONLY IN THE CASE OF AN INVESTOR AND NOT IN THE CASE OF TRAD ER IN SHARES. THE AVERAGE PERIOD OF HOLDING OF SHARES GIVING RISE TO LONG TER M CAPITAL GAIN WAS 1214 DAYS WHILE THE SAME WAS 129 DAYS IN THE CASE OF SHARES G IVING RISE OF SHORT TERM CAPITAL GAIN WHICH AGAIN GOES TO SHOW THAT THE SHAR ES WERE HELD BY THE ASSESSEE FOR A CONSIDERABLY LONG PERIOD BEFORE THE SALE SHOWING LOW FREQUENCY. THE INVESTMENT PORTFOLIO OF THE ASSESSEE WAS COMPRI SING OF MUTUAL FUNDS, SHARES OF UNLISTED COMPANIES ETC. AND THIS PATTERN OF INVESTMENT FURTHER SHOWS THAT THE ASSESSEE WAS INVESTOR IN SHARES AND SECURITIES AND NOT A TRADER. ALL THE INVESTMENTS MADE BY THE ASSESSEE I N SHARES AND SECURITIES WERE CONSISTENTLY VALUED AT COST WHICH FURTHER SHOW S THAT THE SHARES WERE TREATED BY THE ASSESSEE AS INVESTMENT AND NOT STOCK -IN-TRADE. THE ASSESSEE WAS A WORKING DIRECTOR IN M/S DALAL BROACHA STOCK B ROKING PVT. LTD. EARNING A REMUNERATION OF RS. 52 LACS AND ALTHOUGH THE SAID COMPANY WAS ENGAGED IN THE BUSINESS OF TRADING IN SHARES, THE FACT THAT HE WAS IN FULL EMPLOYMENT OF THAT COMPANY SHOWS THAT HE WAS NOT LEFT WITH SUFFIC IENT TIME TO CARRY ON THE BUSINESS OF TRADING ON SHARES ON HIS PERSONAL ACCOU NT. IN OUR OPINION, IF ALL THESE RELEVANT FACTS OF THE ASSESSEES CASE ARE TAK EN INTO CONSIDERATION IN TOTALITY, IT BECOMES ABUNDANTLY CLEAR THAT THE TRAN SACTIONS IN SHARES WERE MADE BY THE ASSESSEE AS IN INVESTOR AND NOT AS A TR ADER AND THE PROFIT EARNED BY HIM FROM THE SAID TRANSACTIONS WAS CAPITAL GAINS AND NOT BUSINESS INCOME AS RIGHTLY HELD BY THE LD. CIT(A). WE, THEREFORE, FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(A) DIRECTING THE A.O. TO TREAT THE PROFIT EARNED ITA 3337/M/09 CO NO. 235/M/09 17 BY THE ASSESSEE FROM SHARE TRANSACTIONS AS CAPITAL GAINS AND UPHOLDING THE SAME, WE DISMISS THIS APPEAL FILED BY THE REVENUE. 12. IN HIS C.O., THE ASSESSEE HAS CHALLENGED THE OR DER OF THE LD. CIT(A) UPHOLDING THE ACTION OF THE A.O. IN TREATING THE PR OFIT EARNED ON SALE OF SHARES HELD FOR LESS THAN ONE MONTH AS BUSINESS INCOME INS TEAD OF SHORT TERM CAPITAL GAINS. 13. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IN OUR OPINION, THE L D. CIT(A) HAVING ACCEPTED THAT THE SHARES PURCHASED AND HELD BY THE ASSESSEE FOR MORE THAN ONE MONTH WERE HIS INVESTMENT WHILE ALLOWING THE CLAIM OF THE ASSESSEE FOR SHORT TERM CAPITAL GAINS ARISING FROM SALE THEREOF, THERE WAS NO JUSTIFICATION FOR HIM TO HOLD THAT THE OTHER SHARES PURCHASED AND HELD BY TH E ASSESSEE WERE HIS STOCK-IN-TRADE MERELY BECAUSE THE SAID SHARES WERE SOLD WITHIN A PERIOD OF ONE MONTH ESPECIALLY WHEN THE OTHER FACTS RELEVANT THERETO WERE SIMILAR. FOR INSTANCE, IF ONE LOT OF 1000 SHARES OF A PARTICULAR COMPANY WAS PURCHASED BY THE ASSESSEE AND 500 SHARES OF THE SAID LOT WERE SO LD BY HIM WITHIN A PERIOD OF ONE MONTH AND THE BALANCE 500 SHARES WERE SOLD A FTER A PERIOD OF ONE MONTH, IT CANNOT BE SAID THAT THERE WERE TWO DIFFER ENT INTENTIONS OF THE ASSESSEE BEHIND THE PURCHASE OF THE SAME LOT. THE INTENTION OF THE ASSESSEE IN SUCH CASE CANNOT BE DIFFERENT AND THE SAME, IN A NY CASE, CANNOT BE DECIDED MERELY ON THE BASIS OF PERIOD OF HOLDING ESPECIALLY WHEN OTHER MATERIAL FACTS RELEVANT IN THE ISSUE ARE SIMILAR. MOREOVER, THE AS SESSEE WAS CONSISTENTLY TREATED AS INVESTOR IN SHARES BY THE DEPARTMENT IN THE EARLIER YEARS AND THERE WAS NO REASON TO CHANGE THE SAID TREATMENT IN THE Y EAR UNDER CONSIDERATION AS PER THE RULE OF CONSISTENCY WHEN THERE WAS NO CH ANGE IN THE RELEVANT FACTS. WE, THEREFORE, ALLOW THE C.O. FILED BY THE ASSESSEE AND DIRECT THE A.O. TO TREAT THE PROFIT EARNED ON SALE OF SHARES HELD FOR LESS T HAN ONE MONTH AMOUNTING TO RS. 7,25,518/- AS SHORT TERM CAPITAL GAINS. ITA 3337/M/09 CO NO. 235/M/09 18 14. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED WHILE THE C.O. FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH AUG. 2013. . 'F B DE* G')H 28-8-2013 E B SD/- SD/- (SANJAY GARG) (P.M. JAGTAP ) & !'# JUDICIAL MEMBER !'# / ACCOUNTANT MEMBER MUMBAI ; G') DATED 28-8-2013 $.&).!./ RK , SR. PS 'F B -&IJ KJ* 'F B -&IJ KJ* 'F B -&IJ KJ* 'F B -&IJ KJ*/ COPY OF THE ORDER FORWARDED TO : 1. +, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. L () / THE CIT(A)- CONCERNED, MUMBAI 4. L / CIT CONCERNED, MUMBAI 5. J$O -&&) , , / DR, ITAT, MUMBAI I BENCH 6. P% Q / GUARD FILE. 'F)! 'F)! 'F)! 'F)! / BY ORDER, !.J -& //TRUE COPY// R R R R/ // /!S !S !S !S ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI