The DCIT, Circle-2(2), Baroda V. Dr. Ajay Isjwarlal Ranka, Baroda

ITA 239/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6432 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 09-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 27-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B L YADAVDR
• Keywords: Business income; Question of law

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' BEFORE SHRI MUKUL SHRAWAT,JM & SHRI A N PAHUJA,AM ITA NO.239/AHD/2009 (ASSESSMENT YEAR:-2005-06) DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-2(2), 4 TH FLOOR, AAYAKAR BHAVAN, RACE COURSE CIRCLE, BARODA V/S DR. AJAY ISHWARLAL RANKA, ZYDEX INDUSTRIES, 10 GANDHI OIL MILL COMPOUND, GIDC, GORWA, BARODA-390016 PAN: ABWPR 8235 R [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI B L YADAV,DR ASSESSEE BY:- NONE [WRITTEN SUBMISSIONS] O R D E R A N PAHUJA: THIS APPEAL BY THE REVENUE AGAINST AN ORDER DATED 25- 11-2008 OF THE LD. CIT(APPEALS)-II, BARODA, FOR THE ASSESSMENT YEAR 2005-06, RAISES THE FOLLOWING GROUNDS:- [1] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN REVERSING THE FINDINGS OF THE A SSESSING OFFICER THAT LONG TERM CAPITAL GAINS OFFERED BY THE ASSESSE E ON THE SALES OF SHARES WAS ASSESSABLE AS BUSINESS PROFIT, WITHOUT A PPRECIATING THE COMPOSITE NATURE OF ACTIVITY FOR EARNING PROFIT FRO M SHARE TRANSACTIONS, WHETHER OFFERED AS LONG TERM OR SHORT TERM CAPITAL GAIN, WHEN THE LATTER WAS ACCEPTED BY THE CIT(A) HI MSELF AS BUSINESS PROFIT, AND THAT, SINCE THE ASSESSEE HAD N OT MAINTAINED TWO SEPARATE PORTFOLIOS, HOLDING OF SHARES BEYOND T HE SPECIFIED DATE WAS A NORMAL INCIDENCE OF BUSINESS NOT DETERMINATIV E OF ITS CHARACTER AS INVESTMENT OR TRADING. [2] THE LD. CIT(A) FAILED TO NOTE THAT EVEN IF THE TRANSACTION WAS NOT TRADING TRANSACTIONS PROPER, IT WAS ADVENTURE IN TH E NATURE OF TRADE IN TERMS OF THE EXTENDED MEANING OF BUSINESS IN S ECTION 2(13) AND AS PER TEST LAID DOWN IN THE CASE OF I G VENKATASWA MI NAIDU & CO. V/S CIT 35 ITR 594 (SC) AND SMT. INDRAMANI BAI VS. CIT 200 ITR 594 (SC), SINCE THE MOTIVE OF PURCHASING THE SHARES WAS SALE THEREOF AND NOT MERE ENJOYING THE FRUITS, I.E. DIVI DEND. [3] THE APPELLANT CRAVES LEAVE TO ADD TO AMEND OR A LTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. 2 ITA NO.239/AHD/2009 2 RELIEF CLAIMED IN APPEAL THE ORDER OF THE CIT(A) TO THE ABOVE EXTENT MADE B E SET ASIDE AND THAT OF THE AO BE RESTORED. 2 FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCOME OF RS.87,83,930/- FILED ON 29-08-2005, AFTER BEING PROCESSED ON 01-12-2006 U/S 143(1) OF THE INCOME-TAX ACT, 196 1 [HEREINAFTER REFERRED TO AS THE ACT], WAS SELECTED FOR SCRUTIN Y WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT. DURING THE COURSE O F ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOT ICED THAT THE ASSESSEE RETURNED SHORT TERM CAPITAL GAINS OF RS.14 ,53,533/- AND LONG TERM CAPITAL GAINS OF RS.34,85,969/- AS A RESU LT OF TRANSACTIONS IN PURCHASE AND SALE OF SHARES, MUTUAL FUNDS, ETC. CONSIDERING THE NUMBER OF TRANSACTIONS AND VOLUME I NVOLVED AND KEEPING IN VIEW THE CBDT INSTRUCTION NO. 1827 AS AL SO THE DECISION IN THE CASES OF KRISHNAPRASAD & CO. LTD. VS. CIT (1 955) 27 ITR 49, 52 AND CIT VS. HOLCK LARSEN (1986) 160 ITR 67 (SC), THE AO SHOWCAUSED THE ASSESSEE AS TO WHY HE SHOULD NOT BE TREATED AS A TRADER IN SHARES INSTEAD OF INVESTOR AND INCOME FRO M SHARE TRANSACTIONS MAY NOT BE TREATED AS BUSINESS INCOME. IN RESPONSE, THE ASSESSEE REPLIED THAT HE WAS CEO OF ZYDEX INDUS TRIES AND THE ENTIRE CAPITAL GAIN WAS EARNED OUT OF INVESTMENT AC TIVITIES CARRIED OUT BY HIM OUT OF HIS OWN FUNDS AND NOT OUT OF ANY BORROWING MADE BY HIM. THE AMOUNT HAS BEEN INVESTED IN PORTFOLIO M ANAGEMENT SCHEMES, MUTUAL FUNDS AND IN SOME CASES SHARES OF V ARIOUS COMPANIES. HIS INTENTION WAS NOT FOR TRADING IN THE SHARES OR SECURITIES, THE ASSESSEE ADDED. THE ASSESSEE FURTHE R SUBMITTED THAT EXCLUDING INVESTMENT THROUGH PMS AND MUTUAL FUNDS, HE HAD UNDERTAKEN 17 TRANSACTIONS OF SALE AND PURCHASE IN THE SHARES DURING THE ENTIRE YEAR. BESIDES, 15 TRANSACTIONS WE RE DONE FOR THE SALE AND PURCHASE OF THE UNITS. IT WAS POINTED THAT HE HAD PLACED FUNDS OF RS.110.00 LACS WITH INDIA INFOLINE BY GIVI NG THEM POWER OF ATTORNEY FOR CARRYING OUT VARIOUS TRANSACTIONS UNDE R THE PMS ON 11- 03-2003. WHILE INVITING ATTENTION OF THE AO TO PRES S NOTE DATED 19- 3 ITA NO.239/AHD/2009 3 07-2006 WHEREIN THE CBDT POINTED OUT THAT THE TRANS ACTIONS CARRIED OUT UNDER THE PMS WOULD BE TREATED AS CAPITAL GAIN TRANSACTIONS AND WOULD NOT BE TREATED AS BUSINESS INCOME, THE ASSESS EE SUBMITTED THAT THE AMOUNT OF PROFIT EARNED BY THEM COULD NOT BE ASSESSED AS BUSINESS INCOME. HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THE TRANSACTION IN S HARES WAS A REGULAR ACTIVITY OF THE ASSESSEE AND DURING THE YEA R UNDER CONSIDERATION, SALE CONSIDERATION OF SHARES & SECURITIES WAS SHOWN AT A HUGE AMOUNT OF RS.62,51,323/- WHILE THE MAIN SOURCE OF INCOME OF THE ASSESSEE WAS FROM THE TRANSACTIONS IN SHARES. WHILE REFERRING TO GUIDEL INES LAID DOWN IN CBDT CIRCULAR NO. 1827 , THE AO CONCLUDED THAT THE NATURE OF ACT IVITY OF THE ASSESSE, CONSIDERING THE FREQUENCY AND VOLUME OF THE SHARE T RANSACTIONS BEING OF LARGER MAGNITUDE, WAS OF A TRADER AND NOT OF AN INVESTOR. ACCORDINGLY, THE AO TREATED THE PROFIT FROM THE SHARE TRANSACTIONS AS BUSINESS INCOME AND NOT AS LONG TERM CAPITAL GAIN OR SHORT TERM CAPITAL GAIN. 3. ON APPEAL, THE LEARNED CIT(A), RELYING UPON THE FINDINGS OF HIS PREDECESSOR IN THE AY 2004-05, CONCLUDED AS UNDER:- 2.3 THESE ISSUES WERE DISCUSSED AT LENGTH BY MY LE ARNED PREDECESSOR WHO HELD THAT IN A NUTSHELL, THE LONG TERM CAPITAL SHOWN BY THE APPELLANT ARE HELD TO BE INCOME FROM LONG TERM CAPITAL GAINS AS AGAINST, BUSINESS PROFITS AS TREATED BY THE AO. AS REGARDS SHORT TERM CAPITAL GAINS DISCLOSED BY THE APPELLANT, THE MUTUAL FUND UNIT TRANSACTIONS ARE HELD TO BE INVESTMENT AND TAXABLE UNDER THE HEAD CAPITAL GAINS . THE TRANSACTIONS IN SHARES AND PMS ARE HELD TO BE BUSINESS AND THE SAME ARE TAXABLE UNDER THE HEAD BUSINESS. THE AO IS DIRECTED TO TREAT TH E INCOME / LOSS FROM SECURITIES / TRANSACTION ACCORDINGLY. 2.4 FOLLOWING THE DECISION OF MY LEARNED PREDECESS OR THE APPELLANTS CLAIM OF LONG TERM CAPITAL GAINS IS ALLOWED, WHILE THE AO IS DIRECTED TO TAX THE PROFIT FROM SHORT TERM CAPITAL GAINS AS BUSINES S INCOME . 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDING OF THE LEARNED CIT(A). NONE APPEARED ON BEH ALF OF THE ASSESSE; INSTEAD WRITTEN SUBMISSIONS HAVE BEEN FILE D, WHEREIN IT WAS POINTED OUT THAT AN IDENTICAL ISSUE HAD BEEN ADJUDI CATED IN THE PRECEDING AY 2004-05 BY THE ITAT VIDE THEIR ORDER DATED 19-12- 4 ITA NO.239/AHD/2009 4 2008 IN ITA NO.17/AHD/2008 HOLDING THAT GAIN ON SAL E OF SHARES SHOULD BE CHARGEABLE TO TAX UNDER THE HEAD CAPITAL GAINS.ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE FINDINGS O F THE AO. 5. WE HAVE HEARD THE LEARNED DR AND GONE THROUGH TH E FACTS OF THE CASE. WE FIND THAT THE ITAT VIDE THEIR ORDER DA TED 19-12-2008 IN THE ASSESSEES OWN CASE FOR AY 2004-05 IN ITA NO.45 16/AHD/2007, WHILE ADJUDICATING A SIMILAR ISSUE, CONCLUDED AS UN DER:- 8 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND, PERUSED THE MATERIAL ON RECORD ALONG WITH THE ORDER OF THE TAX AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE CASE LAW AS HA S BEEN CITED BEFORE US. WE FIND THAT IN THE CASE OF CIT (CENTRAL), CALC UTTA VS ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY (P) LTD. (82-ITR-586 ), THE HON'BLE SUPREME COURT HAS HELD AS UNDER: WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF 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 HE SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE E VIDENCE FROM HIS RECORDS AS TO WHETHER HE HAS MAINTAINED ANY DIS TINCTION BETWEEN THOSE SHARES WHICH ARE HIS STOCK-IN-TRADE A ND THOSE WHICH ARE HELD BY WAY OF INVESTMENT . IN THE CASE OF CIT, BOMBAY VS H HOLCK LARSEN (160-I TR-67), THE HON'BLE SUPREME COURT HAS HELD AS UNDER: IN ORDER TO DETERMINE WHETHER ONE WAS A DEALER IN SHARES OR AN INVESTOR, THE REAL QUESTION WAS NOT WHETHER THE TRANSACTION OF BUYING AND SELLING THE SHARES LACKS THE ELEMENT OF TRADING, BUT WHETHER THE LATER STAGE S OF THE WHOLE OPERATION SHOW THAT THE FIRST STEP THE PURCHASE OF THE SHARES WAS NOT TAKEN AS, OR IN THE COURSE OF, A TRADING TRANSACTION. THE TOTALITY OF ALL THE FACTS WILL HAVE TO BE BORNE IN MIND AND THE CORRECT LEGAL PRINCIPLES APPLIED TO THESE. IF ALL THE RELEVANT FACTORS HAVE BEEN TAKEN INTO CONSIDERATION AND THERE HAS BEEN NO MISAPPLICATION OF THE PRINCIPLES OF LAW, THEN THE CONCLUSION ARRIVED AT B Y THE TRIBUNAL CANNOT BE INTERFERED WITH BECAUSE THE INFERENCE IS A QUESTION OF LAW, IF SUCH AN INFERENCE WAS A POSSIBLE ONE, SUBJECT, HOWEVER, THAT ALL THE RELE VANT FACTORS HAVE BEEN DULY WEIGHED AND CONSIDERED BY THE TRIBUNAL, THE INFEREN CE REACHED BY THE TRIBUNAL SHOULD NOT BE INTERFERED WITH. IN VIEW OF THE AFORESAID DECISIONS, WE ARE OF THE V IEW THAT WHETHER THE PROFIT FROM THE SHARES IS A CAPITAL GAIN OR BUSINES S INCOME WILL DEPEND ON THE FOLLOWING FACTORS: 5 ITA NO.239/AHD/2009 5 - WHETHER THE SHARES ARE HELD BY THE ASSESSEE AS INVE STMENTS OR STOCK-IN- TRADE; - WHETHER THE SHARES ARE PURCHASED WITH AN INTENTION TO KEEP THEM AS INVESTMENTS; - WHETHER THE SHARES PURCHASED WITH AN INTENTION TO S ELL; - WHETHER THE SHARES WERE PURCHASED WITH AN INTENTION TO EARN THE PROFIT IN THE SHORT TERM; - WHETHER THE SHARES ARE HELD TO MAXIMIZE THE RETURN; - WHETHER THE SHARES HAVE BEEN PURCHASED FROM THE PRI MARY MARKET; - WHETHER THE SHARES HAVE BEEN PURCHASED FROM THE SEC ONDARY MARKET; - WHETHER THE SHARES HAVE BEEN PURCHASED BY SUBSCRIPT ION TO PUBLIC ISSUE; - WHETHER THE SHARES HAVE BEEN HELD FOR FAIRLY LONG P ERIOD; AND - WHETHER THE SHARES ONCE SOLD HAVE NEVER BEEN RE-PUR CHASED. SO FAR AS THE CAPITAL GAIN ON THE SALE OF SHARES AM OUNTING TO RS.35,04,977/- IS CONCERNED, AND THE PROFIT SO EARN ED, IN OUR OPINION, WILL BE CAPITAL GAIN AS THE SHARES WERE FAIRLY HELD BY T HE ASSESSEE FOR THE LONG PERIOD. THUS, THE GROUND TAKEN BY THE REVENUE IN TH IS REGARD STANDS DISMISSED. SO FAR AS THE LONG TERM CAPITAL GAIN OF RS.54,50,41 0/- IS CONCERNED, THESE SHARES HAVE BEEN ACQUIRED BY THE ASSESSEE OUT OF ITS OWN FUNDS AND INVESTED DURING THE YEAR 2001-02. THE SAME WERE SOL D IN THE FINANCIAL YEAR 2003-04. THUS, THESE WERE CLEARLY HELD FOR MOR E THAN ONE YEAR. THUS, THE SHARES WERE TREATED AS INVESTMENTS. THEREFORE, WE ARE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY HELD THE PROFIT ARISING OUT OF THESE TRANSACTIONS TO BE THE LONG TERM CAPITAL GAINS AND ACCORDINGLY NO INTE RFERENCE IS CALLED FOR IN THE ORDER OF THE CIT(A) IN THIS REGARD. NOW COMING TO THE SHORT TERM CAPITAL GAINS OF RS.50 ,20,921/- DIVIDED BETWEEN THE ASSESSEE AND HIS WIFE, THIS PROFIT HAS ARISEN ON ACCOUNT OF MUTUAL FUNDS TRANSACTIONS, THE TRANSACTIONS UNDER E QUITY SHARES AND TRANSACTIONS CARRIED OUT UNDER THE PORTFOLIO MANAGE MENT SCHEME. MOST OF THE TRANSACTIONS ARE UNDER THE PMS. THE TRANSACTION S UNDER THE PMS SCHEME ARE DONE ON DAY TO DAY BASIS FOR AND ON ACCO UNT OF THE ASSESSEE. THESE TRANSACTIONS ARE NOT RECORDED IN THE BOOKS OF PMS MANAGER AS THEY ARE DONE FOR THE CUSTOMERS. IT IS JUST LIKE THE SHA RE BROKER DOING THE TRANSACTIONS ON BEHALF OF THE ASSESSEE. THE INSTRUC TIONS FOR CARRYING OUT 6 ITA NO.239/AHD/2009 6 THESE TRANSACTIONS MAY BE GIVEN EITHER IN THE BEGIN NING OR THE SAME MAY BE LEFT AT THE DISCRETION OF THE PORTFOLIO MANAGEME