ADD. CIT RG 15(1), MUMBAI V. E-CAP PARTNERS, MUMBAI

ITA 4785/MUM/2009

• Counselvise Citation: 478519914 RSA 2009
• Duration Of Justice: 4 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 23-12-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 18-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P SINGH
• Keywords: Capital asset; Business income; Rule of consistency; Transactions in derivatives; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUM BAI . . , , BEFORE SHRI R. C. SHARMA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ./ I.T.A. NO. 4785/MUM/2009 ( / ASSESSMENT YEAR: 2005-06) DY. CIT-15(1), ROOM NO.104, MATRU MANDIR, 1 ST FLOOR, TARDEO ROAD, MUMBAI-400 007 / VS. M/S. E-CAP PARTNERS 104, P. J. TOWERS, DALAL STREET, FORT, MUMBAI-400 023 ./ ./PAN/GIR NO. AABFE 3734 E ( ! /APPELLANT ) : ( '#! / RESPONDENT ) ! $ % / APPELLANT BY : SHRI O. P. SINGH '#! $ % / RESPONDENT BY : SHRI RAJAN R. VORA & '( $ ) * / DATE OF HEARING : 07.01.2014 +,-. $ ) * / DATE OF PRONOUNCEMENT : 15.01.2014 / O R D E R PER R. C. SHARMA, A. M.: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER BY THE LD. CIT(A)-XV, MUMBAI DATED 18.06.2009, IN THE MATTER OF ORDER PAS SED U/S.143(3) OF THE INCOME TAX ACT, 1961 FOR THE ASSESSMENT YEAR (A.Y.) 2005-06. 2. FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE REVENUE : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN LAW IN DELETING THE ADDITION REGARDING THE TREATMEN T OF BUSINESS INCOME AT RS.1,68,49,470/- SHOWN AS LONG TERM AND SHORT TERM CAPITAL GAINS IGNORING THE FACTS AVAILABLE ON RECORD IN FAVOUR TRADING THE SHA RES INVOLVING LARGE VOLUME OF TRANSACTIONS AND WITH A SHORT PERIOD. 2 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS 2. THE APPELLANT CRAVES LEAVE TOAD, TO ALTER, TO AM END AND TO MODIFY ANY OF THE GROUND OF APPEAL. 3. RIVAL CONTENTIONS HAVING HEARD AND PERUSED THE M ATERIAL PLACED ON RECORD. FACTS IN BRIEF ARE THAT THE ASSESSEE WAS ENGAGED IN TRADING OF SHARES AS WELL AS INVESTMENT IN SHARES. TWO SEPARATE ACCOUNTS WERE MAINTAINED IN RE SPECT OF SHARES SO PURCHASED ON TRADING ACCOUNT AS WELL AS ON INVESTMENT ACCOUNT . IN THE AUDITED BALANCE-SHEET, THE ASSESSEE HAD SHOWN SEPARATELY INVESTMENT IN SHARES AS WELL AS SHARES HELD AS STOCK-IN- TRADE. THE ASSESSEE WAS IN THE ACTIVITY OF INVESTIN G IN SHARES SINCE INCEPTION AND SHOWING THE SAID SHARES AS INVESTMENT IN THE BALANCE-SHEE T FILED WITH THE RETURN OF INCOME AND AS AND WHEN THE SHARES WERE SOLD, PROFIT AROSE THEREON WERE OFFERED AS CAPITAL GAINS. HOWEVER, DURING THE YEAR UNDER CONSIDERATION THE A. O. DID NOT ALLOW THE GAIN SO EARNED ON SALE OF INVESTMENT AS CAPITAL GAINS AND TREATE D THE SAME AS BUSINESS INCOME. BY THE IMPUGNED ORDER, THE LD. CIT(A) ALLOWED THE ASSESSEE S CLAIM AFTER HAVING THE FOLLOWING OBSERVATIONS: 3.7 I HAVE CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE APPELLANT. I FIND THAT THE APPELLANT HAS SHOWN SHORT TERM CAPI TAL GAINS ON FREQUENT SALE TO VARIOUS COMPANIES. THE APPELLANT HAS ALSO EARNED LO NG TERM CAPITAL GAINS FROM ITS INVESTMENT PORTFOLIO DURING THE YEAR. FROM THE PERU SAL OF THE PROFIT & LOSS ACCOUNT, IT IS FOUND THAT APPELLANT HAS SHOWN INCOM E FROM SECURITY AND DERIVATIVE AT RS.1.59 CRORES IN ADDITION TO THE GAINS ON SALE OF INVESTMENT OF RS.1.39 CRORES. FROM PERUSAL OF THE BALANCE SHEET, IT TRANSPIRES TH AT APPELLANT HAS SHOWN STOCK IN TRADE AT RS.91,21,595 AND INVESTMENT AT RS.3,16,817 . IN THIS WAY THE APPELLANT HAS MADE TWO PORTFOLIOS OF SHARES I.E. INVESTMENT PORTF OLIO COMPRISING OF SECURITY WHICH HAS TO BE TREATED AS CAPITAL ASSETS AND TRADI NG PORTFOLIO COMPRISING OF STOCK IN TRADE WHICH HAS TO BE TREATED AS TRADING ASSETS. IT IS ALSO ON RECORD THAT THE APPELLANT HAS SHOWN INCOME EARNED ON TRADING PORTF OLIO AS BUSINESS INCOME AS WELL AS INCOME FROM SALE OF INVESTMENTS UNDER THE H EAD CAPITAL GAINS. IN FACT IT IS THE PREROGATIVE OF THE ASSESSEE TO CATEGORIZE THE INVESTMENT PORTFOLIO AND TRADING PORTFOLIO BASED ON THE PRUDENCE WHICH IS REFLECTED IN THE BOOKS OF ACCOUNTS. OF COURSE, THERE IS A FORCE IN THE ARGUME NT OF THE ASSESSING OFFICER THAT THERE WAS A SERIES OF TRANSACTIONS OF SHARES VIS PU RCHASE & SALES, WHICH CAN BE REGARDED AS BUSINESS ACTIVITIES AS APPELLANT IS IN THIS BUSINESS RIGHT FROM ITS INCEPTION, BUT BECAUSE OF THE DECISION OF THE HONB LE ITAT IN THE APPELLANTS OWN CASE, MATTER IS REQUIRED TO BE REVIEWED AND CONSIDE RED WITH REGARD TO THE FINAL DECISION. IN THIS CONNECTION, THE DECISION OF JANAK RANGWALLA VS. CIT, ITAT BENCH H, (SUPRA) AND MOTILAL OSWAL VS. ADDL. CIT, (SUPRA) AND J. M. STOCK BROKERS VS. 3 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS JCIT (SUPRA HAVE BEEN CONSIDERED BY THE HONBLE ITA T (SUPRA) WHEREIN THE ITAT PASSED THE ORDERS IN FAVOUR OF THE ASSESSEE ON SIMI LAR FACTS AND CIRCUMSTANCES OF THE CASE HONBLE MUMBAI TRIBUNAL IN THE APPELLANTS OWN CASE (ITA NO.5726/MUM/2007) FOR A.Y. 2004-05 HAS DECIDED THE ISSUE AFTER CONSIDERING THE FINDINGS OF CO-BENCHES AS UNDER: WE ARE OF THE OPINION THAT THE FACTS IN THE GIVEN CASE ARE ALSO SQUARELY COVERED BY THE DECISION OF J. M. SHARE AND STOCK BROKERS (SUPRA). ASSESSEE HAVING MAINTAINED ITS PORTFOLIO F OR TRADING AND INVESTMENT SEPARATELY WAS VERY WELL WITHIN ITS RIGH TS TO CLAIM GAINS ARISNG OUT OF SALE OF SHARES HELD AS INVESTMENT, TO BE SHORT TERM CAPITAL GAINS. LD. CIT(A) CORRECTLY APPRECIATED THI S AND ALLOWED THE CLAIM OF THE ASSESSEE. NO INTERFERENCE IS CALLED FO R. APPEAL OF THE REVENUE STANDS DISMISSED. 3.8 THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF JURISDICTIONAL HONBLE ITAT GROUND 3.1 AND 3.2 OF THE APPEAL ARE DECIDED I N FAVOUR OF THE APPELLANT. AO IS THEREFORE DIRECTED TO TREAT THE INCOME AS CAPITA L GAINS. 4. AGAINST THE ABOVE ORDER OF THE LD. CIT(A), THE R EVENUE IS IN FURTHER APPEAL BEFORE US. 5. SHRI O. P. SINGH, LD. DR APPEARED ON BEHALF OF T HE REVENUE AND CONTENDED THAT THE FACTS DURING THE YEAR ARE DISTINGUISHABLE FROM THE FACTS OF THE EARLIER YEAR, WHEREIN THE TRIBUNAL HAVE HELD THAT THE PROFIT AROSE ON SALE OF SHARES WERE CAPITAL GAINS. HE DRAWN OUR ATTENTION TO THE OBSERVATIONS MADE BY THE A.O. WITH REGARD TO THE VOLUME AND FREQUENCY OF TRANSACTION AND THE INTEREST PAID BY THE ASSESSE E ON THE FUNDS BORROWED FOR THE PURPOSE OF UTILIZATION IN THE SHARES SO PURCHASED. AS PER L D. DR, IN RESPECT OF EACH PURCHASE OF SHARES THE ASSESSEE HAS NOT SEPARATELY SHOWN THE IN TENTION OF INVESTMENT OR KEEPING THE SAME AS STOCK-IN-TRADE, HOWEVER, AT THE YEAR-END, T HE SHARES WERE CLASSIFIED AS INVESTMENT AND STOCK-IN-TRADE. IN TERMS OF OBSERVATIONS OF A.O ., HE CONTENDED THAT THE PROFITS SO AROSE ON SALE OF SHARES WERE CORRECTLY TAXED BY THE A.O. AS BUSINESS INCOME. 6. ON THE OTHER HAND, THE LD. AR, SHRI RAJAN R. VOR A CONTENDED THAT THE ASSESSEE WAS CONSISTENTLY INVESTING IN SHARES AND THE PROFITS SO AROSE ON SALE OF SHARES WERE OFFERED AS CAPITAL GAIN. OUR ATTENTION WAS ALSO INVITED TO I TAT ORDER IN THE ASSESSEES OWN CASE FOR 4 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS THE IMMEDIATELY PRECEDING A.Y. 2004-05, WHEREIN THE CAPITAL GAINS SO EARNED ON SALE OF SHARES WERE ACCEPTED BY THE TRIBUNAL. OUR ATTENTION WERE ALSO INVITED TO VARIOUS DECISIONS OF THE TRIBUNAL ON THE VERY SAME ISSUE, WHEREIN AFT ER ANALYZING THE FACTS, UNDER SIMILAR CIRCUMSTANCES IT WAS HELD TO BE CAPITAL GAINS RAT HER THAN THE BUSINESS INCOME. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS CAREFUL LY AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAD ALSO PERUSED THE SHAR ES HELD AS INVESTMENT WHICH WERE PURCHASED WITH THE INTENTION OF THE INVESTMENT AS W ELL AS THE SHARES PURCHASED WITH THE INTENTION OF TRADING THEREIN. INCOME DERIVED ON SAL E OF SUCH SHARES WERE ALSO ANALYZED AND WE FOUND THAT THE ASSESSEE HAS EARNED PROFIT O UT OF SALE OF SHARES HELD AS STOCK-IN- TRADE AMOUNTING TO RS.1,59,38,969/-, WHEREAS CAPITA L GAIN EARNED ON INVESTMENT WAS MERELY RS.1,39,69,282/-. IF WE ANALYZE THE PERCENTA GE OF THE SHARES HELD AS STOCK-IN-TRADE VIS--VIS INVESTMENTS, WE FOUND THAT 97% WAS HELD A S STOCK-IN-TRADE, WHEREAS IN INVESTMENT IT WAS ON 3%. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. (P.) LTD. [1971] 82 ITR 586 (SC) HAS OBSERVED AS UNDER: WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY O F INVESTMENT OR FORMS PART OF THE STOCK-IN-TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTA NCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOCK-IN-TRADE A ND THOSE WHICH ARE HELD BY WAY OF INVESTMENT. 8. WE HAVE DELIBERATED UPON VARIOUS CASE LAWS CITED BY THE LD. AUTHORIZED REPRESENTATIVE AND LD. CIT DR AND IN THE CONTEXT OF FACTUAL MATRIX OF THE CASE. WE HAD ALSO DELIBERATED ON THE CASE LAWS REFERRED TO BY LO WER AUTHORITIES IN THEIR RESPECTIVE ORDERS. THE QUESTION AS TO WHETHER THE ASSESSEE HAS EARNED CAPITAL GAIN OR BUSINESS PROFITS ON THE SHARES SOLD BY HIM DEPEND ON THE FACTS AND C IRCUMSTANCES OF EACH CASE. SUCH DECISION IS TO BE ARRIVED AT BY TAKING INTO ACCOUNT THE INTENTION OF THE ASSESSEE WHILE PURCHASING THE SHARES, AS TO WHETHER THE SAME WAS A CQUIRED FOR HOLDING AS INVESTMENT OR FOR DOING BUSINESS THEREIN. THE TREATMENT GIVEN BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT IS 5 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS ALSO ONE OF THE DECISIVE FACTORS TO FIND OUT WHETHE R THE SHARES WERE HELD AS INVESTMENT OR STOCK IN TRADE. IF THE SHARES ARE BOUGHT WITH THE I NTENTION OF EARNING CAPITAL GAINS THEREON AND ALSO DIVIDEND INCOME BY KEEPING THE SAME AS INV ESTMENT, THE GAIN ARISING THERE FROM IS REQUIRED TO BE TREATED AS CAPITAL GAINS. ON THE OTHER HAND, IF THE SHARES ARE PURCHASED WITH THE INTENTION TO EARN PROFIT THEREON AND THE S AME IS TREATED AS STOCK IN TRADE IN THE BOOKS OF ACCOUNT, THE PROFIT ARISING OUT OF SALE OF SUCH SHARES ARE LIABLE TO BE TREATED AS BUSINESS INCOME. VOLUME AND FREQUENCY OF TRANSACTIO N IS ALSO ONE OF THE GUIDING FACTORS TO FIND OUT WHETHER THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SHARES OR MAKING INVESTMENT TO HAVE CAPITAL GAINS THEREON. IN THE INSTANT CASES BEFORE US, WE FOUND THAT THE ASSESSEE HAS INVESTED IN SHARES OF I NDIAN COMPANIES SINCE LAST 5 6 YEARS, WHICH IS CLEAR FROM THE STATEMENT OF SHAREHOLDING O F THE ASSESSEE. THUS, THE FACT OF THE ASSESSEE INVESTING IN SHARES FOR THE LAST SEVERAL Y EARS IS NOT IN DISPUTE. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS TREATED T HE EQUITY SHARES OF INDIAN COMPANIES AS INVESTMENT I.E. CAPITAL ASSET ALL ALONG. THE ASSESS EE HAS ALSO VALUED THE SHARES AT COST THUS GIVEN A PARTICULAR TREATMENT TO THE SHARES HELD AS INVESTMENT, THEREFORE, WITHOUT BRINING ON RECORD CONTRARY MATERIAL, THE AO CANNOT CHANGE T HE INTENTION AND MANNER OF INVESTMENT BEING MADE BY THE ASSESSEE. HAD THE ASSE SSEE VALUED THE SHARES AT COST OR MARKET PRICE WHICHEVER IS LOWER, THE GAIN ARISING O UT OF SALE OF SHARES COULD EASILY BE TREATED AS BUSINESS INCOME. ASSESSEE HAD NOT VALUED THE SHARES AS STOCK BUT VALUED THE SAME AS INVESTMENT. THUS, WHAT WAS A CAPITAL ASSET WILL REMAIN A CAPITAL ASSET UNLESS A PERSON HOLDING THE ASSET HIMSELF CHANGES THE NATURE BY A SPECIFIC ACTION LIKE CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE. IN THE INSTAN T CASES BEFORE US, THE ASSESSEE HAS NOT TREATED THE INVESTMENT IN EQUITY SHARES OF INDIAN C OMPANIES AS STOCK IN TRADE. IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE O F RAM KUMAR AGARWAL & BROTHERS, 205 ITR 251, THE AO WAS NOT JUSTIFIED IN TREATING T HE CAPITAL GAIN EARNED FROM SALE OF THESE SHARES, AS BUSINESS PROFITS, WHICH WERE ENTER ED BY THE ASSESSEE AS INVESTMENT IN BOOKS OF ACCOUNT. THERE IS ALSO NO DISPUTE TO THE W ELL SETTLED LEGAL PROPOSITION THAT RES JUDICATA DO NOT STRICTLY APPLY TO THE INCOME TAX PR OCEEDINGS, BUT AT THE VERY SAME TIME, IT IS WELL SETTLED THAT PRINCIPLE OF CONSISTENCY UNDER THE SAME FACTS AND CIRCUMSTANCES IS THE 6 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS FUNDAMENTAL OF JUDICIAL PRINCIPLE, WHICH CANNOT BE BRUSHED ASIDE WITHOUT PROPER REASONING. IN THIS REGARD, RELIANCE CAN BE PLACED O N THE DECISION IN CASE OF S.M.K. SHARES AND STOCK BROKING PRIVATE LIMITED, I.T.A. NO. 799/M UM/09 ORDER DATED 24.11.2010. IN THIS PROPOSITION, THE DECISION OF HON'BLE SUPREME C OURT IN THE CASE OF GOPAL PUROHIT, 228 CTR 582, IS VERY MUCH RELEVANT AND IMPORTANT. 9. MERELY BECAUSE THE ASSESSEE LIQUIDATES ITS INVES TMENT WITHIN A SHORT SPAN OF TIME, WHICH HAD GIVEN BETTER OVERALL EARNING TO THE ASSES SEE, WOULD NOT LEAD TO THE CONCLUSION THAT THE ASSESSEE HAD NO INTENTION TO KEEP ON THE F UNDS AS INVESTOR IN EQUITY SHARES, BUT WAS ACTUALLY INTENDED TO TRADE IN SHARES. 10. HERE, IT IS PERTINENT TO MENTION THE INTENTION OF GOVERNMENT FOR INTRODUCING THE SECURITY TRANSACTION TAX AND EXEMPT THE LONG TERM C APITAL GAIN EARNED FROM SALE OF SHARES AND LEVYING 10 % TAX ON SHORT TERM CAPITAL GAIN AND EARNED ON SALE OF SHARES. IT IS NOTED THAT UNDER THE OLD PROVISIONS OF THE INCOME-TAX ACT , PROFITS OR GAINS ARISING TO AN INVESTOR FROM THE TRANSFER OF SECURITIES WERE CHARGED TO TAX EITHER AS LONG TERM CAPITAL GAINS OR SHORT TERM CAPITAL GAINS DEPENDING ON THE PERIOD OF HOLDING OF THE SAID SECURITIES; SHORT- TERM CAPITAL GAINS ARISING FROM TRANSFER OF SECURIT IES WERE TAXED AT THE APPLICABLE RATES (NORMAL RATE) AND LONG-TERM CAPITAL GAINS WERE TAXE D @ 20%, AFTER ADJUSTING FOR INFLATION BY INDEXING THE COST OF ACQUISITION. FOR LISTED SEC URITIES, THE TAXPAYER HAD AN OPTION TO PAY TAX ON LONG-TERM CAPITAL GAINS @ 10% BUT WITHOUT IN DEXATION. FOR FOREIGN INSTITUTIONAL INVESTORS (FIIS), THE LONG-TERM CAPITAL GAINS AND S HORT-TERM CAPITAL GAINS WERE TAXED AT THE RATE OF 10% (WITHOUT INDEXATION) AND 30% RESPECTIVE LY. IN CASE OF A TRADER IN SECURITIES, HOWEVER, THE GAINS WERE TAXED AS ANY OTHER NORMAL B USINESS INCOME. THUS TAX LIABILITY ON THE INCOME FROM PURCHASE & SALE OF SHARES AS REGARD S TO THE STCG & BUSINESS INCOME WAS AT PAR. HOWEVER, THE ISSUE OF TREATMENT OF INCO ME FROM SHARE TRANSACTION AS CAPITAL GAIN OR BUSINESS INCOME HAS IN-FACT ARISEN AFTER TH E AMENDMENT BROUGHT WITH FINANCE ACT - 2004 BY INSERTION OF PROVISIONS OF SECTION 111A A ND 10(38) AS REGARDS TO LEVY OF TRANSACTION TAX AND EXEMPTION / CONCESSION ON CAPIT AL GAIN ARISING FROM SECURITIES ENTERED IN A RECOGNIZED STOCK EXCHANGE. WITH A VIEW TO SIMPLIFY THE TAX REGIME ON 7 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS SECURITIES TRANSACTIONS, A TAX AT THE RATE OF 0.015 PER CENT. (SEE: CHANGE IN RATES ON SECURITIES TRANSACTIONS, BY FINANCE ACTS, AT APPROP RIATE HEAD) IS LEVIED ON THE VALUE OF ALL THE TRANSACTIONS OF PURCHASE OF SECURITIES THAT TAK E PLACE IN A RECOGNIZED STOCK EXCHANGE IN INDIA. THIS TAX IS COLLECTED BY THE STOCK EXCHAN GE FROM THE PURCHASER OF SUCH SECURITIES AND PAID TO THE EXCHEQUER. THE PROVISIONS RELATING TO THE SECURITIES TRANSACTIONS TAX ARE CONTAINED IN CHAPTER VII OF THE FINANCE (NO.2) BILL , 2004, AND CAME INTO EFFECT FROM 01.10.2004. FURTHER, CLAUSE (38) HAS BEEN INSERTED IN SECTION 10 OF THE INCOME-TAX ACT, SO AS TO PROVIDE EXEMPTION FROM LONG-TERM CAPITAL GAIN S ARISING OUT OF SECURITIES SOLD ON THE STOCK EXCHANGE. A NEW SECTION 111A HAS ALSO BEEN IN SERTED AND SECTION L15AD IS AMENDED, SO AS TO PROVIDE THAT SHORT-TERM CAPITAL G AINS ARISING FROM SALE OF SUCH SECURITIES TO AN INVESTOR INCLUDING FIIS SHALL BE C HARGED AT THE RATE OF TEN PER CENT. THESE AMENDMENTS APPLY TO ASSESSMENT YEAR 2005-2006 AND S UBSEQUENT YEARS. THROUGH FINANCE ACT, 2008, SECTIONS 111A AND 115AD HAVE FURTHER BEE N AMENDED WHEREBY THE RATE OF TAX ON SUCH SHORT-TERM CAPITAL GAIN HAS BEEN RAISED TO FIFTEEN PERCENT. THUS, W.E.F. 01.10.2004; ON THE SHARE TRANSACTIONS SUBJECTED TO STT; CONCESSIONAL TAX RATE OF 10% (WHICH HAS BEEN INCREASED TO 15% FROM AY 2009-10) A RE APPLICABLE IN RESPECT OF STCG WHEREAS NO TAX IS CHARGEABLE IN RESPECT OF LTCG. IT IS ALSO NOTED THAT THE CBDT VIDE ITS CIRCULAR NO.4/2007, DATED 15.06.2007 HAS ALSO RECOG NIZED POSSIBILITY OF TWO PORTFOLIOS, I.E. ONE 'INVESTMENT PORTFOLIO' COMPRISING OF SECUR ITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND THE OTHER 'TRADING PORTFOLIO' COMPRISING OF STOCK IN TRADE WHICH ARE TO BE TREATED AS TRADING ASSETS. IN VIEW OF THESE FACTS, PROFIT AROSE ON SHARES IN RESPECT OF DELIVERY BASED TRANSACTION ARE LIABLE TO BE TAXED A S CAPITAL GAIN AND NOT AS BUSINESS INCOME. 11. IF THE CONCLUSION DRAWN IN THE IMPUGNED ORDER, OBSERVATIONS MADE FROM THE ASSESSMENT ORDER, ASSERTIONS MADE BY RESPECTIVE COU NSEL AND THE MATERIAL AVAILABLE ON RECORD ARE KEPT IN JUXTAPOSITION AND ANALYZED, WE F IND THAT THE ASSESSEE HAD BEEN CONSISTENTLY INVESTING IN SHARES AND INCOME ARISING FROM DELIVERY BASED TRANSACTION OF SALE AND PURCHASE OF SHARES HAD BEEN SHOWN AS CAPIT AL GAINS I.E. LTCG AND STCG 8 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS DEPENDING UPON PERIOD OF HOLDING. ANALYSIS OF BALAN CE SHEET OF ASSESSEE REFLECTS OF HOLDING OF SHARES AS INVESTMENT. IN THE CASE OF GOP AL PUROHIT, 228 CTR 528 (BOM), SLP WAS FILED BY THE DEPARTMENT AGAINST THE DECISION OF BOMBAY HIGH COURT AND THE SAME WAS DISMISSED BY HON'BLE APEX COURT VIDE ORDER DATE D 15.11.2010. IN THE SPEECH BY HON'BLE FINANCE MINISTER REGARDING DIRECT TAX CASES (UNION BUDGET 2004-05), ESPECIALLY CLAUSE 111, THE INTENTION OF GOVERNMENT FOR INTRODUCING THE SECURITY TRANSACTION TAX AND EXEMPTING THE LONG TERM CAPITAL GAIN OR FROM SALE OF SHARE AND LEVYING 10% TAX ON SHORT TERM CAPITAL GAIN OR FROM SALE OF SHARES ALSO SUPPORTS THE CASE OF ASSESSEE. THE IDEA BEHIND INTRODUCTION OF SECURITY TRANSACTION TAX IS TO END THE LITIGATION ON THE ISSUE, WHETHER THE PROFIT EARNED FROM DELIVE RY BASED SALE OF SHARES IS CAPITAL GAINS FOR BUSINESS PROFIT. 12. EVEN THE HON'BLE APEX COURT IN THE CASE OF K.P. VERGHESE VS TO, 131 ITR 597 (SC) OBSERVED AS UNDER:- THE TASK OF INTERPRETATION OF A STATUTORY ENACTME NT IS NOT MECHANICAL TASK. IT IS MORE THAN A MERE READING OF MATHEMATICAL FORMULAE B ECAUSE FEW WORD POSSESSES THE PRECISION OF MATHEMATICAL SYMBOLS. IT IS AN ATT EMPT TO DISCOVER THE INTENT OF THE LEGISLATURE FROM THE LANGUAGE USED BY IT AND IT MUS T ALWAYS BE REMEMBERED THAT LANGUAGE IS AT BEST AN IMPERFECT INSTRUMENT FOR THE EXPRESSION OF HUMAN THOUGHT AND, AS POINTED OUT BY LORD DENNING, IT WOULD BE ID LE TO EXPECT EVERY STATUTORY PROVISIONS TO BE DRAFTED WITH DIVINE PRESCIENCE AN D PERFECT CLARITY. WE CAN DO BETTER THAN REPEAT THE FAMOUS WORDS OF JUDGE LEARNE D HAND WHEN HE SAID. THE ABOVE OBSERVATIONS OF HON'BLE JUDGES OF THE APE X COURT WAS REITERATED BY HON'BLE APEX COURT IN THE CASE OF KERALA STATE INDUSTRIAL C ORPORATION, 259 ITR 51 (SC) HOLDING AS UNDER:- THAT THE FINANCE MINISTERS SPEECH CAN BE RELIED UPON TO THROW LIGHT ON THE OBJECT AND PURPOSE OF THE PARTICULAR PROVISIONS INT RODUCTION BY THE FINANCE BILL HAS BEEN RECOGNIZED BY THIS COURT IN K.P. VERGHESE VS ITO 1981), 131 ITR 597 (SC), AT 609. AGAIN IN THE CASE OF R & B FALCON (A) PVT. LTD VS CIT (2008) 301 ITR 309 (SC), IT WAS HELD THAT (PAGE 323):- RULES OF EXECUTIVE CONSTRUCTION IN A SITUATION OF THIS NATURE MAY ALSO BE APPLIED. WHERE A REPRESENTATION IS MADE BY THE MAKERS OF LEG ISLATION AT THE TIME OF 9 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS INTRODUCTION OF BILL OR CONSTRUCTION THEREUPON IS P UT BY THE EXECUTIVE UPON ITS COMING INTO FORCE, THE CARRIES GREAT WEIGHT. THE HON'BLE DELHI HIGH COURT IN ARJ SECURITY PRINTE RS, 264 ITR 276 AND NEO POLLYPACK PVT LTD. 245 ITR 492 (DEL.) HELD THAT EVE N WHEN THE DOCTRINE OF RES JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS, WHERE A I SSUE HAS BEEN DECIDED CONSISTENTLY IN EARLIER ASSESSMENT YEARS IN PARTICULAR MANNER, THE SAME VIEW SHOULD PREVAIL IN SUBSEQUENT YEARS UNLESS THERE IS A MATERIAL CHANGE IN FACTS, MEANING THEREBY, THERE MUST BE MATERIAL CHANGE IN THE FACTS. THE INDORE BENCH OF THE TRIBUNAL IN THE CASE OF ACI T VS OM PRAKASH SURI (SUPRA) HELD AS UNDER:- 3. WE HAVE CONSIDERED THE SUBMISSIONS PUT FORTH BY THE LEARNED SENIOR DR AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. BRIEF FACTS ARE THAT IN THE PAST THE ASSESSEE WAS ENGAGED IN ROAD BUILDING CONTRACTO R AND WAS DERIVING INCOME FROM CONTRACT RECEIPTS AS WELL AS FROM SALE OF GITT I AND DURING THE IMPUGNED YEAR, VENTURED INTO INVESTMENT IN SHARE MARKET. THE INCO ME ARISING FROM F&O TRANSACTIONS AND DAILY TRADING IN SHARES (WITHOUT P HYSICAL DELIVERY) REFLECTED AS SPECULATIVE BUSINESS WHEREAS THE INCOME ON DELIVERY BASED TRANSACTIONS OF SALE AND PURCHASE OF SHARES, INCOME WAS SHOWN FROM CAPIT AL GAINS. THE LEARNED AO CONSIDERED THE INCOME WHICH WAS BASED ON PURCHASE A ND SALE OF SHARES AS BUSINESS INCOME ON THE GROUNDS AS NARRATED IN THE A SSESSMENT ORDER AS WELL AS AT PAGES 3 AND 4 OF THE APPELLATE ORDER. BROADLY, THE LEARNED AO WAS OF THE VIEW THAT THE INTENTION OF THE ASSESSEE SINCE BEGINNING WAS SALE OF SHARES AS TRADING ACTIVITIES, AS EVIDENT FROM AUDITED PROFIT AND LOSS ACCOUNT BY NOT SHOWING THE SAME AS SHORT TERM CAPITAL GAIN AND ALSO IN FORM 3CD THE ASSESSEE HAS MENTIONED THE NATURE OF BUSINESS AS TRADING/DEALING IN SHARES/SEC URITIES AND MUTUAL FUNDS. THE FREQUENCY OF TRANSACTIONS WAS ALSO CONSIDERED, CONS EQUENTLY HE TREATED THE AMOUNT OF RS.49,81,915/- AS BUSINESS INCOME FROM SH ARE TRADING. HOWEVER, BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) THE BASIS OF ADDITIONS WAS EXPLAINED AS EVIDENT FROM PARA 3.1.1 ONWARDS. THE CRUX OF CLAIM OF THE ASSESSEE IS THAT IN THE AUDITED ACCOUNTS, THE SALE OF SHARES AMOUNTING TO RS. 9.43 CRORES IN WHICH DELIVERY HAD BEEN TAKEN, STT WAS PA ID AND THE SHARES WERE SOLD AFTER HOLDING FOR A FEW DAYS/FEW WEEKS. THE MUTUAL FUNDS OF RS. 2.91 LACS WERE SOLD AND WERE TREATED AS INCOME FROM SHORT TERM CAP ITAL GAINS. BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) THE ASSESSEE A LSO FILED A DETAILED NOTE ON THE PURCHASE PROCESS FOR DELIVERY BASE SHARES, DETA ILS OF DIVIDEND RECEIVED ON THE BASIS OF RELEVANT STATEMENTS BY PLACING RELIANCE ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF JM SHARES & ST OCK BROKERS V. JCIT DATED 10 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS JANUARY, 2009. BRIEFLY, THE CLAIM OF THE ASSESSEE B EFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WAS THAT THE DELIVERY BASED TRANSACTIONS WERE MADE WITH AN INVESTMENT MOTIVE AND AS SUCH THE INCOME THEREFR OM WAS IN THE NATURE OF SHORT TERM CAPITAL GAINS WHEREAS THE INCOME AROSE FROM F& O TRANSACTIONS AND DAILY TRADING IN SHARES WERE WITH THE BUSINESS MOTIVE WHI CH WERE SHOWED AS BUSINESS INCOME ONLY WHICH WAS MAINLY THROUGH STOCK BROKER, ARIHANT CAPITAL MARKETS LIMITED, REGISTERED WITH NSC, NSE AND BSE. IT IS A LSO SEEN THAT IN THE IMPUGNED ORDER THE BOARD CIRCULAR NO. 4/2007 DATED 15.6.2007 WHEREIN IT WAS EMPHASIZED THAT IT IS POSSIBLE FOR A TAX PAYER TO HAVE TWO POR T FOLIOS I.E. AN INVESTMENT PORT FOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREA TED AS CAPITAL ASSET AND TRADING PORT FOLIO COMPRISING STOCK IN TRADE WHICH ARE TO B E TREATED AS TRADING ASSET, WAS CONSIDERED. THE BOARD FURTHER CLARIFIES THAT NO SIN GLE PRINCIPLE WOULD BE DECISIVE AND THE TOTAL PROPOSITION NEEDS TO BE CONSIDERED. T HE ASSESSEE HAS MAINTAINED ONLY ONE PORT FOLIO AND CLAIMED THAT TO BE AN INVES TMENT FOLIO. UNDISPUTEDLY, THE PERIOD OF HOLDING IS LESS THAN ONE YEAR, CONSEQUENT LY, THERE IS NO INFIRMITY IN HOLDING THAT THESE TRANSACTIONS WOULD BE TREATED AS SHORT TERM CAPITAL GAIN ON WHICH THE APPLICABLE TAX IS @ 10% ONLY. IN VIEW OF THIS UNCONTROVERTED FACT, THERE IS NO MERIT IN THE APPEAL OF THE REVENUE AND THE SA ME IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 4 TH AUGUST, 2010. 13. THE AFORESAID DECISION WAS AFFIRMED BY THE HON' BLE MADHYA PRADESH HIGH COURT REPORTED IN (2012) 19 ITJ 326 M.P. THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SHANTILAL M JAIN VS ACIT VIDE ORDER DATED 27-04-201 1 (ITA NO. 269/MUM/2010) HELD THAT DESPITE LARGE VOLUME OF SHARES TRANSACTIONS, T HE ASSESSING OFFICER CANNOT IGNORE THE RULE OF CONSISTENCY TO TREAT THE GAINS ON SALE OF S HARES AS STCG. IN THAT CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING OF INVESTMEN T IN SHARES AND SECURITIES OFFERED RS. 1.54 CRORES AS SHORT TERM CAPITAL GAIN AND RS. 2.91 CRORES FROM LONG TERM CAPITAL GAIN. THE LONG TERM CAPITAL GAIN WAS ACCEPTED WHEREAS SHORT T ERM CAPITAL GAIN WAS HELD TO BE BUSINESS PROFIT. SINCE IN EARLIER ASSESSMENT YEARS THE CLAIM OF THE ASSESSEE WAS CONSISTENTLY ACCEPTED AS SHORT TERM CAPITAL GAIN, I T WAS HELD THAT THE RULE OF CONSISTENCY AS PROPOUNDED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF GOPAL PUROHIT (SUPRA), IT IS FAIRLY APPLICABLE AND THE INCOME HAS TO BE TREATED AS SHORT TERM CAPITAL GAIN. IDENTICALLY IN THE CASE OF NAGINDAS P SETH (ITA NO.961/MUM/2 010) IT WAS HELD THAT DESPITE LARGE NUMBER OF TRANSACTIONS IN SHARES, THE PROFIT CAN BE ASSESSED AS CAPITAL GAINS UNDER THE FACTS OF THE CASE. THE CASE OF THE ASSESSEE IS FURT HER FORTIFIED BY THESE DECISIONS MORE 11 ITA NO. 4785/MUM/2009 (A.Y. 2005-06) DY. CIT VS. M/S. E-CAP PARTNERS SPECIFICALLY WHEN THE ASSESSEE WAS HOLD THE SHARES IN HIS BOOKS AS INVESTOR, AS WELL AS TOCK-IN-TRADE SEPARATELY. THE DECISION IN THE CASE OF JANAK S RANAWALA, 11 SOT 627 (MUM.) FURTHER SUPPORTS THE CASE OF THE ASSESSEE. L IKEWISE, THE DECISION FROM HON'BLE MADRAS HIGH COURT IN CIT VS N.S.S. INVESTMENT PVT L TD. 227 ITR 149 (MAD), CIT VS. ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY, 82 ITR 5 26 (SC) SUPPORTS THE CASE OF THE ASSESSEE. IN THE PRESENT APPEAL, WE NOTE THAT THE A SSESSEE MADE INVESTMENT IN SHARES WITH INTENTION TO EARN DIVIDEND INCOME ON APPRECIATION O F PRICE OF SHARES. THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE WAS DOING BUSINESS. IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) FOR ACCEPTING THE ASSESSEES CLAIM OF CAPITA L GAINS INSTEAD OF A.O.S ACTION OF TREATING IT AS BUSINESS INCOME. 14. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. /. )0 ( $ / $ ) 12 ORDER PRONOUNCED IN THE OPEN COURT ON JANUARY 15, 2 014 SD/- SD/- (SANJAY GARG) (R. C. SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER & 3 MUMBAI; 4' DATED : 15.01.2014 (.'../ ROSHANI , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT 2. '#! / THE RESPONDENT 3. & 5) ( ) / THE CIT(A) 4. & 5) / CIT - CONCERNED 5. 8(9 ')':; , * :;. , & 3 / DR, ITAT, MUMBAI 6. < = / GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , & 3 / ITAT, MUMBAI