DIPTI K MEHTA, MUMBAI V. ACIT 25(3), MUMBAI

ITA 528/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7405 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 08-12-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 23-01-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T T JACOB
• Assessee Lawyers: HEMENDRA N SHAH
• Keywords: Business income; Speculation loss; Capital Gains
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, MUMBAI BEFORE SHRI R.K. GUPTA, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 528/MUM/2009 (ASSESSMENT YEAR: 2005-06) MS. DIPTI K. MEHTA ACIT - 25(3) 602, UMIA BAUG CHS AAYAKAR BHAVAN NANDA PATKAR HALL VS. MUMBAI 400020 VILE PARLE (E), MUMBAI PAN - AGIPM 8618 C APPELLANT RESPONDENT APPELLANT BY: SHRI HEMENDRA N. SHAH RESPONDENT BY: SHRI T.T. JACOB O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF THE CIT(A)- XXV, MUMBAI DATED 24.11.2008. 2. ASSESSEE HAS RAISED THE FOLLOWING TWO GROUNDS: - 1. THE COMMISSIONER OF INCOME TAX (APPEALS) XXV, M UMBAI, ERRED IN DISALLOWING APPEAL FILED BY THE APPELLANT AND CONFI RMING THE ORDER OF THE ASSESSING OFFICER WHEREIN THE SHORT TERM CAP ITAL GAIN AND LONG TERM CAPITAL GAINS EARNED BY THE APPELLANT WAS CONSIDERED AS BUSINESS INCOME THEREBY BRINGING TO TAX AT NORMAL R ATE ALTHOUGH THE APPELLANT HAD BEEN MAINTAINING SEPARATE ACCOUNTS FO R TRADING AND PERSONA ACCOUNTS FOR INVESTMENT. 2. FURTHER THE LEARNED CIT(A) ALSO ERRED IN CONFIRM ING THAT THE LOSS INCURRED BY THE APPELLANT IN DERIVATIVE TRANSACTION AMOUNTING TO RS.2,80,435/- WAS A SPECULATIVE LOSS. 3. GROUND NO. 1 PERTAINS TO THE ISSUE OF TREATING SHOR T TERM CAPITAL GAINS AND LONG TERM CAPITAL GAINS EARNED BY THE ASSESSEE AS BUSINESS INCOME BY THE A.O. IT WAS ASSESSEES CONTENTION THAT THE ASSE SSEE HAS BEEN MAINTAINING SEPARATE BOOKS OF ACCOUNT FOR TRADING A ND INVESTMENT. TRADING ACTIVITY HAS BEEN SHOWN UNDER THE HEAD TRADING PRO FIT WHEREAS OTHER INCOME IS FROM INVESTMENTS MADE BY HER WHICH ARE IN THE NATURE OF CAPITAL GAINS AND HAS BEEN CORRECTLY DISCLOSED AS CAPITAL G AINS. IT WAS ASSESSEES ITA NO. 528/MUM/2009 MS. DIPTI K. MEHTA 2 SUBMISSION THAT SHE IS HAVING PROPRIETARY CONCERN I N THE NAME OF RUCHIRAJ SECURITIES FOR WHICH SEPARATE BALANCE SHEET WAS MAI NTAINED, BANK ACCOUNTS WERE SEPARATELY MAINTAINED AND THE TRANSACTIONS ARE DONE THROUGH A SEPARATE BROKER,M/S REFCOSIFY WHERE AS HER OWN INVE STMENTS WERE SHOWN SEPARATELY AND WAS DONE THROUGH ANOTHER BROKER. THE A.O. DID NOT ACCEPT THE VERSION OF THE ASSESSEE ON THE PRETEXT THAT ENT RIES IN THE BOOKS OF ACCOUNT SHOWING SHARES AS INVESTMENT IS NOT THE ONL Y DETERMINING FACTOR BUT THE REAL NATURE OF THE TRANSACTIONS ARE TO BE CONSI DERED. HE WENT ON TO ANALYSE THE TRANSACTIONS AND RELIED ON VARIOUS CASE LAWS TO HOLD THAT THE ASSESSEES SHORT TERM AND LONG TERM CAPITAL GAINS H AS TO BE TREATED AS BUSINESS INCOME AND ACCORDINGLY AN AMOUNT OF RS.22, 85,363/- WAS BROUGHT TO TAX AS BUSINESS INCOME. THE CIT(A), AFTER CONSID ERING ASSESSEES SUBMISSIONS, CONFIRMED THE ORDER OF THE A.O. 4. DRAWING OUR ATTENTION TO THE PAPER BOOK FILED, THE DETAILS THEREIN, IT WAS SUBMITTED THAT THE ASSESSEE IS CARRYING SHARE T RADING ACTIVITY IN THE NAME OF RUCHIRAJ SECURITIES FOR WHICH SEPARATE BALA NCE SHEET AND P & L ACCOUNT WERE MAINTAINED AND TRANSACTIONS ARE DONE T HROUGH A SEPARATE BROKER. EVEN THE BANK ACCOUNT IS DIFFERENT. IT IS A LSO SUBMITTED THAT THE ASSESSEE ALSO BUYS AND SELLS SHARES AS INVESTMENT A ND MAKES CAPITAL GAIN OR LOSS. THE LEARNED COUNSEL SUBMITTED THAT THERE WERE INVESTMENTS IN INDIVIDUAL CAPACITY AT RS.4,22,276/- AND RS.5,01,90 4/- IN THE YEARS ENDING 31.03.2003 AND 31.03.2004 AND SEPARATE INVESTMENTS IN RUCHIRAJ SECURITIES IN THE FORM OF CAPITAL TO THE EXTENT OF RS.3.69 LA KHS AND RS.7.19 LAKHS IN THE RESPECTIVE YEARS. IT WAS THE SUBMISSION THAT TH E ASSESSEE IS HAVING BOTH TRADING INCOME AS WELL AS INVESTMENT INCOME AND BOT H ARE PERMITTED UNDER THE LAW. ALL THE TRANSACTIONS FOR L.T.C.G. ARE OUT OF OPENING STOCK HELD AS INVESTMENTS, SHORT TERM TRANSACTIONS ARE ALSO DONE IN HER PERSONAL NAME. ALL TRADING TRANSACTIONS ARE DONE IN THE NAME OF RU CHIRAJ SECURITIES AND ARE SEPARATELY MAINTAINED. CIRCULAR NO. 4/2007 DATED 15 .06.2007 ISSUED BY THE CBDT AND REPRODUCED IN THE A.O. ON PAGES 12-16 CONF IRMS THAT A TAX PAYER CAN HAVE TWO PORTFOLIOS ONE AN INVESTMENT PORTFOL IO AND THE OTHER AS STOCK- IN-TRADE. THE APPELLANT IS ALSO HAVING TWO PORTFOLI OS AND HENCE MIXING UP THE TWO AND CONSIDERING EVERYTHING AS STOCK-IN-TRAD E IS NOT CORRECT. IT IS ITA NO. 528/MUM/2009 MS. DIPTI K. MEHTA 3 FURTHER CORROBORATED BY THE FACT THAT IF IT WAS STO CK-IN-TRADE, THE INVESTMENT PORTFOLIO WOULD BE VALUED AT COST OR MARKET VALUE W HICHEVER IS LOWER BUT IT IS NOT SO. IT IS VALUED AND CARRIED FORWARD ONLY AT CO ST. THE ITAT MUMBAI IN THE CASE OF J.M. SHARE & STOCK BROKERS LTD. VS. JCT SPE CIAL RANGE 22 IN ITA NO. 2801/MUM/2000 AND OTHER HAVE ALSO CONSIDERED THE PO SITION AND HAVE HELD THAT THE PROFIT EARNED BY THE ASSESSEE ON SALE OF S HARES WHICH WERE HELD AS INVESTMENTS IS ASSESSABLE UNDER THE HEAD CAPITAL GA INS AND NOT UNDER THE HEAD BUSINESS INCOME. SINCE APPELLANTS CASE IS ON SIMILAR FACTS THE DECISION IS APPLICABLE IN THE CASE ALSO. IT WAS ALSO FURTHER SUBMITTED THAT THE DECISION OF ITAT IN THE CASE OF GOPAL PUROHOIT VS. JCIT 122 TTJ (MUM) 87 HAS BEEN UPHELD BY THE HON'BLE BOMBAY HIGH COURT WHERE THE F ACTS ARE SIMILAR. 5. THE LEARNED D.R., HOWEVER, SUBMITTED THAT THE FACTS ARE ANALYSED BY THE A.O. AND THE CIT(A) IN DETAIL AND ASSESSEES TR ANSACTIONS ARE TO BE CONSIDERED AS BUSINESS AND ACCORDINGLY THE ORDERS A RE CORRECT. HE SUPPORTED THE ORDERS OF THE A.O. AND CIT(A). 6. WE HAVE CONSIDERED THE ISSUE. AS FAR AS THE FACTS A RE CONCERNED THE ASSESSEE IS HAVING HER OWN SHARE TRADING BUSINESS A S WELL AS INVESTMENT PORTFOLIO. THE ASSESSEE IS MAINTAINING SEPARATE BOO KS OF ACCOUNT, SEPARATE CAPITAL ACCOUNT, BALANCE SHEET INCLUDING SEPARATE B ANK ACCOUNT WITH HDFC BANK AND INDIAN BANK. SHE ALSO HAD A SEPARATE D-MAT ACCOUNT WITH MEMBER BROKER WHICH IS DIFFERENT FROM HER PORTFOLIO D-MAT ACCOUNT MAINTAINED IN BANK OF INDIA WHERE SHE IS MAINTAININ G HER PERSONAL INVESTMENT BANK ACCOUNT. ON FACTS IT IS VERY CLEAR THAT THE ASSESSEE IS SHOWING BUSINESS TRANSACTIONS AND INVESTMENT TRANSA CTIONS SEPARATELY WHICH IS ALSO THE CASE IN EARLIER YEARS, WHICH IS A CCEPTED BY THE REVENUE. ON SIMILAR FACTS THE HON'BLE ITAT IN THE CASE OF GOPAL PUROHIT (SUPRA) HAS HELD AS UNDER: - THE ASSESSEE IS MAINTAINING SEPARATE RECORDS FOR B OTH TYPES OF TRANSACTIONS. FURTHER, IT IS IMPORTANT TO NOTICE TH AT THE ASSESSEE HAS ENTERED INTO TWO DIFFERENT TYPES OF TRANSACTIONS WH ERE BOTH ACTIVITIES ARE ENTIRELY DIFFERENT IN NATURE I.E., ONE ACTIVITY IS OF INVESTMENT IN NATURE ON THE BASIS OF DELIVERY AND SECOND ACTIVITY IS PURELY ON JOBBING (WITHOUT DELIVERY), WHICH PUT ASSESSEES CASE ON A MORE STRO NG FOOTING. HENCE, THE DELIVERY BASED TRANSACTION SHOULD BE TREATED AS OF THE NATURE OF INVESTMENT TRANSACTIONS AND PROFIT THEREFROM SHOULD BE TREATED AS SHORT- ITA NO. 528/MUM/2009 MS. DIPTI K. MEHTA 4 TERM CAPITAL GAIN OR LONG-TERM CAPITAL GAIN DEPENDI NG UPON THE PERIOD OF HOLDING. SARNATH INFRASTRUCTURE (P) LTD. VS. ASST . CIT (2008) 16 DTR (LUCKNOW) 97 RELIED ON. THE REVENUE HAS ALSO HELD THAT PRESENTATION IN THE BOOKS OF ACCOUNT WAS NOT CONCLUSIVE WHICH MAY BE TRUE TO SOME EXTENT, BU T IT IS THE MOST CRUCIAL SOURCE OF GATHERING INTENTION OF THE ASSESS EE AS REGARD TO THE NATURE OF TRANSITION AND IN LAW, IT IS ALSO SO, I.E ., SUCH PRESENTATION REFLECTS, PRIMA FACIE, A VIEW OF THE ASSESSEE ON A PARTICULAR SUBJECT AND THIS PRINCIPLE IS EFFECTIVELY APPLICABLE IN A SITUA TION LIKE THIS AS COMPARED TO A SITUATION WHERE NATURE OF EXPENDITURE OR INCOM E IS DIFFERENT IN THE BOOKS OF ACCOUNT AND IN THE RETURN OF INCOME FILED BY THE ASSESSEE WHEREIN THE SPECIFIC PROVISIONS OF IT ACT HAVE TO B E CONSIDERED OVER SUCH PRESENTATION AND IF THERE EXIST NO SPECIFIC PROVISI ONS, IT IS THE COMMERCIAL PROJECTS WHICH HAVE TO BE TAXED AND EVEN IN THAT SI TUATION, THE ASSESSEE MAY BE FOUND TO BE JUSTIFIED IN GIVING DIFFERENT TR EATMENT IN THE BOOKS OF ACCOUNT AS COMPARED TO RETURN OF INCOME BECAUSE OF COMMERCIAL CONSIDERATIONS OR ACCOUNTING REQUIREMENTS. KARAM CHAND THAPAR & BROS. (P) LTD. VS. CIT (1971) 82 ITR 899 (SC). THE REVENUE AUTHORITIES HAVE ALSO HELD THAT BORROWE D FUNDS WERE UTILIZED FOR MAKING SUCH INVESTMENTS WHEREAS IN EAR LIER YEARS, INTEREST ON SUCH LOANS HAS BEEN ALLOWED AS BUSINESS EXPENDIT URE AGAINST PROFIT ON SHARE TRADING TRANSACTIONS SHOWN BUSINESS INCOME AND IN THE YEAR UNDER CONSIDERATION ALSO, NO NEXUS BETWEEN THE INTE REST BEARING FUNDS AND INVESTMENT HAS BEEN ESTABLISHED, HENCE, FOR THI S REASON ALSO, THERE IS NO MERIT IN TREATING THE LONG-TERM CAPITAL GAIN AND SHORT-TERM CAPITAL GAIN AS BUSINESS PROFITS. COUNSEL FOR THE ASSESSEE HAS ALSO CONTENDED THAT IN VESTMENT COULD BE AN ORGANIZED ACTIVITY ALSO AND THERE IS SOME SUBSTA NCE IN THIS CONTENTION BECAUSE NOW THE STAKES ARE HIGH AND NOBODY WANTS TO LOOSE MONEY AS THERE ARE GREAT CHANCES OF CAPITAL LOSS IN RESPECT OF SHARES AS COMPARED TO FIXED INTEREST EARNING SECURITIES WHERE THE PRIN CIPAL MONEY REMAINS SECURED AND ALSO EVERYONE WANTS TO MAXIMIZE WEALTH AND MINIMIZE RISK, HENCE, A PERSON INVESTING IN SHARES IS BOUND TO STU DY THE NEWSPAPERS, BUSINESS MAGAZINES, WATCH THE BUSINESS CHANNELS AND USE WEBSITES AND OTHER TOOLS TO KEEP A TRACK OF THE DEVELOPMENTS WHICH ARE HAPPENING ON DAY-TO-DAY BASIS AND WHICH MAY HAPPEN IN THE NEA R FUTURE AND FOR THIS, HE MAY HAVE ASSISTANCE OF THE FINANCIAL PLANN ER OR INVESTMENT CONSULTANT OR MAY BY HIS OWN EXPERTISE AND CAPABILI TIES DO IT ON HIS WON, HENCE EMPLOYMENT OF SUCH INFRASTRUCTURE CANNOT TURN AN INVESTMENT ACTIVITY INTO A BUSINESS ACTIVITY. THE ASSESSEES C LAIM OF SHORT-TERM CAPITAL GAIN AND LONG-TERM CAPITAL GAIN ON SHARE TR ANSACTIONS WERE THE DELIVERY HAS BEEN TAKEN OR GIVEN AND SECURITIES TRA NSACTIONS TAX HAS BEEN PAID IS LIABLE TO BE ACCEPTED. 7. SINCE THE FACTS ARE SIMILAR AND ASSESSEES TRANSACT IONS HAVE BEEN ACCEPTED IN EARLIER YEARS, WE ARE OF THE OPINION TH AT THE AUTHORITIES HAVE ERRED IN TREATING THE CAPITAL GAINS EARNED BY THE A SSESSEE AS BUSINESS ITA NO. 528/MUM/2009 MS. DIPTI K. MEHTA 5 INCOME. IN VIEW OF THE FACTS AND LAW WE DIRECT THE A.O. TO ACCEPT THE CAPITAL GAINS AS DISCLOSED. ACCORDINGLY GROUND NO. 1 IS ALL OWED. 8. GROUND NO. 2 PERTAINS TO THE ISSUE OF TREATMENT OF DERIVATIVE LOSS AS SPECULATIVE LOSS. THE ASSESSEE IN THE BUSINESS ACTI VITY HAS INCURRED DERIVATIVE TRANSACTION LOSS AND CLAIMED SET OFF TO THE OTHER INCOME. IT WAS THE SUBMISSION THAT DERIVATIVE TRANSACTIONS ARE NOR MAL BUSINESS LOSS AND CANNOT BE CONSIDERED AS SPECULATIVE LOSS IN VIEW OF THE AMENDMENT TO SECTION 43(5) BROUGHT OUT BY THE FINANCE ACT, 2005 W.E.F. 01.04.2006, BY WHICH CLAUSE (D) WAS ADDED IN THE PROVISO TO EXCLUD E THE TRADING IN DERIVATIVE TRANSACTIONS FROM THE PURVIEW SPECULATIV E TRANSACTION. IT WAS ASSESSEES CONTENTION THAT EVEN THOUGH THIS AMENDME NT WAS MADE EFFECTIVE FROM A.Y. 2006-07 IT ALSO SHOULD EQUALLY APPLY TO A.Y. 2005-06. THE A.O. DID NOT ACCEPT AND THE CIT(A) ELABORATELY DISCUSSED THE ISSUE IN PAGES 20 & 21 OF THE ORDER AND TREATED THE TRANSACTION AS SPEC ULATIVE TRANSACTION AND HELD THAT THE AMENDMENT TO THE SECTION SUBSEQUENTLY MADE CANNOT COME TO THE HELP OF THE ASSESSEE. 9. AFTER CONSIDERING THE ARGUMENTS OF THE LEARNED COUN SEL AND LEARNED D.R. WE ARE OF THE OPINION THAT ASSESSEES LOSS FRO M DERIVATIVE TRANSACTIONS ARE TO BE CONSIDERED AS SPECULATIVE LOSS, AS HELD B Y THE SPECIAL BENCH IN THE CASE OF SHREE CAPITAL SERVICES LTD. VS. ACIT IN ITA NO. 1294 (KOL) OF 2008 DATED 31.07.2009. SINCE THE AMENDMENT WAS PROSPECTI VE IN NATURE, THE TRANSACTIONS FOR THE IMPUGNED ASSESSMENT YEAR ARE T O BE CONSIDERED AS SPECULATIVE IN NATURE AND ACCORDINGLY THE GROUND IS REJECTED. 10. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH MARCH 2010. SD/- SD/- (R.K. GUPTA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 12 TH MARCH 2010 ITA NO. 528/MUM/2009 MS. DIPTI K. MEHTA 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXV, MUMBAI 4. THE CIT XXV, MUMBAI CITY 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.