Shri Indrakumar Mutha, Ahmednagar V. ITO, Ahmednagar

ITA 1645/PUN/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80064 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 17-03-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 06-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJIB JAIN
• Keywords: Capital asset; Business income; Advance ruling; Question of law; Reassessment proceedings
• Section: 2(14); 28; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO.1645/PN/2012 (A.Y. 2008-09) SHRI INDRAKUMAR MUTHA VARDHAMAN, SARDA LANE, AHMEDNAGAR. PAN: ABBPM3963G APPELLANT VS. ITO, WARD 3, AHMEDNAGAR RESPONDENT ITA NO.1646/PN/2012 (A.Y. 2008-09) BHARTI INDRAKUMAR MUTHA VARDHAMAN, SARDA LANE, AHMEDNAGAR. PAN: ABAPM3614K APPELLANT VS. ITO, WARD 3, AHMEDNAGAR RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK & SHRI SUHAS P BORA DEPARTMENT BY : SHRI RAJIB JAIN DATE OF HEARING : 01.07.2014 DATE OF PRONOUNCEMENT : 31.07.2014 ORDER PER SHAILENDRA KUMAR YADAV : THE TWO APPEALS PERTAIN TO THE HUSBAND AND WIFE ON SIMILAR GROUNDS AGAINST THE RESPECTIVE ORDERS OF THE COMMIS SIONER OF INCOME TAX(APPEALS)-I, [(IN SHORT CIT(A)] PUNE FOR A.Y. 2008-09. ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER 2. IN ITA NO.1645/PN/2012, THE ASSESSEE HAS FILED T HE APPEAL ON THE FOLLOWING GROUNDS. 1. THE LEARNED CIT (APPEALS), PUNE HAS ERRED IN LAW AN D ON FACTS IN CONFIRMING THE ADDITION MADE BY THE AO. 2. THE LEARNED CIT (APPEALS), PUNE HAS ERRED IN LAW AN D ON FACTS IN CONFIRMING ACTION OF THE AO OF TREATING SH ORT TERM CAPITAL GAIN ON SHARES AS BUSINESS INCOME. 3. THE LEARNED CIT (APPEALS), PUNE HAS ERRED IN LAW AN D ON FACTS IN NOT APPRECIATING THE FACT THAT THE APPELLA NT IS AN INVESTOR AND NOT A TRADER. 4. THE LEARNED CIT (APPEALS), PUNE HAS ERRED IN LAW AN D ON FACTS IN HOLDING THAT THE DECISION OF HON'BLE MUMBA I HIGH COURT IN THE CASE OF CIT VS. GOPAL PUROHIT IS NOT A PPLICABLE TO THE CASE OF THE APPELLANT. 5. THE LEARNED CIT (APPEALS), PUNE HAS ERRED IN LAW AN D ON FACTS IN NOT APPRECIATING THE FOLLOWING IMPORTANT F ACTORS: A. APPELLANT HAS TREATED THE TRANSACTION IN THE SHA RES AS INVESTMENT AND DULY DISCLOSED THE SAME IN THE BOOKS OF ACCOUNTS. B. APPELLANT HAS USED HIS OWN FUNDS FOR PURCHASING SHARES. C. APPELLANT HAS CONSISTENTLY TREATED THE SHARES AS INVESTMENT. D. APPELLANT HAS BEEN REGULARLY EARNING DIVIDEND INCOME. E. PERIOD OF HOLDING OF THE SHARES IS FROM 30 DAYS TO 245 DAYS. 6. THE APPELLANT MAY KINDLY BE PERMITTED TO ADD T O OR ALTER ANY OF GROUNDS OF APPEAL, IF DEEMED NECESSARY. 3. THE ASSESSEE IS AN INDIVIDUAL WHO DERIVES HIS IN COME FROM HOUSE PROPERTY, PARTNERSHIP FIRM, TRANSACTIONS IN S HARES, INCOME FROM OTHER SOURCES ETC. DURING THE YEAR, THE ASSESS EE FILED HIS RETURN ON 30.3.2009 DECLARING A TOTAL INCOME OF 45,94,660/- WHICH COMPRISED OF INCOME FROM RENT FROM PROPERTY, CAPITAL GAIN ON ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER SHARES, INTEREST AND REMUNERATION FROM FIRM ETC. S OME OF THE INCOME EARNED BY THE ASSESSEE WAS EXEMPT AND THEREF ORE, WAS OUTSIDE THE SCOPE OF THE TOTAL INCOME COMPUTED IN T HE RETURN OF INCOME. THE ASSESSING OFFICER EXAMINED THE RETURN AFTER THE SAME WAS SELECTED FOR SCRUTINY AND EVALUATED THE VARIOUS CLAIMS OF THE ASSESSEE AFTER CONSIDERING THE MATERIALS OBTAINED D URING SCRUTINY. THE ASSESSING OFFICER HELD THAT THE INCOME DECLARED UNDER THE HEAD SHORT TERM CAPITAL GAINS AS ASSESSABLE UNDER T HE HEAD BUSINESS AND PROFESSION FOR THE REASONS DISCUSSED T HEREIN. CONSIDERING THE NATURE AND PERIOD OF INVESTMENT IN RESPECT OF SHARES ON WHICH LONG TERM CAPITAL GAINS WAS SHOWN, THE SAME WAS ACCEPTED. THE FINDINGS OF THE ASSESSING OFFICER AR E AVAILABLE AT PARA 3.1 OF ORDER OF CIT(A). 3.1 THE MATTER WAS CARRIED BEFORE FIRST APPELLATE A UTHORITY, WHEREIN THE VARIOUS CONTENTIONS WERE RAISED ON BEHA LF OF ASSESSEE AS DETAILED IN PARA 3.2 OF THE ORDER OF CIT(A), THE CIT(A) HAVING CONSIDERED THE SAME, UPHELD THE ORDER BY DETAILED R EASONING IN PARA 3 OF ITS ORDER. 4. THE SAME HAS BEEN OPPOSED BEFORE US ON BEHALF OF ASSESSEE. THE STAND OF THE ASSESSEE HAS BEEN THAT THE ASSESSI NG OFFICER IN REASSESSMENT PROCEEDINGS HAS TREATED THE INCOME FRO M SHORT TERM CAPITAL GAINS AS BUSINESS INCOME MAINLY ON THE GROU ND THAT THE VOLUME OF TRANSACTIONS OF SHARES IS MORE, THERE IS FREQUENCY IN THE TRANSACTIONS AND THEREFORE, THE MOTIVE IS EARNING O F PROFIT. BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIVE HAS SUBMI TTED THAT THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING ACTION OF THE ASSESSING OFFICER OF TREATING SHORT TERM CAPITAL GA IN ON SHARES AS BUSINESS INCOME. THE CIT (A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FACT THAT THE ASSESSEE IS AN INVES TOR AND NOT A TRADER. ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER 4.1 THE CIT (A) HAS ALSO ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FOLLOWING IMPORTANT FACTORS: A. ASSESSEE HAS TREATED THE TRANSACTION IN THE SHAR ES AS INVESTMENT AND DULY DISCLOSED THE SAME IN THE BOOKS OF ACCOUNTS. B. ASSESSEE HAS USED HIS OWN FUNDS FOR PURCHASING S HARES. C. ASSESSEE HAS CONSISTENTLY TREATED THE SHARES AS INVESTMENT. D. ASSESSEE HAS BEEN REGULARLY EARNING DIVIDEND INC OME. E. PERIOD OF HOLDING OF THE SHARES IS FROM 30 DAYS TO 245 DAYS. 4.2 ACCORDINGLY, THE AUTHORITIES BELOW WERE NOT JUS TIFIED IN TREATING SHORT TERM CAPITAL GAIN ON SHARES AS BUSIN ESS INCOME. THE LEARNED AUTHORIZED REPRESENTATIVE HAS ALSO RELIED O N THE FOLLOWING DECISIONS. I. JCIT VS. SHRI CHHATARMAL GOKULCHAND CHHAJER IN I TA NO.699/PN/2012, WHEREIN, THE TRIBUNAL HAS HELD AS U NDER: 8. CONSIDERING THE TOTALITY AND PECULIARITY OF TH E FACTS, CIT(A) TAKING ALL FACTS AND CIRCUMSTANCES INTO CONSIDERATION, HELD THAT SALE OF SHARES HELD FOR MO RE THAN ONE MONTH WOULD BE CHARGED CAPITAL GAIN AND SURPLUS OF SHARES HELD FOR LESS THAN ONE MONTH WILL BE TREATED AS PROFIT FROM BUSINESS. CIT(A) WAS NOT JU STIFIED TO MAKE ABOVE CLASSIFICATION. THIS CLASSIFICATION IS NOT REASONABLE. TAKING ALL FACTS AND CIRCUMSTANCES AS DISCUSSED ABOVE, WE HOLD THAT ALL THE SHARE TRANSAC TIONS UNDERTAKEN BY ASSESSEE WILL BE CHARGED TO CAPITAL G AIN IRRESPECTIVE OF THEIR HOLDING PERIOD. ASSESSING OF FICER IS DIRECTED TO COMPUTE CAPITAL GAIN ACCORDINGLY. THIS TAKE CARE OF ISSUE RAISED IN CROSS OBJECTION BY ASSESSEE AS WELL. II. MR BOTHARA PEMRAJ MANAKCHAND VS. DCIT IN ITA NO.1172/PN/09, WHEREIN, THE TRIBUNAL HAS HELD AS UN DER: ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE DISPUTE IN THE PRESENT APPEAL ARISES FROM THE TREATMENT ACCORDED TO THE GAIN EARNED BY THE ASSESS EE ON SALE OF SHARES. THE ASSESSEE HAD SHOWN LONG-TERM CAPITAL GAIN OF RS 1,25,336/- AFTER CLAIMING EXEMPT ION UNDER SECTION 10(38) OF THE ACT AND SHORT-TERM CAPI TAL GAIN AT RS 24,00,367/- ON ACCOUNT OF SALE OF SHARE/SECURITIES. THE ASSESSING OFFICER HAS TREATED SUCH GAIN AS ASSESSABLE UNDER THE HEAD INCOME FROM BUSIN ESS AND NOT AS CAPITAL GAINS. THE COMMISSIONER OF INCOM E- TAX (APPEALS) HAS CONCURRED WITH THE STAND OF THE ASSESSING OFFICER AND FOR THAT REASON THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. UNDOUBTEDLY, THE QUESTION AS TO WHETHER A PARTICULAR TRANSACTION IS IN THE NATUR E OF INVESTMENT OR AN ADVENTURE IN THE NATURE OF TRADE I S A MIXED QUESTION OF LAW AND FACT. IT IS ALSO A WELL S ETTLED PRINCIPLE THAT NO SINGULAR FACTOR IS DETERMINATIVE OF THE QUESTION AND THAT THE SAME HAS TO BE INFERRED ON TH E BASIS OF CUMULATIVE EFFECT OF SEVERAL FACTORS SUCH AS, WHETHER THE PURCHASER WAS A TRADER; WHETHER THE PURCHASE OF THE COMMODITY AND ITS RESALE WAS ALLIED TO HIS USUAL TRADE OR BUSINESS; THE NATURE AND THE QUA NTITY OF COMMODITIES TRADED; FREQUENCY AND SIMILARITY OF TRANSACTIONS USUALLY ASSOCIATED WITH TRADE OR BUSIN ESS; THE REPETITION OF TRANSACTIONS; PERIOD OF HOLDING A ND ALSO THE INTENTION OF THE PURCHASER AT THE TIME OF ACQUI SITION. THE HONBLE SUPREME COURT IN THE CASE OF VENKATASWA MI NAIDU & CO. (G) (SUPRA) FURTHER CAUTIONED THAT ALL THE IMPORTANT FACTORS ARE TO BE EVALUATED AND THE DISTI NCTIVE FACTORS OF A PARTICULAR CASE SHALL BE KEPT IN MIND WHILE DETERMINING THE CHARACTER OF THE TRANSACTION. THE ASSESSEE HAS REFERRED TO VARIOUS CASE LAWS ON THE S UBJECT WHICH ARE NOT BEING INDIVIDUALLY DEALT WITH; SO, HO WEVER THE SUM AND SUBSTANCE OF THE PRINCIPLES LAID DOWN I S THAT IN EACH CASE THE TOTAL EFFECT OF ALL THE RELEV ANT FACTS AND CIRCUMSTANCES SHALL DETERMINE THE CHARACTER OF A TRANSACTION. 10. WITH THIS BACKGROUND, WE MAY NOW EXAMINE THE CASE SET UP BY THE ASSESSING OFFICER HEREIN. THE OVERRIDING FACTOR WHICH PREVAILED WITH THE ASSESSIN G OFFICER IS REGULARITY AND THE FREQUENCY OF THE TRANSACTIONS WHICH ACCORDING TO HIM WAS HIGH. SECON DLY, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE WAS RIDING HIGH IN THE BOOM PERIOD AND WANTED TO MAKE QUICK BU CKS AND, THEREFORE, IT SHOWED THE INTENTION TO EARN PRO FITS WHILE MAKING INVESTMENT IN SHARES. IN OUR CONSIDER ED OPINION, MERE VOLUME OF TRANSACTIONS UNDERTAKEN BY THE ASSESSEE IS NOT DETERMINATIVE OF THE NATURE OF ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER TRANSACTION. IT IS THE INTENTION OF THE TRANSACTIO N AS A WHOLE AND NOT MERELY A MAGNITUDE OF THE TRANSACTION WHICH IS REQUIRED TO BE EXAMINED. IN THE PRESENT CA SE, THE ASSESSEE IS NOT HAVING SINGULAR ACTIVITY OF INV ESTMENT IN SHARES. IN FACT, THE ASSESSEE HAS BEEN HOLDING S HARES AS INVESTMENT FROM YEAR TO YEAR. IT IS ALSO AN EMER GING FACTOR THAT INVESTMENTS HAVE BEEN MADE OUT OF SURPLUS/OWN FUNDS AND THE ASSESSEE IS OTHERWISE ENGAGED IN OTHER BUSINESS ACTIVITIES. BEFORE THE LO WER AUTHORITIES THE ASSESSEE ALSO CANVASSED WITH REFERE NCE TO HIS BALANCE SHEET THAT HE HAD SUBSTANTIAL FUNDS AND IT IS ONLY TO REALIZE BETTER RETURN, THE INVESTMENTS IN S HARES HAVE BEEN MADE. IT IS POINTED OUT THAT PRIMARILY TH E ASSESSEE HAS HELD THE SHARES FOR MORE THAN ONE YEAR SO AS TO EARN LONG-TERM CAPITAL GAINS; THAT MERELY BEC AUSE CERTAIN SHARES WERE SOLD FOR A PERIOD LESS THAN ONE YEAR, THE SAME WOULD BE INDICATIVE OF A BUSINESS TRANSACT ION IS NOT CORRECT. HAVING CONSIDERED THE MANNER IN WHI CH THE ASSESSEE HAS TRANSACTED IN SHARES AND HAVING INVESTED ONLY THE SURPLUS FUNDS IN THE TRANSACTION OF SHARES, IN OUR VIEW, THE SAME HAS BEEN RIGHTLY DECL ARED BY THE ASSESSEE AS FALLING UNDER THE HEAD AS CAPITA L GAIN AND NOT AS BUSINESS INCOME. UNDER THESE CIRCUMSTANCES, WE THEREFORE REVERSE THE ORDER OF TH E COMMISSIONER OF INCOME-TAX (APPEALS) AND DIRECT THE ASSESSING OFFICER TO TREAT THE IMPUGNED INCOME FROM SALE OF SHARES AS ASSESSABLE UNDER THE HEAD CAPITAL GAIN S AND NOT AS BUSINESS INCOME. WE ORDER ACCORDINGLY. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. 4.3 IN THIS BACKGROUND, THE LEARNED AUTHORIZED REPR ESENTATIVE HAS SUBMITTED THAT THE AUTHORITIES BELOW WERE NOT J USTIFIED IN TREATING SHORT TERM CAPITAL GAIN ON SHARES AS BUSIN ESS INCOME. ACCORDINGLY, THE SAME SHALL BE SET ASIDE AND THE CL AIM OF THE ASSESSEE MAY BE ALLOWED. 4.4 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE HAS SUBMITTED THAT THE ASSESSING OFFICER WAS JUSTIF IED IN HOLDING THAT THE INCOME EARNED BY THE ASSESSEE AMOUNTING TO 41,73,041/- ON ACCOUNT OF SALE AND PURCHASE OF SHAR E AS BUSINESS INCOME. THE LEARNED DEPARTMENTAL REPRESENTATIVE HA S ALSO SUBMITTED THAT THE FREQUENCY OF INVESTMENT SHOWS TH AT THE ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER ASSESSEE IS A TRADER NOT INVESTOR. THE RATIO OF DE CISION OF HONBLE MUMBAI HIGH COURT IN THE CASE OF GOPAL PUROHIT (SUP RA) SUPPORTS THE ORDER OF AUTHORITIES BELOW. ACCORDING TO THE L EARNED DEPARTMENTAL REPRESENTATIVE, THE DETAILS IN RESPECT OF SHORT TERM TRANSACTIONS PRIMA FACIE REVEALS THAT THERE WAS FRE QUENCY OF HOLDING IN SHARES AND MAGNITUDE OF SUCH TRANSACTION S WERE ALSO QUITE HIGH. THE ASSESSING OFFICER WAS JUSTIFIED IN HOLDING THAT PURCHASE AND SALE TRANSACTIONS OF SHARES BEAR ALL A TTRIBUTES OF TRADE. THE SHORT TERM PROFIT EARNED FROM SUCH TRAN SACTIONS AMOUNTING TO 41,73,041/- IS THEREFORE, RIGHTLY ASSESSED BY THE ASSESSING OFFICER THAT IT AROSE OUT OF TRADE AND TH E SAME SHOULD BE UPHELD. 5. AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND MA TERIAL ON RECORD, WE FIND THAT THE ASSESSING OFFICER IN RE-AS SESSMENT PROCEEDINGS HAS TREATED THE INCOME FROM SHORT TERM CAPITAL GAINS AS BUSINESS INCOME MAINLY ON THE GROUND THAT THE VO LUME OF TRANSACTIONS OF SHARES IS MORE, THERE IS FREQUENCY IN TRANSACTIONS AND THEREFORE, THE MOTIVE IS EARNING OF PROFIT. WE FIND AS UNDER: A. THE ASSESSEE HAS TREATED THE TRANSACTIONS AS INVEST MENT BY RECORDING IN HIS BOOKS OF ACCOUNT BEING INVESTMENT AND NOT AS STOCK IN TRADE. THE ASSESSEE HAS FILED A COPY O F BALANCE SHEET AS ON 31.03.2008. B. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS USED HIS OWN FUNDS FOR PURCHASE OF SHARES C. WE FIND FROM THE DETAILS OF SHORT TERM CAPITAL GAIN S THAT THE TOTAL SHORT TERM CAPITAL GAIN ARISING FROM THE SHAR ES SOLD WITHIN 37 TO 236 DAYS OF PURCHASES, STATEMENT SHOWI NG THE WORKING OF PROFIT AND LOSS GIVING PERIOD OF HOLDING WAS ALSO FILED BEFORE AUTHORITIES BELOW, WHICH SHOWS THAT TH E INTENTION OF THE ASSESSEE WAS TO HOLD THE SHARES FO R A LONGER PERIOD AND TO EARN INCOME OF APPRECIATION OF THE VALUE OF SHARES AND NOT EARN THE PROFIT IN THE SHOR T PERIOD. D. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS REGULARL Y EARNING DIVIDEND INCOME. ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER E. THE AUTHORITIES BELOW HAVE NOT DISPUTED THE FACT TH AT THE ASSESSEE HAS VALUED THE SHARES AT COST AND NEVER VA LUED THE BALANCE AT THE BEGINNING AS WELL AS END OF THE YEAR AT MARKET PRICE OR REALIZABLE VALUE. F. THE ASSESSEE HAS BEEN CONSISTENTLY TREATING THE SHA RES AS INVESTMENT AND DISCLOSED THE GAIN AS SHORT TERM CAP ITAL GAIN OR LONG TERM CAPITAL GAIN, AS THE CASE MAY BE. G. AS PER SEC. 2(14) THE TERM CAPITAL ASSET MEANS PROP ERTY OF ANY KIND HELD BY AN ASSESSEE, WHETHER OR NOT CONNEC TED WITH HIS BUSINESS OR PROFESSION, BUT EXCLUDES STOCK IN TRADE OF THE BUSINESS AND FEW OTHER ITEMS SPECIFIED IN TH E SAID SECTION. THUS THE DEFINITION IS WIDE AND IS HELD TO INCLUDE NOT ONLY THE PROPERTY, BUT RIGHT TO ACQUIRE SUCH PR OPERTY. DERIVATIVES ARE SECURITIES AND THEREFORE PROPERTY W ITH VALUE. DERIVATIVES ACCORDINGLY ARE CAPITAL ASSET, U NLESS HELD AS A STOCK IN TRADE OF A BUSINESS. FUTURES AND OPTI ONS ARE CONTRACTS REPRESENTING A PROPERTY OF VALUE CAPABLE OF BEING ACQUIRED, HELD AND TRANSFER, AND HAVE ALL IMPORTANT INGREDIENTS OF CAPITAL ASSET. 'BUY FUTURES' IS A CO NTRACT TO BUY AND 'SALE FUTURES' IS A CONTRACT TO SELL. BOTH ESSENTIALLY ARE CONTRACTS WHICH CREATE RIGHTS AND OBLIGATIONS A ND CARRY THEIR OWN VALUES. THEY ARE RECOGNIZED AS SECURITIES AND ARE INDEPENDENTLY TRADABLE. THEY ARE PROPERTIES CARRYIN G VALUE AND THEREFORE SHOULD BE CONSIDER AS CAPITAL ASSET W ITHIN THE MEANING OF THE TERM U/S. 2(14) OF THE INCOME TA X ACT, 1961. IN THE CASE OF THE ASSESSEE IT IS NOT DISPUT ED BY THE ASSESSING OFFICER THAT THE LOSS INCURRED BY THE ASS ESSEE IN RESPECT OF FUTURES & OPTIONS TRANSACTION OF RELIANC E PETRO, IT IS ALSO ADMITTED THAT THE ASSESSEE HAS HOLD THIS RIGHT FOR 93 DAYS AND THEREFORE THE ACTION OF THE ASSESSING O FFICER TO HOLD THE SAID LOSS AS A BUSINESS LOSS AND THEREBY D RAWING A CONCLUSION THAT THE SHARES WHICH WERE HELD FOR A PE RIOD OF 36 DAYS TO 237 DAYS AS A BUSINESS INCOME WAS NOT JUSTIFIED. H. WE FIND THAT THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION EARNED THE INCOME BREAK UP OF WHICH I S AS UNDER. A) INCOME FROM HOUSE PROPERTY 59500.00 B) SHARE OF PROFIT FROM FIRM M/S. L.L. MUTHA 48893.00 C) LONG TERM CAPITAL GAIN 481846.00 D) SHORT TERM CAPITAL GAIN 4288571.00 E) INCOME FROM OTHER SOURCES 41982.00 F) DIVIDEND ON SHARES 287925.00 G) PPF INTEREST & INT. ON RELIEF BOND 23065.00 ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER 5.1 FROM THE ABOVE IT IS OBVIOUS THAT THE MAIN SOU RCE OF INCOME IS FROM INVESTMENT ACTIVITY. THE ENTIRE INVESTMENT IN THE SHARES IS AS EVIDENT FROM THE BALANCE SHEET IS HELD OUT OF OWN F UNDS AND THERE ARE NO BORROWED FUNDS UTILIZED FOR MAKING INVESTMEN T IN SHARES. THE BASIC INTENTION WAS TO ACQUIRE SHARES AS AN INV ESTMENT AND THE SHARES WERE HELD FOR A REASONABLE PERIOD OF TIM E. THE ASSESSEE PURCHASED THE SHARES AS AN INVESTMENT AND SUBSEQUEN TLY WHEN HE NOTICED THAT THERE IS SURPLUS ON SELLING OF THESE S HARES HELD AS INVESTMENT DECIDED TO SALE THESE SHARES AS A NORMAL INVESTOR NORMALLY DOES. THIS COULD NOT BE TREATED AS BUSINE SS ACTIVITY. THE GENERAL PRINCIPLE OF LAW APPLICABLE FOR DETERMINING WHEN CERTAIN ACTIVITY CONSTITUTE A BUSINESS OR AN INVESTMENT ACC OUNT WOULD HAVE TO BE APPLIED TO THE ACTIVITY OF SHARE INVESTING IN ORDER TO DETERMINE WHETHER THE TRANSACTION RESULT IN BUSINESS INCOME O R CAPITAL GAIN. THERE IS NO EXPRESS PROVISION IN THE LAW TO DETERMI NE WHEN AN ACTIVITY IS ONE OF INVESTMENT AND WHEN ITS CONSTITU TES TO A BUSINESS. THE DEFINITION OF SECTION 2(13) OF INCOM E TAX ACT WHICH SAYS THAT THE BUSINESS INCLUDES ANY TRADE, COMMERCE , OR MANUFACTURE OR ANY OTHER ADVENTURE IN THE NATURE OF TRADE, COMMERCE OR MANUFACTURE, DOES NOT PROVIDE MUCH GUID ANCE SO FAR AS DETERMINING WHETHER SAID TRANSACTIONS CONSTITUTE A BUSINESS OR NOT, SINE THE DEFINITION IS AN INCLUSIVE DEFINITION AND THEREFORE, MERELY ILLUSTRATIVE. EVEN IN EXPLANATION 2 TO SECTI ON 28 IS NOT OF MUCH HELP AS EXPLANATION DOES NOT DEFINE THE CIRCUM STANCES IN WHICH SUCH TRANSACTION CONSTITUTES THE BUSINESS. 5.2 TEST FOR DISTINCTION BETWEEN SHARES HELD AS STO CK IN TRADE AND SHARES HELD AS INVESTMENT IS MENTIONED BY THE CBDT IN CIRCULAR NO. 4/2007 AT 15/6/2007 AND CLARIFICATION AS UNDER: A) INCOME TAX ACT 1961 MAKES A DISTINCTION BETWEEN A CAPITAL ASSET AND A TRADING ASSET. ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER B) CAPITAL ASSET IS DEFINED IN SECTION 2(14) OF THE IN COME TAX ACT. LONG TERM CAPITAL ASSET AND GAINS ARE DEAL T WITH U/S 2 (29A) AND SECTION 2 (29B). SHORT TERM CAPITAL ASS ET AND GAIN ARE DEALT WITH U/S 2 (42A) AND SECTION 2 (42 B) OF THE ACT. C) TRADING ASSETS ARE DEALT WITH U/S 28 OF THE ACT. D) THE CENTRAL BOARD OF DIRECT TAX (CBDT) THROUGH INSTRUCTION NO 1827 DATED 31.08.1989 HAD BOUGHT TO THE NOTICE OF THE ASSESSING OFFICERS THAT THERE IS A DI STINCTION BETWEEN SHARES HELD AS INVESTMENT (CAPITAL ASSET) A ND SHARES HELD AS STOCK IN TRADE (TRADING ASSET). E) IN THE LIGHT OF NUMBER OF JUDICIAL DECISIONS PRONOU NCED AFTER THE ISSUE OF THE ABOVE INSTRUCTION, IT IS PRO POSED TO UPDATE THE INFORMATION OF THE ASSESSEE AS WELL AS F OR THE GUIDANCE OF THE ASSESSING OFFICERS. F) IN THE CASE OF CIT (CENTRAL), CALCUTTA V. ASSOCIATE D INDUSTRIAL DEVELOPMENT COMPANY (P) LTD [1971) (82 ITR 586 (SC)], THE SUPREME COURT OBSERVED THAT: 'WHETHER A PARTICULAR HOLDING OF SHARE BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK - IN - TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSE E WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOC K-IN- TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT .' G) IN CASE OF CIT, BOMBAY V. H. HOICK LARSEN [(1986 ) (160 ITR 67 (SC)], THE SUPREME COURT OBSERVED; 'THE HIGH COURT, IN OUR OPINION, MADE A MISTAKE IN OBSERVING WHETHER TRANSACTION OF SALE AND PURCHASE OF SHARES WERE TRADING TRANSACTIONS OR WHETHER THESE W ERE IN THE NATURE OF INVESTMENT WAS A QUESTION OF LAW. THIS WAS A MIXED QUESTION OF LAW AND FACT' ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER H) THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE ABOVE TWO CASES AFFORD ADEQUATE GUIDANCE TO THE ASS ESSING OFFICERS. I) THE AUTHORITY FOR ADVANCE RULINGS (AAR) IN FIDEL ITY NORTHSTAR FUND (2007) (288 ITR 641), REFERRING TO T HE DECISION OF THE SUPREME COURT IN SEVERAL CASES, HAS CARVED O UT THE FOLLOWING PRINCIPLES: I. WHERE A COMPANY PURCHASES AND SELLS SHARES, IT MUST BE SHOWN THAT THEY WERE HELD AS STOCK IN TRADE AND THE EXISTENCE OF THE POWER TO PURCHASE AND SELL SHA RES IN MEMORANDUM OF ASSOCIATION IS NOT DECISIVE OF THE NA TURE OF TRANSACTION; II. THE SUBSTANTIAL NATURE OF TRANSACTION, THE MANN ER OF MAINTAINING BOOKS OF ACCOUNTS, THE MAGNITUDE OF PURCHASE AND SALES RATIO BETWEEN PURCHASES AND SALE S AND HOLDING WOULD FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS; III. ORDINARILY THE PURCHASE AND SALE OF SHARES WIT H THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRANSACTIONS BEING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE; BUT WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCO ME BY WAY OF DIVIDEND ETC. THEN THE PROFITS ACCRUING B Y CHANGE IN SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT. J) DEALING WITH THE ABOVE THREE PRINCIPLES, THE AAR HAS OBSERVED IN CASE OF FIDELITY GROUP AS UNDER:- 'WE SHALL REVERT TO THE AFOREMENTIONED PRINCIPLES. THE FIRST PRINCIPLE REQUIRES US TO ASCERTAIN WHETHER TH E PURCHASE OF SHARES BY A FII IN EXERCISE OF THE POWE R OF THE MEMORANDUM OF ASSOCIATION/ TRUST DEED WAS AS STOCK-IN-TRADE AS THE MERE EXISTENCE OF THE POWER T O PURCHASE AND SELL SHARES WILL NOT BY ITSELF BE DECI SIVE OF THE NATURE OF TRANSACTION. WE HAVE TO VERIFY AS TO HOW THE SHARES WERE VALUED/HELD IN THE BOOKS OF ACCOUNT I.E. WHETHER THEY WERE VALUED AS STOCK-IN- TRADE AT THE END OF THE FINANCIAL YEAR FOR THE PURPOSE OF ARRIVING AT T HE BUSINESS INCOME OR HELD AS INVESTMENT IN CAPITAL AS SETS. THE SECOND PRINCIPLE FURNISHES A GUIDE FOR DETERMIN ING ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER THE NATURE OF TRANSACTION BY VERIFYING WHETHER THER E ARE SUBSTANTIAL TRANSACTIONS, THEIR MAGNITUDE, ETC, MAINTENANCE OF BOOKS OF ACCOUNTS AND FINDING THE RA TIO BETWEEN PURCHASES AND SALES. IT WILL NOT BE OUT OF PLACE MENTION THAT REGULATION 18 OF THE SEBI REGULATIONS ENJOINS UPON EVERY FII TO KEEP AND MAINTAIN BOOKS O F ACCOUNTS CONTAINING TRUE AND FAIR ACCOUNTS RELATING TO REMITTANCE OF INITIAL CORPUS OF BUYING AND SELLING AND REALIZING CAPITAL GAINS ON INVESTMENTS AND ACCOUNTS OF REMITTANCE TO INDIA FOR INVESTMENT IN INDIA AND REA LIZING CAPITAL GAIN ON INVESTMENT FROM SUCH REMITTANCES. T HE THIRD PRINCIPLE SUGGEST THAT ORDINARILY PURCHASES A ND SALE OF SHARES WITH THE MOTIVE OF REALIZING PROFIT WOULD LEAD TO INTERFERENCE OF TRADE/ ADVENTURE IN NATURE OF TRADE; WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF THE COMPANIES IS TO DERIVE INCOME BY WAY OF DIVIDENDS E TC; THE TRANSACTIONS OF PURCHASES AND SALES WOULD YIELD CAPITAL GAINS AND NOT BUSINESS PROFITS'. K) CBDT ALSO WISHES TO EMPHASIS THAT IT IS POSSIBLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS, I.E., AN INVESTMENT P ORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRADING PORTFOLIO COMPRISING OF STOCK- IN TRADE WHICH ARE TO BE TREATED AS TRADING ASSETS. WHERE AN ASSESSEE HAS TWO PORTFOLIOS, THE ASSESSEE MAY HAVE INCOME UN DER BOTH HEADS I.E. CAPITAL GAINS AS WELL AS BUSINESS INCOME . L) ASSESSING OFFICERS ARE ADVISED THAT THE ABOVE PR INCIPLES SHOULD GUIDE THEM IN DETERMINING WHETHER IN A GIVEN CASE, THE SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT ( AND THEREFORE GIVING RISE TO BUSINESS PROFITS).THE ASSE SSING OFFICERS ARE FURTHER ADVISED THAT NO SINGLE PRINCIPLE WOULD BE DECISIVE AND THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD B E CONSIDERED TO DETERMINE WHETHER, IN A GIVEN CASE, THE SHARES A RE HELD BY THE ASSESSEE AS INVESTMENT OR STOCK-IN -TRADE. M) THESE INSTRUCTIONS SHALL SUPPLEMENT THE EARLIER INSTRUCTION NO. 1827 DATED 31/8/1989. ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER 5.2 WE FIND THAT THE ASSESSEE'S NORMAL ACTIVITY IS NOT BUYING AND SELLING OF SHARES BUT HIS PURCHASE AND SALE OF SHAR ES WERE IN THE NATURE OF INVESTMENT OF HER OWN SURPLUS MONEY AND T HEREFORE, THE EXCESS AMOUNTS RECEIVED BY SALES WERE CAPITAL RECEI PTS BEING MERELY SURPLUS AND NOT PROFITS. IN CASE THE ASSESS EE IS EARNING LARGE INCOME FROM HIS NORMAL BUSINESS ACTIVITY AND IT WAS HIS SURPLUS INCOME WHICH HE WAS INTERESTING IN BUYING T HE SHARES. WHENEVER HE FOUND IT PROFITABLE HE CONVERTED HIS HO LDING THAT THE VERY NATURE OF INVESTMENT WAS SUCH THAT THEY HAD TO BE CONSTANTLY CHARGED SO THAT THE MONIES INVESTED MAY BE USED TO THE BEST ADVANTAGE OF THE INVESTOR AND THAT THE SALES WERE R EALLY FOR THE PURPOSE OF EMPLOYING THE MONIES THAT HE HAD INVESTE D TO HIS BEST ADVANTAGE. 5.3 IT IS COMMON FOR TRANSACTION IN SHARES TO CARRY ON BOTH AS BUSINESS, AS WELL AS, AN INVESTMENT ACTIVITY. THE LINE THAT DIVIDES TRADING STOCK FROM INVESTED CAPITAL IS FINE AND OFT EN IMPERCEPTIBLE. THE QUESTION WHETHER IT AMOUNTS TO BUSINESS OR AN I NVESTMENT WILL DEPEND UPON THE FACTS OF EACH CASE. 5.4 THE HONBLE GUJARAT HIGH COURT IN CASE OF CIT V /S REWA SHANKAR A. KOTHARI (2006) 283 ITR 338 (GUJ) FOLLOWI NG TESTS WERE LAID DOWN FOR DETERMINING WHETHER IT IS BUSINESS IN COME OR CAPITAL GAIN. A. WHETHER THE INITIAL ACQUISITION WAS WITH THE INTENT ION OF DEALING IN SHARES OR WITH A VIEW TO FINDING AN INVESTMENT. IN ASSESSEE CASE IT IS DEFINITELY AN INVESTMENT. B. WHY, HOW, AND FOR WHAT PURPOSE THE SELL WAS AFFECTE D SUBSEQUENTLY. IN ASSESSEE CASE THE SALE WAS AFFECTE D SUBSEQUENTLY AS HE REALIZES THAT HE WILL GET MONEY FROM THIS INVESTMENT WHICH WILL USE IN THE BUSINESS. THE PRIMARY OBJECT HERE IS TO LIQUIDATE MONEY AND NOT T O GET PROFIT BY DEALING THIS ACTIVITY. ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER C. TREATMENT GIVEN BY ASSESSEE IN THE BOOKS FOR PURCHA SE OF SHARES I.E. WHETHER STOCK IN TRADE OR INVESTMENT . IN THE CASE BEFORE US WAS SHOWN AS AN INVESTMENT. D. THE TREATMENT GIVEN IN THE RETURN OF INCOME. ASSES SEE HAS SHOWN AS CAPITAL GAIN. E. WHETHER THIS IS MAIN OBJECT OF THE ASSESSEE. IN CAS E OF ASSESSEE THE MAIN OBJECT AND ACTIVITY IS CARRYING O UT PARTNERSHIP FIRM ACTIVITY AND INVESTMENT IN SHARE I S ANCILLARY 5.5 IN VIEW OF ABOVE, WE FIND THAT VOLUME OF FREQUE NCY, CONTINUITY AND REGULARITY OF TRANSACTION OF PURCHASE AND SALES ARE FOUND IN CHARACTER AND HOWEVER WHAT IS MORE IMPORTANT IS THE INTENTION OF THE ASSESSEE. IN THE CASE OF THE ASSESSEE INTENTIO N WAS TO PURCHASE THE SHARES AS INVESTMENT AND IF IT GENERATES PROFIT THEN TO TAKE A DECISION WHETHER TO SALE AND REALIZE THE PROFIT. H ON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GOPAL PUROHIT, WH ICH HAS BEEN APPROVED BY HON'BLE SUPREME COURT IN 334 ITR 308 (S T) WHEREIN IN SIMILAR CIRCUMSTANCES THE SUPREME COURT HAS DISMISS ED THE SLP OF THE DEPARTMENT AND THUS APPROVED THE DECISION OF TH E HIGH COURT, WHEREIN, THE HON'BLE HIGH COURT HAS ACCEPTED THE CO NTENTION OF THE ASSESSEE TREATING THE INCOME FROM SALE OF SHARES AS SHORT TERM CAPITAL GAIN, WHICH WAS TREATED AS INCOME FROM BUSI NESS BY THE REVENUE AUTHORITIES. 5.6 WE ALSO FIND THAT ITAT, PUNE BENCH IN THE CASE OF JCIT VS. SHRI CHHATARMAL GOKULCHAND CHHAJER (SUPRA), WHEREIN , THE CIT(A) TAKING ALL FACTS AND CIRCUMSTANCES INTO CONSIDERATI ON, HELD THAT THE SALE OF SHARES HELD FOR MORE THAN ONE MONTH WOULD B E CHARGED CAPITAL GAIN AND SURPLUS OF SHARES HELD FOR LESS TH AN ONE MONTH WILL BE TREATED AS PROFIT FROM BUSINESS. IT WAS HE LD BY THE TRIBUNAL THAT THE CIT(A) WAS JUSTIFIED IN MAKING ABOVE CLASS IFICATION. THIS CLASSIFICATION WAS HELD NOT REASONABLE. TAKING ALL FACTS AND CIRCUMSTANCES INTO CONSIDERATION, THE TRIBUNAL HELD THAT ALL SHARE ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WOULD BE CH ARGED TO CAPITAL GAIN IRRESPECTIVE OF THEIR HOLDING, THE ASS ESSING OFFICER WAS DIRECTED TO COMPUTE THE CAPITAL GAIN ACCORDINGLY. THE RATIO OF SHRI CHHATARMAL GOKULCHAND CHHAJER (SUPRA) HELPS THE LEG AL PROPOSITION PUT FORWARD BY THE LEARNED AUTHORIZED R EPRESENTATIVE FOR THE ASSESSEE. 5.7 WE FIND THAT ITAT, PUNE BENCH IN THE CASE OF MR BOTHARA PEMRAJ MANAKCHAND (SUPRA), WHEREIN, THE ASSESSEE HA D SHOWN LONG TERM CAPITAL GAINS OF 1,25,336/- AFTER MAKING EXEMPTIONS U/S.10(38) OF THE ACT AND SHORT-TERM CAPITAL GAIN AT 24,00,367/- ON ACCOUNT OF SALE OF SHARE/SECURITIES. THE ASSESSI NG OFFICER HAS TREATED SUCH GAIN AS ASSESSABLE UNDER THE HEAD INCO ME FROM BUSINESS AND NOT AS CAPITAL GAINS. THE COMMISSIONER OF INCOME- TAX (APPEALS) HAS CONCURRED WITH THE STAND OF THE A SSESSING OFFICER AND FOR THAT REASON THE ASSESSEE APPROACHED THE TRI BUNAL, WHEREIN, UNDOUBTEDLY, THE QUESTION AS TO WHETHER A PARTICULAR TRANSACTION WAS IN THE NATURE OF INVESTMENT OR AN A DVENTURE IN THE NATURE OF TRADE WAS A MIXED QUESTION OF LAW AND FAC T. NO SINGULAR FACTOR WAS DETERMINATIVE OF THE QUESTION AND THAT T HE SAME HAS TO BE INFERRED ON THE BASIS OF CUMULATIVE EFFECT OF SE VERAL FACTORS SUCH AS, WHETHER THE PURCHASER WAS A TRADER; WHETHER TH E PURCHASE OF THE COMMODITY AND ITS RESALE WAS ALLIED TO HIS USUA L TRADE OR BUSINESS; THE NATURE AND THE QUANTITY OF COMMODITIE S TRADED; FREQUENCY AND SIMILARITY OF TRANSACTIONS USUALLY AS SOCIATED WITH TRADE OR BUSINESS; THE REPETITION OF TRANSACTIONS; PERIOD OF HOLDING AND ALSO THE INTENTION OF THE PURCHASER AT THE TIME OF ACQUISITION. BY DETAILED ANALYSIS, THE TRIBUNAL HELD THAT THE SU RPLUS FUNDS INVESTED IN THE TRANSACTIONS OF SHARES WERE RIGHTLY DECLARED BY THE ASSESSEE FALLING UNDER HEAD CAPITAL GAINS AND NOT B USINESS INCOME. THE RATIO OF MR. BOTHARA PEMRAJ MANAKCHAND (SUPRA) ALSO SUPPORTS THE STAND OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US. ITA NOS.1645 & 1646/PN/2012 SHRI INDRAKUMAR MUTHA & ANOTHER 5.8 IN VIEW OF ABOVE LEGAL AND FACTUAL DISCUSSION, WE REVERSE THE ORDER OF CIT(A) AND DIRECT THE ASSESSING OFFICER TO TREAT THE IMPUGNED INCOME FROM SALE OF SHARES AS ASSESSABLE U NDER THE HEAD CAPITAL GAIN AND NOT AS BUSINESS INCOME. WE ORDE R ACCORDINGLY. AS A RESULT, THE APPEAL IS ALLOWED. 6. A SIMILAR ISSUE AROSE IN THE CASE OF WIFE OF THE ASSESSEE IN ITA NO.1646/PN/12. FACTS BEING SIMILAR, SO FOLLOWING T HE SAME REASONING, THE ASSESSING OFFICER IS DIRECTED TO TRE AT THE IMPUGNED INCOME FROM SALE OF SHARES AS ASSESSABLE UNDER THE HEAD CAPITAL GAIN AND NOT AS BUSINESS INCOME. 7. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASS ESSEES ARE ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE DAY OF 31 ST JULY, 2014. SD/- SD/- (G.S. PANNU) (SHAILENDRA KUMAR YADA V) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED THE 31 ST JULY, 2014 GCVSR COPY TO:- 1) ASSESSEE 2) THE DEPARTMENT 3) THE CIT(A)-I, PUNE 4) THE CIT-I, PUNE 5) THE DR, A BENCH, I.T.A.T., PUNE. 6) GUARD FILE BY ORDER //TRUE COPY// SENIOR PRIVATE SECRETARY, ITAT, PUNE.