The ACIT, Circle-7, Ahmedabad V. Smt. Jayshree M.Patel, Ahmedabad

ITA 1057/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 94511 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 16-09-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 08-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Keywords: Business income

Judgement Text

, B IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ./ ITA NO.1057 /AHD/2011 / ASSTT. YEAR: 2006-2007 ACIT, CIR.7 AHMEDABAD. VS SMT.JAYSHREE M. PATEL A-901, 9H FLOOR, ASAWARI APARTMENT OPP: KARNAVATI CLUB SATELLITE, AHMEDABAD. / (APPELLANT) / (RESPONDENT) REVENUE BY : SHRI NARENDRA SINGH, DR ASSESSEE BY : NONE ! / DATE OF HEARING : 16/09/2015 '#$ ! / DATE OF PRONOUNCEMENT: 23/10/2015 %& / O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: THE REVENUE IS IN APPEAL BEFORE US AGAINST THE ORDE R OF THE CIT(A)-XIV, AHMEDABAD DATED 28.12.2010 PASSED FOR T HE ASSTT.YEAR 2006-07. 2. SOLITARY GRIEVANCE OF THE REVENUE IS THAT THE LD .CIT(A) HAS ERRED IN DIRECTING THE AO TO TREAT RS.14,11,723/- AS SHOR T TERM CAPITAL GAIN RETURNED BY THE ASSESSEE INSTEAD OF BUSINESS INCOME ASSESSED BY THE AO. ITA NO.1057/AHD/2011 2 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HA S FILED HER RETURN OF INCOME ON 19.03.2007 DECLARING TOTAL INCOME OF RS.1 4,94,460/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSE SSMENT AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED AND SERV ED UPON THE ASSESSEE. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE AO THAT THE ASSESSEE HAS SHOWN INCOME AT RS.14,91,321/- FROM SH ORT TERM CAPITAL GAIN FROM THE ACTIVITIES OF PURCHASE AND SALES OF E QUITIES. THE LD.AO HAS NOTICED THE FOLLOWING FEATURES IN THE TRANSACTI ONS OF THE ASSESSEE: 3.4 THEREFORE, WE HAVE TO EXAMINE THE CASE OF THE ASSESSEE IN THE LIGHT OF THE PARAMETERS SET AND JUDICIAL DECISI ONS QUOTED ABOVE. (1) NATURE OF TRANSACTION : ON EXAMINATION OF LIST OF TRANSACTIONS, IT IS SEEN THAT THE ASSESSEE HAS TRAD ED IN SHARES OF ABOUT 3 COMPANIES, BUT THE VOLUME OF SHAR ES IS APPROXIMATELY 615000. (2) FREQUENCY OF TRANSACTIONS: AS ALREADY STATED ABOVE MORE THAN 12 TRANSACTIONS HAVE BEEN ENTERED INTO BY THE ASSESSEE DURING THE COURSE OF YEAR. THERE IS NOT O NLY FREQUENT BUYING BUT THERE IS EQUALLY FREQUENT SELLI NG OF THE SHARES THROUGHOUT THE YEAR RIGHT FROM 01-4-2005 TO 1-3- 2006. THEREFORE, THE FREQUENCY OF PURCHASE AND SEL L OF SHARES IS VERY HIGH AS IS EVIDENT FROM SALE AND PUR CHASE OF 617400 SHARES OF A SINGLE COMPANY NAMELY INTRADECO CO. (3) MAGNITUDE OF TRANSACTIONS: THE ASSESSEE HAS PURCHA SED AND SOLD SHARES WORTH MORE THAN RS.1102923/- AND RS.2588850/- RESPECTIVELY. IT IS NOTICED THAT ON A SINGLE DAY, THE ASSESSEE HAD MADE TRANSACTIONS WORTH RS.707821/- IN A PARTICULAR SHARE. 4. ON THE BASIS OF THE ABOVE FEATURES, THE LD.AO HA S TREATED THE ASSESSEE AS TRADER IN THE SHARES, AND ASSESSED THE INCOME AS BUSINESS INCOME INSTEAD OF SHORT TERM CAPITAL GAIN DISCLOSED BY THE ASSESSEE. 5. ON APPEAL, THE LD.CIT(A) HAS ACCEPTED THE CONTEN TIONS OF THE ASSESSEE AND HELD THAT THE AO FAILED TO BRING ANY S PECIFIC MATERIAL ON ITA NO.1057/AHD/2011 3 THE RECORD WHICH CAN INDICATE THAT THE ASSESSEE WAS TRADING IN THE SHARES. THE LD.CIT(A) HAS TREATED THE ASSESSEE AS AN INVESTOR. 6. IN RESPONSE TO THE NOTICE OF HEARING, NONE COME PRESENT ON BEHALF OF THE ASSESSEE. WITH THE ASSISTANCE OF THE LD.DR, WE HAVE GONE THROUGH THE RECORD CAREFULLY. 7. BEFORE WE EMBARK UPON AN INQUIRY ON THE FACTS OF PRESENT CASE SO AS TO FIND OUT, WHETHER ASSESSEE IS TO BE TERMED AS IN VOLVING IN THE TRADING OF SHARES OR IS TO BE TREATED AS AN INVESTOR SIMPLICITOR . WE WOULD LIKE TO REFER CERTAIN BROAD PRINCIPLE CULLED OUT BY ITAT LUCKNOW BENCH IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LTD. REPORTED IN 120 TT J 216. THESE TESTS READ AS UNDER:- 13. AFTER CONSIDERING ABOVE RULINGS WE CULL OUT FO LLOWING PRINCIPLES, WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTION(S) IN QUESTION ARE IN THE NATURE OF TRA DE OR ARE MERELY FOR INVESTMENT PURPOSES: (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE TI ME OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM). THIS CAN BE FOUND OUT FROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TREATED STOCK-IN-TRADE OR INVESTMENT. WHETHE R SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVEST MENT OR NON- TRADING ASSET. (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREON? NORMALLY, MONEY IS BORROWED TO P URCHASE GOODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN AS SET FOR RETAINING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASE AND DISP OSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND SALE ARE FREQUENT , OR THERE ARE SUBSTANTIAL TRANSACTION IN THAT ITEM, IF WOULD INDI CATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF IN TENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AN D THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADING OR INVESTI NG (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREA S LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). ITA NO.1057/AHD/2011 4 (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PROF IT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION ITS VALUE? FORMER WILL INDICATE INTENTION OF TRADES AND LATTER, AN INVESTM ENT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIA L MOTIVE IS AN ESSENTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN TH E 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 INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEM ORANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION? WHETHER FOR TR ADE OR FOR INVESTMENT? IF AUTHORIZED ONLY FOR TRADE, THEN WHE THER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO C ARRY OUT INVESTMENTS IN THAT COMMODITY? AND VICE VERSE. 7. IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHO W THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT D ISTINCTION HE HAS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPA RENT IS NOT REAL. 8. THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHAR ES ( OR FOR THAT MATTER 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 WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR INVESTMENT. 9. ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITE S FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE A SSESSEE IS COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING AS A TRADER IN THAT ITEM? WHETHER IT HAD SUCH AN I NTENTION (TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM) SINCE BEGINNING OR W HEN PURCHASES WERE MADE? ITA NO.1057/AHD/2011 5 10. IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15 TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIO S, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR B OTH AND THERE IS NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. 11. NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EF FECT OF SEVERAL FACTORS HAS TO BE SEEN. 8. THE HONBLE GUJARAT HIGH COURT HAD ALSO AN OCCAS ION TO CONSIDER THIS ISSUE IN THE CASE OF COMMISSIONER OF INCOME TAX VS. RIVA SHARKAR A KOTHARI REPORTED IN 283 ITR 338. HONBLE COURT HAS MADE REFERENCE TO THE TEST LAID BY IT IN ITS EARLIER DECISION RENDERED IN THE CASE OF PARI MANGALDAS GIRDHARDAS VS. CIT REPORTED IN 1977 CTR 647. THESE TESTS READ AS UNDER: AFTER ANALYZING VARIOUS DECISIONS OF THE APEX COUR T, THIS COURT HAS FORMULATED CERTAIN TESTS TO DETERMINE AS TO WHETHER AN ASSESSEE CAN BE SAID TO BE CARRYING ON BUSINESS. (A) THE FIRST TEST IS WHETHER THE INITIAL ACQUISITI ON OF THE SUBJECT-MATTER OF TRANSACTION WAS WITH THE INTENTION OF DEALING IN THE ITEM, OR WITH A VIEW TO FINDING AN INVESTMENT. IF THE TRANSACTIO N, SINCE THE INCEPTION, APPEARS TO BE IMPRESSED WITH THE CHARACT ER OF A COMMERCIAL TRANSACTION ENTERED INTO WITH A VIEW TO EARN PROFIT, IT WOULD FURNISH A VALUABLE GUIDELINE. (B) THE SECOND TEST THAT IS OFTEN APPLIED IS AS TO WHY AND HOW AND FOR WHAT PURPOSE THE SALE WAS EFFECTED SUBSEQUENTLY. (C) THE THIRD TEST, WHICH IS FREQUENTLY APPLIED, I S AS TO HOW THE ASSESSEE DEALT WITH THE SUBJECT-MATTER OF TRANSACTI ON DURING THE TIME THE ASSET WAS THE ASSESSEE. HAS IT BEEN TREAT ED AS STOCK-IN- TRADE, OR HAS IT BEEN SHOWN IN THE BOOKS OF ACCOUNT AND BALANCE SHEET AS AN INVESTMENT. THIS INQUIRY, THOUGH RELEV ANT, IS NOT CONCLUSIVE. (D) THE FOURTH TEST IS AS TO HOW THE ASSESSEE HIMS ELF HAS RETURNED THE INCOME FROM SUCH ACTIVITIES AND HOW THE DEPARTMENT HAS DEALT WITH THE SAME IN THE COURSE OF PRECEDING AND SUCCEEDING ASSESSMENTS. THIS FACTOR, THOUGH NOT CONCLUSIVE, CAN AFFORD GOOD AND COGENT EVIDENCE TO JUDGE THE NATURE OF THE TRANSACTION AND WOULD BE A ITA NO.1057/AHD/2011 6 RELEVANT CIRCUMSTANCE TO BE CONSIDERED IN THE ABSEN CE OF ANY SATISFACTORY EXPLANATION. (E) THE FIFTH TEST, NORMALLY APPLIED IN CASE OF PAR TNERSHIP FIRMS AND COMPANIES, IS WHETHER THE DEED OF PARTNERSHIP OR TH E MEMORANDUM OF ASSOCIATION, AS THE CASE MAY BE, AUTH ORIZES SUCH AN ACTIVITY. (F) THE LAST BUT NOT THE LEAST, RATHER THE MOST IMP ORTANT TEST, IS AS TO THE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTION OF PURCHASE AND SALE OF THE GOODS CONCERNED. IN A CAS E WHERE THERE IS REPETITION AND CONTINUITY, COUPLED WITH THE MAGN ITUDE OF THE TRANSACTION, BEARING REASONABLE PROPOSITION TO THE STRENGTH OF HOLDING THEN AN INFERENCE CAN READILY BE DRAWN THAT THE ACTIVITY IS IN THE NATURE OF BUSINESS. 9. IN THE LIGHT OF THE ABOVE, IF WE EXAMINE THE FAC TS OF THE PRESENT CASE, THEN IT WOULD REVEAL THAT THE LD.AO HAS UNNEC ESSARILY TREATED THE INVESTMENT OF THE ASSESSEE AS VENTURE-IN-TRADE. TH E ASSESSEE HAS PURCHASED SHARES OF THREE COMPANIES. SHE HAS UNDER TAKEN ONLY 12 TRANSACTIONS IN THE YEAR. SHE HAS NOT USED ANY BO RROWED FUNDS AND THE FREQUENCY OF THE SALES IS NOT TO THAT EXTENT. WE FIND THAT THE LD.CIT(A) HAS APPRECIATED THE FACTS AND CIRCUMSTANC ES IN RIGHT PERSPECTIVE AND NO INTERFERENCE IS CALLED FOR IN TH E ORDER OF THE CIT(A). THE APPEAL OF THE REVENUE IS DISMISSED. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE COURT ON 23 RD OCTOBER, 2015 AT AHMEDABAD. SD/- SD/- (MANISH BORAD) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD; DATED 23/10/2015