DCIT 4(2), MUMBAI V. SMK SHARE & STOCK P. LTD, MUMBAI

ITA 4591/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6220 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 29-11-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 06-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAVI KIRAN
• Keywords: Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER. AND SMT ASHA VIJAY RAGHAVAN, JUDICIAL MEMBER ITA NO.4591/MUM./2009 (ASSESSMENT YEAR : 2006 07 ) DATE OF HEARING: 30.8.2010 DY. COMMISSIONER OF INCOME TAX 4 (2) AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400 020 .. APPELLANT V/S M/S. SMK SHARES & STOCK BROKING PVT. LTD. ,244, P.J. TOWER, DALAL STREET, FORT, MUMBAI 400 001 PAN AABCS4531Q .... RESPONDENT REVENUE BY : SHRI RAVI KIRAN ASSESSEE BY : SHRI SATISH MODY O R D E R PER S.V. MEHROTRA, A.M. THIS APPEAL BY THE REVENUE, IS DIRECTED AGAINST THE IMPUGNED ORDER DATED 6 TH OCTOBER, 2009, PASSED BY THE LEARNED CIT(A) IV, MUMBAI, FOR ASSESSMENT YEAR 20 06 07, ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN TREATING INCOME FROM SH ARE TRADING AS INVESTMENT INCOME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN IGNORING THE FACTS THAT DUE TO HIGH FREQUENCY OF TRANSACTION, THE PROFITS FROM SUCH TRA NSACTION SHOULD BE TREATED AS BUSINESS INCOME. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LW, THE LEARNED CIT(A) ERRED NOT IN APPRECIATING THE FACT T HAT THE ASSESSEE HAS IN PREVIOUS YEAR ALSO DECLARED INCOME FROM SIMILAR TRANSACTIONS AS BUSINESS INCOME. ITA NO. 4591/MUM./2009 SMK SHARES & STOCK BROKING P. L. 2 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE IMPUGNED ORDER OF THE LD.CIT(A) IS CONTRARY TO LAW AND CONSEQUENTLY MERITS TO BE SET ASIDE AND THAT THE OR DER OF THE ASSESSING OFFICER BE RESTORED. 2. BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE COMP ANY, A MEMBER OF BOMBAY STOCK EXCHANGE, IN THE RELEVANT ASSESSMENT Y EAR, FILED RETURN OF INCOME DECLARING TOTAL INCOME AT RS.1,02,53,606/-/- WHICH WAS DULY ACCOMPANIED WITH TAX AUDIT REPORT UNDER SECTION 44A B OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ). THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD DISCLOSED SHORT TERM CAPITAL GAINS DUR ING THE YEAR AT ` 42,10,565 AND LONG TERM CAPITAL GAINS AT ` 2,10,87,138. HE NOTED THAT THE ASSESSEE HAD PURCHASED SHARES IN SMALL LOTS AND ENT ERED INTO MORE THAN 816 TRANSACTIONS DURING THE YEAR. THUS, THE ASSESSEE HA D CONSISTENTLY PURCHASED AND SOLD THE SHARES DURING THE YEAR. CONSIDERING TH E VOLUME AND FREQUENCY OF SALE AND PURCHASE, THE ASSESSING OFFICER CONCLUD ED THAT THE ASSESSEE HAD NO INTENTION TO HOLD THE SHARES. HE FURTHER OBSERVE D THAT THE ASSESSEE IS A BROKING FIRM AND, THEREFORE, THE SHARE TRANSACTIONS RELATE TO THE BUSINESS OF THE ASSESSEE. HE, THUS, CONCLUDED THAT INCOME RETUR NED AS SHORT TERM CAPITAL GAINS WAS ACTUALLY BUSINESS INCOME. 3. THE LEARNED CIT (A) FOLLOWING APPEAL ORDER FOR THE ASSESSMENT YEAR 2005-06 DATED 18.11.2008 DIRECTED THE A.O. TO REAT THE AMOUNT OF RS. 42,10,565, AS SHORT TERM CAPITAL GAINS. 4. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(A) TH E DEPARTMENT IS IN FURTHER APPEAL BEFORE THE TRIBUNAL 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS AND THE CASE LAWS PLACED BEFORE US. WE FIND THAT THE TRIBUN AL HAS DECIDED THE ISSUE AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE IN THE ASSESSEES CASE FOR THE ASSESSMENT YEAR 2005-06 IN ITA NO. 799/MUM/2009 VIDE ITS ORDER 24 TH NOVEMBER, 2010 BY OBSERVING IN PARAS 12 TO 14 AS UNDER: 12. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED T HE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. THERE IS NO ITA NO. 4591/MUM./2009 SMK SHARES & STOCK BROKING P. L. 3 DISPUTE ON FACTS PARTICULARLY WITH REGARD TO INCOME RETURNED AS SHORT TERM CAPITAL GAINS TO THE EXTENT OF ` 10,00,000 BEING OUT OF OPENING INVESTMENT. BY NOW, THE ISSUE THAT A PERSON CAN BE BOTH INVESTOR AS WELL AS TRADER IN SHARES IS NO MORE RES INTEGRA. IN THIS REGARD D RAFT INSTRUCTION NO.2005, UNDER THE SUBJECT DISTINCTION BETWEEN SHARES HELD A STOCK IN TRADE AND SHARES HELD IN INVESTMENT TESTS FOR , READS AS UNDER: THE CENTRAL BOARD OF DIRECT TAXES IN ITS INSTRUCTIO N NO.1827 DATED 31.8.1989 HAD LAID DOWN CERTAIN TESTS TO DISTINGUIS H BETWEEN SHARES HELD AS STOCKINTRADE AND SHARES HELD AS INVESTMEN T. THE FOLLOWING SUPPLEMENTARY INSTRUCTIONS IN THIS REGARD WILL PROV IDE FURTHER GUIDELINES FOR DETERMINING WHETHER A PERSON IS A TR ADER IN STOCKS OR AN INVESTOR IN STOCKS. I. WHETHER THE PURCHASE AND SALE OF SECURITIES WAS ALL IED TO HIS USUAL TRADE OR BUSINESS WAS INCIDENTAL TO IT OR WAS AN OCCASIONAL INDEPENDENT ACTIVITY; II. WHETHER THE PURCHASE IS MADE SOLELY WITH THE INTENT ION TO RESALE AT A PROFIT OR FOR LONG TERM APPRECIATION AND / OR FOR EARNING DIVIDENDS AND INTEREST; III. WHETHER SCALE OF ACTIVITY IS SUBSTANTIAL; IV. WHETHER TRANSACTIONS WERE ENTERED INTO CONTINUOUSLY AND REGULARLY DURING THE ASSESSMENT YEAR; V. WHETHER PURCHASES ARE MADE OUT OF OWN FUNDS OR BORR OWINGS; VI. TYPICAL HOLDING PERIOD FOR SECURITIES BROUGHT AND S OLD; VII. RATIO OF SALES TO PURCHASES AND HOLDING; VIII. THE TIME DEVOTED TO THE ACTIVITY AND THE EXTENT TO WHICH IT IS THE MEANS OF LIVELIHOOD; IX. THE CHARACTERIZATION OF SECURITIES IN THE BOOKS OF ACCOUNT AND IN BALANCE SHEET AS STOCK IN TRADE OR INVESTMENTS; X. WHETHER THE SECURITIES PURCHASED OR SOLD ARE LISTED OR UNLISTED; XI. WHETHER INVESTMENT IS IN SISTER / RELATED CONCERNS OR INDEPENDENT COMPANIES; XII. WHETHER TRANSACTION IS BY PROMOTERS OF THE COMPANY; XIII. TOTAL NUMBER OF STOCKS DEALT IN; AND XIV. WHETHER MONEY HAS BEEN PAID OR RECEIVED OR WHETHER THESE ARE ONLY BOOK ENTRIES. 13. CBDT, VIDE CIRCULAR NO.4/2007 DATED 15 TH JUNE 2007, HAS OBSERVED THAT WHETHER A PARTICULAR HOLDING OF SHARE S IS BY WAY OF INVESTMENT OR FORM PART OF THE STOCK IN TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS HIS SHARES AND HE SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION T O PRODUCE EVIDENCE FROM HIS RECORDS AS TO WHETHER HE IS MAINTAINING AN Y STOCK-IN-TRADE OR HOLDING THE SHARES BY WAY OF INVESTMENT. IN THE PRE SENT CASE, IT IS NOT DISPUTED THAT THE ASSESSEE HAD MAINTAINED THIS DIST INCTION IN ITS RECORDS. IT IS TRUE THAT VOLUME OF TRANSACTION IS A N IMPORTANT INDICATOR OF THE INTENTION OF THE ASSESSEE WHETHER TO DEAL IN SHARES AS TRADING ASSET OR TO HOLD THE SHARES AS INVESTOR BUT CERTAIN LY NOT THE SOLE CRITERION. IN OUR CONSIDERED OPINION, THE ASSESSIN G OFFICERS CONCLUSION ITA NO. 4591/MUM./2009 SMK SHARES & STOCK BROKING P. L. 4 THAT SINCE SALE AND PURCHASE HAD BEEN DETERMINED BY THE VOLATILITY IN THE MARKET, THE SAME IS AGAINST THE BASIC FEATURE O F INVESTOR, IS NOT BASED ON SOUND RATIONAL REASONING. A PRUDENT INVEST OR ALWAYS KEEPS A WATCH ON THE MARKET TRENDS AND, THEREFORE, IS NOT B ARRED UNDER LAW FROM LIQUIDATING HIS INVESTMENTS IN SHARES. THE LAW ITSELF HAS RECOGNISED THIS FACT BY TAXING THESE TRANSACTIONS U NDER THE HEAD SHORT TERM CAPITAL GAINS . IF THE ASSESSING OFFICERS REASONING IS ACCEPTED, THEN IT WOULD BE AGAINST THE LEGISLATIVE INTENT IT SELF. IT IS ALWAYS A VEXED QUESTION TO FIND OUT AS TO WHETHER THE ASSESS EE WAS HOLDING THE SHARES AS STOCK IN TRADE OR UNDER AN INVESTMENT POR TFOLIO PARTICULARLY BECAUSE ONE HAS TO INFER THE INTENTION OF THE ASSES SEE WHICH IS PRIMARILY WITHIN HIS OWN KNOWLEDGE. THE CONDUCT OF THE ASSESSEE ASSUMES SIGNIFICANCE IN THIS REGARD. IT HAS BEEN LA ID DOWN IN VARIOUS JUDICIAL PRONOUNCEMENTS THAT THERE IS NO ACID TEST TO DECIDE THIS ISSUE. IN THE PRESENT CASE, WE FIND THAT THE ASSESSING OF FICER WHILE PASSING ASSESSMENT ORDER UNDER SECTION 143(3) FOR ASSESSMEN T YEARS 2001 02 AND 2004 05, DID NOT DISPUTE THE ASSESSEES CLAIM REGARDING PROFIT ON SALE OF INVESTMENT. ONE MORE IMPORTANT ASPECT IS TH AT THE ASSESSEE HAD NOT BORROWED ANY FUND FOR INVESTMENT IN SHARES AND THIS FACT CANNOT BE LOST SIGHT OFF WHILE DECIDING THE TRUE IN TENTION OF THE ASSESSEE. 14. LEARNED DEPARTMENTAL REPRESENTATIVE POINTED OUT THA T IN ASSESSMENT YEAR 2001 02, THE DIVIDEND WAS ` 4,90,957 AS AGAINST PROFIT ON SALE OF INVESTMENT OF ` 7,67,976 AND, THEREFORE, THERE WAS NO REASON TO DISPUTE THE ASSESSEES CLAIM. HOWEVER, IN ASSESSMENT YEAR 2004 05, WE FIND THAT THE DIVIDEND WAS ONLY ` 3,06,219 AS AGAINST THE PROFIT ON SALE OF INVESTMENT OF ` 58,00,769. THUS, THIS OBJECTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE DOES NOT HOLD G OOD. IT IS TRUE THAT PRINCIPLES OF RES JUDICATA DO NOT STRICTLY APP LY TO INCOME TAX PROCEEDINGS BUT AT THE SAME TIME IT IS A WELL SETTL ED LAW THAT THE PRINCIPLES OF CONSISTENCY SHOULD NOT BE IGNORED. TH E UNIFORMITY IN TREATMENT AND CONSISTENCY UNDER THE SAME FACTS AND CIRCUMSTANCES IS ONE OF THE FUNDAMENTALS OF THE JUDICIAL PRINCIPLES WHICH CANNOT BE BRUSHED ASIDE WITHOUT PROPER REASON. WHEN APPROXIMA TELY ` 10,00,000 WAS OUT OF THE EARLIER INVESTMENT THEN IF THE MODUS OPERANDI OF THE ASSESSEE REMAINED THE SAME IN REGAR D TO OTHER SHARES PURCHASED DURING THE YEAR, THEN THE ASSESSEES CLAI M COULD NOT BE NEGATED ONLY ON THE BASIS OF FREQUENCY OF THE TRANS ACTION. THIS IS A CASE FOR ASSESSMENT YEAR 2005 06 AND POSSIBLY MAJOR CONSIDERATION WHICH WEIGHED THE ASSESSING OFFICERS CONCLUSION WA S ON ACCOUNT OF THE INTRODUCTION OF SECURITIES TRANSACTIONS TAX BY FINA NCE ACT, 2004, CONSEQUENT TO WHICH THE SHORT TERM CAPITAL GAINS WE RE TAXED AT A CONCESSIONAL RATE OF TAX I.E., 10%. FURTHER, SINCE THERE WAS NO CHANGE IN THE MODUS OPERANDI OF THE ASSESSEE FROM EARLIER YEAR, THERE WAS NO REASON TO DEVIATE FROM EARLIER YEARS CONCLUSIONS. THE ASSESSEE HAS MAINTAINED SEPARATE INVESTMENT PORTFOLIO AND ALL TH E SALES OUT OF THIS PORTFOLIO ARE IDENTIFIABLE TO PURCHASES MADE IN THE SAID PORTFOLIO. ASSESSEES CLAIM REGARDING LONG TERM CAPITAL GAIN H AS NOT BEEN DISTURBED BY THE ASSESSING OFFICER AND, THUS, ASSES SING OFFICER HIMSELF ITA NO. 4591/MUM./2009 SMK SHARES & STOCK BROKING P. L. 5 HAS ACCEPTED THAT THE ASSESSEE WAS INVESTOR IN SHAR ES ALSO. ALL THESE FACTORS OUTWEIGH THE TEST OF FREQUENCY OF TRANSACTI ON BEING UNDERTAKEN BY THE ASSESSEE IN DECIDING THE TRUE INTENTION OF A SSESSEE. WE, THEREFORE, CONFIRM THE ORDER OF THE LEARNED CIT(A) . 6. FOLLOWING THE ORDER OF THE TRIBUNAL IN THE ASSES SEES OWN CASE FOR THE PRECEDING ASSESSMENT YEAR, WE UPHOLD THE ORDER OF T HE LEARNED CIT(A). 7. IN THE RESULT, REVENUES APPEAL STANDS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF NOV., 2010. SD. SD/-SD. ASHA VIJAY RAGHAVAN JUDICIAL MEMBER SD. SD/- S.V. MEHROTRA ACCOUNTANT MEMBER MUMBAI, DATED: 30 TH NOV. 2010 KN COPY TO : (1) THE ASSESSEE (2) THE RESPONDENT (3) THE CIT(A)-IV, MUMBAI. (4) THE CIT-4, MUMBAI (5) THE DR, I BENCH, ITAT, MUMBAI TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI