ACIT CIR 13(3), MUMBAI V. RAMJI DEVJI KENIA, MUMBAI

ITA 5443/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9213 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 19-12-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 02-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A B KOLI
• Assessee Lawyers: PRADIP N KAPASI
• Keywords: Capital asset; Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI SANJAY ARORA, ACCOUNTANT MEMBER ITA NO. 5444/MUM/2010 (ASSESSMENT YEAR: 2007-08) A C I T 13 (3) SHRI DHIRAJ D. KENIA ROOM NO. 430, 4TH FLOOR C/O. S.K. OIL TRADING CO. AAYAKAR BHAVAN, MK. ROAD VS. 208/210, NARSHI NATHA STREET MUMBAI 400020 MUMBAI 400009 PAN - AFEPK 4544 A APPELLANT RESPONDENT ITA NO. 5443/MUM/2010 (ASSESSMENT YEAR: 2007-08) A C I T 13 (3) SHRI RAMJI DEVJI KENIA ROOM NO. 430, 4TH FLOOR C/O. S.K. OIL TRADING CO. AAYAKAR BHAVAN, MK. ROAD VS. 208/210, NARSHI NATHA STREET MUMBAI 400020 MUMBAI 400009 PAN - AAHPK 1060 A APPELLANT RESPONDENT APPELLANT BY: SHRI A.B. KOLI RESPONDENT BY: SHRI PRADIP N. KAPASI DATE OF HEARING: 19.12.2012 DATE OF PRONOUNCEMENT: 19.12.2012 O R D E R PER D. MANMOHAN, V.P. THESE TWO APPEALS ARE FILED AT THE INSTANCE OF THE REVENUE AND THEY PERTAIN TO A.Y. 2007-08. SINCE THE ISSUES INVOLVED IN BOTH THE APPEALS ARE IDENTICAL, AS AGREED TO BY THE REVENUE AS WELL AS T HE ASSESSEE, WE PROCEED TO DISPOSE OF THESE APPEALS BY A COMBINED ORDER, FOR T HE SAKE OF CONVENIENCE. 2. IN THE CASE OF SHRI RAMJI DEVJI KENIA, THE ASSESSEE SHOWED LONG TERM CAPITAL GAIN OF ` 91,12,159/- REFERABLE TO PURCHASE AND SALE OF SHARE S ARISING OUT OF 77 TRANSACTIONS WHEREAS ACCORDING TO THE AO IT IS A TRADING ACTIVITY AND HENCE NOT ELIGIBLE FOR EXEMPTION UNDER SECTION 10(38) OF THE INCOME TAX ACT. SIMILARLY IN THE CASE OF SHRI DHIRAJ D. KENIA, SHORT TERM CAPITAL GAIN OF ITA NO. 5444/MUM/2010 SHRI DHIRAJ & RAMJI KENIAS 2 ` 8,52,288 AND LONG TERM CAPITAL GAIN OF ` 97,29,558/- WERE DECLARED REFERABLE TO 115 TRANSACTIONS OF PURCHASE AND SALE OF SHARES WHEREAS IN THE OPINION OF THE AO IT AMOUNTS TO TRADING ACTIVITY. 3. THE AO OBSERVED THAT IN ORDER TO APPRECIATE THE OBJ ECT OF INVESTMENT IN SHARES OF COMPANIES SEVERAL FACTORS HAVE TO BE T AKEN INTO CONSIDERATION WHICH CAN BE APPRECIATED ON ANALYSIS OF THE TRANSAC TIONS OF PURCHASE AND SALE OF SHARES. IN THE CASE OF SHRI RAMJI DEVJI KEN IA THE FOLLOWING FACTORS WERE NOTICED: - (A) SHARES WERE SOLD IN HUGE NUMBERS TO ELIMINATE THE P OSSIBILITY OF HOLDING THAT ASSESSEE PURCHASED SHARES ONLY FOR INV ESTMENT PURPOSES. (B) MOST OF THE SHARES HAVE BEEN SOLD WITHIN ONE YEAR OR TWO YEARS WHICH HIGHLIGHTS THAT THE PURCHASE WAS NOT FROM INVESTOR S ANGLE. (C) FREQUENCY IN PURCHASE AND SALE OF TRANSACTIONS IS A LSO AN INDICATOR. 4. WHEN CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO W HY IT SHOULD NOT BE TREATED AS A TRADING ACTIVITY, THE ASSESSEE, VID E LETTER DATED 25.11.2009 SUBMITTED THAT HE IS AN INVESTOR IN SHARES CONSISTE NTLY OVER A PERIOD OF YEARS. HE INVESTED HIS SURPLUS AND DID NOT BORROW F UNDS FOR THE PURPOSE OF INVESTMENT. SHARE PORTFOLIO HAS BEEN BUILT OVER A P ERIOD OF 30 YEARS GRADUALLY AND CONSISTENTLY. PURCHASE OF SHARES WAS ACCOUNTED FOR IN THE BOOKS AS INVESTMENT. IT WAS ALSO SUBMITTED THAT THE INCOME TAX DEPARTMENT IN THE PAST PASSED SPEAKING ORDERS ACCEPTING THE SA ID POSITION AND THE FACT THAT IT WAS INVESTMENT WAS ACCEPTED BY THE ITAT IN ITS ORDER IN ASSESSEES OWN CASE FOR A.Y. 2005-06. DELIVERY OF SHARES HAS A LWAYS BEEN TAKEN AND DULY HELD IN D-MAT ACCOUNT FOR SUBSTANTIAL PERIOD B EFORE SALE AND SUBSTANTIAL DIVIDEND WAS EARNED CONSISTENTLY EVERY YEAR. IT IS ALSO CONTENDED THAT INVESTMENT WAS MADE IN FUNDAMENTALLY STRONG CO MPANIES AND THERE WAS NO INVESTMENT BASED ON MERE RUMOURS OR GOSSIPS. THE PERIOD OF HOLDING IS AT LEAST 188 DAYS IN THE CASE OF SHORT TERM CAPI TAL GAINS AND 707 DAYS IN THE CASE OF LONG TERM CAPITAL GAINS, WHICH IS CONTR ARY TO THE MINDSET OF A TRADER, WHICH FURTHER PROVES THAT ASSESSEE IS AN IN VESTOR. 2. THE AO REJECTED THE CONTENTIONS OF THE ASSESSEE. IN THIS REGARD HE OBSERVED THAT DURING THE FINANCIAL YEAR 2004-05 SE CURITY TRANSACTION TAX WAS INTRODUCED WHEREBY ALL THE TRANSACTIONS OF SECU RITIES WOULD ENTAIL ITA NO. 5444/MUM/2010 SHRI DHIRAJ & RAMJI KENIAS 3 SECURITY TRANSACTION TAX AND LONG TEM CAPITAL GAIN ARISING ON SUCH SECURITIES ARE EXEMPT UNDER SECTION 10(38) OF THE A CT AND SHORT TERM CAPITAL GAIN ARISING OUT OF SALE OF SECURITIES ON WHICH SEC URITIES TRANSACTION TAX HAS BEEN PAID WOULD BE ENTITLED TO CONCESSIONAL RATE OF TAX @10% UNDER SECTION 111A. IN VIEW OF THE ABOVE AMENDMENT IT WAS REQUIRE D ON THE PART OF THE ASSESSEE TO MAINTAIN TWO SEPARATE PORTFOLIOS COMPRI SING SECURITIES WHICH ARE TREATED AS CAPITAL ASSETS AND TRADE PORTFOLIO COMPR ISING STOCK-IN-TRADE. THE PURPOSE OF INVESTMENT IS MOSTLY WITH EXPECTATION TH AT INVESTMENTS MAY APPRECIATE IN LONG RUN. IN OTHER WORDS, INVESTORS A RE RISK-AVERSE AND ATTEMPT TO MAXIMISE THEIR WEALTH. MERELY BECAUSE SHARES WER E SHOWN AS INVESTMENT AND NOT AS STOCK-IN-TRADE, IT CANNOT PER SE SHOW TH AT IT WAS INVESTMENT. ON THE CONTRARY, IF THERE ARE FREQUENT DEALINGS IN SHA RES IN THE EARLIER YEARS AND IN THE SUBSEQUENT YEARS APART FROM CURRENT YEAR, TH E ENTRIES IN THE BOOKS OF ACCOUNT BY RECORDING IT AS INVESTMENT WOULD NOT COM E TO THE RESCUE OF AN ASSESSEE. IN THE INSTANT CASE THE ASSESSEES MOTIVE WAS TO MAKE MAXIMUM PROFIT, SINCE HE WAS ACTIVELY INVOLVED IN STOCK MAR KET AND FREQUENTLY PURCHASED AND SOLD SHARES TO MAKE A GAIN OUT OF THE MOVEMENT IN PRICES; AS A MATTER OF FACT, MAJOR PROFIT WAS DERIVED FROM SHA RE TRANSACTIONS WHERE PURCHASES AND SALES HAVE TAKEN PLACE WITH A PERIOD OF THREE MONTHS AND THE SCALE OF SHARE TRADING TRANSACTION WAS SUBSTANTIAL. LOOKING AT THE NATURE, NUMBER AND VOLUME OF SHARE TRANSACTIONS, THE ASSESS EE CAN BE SAID TO HAVE DEVOTED SUBSTANTIAL TIME IN SHARE PURCHASE AND SALE ACTIVITIES AND THEREFORE HE HAS TO BE TREATED AS ENGAGED IN THE ACTIVITY OF TRADING IN SHARES TO EARN SUBSTANTIAL PROFIT. 3. IN THE CASE OF SHRI DHIRAJ D. KENIA ALSO THE FACTS ARE IDENTICAL. THE ASSESSEE FURNISHED MORE OR LESS IDENTICAL EXPLANATI ON BY STATING THAT NO BORROWED FUNDS WERE EVER USED AND ASSESSEE INVESTED IN SHARES CONSISTENTLY OVER A PERIOD OF 30 YEARS BY USING HIS SURPLUS POST TAX INCOME FOR PURCHASE OF SHARES. IT WAS ALSO SUBMITTED THAT IN THE PAST T HE TRIBUNAL HAS ALSO ACCEPTED THE VIEW TAKEN BY THE ASSESSEE AND THE INC OME TAX DEPARTMENT HAS ALSO ACCEPTED THE POSITION IN THE PAST. IN THE CASE OF SHRI DHIRAJ D. KENIA THE AO FOLLOWED THE SAME PATTERN OF ANALYSIS WHILE ARRIVING AT A CONCLUSION THAT DESPITE AN APPARENT REFLECTION IN T HE BOOKS AS INVESTMENT IT ITA NO. 5444/MUM/2010 SHRI DHIRAJ & RAMJI KENIAS 4 SHOULD BE CONSIDERED AS TRADING ACTIVITY AND FINALL Y HELD THAT IN THE CASE OF THE ASSESSEE IT WAS TRADING ACTIVITY AND ACCORDINGL Y BROUGHT TO TAX THE SHORT TERM AND LONG TERM GAINS AS BUSINESS INCOME. 4. AGGRIEVED ASSESSEES HEREIN PREFERRED APPEALS BEFORE THE CIT(A) 24, MUMBAI WHEREIN IT WAS CONTENDED THAT THE ISSUE STAN DS COVERED IN FAVOUR OF THE ASSESSEES IN ASSESSEES OWN CASE FOR A.Y. 2005- 06. BOTH THE ASSESSEES FILED CHARTS SHOWING COMPARISON OF VOLUME OF PURCHA SES AND SALES OF SHARES IN THREE YEARS TO INDICATE THAT THE FACTS AND CIRCU MSTANCES ARE IDENTICAL IN THIS YEAR AS COMPARED TO THE EARLIER YEARS. THE LEA RNED CIT(A) ANALYSED THE FACTS OF THE CASE TO HOLD THAT THE INCOME EARNED FR OM SALE OF SHARES CANNOT BE TREATED AS INCOME FROM BUSINESS. IN THIS REGARD HE HAS TAKEN INTO CONSIDERATION THE NUMBER OF SCRIPS PURCHASED AND SO LD, AVERAGE PERIOD OF HOLDING, NUMBER OF DAYS OF PURCHASE, NUMBER OF DAYS OF SALES, ETC. TO COME TO THE CONCLUSION THAT IT WAS NOT A CASE OF TRADING ACTIVITY BUT AN INVESTMENT ACTIVITY. AGGRIEVED REVENUE PREFERRED APPEALS BEFOR E US. 5. AT THE TIME OF HEARING BOTH THE PARTIES ADMITTED TH AT THE FACTS IN BOTH THE CASES ARE IDENTICAL AND TOOK US TO THE FACTS ST ATED IN THE CASE OF SHRI DHIRAJ D. KENIA. THE LEARNED D.R. STRONGLY RELIED U PON THE ORDER OF THE AO TO SUBMIT THAT THERE WERE 115 TRANSACTIONS OF PURCHASE AND SALE WHICH ITSELF SHOWS THAT THERE WAS FREQUENCY AND REGULARITY OF TR ANSACTIONS DENOTING A SYSTEMATIC ACTIVITY OF TRADING. IT WAS ALSO SUBMITT ED THAT MAJORITY OF SHARES WERE PURCHASED AND SOLD WITHIN A PERIOD OF SIX MONT HS. THEREFORE, CONSIDERING THE COMPLEX NATURE OF INVESTMENT, IT HA S TO BE ASSUMED THAT THE ASSESSEE WAS INVOLVED IN SHARE TRADING ACTIVITY. 6. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSE SSEE SUBMITTED THAT INCOME FROM SIMILAR TRANSACTIONS, IN FINANCIAL YEAR 2005-06 CORRESPONDING TO A.Y. 2006-07, WAS ACCEPTED AS CAPI TAL GAIN BY AO VIDE INTIMATION UNDER SECTION 143(1) OF THE ACT. EVEN AF TER PASSING A DETAILED ORDER FOR A.Y. 2007-08, BY BRINGING TO TAX THE INCO ME EARNED FROM SALE OF SHARES AS A TRADING ACTIVITY, THE AO PROCEEDED TO A CCEPT THE CAPITAL GAIN DECLARED BY THE ASSESSEE FOR A.Y. 2009-2010 IN AN O RDER PASSED UNDER SECTION 143(3) OF THE ACT. IT WAS ALSO SUBMITTED TH AT IN RESPECT OF A.Y. 2005- 06, UNDER IDENTICAL CIRCUMSTANCES, THE ITAT IN THE CASE OF BOTH THE ITA NO. 5444/MUM/2010 SHRI DHIRAJ & RAMJI KENIAS 5 ASSESSEES, CONSIDERED THE ISSUE AT HAND AND CONCLUD ED THAT IT WAS A CASE OF INVESTMENT IN SHARES. IN THE YEAR UNDER CONSIDERATI ON, THE FACTS ARE MORE FAVOURABLE TO HOLD IT AS INVESTMENT AND HENCE THERE IS NO CASE FOR MAKING AN ADDITION BY HOLDING THAT IT WAS A TRADING ACTIVITY. HE HAS ALSO ENCLOSED A CHART SHOWING A CIRCULAR OF CBDT DATED 16.06.2007 W HEREIN THE BOARD HIGHLIGHTED CERTAIN CRITERIA TO CONSIDER AS TO WHET HER A TRANSACTION CAN BE TREATED AS FALLING IN THE ZONE OF INVESTMENT OR AS TRADING ACTIVITY. 15 REQUIREMENTS WERE STIPULATED AND THE LEARNED COUNSE L FOR THE ASSESSEE SUBMITTED THAT THIS IS A CASE WHERE THERE WAS NO RE PETITION OF TRANSACTIONS OR BORROWED FUNDS WERE NOT USED FOR PURCHASE OF SHA RES AND NONE OF THE CRITERION MENTIONED IN THE CIRCULAR ARE APPLICABLE TO HOLD IT AS BUSINESS ACTIVITY. HE ALSO SUBMITTED THAT THE ORDER PASSED B Y THE ITAT IN ASSESSEES OWN CASE FOR THE EARLIER YEAR WAS CONFIRMED BY THE HON'BLE BOMBAY HIGH COURT. PLACING RELIANCE ON THE PRINCIPLE OF CONSIST ENCY THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FACTS IN THIS Y EAR ALSO BEING IDENTICAL, RATHER MORE FAVOURABLE, THE TRANSACTIONS OF PURCHAS E AND SALE OF SHARES CANNOT BE TREATED AS A TRADING ACTIVITY. HE THUS ST RONGLY SUPPORTED THE ORDER PASSED BY THE LEARNED CIT(A). 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. THE LEARNED CIT(A) HAS GIVEN A CATEGORICAL FINDING THAT ALL THE REQUIREMENTS SPECIFIED BY THE CBDT IN CIRCULAR NO. 4 OF 2007 TO TREAT THE TRANSACTIONS AS INVESTMENT ACTIVITY WERE SATISFIED. THE LEARNED D.R. WAS UNABLE TO CONTRADICT THE FINDINGS OF THE CIT(A). NO DOUBT, ACCORDING TO THE AO, THE SCALE OF ACTIVITY IS SUBSTANTIAL BUT THE FA CT REMAINS THAT IN THE CASE OF SHRI DHIRAJ D. KENIA THERE WERE NO TRANSACTIONS FOR 224 DAYS AND NO PURCHASES FOR 274 DAYS WHICH PROVES THAT IT WAS NOT A REGULAR AND CONTINUOUS ACTIVITY. THE RATIO OF SALES TO PURCHASE S WAS ALSO 1.15:1. THE ASSESSEE HAS REFLECTED THE TRANSACTIONS IN HIS BOOK S AS INVESTMENT AND HE HAS NOT UTILISED BORROWED FUNDS. THERE WAS NO REPET ITION OF TRANSACTIONS, I.E. ONCE A SCRIP IS SOLD IT IS NOT PURCHASED AGAIN. IT WAS NOT A CASE OF DEALING IN SHARES OF DIFFERENT INDIVIDUAL COMPANIES. IT WAS LI MITED TO FEW BLUE CHIP CONCERNS. THE OVERWHELMING EVIDENCE PLACED BEFORE T HE CIT(A) AND BEFORE US IN SUPPORT OF ASSESSEES CONTENTION THAT THEY WERE H OLDING SHARES AS ITA NO. 5444/MUM/2010 SHRI DHIRAJ & RAMJI KENIAS 6 INVESTMENT COULD NOT BE COUNTERED BY THE LEARNED D.R. BY FURNISHING ANY MATERIAL TO THE CONTRARY. UNDER THESE CIRCUMSTANCES WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDERS PASSED BY THE L EARNED CIT(A). WE, THEREFORE, CONFIRM THE ORDERS PASSED BY THE CIT(A) AND DISMISS THE APPEALS FILED THE REVENUE. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH DECEMBER, 2012. SD/- SD/- (SANJAY ARORA) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATED: 19 TH DECEMBER, 2012 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 24, MUMBAI 4. THE CIT 13, MUMBAI CITY 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.