JCIT RG 21(2), MUMBAI V. SONAL P. SHAH, MUMBAI

ITA 4142/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56243 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 29-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 21-05-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Assessee Lawyers: RA JEEV WAGLAY
• Keywords: Business income; Set aside
• Section: 143(3)

Judgement Text

N THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G, MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 4142 /MUM/2010. ASSESSMENT YEAR : 2007-08 ASSTT. COMMISSIONER OF INCOME-TAX, SMT. SONAL P. SHAH, CIRCLE-21(2), MUMBAI. VS. 17/18, SWASTIK BLDG.,4 TH FLOOR, N.S. ROAD NO.1, JVPD SCHEME, VILE PARLE (W), MUMBAI-4 00 056 PAN AFJPK 0816L. APPELLANT. RESPONDENT APPELLANT BY : SHRI A.K. NAYAK. RESPONDENT BY : SHRI RAJEEV WAGLA Y. DATE OF HEARING : 29-11-2011. DATE OF PRONOUNCEMENT : 16-12-2011. O R D E R. PER P.M. JAGTAP, A.M. : THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST TH E ORDER OF LEARNED CIT(APPEALS)-32, MUMBAI DATED 29-03-2010 AND THE SO LITARY ISSUE ARISING OUT OF THE SAME RELATES TO THE DETERMINATION OF HEAD OF IN COME UNDER WHICH THE PROFIT ARISING TO THE ASSESSEE FROM SALE OF SHARES IS CHAR GEABLE TO TAX. 2. THE ASSESSEE IN THE PRESENT CASE IS AN INDIVIDUA L WHO FILED HER RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION ON 31-10-20 07 DECLARING TOTAL INCOME OF RS.1,02,34,762/-. IN THE SAID RETURN, PROFIT ARISIN G FROM SALE OF SHARES WAS DECLARED BY THE ASSESSEE AS SHORT TERM CAPITAL GAIN. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE AO FROM THE DETA ILS OF SHARE TRANSACTIONS CARRIED 2 ITA NO.4142/MUM/2010 ASSESSMENT YEAR:2007-08 OUT BY THE ASSESSEE GIVING RISE TO THE SAID PROFIT, AS GIVEN ON PAGE NOS. 4 TO 12 OF THE ASSESSMENT ORDER, THAT THE QUANTUM OF THE SAID TRANSACTIONS WAS SUBSTANTIAL WITH HIGH FREQUENCY AND LOW HOLDING PERIOD. HE NOTED THA T MOST OF THE SCRIPTS WERE HELD BY THE ASSESSEE FOR LESS THAN 10 DAYS. HE ALSO NOTE D THAT THE SAID TRANSACTIONS WERE CARRIED OUT BY THE ASSESSEE WITH BORROWED FUNDS AND THE ASSESSEE HAD CARRIED OUT BOTH INTRADAY AND DELIVERY BASED TRANSACTIONS. ACCO RDING TO THE AO, THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE IN THE SHA RES AND SECURITIES THUS WERE IN THE NATURE OF TRADE AND THE PROFIT ARISING FROM THE SAI D TRANSACTIONS WAS HER BUSINESS INCOME AND NOT SHORT TERM CAPITAL GAIN. ACCORDINGLY THE PROFIT EARNED BY THE ASSESSEE FROM SHARE TRANSACTIONS WAS BROUGHT TO TAX BY THE AO IN THE HANDS OF THE ASSESSEE UNDER THE HEAD PROFITS & GAINS FROM BUSIN ESS OR PROFESSION IN THE ASSESSMENT COMPLETED U/S 143(3) VIDE AN ORDER DATED 31-12-2009. 3. AGAINST THE ORDER PASSED BY THE AO U/S 143(3), A N APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LEARNED CIT(APPEALS) AND AF TER CONSIDERING THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AS WELL AS THE MATE RIAL AVAILABLE ON RECORD, THE LEARNED CIT(APPEALS) DIRECTED THE AO TO TREAT THE P ROFIT EARNED BY THE ASSESSEE FROM SHARE TRANSACTIONS AS SHORT TERM CAPITAL GAIN FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH NOS. 4.4 TO 4.4.2 OF HIS IMPUGNED ORDER : 4.4 I HAVE CAREFULLY CONSIDERED THE ISSUE. IT IS S EEN FROM THE ASSESSMENT ORDER THAT THE LD. A.O. HAS ANALYSED THE FACTS OF T HE CASE IN GREAT DETAIL TO ESTABLISH THAT THE FREQUENCY AND THE QUANTUM OF TRA NSACTIONS IS FAIRLY HIGH IN THE CASE TO HOLD THAT THE APPELLANT IS ENGAGED IN T HE BUSINESS OF SHARE TRANSACTIONS. THE APPELLANT IS ACTIVELY ENGAGED IN THE LINE OF ACTIVITY, IS ALSO APPARENT FROM THE FACT THAT THE SHE HAS BROKERAGE A ND SPECULATION PROFITS ALSO. THE LD. A.O. HAS ALSO DESCRIBED THE ROLE OF B ORROWED FUNDS IN THE CASE AT PARA 4.7 OF THE ASSESSMENT ORDER. HOWEVER, THE A PPELLANT HAS DESCRIBED HOW MOST OF THE BORROWED MONEY IS UTILIZED IN TRADI NG IN DERIVATIVES, THUS TRYING TO ESTABLISH THAT BORROWED MONEY WAS HARDLY UTILIZED FOR INVESTMENT IN SHARES. CONSIDERING THE OVERALL SITUATION, IT CA N CERTAINLY BE SAID THAT THE 3 ITA NO.4142/MUM/2010 ASSESSMENT YEAR:2007-08 APPELLANTS ATTENTION AND LABOUR IS SUBSTANTIALLY O CCUPIED IN THE ACTIVITY OF DEALING IN SHARES AND DERIVATIVES TO HOLD HER AS A BUSINESS PERSON. 4.4.1 HAVING HELD SO, IT LEAVES US WITH ISSUE OF CO MPARING APPELLANTS CASE WITH THE CASE OF GOPAL PUROHIT. IN GOPAL PUROHITS CASE, THE HONBLE ITAT HAVE HELD ALL DELIVERY BASED TRANSACTIONS TO QUALIF Y AS INVESTMENT, IF THEY ARE REFLECTED IN THE ASSESSEES BOOKS AS INVESTMENTS. I N THIS JUDGMENT, HONBLE ITAT HAVE OVEREMPHASIZED THE ISSUE OF TREATMENT OF PURCHASE OF SHARES IN THE ASSESSEES BOOKS AS INVESTMENT OR TRADING. IT H AS FURTHER EMPHASIZED THAT IF AN ASSESSEE HOLDS HIS DEALING IN SHARES AS INVES TMENT YEAR AFTER YEAR AFTER YEAR, WITHOUT CHANGING THE TREATMENT IN HIS BOOKS, THE A.O. SHOULD NOT HOLD HIS INVESTMENTS AS TRADING TRANSACTIONS. HONBLE IT AT WAS HOLDING CONTRARY VIEW IN A SMALL NUMBER OF CASES HAVING THE POWER OF INTERPRETATION TO THE A.O. BUT CONFIRMATION OF GOPAL PUROHITS CASE BY HO NBLE BOMBAY HIGH COURT (APPEAL NO. 1121 OF 2009) HAS CREATED A SITUA TION WHERE IF AN ASSESSEE CARRIES PURCHASE OF SHARES TO HIS INVESTMENT ACCOUN T AND SELLS THE SAME ONLY AFTER TAKING DELIVERY, AND THE PURCHASES ARE CONSIS TENTLY SHOWN AS INVESTMENT, THEN IRRESPECTIVE OF FREQUENCY AND VOLU ME OF TRANSACTIONS, THE PROFIT WILL HAVE TO BE TAKEN AS SHORT TERM CAPITAL GAINS. 4.4.2 SINCE THE APPELLANTS CASE COMPARES WELL WITH GOPAL PUROHITS CASE ON ALL FACTORS, SUCH AS TREATMENT OF INVESTMENT IN BOO KS, EXISTENCE OF BROKERAGE AND SPECULATION INCOME, ETC., RESPECTIVELY FOLLOWIN G THE JUDGMENT OF BOMBAY HIGH COURT IN GOPAL PUROHITS CASE (APPEAL N O. 1121 OF 2009) THE AMOUNT OF RS.92,27,762/- IS DIRECTED TO BE TREATED AS SHORT-TERM CAPITAL GAIN. THIS GROUND OF APPEAL IS, ACCORDINGLY, ALLOWED. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(APPEALS), THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE ISSUE AS TO WHETHER THE PRO FIT ON SALE OF SHARES CONSTITUTES BUSINESS INCOME OF THE ASSESSEE OR CAPITAL GAINS DE PENDS ON WHETHER THE SAID SHARES WERE PURCHASED AND HELD BY THE ASSESSEE AS INVESTME NT OR STOCK IN TRADE. IN ORDER TO ASCERTAIN AS TO WHETHER THE SHARES WERE PURCHASED B Y THE ASSESSEE AS INVESTMENT OR STOCK IN TRADE, THE MOST RELEVANT ASPECT THAT IS TO BE SEEN IS THE INTENTION OF THE ASSESSEE BEHIND PURCHASING AND HOLDING THE SHARES A ND SUCH INTENTION HAS TO BE 4 ITA NO.4142/MUM/2010 ASSESSMENT YEAR:2007-08 GATHERED FROM THE FACTS OF THE CASE INCLUDING THE C ONDUCT OF THE ASSESSEE. THE TREATMENT GIVEN BY THE ASSESSEE TO THE SHARES IN IT S BOOKS OF ACCOUNT AND ACCEPTANCE OF THE SAME BY THE REVENUE IN THE EARLIE R YEARS IS ONLY ONE OF SUCH ASPECTS WHICH IS ALSO TO BE TAKEN INTO CONSIDERATIO N FOR DECIDING THIS ISSUE. HOWEVER, THAT IS NOT THE ONLY CRITERIA WHICH CAN BE ADOPTED AS A CONCLUSIVE TEST AND IT HAS TO BE TAKEN INTO CONSIDERATION ALONG WITH OT HER CRITERIAS TO ASCERTAIN THE EXACT INTENTION OF THE ASSESSEE TO PURCHASE AND HOLD THE SHARES. IN THE CASE OF SARNATH INFRASTRUCTURE (P).LTD. VS. ACIT REPORTED IN 120 TT J (LUCKNOW) 216, THE COORDINATE BENCH OF THIS TRIBUNAL AFTER TAKING INTO CONSIDERATION THE VARIOUS JUDICIAL PRONOUNCEMENTS ON THIS ISSUE AS WELL AS TH E RELEVANT CIRCULAR ISSUED BY THE BOARD, HAS LAID DOWN THE FOLLOWING PRINCIPLES/CRITE RIAS WHICH CAN BE APPLIED TO THE FACTS OF THE CASE TO FIND OUT WHETHER THE TRANSACTI ONS IN SHARES ARE IN THE NATURE OF TRADE OR ARE MERELY FOR THE INVESTMENT PURPOSES : (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 F ROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER I T IS TREATED AS STOCK-IN- TRADE OR INVESTMENT? WHETHER SHOWN IN OPENING/CLOSI NG STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET? (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREO N. NORMALLY, MONEY IS BORROWED TO PURCHASE GOODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINING. (3) WHAT IS THE FREQUENCY O F SUCH PURCHASES AND DISPOSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND S ALE ARE FREQUENT, OR THERE ARE SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF IN TENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDI NGS MAY SHOW WHETHER THE ASSESSEE IS TRADING OR INVESTING (HIGH TRANSACT IONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HO LDINGS INDICATE INVESTMENT): (4) WHETHER PURCHASE AND SALE IS FOR R EALIZING PROFIT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION I N ITS VALUE. FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTME NT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MER ELY EARN PROFIT ON SALE 5 ITA NO.4142/MUM/2010 ASSESSMENT YEAR:2007-08 AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN E SSENTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKE N IN THE BALANCE SHEET? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD 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 INDIC ATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. (6) HOW THE COMPANY (ASS ESSEE) IS AUTHORIZED IN MEMORANDUM OF ASSOCIATION/ARTICLE OF ASSOCIATION? W HETHER FOR TRADE OR FOR INVESTMENT? IF AUTHORIZED ONLY FOR TRADE, THEN WHET HER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY? AND VICE VERSA. (7) IT IS FOR THE ASSESS EE TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRA DING AND WHAT DISTINCTION HE HAS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TW O TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT FOR SAY, STOCK-IN-TRADE), THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPARENT IS NO T REAL. (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES (OR FOR THAT M ATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FR EQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICIENT TO SAY T HAT ASSESSEE WAS HOLDING THE SHARES FOR THE ITEMS IN QUESTION) FOR INVESTMENT. ( 9) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS COMPLYING WITH THEM. WHETHE R IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUI REMENTS, IF IT 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 BEGIN NING OR WHEN PURCHASES WERE MADE? (10) IT IS PERMISSIBLE AS PER CBDTS CIR CULAR NO. 4 OF 2007 OF 15 TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLI OS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT MAINTAINING SEPARA TE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE I S 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 CONC LUSION BUT THE CUMULATIVE EFFECT OF SEVERAL FACTORS HAS TO BE SEEN. 7. A PERUSAL OF THE ORDERS PASSED BY THE LOWER AUTH ORITIES IN THE PRESENT CASE SHOWS THAT NEITHER THE AO NOR THE LEARNED CIT(APPEA LS) HAS DONE THE EXERCISE TO FIND OUT THE EXACT NATURE OF SHARE TRANSACTIONS CAR RIED ON BY THE ASSESSEE IN A PROPER MANNER BY APPLYING THE RELEVANT CRITERIAS/PRINCIPLE S TO THE FACTS OF THE CASE. WE, THEREFORE, DEEM IT FIT AND PROPER AND IN THE INTERE ST OF JUSTICE TO SET ASIDE THE ORDERS 6 ITA NO.4142/MUM/2010 ASSESSMENT YEAR:2007-08 OF THE AUTHORITIES BELOW ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE SAME AFRESH AFTER AP PLYING THE PRINCIPLES/CRITERIAS LAID DOWN BY THE LUCKNOW BENCH OF THE TRIBUNAL IN THE CA SE OF SARNATH INFRASTRUCTURE (SUPRA) TO THE FACTS OF THE CASE. NEEDLESS TO OBSER VE THAT THE AO SHALL AFFORD PROPER AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS TREA TED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF DEC.,2011. SD/- SD/ - (V. DURGA RAO) (P.M. J AGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED : 16 TH DEC., 2011. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, G-BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI. WAKODE