The ACIT.Circle-3, Surat V. Smt. Jahnvikaben Rameshchandra Upadhyay, Surat

ITA 2494/AHD/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6644 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 06-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 11-08-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S P TALATI
• Assessee Lawyers: J P SHAH
• Keywords: Business income; Source of fund

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M ASSTT. CIT, CIRCLE-3, SURAT. VS. SMT. JAHNVIKABEN RAMESHCHANDRA UPADHYAY, 202, AKRUTI B WING, WEE HOME PARK, SURAT. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI S. P. TALATI, SR.DR RESPONDENT BY:- SHRI J.P. SHAH, AR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUND:- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY T HE AO OF RS.12,82,472/- ON ACCOUNT OF TRANSACTIONS IN SHARES MADE BY THE ASSESSEE AS BUSINESS PROFITS. 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS WHETHE R PROFIT EARNED IN TRANSACTIONS IN SHARES SHOULD BE ASSESSED AS BUSINE SS INCOME OR AS CAPITAL GAINS. THE AO TREATED THE PROFIT OF RS.12,82,471/- AS BUSINESS INCOME THOUGH DECLARED BY THE ASSESSEE AS SHORT TERM CAPIT AL GAINS. ITA NO.2494/AHD/2010 ASST. YEAR 2006-07 ITA NO.2494/AHD/2010 ASST. YEAR 2006-07 2 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT ASSESSEE IS DEALING IN SALE AND PURCHASE OF SHARES. IT HAD DECLARED DIVIDEND OF RS.,136,785/- AND SHORT TERM CAPITAL GA INS OF RS.12,82,471/-. THE ASSESSEE DEALT IN 104 SCRIPS AND IN EVERY SCRIP THE ASSESSEE HAD TRANSACTED ON AN AVERAGE 18-20 TIMES SHOWING THAT I T IS CARRYING OUT 10-12 TRANSACTIONS EVERY DAY. THE AO GAVE AN EXAMPLE THAT IN SHARES OF TISCO ASSESSEE HAS CARRIED OUT 40 PURCHASE TRANSACTIONS A ND 42 SALE TRANSACTIONS WHEREAS IN THE SHARE OF SAIL IT HAS CARRIED OUT 23 PURCHASE TRANSACTIONS AND 26 SALE TRANSACTIONS. THUS ACCORDING TO THE AO THERE WAS A MAGNITUDE OF SALE AND PURCHASES OF SHARES. THE ASSESSEE IS US ING HER SOURCE OF FUNDS BASICALLY TO CHURN OUT PROFIT. THE LENGTH OF PERIOD OF OWNERSHIP OR HOLDING PERIOD IS MUCH LESS. HE NOTICED THAT MAJORI TY OF SCRIPS WERE HELD FOR LESS THAN 45 DAYS. THE INFRASTRUCTURE EMPLOYED BY THE ASSESSEE FOR SHARE TRANSACTIONS SHOWS THAT SHE MAINTAINS ACCOUNT WITH RENOWNED SHARE BROKERS. SHE IS NOT ORDINARY SHARE BROKER BUT A TRA DER. ASSESSEE IS EARNING HER INCOME FROM PROFIT ON SPECULATION, TRANSACTION IN SHARES, INTEREST, DIVIDEND ETC. THUS GIVING A DETAILED REASONING THE AO TREATED THE SUM OF RS.12,82,471/- AS BUSINESS INCOME. 4. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY HOLDING AS UNDER :- ITA NO.2494/AHD/2010 ASST. YEAR 2006-07 3 11. THUS, FROM A HOLISTIC PERSPECTIVE, IN THE ABSE NCE OF ANY PROOF OF A SPECULATIVE TRADING ACTIVITY, EITHER IN THE FORM OF NON-DELIVERY BASED TRANSACTION, FUTURE AND OPTION TRANSACTION, OR TAKI NG POSITIONS IN DAY TRADING WITHOUT SUFFICIENT FUNDING, TREATMENT OF IN VESTMENT IN SHARES WHICH HAS BEEN REFLECTED IN THE BALANCE SHEET AS AN INVESTMENT CANNOT BE TERMED AS BUSINESS ACTIVITY. THE FACT THAT THE APPE LLANT USES HER OWN RESOURCES FOR INVESTING IN SHARES AND PERIOD OF HOL DING IS SUFFICIENTLY LONG EXTENDING TO 45 TO 60 DAYS ALSO BUTTRESSES THE CLAI M THAT THE ACTIVITY OF BUYING AND SELLING SHARES BY THE APPELLANT WAS NOT IN THE NATURE OF TRADING BUT ONLY AS AN INVESTMENT. HENCE, I DIRECT THE AO TO TREAT THE INCOME FROM THE IMPUGNED TRANSACTIONS AS CAPITAL GA INS RATHER THAN PROFIT UNDER THE HEAD BUSINESS. THEREFORE, APPELLAN TS ALTERNATIVE PLEAS BECOME REDUNDANT AND GROUND NUMBER 3 IS THEREFORE N OT REQUIRED TO BE ADJUDICATED UPON. 5. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERI AL ON RECORD. THE LD. AR VERY FAIRLY SUBMITTED THAT THE ISSUE MAY BE CONSIDERED IN THE LIGHT OF DECISION OF THE TRIBUNAL, AHMEDABAD D BENCH IN THE CASE OF SUGAMCHAND C. SHAH VS. ACIT (2010) 37 DTR (AHD)(TRI B) 345 WHEREIN THE TRIBUNAL HAD CULLED OUT SEVERAL PRINCIPLES AFTE R CONSIDERING SEVERAL DECISIONS AND FINALLY HELD THAT IF SHARES ARE HELD FOR LESS THAN 30 DAYS I.E. THEY ARE DISPOSED OF WITHIN 30 DAYS THEN THE PROFIT MAY BE TREATED AS BUSINESS INCOME AND IF THEY ARE HELD ABOVE 30 DAYS THEN THEY SHOULD BE TREATED AS INVESTMENT AND CAPITAL GAINS SHOULD BE C HARGED. THE LD. AR REFERRED TO PARA 13,16,17,18 & 19 FROM THAT DECISIO N AS UNDER :- 13. AFTER CONSIDERING ABOVE RULINGS WE CULL OUT FOLL OWING PRINCIPLES, WHICH CAN BE APPLIED ON THE 'ACTS OF A CASE TO FIND OUT WHETHER TRANSACT IO N (S) IN QUESTION ARE IN THE NATURE OF TRADE OR ARE MERELY FOR INVESTMENT PURPOSES : (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF THE SHARES (OR ANY OTHER TERN) ? 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 INVEST MENT ? WHETHER SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET ? ITA NO.2494/AHD/2010 ASST. YEAR 2006-07 4 (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREON ? NORMALLY, MONEY IS BORROWED TO PURCHASE GOODS FOR THE P URPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET 'OR RETAINING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISPOS AL IN THAT PARTICULAR ITEM ? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTANTIAL TRAN SACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS I NDICATIVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS MAY SHO W WHETHER THE ASSESSEE IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDING S INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). (4) WHETHER PURCHASE AND SALE IS FOR REALIZING PROF IT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE ? FORMER WILL INDICATE INTEN TION OF TRADE AND LATTER, AN INVESTMENT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVI DEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTI AL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN THE B ALANCE SHEET ? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDICATE THAT THEY ARE I NVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NET REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE, (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEMORA NDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION ? WHETHER FOR TRADE OR FOR INVESTMENT ? I F AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTO RS TO CARRY OUT INVESTMENTS IN THAT COMMODITY ? AND VICE VERSA. (7) IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE HAS KEPT IN THE RECORD S OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRI MARY ONUS AND COULD PRIMA FADE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-I N-TRADE) THEN ONUS WOULD SHIFT TO REVENUE TO ROVE THAT APPARENT IS NOT REAL. (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES ( OR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQU ENCY OF SALE AND PURCHASE WILL ALONE NOT BE SUFFICIENT TO SAY THAT ASSESSEE WAS HOLDING THE SHA RES (OR THE ITEMS IN QUESTION) FOR INVESTMENT. (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 IS COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF I T IS CLAIMED THAT IT IS DEALING AS A TRADER IN THAT ITEM ? WHETHER IT HAD SUCH AN INTENTION (TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASES WERE MADE ? (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTERMINGLING 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 LE CUMULATIVE EFFECT OF SEVERAL FACTORS HAS T O BE SEEN.' 16. THE QUESTION IS WHETHER THEREFORE, MERELY FROM FREQUENCY OF THE TRANSACTIONS CARRIED ON BY THE ASSESSEE, HE IS TREATED AS DEALER IN SHARES OR STILL HE IS HELD AS INVESTOR. AS FOUND IN THE CASE OF INFRASTRUCTURE (P ) LTD. VS. ASSTT. CIT (SUPRA) ALSO, ASSESSEE ADDUCED EVIDENCE TO SHOW THAT HOLDINGS ARE FOR INVESTMENT AS RECORDED IN THE BOOKS OF ACCOUNT. THE HOLDINGS ARE VALUED AT CO ST AND SUCH ACCOUNTING HAS BEEN ACCEPTED BY THE REVENUE IN EARLIER YEARS. THERE IS NO MATERIAL HOW THAT ASSESSEE HAS DECLARED HIMSELF AS A TRADER IN SHARES AND LEGA L REQUIREMENTS THERE-FOR HAVE ITA NO.2494/AHD/2010 ASST. YEAR 2006-07 5 BEEN COMPLIED WITH. IT IS ALSO A FACT THAT HE HAS N OT BORROWED ANY MONEY FOR INVESTING IN SHARES. MERELY BECAUSE, ASSESSEE HAD SOME BORROW ED FUNDS IT WOULD NOT BY ITSELF SHOW THAT THEY WERE DEPLOYED IN INVESTMENT. NOTWITH STANDING, EVEN BORROWINGS ARE REQUIRED TO SETTLE PAYMENT OBLIGATIONS IN RESPECT O F INVESTMENTS, LIKE ONE TAKES LOAN FOR PURCHASING A HOUSE. IN ANY CASE, HIGH CY TRANSA CTIONS AND LOW PERIOD HOLDINGS INDICATE TRADE, WHEREAS LOW FREQUENCY TRANSACTIONS J NIGH PERIOD HOLDINGS INDICATE INVESTMENT. 17. IN THIS CASE, THE ASSESSEE HAS DISCHARGED THE O NUS OF SHOWING THAT IT IS MAKING INVESTMENT BUT E IS ABLE TO SHOW THAT THERE ARE HIGH FREQUENCIES AND LOW HOLDINGS IN MANY TRANSACTIONS OF INDICATING THAT AS SESSEE HAS SOME INTENTION OF PURCHASING AND SELLING SHARES AS A TRADER, SE OF TH E ASSESSEE IS SUPPORTED BY THE FACT THAT IT HAS ENTERED THE PURCHASES IN THE BOOKS AS TENT, SHARES ARE VALUED AT COST AND REVENUE IS HOLDING SUCH ACCOUNTING TREATMENT AS LENT IN THE PAST. THUS, THERE CANNOT BE A FIXED CRITERIA TO DECIDE AS IN THE PRES ENT CASE IR ASSESSEE HAS TRADED IN SHARES EVEN THOUGH ASSESSEE HELD THEM AS INVESTMENT . 18. THOUGH IT HAS BEEN HELD IN THE CASE OF SARNATH INFRASTRUCTURE (P) LTD. (SUPRA) THAT DELIVERY OF IS AN IMPORTANT CRITERIA FOR HOLDI NG THAT ASSESSEE IS INVESTING IN THEM BUT AFTER DEMATIZATION WHERE SHARES ARE DELIVERED I N THE DEMAT ACCOUNT THE NEXT DAY, IT CANNOT BE HELD THAT IN ALL SUCH T WOULD BE INVES TMENT AND NOT TRADING. IF THAT IS SO HELD, THEN ALL THOSE TRADERS IN SHARES IN WHOSE DEM AT ACCOUNTS SHARES ARE DELIVERED CAN BE SAID TO HAVE EARNED CAPITAL GAINS AND NOT PR OFITS. THEREFORE, ONLY ONE CRITERIA, I.E. DELIVERY OF SHARES ALONE WILL NOT BE SUFFICIEN T TO DECIDE THE ISSUE. EVEN OTHERWISE IN SARNATH INFRASTRUCTURE (P) LTD. (SUPRA) ITSELF I T HAS BEEN HELD THAT CUMULATIVE EFFECT OF SEVERAL FACTORS WILL DECIDE THE ISSUE. 19. CONSIDERING THE TOTALITITY AND PECULIARITY OF T HE FACTS OF THIS CASE, WE FIND THAT ASSESSEE IS NEITHER FULLY ACTING AS A TRADER NOR AS AN INVESTOR. DEMARCATION IS QUITE HAZY; THOUGH IN THE BOOKS HE IS SHOWING ALL THE PUR CHASES AS INVESTMENT BUT FREQUENCY OF TRANSACTION IN SEVERAL CASES IS SO LAR GE AND HOLDING PERIOD IN MANY CASES IS SO SMALL FROM 0 TO A WEEK OR SO THAT ASSES SEE IS DE FACTO SELLING AND PURCHASING SHARES AS TRADER. HE IS ALSO HOLDING SHA RES FOR LONG PERIOD INDICATING THAT THEY ARE HELD AS INVESTMENT. THEREFORE, A CRITERIA HAS TO BE FIXED FOR DETERMINING AS TO WHEN HE IS ACTING AS TRADER AND WHEN AS INVESTOR. A CCORDINGLY, WE DECIDE FOLLOWING CRITERIA TO HOLD WHEN GAINS ARE TO BE TAXED AS PROF IT TO BE EARNED UNDER THE BUSINESS OR TO BE TAXED AS SHORT TERM CAPITAL GAIN, WE HOLD THAT IF SHARES ARE NOT HELD EVEN SAY FOR A MONTH, THEN THE INTENTION IS CLEARLY TO REAP PROFIT BY ACTING AS A TRADER AND HE DID NOT INTEND TO HOLD THEM IN INVESTMENT PORTFOLIO. WE BELIEVE THAT IF A PERSON INTENDS TO HOLD HIS PURCHASES OF SHARES AS INVESTMENT, HE WOUL D WATCH THE FLUCTUATION OF RATES IN THE MARKET FOR WHICH A MINIMUM TIME IS NECESSARY , WHICH WE ESTIMATE AT ONE MONTH. WHERE SHARES ARE HELD FOR MORE THAN A MONTH, THEY SHOULD BE TREATED AS INVESTMENT AND ON THEIR SALE SHORT TERM CAPITAL GAI N SHOULD BE CHARGED. WHEN SHARES ARE HELD FOR LESS THAN A MONTH, GAIN ON THEM SHOULD BE TREATED AS PROFIT FROM BUSINESS. SINCE BASIC DATA REQUIRED TO WORK OUT THE FREQUENCY OF TRANSACTIONS OF HOLDING PERIOD IS NOT COLLECTED BY THE AO, WE RESTO RE THE MATTER BACK TO THE FILE OF AO AND DIRECT HIM TO GIVE OPPORTUNITY T O THE ASSESSEE TO WORK ITA NO.2494/AHD/2010 ASST. YEAR 2006-07 6 OUT ON THE BASIS OF HOLDING PERIOD AS TO WHAT WOULD BE THE BUSINESS INCOME AND WHAT WOULD BE THE CAPITAL GAINS AS PER T HE DECISION OF THE TRIBUNAL IN THE CASE OF SUGAMCHAND C. SHAH VS. ACIT (SUPRA). IN OTHER WORDS, THE AO WILL WORK OUT BUSINESS INCOME/CAPITAL GAINS IN ACCORDANCE WITH THE DECISION IN SUGAMCHAND C. SHAH(SUPRA). AS A RESULT, APPEAL FILED BY THE REVENUE IS ALLOWED BUT FOR STATISTICAL PURPO SES. 6. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN OPEN COURT ON 13/5/11. SD/- SD/- (BHAVNESH SAINI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 13/5/11. MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD ITA NO.2494/AHD/2010 ASST. YEAR 2006-07 7 1.DATE OF DICTATION 9/5/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 10/5/2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..