The ACIT, Circle-6, Surat V. Shri Manish Sumatilal Shah, Surat

ITA 1934/AHD/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 50776 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 21-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 12-06-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B L YADAV
• Assessee Lawyers: NILESH R KOYANI A R
• Keywords: Capital asset; Business income; Depreciation; Salary income; Cost of acquisition
• Section: 43(5)

Judgement Text

, , , , , , ! !! !' '' ' ! ! ! !. .. .! !! !. .. .$%& $%& $%& $%& , ' ' ' ' ( ( ( ( IN THE INCOME TAX APPELLATE TRIBUNAL : D BENCH : AHMEDABAD (BEFORE HONBLE SHRI BHAVNESH SAINI, J.M. & HON BLE SHRI A.L.GEHLOT, A.M.) ' '' '. ITA NO. 1934/AHD./2009 : )*- 2006-07 ACIT, CIRCLE-6, SURAT (-. /APPELLANT) -VS- SHRI MANISH SUMATILAL SHAH, SURAT ( /0-. /RESPONDENT ) (PAN : ADRPS 1088E) -. 1 2 / APPELLANT BY : SHRI B.L.YADAV, D.R. /0-. 1 2 / RESPONDENT BY : SHRI NILESH R. KOYANI, A.R. 34 1 &' / DATE OF HEARING : 21/10/2011 5%) 1 &' / DATE OF PRONOUNCEMENT : 21/10/2011 / ORDER PER SHRI A.L.GEHLOT, ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE REVENUE. THE ASSESSMEN T YEAR INVOLVED IS 2006-07. THE APPEAL IS INSTITUTED AGAINST THE ORDER OF THE L D. CIT(A)-IV, SURAT DATED 25.03.2009. THE GROUND IS REPRODUCED AS UNDER: ( 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A)-IV, SURAT HAS ERRED IN DELETING THE ADDIT ION OF RS.1,02,75,486/- MADE BY THE ASSESSING OFFICER ON A CCOUNT OF SHORT TERM CAPITAL GAIN TREATED AS BUSINESS INCOME . 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A DIRECTOR OF M/S. VINODKUMAR DIAMONDS PVT. LTD. ENGAGED IN THE BUSINESS OF DIAMO NDS. THE ASSESSEE FILED THE RETURN OF INCOME SHOWING SALARY INCOME, INTEREST INCOME, L ONG TERM CAPITAL GAIN/LOSS ON SALE OF SHARES AND SHORT TERM CAPITAL GAIN. THE SALARY I NCOME DECLARED BY THE ASSESSEE IS RS.60 LAKHS. THE INCOME IS ALSO DECLARED BY THE ASS ESSEE ON SALE OF SHARES AS CAPITAL GAIN/LOSS. THE AO TREATED THE SHORT TERM CAPITAL GA IN INCOME ON SALE OF LISTED EQUITY SHARES AS BUSINESS INCOME ON VARIOUS COUNTS. ITA NO. 1934-AHD-09 2 3. THE CIT(A) ACCEPTED THE ASSESSEES CLAIM AS SHOR T TERM CAPITAL GAIN AND NOT AS A BUSINESS INCOME. THE RELEVANT FINDING OF THE CIT( A) IS REPRODUCED HEREUNDER: I HAVE CONSIDERED THE FINDINGS OF THE AO AND SUBMIS SIONS MADE BY THE APPELLANT. FROM THE FACTS OF THE CASE, IT IS EVIDEN T THAT THE APPELLANT IS A FULL TIME DIRECTOR IN S. VINODKUMAR DIAMONDS PVT. LTD. W HICH HAS A TOTAL TURNOVER OF MORE THAN 643 CRORES IN THE YEAR UNDER CONSIDERA TION. ON ACCOUNT OF HIS INVOLVEMENT IN THE BUSINESS OF THE COMPANY, THE APP ELLANT IS DERIVING ANNUAL SALARY OF RS.60,00,000/- FROM THE SAID COMPANY. D URING THE YEAR UNDER CONSIDERATION, THE APPELLANT APPARENTLY HAD SURPLUS IN THE FORM OF NET SALARY INCOME OF RS. 33.15 LACS AFTER DEDUCTING IDS AND HO USEHOLD WITHDRAWALS AS ALSO NET INTEREST INCOME OF RS. 98.95 LACS ON THE L OANS GIVEN TO THE SAID COMPANY. THE APPELLANT HAS NOT BORROWED ANY FUNDS F OR MAKING INVESTMENTS IN THE CAPITAL MARKET. FURTHER THE ENTIRE SHORT TERM C APITAL GAIN OF RS. 1.02 CRORES ON SALE OF LISTED EQUITY SHARES HAS BEEN RE-INVESTE D IN EQUITY SHARES. THE ACTIVITY OF INVESTMENT IN THE CAPITAL MARKET IS NEI THER ALLIED NOR INCIDENTAL TO THE USUAL TRADE OF THE APPELLANT OF EXPORT OF DIAMO NDS. THE APPELLANT DOES NOT HAVE ANY INFRASTRUCTURE IN THE FORM OF OFFICE, EMPL OYEES, COMPUTER SYSTEMS, BOLT, ON LINE TRADING ACTIVITY ETC. SO AS TO CARRY ON THE BUSINESS OF TRADING IN SHARES AND HIS INVESTMENT HAS BEEN MANAGED BY THE B ROKER AND ALL THE TRANSACTIONS OF PURCHASE AND SALE ARE ONLY THROUGH DEMAT ACCOUNT. DURING THE YEAR THE APPELLANT HAS EARNED INCOME OF ONLY RS . 22,321/- IN RESPECT OF NON DELIVERY OF SHARES WHICH HAS ALREADY BEEN OFFERED B Y HIM UNDER THE HEAD BUSINESS INCOME AS PER THE PROVISIONS OF SEC. 43(5) OF THE INCOME TAX ACT. THE APPELLANT HAS ALSO EARNED DIVIDEND INCOME OF RS. 4, 98,258/- DURING THE YEAR I.E. ON 45 SCRIPS OUT OF THE TOTAL INVESTMENTS IN 5 8 SCRIPS .E. A RATIO OF 77% WHICH IS SUBSTANTIAL. THE APPELLANT HAS ALSO RECEIV ED DIVIDEND ON 53 OCCASIONS DURING THE YEAR WHICH ALSO FAVOURS THE ACT OF THE A PPELLANT AS AN INVESTOR. FURTHER, THE AVERAGE PERIOD OF PURCHASE AND SALE OF SHARES IN THE CASE OF THE APPELLANT IS 134 DAYS WHEREAS THE AVERAGE PERIOD OF HOLDING OF SHARES AS AT THE YEAR END IS 220 DAYS, WHICH CLEARLY LEAD TO AN INFE RENCE THAT THE APPELLANT IS AN INVESTOR SINCE NO BUSINESSMAN WOULD HOLD HIS STOCK FOR AN AVERAGE PERIOD OF 220 DAYS AND THERE WOULD ALSO NOT BE A GAP OF 134 D AYS BETWEEN A PURCHASE AND SALE TRANSACTION. IT IS IMPORTANT TO NOTE THAT THE APPELLANT HAS SHOWN THE SHARES AS AT THE YEAR END IN HIS BALANCE SHEET UNDE R THE HEAD 'INVESTMENTS' AND NOT AS 'STOCK-IN-TRADE AND ACCORDINGLY, THE SAID I NVESTMENT HAS BEEN CARRIED IN THE BOOKS AT COST WITHOUT CLAIMING BENEFIT OF DIMIN UTION IN THE MARKET VALUE OF SHARES AS WOULD HAVE BEEN AVAILABLE IN THE CASE OF STOCK-IN-TRADE. AS PER THE APPELLANT, THE PURCHASE COST OF THE SHARES HELD AT THE YEAR END IS RS. 1,27,87,663/- AS AGAINST THE MARKET VALUE OF RS.70, 15,418/- AND HENCE, THERE IS A DEPRECIATION IN THE VALUE OF INVESTMENT AS ON 31- 03-2005 OF RS.57,72,245/-. IT IS SEEN THAT THE AO HAS HELD THAT THE SHARES ARE ST OCK IN TRADE OF THE APPELLANT AND NOT CAPITAL ASSET BUT AFTER THIS FINDING THE AO IS NOT VALUING THE SAID STOCK- IN-TRADE AT THE LOWER OF COST OR MARKET VALUE AS PE R THE ACCOUNTING STANDARD PRESCRIBED UNDER THE ACT. IF HE HAD DONE SO AND COM PUTED THE INCOME OF THE ITA NO. 1934-AHD-09 3 APPELLANT, THE BUSINESS INCOME WOULD HAVE BEEN RS. 52,64,765/- IN THE ACTIVITY OF SALE OF SHARES INSTEAD OF THE SHORT TERM CAPITAL GAIN OF RS. 1,02,75,489/- DULY OFFERED BY THE APPELLANT. HOWEVER, THE AO ONLY APPL IED THE TAX RATE OF 30% ON THE INCOME COMPUTED AS PER THE PROVISIONS OF SEC. 4 5 I.E. UNDER THE HEAD CAPITAL GAINS WHICH IS NOT CORRECT. IT IS ALSO SEEN THAT IF THIS APPROACH OF COMPUTING THE BUSINESS INCOME IS APPLIED ON A CONSISTENT BASIS IN THE SUBSEQUENT YEAR THE TOTAL BUSINESS INCOME FOR F.Y. 2005-06 TO F.Y. 2008 -09 WOULD WORK OUT TO RS. 1,57,98,642/- AS AGAINST THE SHORT TERM CAPITAL GAI N OF RS, 3,81,66,063/- AS DULY OFFERED BY THE APPELLANT IN HIS REGULAR RETURNS. TH E ISSUE IS DECIDED IN FAVOUR OF THE APPELLANT BY THE HON'BLE ITAT MUMBAI IN THE CAS E OF M/S. J.M. SHARES & STOCK BROKERS LTD.(SUPRA) WHEREIN IT WAS HELD THAT THE PROFIT EARNED BY THE APPELLANT ON SALE OF SHARES WHICH WERE HELD BY IT A S INVESTMENT WAS ASSESSABLE UNDER THE HEAD CAPITAL GAIN AND NOT UNDER THE HEAD BUSINESS INCOME SINCE THE APPELLANT HAD NOT CLAIMED THE BENEFIT OF THE DEPREC IATION IN THE MARKET VALUE OF SHARES AS IS AVAILABLE IN THE CASE OF STOCK-IN-TRAD E. IF THE FACTS OF THE CASE ARE VIEWED IN LINE WITH THE PARAMETERS AS LAID DOWN IN THE CBDT CIRCULAR NO. 4/2007 DATED 15-06-2007 AND THE VARIOUS TESTS AS DI SCUSSED BY THE AO IN THE ASSESSMENT ORDER, I FIND THAT FIRST OF ALL THE PURC HASE AND SALE OF SHARES IS NOT THE USUAL TRADE OR BUSINESS OF THE APPELLANT NOR IS IT INCIDENTAL TO HIS BUSINESS OF EXPORT OF DIAMONDS. SECONDLY, I ALSO FIND THAT T HE MOTIVE BEHIND THE INVESTMENTS IS LONG TERM APPRECIATION SINCE DIVIDEN D HAS ALSO BEEN RECEIVED ON 45 SCRIPS OUT OF 58 SCRIPS AND IN THE MEANTIME IF T HE INVESTMENT IS CHANGED FOR BETTER RE-INVESTMENT THEN, IT CANNOT BE HELD THAT I T IS BUSINESS SINCE THE SURPLUS AGAIN STANDS REINVESTED IN OTHER SCRIPS. MERE M AGNITUDE OF THE TRANSACTIONS DOES NOT CHANGE THE NATURE OF TRANSACTION. IT IS AL SO SEEN THAT THE APPELLANT HAS NOT MADE ANY BORROWINGS FOR INVESTMENTS BUT IT IS O UT OF HIS OWN SURPLUS FUNDS. THE CHARACTERIZATION OF SHARES IN THE BOOKS AS INVE STMENTS AND NOT AS STOCK-IN- TRADE AND THEREBY NOT CLAIMING THE BENEFIT OF DIMIN UTION IN THE MARKET VALUE OF SHARES SUPPORTS THE CLAIM OF THE APPELLANT THAT HE IS AN INVESTOR NOT HAVING CLAIMED ANY HOLDING LOSS. THEREFORE, I AM OF THE CONSIDERED VIEW THAT THE APP ELLANT HAS CORRECTLY SHOWN THE INCOME ON SALE OF LISTED EQUITY SHARES AS SHORT TERM CAPITAL GAINS AND THE SAME DOES NOT AMOUNT TO BUSINESS. ACCORDING LY, THE AO'S ACTION OF TREATING THE INCOME OF THE APPELLANT AS BUSINESS IN COME AND NOT AS SHORT TERM CAPITAL IS NOT IN ORDER. THIS GROUND IS THEREFORE, DECIDED IN FAVOUR OF THE APPELLANT. 4. THE LD. D.R. RELIED UPON THE ORDER OF THE AO AND SUBMITTED THAT THE AO HAS EXAMINED THE CASE IN DETAIL, DURATION OF HOLDING OF SHARES, ETC. AND FOUND THAT INCOME FROM SALE OF SHARES IS A BUSINESS INCOME. 5. THE LD. A.R., ON THE OTHER HAND, RELIED UPON THE ORDER OF THE LD. CIT(A). ITA NO. 1934-AHD-09 4 6. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PAR TIES AND RECORDS PERUSED. THE ADMITTED FACTS OF THE CASE ARE THAT THE ASSESSEE IS A DIRECTOR OF THE COMPANY AND INVOLVED IN THE BUSINESS OF THE COMPANY FOR WHICH T HE ASSESSEE DERIVES ANNUAL SALARY OF RS.60 LAKHS. THE CIT(A), AFTER DETAILED DISCUSSI ON ON EACH AND EVERY ASPECTS, FOUND THAT THE ACTIVITY OF INVESTMENT IN CAPITAL MARKET B Y THE ASSESSEE IS NEITHER ALLIED NOR INCIDENTAL TO THE USUAL TRADE OF THE ASSESSEE OF EX PORT OF DIAMONDS. THE ASSESSEE DOES NOT HAVE ANY INFRASTRUCTURE IN THE FORM OF OFFICE, EMPLOYEES, COMPUTER SYSTEMS, BOLT, ONLINE TRADING ACTIVITIES, ETC. SO AS TO CARRY ON T HE BUSINESS OF TRADING IN SHARES AND INVESTMENT. THE CIT(A) HAS ALSO EXAMINED THE ISSUE FROM THE ANGLE OF HOLDING OF THE SHARES AND NOTED THAT AVERAGE PERIOD OF PURCHASE AN D SALE OF SHARES IN CASE OF THE ASSESSEE IS 134 DAYS WHEREAS THE AVERAGE PERIOD OF HOLDING OF SHARES AS AT THE YEAR END IS 220 DAYS, WHICH CLEARLY LEAD TO AN INFERENCE THA T THE ASSESSEE IS AN INVESTOR. THE CIT(A) HAS ALSO NOTED THAT THE ASSESSEE, AT THE YEA R END, IN HIS BALANCE-SHEET, SHARE INVESTMENT HAS BEEN SHOWN AS INVESTMENT AND NOT AS STOCK-IN-TRADE. THE CIT(A) ALSO EXAMINED THE ISSUE IN THE LIGHT OF PARAMETERS LAID DOWN BY THE CBDT IN ITS CIRCULAR NO.4/2007 DATED 15.06.2007 AND FOUND THAT THE PURCH ASE AND SALE OF SHARES IS NOT USUAL TRADE OR BUSINESS OF THE ASSESSEE NOR IT IS INCIDEN TAL TO BUSINESS OF EXPORT OF DIAMONDS. THE CIT(A) ALSO CONSIDERED THE DECISION DATED 30.11 .2007 OF THE ITAT, MUMBAI J BENCH IN THE CASE OF M/S. J.M. SHARE & STOCK BROKER S LTD. VS- JCIT. THE LD. CIT(A), AT PAGE 4 OF HIS ORDER, CONSIDERED THE ASSESSEES S UBMISSIONS IN RESPECT OF THE HOLDING OF THE SHARES BY THE ASSESSEE. THE CIT(A) HAS ALSO CONSIDERED THE ASSESSEES SUBMISSION THAT THE ASSESSEE HAS CONSEQUENTLY FOLLO WING THE SAME TREATMENT OF TREATING PROFIT ON SALE OF SHARES AS SHORT TERM CAP ITAL GAINS. THE CIT(A) HAS ALSO CONSIDERED THE ASSESSEES SUBMISSION WHICH HE HAS S UMMARIZED AT PAGE 7, OBJECT AND MOTIVE OF THE ASSESSEE IN DEALING IN SHARES, MAINTE NANCE OF BOOKS OF ACCOUNTS, FUND INVESTMENT IN PURCHASE OF SHARES AND INFRASTRUCTURE S, ETC. IN THE LIGHT OF THE ITAT ORDER DATED 28.01.2011 IN CASE OF SHRI RAVINDRA M. AGRAWAL IN ITA NOS.1725 TO 2167 OF 2008, A COPY OF WHICH HAS BEEN PLACED BY THE ASS ESSEE IN THE PAPER BOOK, WE FIND THAT THE ORDER OF THE CIT(A) IS IN CONSONANCE WITH THE ORDER OF THE ITAT IN CASE OF SHRI RAVINDRA M. AGRAWAL ( SUPRA ). THEREFORE, WE FIND THAT THE CIT(A) HAS RIGHTLY HELD THAT THE INCOME OF THE ASSESSEE ON SALE OF LIS TED EQUITY SHARES IS TAXABLE UNDER THE ITA NO. 1934-AHD-09 5 HEAD SHORT TERM CAPITAL GAIN AND DOES NOT AMOUNT TO BUSINESS. THE REVENUE DID NOT POINT OUT ANY CONTRARY MATERIALS OR EVIDENCE AGAINS T THE FINDING OF THE CIT(A). IN THE LIGHT OF THE FACT, THE ORDER OF THE CIT(A) IS CONFI RMED. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. 6 1 5%) 7'* 21/10 /2011 % 8 1 $4 9 THIS ORDER PRONOUNCED IN THE OPEN COURT ON 21/10/2011. SD/- SD/- (BHAVNESH SAINI) (A.L.GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 21/10/2011 1 11 1 /&: /&: /&: /&: ;:)&* ;:)&* ;:)&* ;:)&*- -- - 1. -. 2. /0-. 3. '' & 3? 4. 3?- - 5. :$ /& , , 9 6. $ C6 , D/ 'F , 9 TALUKDAR/ SR. P.S.