CHETAN R. PARIKH, MUMBAI V. ITO 5(1)(3), MUMBAI

ITA 1569/MUM/2010

• Counselvise Citation: 156919914 RSA 2010
• Duration Of Justice: 1 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 09-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 26-02-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: L K AGRAWAL
• Assessee Lawyers: MILIND S KOTHARI
• Keywords: Business income

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI D. K.AGARWAL (JM) AND SHRI RAJENDRA SI NGH(AM) ITA NO.1569/M/2010 ASSESSMENT YEAR 2006-07 MR. CHETAN R. PARIKH THE INCOME-TAX OFFICER 5(1 )(3), RASIK NIWAS NO1, 1 ST FLOOR MUMBAI DR. A.R.RANGNEKAR MARG CHOWPATTY, MUMBAI 400 007. APPELLANT RESPONDENT ASSESSEE BY : SHRI MILIND S.KOTHARI REVENUE BY : SHRI L.K.AGRAWAL ORDER PER RAJENDRA SINGH (AM) THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 2.12.2009 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-07 . THE ONLY DISPUTE RAISED BY THE ASSESSEE IN THIS APPEAL IS REGARDING THE NAT URE OF INCOME FROM PURCHASE AND SALE OF SHARES. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD DECLARED SHORT TERM CAPITAL GAIN OF RS.2,49,955/- FROM SALE OF SHARES A ND UNITS OF MUTUAL FUNDS ON WHICH TAX HAD BEEN PAID @ 10%. THE AO NOTED THAT TH E ASSESSEE HAD MADE SUBSTANTIAL TRANSACTIONS IN PURCHASE AND SALE OF SH ARES ON FREQUENT INTERVALS. THERE WERE PURCHASE AND SALE OF SHARES OF 74 COMPAN IES AND 10 MUTUAL FUNDS. CONSIDERING THE FREQUENCY, VOLUME AND THE RATIO BET WEEN PURCHASE AND SALE THE AO CONCLUDED THAT THE ASSESSEE WAS TRADING IN S HARES AND UNITS AND 2 ACCORDINGLY TREATED INCOME DECLARED BY THE ASSESSEE AS BUSINESS INCOME AS THE ASSESSEE GAVE NO EXPLANATION DESPITE SPECIFIC QUERY MADE BY THE AO. IN APPEAL THE ASSESSEE SUBMITTED THAT HE WAS AN INVESTOR IN S HARES AND UNITS AND THE SAME HAD BEEN SHOWN AS INVESTMENT IN THE BOOKS OF A CCOUNT. THE ASSESSEE HAD ALSO EARNED DIVIDEND INCOME OF RS.1,16,796/-. THE A SSESSEE HAD TO SELL THE SHARES FROM TIME TO TIME TO MINIMIZE THE LOSS FOR P ROTECTING THE ASSETS. CIT(A) HOWEVER WAS NOT SATISFIED BY THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT IN DECIDING THE TRUE NATURE OF INCOME FROM SAL E AND PURCHASE OF SHARES, THE VARIOUS FACTORS SUCH AS MAGNITUDE AND FREQUENCY OF TRANSACTION, THE HOLDING PERIOD, THE RATIO OF PURCHASE AND SALES, CO NTINUITY, THE INTENTION AT THE TIME OF PURCHASE HAVE TO BE CONSIDERED AND NO SINGL E FACTOR WAS CONCLUSIVE. IN THIS CASE THE AO HAD SPECIFICALLY ASKED THE ASSESSE E TO EXPLAIN THE MATTER BUT THE ASSESSEE HAD NOT GIVEN ANY EXPLANATION. CIT(A) ALSO OBSERVED THAT THE TRANSACTIONS IN PURCHASE AND SALE OF SHARES WERE CO NTINUOUSLY CARRIED OUT THROUGHOUT THE YEAR. THE ASSESSEE HAD A SYSTEMATIC AND ORGANIZED ACTIVITY OF DEALING IN SHARES OF 74 COMPANIES AND 10 MUTUAL FUN DS. HE THEREFORE HELD THAT THE ASSESSEE WAS TRADING IN SHARES AND ACCORDINGLY INCOME FROM SALE AND PURCHASE OF SHARES WAS UPHELD AS BUSINESS INCOME. A GGRIEVED BY THE SAID DECISION, THE ASSESSEE IS IN APPEAL BEFORE THE TRIB UNAL. 3. BEFORE US THE LEARNED AR REITERATED THE SUBMISSI ONS MADE BEFORE LOWER AUTHORITIES THAT THE ASSESSEE WAS AN INVESTOR. THE ASSESSEE HAD INVESTED HIS OWN FUNDS AND NO BORROWED FUNDS WERE INVOLVED. IT W AS ALSO SUBMITTED THAT THE GAIN ALSO INCLUDED LONG TERM CAPITAL GAIN FROM SALE OF UNITS AT RS.1,32,509/- AND LONG TERM CAPITAL GAIN FROM SALE OF SHARES AT R S.48,880/-. THE INVESTMENTS WHICH WAS SOLD AT SHORT TERM INTERVALS WERE DECLARE D AS SHORT TERM CAPITAL GAIN. SOME OF THE INVESTMENT WAS SOLD AFTER SHORT HOLDING TO OPTIMIZE EARNINGS. THE 3 ASSESSEE HAD AN ORGANIZED ACTIVITY IN INVESTMENTS A ND WAS NOT A TRADER. ACCORDINGLY IT WAS REQUESTED THAT CLAIM OF THE ASSE SSEE AS INVESTMENT SHOULD BE ACCEPTED. THE LEARNED DR ON THE OTHER HAND STRO NGLY SUPPORTED THE ORDER OF THE CIT(A) AND PLACED RELIANCE ON THE FINDINGS G IVEN THEREIN. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE M ATTER CAREFULLY. THE DISPUTE IS REGARDING NATURE OF INCOME FROM PURCHASE AND SALE OF SHARES AND UNITS WHICH HAD BEEN SHOWN AS SHORT TERM CAPITAL GA IN BUT HAVE BEEN TREATED BY THE AO AS BUSINESS INCOME. IN UNDERSTANDING THE TRUE NATURE OF INCOME FROM THE SHARE TRANSACTIONS IT IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE WHICH IS THE MOST IMPORTANT FACTOR BUT SUC H INTENTION HAS TO BE GATHERED FROM THE SUBSEQUENT CONDUCT OF THE ASSESSE E IN DEALING WITH THE SHARES AND NOT FROM THE ENTRY IN THE BOOKS OF ACCOU NTS WHICH IS NOT CONCLUSIVE. THE VARIOUS OTHER FACTORS WHICH ARE RELEVANT ARE TH E FREQUENCY AND VOLUME OF TRANSACTIONS, THE HOLDING PERIOD, USE OF OWN FUNDS, RATIO OF PURCHASE AND SALE BUT NO SINGLE FACTOR IS CONCLUSIVE AND TOTALITY OF ALL THE FACTS AND CIRCUMSTANCES HAS TO BE TAKEN INTO ACCOUNT TO FIND THE TRUE NATUR E OF TRANSACTION. AN INVESTOR PURCHASE SHARE WITH A VIEW TO EARNING INCOME IN THE FORM OF DIVIDEND AND FOR APPRECIATION IN VALUE OVER A LONG PERIOD OF TIME AN D IS NOT MOTIVATED TO SELL ON EACH AND EVERY RISE IN THE VALUE OF SHARES WHICH AR E IN FACT THE ATTRIBUTES OF A TRADER. EVEN AN INVESTOR MAY SOME TIME SELL SHARES AFTER HOLDING FOR A SHORT PERIOD OF TIME IN ORDER TO RESHUFFLE THE PORTFOLIO WHEN A PARTICULAR SHARE IS NOT DOING WELL OR IN CASE OF EXCEPTIONAL APPRECIATION B UT THIS HAS TO BE EXPLAINED FROM THE FACTS AND CIRCUMSTANCES OF EACH CASE. IN T HIS CASE, A PERUSAL OF TRANSACTIONS GIVEN AT PAGES 11 TO 16 OF THE PAPER B OOK SHOWS THAT THE ASSESSEE HAS REGULAR AND CONTINUED TRANSACTION IN PURCHASE A ND SALE OF SHARES. THERE ARE 122 TRANSACTIONS OF PURCHASE AND THE SAME NUMBER OF TRANSACTIONS IN SALES. 4 THE ASSESSEE HAS PURCHASED AND SOLD SHARES OF 74 CO MPANIES. HE HAS SOLD SHARES IN 21 CASES WITHIN A MONTH. IN OTHER CASES A LSO THE SHARES HAVE BEEN FREQUENTLY PURCHASES AND SOLD THOUGH AFTER HOLDING FOR MORE THAN A MONTH. NO SATISFACTORY EXPLANATION HAS BEEN GIVEN FOR SUCH FR EQUENT PURCHASES AND SALES WHEN THE ASSESSEE IS CLAIMED TO BE AN INVESTOR THOU GH THE ASSESSEE HAD ALSO DIVIDEND BUT SUCH DIVIDEND APPEARS ONLY INCIDENTAL AS EVEN IN CASE OF TRADING PURCHASE AND SALES THE ASSESSEE WILL BE ENTITLED TO DIVIDEND IF ON THE RECORD DATE THE ASSESSEE WAS HOLDING THE SHARES IN ITS NAM E. MOREOVER, THE ASSESSEE HAS ALSO MADE LONG TERM INVESTMENTS IN SHARES AND M UTUAL FUNDS UNITS FROM WHICH IT MUST HAVE RECEIVED DIVIDEND. IN OUR VIEW ON THE FACTS OF THE CASE, THE TRANSACTIONS DECLARED AS SHORT TERM PURCHASES AND S ALES HAVE TO BE CONSIDERED AS BUSINESS ACTIVITY. HOWEVER, THE UNITS OF MUTUAL FUNDS ARE NOT GENERALLY A TRADING INSTRUMENT BECAUSE OF COMPARATIVELY LOW FLU CTUATION AND NUMBER OF TRANSACTIONS IN UNITS ARE ALSO NOT LARGE. THEREFORE IN OUR VIEW THE PURCHASE AND SALE OF UNITS HAS TO BE CONSIDERED AS INVESTMENT AC TIVITY. EVEN THE CIT(A) HAS TREATED THE SALE AND PURCHASE OF ONLY SHARES AS TRA DING ACTIVITIES. CONSIDERING THE ENTIRETY OF FACTS AND CIRCUMSTANCES WE CONFIRM THE ORDER OF CIT(A) HOLDING THE PURCHASES AND SALES OF SHARES AS BUSINESS ACTIV ITY. 5. IN THE RESULT THE APPEAL OF THE ASSESSEE IS DISM ISSED. THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 25 .05.2011. SD/- SD/- ( D. K. AGARWAL ) (RAJENDRA SIN GH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 25 .05.2011 AT :MUMBAI 5 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), MUMBAI CONCERNED 4. THE CIT, MUMBAI CITY CONCERNED 5. THE DR C BENCH, ITAT, MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ALK