ACIT- 25(3), MUMBAI V. SHRI. CHETAN K. MEHTA, MUMBAI

ITA 5662/MUM/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8020 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 08-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 21-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P N DEVDASAN
• Assessee Lawyers: PRADEEP SAGAR
• Keywords: Capital asset; Business income; Salary income; Rule of consistency; Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI RAJENDRA SIN GH (A.M) ITA NO.5662/MUM/2009(A.Y. 2006-07) THE ACIT 25(3), C-11, ROOM NO.308, PRATYAKSH KAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI 51. (APPELLANT) VS. SHRI CHETAN K. MEHTA, 2-3, KOTHARI HOUSE, 1 ST FLOOR, 5/7, OAK LANE, FORT, MUMBAI 400 001. PAN:AAIPM 2802J (RESPONDENT) APPELLANT BY : SHRI P.N.DEVDASAN RESPONDENT BY : SHRI PRADEEP SAGAR ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE REVENUE DIRECTED AGAINST THE ORDER DATED 13/8/2009 OF CIT(A) XXV, MUMBAI RELATING TO THE ASS ESSMENT YEAR 2006-07. THE GROUND OF APPEAL RAISED BY THE REVENUE READS AS FOLLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ACCEPT THE CLAIM OF SHORT TERM CAPITAL GAIN ON PROFIT ARRIVING FROM PURCHASE OF SHARES INS TEAD OF BUSINESS INCOME TREATED BY THE AO WITHOUT APPRECIATING THE F ACT THE ASSESSEE IS DEALING IN LARGE VOLUME OF SHARES AND MOST OF THE S HARES ARE BOUGHT AND SOLD IN A SHORT PERIOD, THUS INDICATING THAT TH E MAIN INTENTION WAS NOT TO HOLD THE SHARES AS INVESTMENT BUT RATHER THE PRIMARY AND MAIN INTENT WAS TO BOOK PROFIT. 2. THE ASSESSEE IS AN INDIVIDUAL. THE ASSESSEE IS A WHOLE TIME DIRECTOR OF M/S.CM SECURITIES PRIVATE LIMITED. THE BUSINESS OF M/S.CM SECURITIES PRIVATE LIMITED IS THAT DEALING IN SHARES AND SECUR ITIES. THE ASSESSEE IS MAINLY ENGAGED IN DAY-TO-DAY ACTIVITY OF THE SAID C OMPANY. THE ASSESSEE IS ITA NO.5662/MUM/2009(A.Y. 2006-07) 2 THEREFORE WELL VERSED IN THE BUSINESS OF TRADING IN SHARES AND SECURITIES. HE GIVES TECHNICAL, FUNDAMENTAL, CORPORATE ADVISORY AN ALYSIS AND CONSULTANCY SERVICES TO THE CORPORATE REGARDING THE SHARES AND STOCK MARKETS. 3. THE ASSESSEE IN HIS INDIVIDUAL CAPACITY BUYS A ND SELLS SHARES. FOR AY 06-07, THE ASSESSEE FILED RETURN OF INCOME IN WHICH HE DECLARED SHORT TERM CAPITAL GAIN(STCG) ON PURCHASE AND SALE OF SHARES A ND LONG TERM CAPITAL LOSS (LTCG) IN PURCHASE AND SALE OF SHARES. THE ISSUE I N THIS APPEAL IS AS TO WHETHER THE STCG DECLARED BY THE ASSESSEE HAS TO BE ASSESSED AS STCG OR AS INCOME FROM BUSINESS. 