HEMCHAND LALJI GALA ITA NOS. 4525 & 4526/MUM/ 2009 (ASST YEARS 2005-06 AND 06-07) IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI H BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI RAJENDRA SINGH , AM & SHRI VIJAY PAL R AO, JM ITA NOS. 4525 & 4526/MUM/ 2009 (ASST YEARS 2005-06 AND 06-07) THE ADDL. COMMR OF INCOME TAX PALGHAR DIST, THANE VS HEMCHAND LALJI GALA C/O BHARAT CHEMICALS L-30 MIDC TARAPUR BOISAR TAL. PALGHAR, DIST THANE (APPLICANT) (RESPONDENT) PAN NO. ABUPG3062D ASSESSEE BY SH SANJAYU R PARIKH REVENUE BY SH V V SHASTRI DT.OF HEARING 22 ND FEB 2012 DT OF PRONOUNCEMENT 19 TH , MARCH, 2012 ORDER PER VIJAY PAL RAO, JM THESE APPEAL BY THE REVENUE ARE DIRECTED AGAINST T WO SEPARATE ORDERS OF THE CIT(A) BOTH DATED 4.5.2009 FOR THE AYS 2005-06 AND 2006-07 RESPECTIVELY. 2 THE REVENUE HAS RAISED COMMON GROUND IN THESE APP EALS; THEREFORE, FOR THE SAKE OF CONVENIENCE, WE REPRODUCE THE GROUND FOR TH E AY 2005-06 AS UNDER: 1 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN THE LAW, THE ID. CIT((A)-LL, THANE ERRED IN TREATING THE SHORT TERM CAPITAL GAIN ON SALE OF SHARES AND NOT AS INCOME FROM BUSINESS & PROFESSION A S ASSESSED BY THE ASSESSING OFFICER. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN THE LAW, THE ID. CIT((A)-LL, THANE ERRED IN TREATING THE DIV IDEND INCOME RECEIVED FROM PORTFOLIO MANAGEMENT SCHEME AND NOT AS INCOME FROM B USINESS & PROFESSION AS ASSESSED BY THE ASSESSING OFFICER. HEMCHAND LALJI GALA ITA NOS. 4525 & 4526/MUM/ 2009 (ASST YEARS 2005-06 AND 06-07) 2 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN THE LAW, THE ID. CIT((A)-LI, THANE ERRED IN TREATING THE LOSS FROM F & 0 AS BUSINESS LOSS AND NOT AS A SPECULATION LOSS. 4. THE APPELLANT PRAYS THAT THE ORDER OF THE ID. CI T(A)-IL, THANE BE CANCELLED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 3 GROUND NOS.1 & 2 REGARDING THE SHORT TERM CAPITAL GAINS TREATED AS INCOME FROM BUSINESS AND PROFESSION. THE ASSESSEE HAS SH OWN SHORT TERM CAPITAL LOSS AS WELL AS LONG TERM CAPITAL GAINS. THE ASSESSING OFFICER TREATED THE SAME AS BUSINESS INCOME WHILE COMPLETING THE ASSESSMENT FOR THE YEAR S UNDER CONSIDERATION. 3.1 ON APPEAL, THE CIT(A) HAS REVERSED THE ORDER O F THE ASSESSING OFFICER AND ALLOWED THE CLAIM OF THE ASSESSEE AS CAPITAL GAIN O N SALE AND PURCHASE OF SHARES. 4 BEFORE US, THE REVENUE HAS RAISED THE ISSUE REGAR DING SHORT TERM CAPITAL LOSS ARISING FROM SALES AND PURCHASE OF SHARES WHICH WAS TREATED AS INCOME FROM BUSINESS AND PROFESSION; BUT IT WAS HELD BY THE CIT (A) AS CAPITAL GAIN. THEREFORE, THERE IS NO DISPUTE BEFORE US SO FAR AS THE LONG TE RM CAPITAL GAIN ON SALE AND PURCHASE OF SHARES. 5 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF T HE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD DR HAS SUB MITTED THAT THE CIT(A) HAS NOT DISCUSSED ANYTHING TO SHOW THAT THE TRANSACTIONS OF SALE AND PURCHASE OF SHARES ARE IN THE NATURE OF INVESTMENT; BUT ALLOWED THE CLAIM OF THE ASSESSEE ONLY BY FOLLOWING THE CBDT CIRCULAR. THE LD DR HAS REFERRED THE ASSES SMENT ORDER AND SUBMITTED THAT THE ASSESSEE IS ENGAGED IN REGULAR PURCHASE AND SAL E OF SHARES AND ALSO DOING TRANSACTIONS OF FUTURE AND OPTION WHICH CLEARLY SHO W THAT THE ASSESSEES ACTIVITY OF SALE AND PURCHASE OF SHARE IS IN THE NATURE OF TRAD ING AND NOT AS INVESTMENT. THE LD DR HAS FURTHER SUBMITTED THAT IN A NUMBER OF INSTA NCES, THE ASSESSEE HAS PURCHASED HEMCHAND LALJI GALA ITA NOS. 4525 & 4526/MUM/ 2009 (ASST YEARS 2005-06 AND 06-07) 3 AND SOLD THE SHARES ON THE SAME DAY. THE VOLUME OF TRANSACTIONS IS ALSO HUGE; THEREFORE, THE MOTIVE OF THE ASSESSEE IS TO EARN PROFIT AT THE EARLIEST POSSIBLE INCREASE IN THE VALUE IN PURCHASE OF SHARES WHICH C ANNOT BE HELD AS INVESTMENT IN NATURE. HE HAS RELIED UPON THE ORDER OF THE TRIBUN AL IN THE CASE OF JAYSHREE PRADIP SHAH V ACIT IN ITA 3608/MUM/2007 DATED 24.2.2010. H E HAS ALSO SUBMITTED THAT THE ASSESSEE HAS NOT FILED THE TRANSACTION WISE DETAILS TO SHOW THE HOLDING PERIOD OF EACH AND EVERY TRANSACTION TO DETERMINE THE NATURE OF THE TRANSACTION. 5.1 ON THE OTHER HAND, THE LD AR HAS SUBMITTED THAT THE BOARDS GUIDELINES ISSUED VIDE CIRCULAR NO.4/2007 DT 15.6.2007 ARE TO BE CONS IDERED. THE BOARD HAS ACCEPTED THAT THE ASSESSEE CAN HAVE TWO PORTFOLIOS, VIZ (I) INVESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSE TS AND (II) TRADING PORTFOLIO COMPRISING OF STOCK AND TRADE, WHICH ARE TO BE TREA TED AS TRADING ASSETS. HOWEVER, THE TREATMENT GIVEN IN THE BOOKS OF ACCOUNT ALONE I S NOT ANY CONCLUSIVE EVIDENCE/PROOF TO DECIDE SUCH TRANSACTION AS CAPIT AL GAINS OR BUSINESS INCOME, HE HAS RELIED UPON VARIOUS ORDERS OF THE TRIBUNAL IN SUPPORT OF HIS CONTENTION. THE LD AR HAS SUPPORTED THE ORDER OF THE CIT(A). 6 WE HAVE CONSIDERED THE RIVAL CONTENTION AS WELL A S THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS THOUGH RELIED UPON VARIOUS DECISIONS INCLUDING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL. HOWEVER, IT IS SETTLED PROPOSITION OF LAW THAT IN THE MATTER OF DETERMINING THE NATURE OF TRANSACT ION IN PURCHASE AND SALE OF SHARES HAS TO BE DECIDED ON THE BASIS OF THE FACT OF EACH CASE AND THE PRECEDENT/RATIO OF THE DECISION CAN BE APPLIED ONLY WHEN THE FACTS OF THE CASE ARE SIMILAR IN NATURE. THE ASSESSEE THOUGH PRODUCED SOME DETAILS BUT IN OU R VIEW, THE DETAILS ARE NOT COMPLETE TO DECIDE THE ISSUES BECAUSE THE ASSESSEE HAS NOT FURNISHED THE HOLDING HEMCHAND LALJI GALA ITA NOS. 4525 & 4526/MUM/ 2009 (ASST YEARS 2005-06 AND 06-07) 4 PERIOD OF EACH TRANSACTION. IN THE ABSENCE OF HOLDI NG PERIOD DECIDING THE QUESTION OF NATURE OF TRANSACTION AS INVESTMENT OR TRADING I S NOT POSSIBLE. THE CIT(A) HAS ADJUDICATED THE ISSUE ONLY ON THE BASIS OF SOME PRI NCIPLE WITHOUT GOING INTO THE FACTS OF THE CASE IN 5 TO 5.1 AS UNDER: 5. APPELLANT IS A CHEMICAL ENGINEER AND WORKING IN CAPACITY OF PARTNER IN M/S VALIANT CHEMICAL CORPORATION. APPELLANT IS PARTNER IN FIRM, HE LOOKS AFTER DAY TO DAY BUSINESS ACTIVITY OF THE FIRM. 5.1 APPELLANT HAS MADE INVESTMENT IN SHARES SINCE LA ST 25 YEARS. APPELLANT HAS MADE INVESTME3NT IN SHARES THROUGH PORTFOLIO MAN AGERS UNDER VARIOUS SCHEME OF INVESTMENT. PMS IS ONLY INVESTMENT IN SHA RES & SECURITIES WITH EXPERTISE KNOWLEDGE OF PORTFOLIO MANAGERS. PMS IS JU ST LIKE MUTUAL FUND WHEREAS MUTUAL FUND, HAS A SPECIFIC EXEMPTION FOR ITS INCOME U/S 10(23DS). HENCE SHORT TERM CAPITAL GAIN FROM PMS HAS TO BE TREAT ED AS SHORT TERM CAPITAL GAIN AND NOT AS BUSINESS INCOME. 6 IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CAS E, WE ARE OF THE CONSIDERED OPINION THAT THIS ISSUE REQUIRES PROPER EXAMINATION OF THE FACTS AT THE LEVEL OF THE ASSESSING OFFICER AND THE ASSESSEE IS DIRECTED TO F ILE THE COMPLETE DETAILS INCLUDING THE HOLDING PERIOD OF EACH AND EVERY TRANSACTION BE FORE THE ASSESSING OFFICER. ACCORDINGLY, THIS ISSUE IS REMANDED TO THE RECORD O F THE ASSESSING OFFICER FOR FRESH EXAMINATION AND VERIFICATION OF THE FACTS AND THEN DECIDE THE SAME AS PER LAW. 7 THIRD ISSUE IS REGARDING TREATING THE LOSS ARISI NG FROM F&O AS SPECULATION LOSS 8 WE HAVE CONSIDERED THE RIVAL CONTENTION AND RELEV ANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT THIS ISSUE IS DECIDED AGAIN ST THE ASSESSEE BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F CIT VS BHARAT R RUIA (HUF) REPORTED IN 241 CTR 01 (BOM). THE HONBLE HIGH COUR T HAS HELD IN PARA AS UNDER: 33. THUS, THE FUTURES CONTRACTS BEING ARTICLES OF T RADE AND COMMERCE WHICH ARE LEGALLY PERMITTED TO BE TRADED ON THE STOCK EXCH ANGE, THE TRANSACTIONS IN FUTURES WOULD BE TRANSACTIONS IN A COMMODITY AS CON TEMPLATED UNDER S. 43(5) OF THE ACT. ORDINARILY A TRANSACTION IN A COMMODITY REL ATES TO PURCHASE/SALE HEMCHAND LALJI GALA ITA NOS. 4525 & 4526/MUM/ 2009 (ASST YEARS 2005-06 AND 06-07) 5 OF AN ASSET WHICH IS TANGIBLE AND WHICH IS CAPABLE OF BEING DELIVERED. HOWEVER, S. 18A OF THE 1956 ACT INSERTED W.E.F. 22ND FEB., 2000 PROVIDES THAT NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE, CONTRACTS IN DERIVATIVE (LIKE FUTURES CONTRACT S) SHALL BE LEGAL AND VALID IF SUCH CONTRACTS ARE TRADED ON A RECOGNIZED STOCK EXCHAN GE AND SETTLED ON THE CLEARING HOUSE OF A RECOGNIZED STOCK EXCHANGE I N ACCORDANCE WITH THE RULES AND BYE-LAWS OF SUCH STOCK EXCHANGE. THUS, BY OPERATION OF LAW, THE TRANSACTIONS IN FUTURES ARE MADE LEGAL AND VALID EVE N IF THE UNDERLYING SECURITIES PERMITTED TO BE PURCHASED/SOLD UNDER THE FUTURES CONTRACTS ARE NOT TANGIBLE AND INCAPABLE OF ACTUAL DELIVERY, PROVIDED SUCH TRANSACTIONS ARE TRADED ON A RECOGNIZED STOCK EXCHANGE AND SETTLED O N THE CLEARING HOUSE OF A RECOGNIZED STOCK EXCHANGE. MOREOVER, S. 43(5) OF TH E ACT PROVIDES THAT A TRANSACTION FOR PURCHASE/SALE OF ANY COMMODITY WOULD BE A SPECULATIVE TRANSACTION IF IT IS SETTLED OTHERWISE THAN BY ACTU AL DELIVERY. FOR THE PURPOSES OF S. 43(5), IT IS NOT NECESSARY THAT THE COMMODITY AGRE ED TO BE PURCHASED OR SOLD MUST BE CAPABLE OF ACTUAL DELIVERY. THEREFORE, FUTURES CONTRACTS FOR PURCHASE/SALE OF AN UNDERLYING SECURITY PERMITTED TO BE TRADED ON THE STOCK EXCHANGE AND SETTLED OTHERWISE THAN BY ACTUAL DELIVE RY WOULD BE SPECULATIVE TRANSACTIONS UNDER S. 43(5) OF THE ACT. 34. IT IS CONTENDED THAT THE EXPRESSION COMMODITY DOES NOT INCLUDE STOCKS AND SHARES, HOWEVER, FOR THE PURPOSES OF S. 43(5), THE EXPRESSION COMMODITY HAS BEEN EXPANDED TO INCLUDE STOCKS AND SHARES AND SINCE TRANSACTIONS IN DERIVATIVES ARE NOT SPECIFICALLY INCLUDED IN S. 43(5 ), THE SAME WOULD FALL OUTSIDE THE PURVIEW OF S. 43(5). WE SEE NO MERIT IN THE ABOV E CONTENTIONS. THE EXPRESSION COMMODITY WOULD COVER ALL ARTICLES OF TR ADE INCLUDING STOCKS AND SHARES. EVEN UNDER S. 43(5), THE EXPRESSION COMMODIT Y IS NOT EXPANDED TO INCLUDE STOCKS AND SHARES. IN FACT, USE OF COMMA IN BETWEEN THE WORD COMMODITY AND THE WORDS INCLUDING STOCKS AND SHA RES IN S. 43(5) MAKES IT CLEAR THAT TRANSACTIONS FOR PURCHASE OF ANY COMMODITY W OULD INCLUDE TRANSACTION FOR PURCHASE OR SALE OF STOCKS AND SHARES . IN OTHER WORDS, S. 43(5) DOES NOT SEEK TO EXPAND THE SCOPE OF EXPRESSION COM MODITY BUT MERELY EMPHASIZES THAT THE TRANSACTION IN COMMODITY INCLUD ES TRANSACTIONS IN STOCKS AND SHARES. THEREFORE, TRANSACTIONS IN FUTURES CONTRACTS LIKE TRANSACTIONS IN STOCKS AND SHARES WHEN SETTLED OTHERWISE THAN BY AC TUAL DELIVERY WOULD BE SPECULATIVE TRANSACTIONS UNDER S. 43(5) OF THE ACT. 39. IN THE RESULT, WE HOLD THAT THE EXCHANGE TRADED D ERIVATIVE TRANSACTIONS CARRIED ON BY THE ASSESSEE DURING ASST. YR. 2003-04 ARE SPECULATIVE TRANSACTIONS COVERED UNDER S. 43(5) OF THE ACT AND TH E LOSS INCURRED IN THOSE TRANSACTIONS IS LIABLE TO BE TREATED AS SPECULATIVE LOSS AND NOT BUSINESS LOSS. WE FURTHER HOLD THAT CL. (D) INSERTED TO THE PROVISO TO S. 43(5) W.E.F. 1ST APRIL, 2006 IS PROSPECTIVE IN NATURE AND THE TRIBUNAL WAS IN ERROR IN HOLDING THAT CL. (D) TO THE PROVISO TO S. 43 (5) APPLIED RETROSPECTIVE LY SO AS TO APPLY TO THE TRANSACTIONS CARRIED ON BY THE ASSESSEE DURING ASST. YR. 2003-04. HEMCHAND LALJI GALA ITA NOS. 4525 & 4526/MUM/ 2009 (ASST YEARS 2005-06 AND 06-07) 6 9 ACCORDINGLY, RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT (SUPRA), WE DECIDE THIS ISSUE AGAINST TH E ASSESSEE AND IN FAVOUR OF THE REVENUE. 10 IN THE RESULT, THE APPEALS OF THE REVENUE ARE PA RTLY ALLOWED AND PARTLY FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON THIS 19 TH DAY OF MAR 2012 SD/ S D/- ( RAJENDRA SINGH ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 19 TH , MAR 2012 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI