Shri Narottam Somani (HUF), V. The Jt. CIT, Cir-4,

ITA 349/IND/2008

• Counselvise Citation: 34922714 RSA 2008
• Duration Of Justice: 2 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 07-04-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 22-07-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR MITRA
• Assessee Lawyers: S S DESHPANDE; ASHOK KHASGIWALA CAS
• Keywords: Capital asset; Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARM A, A.M. PAN NO. : AACHS0253D I.T.A.NO.349/IND/2008 A.Y. : 2005-06 SHRI NAROTTAM SOMANI (HUF), JT. CIT, C/O M/S. SOMANI BROTHERS, VS RANGE 4, 470, JAWAHAR MARG, INDORE. INDORE. APPELLANT RESPONDENT PAN NO. : ALLPS5225R I.T.A.NO.494/IND/2009 A.Y. : 2006-07 SHRI NAROTTAM SOMANI , JT. CIT, C/O M/S. SOMANI BROTHERS, VS RANGE 4, 470, JAWAHAR MARG, INDORE. INDORE. APPELLANT RESPONDENT APPELLANT BY : SHRI S.S.DESHPANDE AND SHRI ASHOK KHASGIWALA, CAS RESPONDENT BY : SHRI PRADEEP KUMAR MITRA, SR. DR O R D E R -: 2: - 2 PER R. C. SHARMA, A.M. THESE ARE THE APPEALS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) FOR THE ASSESSMENT YEARS 2005-06 & 2006-07 IN THE MATTER OF ORDER PASSED U/S 143(3) OF THE INCOME -TAX ACT, 1961. 2. THE SORT GRIEVANCE OF THE ASSESSEE RELATES TO TREAT ING THE PROFIT SHOWN BY THE ASSESSEE ON SALE OF SHARES AS BUSINESS INCOME IN PLACE OF TREATING THE SAME AS SHORT TERM CAPITAL GAINS. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORDS PERUSED. THE FACTS, IN BRIEF, ARE THAT DURING BOTH THE YEARS UNDER CONSIDERATION, THE ASSESSEE HAS DECLARED PROF IT EARNED ON TRADING OF SHARES AS SHORT TERM CAPITAL GAINS AN D WORKED OUT TAX LIABILITY THEREON @ 10 %. IN VIEW OF THE FR EQUENCY OF THE TRANSACTIONS, THE PERIOD OF HOLDING AND THE INTENTI ON OF THE ASSESSEE TO EARN PROFIT BY SELLING THE SHARES WITHI N VERY SHORT PERIOD AND WITHIN THE YEAR ITSELF, WITHOUT EARNING ANY DIVIDEND INCOME THEREON, THE AO HELD THAT THE PROFIT SO EARN ED WAS IN THE NATURE OF BUSINESS INCOME RATHER THAN SHORT TER M CAPITAL -: 3: - 3 GAINS. BY THE IMPUGNED ORDER, THE LD. CIT(A) CONFIR MED THE ACTION OF THE AO AND THE ASSESSEE IS IN FURTHER APP EAL BEFORE US. 4. SHRI S. S. DESHPANDE APPEARED ON BEHALF OF THE ASSESSEE AND VEHEMENTLY ARGUED THAT THE AO DID NOT ACCEPT THE CLAIM OF THE ASSESSEE AS SHORT TERM CAPITAL GAI NS AND HAS WRONGLY OBSERVED THAT THE ASSESSEE HAS BOUGHT THE S HARES WITHOUT ANY MARGIN MONEY WITH THE BROKER AND WRONGL Y PLACED RELIANCE ON THE VOLUME AND FREQUENCY OF TRANSACTION S, NUMBER OF SCRIPTS, BEING ONLY ONE AND THE DEPLOYMENT OF FU NDS AND THE TREATMENT GIVEN BY THE ASSESSEE IT WAS BEYOND DOUBT THAT THE ASSESSEE IS ENGAGED IN SHARE TRADING AND THE MOTIVE OF THE ASSESSEE WAS NOT TO EARN DIVIDEND BUT TO EARN PROFI T THEREON. HE FURTHER CONTENDED THAT THE CIT(A) HAS NOT CONSID ERED THE FACT THAT THE ASSESSEE HAD SHOWN THE SHARE IN HIS B ALANCE SHEET AS HIS INVESTMENT AND SUBSEQUENTLY PROFIT WAS EARNED AS CAPITAL GAINS ON THEIR SALE. HE FURTHER STRESSED ON THE FACTS THAT THE ASSESSEE HAS DEALT WITH ONLY ONE SCRIPT AN D THE SAME WERE DULY ENTERED INTO DEMAT ACCOUNT. HE FURTHER RE LIED ON VARIOUS DECISIONS OF THE COORDINATE BENCH INCLUDING THE -: 4: - 4 DECISION IN THE CASE OF GOPAL PURHOTM VS. JCIT, 122 TTJ 87, WHICH WAS UPHELD BY THE MUMBAI HIGH COURT AND REPOR TED AT 14 ITJ 282. 5. ON THE OTHER HAND, THE CONTENTION OF THE LD. SR. DR SHRI PRADEEP KUMAR MITRA WAS THAT THE ASSESSEE HAD NO INTENTION TO EARN THE DIVIDEND INCOME THEREON AND T HE SAME WAS NOT PURCHASED FOR MAKING INVESTMENT BUT FOR EAR NING PROFIT IMMEDIATELY ON THEIR SALE. HE HIGHLIGHTED TH E FREQUENCY OF TRANSACTION, WHICH IS NORMALLY ENTERED BY A PERS ON ENGAGED IN THE BUSINESS OF SHARES. HE FURTHER SUBMITTED THA T SHARES WERE NOT PURCHASED WITH THE INTENTION TO MAKE INVES TMENT AND EARN DIVIDEND INCOME THEREON BUT TO MAKE PROFIT OUT OF THEIR SALE. THEREFORE, HE ARGUED THAT THE LOWER AUT HORITIES WERE PERFECTLY JUSTIFIED IN TREATING THE PROFIT ARISING OUT OF THEIR SALES AS INCOME FROM BUSINESS RATHER THAN WHAT WAS OFFERE D BY THE ASSESSEE AS SHORT TERM CAPITAL GAINS. 6. WE HAVE CONSIDERED THE CONTENTIONS OF BOTH LD. AUTHORIZED REPRESENTATIVE AND LD. SENIOR D.R. AND A LSO DELIBERATED ON THE CASE LAWS RELIED UPON BY THEM. F ROM THE RECORD, WE FOUND THAT DURING THE ASSESSMENT YEAR 20 05-06, -: 5: - 5 THE ASSESSEE HAD EARNED INCOME OF RS. 39.95 LAKHS A ND IN THE ASSESSMENT YEAR 2006-07, IT HAD EARNED INCOME OF RS .7.53 LAKHS ON SALE OF SHARES. THE QUESTION AS TO WHETHER PROFIT EARNED ON SALE OF SHARES IS LIABLE TOT AX AS INCOME FROM BUSINESS OR UNDER THE HEAD CAPITAL GAINS IS A MIX ED QUESTION OF FACT AND LAW. THE MOST IMPORTANT TEST TO DETERMI NE WHETHER SUCH PROFIT IS LIABLE TO TAX AS CAPITAL GAINS OR AS BUSINESS INCOME IS THE VOLUME, FREQUENCY, CONTINUITY AND REG ULARITY OF TRANSACTION OF PURCHASES AND SALE OF SHARES. IN CAS E WHERE THERE IS REPETITION AND CONTINUITY COUPLED WITH MAG NITUDE OF TRANSACTION BEARING REASONABLE PROPORTION TO THE ST RENGTH OF HOLDING, AN INFERENCE CAN BE DRAWN THAT THE ACTIVIT Y IS IN THE NATURE OF BUSINESS. THE ANOTHER TEST IS WHETHER THE INITIAL ACQUISITION OF THE SHARES WAS WITH THE INTENTION OF DEALING IN THEM OR WITH A VIEW TO MAKE AN INVESTMENT. IT IS NO T A CONCLUSIVE TEST BUT ONE OF THE IMPORTANT FACTORS FO R DECIDING THIS ISSUE. THE NEXT TEST IS WHY AND HOW AND FOR WH AT PURPOSE SALES WAS EFFECTED SUBSEQUENTLY AND HOW THE ASSESSE E DEALT WITH THE SHARES DURING THE TIME THE ASSESSEE WAS HO LDING IT, WHETHER IT WAS TREATED AS STOCK IN TRADE AND HAS BE EN SHOWN -: 6: - 6 IN THE BOOKS OF ACCOUNT AND BALANCE AS INVESTMENT. THESE TESTS ARE ALSO IMPORTANT BUT NOT CONCLUSIVE FOR REA CHING TO THE CONCLUSION, MERELY BECAUSE THE ASSESSEE HAS ENTERED THESE TRANSACTIONS IN THE BOOKS OF ACCOUNT AND TREATED TH E SAME AS INVESTMENT, THE SAME CANNOT BE HELD TO BE AS INVEST MENT. BOOK ENTRY IS NOT CONCLUSIVE BUT ONLY A GUIDING FAC TOR FOR DECIDING THE NATURE OF TRANSACTION AND ITS INCOME O N SALE. FREQUENCY OF PURCHASES AND DISPOSAL OF SHARES IS AL SO A GUIDING FACTOR. IF PURCHASES AND SALES ARE FREQUENT OR THERE ARE SUBSTANTIAL TRANSACTIONS IN THE SHARES, IT WOULD IN DICATE TRADE. HABITUALLY DEALING IN THE SHARES IS INDICATIVE OF T RADE, SIMILARLY, RATIO BETWEEN THE PURCHASE AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADING O R INVESTING IN SHARES. HIGH TRANSACTIONS AND LOW HOLD INGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HO LDINGS INDICATE INVESTMENT. WHETHER PURCHASES AND SALES IS FOR REALIZING PROFIT OR PURCHASES ARE MADE FOR RETENTIO N AND APPRECIATION OF ITS VALUE IS ALSO A GUIDING FACTOR. FORMER WILL INDICATE INTENTION OF TRADE AND LATER, AN INVESTMEN T. IN THE CASE OF SHARES WHETHER THE INTENTION WAS TO ENJOY D IVIDEND AND -: 7: - 7 NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHAR ES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF TRA DE. HOW THE SHARES HAVE BEEN TAKEN IN THE BALANCE SHEET AND HOW THEY HAVE BEEN VALUED, AT COST OR AT COST OR MARKET PRIC E, WHICH EVER IS LOWER IS ALSO INDICATIVE AS TO WHETHER THEY ARE INVESTMENT OR STOCK IN TRADE. IT IS FOR THE ASSESSE E TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDINGS IS FOR INVESTMEN T OR FOR TRADING AND WHAT DISTINCTION HE HAS KEPT IN THE REC ORDS BETWEEN THE TWO TYPES OF HOLDINGS IS ALSO A GUIDING FACTOR FOR DECIDING THE NATURE OF TRANSACTION/INCOME AS TO WHE THER INCOME FROM BUSINESS OR CAPITAL GAINS. IF THE ASSES SEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE , SHOW THAT PARTICULAR SHARES ARE HELD AS INVESTMENT OR AS STOCK IN TRADE, THEN ONUS WOULD SHIFT TO THE REVENUE TO PROV E THAT APPARENT IS NOT REAL. THE MERE FACT OF CREDIT FOR S ALE PROCEEDS OF SHARES IN A PARTICULAR ACCOUNT OR NOT SO MUCH FR EQUENCY OF SHARES ON SUCH PURCHASES WILL ALONE NOT BE ABLE TO SUFFICIENTLY PROVE THAT THE ASSESSEE WAS HOLDING THE SHARES AS I NVESTMENT. ORDINARILY, THE PURCHASE AND SALE OF SHARES WITH TH E INTENTION OF EARNING PROFIT, WOULD RESULT IN THE TRANSACTION BEING IN THE -: 8: - 8 NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE, B UT WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC., THEN THE PRO FIT ACCRUING BY CHANGE IN SUCH INVESTMENT WILL YIELD CAPITAL GAI NS AND NOT REVENUE RECEIPT. THE C.B.D.T. CIRCULAR NO. 3 OF 15. 6.2007 HAS ALSO EMPHASIZED THAT IT IS POSSIBLE FOR TAX PAYER T O HAVE TWO PORTFOLIOS I.E. AN INVESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRA DING PORTFOLIO COMPRISING OF STOCK IN TRADE, WHICH ARE T O BE TREATED AS TRADING ASSETS. WHERE AN ASSESSEE HAS TWO PORTFO LIOS, THE ASSESSEE MAY HAVE INCOME UNDER BOTH THE HEADS I.E. CAPITAL GAINS AS WELL AS BUSINESS INCOME. WHERE THE ASSESSE E HAVE RETAINED THE SHARES FOR ENJOYING APPRECIATION IN VA LUE AND NOT FOR THE PURPOSE OF REALIZATION OF PROFITS, INFERENC E CAN BE DRAWN THAT THERE IS APPARENTLY NO COMMERCIAL VALUE WHICH IS AN ESSENTIAL INGREDIENT TO BE A TRADER. 7. APPLYING THE ABOVE TESTS TO THE FACTS OF THE INSTAN T CASE, WE FOUND THAT EVEN THOUGH THE ASSESSEE HAS TR ADED IN ONE SCRIPT ONLY, BUT THE FREQUENCY OF TRANSACTION I S VERY HIGH AND SHARES HAVE BEEN HELD FOR VERY SHORT TIME AND T HE SAME -: 9: - 9 HAD BEEN SOLD IMMEDIATELY AFTER A SHORT PERIOD OF P URCHASES IS CLEARLY INDICATIVE OF ASSESSEES INTENTION OF TRADI NG IN SHARES. FROM THE FACTS BROUGHT ON RECORD BY THE LOWER AUTHO RITIES, WE FOUND THAT ON SOME OF THE INSTANCES, IN RESPECT OF VERY SAME SCRIPT, THE ASSESSEE HAS NOT TAKEN THE DELIVERY AND IN THAT CASE, THE ASSESSEE HIMSELF HAS TREATED THE SAME AS TRADING IN SHARES. WHEN ALL THESE SHARES ARE HELD IN THE SAME PORTFOLIO AND THE FACTS AND CIRCUMSTANCES ARE INDICATIVE OF H IGH FREQUENCY OF TRANSACTION IN THESE SCRIPTS, INFERENC E CAN BE DRAWN THAT PURCHASES AND SALES OF SHARES WERE NOT F OR EARNING DIVIDEND INCOME AND CAPITAL GAINS THEREON, IN SO FA R AS NO DIVIDEND INCOME WAS SHOWN BY THE ASSESSEE. IN RESPE CT OF SHARES OF MARCATERS LINES LIMITED, WHICH WERE EVEN SOLD BEFORE THE END OF THE CLOSE OF THE YEAR. THE SHARES IN RESPECT OF WHICH THE ASSESSEE HAD SHOWN HOLDINGS FOR REASONABL E LONGER PERIOD WITH INTENTION TO EARN DIVIDEND AND FOR WHIC H DIVIDEND INCOME HAD ALSO BEEN SHOWN BY THE ASSESSEE, THE AO HAD ALREADY ACCEPTED THE SAME AS LONG TERM CAPITAL GAIN S RATHER THE BUSINESS INCOME. THE DETAILED FINDINGS RECORDED BY THE LOWER AUTHORITIES WITH REGARD TO INTENTION OF ASSES SEE, -: 10: - 10 FREQUENCY OF TRANSACTION OF SALES AND PURCHASES HAV E NOT BEEN CONTROVERTED BY LD. AUTHORIZED REPRESENTATIVE BY BR INGING ANY POSITIVE MATERIAL ON RECORD, WE, THEREFORE, DO NOT SEE ANY REASON TO INTERFERE IN THE SAME. 8. IN VIEW OF THE ABOVE DISCUSSION, WE ARE INCLINED TO AGREE WITH LD. SENIOR D.R. THAT PROFIT ARISING OUT OF PURCHASE AND SALE OF SHARES, WHICH HAVE BEEN SHOWN BY THE AS SESSEE AS CAPITAL GAINS IN ITS RETURN OF INCOME HAVE BEEN COR RECTLY ASSESSED BY THE REVENUE AUTHORITIES AS INCOME FROM BUSINESS. 9. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE DISMISSED. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 30 TH MAY, 2011. SD/- SD/- (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30 TH MAY, 2011. CPU* 305