4. IN THE INCOME AND EXPENDITURE ACCOUNT, THE ASSE SSEE CREDITED CONSULTANCY FEES RECEIVED OF RS. 10,00,000/-, COMMI SSION RECEIVED OF RS. 1,80,000/- AND PROFIT FROM TRADING IN FUTURE & OPTI ONS OF RS. 77,14,289/- , TOTALING RS.88,94,289/-. AGAINST THESE RECEIPTS TH E ASSESSEE CLAIMED VARIOUS EXPENSES OF RS.86,992/- AND THE NET SURPLUS OF INCO ME OVER EXPENDITURE OF RS.88,07,297/- WAS SHOWN UNDER THE HEAD BUSINESS. UNDER THE HEAD CAPITAL GAINS THE ASSESSEE HAD SHOWN SHORT TERM S PECULATION GAINS (TAXABLE AT NORMAL RATE) OF RS.40,77,711/-, SHORT TERM CAPIT AL GAINS ON SHARES (TAXABLE @10%) OF RS. 6,15,19,949/- AND LONG TERM C APITAL LOSS ON SHARES OF RS. 1,908/-. APART FROM THE ABOVE, THE ASSESSEE DE CLARED SALARY INCOME OF RS. 6,00,000/- AND BANK INTEREST OF RS.6,784/-. DI VIDEND RECEIVED OF RS. 10,67,385/- WAS CLAIMED AS EXEMPT U/S.10(34). 5. ACCORDING TO THE ASSESSEE HE HAS APPLIED HIS KN OWLEDGE BY INVESTING IN THOSE SHARES SECURITIES WHICH HAVE HIGHLY POTENTIAL RETURN AS WELL AS APPRECIATION IN VALUES AND GOOD RETURN BY WAY OF DI VIDEND OR EXPECTED GROWTH OF THE COMPANY. HOWEVER, HE ALWAYS INTENDED TO MAKE INVESTMENTS IN SHARES WITH A VIEW TO EARN RETURN ON INVESTMENT BY WAY OF DIVIDEND AND ITA NO.5662/MUM/2009(A.Y. 2006-07) 3 LOOKING AT EXPECTED GROWTH OF THE COMPANY, WHICH IN DIRECTLY INCREASES PRICE OF THE EQUITIES. AS FAR AS THE FUTURE & OPTION TRA NSACTION ARE CONCERNED HE HAS VERY SHARP REVIEW OF THE MARKET AND TRADED IN T HOSE FUTURE STOCKS WHICH GIVES HIM THE BETTER RETURN AT THE MINIMUM RISK. 6. AN ANALYSIS OF THE TRANSACTIONS WHICH YIELDED S TCG OF RS.6,15,19,949/- EARNED BY THE ASSESSEE SHOWS THE FOLLOWING FEATURES : STCG NO. OF SCRIPS 38 NO. OF SHARES 3079124 FREQUENCY (NO. OF TRANSACTIONS) 142 PURCHASE AMOUNT RS. 31,51,52,676/- SALE AMOUNT RS. 37,89,50,349/- PROFIT/GAIN RS. 6,37,97,673/- EXPENSE CLAIMED RS. 22,77,724/- NET PROFIT RS. 6,15,19,949/- 7. THE ASSESSEE HAS BORROWED MONEY TO THE TUNE OF R S.7.74 CRORES, AS PART OF WHICH HAS BEEN UTILIZED FOR THE ABOVE SHARE TRANSACTIONS. THE ASSESSEE CLAIMED EXPENSES OF RS.22,77,724/- (INCLUD ING INTEREST ON BORROWED FUNDS OF RS.13,54,091/-) AGAINST SHORT TERM CAPITAL GAINS. THE ASSESSEE HAS MAINTAINED FULL OFFICE INFRASTRUCTURE FOR THE PURPO SE OF CARRYING OUT BUSINESS OF SHARE TRADING AND HAD DEBITED EXPENSES OF RS.86, 992/- IN THE INCOME AND EXPENDITURE ACCOUNT UNDER VARIOUS HEADS. IN THE CA SES OF DEALING IN SHARES, SHOWN AS BUSINESS INCOME, BY THE ASSESSEE DURING TH E YEAR, IT WAS OBSERVED BY THE AO THAT ALL THE SHARES WERE BOUGHT AND SOLD ON THE SAME DAY. THE ASSESSEE HAD DIVIDED THE SHARE TRANSACTIONS DONE IN TO TWO CATEGORIES I.E. FIRST WHERE SHARES WERE TO BE DELIVERED TO THE ASSESSEE A ND SECOND WHERE NO DELIVERY WAS REQUIRED TO BE TAKEN. THE ASSESSEE H AS TREATED THE INCOME ARISING OUT OF THE FIRST CATEGORY AS INCOME FROM CA PITAL GAINS AND THAT ARISING OUT OF SECOND CATEGORY I.E. TRANSACTIONS WHERE NO DELIVERY IS REQUIRED TO BE ITA NO.5662/MUM/2009(A.Y. 2006-07) 4 TAKEN, AS BUSINESS INCOME. THE HOLDING PERIOD OF THE 3079124 SHARES BOUGHT & SOLD , THE PROFIT ON WHICH HAS BEEN TREATE D BY THE ASSESSEE AS SHORT TERM CAPITAL GAINS (STCG) WAS AS UNDER: NO. OF SHARES HOLDING PERIOD % OF TOTAL 770317 UPTO 1 WEEK 25% 874619 UPTO 1 MONTH 28% 1275061 UPTO 6 MONTHS 42% 159127 MORE THAN 6 MONTHS 5% THE DIVIDEND ON SHARES EARNED BY THE ASSESSEE OF RS . 10,67,385/- CONSTITUTED 1.44% OF THE TOTAL INCOME (INCLUDING DI VIDEND) FROM SHARE TRANSACTIONS. 8. THE AO WAS OF THE VIEW THAT CONSIDERING THE VOLU ME OF TRANSACTIONS, FREQUENCY, UTILIZATION OF BORROWED FUNDS THE FACT T HAT THE ASSESSEE IS CARRYING OUT PURCHASE AND SALE OF SHARES IN ORGANIZED AND SY STEMATIC MANNER THE AO CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY TH E INCOME OFFERED UNDER THE HEAD STCG SHOULD NOT BE TAXED UNDER THE HEAD IN COME FROM BUSINESS. 9. THE ASSESSEE SUBMITTED IN REPLY THAT HE WAS TH E DIRECTOR OF CM SECURITIES PVT. LTD. AND WAS MAINLY ENGAGED IN THE DAY-TO-DAY ACTIVITY OF THE SAID COMPANY. THE ASSESSEE INVESTED IN EQUITIES L OOKING AT LONG TERM PROSPECT, AS AND WHEN SOME SORT OF GOOD RETURN WAS EXPECTED BY WAY OF DIVIDEND ARE EXPECTED GROWTH OF THE COMPANY THE AS SESSEE HAS SOLD THE SHARES. IT WAS ALWAYS THE INTENTION OF THE ASSESSE E TO EARN RETURN AND INVESTMENTS BY WAY OF DIVIDEND AND LOOKING AT EXPEC TED GROWTH OF INVESTMENTS. THE ASSESSEE HAD TREATED THE SHARES A S INVESTMENT IN ITS BOOKS OF ACCOUNT AND NOT AS STOCK IN TRADE. THE ASSESSEE SUBMITTED THAT THE SHEER MAGNITUDE OF TRANSACTION WILL NOT ALTER NATURE OF T HE TRANSACTION WHICH IS ONE OF TRANSFER OF CAPITAL ASSETS. THE ASSESSEE ALSO P OINTED OUT THAT IT HAD EARNED DIVIDEND OF RS. 10,67,385/- ON THE SHARES WH ICH WERE OFFERED TO TAX ITA NO.5662/MUM/2009(A.Y. 2006-07) 5 UNDER THE HEAD INCOME FROM OTHER SOURCES. THE ASSE SSEE ALSO POINTED OUT THAT IT WAS HOLDING SHARES OF UNLISTED COMPANIES WH ICH WERE SUBJECT TO LOCK IN PERIOD AS WELL AS SHARES OF PRIVATE LIMITED COMP ANIES. THE ASSESSEE POINTED OUT THE MAJOR TRANSACTIONS AS FOLLOWS: PARTICULARS APPRECIATION IN THE VALUE AVERAGE HOLDING PERIOD MAXIMUM HOLDING PERIOD PROFIT ON SHARES RATI UDYOG LTD. 175% 12 DAYS 23 DAYS 1304 9738.94 TALBROS AUTO 272% 212 DAYS 269 DAYS 1747441 6.32 RADHA MADHAV 155% 23 DAYS 36 DAYS 52997 07.78 KHAITAN CHEMICAL 162% 58 DAYS 66 DAYS 172863.68 KIRLOSKAR FERROUS 131% 21 DAYS 21 DAYS 57503.98 SONY SOFTECH 193% 27 DAYS 47 DAYS 221129 26.99 RELIANCE INDUSTRIES 103% 12 DAYS 13 DAYS 2272680.88 THE ASSESSEE ALSO POINTED OUT THAT HE HELD SHARES O F M/S. TALBROS AUTO LTD. AND GOT BONUS SHARES OF 110655 AND RIGHTS ISSUE OF 10539 SHARES. THE ASSESSEE THUS SUBMITTED THAT THE INCOME ON SALE OF SHARES HAS TO BE ASSESSED AS INCOME UNDER THE HEAD CAPITAL GAIN. 10. THE AO HOWEVER, DID NOT ACCEPT THE PLEA OF THE ASSESSEE. HE AFTER REFERRING TO SEVERAL JUDICIAL PRONOUNCEMENTS HELD T HAT THE QUESTION WHETHER TRANSACTION RELATING TO PURCHASE AND SALE OF SHARES WOULD RESULT INTO CAPITAL GAIN OR BUSINESS INCOME IS TO BE DECIDED KEEPING IN MIND THE RATIO LAID DOWN IN SEVERAL DECISIONS. ACCORDING TO THE AO THE ASS ESSEE WAS DEALING IN LARGE VOLUME OF SHARES AND WAS THE SOLE BUSINESS OF THE A SSESSEE. MOST OF THE SHARES ARE BOUGHT AND SOLD WITHIN A SHORT PERIOD. WHILE SOME ARE NOT SOLD DUE TO MARKET CONDITIONS AND THEIR HOLDING WITH THE ASSESSEE REMAINS BEYOND FEW DAYS BUT THAT WILL NOT CHANGE THE NATURE OF TRANSACTIONS. HE HELD THAT THE ASSESSEE HAS ALSO TAKEN LOANS TO DO S HARE BUSINESS. THE ASSESSEE CAN THEREFORE BE SAID TO BE ENGAGED IN THE BUSINESS OF SHARE TRADING ITA NO.5662/MUM/2009(A.Y. 2006-07) 6 AND RUNNING A FULL-FLEDGED OFFICE FOR THIS PURPOSE. THEREAFTER THE AO REFERRED TO THE CBDT CIRCULAR NO.4/2007 DATED 15/6/2007, WHE REIN THE DEPARTMENT HAS LAID DOWN CERTAIN GUIDELINES FOR DECIDING THE Q UESTION AS TO WHETHER INCOME FROM SALE OF SHARES WILL GIVE RAISE TO CAPIT AL GAIN OR INCOME FROM BUSINESS. THE AO THEREAFTER APPLIED THE TEST LAID DOWN IN THE CIRCULAR TO THE CASE OF THE ASSESSEE AND CAME TO THE FOLLOWING CONC LUSION. 1. WHETHER THE PURCHASE AND SALE OF SECURITIES WA S ALLIED TO HIS USUAL TRADE OR BUSINESS/ WAS INCIDENTAL TO IT OR WAS AN O CCASIONAL INDEPENDENT ACTIVITY. THE ASSESSEE IS HAVING PREDOMINANT ACTIVITY OF DEA LING IN SHARES WHERE THE TRANSACTIONS WERE ENTERED INTO CONTINUOU SLY AND REGULARLY DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. 2. TIME DEVOTED TO THE ACTIVITY AND THE EXTENT TO WHICH IT IS THE MEANS OF LIVELIHOOD. IN THE GIVEN CASE THE SHARE RELATED ACTIVITY IS THE PREDOMINANT ACTIVITY BEING UNDERTAKEN BY THE ASSESSEE AND IS A WHOLE TIM E OCCUPATION FOR THE ASSESSEE. 3. WHETHER SCALE OF ACTIVITY IS SUBSTANTIAL. THE SCALE OF ACTIVITY IS DEFINITELY SUBSTANTIAL IN THE CASE OF THE ASSESSEE. THE NUMBER OF TRANSACTIONS AND HE QUANTU M OF SALE AND PURCHASE OF SHARES HAVE BEEN ELABORATED IN PARA 5.2 OF THIS ASSESSMENT ORDER FROM WHERE IT IS CLEAR THAT BOTH T HE NUMBER AND QUANTUM OF TRANSACTIONS ARE SUBSTANTIAL. 4. HOLDING PERIOD OF SECURITIES BOUGHT AND SOLD AN D FREQUENCY OF TRANSACTIONS. ANALYSIS OF STATEMENT OF CAPITAL GAINS FILED BY THE ASSESSEE SHOWS THAT FOR MANY OF THE SCRIPS, THE PERIOD OF HOLDING WAS A FEW DAYS AND MOST OF THE SHARES ARE HELD FOR A FEW MONTHS ONLY. IT WILL NOT BE OUT OF PLACE TO MENTION EVEN AT THE COST OF REPETITION TH AT TAXABILITY OF TRANSACTIONS WILL NOT DEPEND ON PRESENTATION OF ACC OUNTS OR BY SHOWING THE SHARES AS INVESTMENT. IT WILL DEPEND O N THE FACTS OF THE CASE. THE VOLUME, FREQUENCY AND REGULARITY OF SHAR E TRANSACTIONS DONE IN ORGANIZED MANNER INDICATE BUSINESS ACTIVITY [CIT VS. MOTILAL HIRABHAI SPG. & SVG. CO. LTD. (1978) 113 ITR 173 (GUJ)] ITA NO.5662/MUM/2009(A.Y. 2006-07) 7 11. THE A.O THEREAFTER CONCLUDED THAT LOOKING INTO THE VOLUME AND PERIOD OF HOLDING OF THE SHARES, IT WAS CLEAR THAT THE ASS ESSEE HAD NO INTENTION TO HOLD THE SHARES AS INVESTMENT AND EARN DIVIDEND ON THE SAME. 12. THE ASSESSEE ALSO POINTED OUT BEFORE THE AO THA T IN THE EARLIER ASSESSMENT YEAR I.E. A.Y 2005-06 THE DEPARTMENT, IN THE ASSESSMENT OF THAT YEAR, CONSIDERED IDENTICAL TRANSACTIONS AND THE GAI N FROM SUCH TRANSACTIONS CAPITAL GAIN. ON THIS SUBMISSION THE AO HELD THAT THE PRINCIPLE OF REJUDICATA DOES NOT APPLY TO THE PROCEEDINGS UNDER THE INCOME TAX ACT. HE ALSO HELD THAT IN A.Y 2005-06 THE VOLUME AND QUANTUM OF SHARE TRANSACTIONS WAS LESS AND THE STCG EARNED BY THE ASSESSEE WAS ONLY RS.51, 53,873/- AND THAT IN A.Y 2005-06 THE ASSESSEE HAD DEALT IN 33 SCRIPS AS AGAINST 38 SCRIPS IN A.Y 2006-07. THE AO ALSO HELD THAT THE ASSESSEE HAS BE EN TRANSACTING IN SHARES CONTINUOUSLY SINCE LAST MANY YEARS AND THE QUANTUM AND NUMBER OF SCRIPS AND FREQUENCY WAS INCREASING YEAR TO YEAR AND THIS INDICATED THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF PURCHASE AN D SALE OF SHARES. FOR ALL THE ABOVE REASONS THE AO TREATED THE INCOME DEC LARED BY THE ASSESSEE UNDER THE HEAD STCG AS INCOME FROM BUSINESS. THE A O ALLOWED REBATE UNDER SECTION 88E ON STT PAID OF RS.8,74,459/- AND DISALLOWED THE BENEFIT OF LOWER RATE OF TAX ON PROFIT AND SALE OF SHARES. THE AO ALSO TREATED THE GAIN OF RS. 40,77,711/- WHICH WAS DECLARED UNDER THE HEA D CAPITAL GAIN AND WHICH WAS A GAIN ON SHORT TERM SPECULATION TRANSACT ION AS INCOME FROM BUSINESS. 13. AGGRIEVED BY THE AFORESAID ORDER OF THE AO TH E ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). THE CIT(A) ALLOWED THE AP PEAL OF THE ASSESSEE ON THE SOLE GROUND THAT THE FACTS IN THE PRESENT ASSES SMENT YEAR AND ASSESSMENT YEAR 2005-06 WERE IDENTICAL. THE CIT(A ) HELD AS UNDER: ITA NO.5662/MUM/2009(A.Y. 2006-07) 8 6.1 I HAVE CONSIDERED THE SUBMISSIONS OF THE REPR ESENTATIVE AND THE STAND TAKEN BY THE AO. THE APPELLANT WAS ASSESSED U/S. 143(3) FOR THE A.Y 2005-06 AND HIS INCOME ON SALE OF SHARES WA S TREATED AS CAPITAL GAINS. THOUGH THE AO HAD PROPOSED TO TREAT CAPITAL GAIN AS BUSINESS INCOME, ON EXPLANATION BY THE APPELLANT, T HE PROPOSAL WAS DROPPED FOR A.Y. 2005-06. THIS IS CLEAR FROM THE C OPY OF ASSESSMENT ORDER PLACED ON RECORD. FURTHER, THE DETAILS SUBMI TTED BY THE APPELLANT REVEALS THE FOLLOWING FACTS:- A) DURING HE YEAR UNDER APPEAL, THE APPELLANT BOUGHT A ND SOLD SHARES OF 38 COMPANIES AS AGAINST SHARES OF 23 COMPANIES I N EARLIER YEAR; B) DURING THE YEAR THE APPELLANT DID BUYING AND SELLIN G TRANSACTION ON 92 DAYS AS AGAINST 96 DAYS IN THE PREVIOUS YEAR; C) 95% OF THE SHORT TERM GAIN ( RS. 6,03,49,146) WAS E ARNED ON SALE OF SHARES OF ONLY 5 COMPANIES AS AGAINST 96% OF GAIN ( RS.42,34,706) WAS MADE IN EARLIER YEAR; D) AVERAGE HOLDING PERIOD OF SHARES OF THOSE 5 COMPANI ES WAS BETWEEN 10 DAYS TO 205 DAYS DURING THIS YEAR AS AGAINST BET WEEN 5 DAYS TO 42 DAYS IN THE EARLIER YEAR. E) 99.36% OF THE CLOSING INVESTMENT WAS ONLY IN SHARES OF JUST 6 COMPANIES AS AGAINST 99.57% OF THE CLOSING INVESTME NT IN SHARES OF ONE COMPANY. ALL THESE FACTS CLEARLY INDICATE THAT THERE IS NO M ATERIAL CHANGE IN THE OPERATIONS OF THE APPELLANT. SINCE THERE IS NO CHA NGE ON FACTS OR IN LAW, THERE IS NO REASON WHY THERE SHOULD BE A DEPAR TURE IN TREATING CAPITAL GAIN AS BUSINESS INCOME. PRINCIPLE OF CON SISTENCY AS PRONOUNCED BY THE APEX COURT IN RADHASOAMI SATSANG VS. CIT 193 ITR 321 MUST BE HONOURED AND APPLIED. 14. THE CIT(A) ALSO HELD THAT THE TREATMENT OF SHAR ES AS INVESTMENT IN THE ASSESSEES BOOKS OF ACCOUNTS IS NOT CONCLUSIVE BUT WAS INDICATIVE OF THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE. HE WAS OF THE VIEW THAT IN THE CASE OF THE ASSESSEE THE INTENTION AT THE TIME OF PURCHASE WAS TO HOLD THE SHARES AS INVESTMENT AND NOT STOCK IN TRADE. THE C IT(A) ALSO HELD THAT THE INCREASE IN THE VALUE OF THE SHARES AND INCOME WAS BECAUSE OF THE UNUSUAL JUMP IN THE SENSEX. THE CIT(A) ALSO HELD THAT USE OF BORROWED FUNDS FOR PURCHASE OF SHARES SHOULD NOT BE AN ADVERSE FACTOR AND THAT IT IS NOT CORRECT TO SAY THAT WHEN SHARES ARE PURCHASED THROUGH BOR ROWED FUNDS THEY