Shri Rajendra Mithalal Jain, Ahmedabad V. The Addl.CIT.,Range-7, Ahmedabad

ITA 2061/AHD/2010

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9749 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 05-12-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 15-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ROOP CHAND
• Assessee Lawyers: M K PATEL
• Keywords: Capital asset; Business income; Wrong claim; Sham transactions

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH (BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER) ITA. NO: 2061/AHD/2010 (ASSESSMENT YEAR: 2006-07) SHRI RAJENDRA MITHALAL JAIN B. NO. 20, NAVKAR COTTAGE, SATELLITE ROAD, AHMEDABAD V/S THE ADDL. CIT, RANGE-7, AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AARPJ0417D APPELLANT BY : SHRI M.K. PATEL, AR RESPONDENT BY : SHRI ROOP CHAND, SR. D.R. ( )/ ORDER DATE OF HEARING : 05 -12-20 16 DATE OF PRONOUNCEMENT : 06 -12-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST TH E ORDER OF LD. CIT(A)-XVI, AHMEDABAD DATED 30.03.2010 PERTAINING TO A.Y. 2006- 07. ITA NO 2061/ AHD/2010 . A.Y. 2006-07 2 2. THE ASSESSEE HAS RAISED TWO SUBSTANTIVE GROUNDS OF APPEAL. GROUND NO. 1 RELATES TO THE TREATMENT OF SHORT-TERM CAPITAL GAIN OF RS. 49,02,350/- AS BUSINESS INCOME AND GROUND NO. 2 RELATES TO THE DIS ALLOWANCE OF RS. 98,335/- OUT OF INTEREST EXPENSES. 3. THE ASSESSEE IS IN THE BUSINESS OF PRODUCTION OF TE LEVISION SERIALS AND ADVERTISEMENT, INVESTMENT IN SHARES AND SECURITIES. THE RETURN FOR THE YEAR WAS FILED ON 31.12.2006 DECLARING TOTAL INCOME OF R S. 74,58,930/-. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT UNDER C ASS AND ACCORDINGLY STATUTORY NOTICES WERE ISSUED AND SERVED UPON THE A SSESSEE. 4. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEE DINGS, THE A.O. NOTICED THAT THE ASSESSEE HAS SHOWN INCOME OF RS. 49,02,350 /- UNDER THE HEAD SHORT-TERM CAPITAL GAIN FROM PURCHASE AND SALE OF EQUITY SHARES OF VARIOUS COMPANIES. THE A.O. NOTICED THAT THERE ARE MORE THA N 300 TRANSACTIONS OF PURCHASE AND SALE. THE A.O. WAS OF THE FIRM BELIEF THAT THE MAGNITUDES OF SOME TRANSACTION ARE VERY HIGH. THE A.O. FORMED A B ELIEF THAT THE ASSESSEE IS INDULGED IN TRADING ACTIVITIES IN SHARE AND SECU RITIES. THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM OF SHORT-TERM CAPITAL GA IN FROM SALE OF SHARES. THE ASSESSEE WAS ALSO ASKED TO SHOW CAUSE WHY THE SHORT -TERM CAPITAL GAIN SHOULD NOT BE TREATED AS INCOME FROM BUSINESS IN SH ARES. ASSESSEE FILED A DETAILED REPLY IN SUPPORT OF ITS CLAIM. THE A.O. DI SMISSED THE CLAIM OF THE ASSESSEE ON THE STRENGTH OF THE CBDT CIRCULAR NO. 4 /2007 DATED 15.06.2007 AND TREATED THE ENTIRE SHORT TERM CAPITAL GAIN AS B USINESS INCOME OF THE ASSESSEE. THE REASONS GIVEN BY THE A.O. RELATED TO THE FOLLOWING:- ITA NO 2061/ AHD/2010 . A.Y. 2006-07 3 (I) NATURE OF TRANSACTION (II) FREQUENCY OF TRANSACTION (III) MAGNITUDE OF TRANSACTION 5. ASSESSEE STRONGLY AGITATED THE MATTER BEFORE THE FI RST APPELLATE AUTHORITY BUT WITHOUT ANY SUCCESS. 6. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR I.E. A.Y. 2005-06, THE FI RST APPELLATE AUTHORITY HAS ACCEPTED THAT THERE WERE NO PURCHASE AND SALE O F SHARES. THE ENTIRE INVESTMENTS IN SHARES WERE BROUGHT FORWARD BALANCES FROM EARLIER ASSESSMENT YEARS. IT IS THE SAY OF THE LD. COUNSEL THAT THE SHARES ARE PURCHASED WITH OWN FUNDS AND NOT FROM BORROWED MONE Y. THE LD. COUNSEL FURTHER STATED THAT THE ASSESSEE HAS BEEN SHOWING T HE PURCHASE OF SHARES AS INVESTMENTS SINCE PAST MANY YEARS AND THE SAME H AS BEEN ACCEPTED BY THE REVENUE AUTHORITIES. 7. THE LD. COUNSEL FURTHER STATED THAT WHEREVER THE AS SESSEE HAS DONE DAY TRADING IN THE SHARES, THE SAME HAS BEEN OFFERED AS BUSINESS INCOME. PER CONTRA, THE LD. D.R. STRONGLY SUPPORTED THE FINDING S OF THE A.O. 8. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE AUTH ORITIES BELOW. THE UNDISPUTED FACT IS THAT THE ASSESSEE HAS BEEN SHOWI NG THE PURCHASE OF SHARES UNDER THE HEAD INVESTMENT. IT IS ALSO AN U NDISPUTED FACT THAT IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR I.E. A.Y. 2005- 06, THE ASSESSEE HAS ITA NO 2061/ AHD/2010 . A.Y. 2006-07 4 NOT DONE ANY TRANSACTION AND, THEREFORE, THE INVEST MENTS WERE BROUGHT FORWARD BALANCES FROM EARLIER YEARS. 9. THE DISPUTE IS REGARDING THE NATURE OF INCOME ON SA LE AND PURCHASE OF SHARES BY THE ASSESSEE. THE ISSUE, WHETHER THE INCO ME FROM SALE AND PURCHASE OF SHARES IN A PARTICULAR CASE SHOULD BE T REATED AS CAPITAL GAIN OR AS BUSINESS INCOME HAS BEEN A DEBATABLE ISSUE AND T HERE ARE CONFLICTING DECISIONS OF THE TRIBUNAL ON THIS ISSUE. EACH CASE IS THEREFORE, TO BE BASED ON ITS OWN FACTUAL SITUATION. IN THE BALANCE SHEET, THE ASSESSEE HAS SHOWN SHARES UNDER THE HEAD 'INVESTMENT'. THESE INVESTMEN T SHARES HAVE BEEN VALUED AT COST. THE HON'BLE SUPREME COURT IN THE CA SE OF CIT ASSOCIATED INDUSTRIAL DEVELOPMENT CO PVT. LTD. 82 ITR 586, WHI CH DECISION HAS ALSO BEEN CONSIDERED BY THE CBDT IN ITS CIRCULAR NO. 4/2 007 DT. 15.6.2007, HAS OBSERVED THAT: 'WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY O F INVESTMENT OR FORMS PART OF THE STOCK-IN-TRADE IS A MATTER WHICH IS -WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTA NCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOCK-IN-TRADE A ND THOSE WHICH ARE HELD BY WAY OF INVESTMENT' 10. THE CBDT HAS FURTHER THROWN LIGHT ON THIS CONTROVER SIAL ISSUE IN ITS CIRCULAR NO. 6/2016 DATED 29.02.2016 AND THE SAME READS AS UNDER:- SUB: ISSUE OF TAXABILITY OF SURPLUS ON SALE OF SHAR ES AND SECURITIES - CAPITAL GAINS OR BUSINESS INCOME INSTRUCTIONS IN ORDER TO REDUC E LITIGATION - REG.- SUB-SECTION (14) OF SECTION 2 OF THE INCOME-TAX ACT , 1961 ('ACT') DEFINES THE TERM 'CAPITAL ASSET' TO INCLUDE PROPERTY OF ANY KIND HEL D BY AN ASSESSEE, WHETHER OR NOT ITA NO 2061/ AHD/2010 . A.Y. 2006-07 5 CONNECTED WITH HIS BUSINESS OR PROFESSION, BUT DOES NOT INCLUDE ANY STOCK-IN-TRADE OR PERSONAL ASSETS SUBJECT TO CERTAIN EXCEPTIONS. A S REGARDS SHARES AND OTHER SECURITIES, THE SAME CAN BE HELD EITHER AS CAPITAL ASSETS OR STOCK-IN-TRADE/TRADING ASSETS OR BOTH. DETERMINATION OF THE CHARACTER OF A PARTICULAR INVESTMENT IN SHARES OR OTHER SECURITIES, WHETHER THE SAME IS IN THE NATURE OF A CAPITAL ASSET OR STOCK-IN-TRADE, IS ESSENTIALLY A FACT-SPECIFIC DETE RMINATION AND HAS LED TO A LOT OF UNCERTAINTY AND LITIGATION IN THE PAST. 2. OVER THE YEARS, THE COURTS HAVE LAID DOWN DIFFER ENT PARAMETERS TO DISTINGUISH THE SHARES HELD AS INVESTMENTS FROM THE SHARES HELD AS STOCK-IN-TRADE. THE CENTRAL BOARD OF DIRECT TAXES ('CBDT') HAS ALSO, THROUGH IN STRUCTION NO. 1827, DATED AUGUST 31, 1989 AND CIRCULAR NO. 4 OF 2007 DATED JU NE 15, 2007, SUMMARIZED THE SAID PRINCIPLES FOR GUIDANCE OF THE FIELD FORMATION S. 3. DISPUTES, HOWEVER, CONTINUE TO EXIST ON THE APPL ICATION OF THESE PRINCIPLES TO THE FACTS OF AN INDIVIDUAL CASE SINCE THE TAXPAYERS FIND IT DIFFICULT TO PROVE THE INTENTION IN ACQUIRING SUCH SHARES/SECURITIES. IN T HIS BACKGROUND, WHILE RECOGNIZING THAT NO UNIVERSAL PRINCIPAL IN ABSOLUTE TERMS CAN BE LAID DOWN TO DECIDE THE CHARACTER OF INCOME FROM SALE OF SHARES AND SECURITIES (I.E. WHETHER THE SAME IS IN THE NATURE OF CAPITAL GAIN OR BUSINESS I NCOME), CBDT REALIZING THAT MAJOR PART OF SHARES/SECURITIES TRANSACTIONS TAKES PLACE IN RESPECT OF THE LISTED ONES AND WITH A VIEW TO REDUCE LITIGATION AND UNCER TAINTY IN THE MATTER, IN PARTIAL MODIFICATION TO THE AFORESAID CIRCULARS, FURTHER IN STRUCTS THAT THE ASSESSING OFFICERS IN HOLDING WHETHER THE SURPLUS GENERATED F ROM SALE OF LISTED SHARES OR OTHER SECURITIES WOULD BE TREATED AS CAPITAL GAIN O R BUSINESS INCOME, SHALL TAKE INTO ACCOUNT THE FOLLOWING- A) WHERE THE ASSESSEE ITSELF, IRRESPECTIVE OF THE PERIOD OF HOLDING THE LISTED SHARES AND SECURITIES, OPTS TO TREAT THEM AS STOCK- IN-TRADE, THE INCOME ARISING FROM TRANSFER OF SUCH SHARES/SECURITIES WOULD BE TR EATED AS ITS BUSINESS INCOME, B) IN RESPECT OF LISTED SHARES AND SECURITIES HELD FOR A PERIOD OF MORE THAN 12 MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSF ER, IF THE ASSESSEE DESIRES TO TREAT THE INCOME ARISING FROM THE TRANSFER THEREOF AS CAPITAL GAIN, THE SAME SHALL NOT BE PUT TO DISPUTE BY THE ASSESSING OFFICER. HOW EVER, THIS STAND, ONCE TAKEN BY ITA NO 2061/ AHD/2010 . A.Y. 2006-07 6 THE ASSESSEE IN A PARTICULAR ASSESSMENT YEAR, SHALL REMAIN APPLICABLE IN SUBSEQUENT ASSESSMENT YEARS ALSO AND THE TAXPAYERS SHALL NOT BE ALLOWED TO ADOPT A DIFFERENT/CONTRARY STAND IN THIS REGARD IN SUBSEQ UENT YEARS; C) IN ALL OTHER CASES, THE NATURE OF TRANSACTION (I .E. WHETHER THE SAME IS IN THE NATURE OF CAPITAL GAIN OR BUSINESS INCOME) SHALL CO NTINUE TO BE DECIDED KEEPING IN VIEW THE AFORESAID CIRCULARS ISSUED BY THE CBDT. 4. IT IS, HOWEVER, CLARIFIED THAT THE ABOVE SHALL N OT APPLY IN RESPECT OF SUCH TRANSACTIONS IN SHARES/SECURITIES WHERE THE GENUINE NESS OF THE TRANSACTION ITSELF IS QUESTIONABLE, SUCH AS BOGUS CLAIMS OF LONG TERM CAP ITAL GAIN/SHORT TERM CAPITAL LOSS OR ANY OTHER SHAM TRANSACTIONS. 5. IT IS REITERATED THAT THE ABOVE PRINCIPLES HAVE BEEN FORMULATED WITH THE SOLE OBJECTIVE OF REDUCING LITIGATION AND MAINTAINING CO NSISTENCY IN APPROACH ON THE ISSUE OF TREATMENT OF INCOME DERIVED FROM TRANSFER OF SHARES AND SECURITIES. ALL THE RELEVANT PROVISIONS OF THE ACT SHALL CONTINUE TO AP PLY ON THE TRANSACTIONS INVOLVING TRANSFER OF SHARES AND SECURITIES. 11. CONSIDERING THE FACTS IN HAND, IN THE LIGHT OF THE AFOREMENTIONED CIRCULAR OF THE BOARD, IN OUR CONSIDERED OPINION, THE INTENTION OF THE ASSESSEE AT THE TIME OF THE PURCHASE OF SHARES IS PARAMOUNT. IF THE ASSESSEE HAS CLEAR INTENTION OF BEING AN INVESTOR AND SHOWING THE SHAR ES AS INVESTMENT, WE DO NOT FIND ANY REASON TO DISTURB THE INTENTION OF THE ASSESSEE. THE ASSESSEE UNDER CONSIDERATION IS INVESTOR AND, THEREFORE, ANY GAIN ARISING OUT THE TRANSFER OF SHARES SHOULD BE TREATED AS CAPITAL GAI NS BE IT SHORT TERM OR LONG TERM. 12. IN THE LIGHT OF THE AFOREMENTIONED DISCUSSION QUA T HE FACTUAL MATRIX OF THE CASE IN HAND, WE HAVE NO HESITATION IN HOLDING THAT THE ASSESSEE WAS AN INVESTOR. WE, THEREFORE, SET ASIDE THE FINDINGS OF THE CIT(A). AND DIRECT THE ITA NO 2061/ AHD/2010 . A.Y. 2006-07 7 A.O. TO TREAT THE SHORT-TERM CAPITAL GAIN OF RS. 49 ,02,350/-. GROUND NO. 1 IS ACCORDINGLY ALLOWED. 13. COMING TO THE NEXT GRIEVANCE OF THE ASSESSEE RELATI NG TO THE DISALLOWANCE OF RS. 98,335/- OUT OF INTEREST EXPENSES, WE FIND T HAT THE A.O. HAS SUCCESSIVELY PROVED THAT THE ASSESSEE HAS GIVEN IN INTEREST FREE ADVANCES OUT OF INTEREST BEARING FUNDS. THEREFORE, IT CAN BE SAFELY CONCLUDED THAT INTEREST BEARING FUNDS WERE DIVERTED TOWARDS INTERE ST FREE ADVANCES. ON THE GIVEN FACTS, WE DECLINE TO INTERFERE WITH THE F INDINGS OF THE LD. CIT(A). GROUND NO. 2 IS ACCORDINGLY DISMISSED. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 06 - 12- 20 16. SD/- SD/- (MAHAVIR PRASAD) (N. K. BILLAIYA) JUDICIAL MEMBER TRUE COPY ACCOUNTANT MEMBER AHMEDABAD: DATED 06 /12/2016 RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD