AMAR H. PATEL -HUF, MUMBAI V. DCIT RG 17(3), MUMBAI

ITA 2352/MUM/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2929 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 26-03-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 23-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A RAMACHANDRAN
• Keywords: Capital asset; Business income; Opportunity of being heard; Principle of natural justice; Question of law; Cost of acquisition
• Section: 143(3)

Judgement Text

A IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.7248 /MUM/2010 AND 2352/MUM/2011 ( / ASSESSMENT YEAR : 2006-07 AND 2007-08) SHRI AMAR H. PATEL(HUF) 601/B, AMRUT VILLA, DR. AMBEDKAR ROAD,MATUNGA(E) MUMBAI-400 019 / V. DEPUTY COMMISSIONER OF INCOME TAX RANGE 17(3) MUMBAI. ./ PAN : AAAHA2411B ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY SH VIPUL JOSHI REVENUE BY : SHRI A. RAMACHANDRAN / DATE OF HEARING : 21-6-2016 / DATE OF PRONOUNCEMENT : 14-09-2016 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THESE TWO APPEALS, FILED BY THE ASSESSEE-HUF, BEIN G ITA NO. 7248/MUM/2010 AND 2352/MUM/2011, ARE DIRECTED AGAIN ST THE SEPARATE APPELLATE ORDERS BOTH DATED 8 TH JULY, 2010 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-29, MUMBAI (HEREINAFTER CALLED THE CIT(A)), FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08 RESPECTIVELY, THE APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(A) ARISING FROM THE SEPARATE ASSESSMENT ORDERS DATED 20 TH NOVEMBER, 2008 AND 30 TH NOVEMBER 2009 RESPECTIVELY PASSED BY THE LEARNED ASSESSING OFFICER (HEREINAFTE R CALLED THE AO) U/S 143(3) OF THE INCOME TAX ACT,1961 HEREINAFTER CALLE D THE ACT). ITA 7248/MUM/2010 AND 2352/MUM/2011 2 2. FIRST WE SHALL TAKE UP ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2006- 07 BEING ITA NO. 7248/MUM/2010 . THE GROUNDS OF APP EAL RAISED BY THE ASSESSEE HUF IN THE MEMO OF APPEAL FILED WITH THE I NCOME TAX APPELLATE TRIBUNAL, MUMBAI (HEREINAFTER CALLED THE TRIBUNAL ) READ AS UNDER:- 1. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) -29, MUMBAI [LD. CIT(A)] HAS ERRED IN CONFIRMING THE ASSESSING OFFICERS ACTION TO TREAT THE SHORT TERM CAPITAL GAIN ON SALE OF SHARES AMO UNTING TO RS.13,10,760/- AS BUSINESS INCOME. IT IS RESPECTFULLY SUBMITTED THAT THE APPELLANT IS AN INV ESTOR AND IN PAST ALSO, HE HAS SHOWN PROFIT OR LOSS ON SALE OF SHARES AS SHORT OR LONG TERM CAPITAL GAIN OR LOSS. ALSO APPELLANT HAS MADE AP PLICATION IN IPO UNDER THE CATEGORY OF RETAIL INVESTOR. APPELLANT WAS HA VING SHARES AS INVESTMENT ONLY. APPELLANT HAS SHOWN INVESTMENT IN SHA RES FOR THE A.Y. 2002-2003 AND FOR A.Y. 2005-2006 I.E. IN PREVIOUS Y EAR AND HAS STCG AND LTCL OUT OF INVESTMENT ACTIVITIES. APPELLANT INTENTION WAS NEVER OF TRADING IN SHARES . HE WAS INVESTOR ALL ALONG THE YEAR AND HAS SHOWN SHARES AS INVESTMENT IN HIS BALANCE SHEET AND NEVER SHOWN THAT SAID IS STOCK IN TRADE. PAS T HISTORY OF THE APPELLANT ALSO SHOWS THAT HE IS INVESTOR AND HIS INCOME OR LOSS WAS OFFERED FOR TAXATION AS SHORT TERM OR LONG TERM CAPITAL GAIN OR LOSS. THE ASSESSEE HUF HAS RAISED ADDITIONAL GROUND OF AP PEAL FOR WHICH AN APPLICATION IS MOVED CONTENDING IN THE APPLICATION THAT THE ADDITIONAL GROUND GOES TO THE ROOT OF THE MATTER AND DOES NOT REQUIRE VERIFICATION OF THE ANY ADDITIONAL FACTS AND PRAYED THAT THE SAME MAY BE AD MITTED. THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS AS UNDER: 1. THE ASSESSMENT FRAMED BY THE ASSESSING OFFICER [A .O.] WAS BAD, ILLEGAL AND VOID AS THE MANDATORY AND STATUTORY NOT ICE UNDER SECTION 143(2) OF THE INCOME TAX ACT,1961 WAS NOT SERVED UP ON THE APPELLANT. ITA 7248/MUM/2010 AND 2352/MUM/2011 3 3.THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE ACTIVITY OF PURCHASE AND SALE OF SHARES AND DURING THE ASSESSME NT YEAR UNDER CONSIDERATION , THE ASSESSEE HAS OFFERED SHORT TERM CAPITAL GAINS OF RS.13,10,760/- FOR TAXATION IN THE RETURN OF INCOME FILED WITH THE REVENUE. IT WAS OBSERVED BY THE AO DURING COURSE OF ASSESSMENT PROCEEDINGS U/S. 143(3) READ WITH SECTION 143(2) OF THE ACT AFTER VERIFICAT ION OF DETAILS OF SHORT TERM CAPITAL GAINS, THAT 90% OF SHORT TERM CAPITAL GAINS HAVE BEEN EARNED BY THE ASSESSEE FROM ONE TRANSACTION I.E. ON SALE OF 12971 SHARES OF FCS SOFTWARE SOLUTIONS LIMITED WHICH WERE ALLOTTED TO THE ASSESS EE IN IPO WHICH WERE ALLOTTED ON 17-09-2005 AND SOLD ON 22-09-2005 AND 2 3-09-2005 WITHIN A GAP OF 5 DAYS WHICH LED TO EARNING OF SHORT TERM CAPITA L GAINS OF RS. 16,48,237/- OUT OF TOTAL SHORT TERM CAPITAL GAIN OF RS.17,26,85 5/- EARNED BY THE ASSESSEE. IT WAS OBSERVED BY THE AO THAT THE ASSESSEE APPLIED FOR SHARES IN IPO OF FCS SOFTWARE SOLUTIONS LIMITED WITH THE HELP OF LOAN/FI NANCES TAKEN FROM VARIOUS SOURCES ON WHICH INTEREST WAS PAID BY THE ASSESSEE AND ADDED TO THE COST OF PURCHASE OF SHARES. THE ASSESSEE WAS SHOW CAUSED BY THE AO AS TO WHY THE SHARE TRANSACTION ACTIVITY UNDER TAKEN BY THE ASSES SEE BE NOT TREATED AS BUSINESS ACTIVITY AND THE ASSESSEE IN REPLY SUBMITT ED THAT THE ASSESSEE IS AN INVESTOR . IN THE EARLIER YEARS ALSO THE ASSESSEE W AS AN INVESTOR AND DECLARED CAPITAL GAINS/LOSS ON SALES AND PURCHASE OF SHARES. THE ASSESSEE SUBMITTED THAT MARKET IS VERY VOLATILE AND BEING A PRUDENT IN VESTOR THE ASSESSEE BOOKED PROFIT. THE ASSESSEE SUBMITTED THAT KEEPING IN VIEW TRANSACTIONS OF THE ASSESSEE , IT COULD NOT BE SAID THAT THE ASSESSEE I S IN BUSINESS OF SHARES AND HENCE THE ASSESSEE BE TREATED AS INVESTOR. THE AO REJECTED THE CONTENTIONS OF THE ASSESSSEE BY OBSERVING THAT THE ASSESSEE HAS APPLIED FOR 35 LACS SHARES OF FCS SOFT WARE SOLUTIONS LIMITED IN IPO BY OBTAINING FINANCE OF RS. 8.75 CRORES FROM M/ S MERIT CREDIT CORPORATION LIMITED AND ALSO FROM MASAT TEXTURISERS AND TWISTIN G PRIVATE LIMITED FOR WHICH FINANCE CHARGES WERE PAID FRO AVAILING LOAN/F INANCE FROM THESE TWO ITA 7248/MUM/2010 AND 2352/MUM/2011 4 ENTITIES. THE ASSESSEE WAS ALLOTTED 12971 SHARES ON 17.09.2005 AND AMOUNT ADJUSTED AGAINST ALLOTMENT WAS RS.6,48,550/- @ RS. 50 PER SHARE. THE ASSESSEE SOLD THESE SHARES ON 22.09.2005 AND 23.09. 2005 FOR RS.28,02,721/- AND EARNED RS.21,54,171/- OUT OF THESE TRANSACTIONS . THE ASSESSEE SHOWED PROFIT OF RS.16,07,596/- FROM THESE TRANSACTIONS. T HE AO OBSERVED THAT THE ASSESSEE SHOWED COST OF ACQUISITION AT RS.11,95,125 /- AS AGAINST RS.6,48,550/-. THUS, AS PER THE AO PROFIT WILL INCR EASE TO RS. 21,54,171/- AS AGAINST RS.16,07,596/- DECLARED BY THE ASSESSEE. IT WAS ALSO OBSERVED BY THE AO THAT THE ASSESSEE PU RCHASED 11018 SHARES OF KERNEX MICROSYSTEM LIMITED ON 16.12.2005 FOR AN AMO UNT OF RS. 40,73,575/- AND SOLD THE SAME ON 20.12.2005 FOR RS.37,08,200/- INCURRING LOSS OF RS.3,65,375/- .THE ASSESSEE PUT A STOPLOSS SO THAT LOSS DOES NOT INCREASE WHERE THERE IS FURTHER FALL IN PRICE OF SHARES WHIC H ALSO INDICATES THAT THE INVESTMENT OR TRANSACTIONS WERE NOT MADE WITH AN IN TENTION OF LONG TERM INVESTMENT TO EARN DIVIDEND AND CAPITAL APPRECIATIO N. IT WAS ALSO OBSERVED BY THE AO THAT THERE IS ONE MO RE TRANSACTION WHICH IS INTRA DAY TRADING IN THE SHARE OF NANDAN EXIM SCRIP WHICH WERE PURCHASED AND SOLD ON THE SAME DAY I.E. 01-06-2005. IT WAS ALSO OBSERVED THAT SHARES OF CERTAIN SHARES AS DETAILED IN ASSESSMENT ORDER WERE SOLD WITHIN A PERIOD OF LESS THAN ONE MO NTH FROM THE DATE OF PURCHASE OF SHARES. THUS, THE AO CONCLUDED THAT THE INTENTION OF THE A SSESSEE IS TO MAKE PROFITS BY RESELLING AT THE EARLIEST POINT IN TIME. THE ASS ESSEE DID NOT HAD THE INTENTION TO KEEP SHARES FOR A LONGER PERIOD AND TO REMAIN INVESTED IN THESE SHARES TO EARN DIVIDEND AND CAPITAL APPRECIATION. T HE ASSESSEE HAS ALSO AVAILED LOAN AND PAID INTEREST ON LOANS/FINANCE OBT AINED FOR PURCHASING ITA 7248/MUM/2010 AND 2352/MUM/2011 5 SHARES WHICH THE ASSESSEE INCLUDED IN THE PURCHASE COST OF THE SHARES. IT WAS OBSERVED BY THE AO THAT THE ASSESSEE IS FOUND TO BE INVOLVED IN FULL TIME SHARE TRANSACTION ACTIVITY WHICH IS CARRIED ON BY THE ASS ESSEE ON DAY TO DAY BASIS AS CONTINUOUS AND REGULAR TRANSACTIONS WITH THE INTENT ION OF MAKING PROFITS AND THE ASSESSEE DID NOT HAVE ANY OTHER ACTIVITY TO EAR N LIVELIHOOD. THE AO CONSIDERED THE INSTRUCTION NO 1827 OF CBDT DATED 31 -08-1989 WHICH WAS SUPPLEMENTED WITH LATEST INSTRUCTION DATED 16.05.20 06 TO COME TO THE CONCLUSION THAT THE ASSESSEE IS UNDERTAKING PURCHAS E AND SALE OF SHARE AS BUSINESS ACTIVITY TO EARN LIVELIHOOD . THE TRANSACT IONS ARE HUGE RUNNING INTO CRORES IN MORE THAN 20 SCRIPS IN WHICH THE ASSESSEE DEALT WITH. THE ASSESSEE HAS DEALT WITH IN ON DAY TO DAY BASIS IN THE STOCK MARKET AND UNDERTAKEN INTRA DAY TRADES AS WELL STOP LOSS WAS APPLIED FOR WHICH REFLECT INDICA OF TRADE. THE VALUE OF PURCHASE AND SALE ARE MATCHING MEANING THEREBY THAT THE ASSESSEE DID NOT HAD INTENTION OF HOLDING THE SHARE S. THUS, THE AO HELD THAT THE ASSESSEE HAS DEALT IN THE SHARES AS BUSINESS AN D THE SHORT TERM CAPITAL GAIN DECLARED BY THE ASSESSEE OF RS. 13,10,760/-WAS TREATED AS INCOME FROM BUSINESS . THE ASSESSEE SHOWED COST OF ACQUISITION OF SHARES OF FCS SOFTWARE SOLUTIONS LIMITED AT RS.11,95,125/- AS AGAINST THE ALLOTMENT COST OF RS. 6,48,550/- AND HENCE RS. 5,46,575/- WAS ALSO ADDED TO THE INCOME OF THE ASSESSEE UNDER THE HEAD INCOME FROM BUSINESS BY THE AO VIDE ASSESSMENT ORDER DATED 20-11-2008 PASSED BY THE AO U/S. 143(3) OF THE ACT. 4.AGGRIEVED BY THE ASSESSMENT ORDER DATED 20-11-200 8 PASSED BY THE AO U/S 143(3) OF THE ACT , THE ASSESSEE FILED FIRST APPEAL WITH THE LEARNED CIT(A) AND REITERATED ITS SUBMISSIONS. THE LEARNED CIT(A) DISM ISSED THE APPEAL OF THE ASSESSEE AND CONFIRMED/SUSTAINED THAT THE GAINS FRO M THE SALE OF SHARES IS TO BE BROUGHT TO TAX AS INCOME FROM BUSINESS. THE LEAR NED CIT(A) HELD THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION OF INTEREST PAID ON FINANCING/LOAN OBTAINED FOR APPLYING FOR IPO AND THE ASSESSEE GOT RELIEF OF RS.5,46,575/- TOWARDS INTEREST PAID BY THE ASSESSEE FOR THE PURCHASE OF S HARES AGAINST THE BUSINESS ITA 7248/MUM/2010 AND 2352/MUM/2011 6 INCOME ON MATCHING PRINCIPLES VIDE APPELLATE ORDER DATED 08-07-2010 PASSED BY LEARNED CIT(A) . 5. AGGRIEVED BY THE ORDERS DATED 08-07-2010 PASSED BY LEARNED CIT(A),THE ASSESSEE FILED SECOND APPEAL WITH THE TRIBUNAL. 6. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED T HAT THE INVESTMENT THROUGH IPO SHOWED INTENTION OF THE ASSESSEE TO MAK E INVESTMENT , THAT UTILIZATION OF BORROWED FUNDS WAS NO BAR TO MAKE IN VESTMENT IN A CAPITAL ASSETS, THAT FREQUENCY OF SHARES TRANSACTION WAS LO W , THAT THE ASSESSEE WAS INVESTOR IN SHARES FOR PAST MANY YEARS AND HAS BEEN ASSESSED AS SUCH . IT WAS SUBMITTED THAT THE IDENTICAL ISSUE HAS BEEN DECIDED IN THE CASE OF BROTHER OF THE KARTA OF THE ASSESSEE NAMELY SH DHRUV H PATEL I N ITA NO. 7857/MUM/2010 DATED 05-12-2004 AS ALSO BY THE DECIS ION OF THE TRIBUNAL IN THE CASE OF KARTA OF THE ASSESSEE NAMELY SH. AMAR H PATEL IN ITA NO 6568/MUM/2010 VIDE ORDERS DATED 05-04-2016 WHERE IN THE TRIBUNAL FOLLOWED THE DECISION OF THE TRIBUNAL IN ITA NO. 78 57/MUM/2010 AS THE FACTS WERE IDENTICAL. IT WAS SUBMITTED THAT THE FACTS IN THE INSTANT CASE ARE ALSO IDENTICAL AND HENCE ISSUE IS SQUARELY COVERED BY T HE AFORESAID DECISIONS OF THE TRIBUNAL . THE LD DR RELIED ON THE ORDERS OF TH E LEARNED CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US . WE FIND THAT IN CASE OF SH. AMAR H. PATEL (SUPRA) T HE TRIBUNAL HAS DECIDED THE APPEAL BY FOLLOWING THE DECISION IN THE CASE OF SH. DHRUV H. PATEL(SUPRA) WHEREIN THE ISSUE WAS DELIBERATED IN DETAIL AND DEC IDED, AS UNDER: CHALLENGING THE ORDER,DATED 30.06.2010,OF CIT (A) 29, MUMBAI, THE ASSESSEE HAS FILED THE PRESENT APPEAL. ASSESSEE, AN INDIVIDUAL, FILED HIS RETURN OF INCOME ON 31.07.2007, DECLARING INCOME OF RS. 94,46,168/-. THE ASSESSING OFFICER (AO) COMPLETED THE ASSESSMENT UND ER SECTION 143(3) OF ITA 7248/MUM/2010 AND 2352/MUM/2011 7 THE ACT ON 30.11.2009,DETERMINING THE INCOME OF THE ASSESSEE AT RS.94,46,170/-. 2.EFFECTIVE GROUND OF APPEAL IS ABOUT TREATING THE SHORT TERM CAPITAL GAIN ON SALE OF SHARES, AMOUNTING TO RS. 94.46 LACS, AS BUSINESS INCOME. DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT ASSESSEE WAS ENGAGED IN THE ACTIVITY OF PURCHASE AND SALE OF SHA RES, THAT HE HAD EARNED MOST OF ITS INCOME BY WAY OF INVESTMENT IN S HARES WHICH WERE TAKEN ON LOAN FROM VARIOUS PARTIES, IPO FUNDING AND INVESTMENT IN MUTUAL FUNDS, THAT MOST OF THE SHARE TRANSACTIONS WERE EIT HER SQUARED UP IN A VERY SHORT DURATION OF TIME. CONSIDERING THE FACTS OF THE CASE, THE AO HELD THAT TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WERE N OT IN THE NATURE OF INVESTMENT, THAT HE HAD EARNED SHORT TERM CAPITAL G AIN THROUGH HIS BUSINESS ACTIVITIES.. HE CALLED FOR AN EXPLANATION FROM THE ASSESSEE IN THAT REGARD AND AFTER CONSIDERING THE SAME HE HELD THAT MOST OF THE INVESTMENTS HAD BEEN MADE OUT OF THE BORROWED FUNDS , THAT THE LOANS HAD BEEN INVESTED IN THREE COMPANIES, THAT HE WAS H OLDING THE SHARES FOR A VERY SHORT DURATION, THAT FREQUENCY OF SUCH TRANS ACTIONS WAS EXTREMELY HIGH, THAT THE MOTIVE OF THE ASSESSEE WAS TO EARN Q UICK PROFIT,THAT INCOME OF THE ASSESSEE HAD TO BE TAXED UNDER THE HEAD BUSI NESS/ADVENTURE IN NATURE OF BUSINESS AND NOT UNDER THE HEAD SHORT TER M CAPITAL GAIN, AS CLAIMED BY HIM. 3.AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PR EFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE H IM, IT WAS ARGUED THAT THE ASSESSEE WAS AN INVESTOR, THAT IN EARLIER YEARS SIMILAR INCOME BY SHOWN UNDER THE HEAD SHORT TERM CAPITAL GAIN, THAT HE HAD MADE APPLICATION IN IPO AS A RETAIL INVESTOR, THAT HE HA D MADE INVESTMENTS WITH BORROWED FUNDS KNOWING THAT THE INVESTMENT WIL L GIVE GOOD RETURN. AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBM ISSION OF THE ITA 7248/MUM/2010 AND 2352/MUM/2011 8 ASSESSEE, THE FAA HELD THAT THE ASSESSEE HAD PURCHA SED THE SHARES WITH BORROWED FUNDS FOR QUICKENS, THAT THE IPO APPLICATI ONS WERE MADE WITH BORROWED FUNDS AND THE SHARES WERE OFFLOADED AFTER LISTING, THAT MAJOR PROFIT HAD BEEN EARNED ON TRADING OF ONE SCRIP ONLY , THE HOLDING PERIOD OF THE SCRIPS WAS ONLY FOR A FEW DAYS AND MOSTLY BELOW 30 DAYS, THAT THE ASSESSEE WAS ENGAGED IN A STRUCTURED AND ORGANISED BUSINESS ACTIVITY. FINALLY, HE UPHELD THE ORDER OF THE AO. 4.DURING THE COURSE OF HEARING BEFORE US,THE AUTHOR ISED REPRESENTATIVE(AR)STATED THAT INVESTMENT THROUGH IP OS SHOWED THAT INTENTION OF THE ASSESSEE WAS TO MAKE INVESTMENT, T HAT UTILISATION OF BORROWED FUNDS WAS NO BAR TO MAKE INVESTMENT IN A C APITAL ASSETS, THAT FREQUENCY OF SHARE TRANSACTIONS WAS VERY LOW, THAT THE AVERAGE PERIOD OF HOLDING WAS APPROXIMATELY 40 DAYS, THE ASSESSEE WAS AN INVESTOR IN SHARES SINCE THE PAST MANY YEARS AND HAD BEEN ASSES SED AS SUCH.HE FURTHER STATED THAT THE IDENTICAL ISSUE HAD BEEN DE CIDED BY THE TRIBUNAL WHILE ADJUDICATING THE APPEAL OF THE BROTHER OF THE ASSESSEE NAMELY DHRUV H PATEL (ITA/7857/MUM/2010,DATED 05/12/2014). THE DEPARTMENTAL REPRESENTATIVE (DR) SUPPORTED THE ORDE R OF THE FAA. 5.WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL BEFORE US WE FIND THAT IN CASE OF DHRUV H. PATEL (SUPRA TH E TRIBUNAL HAS DELIBERATED THE ISSUE AND HAS DECIDED THE SAME AS U NDER: 3. THE RETURN FOR THE YEAR WAS FILED ON 28.7.2006 DECLARING TOTAL INCOME OF RS. 14,54,100/-. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT. DURING THE COURSE OF THE SCRUTINY ASSES SMENT PROCEEDINGS,THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN OF RS. 17,26,855/- .THE AO FURTHER NOTICED THAT 90% OF THE INCOME HAS BEEN DER IVED FROM ONE ITA 7248/MUM/2010 AND 2352/MUM/2011 9 TRANSACTION WHICH WAS ON ALLOTMENT OF SHARES IN IPO OF FCS SOFTWARES SOLUTIONS LTD. THE AO ALSO NOTICED THAT T HE APPLICATION IN THE IPO WAS MADE OUT OF BORROWED FUNDS AND THE S HARES WERE SOLD WITHIN 5 DAYS FROM THE DATE OF ALLOTMENT. THE AO WAS OF THE FIRM BELIEF THAT THE ASSESSEE HAS CARRIED OUT BUSIN ESS ACTIVITIES. THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE SHORT TER M CAPITAL GAIN SHOULD NOT BE TREATED AS BUSINESS PROFIT. IT W AS EXPLAINED THAT THE ASSESSEE IS AN INVESTOR AND WAS INVESTOR I N PAST YEARS ALSO. THE PROFIT WAS BOOKED ON THE ALLOTMENT OF THE SHARES OF FCS SOFTWARES SOLUTIONS LTD AS THE ASSESSEE HAS TAKEN C AUTIOUS VIEW LIKE A PRUDENT INVESTOR. THE EXPLANATION OF THE ASS ESSEE DID NOT FIND FAVOUR WITH THE AO. THE AO OBSERVED THAT THE A SSESSEE HAS APPLIED FOR THE IPO OF FCS SOFTWARES SOLUTIONS LTD. , BY TAKING FINANCE FROM M/S. MERIT CREDIT CORPN. LTD. AND ALSO FROM MASAT TEXTURISERS & TWISTING PVT. LTD. THE APPLICATION AM OUNT WAS FOR 35 LAKHS SHARES AMOUNTINTO RS. 8.75 LAKHS. THE ASSESSE E WAS ALLOTTED 12971 SHARES ON 17.9.2005 AND THE SHARES W ERE SOLD ON 22.9.2005 AND 23.9.2005 AT THE AVERAGE RATE OF RS. 228/- AS AGAINST THE PURCHASE PRICE OF RS. 50/- PER SHARE. T HE AO PROCEEDED BY CONSIDERING THE CBDT CIRCULAR QUA INST RUCTION NO. 1827 DT. 31.8.1989 AND INSTRUCTION DT. 16.5.2006 AN D TREATED THE SHARE TRANSACTION OF THE ASSESSEE AS BUSINESS INCOM E. 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) BUT WITHOUT ANY SUCCESS. 5. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE CLAI MED THAT THE ASSESSEE WAS AN INVESTOR AND DURING THE YEAR UNDER CONSIDERATION HE HAS APPLIED FOR THE SHARES OF FCS SOFTWARES SOLU TIONS LTD THROUGH IPO. THE ASSESSEE EXPLAINED THAT AFTER HE H AS SOLD THE ITA 7248/MUM/2010 AND 2352/MUM/2011 10 SHARES AT AN AVERAGE RATE OF RS. 228/- PER SHARE TH E SHARE PRICE CAME DOWN TO RS. 93.60 WITHIN ONE MONTH AND THEREFO RE BEING A PRUDENT INVESTOR, THE ASSESSEE'S DECISION FOR SELLI NG THE SHARES AT THE RIGHT TIME HAS EARNED HIM SHORT TERM CAPITAL GA INS. THE LD. COUNSEL FURTHER STATED THAT UTILIZATION OF BORROWED FUNDS IS NO BAR TO MAKE AN INVESTMENT IN CAPITAL ASSET. THE LD. COU NSEL FURTHER STATED THAT THE ASSESSEE HAS DEALT ONLY IN 19 SCRIP S THEREFORE CONSIDERING THE FACTS OF THE CASE, THE FINDINGS OF THE LD. CIT(A) ARE ERRONEOUS AND DESERVES TO BE REVERSED. 6. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 7. WE HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER A ND THE ORDER OF THE FIRST APPELLATE AUTHORITY. IT IS AN ADMITTED FACT THAT AROUND 90% OF THE TOTAL GAINS IS FROM SALE OF THE SHARES O F FCS SOFTWARES SOLUTIONS LTD. IT IS ALSO AN UNDISPUTED FACT THAT T HE ASSESSEE HAD APPLIED IN THE SHARES OF THE IPO OF THE SAID COMPAN Y FROM BORROWED CAPITAL. MERELY BECAUSE THE SHARES WERE A PPLIED THROUGH BORROWED CAPITAL CANNOT BE A GROUND FOR TREATING TH E CAPITAL GAINS AS BUSINESS INCOME. THE IPO FUNDING AVAILED BY THE ASSESSEE WAS TO GET MORE ALLOTMENT BUT THE FACT OF THE MATTER IS THAT THE ASSESSEE WAS AN INVESTOR AND THE SOLE INTENTION OF APPLYING IN THE SHARES THROUGH IPO WAS TO GET HIGHER ALLOTMENT OF SHARES. WE ALSO FIND THAT THERE ARE NO REPETITIVE PURCHASE AND SALE OF T HE SAME SCRIPT WHICH MEANS THAT THERE IS NO CHURNING OF SHARES. TH E TOTAL NUMBER OF DAYS UTILIZED BY THE ASSESSEE FOR INVESTMENT IN SHARES IS 32 DAYS. CONSIDERING ALL THESE FACTS IN TOTALITY, WE D O NOT FIND ANY REASON TO TREAT THE ASSESSEE AS A TRADER. WE, THERE FORE SET ASIDE THE FINDINGS OF THE LD. CIT(A) AND DIRECT THE AO TO TREAT THE SHORT ITA 7248/MUM/2010 AND 2352/MUM/2011 11 TERM CAPITAL GAIN ON SALE OF SHARES AMOUNTING TO RS . 17,26,855/- AS DECLARED BY THE ASSESSEE. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. WE FIND THAT THE FACTS OF THE ABOVE MENTIONED CASE ARE MORE ARE LESS SIMILAR TO THE FACTS OF THE CASE UNDER CONSIDE RATION-THE AMOUNTS INVOLVED ARE DIFFERENT.SO,FOLLOWING THE ABO VE ORDER OF THE TRIBUNAL,WE DECIDE THE EFFECTIVE GROUND OF APPEAL I N FAVOUR OF THE ASSESSEE. WE FIND THAT THE FACTS OF THE ABOVE MENTIONED APPEA LS ARE MORE OR LESS SIMILAR TO THE FACTS OF THE CASE UNDER CONSIDERATION . SO F OLLOWING THE ABOVE ORDER OF THE TRIBUNAL, WE DECIDE THE EFFECTIVE GROUND OF APP EAL IN FAVOUR OF THE ASSESSEE. THE ADDITIONAL GROUND RAISED BY THE ASSES SEE IS NOT ARGUED BEFORE US AND HAS ALSO BECOME ACADEMIC NOW IN VIEW OF OUR DECISION TO ALLOW THE APPEAL ON MERITS AND HENCE THE SAME IS DISMISSED. W E ORDER ACCORDINGLY. 8. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IN I TA NO. 7248/MUM/2010 FOR THE ASSESSMENT YEAR 2006-07 IS ALLOWED. 9. NOW WE TAKE UP THE APPEAL OF THE ASSESSEE IN ITA NO. 2352/MUM/2011 FOR ASSESSMENT YEAR 2007-08. THE ISSUE INVOLVED IN THIS APPEAL IS IDENTICAL AS W AS IN ITA NO. 7248/MUM/2010 FOR ASSESSMENT YEAR 2006-07 WHICH IS ADJUDICATED BY US IN PRECEDING PARAS OF THIS ORDER , AS TO TREATMENT O F SHORT TERM CAPITAL GAINS OF RS. 37,65,775/- AS INCOME FROM BUSINESS BY THE AUTH ORITIES BELOW. HOWEVER, IN THIS YEAR IT WAS NOTICED BY THE AUTHORITIES BELO W THAT THE ASSESSEE HAS NOT ONLY AVAILED LOAN FOR MAKING APPLICATION IN IPO BUT HAS ALSO MADE MOST OF THE ITA 7248/MUM/2010 AND 2352/MUM/2011 12 INVESTMENTS IN SHARES OUT OF BORROWED FUNDS, TRANSA CTIONS ARE ALSO ON HIGHER SCALES SPREAD THROUGH OUT THE YEAR AND PERIOD OF HO LDING IS VERY SHORT. THE AO TREATED THE SAID SHORT TERM CAPITAL GAINS OF RS. 37,65,775/- AS INCOME FROM BUSINESS WHICH WAS CONFIRMED BY LEARNED CIT(A) IN THE FIRST APPEAL . AGGRIEVED , THE ASSESSEE FILED SECOND APPEAL AND RE ITERATED THE SUBMISSIONS AS WERE MADE WHILE ARGUING APPEAL IN ITA NO. 7248/M UM/2010 FOR ASSESSMENT YEAR 2006-07 WHILE LEARNED DR RELIED UPO N THE ORDERS OF LEARNED CIT(A). IN OUR CONSIDERED VIEW KEEPING IN VIEW FACTUAL MATR IX OF THE CASE WHICH IS DIFFERENT FROM THE PRECEDING ASSESSMENT YEAR 2006-0 7 AS DETAILED ABOVE IN PRECEDING PARA ( VIZ. THE ASSESSEE HAS NOT ONLY AVA ILED LOAN FOR MAKING APPLICATION IN IPO BUT HAS ALSO MADE MOST OF THE IN VESTMENTS IN SHARES OUT OF BORROWED FUNDS, TRANSACTIONS ARE ALSO ON HIGHER SCA LES SPREAD THROUGH OUT THE YEAR AND PERIOD OF HOLDING IS VERY SHORT), THIS ISSUE NEEDS TO BE SET ASIDE AND RESTORED TO FILE OF THE AO FOR DE-NOVO DETERMIN ATION OF THE ISSUE ON MERITS IN ACCORDANCE WITH LAW AFTER EXAMINING THE ENTIRE S PECTRUM OF SHARE TRANSACTIONS AND FACTUAL MATRIX OF THE CASE IN DETA ILS IN ACCORDANCE WITH PRINCIPLES LAID DOWN BY HONBLE BOMBAY HIGH COURT I N THE CASE OF CIT V. GOPAL PUROHIT (2011) 336 ITR 287(BOMBAY) WHEREIN DE CISION OF THE TRIBUNAL WAS UPHELD BY HONBLE BOMBAY HIGH COURT AS UNDER: 1. THE FOLLOWING QUESTIONS OF LAW HAVE BEEN FORMULATE D IN THE APPEAL FILED BY THE REVENUE AGAINST THE JUDGMENT OF THE INCOME-T AX APPELLATE TRIBUNAL, DATED 10-2-2009 : '(A)WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE ITAT WAS JUSTIFIED IN TREATING THE INCOME F ROM SALE OF 7,59,003 SHARES FOR RS. 5,00,12,879 AS AN INCOME FROM SHORT- TERM CAPITAL GAIN AND ITA 7248/MUM/2010 AND 2352/MUM/2011 13 SALE OF 3,88,797 SHARES FOR RS. 6,65,02,340 AS LONG -TERM CAPITAL GAIN AS AGAINST THE 'INCOME FROM BUSINESS' ASSESSED BY THE ASSESSING OFFICER? (B)WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HON'BLE ITAT WAS JUSTIFIED IN HOLDING THAT PRINCIPL E OF CONSISTENCY MUST BE APPLIED HERE AS AUTHORITIES DID NOT TREAT THE ASSES SEE AS A SHARE TRADER IN PRECEDING YEAR, IN SPITE OF EXISTENCE OF SIMILAR TR ANSACTION, WHICH CANNOT IN ANY WAY OPERATE AS RES JUDICATA TO PRECLUDE THE AUT HORITIES FROM HOLDING SUCH TRANSACTIONS AS BUSINESS ACTIVITIES IN CURRENT YEAR ? (C)WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HON'BLE ITAT WAS JUSTIFIED IN HOLDING THAT PRESENTA TION IN THE BOOKS OF ACCOUNT IS THE MOST CRUCIAL SOURCE OF GATHERING INT ENTION OF THE ASSESSEE AS REGARDS TO THE NATURE OF TRANSACTION WITHOUT APPREC IATING THAT THE ENTRIES IN THE BOOKS OF ACCOUNT ALONE ARE NOT CONCLUSIVE PROOF TO DECIDE THE INCOME?' 2. THE TRIBUNAL HAS ENTERED A PURE FINDING OF FACT TH AT THE ASSESSEE WAS ENGAGED IN TWO DIFFERENT TYPES OF TRANSACTIONS. THE FIRST SET OF TRANSACTIONS INVOLVED INVESTMENT IN SHARES. THE SECOND SET OF TR ANSACTIONS INVOLVED DEALING IN SHARES FOR THE PURPOSES OF BUSINESS (DES CRIBED IN PARAGRAPH 8.3 OF THE JUDGMENT OF THE TRIBUNAL AS TRANSACTIONS PURELY OF JOBBING WITHOUT DELIVERY). THE TRIBUNAL HAS CORRECTLY APPLIED THE P RINCIPLE OF LAW IN ACCEPTING THE POSITION THAT IT IS OPEN TO AN ASSESSEE TO MAIN TAIN TWO SEPARATE PORTFOLIOS, ONE RELATING TO INVESTMENT IN SHARES AND ANOTHER RE LATING TO BUSINESS ACTIVITIES INVOLVING DEALING IN SHARES. THE TRIBUNA L HELD THAT THE DELIVERY BASED TRANSACTIONS IN THE PRESENT CASE, SHOULD BE T REATED AS THOSE IN THE NATURE OF INVESTMENT TRANSACTIONS AND THE PROFIT RE CEIVED THEREFROM SHOULD BE TREATED EITHER AS SHORT-TERM OR, AS THE CASE MAY BE , LONG-TERM CAPITAL GAIN, DEPENDING UPON THE PERIOD OF THE HOLDING. A FINDING OF FACT HAS BEEN ARRIVED AT BY THE TRIBUNAL AS REGARDS THE EXISTENCE OF TWO DISTINCT TYPES OF TRANSACTIONS NAMELY, THOSE BY WAY OF INVESTMENT ON ONE HAND AND THOSE FOR ITA 7248/MUM/2010 AND 2352/MUM/2011 14 THE PURPOSES OF BUSINESS ON THE OTHER HAND. QUESTIO N (A) ABOVE, DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. 3. INSOFAR AS QUESTION (B ) IS CONCERNED, THE TRIBUNA L HAS OBSERVED IN PARAGRAPH 8.1 OF ITS JUDGMENT THAT THE ASSESSEE HAS FOLLOWED A CONSISTENT PRACTICE IN REGARD TO THE NATURE OF THE ACTIVITIES, THE MANNER OF KEEPING RECORDS AND THE PRESENTATION OF SHARES AS INVESTMEN T AT THE END OF THE YEAR, IN ALL THE YEARS. THE REVENUE SUBMITTED THAT A DIFF ERENT VIEW SHOULD BE TAKEN FOR THE YEAR UNDER CONSIDERATION, SINCE THE PRINCIP LE OF RES JUDICATA IS NOT APPLICABLE TO ASSESSMENT PROCEEDINGS. THE TRIBUNAL CORRECTLY ACCEPTED THE POSITION, THAT THE PRINCIPLE OF RES JUDICATA IS NOT ATTRACTED SINCE EACH ASSESSMENT YEAR IS SEPARATE IN ITSELF. THE TRIBUNAL HELD THAT THERE OUGHT TO BE UNIFORMITY IN TREATMENT AND CONSISTENCY WHEN THE FACTS AND CIRCUMSTANCES ARE IDENTICAL, PARTICULARLY IN THE CASE OF THE ASSE SSEE. THIS APPROACH OF THE TRIBUNAL CANNOT BE FAULTED. THE REVENUE DID NOT FUR NISH ANY JUSTIFICATION FOR ADOPTING A DIVERGENT APPROACH FOR THE ASSESSMENT YE AR IN QUESTION. QUESTION (B), THEREFORE, DOES NOT ALSO RAISE ANY SUBSTANTIAL QUESTION. 4. INSOFAR AS QUESTION (C ) IS CONCERNED, AGAIN THERE CANNOT BE ANY DISPUTE ABOUT THE BASIC PROPOSITION THAT ENTRIES IN THE BOO KS OF ACCOUNT ALONE ARE NOT CONCLUSIVE IN DETERMINING THE NATURE OF INCOME. THE TRIBUNAL HAS APPLIED THE CORRECT PRINCIPLE IN ARRIVING AT THE DECISION IN TH E FACTS OF THE PRESENT CASE. THE FINDING OF FACT DOES NOT CALL FOR INTERFERENCE IN AN APPEAL UNDER SECTION 260A. NO SUBSTANTIAL QUESTION OF LAW IS RAISED. THE APPEAL IS ACCORDINGLY DISMISSED. THE ASSESSEE IS DIRECTED TO APPEAR BEFORE THE AO AN D PRODUCE ALL NECESSARY AND RELEVANT EVIDENCES AND EXPLANATIONS IN SUPPORT OF ITS CONTENTIONS . NEEDLESS TO SAY PROPER AND ADEQUATE OPPORTUNITY OF BEING HEARD SHALL BE PROVIDED BY THE AO TO THE ASSESSEE IN ACCORDANCE WI TH THE PRINCIPLES OF NATURAL JUSTICE IN ACCORDANCE WITH LAW. WE ORDER AC CORDINGLY. ITA 7248/MUM/2010 AND 2352/MUM/2011 15 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IN ITA NO. 2352/MUM/2011 FOR THE ASSESSMENT YEAR 2007-08 IS ALLOWED FOR STAT ISTICAL PURPOSES. 11. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IN ITA NO. 7248/MUM/2010 FOR ASSESSMENT YEAR 2006-07 IS ALLOWED WHILE ASSESS EE APPEAL IN ITA NO. 2352/MUM/2011 FOR THE ASSESSMENT YEAR 2007-08 IS AL LOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH SEPTEMBER, 2016. # $% &' 14-09-2016 ( ) SD/- SD/- (MAHAVIR SINGH) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 14-09-2016 [ .9../ R.K. R.K. R.K. R.K. , EX. SR. PS !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI A BENCH 6. (BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI