Vinod Bakhle, Pune V. ACIT, Range-5, Pune

ITA 243/PUN/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56456 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 12-02-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ANN KAPTHUAMA
• Keywords: Business income; Opportunity of being heard
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE SHRI I.C. SUDHIR (JM) AND SHRI D. KARUNAKARA RAO (AM) ITA NO. 243/PN/2010 (ASSTT. YEAR: 2006-07) VINOD BAKHLE ... A PPELLANT FLAT NO. F-2/3, SUYOG NAGAR, OFF SENAPATI BAPAT ROAD, PUNE 411 007 PAN : ACWPB7594A V. ADDL CIT, RANGE 5, PUNE RESPONDENT APPELLANT BY : SHRI C.H. NANIWADEKAR RESPONDENT BY : MS. ANN KAPTHUAMA DATE OF HEARING : 3.8.11 DATE OF PRONOUNCEMENT: 3.10.11 ORDER PER I.C. SUDHIR, JM THE ASSESSEE HAS QUESTIONED FIRST APPELLATE ORDER AS UNDER : 1. THE LEARNED CIT(A) APPEALS ERRED IN LAW AND ON FACTS IN TREATING THE SHORT-TERM GAIN ARISING ON SALE OF EQUITY SHARES AS BUSINESS INCOME. ASSESSEES PAST HISTORY, NATURE OF TRANSACTIONS, HO LDING PERIOD OF THE SHARES AND SECURITIES OUGHT TO HAVE BEEN CONSIDERED APART FROM ONLY FREQUENCY OF TRANSACTIONS. THE LEARNED CIT(A) ERRED IN TREATING THE BORROWINGS FROM SON AND DAUGHTER AS MEANT FOR PURCHASE OF SHARES WITHOU T THERE BEING ANY EVIDENCE IN THIS REGARD AND WHEN IN FACT THE BORROW INGS WERE MADE MAINLY FOR FUTURE AND OPTIONS MARGIN REQUIREMENT. 2. THE RELEVANT FACTS ARE THAT DURING THE YEAR, THE ASSESSEE HAS SHOWN INCOME FROM PROFESSION AS MARINE ENGINEERING CONSULTANT AF TER HIS RETIREMENT FROM M/S. ITC LTD. THE MAJOR COMPONENT OF HIS INCOME WAS ON ACCO UNT OF TRANSACTIONS IN SHARES LEADING TO SHORT TERM CAPITAL GAINS OF RS. 21,47,96 0/- AND INCOME OF RS. 48,45,422/- FROM FUTURES AND OPTION TRANSACTIONS WHICH WERE OFF ERED BY THE ASSESSEE TO TAX AT THE RATE OF 10% U/S. 111A OF THE ACT. HOWEVER, AFTE R THE ISSUANCE OF NOTICE U/S. ITA . NO 243/PN/2010 VINOD BAKHLE A.Y. 2006-07 PAGE OF 7 2 143(2), THE ASSESSEE OFFERED THE CAPITAL GAINS OF R S. 48,45,422/- ON ACCOUNT OF PROFIT ARISING FROM TRANSACTION IN FUTURE OPTIONS SEGMENTS AT THE HIGHEST RATE OF 30% AND PAID THE BALANCE AMOUNT OF TAX. HOWEVER, THE SHORT TERM CAPITAL GAINS ON SHARE TRANSACTIONS AMOUNTING TO RS.21,41,960/- WAS OFFERE D TO TAX AT THE RATE OF 10% U/S. 111A SINCE SUCH TRANSACTIONS WERE SUBJECT TO SECUR ITIES TRANSACTIONS ACT. HAVING GONE THROUGH THE DETAILS, THE A.O FOUND THAT THE SH ARE TRANSACTIONS ON WHICH SHORT TERM CAPITAL GAIN IS SHOWN ARE COMPOSED OF 234 PURC HASE TRANSACTIONS AND 588 SALE TRANSACTIONS. THE ASSESSEE HAD BORROWED INTEREST F REE AMOUNTS OF RS. APPROXIMATELY 34 LAKHS WHICH WERE DEPLOYED FOR SUCH TRANSACTIONS. ASSESSEE WAS REQUIRED TO EXPLAIN AS TO WHY THE SHORT TERM CAPITA L GAIN TRANSACTIONS SHOULD NOT BE TREATED AS BUSINESS TRANSACTIONS SINCE THE FREQUEN CY OF THESE TRANSACTIONS WAS EXTREMELY HIGH AND ALSO, BECAUSE THE BORROWED FUNDS HAVE BEEN DEPLOYED FOR SUCH TRANSACTIONS. THE ASSESSEE REITERATED THE CLAIMED TRANSACTIONS AS INVESTMENT. IT WAS STATED THAT THE ASSESSEE HAD NO TIME, INTENTION OR TENDENCY OR TEMPERAMENT NEEDED, OF THE EXPERTISE TO OPERATE THE BUSINESS OF TRADING IN SHARES. WITH REGARD TO THE BORROWING OF FUNDS, IT WAS SUBMITTED THAT SA ME WERE BORROWED FROM HIS SON AND DAUGHTER FOR THE PURPOSE OF MARGIN PAYMENT REQ UIREMENT IN CASE OF FUTURES AND OPTIONS TRANSACTIONS. THE A.O DID NOT AGREE WITH THE EXPLANATION OF THE ASSESSEE AND TREATED THE TRANSACTIONS AS BUSINESS T RANSACTIONS. THE LD CIT(A) HAS UPHELD THE SAME. HE HELD THAT THE FREQUENCY WITH WHICH THE ASSESSEE HAS ENTERED INTO THESE TRANSACTIONS GOES AGAINST THE CLAIM OF T HE ASSESSEE THAT HE WAS OUT OF TOUCH WITH THE STOCK MARKET. THE ASSESSEE HAD CON DUCTED 100S OF FEATURES AND OPTIONS TRANSACTIONS, WHICH ADMITTEDLY ARE IN THE NATURE OF BUSINESS TRANSACTIONS. THE LD CIT(A) HAS OBSERVED FURTHER THAT ALTHOUGH TH E ASSESSEE HAS CLAIMED THAT THE AMOUNT OF RS. 34,00,000/- WAS BORROWED BY THE ASSE SSEE FOR CONDUCTING FUTURE AND OPTION TRANSACTIONS, BUT, HE HAS FAILED TO SUBSTA NTIATE HIS CLAIM BY BRINGING IN MATERIAL ON RECORD. THE LD CIT(A) HAS ALSO NOTED O BSERVATIONS OF THE A.O THAT THE SAID EXPLANATION OF THE ASSESSEE IS NOT SUPPORTED BY THE BANK STATEMENTS. ITA . NO 243/PN/2010 VINOD BAKHLE A.Y. 2006-07 PAGE OF 7 3 3. BEFORE THE TRIBUNAL, THE LD. A.R. WHILE REITERA TING SUBMISSIONS OF THE ASSESSEE BEFORE THE AUTHORITIES BELOW, ASSERTED THA T ON THE BASIS OF FREQUENCY OF THE TRANSACTIONS, THE A.O HAS HELD SOME SHORT TERM CAPI TAL GAINS AS BUSINESS TRANSACTIONS. HE SUBMITTED THAT THE ASSESSEE HAD N OT BORROWED ANY FUNDS BUT THE AMOUNT WAS TAKEN FROM HIS CHILDREN WITHOUT PAYING A NY INTEREST. HE ARGUED THAT UPTO A.Y. 2005-06, NOR IN THE PAST YEAR, THE A.O H AS DISTURBED THE CLAIM OF THE ASSESSEE IN SIMILAR TRANSACTIONS OF SHARES AS INVES TMENT. HE REFERRED THE CBDT CIRCULAR NO. 4/2007 DT. 15.6.2007 MADE AVAILABLE AT PAGE NO. 6 & 7 OF THE PAPER BOOK. HE ALSO REFERRED COPIES OF SUBMISSIONS MADE BEFORE THE LD CIT(A), ASSESSMENT ORDER U/S. 143(3) FOR A.Y. 2008-09, COMP UTATION SHEET AND SHORT TERM CAPITAL GAINS FOR A.Y. 2008-09, EXTRACT OF BANK ACC OUNT SHOWING THE END USE OF AMOUNTS BORROWED MADE AVAILABLE AT PAGE NOS. 1 TO 2 3 OF THE PAPER BOOK. THE LD. A.R. SUBMITTED THAT DURING HIS CAREER, THE ASSESSEE HAD INVOLVED HIS SURPLUS FUNDS IN VARIOUS SECURITIES. THESE SECURITIES WERE HELD FOR A CONSIDERABLE PERIOD OF TIME AND HAD HELD THAT THE ONLY INTENTION AS INVESTMENTS. N EVER IN THE PAST, THE ASSESSEE HAD ACTIVELY TRADED IN THE SHARES. IT WAS ONLY IN ORDER TO CHANGE THE STRUCTURE OF HIS PORTFOLIO THAT THE ASSESSEE HAD RESHUFFLED HIS INVE STMENTS AND IN THE PROCESS MADE A SHORT TERM CAPITAL GAIN OF RS. 21,47,960/-. THIS A CTIVITY WAS UNDERTAKEN ONLY IN ORDER TO OPTIMIZE THE INVESTMENT PORTFOLIO AND THE BASIC INTENTION TO EARN RETURN FROM THESE INVESTMENTS BY WAY OF DIVIDENDS, WAS NEV ER DONE AWAY WITH. THE LD. A.R. ALSO CONTENDED THAT THE FUNDS TAKEN FROM HIS C HILDREN WERE INTEREST FREE AND THUS NO INTEREST WAS PAID THEREON. THE LD. A.R. SUB MITTED THAT FROM THE ENCLOSED STATEMENT WHICH CAN BE SEEN THAT MOST THE 139 COMPA NIES, THE ASSESSEE HAD OPENING BALANCE CARRIED FORWARD FROM EARLIER YEARS . DURING THE YEAR, THE ASSESSEE HAS MERELY RESHUFFLED HIS PORTFOLIO BY SELLING OF H OLDINGS IN ORIGINAL COMPANIES TO THE PORTFOLIO. ALSO IN RESPECT OF SOME COMPANIES IN PR OCESS OF RESHUFFLING PORTFOLIOS, THE SHARES OF EACH COMPANY WERE SOLD AND PURCHASE IN SM ALL LOTS AND I.E. WHY THE NUMBERS MENTIONED BY THE A.O APPEARED UNDULY HIGH. THE ASSESSEE IN FUTURE HAS ITA . NO 243/PN/2010 VINOD BAKHLE A.Y. 2006-07 PAGE OF 7 4 CONTINUED TO MAINTAIN THE CHANGED INVESTMENT PORTFO LIOS. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS : 1. ACIT VS. NAISHADH V. VACHHARAJANI, ITA NO. 6429/MUM /2009 (A.Y.2006- 07), ORDER DATED 25 TH FEBRUARY 2011. 2. VINOD K. NEVATIA VS. ACIT, 49 DTR (MUM) 16 3. VINOD M. SHAH VS. ACIT, 38 SOT 503 (MUM) 4. MAHENDRA C. SHAH VS. ADDL CIT, ITA NO. 6289/MUM/200 8 (A.Y. 2005-06), ORDER DATED 18 TH MAY 2011 4. CONSIDERING THE ABOVE SUBMISSIONS, WE FIND THAT THE AUTHORITIES BELOW HAVE HELD THE TRANSACTIONS IN QUESTION AS BUSINESS IN NATURE MERELY ON THE BASIS OF HIGH FREQUENCY OF TRANSACTIONS. THE A.O HAS MENTIONED THAT SALE TRANSACTIONS ARE 588 AND PURCHASE TRANSACTIONS ARE 234 AND THE ASSESSEE HAS DEALT IN AS MANY AS SHARES OF 139 COMPANIES. THE CONTENTION OF THE LD. A.R. W ITH ASSISTANCE OF THE STATEMENTS OF TRANSACTIONS MADE AVAILABLE AT PAGE NOS. 3 TO 5 OF THE PAPER BOOK REMAINED THAT IN MOST OF THE SO CALLED 139 COMPANIES, THE ASSESSE E HAD OPENING BALANCE CARRIED FORWARD FROM EARLIER YEARS. HIS FURTHER CONTENTION REMAINED THAT DURING THE YEAR, THE ASSESSEE MERELY RESHUFFLED HIS PORTFOLIOS BY S ELLING OF HOLDINGS IN ORIGINAL COMPANIES PORTFOLIOS. ALSO IN RESPECT OF SAME COM PANIES, IN PROCESS OF RESHUFFLING PORTFOLIOS, THE SHARES OF EACH COMPANY WERE SOLD OR PURCHASED IN SMALL LOTS AND I.E. WHY THE NUMBERS MENTIONED BY THE A.O WERE UNDULY HI GH. IT WAS FURTHER CONTENDED THAT ASSESSEE HAD NEVER IN PAST DEALT IN SHARES AND HAD A CONSIDERABLE INVESTMENT PORTFOLIO. WE FULLY AGREE WITH THE SUB MISSION OF THE LD. A.R. THAT MERELY HIGH FREQUENCY OF TRANSACTIONS CANNOT BE A S OLE CRITERIA TO DRAW INFERENCE AS TO WHETHER THE INTENTION OF THE ASSESSEE BEHIND THE TRANSACTION IN QUESTION IS INVESTMENT OR TRADING. AS PER CBDT CIRCULAR NO. 4/ 2007 DATED 15.6.2007, THE TOTAL EFFECT OF THE FOLLOWING PRINCIPLES SHOULD BE CONSID ERED IN DETERMINING THE ISSUE : 1) PAST HISTORY OF THE ASSESSEE ITA . NO 243/PN/2010 VINOD BAKHLE A.Y. 2006-07 PAGE OF 7 5 2) TREATMENT IN BOOKS OF ACCOUNT 3) FREQUENCY OF TRANSACTIONS 4) INTENTION OF THE ASSESSEE WE HAVE OCCASION TO GO THROUGH THE DECISION OF MUMB AI BENCH OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT VS. JCIT (2009), 20 DTR (MUM ) (TRIBUNAL) (1999) UPHELD BY THE HONBLE BOMBAY HIGH COURT. THE BOMBAY BENCH OF THE TRIBUNAL WHILE DEALING WITH THE ISSUE IN DETAILS HAVE TAKEN ASSISTANCE OF SEVERAL DECISIONS REFERRED THEREIN INCLUDING THAT OF LUCKNOW BENCH OF THE TRIBUNAL IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD. VS. ACIT (2008) (TRIBUNAL) 1997. IN PARA NO. 13 OF THE DECISION, THE LUCKNOW BENCH OF THE TRIBUNAL IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD. VS. ACIT (SUPRA) HAS SUMMARIZED THE FOLLOW ING PRINCIPLES TO DETERMINE THE VERY NATURE OF THE SHARE TRANSACTIONS. FOR A READY REFERENCE, THESE ARE BEING REPRODUCED HEREUNDER : (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE T IME OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM). THIS CAN BE FOUND OUT FROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TREATED AS STOCK-IN- TRADE OR INVESTMENT. WHETHER SHOWN IN OPENING/CLOS ING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET. (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREON ? NORMALLY, MONEY IS BORROWED TO PURCHASE GOODS FOR THE PURPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETA INING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DIS POSAL IN THAT PARTICULAR ITEM ? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DE ALING IN THAT PARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSE E IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDIC ATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT) . ITA . NO 243/PN/2010 VINOD BAKHLE A.Y. 2006-07 PAGE OF 7 6 (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PROF IT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE ? FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN T HE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSE NTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN T HE BALANCE SHEET ? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOUL D INDICATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MAR KET VALUE OR NET REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT IT EMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEM ORANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION ? WHETHER FOR T RADE OR FOR INVESTMENT? IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE S EPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY ? AND VICE VERSA. (7) IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SH OW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE H AS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE S HOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ON US WOULD SHIFT TO REVENUE TO PROVE THAT APPARENT IS NOT REAL. (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHA RES (OR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICI ENT TO SAY THAT ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR I NVESTMENT. (9) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISIT ES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE I S COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING A S A TRADER IN THAT ITEM ? WHETHER IT HAD SUCH AN INTENTION (TO CARRY ON ILLE GAL BUSINESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASES WERE MADE ? (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15 TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCO UNT FOR EACH TYPE, THERE ITA . NO 243/PN/2010 VINOD BAKHLE A.Y. 2006-07 PAGE OF 7 7 ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO I NTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. (11) NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SE VERAL FACTORS HAS TO BE SEEN. WE ARE OF THE VIEW THAT TO MEET THE END OF THE JUS TICE ON THE ISSUE RAISED BEFORE US, IT IS NECESSARY TO EXAMINE THE FACTS OF THE PRE SENT CASE KEEPING IN MIND THE ABOVE REFERRED PRINCIPLES TO DRAW AN INFERENCE AS T O WHETHER TRANSACTION IN QUESTION WAS TRADING OR INVESTMENT IN NATURE. WE THUS SET A SIDE THE MATTER TO THE FILE OF THE A.O TO DECIDE THE ISSUE AFRESH ACCORDINGLY AFTER AF FORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUND IS THUS ALLOWED FOR ST ATISTICAL PURPOSES. 5. IN RESULT, APPEAL IS ALLOWED FOR STATISTICAL PUR POSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 3RD O CTOBER 2011. SD/- SD/- (D.KARUNAKARA RAO) ACCOUNTANT MEMBER (I.C. SUDHIR ) JUDICIAL MEMBER PUNE, DATED THE 3RD OCTOBER, 2011 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT -III, PUNE 4. THE CIT(A)-III, PUNE 4. THE D.R. B BENCH, PUNE 5. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL PUNE