ITA NOS. 1552 & 5019/DEL/2012 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NOS. 1552 & 5019/DEL/2012 A.YRS. : 2008-09 & 2009-10 DCIT, CIR. - 11(1), NEW DELHI ROOM NO. 312, CR BUILDING, NEW DELHI VS. M/S EMERGING SECURITIES PVT. LTD., 106, ORIENTAL HOUSE, GULMOHAR PARK, COMMERCIAL COMPLEX, NEW DELHI 110 049 (PAN/GIR NO. : AAACE0195R) (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ASSESSEE BY : SH. PRADEEP DINODIA, SH. R.K. KAPOOR, CA DEPARTMENT BY : DR. SUDHA KUMARI, C.I.T. (D.R.) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA : AM PER SHAMIM YAHYA : AM PER SHAMIM YAHYA : AM PER SHAMIM YAHYA : AM THESE APPEALS BY THE REVENUE ARE DIRECTED AGAINST THE RESPECTIVE ORDERS OF THE LD. COMMISSIONER OF INCOME TAX (A) FOR THE CONCERNED ASSESSMENT YEARS. SINCE THE ISSUES ARE C ONNECTED AND THE APPEALS WERE HEARD TOGETHER, THEY ARE BEING CONSOLI DATED FOR THE SAKE OF CONVENIENCE AND DISPOSED OF BY THIS COMMON ORDE R. 2. THE GROUND RAISED IN I.T.A. NO. 1552/DEL/2012 (A .Y. 2008-09) READ AS UNDER:- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. COMMISSIONER OF INCOME TAX (A) HAS ERRED IN DELETI NG ITA NOS. 1552 & 5019/DEL/2012 2 THE ADDITION OF ` 1,76,26,326/- MADE ON ACCOUNT OF TREATMENT OF INCOME FROM CAPITAL GAINS AS BUSINESS I NCOME. (2) THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AME ND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARI NG. 3. THE GROUND RAISED IN I.T.A. NO. 5019/DEL/2012 (A .Y. 2009-10) READ AS UNDER:- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. COMMISSIONER OF INCOME TAX (A) HAS ERRED IN DELETI NG THE ADDITION OF ` 62,93,563/- MADE ON ACCOUNT OF C APITAL LOSS BEING TREATED AS BUSINESS LOSS, IGNORING THE F ACTS THAT THE ASSESSEE IS TREATED TO BE ENGAGED IN THE BUSINE SS OF TRADING AND INVESTMENT IN SHARES AND WAS A MEMBER O F NSE. (2) THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AME ND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARI NG. IT IS PRAYED THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A)-XIII, BEING CONTRARY TO THE FACTS ON RECORD AND THE SETTLED POSITION OF LAW, BE SET ASIDE AND T HAT OF THE ASSESSING OFFICER BE RESTORED. 4. SINCE THE ISSUES INVOLVED ARE SIMILAR, WE ADJUDI CATE THESE APPEALS BY TAKING THE FACTS AND FIGURES FROM THE ORDERS OF THE LOWER AUTHORITIES FOR THE ASSESSMENT YEAR 2008-09. 5. THE ASSESSEE WAS ENGAGED IN THE INVESTMENT AND T RADING IN SHARES THROUGH PORTFOLIO MANAGEMENT SCHEME. THE ASSE SSEE COMPANY WAS HOLDING MEMBERSHIP OF NATIONAL STOCK EXCH ANGE OF INDIA. ITA NOS. 1552 & 5019/DEL/2012 3 HOWEVER, THE SAME HAS BEEN SURRENDERED VIDE ITS LET TER DATED 5 TH APRIL, 2004. THE APPLICATION FOR SURRENDER OF TRADING ME MBERSHIP WAS APPROVED BY NSE VIDE ITS LETTER DATED 04.1.2005. THE ASSESSEE HAS SOLD THE CARRIED FORWARD THE OPENING STOCK OF THE S HARES WHICH WERE KEPT IN THE TRADING ACCOUNT BY THE ASSESSEE. DURING THE YEAR NO PURCHASES IN THE TRADING ACCOUNT HAS BEEN MADE BY T HE ASSESSEE IT HAS SOLD SHARES OF ` 6,67,057/- IN THE TRADING ACCO UNT. IN THE INVESTMENT ACCOUNT THE ASSESSEE HAD SHARES OF ` 13, 49,16,950/- AS ON 31 ST MARCH, 2007. OUT OF SUCH INVESTMENTS THE ASSESSEE HAS SOLD THE SHARES AND HAS EARNED LONG TERM CAPITAL GAIN OF ` 1 ,23,79,769/- AND SHORT TERM CAPITAL GAIN OF ` 71,07,555/-. THE ASSE SSEE HAS ALSO RECEIVED DIVIDEND INCOME OF ` 39,08,815/- OUT OF SU CH INVESTMENTS. IN THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICE R FOR THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER HAS TRE ATED THE ENTIRE TRANSACTIONS AS TRADING ACTIVITIES IN SHARES AND TR EATED THE INCOME EARNED FROM SUCH SALE AND PURCHASE OF SHARES AS BUSINESS INCOME AND ADDED ` 1,76,26,326/- INSTEAD OF SHORT TERM AND LONG TERM CAPITAL GAIN OFFERED BY THE ASSESSEE IN THE RETURN OF INCOM E. 5.1 THE ASSESSING OFFICER GAVE THE FOLLOWING REA SONING FOR NOT ACCEPTING THE ASSESSEES SUBMISSIONS. A) THE ASSESSEE IS NOT MAINTAIN SEPARATE BOOKS OF ACCOUNTS FOR THE ALLEGED INVESTMENTS AND REGULAR BUSINESS, NO SEPARATE BANK ACCOUNT IS MAINTAINED F OR DIFFERENTIATING THE ALLEGED INVESTMENT MADE AND FOR BUSINESS ACTIVITY. THE ASSESSEE WAS UTILIZING TH E SALES PROCEEDS OF THE ALLEGED INVESTMENTS FOR THE PURPOSE OF BUSINESS. SIMILARLY THE ASSESSEE WAS ITA NOS. 1552 & 5019/DEL/2012 4 UTILIZING THE FUNDS OF BUSINESS FOR ALLEGED PURCHAS E OF INVESTMENT/SHARES. MERELY, AN ASSUMPTION BY THE ASSESSEE THAT A PARTICULAR PURCHASE IS INVESTMENT I S NOT SUFFICIENT. IF IT IS ALLOWED THEN EVERY PERSON SHALL OPT FOR INCOME TRADING OF SHARES AS CAPITAL GAIN INCOME, ONLY BECAUSE TAX ON CAPITAL GAIN IS EITHER LEVIED LESSER RATE OR NIL RATE. B) THE TURNOVER OF THESE SHARES WAS TO THE TUNE OF ` 9.50 CRORE. THIS IN ITSELF SHOWS THAT IT WAS TRADING AC TIVITY. C) THE ASSESSEE WAS FREQUENTLY TRADING IN A PARTICU LAR SCRIPT I.E. A PARTICULAR SHARE WAS FREQUENTLY PURCH ASED AND SOLD. IF THE INTENTION OF THE ASSESSEE WAS T O EARN DIVIDEND THEN THEY WOULD HAVE HELD THOSE SHARES FOR A LONGER PERIOD INSTEAD OF SELLING AND PURCHASING AT SHORT INTERVALS. D) THE TOTAL SOURCES OF FUNDS ARE OF ` 16.41 CRORE WHEREAS THE ASSESSEE HAS INVESTED ` 13.90 CRORE IN LISTED SHARES. E) THE TOTAL INCOME OF ` 2.81 CRORE AS DECLARED IN TRADING AND PROFIT AND LOSS ACCOUNT CONSIST OF ` 1.94 CRORE FROM SHARE TRANSACTION. 6. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (A) NOTED THAT ASSESSEE WAS MAKING INVESTMENTS IN SHARE S AND ALSO DOING TRADING IN SHARES OUT OF THE STOCK IN TRADE CARRIED FORWARD FROM THE EARLIER YEARS. DURING THE YEAR THE ASSESSEE IS PU RCHASING AND SELLING SHARES THROUGH PORTFOLIO MANAGEMENT SCHEME ALSO. LD. ITA NOS. 1552 & 5019/DEL/2012 5 COMMISSIONER OF INCOME TAX (A) FURTHER NOTED THAT MOS T OF THE TRANSACTIONS OF THE ASSESSEE ARE FROM BROUGHT FORWA RD HOLDING FROM PRECEDING YEARS WHICH HAS BEEN ACCEPTED AS INVESTME NTS IN EARLIER YEARS. THAT IT WAS OBSERVED FROM THE BALANCE SHE ET OF THE ASSESSEE THAT THE ASSESSEE WAS MAINTAINING SEPARATE ACCOUNT FOR INVESTMENT AND AS WELL AS TOCK IN TRADE OF THE SHARES. THE INVESTMENT IN SHARES HAS BEEN SHOWN FROM F.Y. 2003-04 AND ASSESSEE HAS D ECLARED SHORT TERM AND LONG TERM CAPITAL GAIN ON SUCH INVESTMENTS OVER THE YEARS. THE SAME HAVE BEEN ACCEPTED IN ASTT. YEARS 2004-05, 2005-06 AND 2006-07 IN THE SCRUTINY ASSESSMENT. FOR ASSESSME NT YEAR 2008-09 ALSO NO ADVERSE VIEW WAS TAKEN BY THE DEPARTMENT FO R THE LTCG AND STCG DECLARED BY THE ASSESSEE IN THE RETURN OF INCO ME. 6.1 LD. COMMISSIONER OF INCOME TAX (A) FURTHER OBSERV ED THAT ASSESSEE HAS SHOWN INVESTMENT IN SHARES AS ON 1.4.20 07 OF ` 13,49,16,950/-. OUT OF THESE INVESTMENTS THE ASSESS EE HAS SOLD SHARES DURING THE YEAR AND HAS DECLARED LONG TERM CAPITAL G AIN OF ` 1,23,79,769/-. THAT FROM THE DETAILS IT WAS FOUND THAT MORE THAN 50% OF SHORT TERM CAPITAL GAIN HAVE BEEN DECLARED OUT O F SUCH INVESTMENTS CARRIED FORWARD FROM THE LAST YEAR. THAT THE ENT IRE LONG TERM CAPITAL GAIN HAS BEEN EARNED BY THE ASSESSEE OUT OF SHARES HELD BY THE ASSESSEE AS ON 31.3.2007. THAT THE ASSESSEE HA S CONSTANTLY BEING SHOWING THE INVESTMENT IN SHARES IN HIS BALAN CE SHEET FROM ASSTT. YEAR 2004-05. LD. COMMISSIONER OF INCOME TAX (A) NOTED THAT DETAIL OF INVESTMENTS FROM ASSTT. YEAR 2004-05 TO A SSTT. YEAR 2008-09 AND DIVIDEND INCOME EARNERD FROM SUCH INVESTMENTS WA S AS UNDER:- A.Y. A.Y. A.Y. A.Y. 2004 2004 2004 2004- -- -05 0505 05 2005 2005 2005 2005- -- -06 0606 06 2006 2006 2006 2006- -- -07 0707 07 2007 2007 2007 2007- -- -08 0808 08 2008 2008 2008 2008- -- -09 0909 09 INVESTMENTS 75791790 76170819 111265646 134916950 139099831 DIVIDEND 6395939 4063716 4578699 5459571 3908815 ITA NOS. 1552 & 5019/DEL/2012 6 6.2 LD. COMMISSIONER OF INCOME TAX (A) FURTHER OBSERV ED THAT ALL THE SALE AND PURCHASES WERE DELIVERY BASED. THE HOLDI NG PERIOD OF THE SHARES ON WHICH LONG TERM CAPITAL GAIN HAS BEEN DEC LARED IS MORE THAN 12 MONTHS AND IN THE CASES WHERE SHORT TERM CAPITAL G AIN HAS BEEN DECLARED, THE HOLDING PERIOD VARIES FROM FEW DAYS T O 7 TO 8 MONTHS. LD. COMMISSIONER OF INCOME TAX (A) NOTED THAT THE ASS ESSEES SUBMISSION WAS THAT INVESTMENT WAS MADE IN SHARES WITH THE INTENTION TO HOLD THE SAME FOR LONG TERM APPRECIATI ON AND FOR EARNING DIVIDENDS. HOWEVER, IN FEW CASES THE INVESTMENT WAS OFF LOADED AFTER A SHORT HOLDING DUE TO RECEIPT OF CERTAIN ADVERSE MARKET REPORTS OR BECAUSE OF SHORT TERM FUNDS REQUIREMENTS. 6.3 LD. COMMISSIONER OF INCOME TAX (A) FURTHER OBSERV ED THAT HE WAS IN AGREEMENT WITH THE SUBMISSION OF THE ASSESSEE THA T THE PERIOD OF HOLDING OF SHARES AND NON-RECEIPT OF DIVIDEND INCOME WAS NOT A DECISIVE FACTOR FOR TREATMENT OF PARTICULAR TRANSAC TIONS AS INVESTMENT OR TRADING TRANSACTION. LD. COMMISSIONER OF INCO ME TAX (A) NOTED THAT CIRCULAR NO. 4 OF 2007 ISSUED BY THE CBDT ALSO DOES NOT PRESCRIBE ANY TIME LIMIT FOR HOLDING OF SHARES WHERE SHARES A RE PURCHASED FOR INVESTMENT PURPOSES. LD. COMMISSIONER OF INCOME TAX (A) FURTHER NOTED THAT THE QUANTUM OF SALE AND PURCHASE OF SHARE S WAS NOT VERY LARGE IN THE ENTIRE YEAR. HE OPINED THAT IF THE ASSESSEE HAD BEEN ENGAGED IN THE TRADING OF SHARES THE FREQUENCY OF S ALE AND PURCHASE WOULD HAVE BEEN VERY HIGH AND ON DAILY BASIS. HE FURTHER NOTED THAT FOR MAKING THE INVESTMENTS IN SHARES, ASSESSEE HAS USED HIS OWN FUNDS AND THERE WAS NO BORROWING MADE FOR INVESTMENT . THEREAFTER, LD. COMMISSIONER OF INCOME TAX (A) CONCLUDED AS UNDE R:- ITA NOS. 1552 & 5019/DEL/2012 7 THE ASSESSING OFFICER IN THE ASSESSMENT ORDER HAS ALSO RELIED UPON THE CONTENTS OF CIRCULAR NO. 4 OF 2007 DATED 15.6.2007. IT IS CLEARLY MENTIONED IN THE CBDT CI RCULAR THAT A PERSON CAN HAVE TWO PORTFOLIOS, ONE FOR INVESTMEN T PURPOSES AND ANOTHER FOR TRADING PURPOSES. IN THI S CIRCULAR NO TIME LIMIT HAS BEEN PRESCRIBED FOR HOLDING A SHARE TO DETERMINE WHETHER THE SHARES WERE HELD FOR INVESTMEN T OR STOCK IN TRADE. THESE THINGS HAVE TO BE DETERMIN ED BY THE INTENTION OF THE PERSON WHO IS DOING INVESTMENT OR SALE OR PURCHASE OF SHARES. IN THE CASE OF APPELLANT THE CIRCUMSTANCES CLEARLY SUGGEST THAT HE HAD PURCHASED SHARES ONLY FOR INVESTMENT P URPOSES AND NOT FOR TRADING PURPOSES. IN THE ENTIRE YEAR H E HAS DEALT ONLY IN SHARES OF 29 COMPANIES AND THE FREQUEN CY OF THE TRANSACTIONS IS LIMITED. THE APPELLANT HAS NO T ENTERED INTO ANY TRANSACTIONS OF F&O, OR DAY TRADING DURING THE ENTIRE YEAR. IN VIEW OF THE FACTS STATED ABOVE, IT IS CLEARLY ESTABLISHED THAT THE SHARES PURCHASED BY THE APPELL ANT WERE FOR INVESTMENT PURPOSES AND CAPITAL GAINS RECEI VED ON SUCH SALE IS LIABLE TO BE TAX UNDER THE HEAD SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN. HENCE, TH E ACTION OF THE ASSESSING OFFICER OF TREATING THE SHORT TERM C APITAL GAIN AND LONG TERM CAPITAL GAIN AS BUSINESS INCOME WAS NO T JUSTIFIED. I, THEREFORE, DIRECTED THE ASSESSING O FFICER TO TREAT THE SURPLUS RECEIVED ON SALE AND PURCHASE OF SHARES AS SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN AS CLAIMED BY THE APPELLANT IN THE RETURN OF INCOME. A S A RESULT, THIS GROUND OF APPEAL OF THE APPELLANT IS A LLOWED. ITA NOS. 1552 & 5019/DEL/2012 8 6.4 FURTHER IN THIS REGARD, LD. COMMISSIONER OF INCOME TAX (A) RELIED UPON THE FOLLOWING CASE LAWS:- - COMMISSIONER OF INCOME TAX VS. GOPAL PUROHIT (2010 ) 188 TAXMAN 140 (BOM.) - ITO WARD 33(4), NEW DELHI VS. ROHIT ANAND 34 SOT 42 (DEL.) - ARA TRADING AND INVESTMENTS (P) LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, RANGE 11(1), PUNE 47 SOT 172 (PUNE). - ITO, 19(2)(1) VS. RADHA BIRJU PATEL 46 (SOT) 23 (MU M). 7. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEAL BEFORE US. 8. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. WE FIND THAT THE ASSESSEE WAS ENGAGED IN THE INVESTMENT AND TRADING OF SHARES. A SSESSEE WAS MEMBER OF NATIONAL STOCK EXCHANGE(NSE). HOWEVER, THE TRADING MEMBERSHIP WAS SURRENDERED VIDE ITS LETTER DATED 5 TH APRIL, 2004 AND THE SAME HAS BEEN ACCEPTED BY THE NSE VIDE ITS LETTE R DATED 04.1.2005. THEREAFTER, ASSESSEE IS MAKING INVESTMEN TS IN SHARES AND ALSO DOING TRADING IN SHARES OUT OF THE STOCK IN TR ADE CARRIED FORWARD FROM THE EARLIER YEARS. DURING THE YEAR ASSESSEE WAS ALSO PURCHASING AND SELLING SHARES THROUGH PORTFOLIO MANA GEMENT SCHEME ALSO. WE FURTHER FIND THAT MOST OF THE SHARES WERE FROM BROUGHT FORWARD HOLDING FORM PRECEDING YEARS WHICH HAS BEEN ACCEPTED AS INVESTMENT IN EARLIER YEARS. WE FURTHER NOTE THAT ASSESSEE WAS MAINTAINING SEPARATE ACCOUNT FOR INVESTMENT AS WELL AS STOCK IN TRADE OF THE SHARES. THE INVESTMENT IN SHARES HAS BEEN S HOWN IN FINANCIAL ITA NOS. 1552 & 5019/DEL/2012 9 YEAR 2003-04 AND THE ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN OF SUCH INVESTMENTS OVER THE YEARS. THIS HAS BEEN DULY ACCEPTED BY THE REVENUE OVER THE PRECEDING YEARS. WE FURTHE R FIND THAT THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE PRESENT YEAR WITH THAT OF EARLIER YEARS WHEREIN LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN HAS BEEN ACCEPTED BY THE DE PARTMENT. 8.1 WE FURTHER FIND THAT ALL SHARES PURCHASED ARE D ELIVERY BASIS. THE HOLDING PERIOD OF THE SHARES ON WHICH LONG TERM CA PITAL GAIN HAVE BEEN DECLARED WAS MORE THAN 12 MONTHS AND IN THE CA SES WHERE SHORT TERM CAPITAL GAIN HAS BEEN DECLARED, THE HOLDING P ERIOD VARIES FROM FEW DAYS TO 7 TO 8 MONTHS. WE FURTHER NOTE THAT L D. COMMISSIONER OF INCOME TAX (A) IS CORRECT IN OBSERVING THAT THE PE RIOD OF HOLDING OF SHARES AND NON-RECEIPT OF DIVIDEND INCOME WAS NOT A DECISIVE FACTOR FOR TREATMENT OF PARTICULAR TRANSACTIONS AS INVESTMENT OR TRADING TRANSACTION. ONE HAS TO SEE THE INTENTION OF TH E PERSON WHO IS DOING PURCHASE AND SALE OF SHARES. WE FURTHER NOTE THA T CIRCULAR NO. 4 OF 2007 DATED 15.6.2007 ISSUED BY THE CBDT MENTIONS T HAT A PERSON CAN HAVE TWO PORTFOLIOS, ONE FOR INVESTMENT PURPOSES AN D ANOTHER FOR TRADING PURPOSES. IN THIS CIRCULAR NO TIME LIMIT HA S BEEN PRESCRIBED FOR HOLDING A SHARE TO DETERMINE WHETHER THE SHARES WERE HELD FOR INVESTMENT OR STOCK IN TRADE. WE FURTHER NOTE THA T LD. COMMISSIONER OF INCOME TAX (A)S RELIANCE ON THE CASE LAWS AS AB OVE IS ALSO GERMANE AND SUPPORTS THE CASE OF THE ASSESSEE. 8.2 IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS AND PRECEDENTS, WE FIND THAT THE LD. COMMISSIONER OF INCOME TAX (A) HAS PASSED A WELL ITA NOS. 1552 & 5019/DEL/2012 10 REASONED ORDER, THE SAME DOES NOT NEED ANY INTERFER ENCE ON OUR PART. ACCORDINGLY, WE UPHOLD THE SAME. 9. IN THE RESULT, BOTH THE REVENUE APPEALS STAND DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15/2/2013. SD/- SD/- [R.P. TOLANI] [R.P. TOLANI] [R.P. TOLANI] [R.P. TOLANI] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE:- 15/2/2013 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES ITA NOS. 1552 & 5019/DEL/2012 11