DCIT 24(3), MUMBAI V. SUBHSAH CHAND MANTRI (HUF), MUMBAI

ITA 2851/MUM/2010

• Counselvise Citation: 285119914 RSA 2010
• Duration Of Justice: 1 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 12-05-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 12-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Assessee Lawyers: BEHARILAL
• Keywords: Capital asset; Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER ITA NO. 2851/MUM./2010 (ASSESSMENT YEAR : 2007-08 ) DATE OF HEARING: 12.5.2011 DY. COMMISSIONER OF INCOME TAX CIRCLE-24(3), C-11, BANDRA KURLA COMPLEX, BANDRA (EAST) MUMBAI 400 051 .. APPELLANT V/S SUBHASH CHAND MANTRI (HUF) B-15, JAMUNA DARSHAN BANGUR NAGAR, GOREGAON (W) MUMBAI 400 090 AAAHS4865F .... RESPONDENT REVENUE BY : MR. S.K. SINGH ASSESSEE BY : MR. BEHARILAL O R D E R PER J. SUDHAKAR REDDY, A.M. THIS APPEAL PREFERRED BY THE REVENUE, IS DIRECTED A GAINST THE IMPUGNED ORDER DATED 12 TH JANUARY 2010, PASSED BY THE COMMISSIONER (APPEALS)-XXXIV, MUMBAI, FOR ASSESSMENT YEAR 2007-0 8. 2. THE ASSESSEE IS H.U.F. AND DERIVES INCOME FROM DERI VATIVE TRANSACTIONS IN SALE AND PURCHASE OF SHARES AND SECURITIES AND I NCOME FROM OTHER SOURCES. THE SHORT POINT FOR OUR ADJUDICATION IN THIS CASE I S, WHETHER THE FIRST APPELLATE AUTHORITY WAS RIGHT IN UPHOLDING THE CONTENTION OF THE ASSESSEE THAT THE INCOME IN QUESTION IS ASSESSABLE UNDER THE HEAD CAPITAL GAINS AND NOT UNDER THE HEAD INCOME FROM BUSINESS . SUBHASH CHAND MANTRI (HUF) ITA NO.2851/MUM./2010 2 3. THE ASSESSING OFFICER BROUGHT OUT THE FACTS AT PAGE -2 / PARA-3, WHICH IS EXTRACTED FOR READY REFERENCE:- 3. AFTER GOING THROUGH THE DETAILS FILED AND AFTER A TEST CHECK OF THE BOOKS OF ACCOUNT AND AFTER DISCUSSION, THE ASSESSME NT IS FINALIZED AFTER CONSIDERING THE FOLLOWING ISSUES. BUSINESS INCOME V/S CAPITAL GAINS IN THE RETURN OF INCOME, ASSESSEE HAS DECLARED INCO ME FROM BUSINESS AND PROFESSION AT ` 10,65,479, WHICH INCLUDES AN AMOUNT OF ` 10,65,314 ON ACCOUNT OF PROFIT IN DERIVATIVE TRANSA CTIONS AND ` 165 ON ACCOUNT OF SPECULATION INCOME AFTER SETTING OF B/F LOSS OF ` 1,100; SHORT TERM CAPITAL GAINS AT ` 1,87,25,264 AND INCOME FROM OTHER SOURCES AT ` 20,887. IN THE CAPITAL ACCOUNT FILED ALONG WITH TH E RETURN OF INCOME, ASSESSEE HAS CREDITED THE FOLLOWING AMOUNTS:- DIVIDEND 40,266 10% SHORT TERM CAPITAL GAINS U/S 111A 1,87,47,366 TAX FREE LONG TERM CAPITAL GAIN / LOSS (7,814) PROFIT / (LOSS) DERIVATIVES 10,65,313 SHARE TRADING PROFIT / (LOSS) 1,265 INTEREST INCOME 44,582 TOTAL 1,98,90,978 THIS SHOWS THAT ALL THE RECEIPTS OF ASSESSEE ARE AR ISING OUT OF TRANSACTIONS IN SHARES AND SECURITIES EXCEPT INTERE ST INCOME. THIS GIVES RISE TO THE QUESTION THAT WHETHER THE INCOME ARISIN G OUT OF SOME OF THE TRANSACTIONS CARRIED OUT BY ASSESSEE BE CLASSIFIED AS CAPITAL GAINS AND THE REST AS BUSINESS, CONSIDERING THE INTERMINGLED STATEMENT OF FINANCIAL AFFAIRS AND THE FREQUENCY AND VOLUME OF T HE SHARE TRANSACTIONS. THIS IS AN IMPORTANT ISSUE CONSIDERIN G THE INTERLACING OF ACTIVITIES, COMMON MANAGEMENT, COMMON FUNDS, AND CO MMON OFFICE SET UP. AS PER THE STATEMENT OF TRADING IN SHARES FILED ALO NG WITH THE RETURN OF INCOME IT IS OBSERVED THAT ASSESSEE HAD OPENING STO CK OF SHARES AT ` 43,92,560, MADE PURCHASES TO THE TUNE OF ` 3,08,89,077 AND SOLD THE SAME FOR ` 4,23,38,864 AND RETAINING THE STOCK OF SHARES TO T HE TUNE OF ` 1,16,79,056 THEREBY EARNING A PROFIT OF ` 1,87,47,366 BY WAY OF SHORT TERM CAPITAL GAIN AND SUFFERED A LOSS OF ` 7,814 UNDER THE HEAD LONG TERM CAPITAL GAIN. THESE SCRIPTS PERTAINED TO SIXTY COMPANIES AND TOTAL NUMBER OF TRANSACTIONS DONE BY THE ASSESSEE W ERE 106. IN THE NUT SHELL DURING THE YEAR ASSESSEE HAS CARRIED OUT TRANSACTIONS IN SHARES ONLY AND THAT TOO INVOLVING ONLY FEW COMPANI ES AND OFFERED THE INCOME BY WAY OF SHORT TERM CAPITAL GAINS. IT IS NO T OUT OF PLACE TO MENTION THAT THERE IS NO DIFFERENCE IN THE NATURE O F TRANSACTIONS AND THE SCRIPS INVOLVED IN TRANSACTIONS RELATING TO THE SEGMENT OF DERIVA- SUBHASH CHAND MANTRI (HUF) ITA NO.2851/MUM./2010 3 TIVES AND IN BOTH THE CASES THESE ARE MOSTLY SAME, AND AS WELL AS THE QUANTUM INVOLVED IS VERY HIGH IN BOTH THE CASES. ANALYSIS OF STATEMENT OF CAPITAL GAINS FILED BY THE ASSESSEE SHOWS THAT FOR MOST OF THE SCRIPS THE PERIOD OF HOLDING WAS A FEW DAYS ONLY. IN CASE OF SCRIPS SHOWN AS TRADED DURING THE YEAR BY T HE ASSESSEE IT IS OBSERVED THAT FEW OF THE SCRIPS WERE BOUGHT AND SOL D ON THE SAME DAY. THUS, FROM THE ABOVE FACTS, IT WILL BE SEEN THAT IN MOST OF THE CASES, THE SHARES WERE HELD FOR A VERY SHORT PERIOD AND WE RE SOLD OFF TO BOOK PROFITS, THUS, INDICATING THAT THE MAIN INTENTION O F THE ASSESSEE WAS NOT TO HOLD THE SHARES AS AN INVESTMENT BUT RATHER THE PRIMARY AND MIN INTENT WAS TO BOOK PROFITS. AS IT WAS OBSERVED FROM THE DETAILS FILED BY THE AS SESSEE THAT THE FREQUENCY OF THE TRANSACTIONS CARRIED OUT BY THE AS SESSEE IS VERY HIGH WITH LARGE VOLUME OF SHARES INVOLVED, AND SINCE THE QUANTITY OF SHARES PURCHASED DURING THE YEAR, THE QUANTUM OF THE SALES , THE NUMBER OF TRANSACTIONS ENTERED INTO OF PURCHASE AND SALE OF S HARES ALL CUMULATIVELY SHOWED THE ASSESSEE IS ENGAGED IN AN O RGANIZED ACTIVITY OF PURCHASE AND SALE OF SHARES WITH A PROFIT MOTIVE , AND HENCE THE ASSESSEE WAS ASKED TO FURNISH REASONS AS TO WHY THE SHARE TRANSACTIONS SHOULD NOT BE TREATED AS BUSINESS INCO ME. 4. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE ASSESSING OFFICER HELD THAT INCOME IN QUESTION IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS AND NOT UNDER THE HEAD INCOME FROM SHORT TERM CAPITAL GAINS , FOR THE FOLLOWING REASONS:- (A) MERE ENTRIES IN THE BOOKS OF ACCOUNT SHOWING SHARES AS INVESTMENT ARE NOT A DETERMINATIVE FACTOR TO DECIDE REAL NATURE OF TRANSACTION. (B) THE ASSESSEE CANNOT DEVICE HIS OWN CRITERIA FOR BIF URCATING THE TRANSACTIONS RELATING TO PURCHASE AND SALE OF S HARES INTO CAPITAL GAINS AND BUSINESS INCOME. (C) THE LINE THAT DIVIDES A TRADING IN STOCK FROM INVES TMENT CAPITAL IS THIN OFTEN IMPERCEPTIBLE. (D) THE QUESTION WHETHER IT AMOUNTS TO BUSINESS OR AN INVESTMENT ACTIVITY, WILL DEPEND ON THE PECULIAR AN D PARTICULAR FACTS OF EACH CASE. SUBHASH CHAND MANTRI (HUF) ITA NO.2851/MUM./2010 4 (E) THE ASSESSEE IS DEALING IN LARGE VOLUMES AND THE HO LDING PERIOD IS ONLY A FEW DAYS. THE ASSESSEE IS HAVING S ALE ACTIVITY OF BUYING AND SELLING SHARES ON A CONTINUO US BASIS AND IT IS THE WHOLE TIME OCCUPATION OF THE ASSESSEE AND THE SCALE OF ACTIVITY IS SUBSTANTIAL. 5. IN APPEAL, THE FIRST APPELLATE AUTHORITY OBSERVED T HAT THE ASSESSEE HAS EARNED INCOME FROM SALE OF BONUS SHARES AND THAT IN THE BOOKS OF ACCOUNT, THE SHARES WERE SHOWN AS INVESTMENT AND IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN CIT V/S MADANGOPAL RADHELA L, 72 ITR 652 (SC), THE BONUS SHARES WERE RECEIVED AS CAPITAL AND INCOM E FROM THE SAME WOULD BE CAPITAL GAINS. AGGRIEVED, THE REVENUE IS IN APPE AL BEFORE THE TRIBUNAL. 6. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE, MR. S.K. SINGH, TOOK THIS BENCH TO THE VARIOUS FINDINGS OF THE ASSE SSING OFFICER AND ARGUES THAT IT IS PROVED BEYOND DOUBT THAT THE ASSESSEE WA S DEALING IN SHARES. HE SUBMITS THAT THE MAIN PROFESSION OF THE ASSESSEE IS TO DEAL IN SHARES AND STOCKS AND EARN INCOME FROM THE SAME. HE REFERRED T O PAPER BOOK FILED BY THE ASSESSEE AND SPECIFICALLY PAGES-81 AND 82, WHER EIN PERIOD OF HOLDING HAS BEEN GIVEN AND POINTS OUT THAT THE ASSESSEE HAD INT RA DAY TRANSACTION. HIS CASE IS THAT, THE PITH AND SUBSTANCE OF ALL THE DEC ISIONS ON THE ISSUE IS THAT, THE INTENTION OF THE PARTIES HAS TO BE THE BASIS FO R DETERMINING WHETHER A PARTICULAR INCOME IS UNDER THE HEAD INCOME FROM BUSINESS OR UNDER THE HEAD INCOME FROM OTHER SOURCES . HE RELIED ON A DECISION OF MUMBAI I BENCH OF THIS TRIBUNAL, IN SADHANA NABERA V/S ACIT, ITA NO.2586/MUM./ 2009, ORDER DATED 26 TH MARCH 2010., 7. THE LEARNED COUNSEL POINTED OUT THAT IN CASE OF UNI TECH LTD., THE SHARES WERE ACQUIRED ON 27 TH JANUARY 2005, AND THE HOLDING WAS FOR A SUBSTANTIAL PERIOD AND THAT THE ENTIRE PROFIT WAS F ROM SALE OF BONUS SHARES OF UNITECH LTD. HE RELIED ON THE JUDGMENT OF HON'BLE S UPREME COURT IN MADANGOPAL RADHELAL (SUPRA) AND SUBMITS THAT EVEN I F BONUS SHARES ARE ATTRIBUTABLE TO STOCK-IN-TRADE, THEY WOULD BE TREAT ED AS CAPITAL ASSET AND THE SALE OF THE SAME SHOULD BE TAXED AS CAPITAL GAINS U NLESS THE ASSESSEE SUBHASH CHAND MANTRI (HUF) ITA NO.2851/MUM./2010 5 CONVERTS THESE BONUS SHARES INTO STOCK-IN-TRADE. HE RELIED ON THE DECISION OF MUMBAI BENCH OF THIS TRIBUNAL IN ATLAS CORPORATION V/S ITO, (1997) 57 ITD 139 (MUM.), AND SUBMITS THAT UNDER IDENTICAL SITUAT ION, THE TRIBUNAL HELD IN FAVOUR OF THE ASSESSEE. 8. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS & CIRCUMSTANCES OF THE CASE AND A PERUSAL OF THE PAPE RS ON RECORD, ORDERS OF THE AUTHORITIES BELOW, AND THE CASE LAWS CITED BEFO RE US, WE HOLD AS FOLLOWS:- I) THE ASSESSEE HAS RECEIVED BONUS SHARES FROM UNITECH LTD. THE SALE OF THESE SHARES HAVE YIELDED SHORT TERM CAPITAL GAINS OF ` 1,88,69,186. THE ASSESSING OFFICER SEEKS TO BRING THIS PROFIT TO TAX UNDER THE HEAD INCOME FROM BUSINESS . II) THE ISSUE IS, WHETHER THE BONUS SHARES ACQUIRED BY THE ASSESSEE IN THE EARLIER YEARS CAN BE CONSIDERED AS STOCK-IN-TRADE O R SHOULD BE CONSIDERED AS CAPITAL ASSET OF THE ASSESSEE AND, THUS, INVESTMENT . III) THE MUMBAI BENCH OF THIS TRIBUNAL IN ATLAS CORPORAT ION (SUPRA), VIDE PARA-17, HELD AS FOLLOWS:- 17. AS FAR AS BONUS SHARES ARE CONCERNED, WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT ACQUISITION OF BONUS SHARES IS ALWAYS ON CAPITAL ACCOUNT IRRESPECT IVE OF THE NATURE OF HOLDING OF SHARES ON THE BASIS OF WHICH BONUS SHARE S ARE ISSUED. SUCH PROPOSITION HAS BEEN LAID DOWN BY THE HON'BLE SUPRE ME COURT IN THE CASE OF MADAN GOPAL RADHAY LAL (SUPRA). THE RELEVAN T OBSERVATIONS OF THEIR LORDSHIPS REPORTED AT P.655 ARE BEING REPRODU CED AS UNDER: 'WE ARE UNABLE TO AGREE WITH THE JUDGMENT OF THE BOMBAY HIGH COURT (TO WHICH REFERENCE WAS MADE BY THE TRIBUNAL) IN CIT VS . MANIKLAL CHUNNILAL & SONS LTD. (IT REFERENCE NO. 16 OF 1948) THAT BONUS SHARES RECEIVED BY A SHAREHOLDER WHO CARRIES ON BUSINESS I N SHARES AND SECURITIES 'IPSO FACTO BECOME ACCRETION TO HIS STOC K-IN-TRADE'. BONUS SHARES WOULD NORMALLY BE DEEMED TO BE DISTRIBUTED B Y THE COMPANY AS CAPITAL AND THE SHAREHOLDER RECEIVES THE SHARES AS CAPITAL. THE BONUS SHARES ARE ACCRETIONS TO THE SHARES IN RESPEC T OF WHICH THEY ARE ISSUED, BUT ON THAT ACCOUNT THOSE SHARES DO NOT BEC OME STOCK-IN-TRADE OF THE BUSINESS OF THE SHAREHOLDER. A TRADER MAY AC QUIRE A COMMODITY IN WHICH HE IS DEALING FOR HIS OWN PURPOSES, AND HO LD IT APART FROM THE STOCK- IN-TRADE OF HIS BUSINESS. THERE IS NO PRESUM PTION THAT EVERY ACQUISITION BY A DEALER IN A PARTICULAR COMMODITY I S ACQUISITION FOR THE PURPOSE OF BUSINESS; IN EACH CASE THE QUESTION IS O NE OF INTENTION TO BE GATHERED FROM THE EVIDENCE OF CONDUCT AND DEALINGS BY THE ACQUIRER WITH THE COMMODITY. BONUS SHARES HAVING BEEN RECEIV ED BY THE SUBHASH CHAND MANTRI (HUF) ITA NO.2851/MUM./2010 6 ASSESSEES IN RESPECT OF THEIR STOCK-IN-TRADE DID NO T, THEREFORE, BECOME PART OF THEIR STOCK-IN-TRADE, MERELY BECAUSE THEY W ERE ACCRETIONS TO THE STOCK- IN-TRADE. THE BONUS SHARES WERE RECEIVED AS CAPITAL; THEY COULD BE CONVERTED BY THE ASSESSEES INTO THEIR STOC K-IN-TRADE OR RETAINED AS THEIR CAPITAL ASSET.' IT IS CLEAR FROM THE ABOVE OBSERVATIONS THAT EVEN IN A CASE WHERE SHARES ARE HELD BY AN ASS ESSEE AS STOCK-IN- TRADE AND BONUS SHARES ARE ACQUIRED ON THE BASIS OF SUCH HOLDING, EVEN THEN BONUS SHARES ARE TO BE TREATED ON CAPITAL ACCOUNT AND, THEREFORE, PROFIT ON SALE OF SUCH SHARES IS TO BE A SSESSED AS CAPITAL GAIN AND NOT AS BUSINESS INCOME UNLESS IT IS SHOWN THAT ASSESSEE HAD CONVERTED THEM INTO STOCK-IN-TRADE. IN THE PRESENT CASE, THERE IS NO MATERIAL TO HOLD THAT ASSESSEE EVER CONVERTED ANY O F SUCH SHARES AS STOCK-IN-TRADE. THEREFORE, RESPECTFULLY FOLLOWING T HE JUDGMENT OF THE HON'BLE SUPREME COURT IT IS HELD THAT INCOME ARISIN G IN RESPECT OF SUCH BONUS SHARES CANNOT BE ASSESSED AS BUSINESS INCOME BUT HAS TO BE ASSESSED UNDER THE HEAD 'CAPITAL GAINS'. IV) IT CAN BE SEEN THAT THE TRIBUNAL FOLLOWED THE DECIS ION OF THE APEX COURT AND TOOK A VIEW THAT THE PROFIT ON SALE OF SHARES R ECEIVED AS BONUS SHARES CAN BE TAXED ONLY UNDER THE HEAD CAPITAL GAINS UNLESS THE ASSESSEE CHOOSES TO CONVERT SUCH SHARES INTO STOCK-IN-TRADE. AS THE ENTIRE SHORT TERM CAPITAL GAINS CONSIST OF INCOME FROM SALE OF BONUS SHARES, THIS CASE LAW APPLIES ON ALL FOURS TO THE FACTS OF THE CASE. V) IN VIEW OF THE ABOVE DISCUSSIONS, WE FIND NO INFIRM ITY IN THE ORDER OF THE COMMISSIONER (APPEALS) WHEREIN HE HAS APPLIED T HE JUDGMENT OF THE HON'BLE SUPREME COURT AND DECIDED THE ISSUE IN FAVO UR OF THE ASSESSEE. 9. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20.5.2011 SD/- N.V. VASUDEVAN JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 20.5.2011 SUBHASH CHAND MANTRI (HUF) ITA NO.2851/MUM./2010 7 COPY TO : (1) THE ASSESSEE (2) THE RESPONDENT (3) THE CIT(A), MUMBAI, CONCERNED (4) THE CIT, MUMBAI CITY CONCERNED (5) THE DR, J BENCH, ITAT, MUMBAI TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI DATE INITIAL 1. DRAFT DICTATED ON 13.5.2011 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 16.5.2011 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 16.5.2011 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 16.5.2011 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 16.5.2011 SR.PS/PS 6. DATE OF PRONOUNCEMENT 20.5.2011 SR.PS 7. FILE SENT TO THE BENCH CLERK 20.5.2011 SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER