ITO 19(2)(1), MUMBAI V. RADHA BIRJU PATEL, MUMBAI

ITA 5382/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6173 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 01-07-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 24-09-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Keywords: Business income

Judgement Text

I.T.A NO. 5382 MUM/2009 ASSESSMENT YEAR:2006-07 1 IN THE INCOME TAX APPELLATE TRIBUNAL, D BENCH, MUMBAI. BEFORE SHRI N.V.VASUDEVAN (JUDICIAL MEMBER) AND PRAMOD KUMAR(ACCOUNTANT MEMBER) I.T.A NO. 5382 MUM/2009 ASSESSMENT YEAR:2006-07 INCOME TAX OFFICER 19(2)(1), APPELLANT PIRAMAL CHAMBERS, LALBAUG, PAREL, MUMBAI. VS RADHA BIRJU PATEL, . RESPONDENT 8, MADHUVAN SOCIETY, SARASWATI ROAD, SANTACRUZ(W), MUMBAI-54. PA NO.AEEPP 4544 G APPELLANT BY: SHRI JITENDRA YADAV RESPONDENT BY : SHRI SHALIN S.DIVATIA O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS C ALLED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 22 ND JULY 2009, FOR THE ASSESSMENT YEAR 2006-07, ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD CIT (A) HAS ERRED IN DIRECTING TO TREAT THE STC GAIN OF ` .11,11,063/- AS A STC GAIN OF ` .11,11,063/- AS A STC GAIN INSTEAD OF BUSINESS INCO ME MADE BY AO IN HIS ASSESSMENT ORDER, IGNORING THE FACT THAT : A) THE ASSESSEE HAS DEPLOYED HER FUND WITH AN INTENTIO N OF EARNING PROFIT OF SUCH FUNDS AND THERE WAS NO INTENTION OF THE ASSESSEE TO APPRECIATE THE INVESTMENT SO MADE DURING THE YEAR. B) THE ASSESSEE HAS NO INTENTION TO HOLD HER SHARES IN ORDER TO EARN REGULAR INCOME OUT OF SUCH PURCHASES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT (A) FAILED TO APPRECIATE THE FACT THAT THE TRANSACTIONS IS SHOWN WHETHER BY HERSELF OR THROUGH HER AGENT HAS TO BE TREATED AS ASSESSEES O WN TRANSACTION AND THE MOTIVE BEHIND SUCH TRANSACTION WAS TO EARN MAXIMUM PROFIT AND NOT INVESTMENT. I.T.A NO. 5382 MUM/2009 ASSESSMENT YEAR:2006-07 2 2. THE ABOVE TWO GROUNDS OF APPEAL ARE SOMEWHAT INT ER-CONNECTED AND, THEREFORE, WE TAKE UP BOTH THE GROUNDS TOGETHER. BRIEFLY STATED THE MATERIAL FACTS ARE LIKE THIS. ON 31.10.2006, THE ASSESSEE FILED HER INCOME TAX RETUR NS DISCLOSING TOTAL INCOME AT ` .15,88,890/-. THIS RETURN WAS SELECTED FOR SCRUTINY UNDER THE COMPUTER ASSISTED SCRUTINY SYSTEM (CASS) AND DURING THE COURSE OF SCRUTINY AS SESSMENT PROCEEDINGS, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS DISCLOS ED A SHORT TERM CAPITAL GAIN OF ` .11,61,751/- AND SHORT TERM CAPITAL LOSS OF ` .50,688/- IN RESPECT OF PURCHASE AND SALES OF SHARES OF VARIOUS COMPANIES. THE ASSESSEE WAS REQU IRED TO SHOW CAUSE AS TO WHY THESE CAPITAL GAINS SHOULD NOT BE TREATED AS BUSINESS INC OME OF THE ASSESSEE. THE EXPLANATION GIVEN BY THE ASSESSEE WAS REJECTED BY THE AO ON THE GROUND THAT BASED ON CBDT CIRCULAR NO.4 OF 2007 DATED 15.6.2007, THE PRESENT CASE FALL S IN THE CASE OF TRADING IN SHARES. A REFERENCE WAS ALSO MADE TO THE HONBLE SUPREME COUR T JUDGEMENT IN THE CASE OF G.VENKATASWAMI NAIDU & CO V. CIT (35 ITR 594), WHER EIN, THEIR LORDSHIPS HAVE LAID DOWN WHERE PURCHASE HAS BEEN MADE SOLELY AND EXCLUSIVELY WITH INTENTION TO RESELL AT A PROFIT AND THE PURCHASER HAS NO INTENTION OF HOLDING PROPERTY FOR HIMSELF OR OTHERWISE ENJOYING OR USING IT, PRESENCE OF SUCH AN INTENTION IS A RELEVA NT FACTOR AND UNLESS IT IS OFFSET BY PRESENCE OF OTHER FACTORS, IT WOULD RAISE A STRONG PRESUMPTI ON THAT TRANSACTION IS IN THE NATURE OF TRADE. IT WAS ALSO NOTED THAT DIVIDEND EARNED DURI NG THE YEAR AMOUNTED TO ` .94,259/-, WHICH CLEARLY SHOWS THE INTENTION OF THE ASSESSEE T O HOLD SHARES ONLY FOR SUCH PERIOD AS MAY ENABLE HER ENCASHING THE APPRECIATION IN ITS VALUE. IT WAS IN THIS BACKGROUND THAT THE ASSESSING OFFICER CONCLUDED THAT THE ASSESSEE WAS E NGAGED IN THE BUSINESS OF DEALING IN SHARES AND, ACCORDINGLY, GAINS ON SALE OF SHARES AR E REQUIRED TO BE TREATED AS INCOME FROM BUSINESS AND NOT CAPITAL GAINS. AGGRIEVED WITH THE STAND SO TAKEN BY THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE TH E CIT (A). 3. IT WAS SUBMITTED BY THE ASSESSEE THAT SHE IS A L ADY THAT SHE HAD NO KNOWLEDGE OF TRADING IN SHARES AND STOCKS THAT SHE HAD INVESTED HER SURPLUS FUNDS IN SHARES AND STOCKS FOR GROWTH AND CAPITAL APPRECIATION AND THAT SHE HA D GIVEN HER FUNDS TO ASK RAYMOND JAMES FOR MANAGEMENT UNDER THEIR PORTFOLIO MANAGEM ENT SCHEME(PMS). IT WAS ALSO SUBMITTED THAT THE BUSINESS CANNOT BE CONDUCTED IN SUCH A SCHEME WITHOUT ANY RESTRICTION OR CONTROL ON THE PMS MANAGER AND THAT BUSINESS WAS ALWAYS DONE BY THE PERSON HIMSELF OR DIRECTLY UNDER HIS SUPERVISION. IT WAS ALSO POINTE D OUT BY THE ASSESSEE THAT THE SHARES WERE INVESTED THROUGH PORTFOLIO MANAGEMENT SCHEME AND IN SHARES UNDER THE HEAD INVESTMENTS IN ITS BALANCE SHEET AND THAT THE BOA RD CIRCULAR NO.4 OF 2007 REFERRED (SUPRA) AND THE HONBLE SUPREME COURT JUDGEMENT IN THE CASE OF G.VENTATSWAMI NAIDU & G. V I.T.A NO. 5382 MUM/2009 ASSESSMENT YEAR:2006-07 3 CIT REFERRED ( SUPRA) ARE NOT APPLICABLE ON THE FACTS OF THE ASSESSEES CASE. A DETAILED ANALYSIS WAS THEN MADE TO THE TESTS LAID DOWN BY TH EIR LORDSHIPS IN THE CASE OF G.VENKATSWAMI NAIDU & G. V CIT REFERRED ( SUPRA) AND HOW IT WAS NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE. THE SAME IS REPRODUCED BELOW: - THE SAID DECISION RELIED UPON BY THE AO HAS LAID DO WN CERTAIN TESTS TO DETERMINE WHETHER A TRANSACTION CONSTITUTES CAPITAL GAIN OR B USINESS. THE TESTS AND FACTS OF THE ASSESSEES CASE ARE SET OUT HEREAFTER. 1) WAS THE PURCHASE OF THE COMMODITY AND ITS RESALE AL LIED TO HIS USUAL TRADE OR BUSINESS OR INCIDENTAL TO IT? NO ASSESSEE HAS NO SUCH BUSINESS 2) WHAT IS THE NATURE OF THE COMMODITY PURCHASED AND R ESOLD AND IN WHAT QUANTITY WAS IT PURCHASED AND RESOLD? INVESTMENTS ARE MADE IN SHARES AND MUTUAL FUNDS. 3) DID THE PURCHASE, BY ANY ACT SUBSEQUENT TO THE PURC HASE, IMPROVE THE QUALITY OF THE COMMODITY PURCHASED AND THEREBY MAKE IT MORE READIL Y RE-SALABLE? NO 4) WHAT ARE THE INCIDENTS ASSOCIATED WITH THE PURCHASE AND RESALE? THERE ARE NO ACTIVITIES OF IMPROVEMENT ASSOCIATED W ITH THE PURCHASE AND RESALE, ETC. FURTHER FULL PAYMENT OF THE PURCHASE AND SALE PRICE AND IT WAS NOT A CASE OF THE TRANSACTIONS BEING SQUARED OFF FOR THE DIFFEREN CE. 5) WERE THEY SIMILAR TO THE OPERATIONS USUALLY ASSOCIA TED WITH TRADE OR BUSINESS? NO. IN FACT SHORT TERM GAINS ARE FROM PORTFOLIO MA NAGEMENT SCHEME OPERATED BY ASK RAYMOND JAMES. THE ASSESSEE HAS HERSELF ONLY 9 TRANSACTIONS OF LON G TERM GAIN AND 2 TRANSACTIONS OF SHORT TERM GAINS. 6) IN REGARD TO THE PURCHASE OF THE COMMODITY AND ITS SUBSEQUENT POSSESSION BY THE PURCHASER. DOES THE ELEMENT OF PRIDE OF POSSESSION COME INTO THE PICTURE? NOT APPLICABLE 7) WHETHER THE FINANCE REQUIRED FOR THE PURCHASE OF TH E COMMODITY HAS BEEN FOUND FROM THE SURPLUS FUNDS WITH THE ASSESSE OR WHETHER THEY REPRESENT BORROWED MONEY? INVESTMENTS ARE MADE FROM THE SURPLUS FUNDS THAT AS SESSEE HAS AND SHOWN AS INVESTMENTS IN ITS BALANCE SHEET FILED WITH ASSESSI NG OFFICER. EVEN IN RESPECT OF THE TRANSACTIONS DONE BY THE POR TFOLIO MANAGER, THERE IS ONLY 1 TRANSACTION OF PURCHASE AND SALE BEING IN LESS THAN 7 DAYS (GAIN- ` .35/-) AND ONLY 4 TRANSACTIONS OF PURCHASE AND SALE BEING IN LESS THA N 30 DAYS (GAIN ` .2143/-) ALL OF SALE OF IDBI (GROWTH PLAN) MUTUAL FUND. IT IS SUBMITTED THAT ONE DOES NOT DO TRADING IN MUT UAL FUND. COMPLETE DETAILS OF THE SALE AND PURCHASE HAVE BEEN GIVEN TO THE AO WHO HAS NOT MADE ANY ADVERSE COMMENT. I.T.A NO. 5382 MUM/2009 ASSESSMENT YEAR:2006-07 4 THE AFORESAID CLEARLY INDICATES THAT THE ASSESSEE W AS NOT A TRADER IN SHARES. HENCE, THE ADDITION, IT IS HUMBLY SUBMITTED, SHOULD BE DELETED . 4. ON TAKING INTO CONSIDERATION THE FACTS OF THE CA SE AS ALSO THE SUBMISSIONS SO MADE BY THE ASSESSEE, THE CIT (A) REVERSED THE ACTION OF T HE ASSESSING OFFICER, INTER ALIA, OBSERVING AS FOLLOWS:- 3.8 I HAVE PERUSED THE ASSESSMENT ORDER, WRITTEN SUBMIS SION AND THE JUDICIAL PRONOUNCEMENTS RELIED IN THIS CASE FROM EITHER SIDE . THE MOST FORMIDABLE CONTROVERSY ARISING FROM THE TRANSFER OF SHARES AND SECURITIES IS TO DETERMINE THE EXACT HEAD OF INCOME IN WHICH THE GAINS OR LOSS HAS TO BE TAXED, I.E. THE SAME HAS TO BE TAXED AS BUSINESS INCOME OR CAPITAL GAINS. THIS ISSUE HAS A SSUMED GREATER IMPORTANCE AND THE TAX RATE VARY CONSIDERABLY UNDER THE TWO HEADS. TH E PERCEPTION OF THE TAX PAYERS AND TAX AUTHORITIES ABOUT THE CAPITAL GAINS OR THE BUSI NESS INCOME ARE AT TIMES SO DRAMATICALLY OPPOSED TO EACH OTHER THAT THERE IS EF FECTIVELY NO MEETING GROUND BETWEEN THESE TWO EXTREMES. 3.9 HOWEVER, THIS CASE DOES NOT HAVE THE COMPLEXI TY WHICH ORDINARILY ONE ENCOUNTERS WHILE DEALING WITH THOSE OF ASSESSEES WHO ARE DEAL ING HEAVILY AND EXTENSIVELY IN SHARES AND SECURITIES. THIS CASE IS OF A LADY APPELLANT W HO IS HANDLING ADMINISTRATIVE AND ACCOUNTING FUNCTIONS IN HER HUSBANDS OFFICE ON RET AILER BASIS. SHE HAS INVESTED HER SURPLUS FUND IN SHARES AND STOCKS. SHE HAS SHOWN I T AS INVESTMENT IN HER BALANCE SHEET. SHE HAS CHOSEN ASK RAYMOND JAMES FOR MANAGING SURPL US FUNDS IN THEIR PORTFOLIO MANAGEMENT SCHEME. THE AFORESAID PORTFOLIO MANAGEM ENT SCHEME IS DISCRETIONARY AND THE ASSESSEE HAS NO CONTROL OVER IT SO FAR AS M ETHOD OF INVESTMENT, NUMBER OF TRANSACTION, ETC, IS CONCERNED. THE BUSINESS IS AL WAYS CONDUCTED BY THE PERSON HIMSELF/HERSELF DIRECTLY UNDER HIS/HER SUPERVISION. THE FACTS IN THE PRESENT CASE, THE LADY APPELLANT HAS INVESTED HER SURPLUS FUND IN A Q UALIFIED AGENCY. SHE HAS DONE ONLY 9 TRANSACTION OF LTCG AND 2 TRANSACTION OF STCG. SHE HAS ALSO DEALT IN MUTUAL FUNDS. FROM THE TOTALITY OF THE FACTS, IT IS OBVIOUS THAT THIS APPELLANT DOES NOT HAVE ANY HALLMARK OF TRADE WHETHER IN TERMS OF SOURCE OF DEP LOYMENT OF FUNDS, FREQUENCY OR VOLUME OF TRANSACTION. SIMPLY BECAUSE THERE IS AME NDMENT IN THE ACT THAT SHOULD NOT LEAD TO CHANGING OF THE HEAD IF THE FACTS AND CIRCU MSTANCES DO NOT JUSTIFY. ON THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, THERE IS NO RE ASON FOR TREATING ` .11,11,063/- SHOWN UNDER SHORT TERM CAPITAL GAIN AS BUSINESS INC OME. THEREFORE, THE ORDER OF THE AO IS REVERSED AND THIS GROUND OF APPEAL IS ALLOWED. THE ASSESSING OFFICER IS AGGRIEVED OF THE RELIEF SO GRANTED BY THE CIT (A) AND IS IN APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD OF THE CASE. WE HAVE NOTED THAT SO FAR AS THE PRESENT TRANSACTIONS ARE C ONCERNED, THESE TRANSACTIONS ARE UNDISPUTEDLY CARRIED OUT BY THE ASSESSEES PORTFOLI O MANAGER AND, THEREFORE, THESE ITEMS ARE CLEARLY IN THE NATURE OF TRANSACTIONS MEANT FOR MAX IMIZATION OF WEALTH RATHER ENCASHING THE PROFITS ON APPRECIATION IN VALUE OF SHARES. THE VE RY NATURE OF PORTFOLIO MANAGEMENT SCHEME IS SUCH THAT THE INVESTMENTS MADE BY THE ASS ESSEE ARE PROTECTED AND ENHANCED AND IN SUCH A CIRCUMSTANCE, IT CANNOT BE SAID THAT PORT FOLIO MANAGEMENT IS SCHEME OF TRADING IN SHARES AND STOCK. WHETHER, I.T.A NO. 5382 MUM/2009 ASSESSMENT YEAR:2006-07 5 THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEALING IN SHARES OR INVESTMENT IN SHARES IS ESSENTIALLY A QUESTION OF FACT AND IT HAS TO BE DET ERMINED WITH REGARD TO THE ENTIRETY OF THE CIRCUMSTANCES. IN OUR CONSIDERATION VIEW, IN CIRC UMSTANCE, IN WHICH THE ASSESSEE IS ENGAGED IN A SYSTEMATIC ACTIVITIES OF HOLDING PORTF OLIO THROUGH A PMS MANAGER, IT CANNOT, BY ANY STRETCH OF IMAGINATION, BE SAID THAT THE MAIN O BJECT OF HOLDING THE PORTFOLIO IS TO MAKE PROFIT BY SALE OF SHARES DURING THE COURSE OF MAINT AINING THE PORTFOLIO INVESTMENT OVER THE PERIOD. AS REGARDS THE HIGH NUMBER OF TRANSACTIONS , WHICH HAVE BEEN REFERRED TO BY THE ASSESSING OFFICER, WE HAVE NOTED, ON A PERUSAL OF S TATEMENT FILED BEFORE US, THAT THE NUMBER OF TRANSACTION REFLECTED IN THE STATEMENT DO NOT CO NSTITUTE INDEPENDENT TRANSACTION INASMUCH AS WHEN, IN A COMPUTER BASED TRADING SYSTE M, LET US SAY THE ASSESSEE BUY 1000 SHARES AND THIS PURCHASE IS SPLIT OVER 10 TRANSACTI ONS FROM DIFFERENT PERSONS , WHILE OVER ALL TRANSACTIONS IS OF ONLY ONE PURCHASE 100 SHARES, T HE STATEMENT REFLECT OF THE INDIVIDUAL COMPONENT OF THE TRANSACTION AND WILL THUS SHOW A M ISLEADING HIGH FIGURE. KEEPING IT IN MIND ALL THESE FACTORS AS ALSO THE ENTIRETY OF TH E CASE, WE ARE IN CONSIDERED AGREEMENT WITH THE CONCLUSIONS ARRIVED BY THE CIT (A) WHICH NEEDS NO INTERFERENCE. GRIEVANCES RAISED BY THE ASSESSING OFFICER ARE THUS REJECTED. 6. IN THE RESULT, APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 30 TH NOVEMBER, 2010 SD/- (N.V.VASUDEVAN) (JUDICIAL MEMBER) SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED 30 TH NOVEMBER, 2010 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)-XIX , MUMB AI 4. COMMISSIONER OF INCOME TAX, 19, MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH D, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI I.T.A NO. 5382 MUM/2009 ASSESSMENT YEAR:2006-07 6 I.T.A NO. 5382 MUM/2009 ASSESSMENT YEAR:2006-07 7