NT BUT ALL THESE TRANSACTIONS BELONGED TO THE CUSTOMER AND THE PMS M ANAGER WORKS ON BEHALF OF THE CUSTOMER, I.E., THE ASSESSEE. IT IS N OT DISPUTED THAT THE TRANSACTIONS CARRIED OUT THROUGH PMS FOR THE SALE A RE 212 AND FOR THE PURCHASE ARE 615. THE FREQUENCY AND VOLUME OF THE B USINESS AND THE PURPOSE OF TRANSACTIONS ARE SUCH THAT THIS CAN BY N O POSSIBILITY BE TREATED AS INVESTMENT. IN THE CASE OF INVESTMENT, AN OBJECT IVE IS TO EARN THE REGULAR INCOME FROM THE INVESTMENT WHILE IN THE CAS E OF THE BUSINESS THE OBJECTIVE IS TO EARN THE PROFIT FROM THE PURCHASE A ND SALE TRANSACTIONS. THE TRANSACTIONS THROUGH PMS ARE BEING DONE WITH THE CL EAR OBJECTIVE OF MAXIMIZE THE RETURN FROM THE PURCHASE AND SALE TRAN SACTIONS. IT CANNOT BE WITH THE OBJECTIVE OF HOLDING THE SHARES AS INVESTM ENTS. THE LEARNED AR COULD NOT BRING TO OUR NOTICE ANY CIRCULAR OR INSTR UCTION EXCEPT THE NEWS ITEM WHICH, IN OUR OPINION, CANNOT BE REGARDED TO B E THE CIRCULAR OR INSTRUCTION SO THAT IT CANNOT BE BINDING ON THE REV ENUE. IN OUR OPINION, THE CIT(A) HAS DEALT WITH THE ISSUE EXTENSIVELY AND HAS RIGHTLY DECIDED DEALING WITH EACH AND EVERY ASPECT OF THE ARGUMENTS TAKEN B Y THE LEARNED AR. THE CIT(A) HAS RIGHTLY TREATED THE TRANSACTIONS THR OUGH PMS TO BE THE INCOME FROM BUSINESS, AND NOT AS CAPITAL GAINS. WE ARE ACCORDINGLY OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE ORDE R OF THE CIT(A) IN THIS REGARD AND ACCORDINGLY WE CONFIRM THE ORDER OF THE CIT(A) DISMISSING GROUND NOS.1 AND 2 IN THE APPEAL OF DR. AJAY RANKA, GROUND NOS.1 AND 2 IN THE APPEAL OF SMT. SEEMA AJAY RANKA AND ALSO DIS MISSING GROUND NOS.1 AND 2 TAKEN BY THE REVENUE IN CASES OF BOTH T HE ASSESSEES. 6. INDISPUTABLY THE FACTS AND CIRCUMSTANCES OF T HE CASE IN THE YEAR UNDER CONSIDERATION ARE SIMILAR TO THOSE OBTAINING IN THE PRECEDING ASSESSMENT YEAR 2004-05. FOLLOWING THE VIEW TAKEN I N THE AFORESAID DECISION, THE AO IS DIRECTED TO RECOMPUTE THE CAPIT AL GAINS AND BUSINESS INCOME IN THE LIGHT OF AFORESAID FINDINGS OF THE TRIBUNAL IN THEIR ORDER DATED 19-12-2008. WITH THESE DIRECTIONS , GROUND NOS.1 & 2 IN THE APPEAL ARE DISPOSED OF. 7. NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE U S IN TERMS OF RESIDUARY GROUND NO.3 IN THE APPEAL, ACCORDINGLY, T HIS GROUND IS DISMISSED. 8. IN THE RESULT, APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE COURT TODAY ON 17-06-2011 SD/- SD/- 7 ITA NO.239/AHD/2009 7 (MUKUL SHRAWAT) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 17-06-2011 COPY OF THE ORDER FORWARDED TO: 1. DR. AJAY ISHWARLAL RANKA, ZYDEX INDUSTRIES, 10 G ANDHI OIL MILL COMPOUND, GIDC, GORWA, BARODA-390016 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-2( 2), 4 TH FLOOR, AAYAKAR BHAVAN, RACE COURSE CIRCLE, BARODA 3. CIT CONCERNED 4. CIT(A)-II, BARODA 5. DR, ITAT, AHMEDABAD BENCH-D, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD