SUDHA J. ZAVERI, MUMBAI V. ACIT 20(3), MUMBAI

ITA 3626/MUM/2010

• Counselvise Citation: 362619914 RSA 2010
• Duration Of Justice: 1 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 12-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 07-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T T JACOB
• Assessee Lawyers: K SHIVARAM; AJAY R SINGH
• Keywords: Business income; Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J : MUMBAI BEFORE SHRI R.S. PADVEKAR, ( JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.3626/MUM/2010 ASSESSMENT YEAR : 2006-07 SUDHA S. ZAVERI 1301, SEA LEGEND, JUHU VERSOVA ROAD, ANDHERI (W), MUMBAI-400 061. ..( APPELLANT ) P.A. NO. ( AAAPZ 1605 J ) VS. ASST. COMMISSIONER OF INCOME TAX CIRCLE-20(3), PIRAMAL CHAMBERS, LALBAUG, MUMBAI. ..( RESPONDENT ) APPELLANT BY : SHRI K. SHI VARAM AND SHRI AJAY R. SINGH RESPONDENT BY : SHRI T. T. JACO B DATE OF HEARING : 12.10.2011 DATE OF PRONOUNCEMENT : 28 TH OCTOBER, 2011 O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER D ATED 15.3.2010 OF THE CIT(A) FOR THE ASSESSMENT YEAR 2006-0 7. THE ONLY DISPUTE RAISED BY THE ASSESSEE IN THIS APPEAL IS REGARDING NATURE OF ITA NO.3626/M/10 A.Y:06-07 2 INCOME FROM SHARE TRANSACTIONS DECLARED BY THE ASSESSEE AS SHO RT TERM CAPITAL GAIN. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESS EE FOR THE RELEVANT YEAR HAD DECLARED INCOME OF RS.2,89,176/- FRO M SPECULATION IN SHARES IN ADDITION TO SHORT TERM CAPITAL GAIN OF RS.9 ,26,110/- AND LONG TERM CAPITAL GAIN OF RS.4,86,486/- FROM SALE AND PURCHASE OF SHARES. THE AO NOTED THAT THE VOLUME OF TRANSACTIONS A S WELL AS FREQUENCY WAS VERY HIGH AND THE ASSESSEE HAD CARRIED OUT T HE TRANSACTION IN A SYSTEMATIC MANNER. HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY INCOME FROM SHARES SHOULD NOT BE CON SIDERED AS BUSINESS INCOME. THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD PURCHASED SHARES AS INVESTMENT WHICH HAD ALSO BEEN DISCLOSED IN THE BALANCE SHEET AS INVESTMENT. FURTHER THE ASSESSEE HAD BEEN HOLDING THE INVESTMENT FOR THE LAST MANY YEARS AND THEREFORE, IT WAS ARGUED THAT INCOME DECLARED AS CAPITAL GAIN SHOULD BE ACCEPTED. THE AO WAS NOT SATISFIED BY THE EXPLANATION GIVEN. IT WAS OBSERVE D BY HIM THAT THE ENTRY IN THE BOOKS OF ACCOUNT WAS NOT CONCLUSIVE IN DE TERMINING THE TRUE NATURE OF TRANSACTIONS. IT WAS THE INTENTION OF THE ASSESSEE WHICH WAS IMPORTANT WHICH HAD TO BE SEEN FROM THE ACTU AL CONDUCT OF THE ASSESSEE IN DEALING IN SHARES. HE REFERRED TO THE J UDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF S. VENKATA SWAMY (35 ITR 594). ITA NO.3626/M/10 A.Y:06-07 3 IT WAS OBSERVED BY HIM THAT THE ASSESSEE WAS REGULARLY DE ALING IN SHARES AND HAD NOT MAINTAINED SEPARATE D-MAT ACCOUNT FOR INVESTMENT. THE CLAIM OF THE ASSESSEE TO TREAT INCOME FR OM ALL DELIVERY BASED TRANSACTION AS CAPITAL GAIN WAS NOT CORRECT . CONSIDERING THE FREQUENCY OF TRANSACTIONS AND REGULARITY OF TRANSACTI ONS THE AO ASSESSED THE ENTIRE CAPITAL GAIN AS BUSINESS INCOME. 2.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE HAD SHOWN INCOME FROM TRANSACTION S WHICH WERE SQUARED OFF ON DAILY BASIS AS BUSINESS AND INCOME FR OM DELIVERY BASED TRANSACTION AS CAPITAL GAIN. THE DELIVERY OF SHARE S HAD BEEN TAKEN ONLY WITH THE INTENTION OF MAKING INVESTMENT. THE VOLUME AND FREQUENCY COULD NOT BE SOLE CRITERIA FOR DETERMINING TH E NATURE OF TRANSACTIONS. IT WAS ALSO SUBMITTED THAT THE INCOME SHOWN AS CAPITAL GAIN IN THE EARLIER YEAR HAD BEEN ACCEPTED. THE ASSE SSEE ALSO REFERRED TO THE DECISION OF TRIBUNAL IN THE CASE OF GO PAL PUROHIT (29 SOT 117) IN WHICH IT WAS CLAIMED THAT DELIVERY BASED TR ANSACTIONS HAD TO BE TREATED AS INVESTMENT TRANSACTIONS. THE SAID ORD ER OF THE TRIBUNAL IT WAS POINTED HAD BEEN CONFIRMED BY THE HON BLE COURT. CIT(A) AGREED WITH THE SUBMISSION OF THE ASSESSEE THAT I T COULD HAVE BOTH TRADING AND INVESTMENT PORTFOLIO. IT WAS ALSO O BSERVED BY HIM THAT THE CASE OF THE ASSESSEE WAS MORE OR LESS IDENTICAL TO THE CASE OF ITA NO.3626/M/10 A.Y:06-07 4 GOPAL PUROHIT (SUPRA). IN THE CASE OF GOPAL PUROHIT ( SUPRA), CIT(A) FURTHER POINTED OUT THAT THE TRIBUNAL HAD RELIED O N THE DECISION OF ITAT IN THE CASE OF SARANATH INFRASTRUCTURE PVT. LTD. VS. A CIT(16 DTR 97) AND HELD ON THE FACTS OF THAT CASE THAT SHORT TERM CAPIT AL GAIN AND LONG TERM CAPITAL GAIN DECLARED BY THE ASSESSEE FROM DELIVERY BASED TRANSACTION HAD TO BE ACCEPTED AS CAPITAL GAIN. HOWEVER, CIT(A) FURTHER OBSERVED THAT THE FACTS IN CASE OF THE ASSESSEE IN THIS YEAR WERE DISTINGUISHABLE FROM THE FACTS IN CASE OF GOPAL PURO HIT (SUPRA) OR IN ASSESSEES OWN CASE IN EARLIER YEARS. IN THE CASE OF THE ASSESSEE, FREQUENCY AND VOLUME OF TRANSACTION ARE HIGHER AS COMPA RED TO EARLIER YEAR IN WHICH TRANSACTIONS HAD BEEN ACCEPTED AS INVESTMENT . IN THIS YEAR THE TRANSACTIONS OF THE ASSESSEE IN CERTAIN SHARES VIZ. GIPCL, MTNL, TATA STEEL AND ONGC WERE QUITE FREQUENT AND T HERE WERE REPEATED TRANSACTIONS IN THE SAME SCRIPS WHICH HAD THE NA TURE OF TRADING ACTIVITY. THEREFORE, THE CASE OF GOPAL PURO HIT (SUPRA) WAS NOT APPLICABLE TO THE FREQUENT AND REPETITIVE TRANSACTIO NS IN CASE OF THE SCRIPS MENTIONED ABOVE. THE ASSESSEE, THEREFORE, COULD NOT BE SAID TO BE AN INVESTOR IN THESE SCRIPS MERELY ON THE GROUND THAT THE ASSESSEE HAD TAKEN DELIVERY. THEREFORE, INCOME FROM TRANSACTIO NS IN THESE SCRIPS WHICH HAD RESULTED INTO GAIN OF RS.7,98,995/- WAS TREATED BY CIT(A) AS BUSINESS INCOME INSTEAD OF SHORT TERM CAPITAL G AIN DECLARED ITA NO.3626/M/10 A.Y:06-07 5 BY THE ASSESSEE. AGGRIEVED BY THE SAID DECISION, THE ASSESSE E IS IN APPEAL BEFORE THE TRIBUNAL. 3. BEFORE US, THE LD. A.R REITERATED THE SUBMISSIONS MA DE BEFORE THE LOWER AUTHORITIES THAT THE ASSESSEE WAS AN INVESTOR IN SHARES AND THAT SIMILAR TRANSACTIONS HAD BEEN ACCEPTED AS INVESTMENT IN THE EARLIER YEARS BY THE DEPARTMENT. HE REFERRED TO THE ORDER OF AO DATED 27.9.2006 UNDER SECTION 143(3) OF THE ACT FOR A.Y 2004 -05 PLACED AT PAGE 35 OF THE PAPER BOOK IN WHICH INCOME FROM SHARE T RANSACTIONS DECLARED AS CAPITAL GAIN HAD BEEN ACCEPTED BY THE AO. HE ALSO REFERRED TO THE DETAILS OF TRANSACTIONS IN THE FOUR SCRIP S PLACED IN THE PAPER BOOK WHICH HAVE BEEN TREATED BY THE AO AS BUSINE SS TRANSACTION TO POINT OUT THAT EVEN IN THESE CASES, IN SOME CASES SHARES H AD BEEN SOLD AFTER HOLDING FOR ONE YEAR. IT WAS ALSO SUBMITTE D THAT CIT(A) ADMITTED THAT THE CASE WAS ALMOST SIMILAR TO THAT OF GOP AL PUROHIT (SUPRA) AND HE ALSO ACCEPTED THE INCOME FROM SOME TRANSA CTIONS AS CAPITAL GAIN AND THEREFORE, CIT(A) WAS NOT JUSTIFIED IN TREATING CERTAIN PART OF TRANSACTIONS AS BUSINESS INCOME. IT WAS ALSO SUBMITT ED THAT IN RESPECT OF SOME OF THE SALES, INCOME FROM WHICH HAD BEEN TREATED AS BUSINESS INCOME, THE PURCHASES HAD BEEN MADE IN THE EARLIE R YEAR, IN WHICH THE SAME HAD BEEN ACCEPTED AS INVESTMENT. HE ALSO RE FERRED TO CERTAIN OTHER DECISIONS OF THE TRIBUNAL IN WHICH INCOME F ROM SHARE TRANSACTIONS HAD BEEN ACCEPTED AS CAPITAL GAIN. ACCORDINGLY IT WAS ITA NO.3626/M/10 A.Y:06-07 6 URGED THAT THE ORDER OF CIT(A) SHOULD BE SET ASIDE AND CLAIM OF THE ASSESSEE SHOULD BE ALLOWED. 3.1 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND STRONGLY SUPPORTED THE ORDER OF CIT(A). IT WAS POINTED OUT TH AT MORE THAN 95% OF TRANSACTIONS WERE IN THE FOUR SCRIPS WHICH WERE NOT ONL Y VERY FREQUENT BUT ALSO REPETITIVE TRANSACTIONS IN THE SAME SCR IPTS. IT WAS POINTED OUT THAT THE AVERAGE HOLDING PERIOD OF TRAN SACTIONS IN THE FOUR SCRIPTS WAS 39 DAYS AND IT WAS LESS THAN 30 DAYS IN CASE OF 72 % OF THE TRANSACTIONS. THERE WERE ONLY FEW CASES IN WHICH SHARES WE RE ON HOLD FOR ONE YEAR. IT WAS ALSO SUBMITTED THAT MERELY BECAUSE TRANSACTIONS WERE ACCEPTED AS INVESTMENT IN THE EARLIER YEAR, THERE WAS NO GROUND TO TREAT THE TRANSACTIONS IN THE SUBSEQUENT YEAR ALSO AS INVESTMENT WHEN THE PATTERN AND NATURE OF TRANSACTIONS HAD COMPLET ELY CHANGED. IT WAS THUS REQUESTED THAT THE ORDER OF CIT(A) SHOULD B E UPHELD. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING NATURE O F INCOME FROM SHARE TRANSACTIONS ENTERED INTO BY THE ASSESSEE. THE ISSUE WH ETHER THE SHARE TRANSACTIONS IN A PARTICULAR CASE SHOULD BE TREATED AS INVESTMENT ACTIVITY OR TRADING ACTIVITY HAS BEEN HIGHLY A DEBATAB LE ISSUE. THERE ARE DECISIONS OF THE TRIBUNAL ON BOTH THE SIDES. EACH CASE WILL DEPEND ON ITS OWN FACTS AND CIRCUMSTANCES. THERE ARE VARIOUS FACTORS SUCH AS ITA NO.3626/M/10 A.Y:06-07 7 FREQUENCY, VOLUME, ENTRY IN THE BOOKS OF ACCOUNTS, NATUR E OF FUNDS USED, HOLDING PERIOD ETC. WHICH ARE RELEVANT IN DECIDIN G THE TRUE NATURE OF TRANSACTIONS AND NO SINGLE FACTOR IS CONCLUSIVE. THE MOST IMPORTANT FACTOR IS THE INTENTION OF THE ASSESSEE AT THE TIME OF P URCHASE WHICH HAS TO BE GATHERED FROM THE ACTUAL CONDUCT OF THE ASSESSE E WHILE DEALING WITH THE SHARES SUBSEQUENTLY AND NOT ONLY ON T HE BASIS OF ENTRY IN THE BOOKS OF ACCOUNT OR THE OBJECTS IN THE MEMO RANDUM OF ASSOCIATION. THIS VIEW IS SUPPORTED BY THE JUDGMENT OF T HE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MADANGOPAL RADHE YLAL (73 ITR 642). THE ACTUAL CONDUCT HAS TO BE EVALUATED BY ANALYZ ING OF THE HOLDING PERIOD ETC. AN INVESTOR MAKES PURCHASES WITH LON G TERM GOAL OF EARNING INCOME FROM THE INVESTMENT AND HE IS NOT T EMPTED TO SELL THE SHARES ON EVERY RISE AND FALL IN THE MARKET WHICH A RE THE ATTRIBUTES OF A TRADER. SINCE INCOME FROM INVESTMENT IN SHARES WHICH IS IN THE FORM OF DIVIDEND IS RECEIVED ANNUALLY, NORMALLY AN IN VESTOR IS EXPECTED TO HOLD THE SHARES FOR MORE THAN A YEAR. HOWEVER THERE MAY BE SITUATIONS WHEN THE INVESTOR MAY ALSO SELL THE SHARES AFTE R SHORT HOLDING IN ORDER TO RESHUFFLE PORTFOLIO WHEN PRICES A RE FALLING OR TO ENCASH INVESTMENT IN CASE OF EXCEPTIONAL GAIN OR FOR SOME PERSONAL EXIGENCIES. EACH CASE IS REQUIRED TO BE EXAMINED CAREFULLY TO ASCERTAIN THE TRUE NATURE OF TRANSACTIONS. ITA NO.3626/M/10 A.Y:06-07 8 4.1 IN THIS CASE THE ASSESSEE HAD SOLD SHARES WORTH RS.3.95 CRO RES AND PURCHASED SHARES OF RS .3.86 CRORES DURING THE YEAR RESULTING INTO SHORT TERM CAPITAL GAIN OF RS.9.26 LACS. THE HOLDING PE RIOD IN RESPECT OF SUCH TRANSACTIONS AS GIVEN BY THE ASSESSEE WAS 135 DAYS. HO WEVER, WITHIN THE SAID TRANSACTION, THE ASSESSEE HAD TRANSACTIONS IN FOUR SCRIPS GIPCL, MTNL, TATA STEEL AND ONGC IN WHICH THE T RANSACTIONS WERE FOUND BY AO TO BE VERY FREQUENT AND ALSO VOLUMI NOUS AND ASSESSEE WAS FOUND TO HAVE REPETITIVE TRANSACTION IN THE SA ME SCRIP. AN INVESTOR PURCHASES SHARES FOR HOLDING SO AS TO ENJOY INCO ME FROM INVESTMENT AS DIVIDEND AND NOT FOR SELLING AND A GAIN BUYING THE SAME SCRIP. IN THIS CASE AS POINTED OUT BY THE AO AND WHICH HA S NOT BEEN CONTROVERTED BEFORE US, THE AVERAGE HOLDING PERIOD IN RESPECT OF SUCH TRANSACTION WAS ONLY 39 DAYS AND IN 72% OF SUCH TRANSACTION S THE HOLDING PERIOD WAS LESS THAN 30 DAYS. IN MANY CASES SHARE S WERE SOLD WITHIN A FEW DAYS. SUCH TRANSACTIONS BY NO STANDARDS COULD BE CONSIDERED AS INVESTMENT ACTIVITY. MERELY BECAUSE SHARE TRANSACTIONS IN THE EARLIER YEAR HAS BEEN ACCEPTED AS INVESTMENT ACTI VITY, CANNOT BE THE SOLE GROUND TO ACCEPT ALL TRANSACTIONS IN FUTURE AS I NVESTMENT ACTIVITY. THE ASSESSEE WHO WAS AN INVESTOR IN EARLIER YEA R CAN ALWAYS TURN INTO A TRADER IN THE SUBSEQUENT YEAR. EACH CASE HA S TO BE DECIDED BASED ON ITS OWN SET OF FACTS. VARIOUS DECISIONS CITED BY TH E ASSESSEE ARE DISTINGUISHABLE ON FACTS. ARGUMENT OF LD. AUTHORI SED ITA NO.3626/M/10 A.Y:06-07 9 REPRESENTATIVE THAT CIT(A) WAS NOT JUSTIFIED IN TREAT ING THESE TRANSACTIONS AS BUSINESS TRANSACTIONS AS SIMILAR TRANSACTIONS WE RE ACCEPTED BY HIM AS INVESTMENT ACTIVITY CANNOT BE ACCEPTED. THE TRANSACTIONS ACCEPTED BY CIT(A) AS INVESTMENT WERE LESS FRE QUENT THAN THESE TRANSACTIONS WHICH ARE NOT ONLY VERY FREQUENT BUT ALSO REPETITIVE, CLEARLY SHOWING THE TRADING CHARACTER. 4.2 THE LD. AR FOR THE ASSESSEE HAS RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT (29 SOT 171) T O ARGUE THAT INCOME FROM ALL DELIVERY BASED TRANSACTIONS HAS TO BE ASSESSE D AS INCOME AS HELD BY THE TRIBUNAL IN THE SAID CASE. WE HAV E CAREFULLY PERUSED THE ORDER OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT (SUPRA), BUT WE FIND THAT THERE IS NO UNIVERSAL FINDING IN THA T CASE THAT ALL DELIVERY BASED TRANSACTIONS HAVE TO BE TREATED AS INVESTM ENT. IT IS PERTINENT TO NOTE THAT THE TRIBUNAL IN CASE OF GOPAL PUROHIT (SUPRA), HAD DECIDED THE CASE FOLLOWING THE DECISION OF TRIBUNAL IN CASE OF SARNATH INFRASTRUCTURE PVT. LTD VS. ACIT (2009) 120 T TJ 216 HOLDING THAT FACTS IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LT D (SUPRA), WERE IDENTICAL. HOWEVER, IT IS NOTED THAT IN SARNATH INFRA STRUCTURE PVT. LTD (SUPRA), THE SHARES SOLD OUT OF INVESTMENT ACCOUNT HAD BE EN HELD THAT 2-3 YEARS AND REVENUE COULD NOT SHOW ANY SHARES SOLD WHICH HAD BEEN PURCHASED DURING THE YEAR OR IN THE IMMEDIATELY PRECED ING YEAR. ITA NO.3626/M/10 A.Y:06-07 10 THEREFORE, ONLY IN RESPECT OF SUCH CASES, THE DECISION IN C ASE OF GOPAL PUROHIT (SUPRA), COULD BE APPLIED. THE HONBLE HIGH COU RT OF DELHI HAD UPHELD THE DECISION OF THE TRIBUNAL IN THE CASE OF GOPA L PUROHIT (SUPRA), ON THE GROUND THAT THERE WAS NO SUBSTANTIAL QUESTION OF LAW INVOLVED. EVEN BEFORE HONBLE HIGH COURT THERE WAS N O QUESTION RAISED THAT ALL DELIVERY BASED TRANSACTIONS HAVE ALWAYS T O BE TREATED AS INVESTMENT ACTIVITY. THUS THE DECISION OF THE TRIBUNAL AS WELL AS THE HONBLE HIGH COURT IN CASE OF GOPAL PUROHIT (SUPRA), CANNO T BE CONSIDERED AS A PRECEDENT FOR THE PROPOSITION THAT ALL D ELIVERY BASED SHARES HAVE TO BE TREATED AS INVESTMENT ACTIVITY. THE ASSESSEE CAN ALSO BE A TRADER IN CASE OF DELIVERY BASED PURCHASES AND SALES, WHICH IS A NORMAL FEATURE OF ANY TRADING ACTIVITY. THEREFOR E, IN OUR VIEW RELIANCE PLACED BY THE LD. AR ON THE DECISION IN THE CAS E OF GOPAL PUROHIT IS MISPLACED. EACH CASE HAS TO BE DECIDED BASED ON ITS OWN FACTS. CONSIDERING THE FACTS OF THIS CASE, WE HOLD THAT T HE SHARE TRANSACTIONS IN FOUR SCRIPS I.E., GIPCL, MTNL, TATA STEE L AND ONGC WERE OF THE NATURE OF TRADING ACTIVITY OF THE ASSESSEE A ND ACCORDINGLY WE CONFIRM THE ORDER OF THE CIT(A) TREATING THE INCOM E FROM SUCH TRANSACTIONS AS BUSINESS INCOME OF THE ASSESSEE. HOWEVER, IF A NY OF THE SALES IN THESE SCRIPS, RELATED TO PURCHASES MADE IN THE EARLIER YEAR, IN WHICH THE SAID PURCHASES HAVE BEEN TREATED AS INVESTME NT, INCOME ITA NO.3626/M/10 A.Y:06-07 11 FROM SUCH SALES WILL BE TREATED AS CAPITAL GAIN. THE AO WILL TAKE NECESSARY ACTION AFTER VERIFICATION. 5. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 28.10.2011. SD/- SD/- (R.S. PADVEKAR) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 28.10.2011. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.