CANNOT BE CLAIMED TO BE HELD AS INVESTMENTS. THE C IT(A) ALSO HELD THAT THE ITA NO.5662/MUM/2009(A.Y. 2006-07) 9 FACT THAT THE ASSESSEE HELD UNLISTED SHARES AND SHA RES OF PRIVATE LIMITED COMPANIES ALSO SHOWED THAT HE WAS NOT A TRADER IN S HARES. THE CIT(A) FOLLOWED THE DECISION OF THE ITAT IN THE CASE OF GO PAL PUROHIT VS. JCIT, 29 SOT 117, WHEREIN IT WAS HELD THAT THE PRINCIPLE OF CONSISTENCY MUST BE APPLIED AND IF ON SAME FACTS A PARTICULAR STAND HAS BEEN ACCEPTED BY THE REVENUE IN THE PAST THE REVENUE CANNOT BE ALLOWED T O TAKE CONTRARY STAND ON A LATER ASSESSMENT. FOR ALL THE ABOVE REASONS THE CIT(A) HELD THAT THE STCG DECLARED BY THE ASSESSEE SHOULD BE ACCEPTED. 15. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVEN UE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 16. THE LD. D.R RELIED ON THE ORDER OF THE AO AND F URTHER SUBMITTED THAT BORROWINGS WERE SUBSTANTIAL IN THIS YEAR AND THAT T HE VALUE OF THE SHARES DEALT WITH BY THE ASSESSEE WERE ALSO HIGH. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND SUBMITTED A COMPARATIVE CHART OF THE FACTS AS PREVAILED IN A.Y 2005-06 AND 2006-07 AND SUBMITTED THAT THE ACTI ON OF THE CIT(A) IN TREATING THE GAIN ON SALE OF SHARES AS STCG WAS JUS TIFIED. IN THIS REGARD A COPY OF ORDER OF ASSESSMENT FOR A.Y 2005-06, WHEREI N THE STAND OF THE ASSESSEE WAS ACCEPTED BY THE AO HIMSELF WAS ALSO FI LED. FURTHER RELIANCE WAS PLACED ON THE DECISION OF ITAT MUMBAI IN ITA NO .6429/M/09, IN THE CASE OF ACIT VS. NAISHADH V. VACHHARAJANI, WHEREIN IT WAS HELD THAT VOLUME AND FREQUENCY OF TRANSACTIONS, WOULD NOT BE DECISIV E IN HOLDING THAT STCG IS IN FACT BUSINESS INCOME. ALTERNATIVELY THE ASSESSE E SUBMITTED THAT IF FOR ANY REASON THE TRIBUNAL COMES TO THE CONCLUSION THAT TH E STCG IS INCOME FROM BUSINESS THEN TO THE EXTENT OF SHARES SOLD DURING THE PREVIOUS YEAR WHICH WAS OPENING STOCK OF SHARES AS ON 1/4/2006 AND BONU S SHARES AND RIGHT SHARES( WHICH HE ASSESSEE BECAME ENTITLED TO BY VIR TUE OF HIS HOLDINGS IN THE OPENING STOCK OF SHARES HELD BY THE ASSESSEE AS ON 1/4/2006) SHOULD BE ITA NO.5662/MUM/2009(A.Y. 2006-07) 10 TREATED AS GIVING RISE TO STCG BECAUSE IN A.Y. 2005 -06 THESE SHARES WERE ALREADY TREATED AS INVESTMENT BY THE AO HIMSELF AND A DIFFERENT TREATMENT CANNOT BE GIVEN IN A.Y. 2006-07. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSION. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE ISSUE TO BE DECIDED IS AS TO WHETH ER THE STCG ON TRANSACTION OF PURCHASE AND SALE OF SHARES UNDERTAKEN BY THE ASSES SEE DURING THE PREVIOUS YEAR IS TO BE ASSESSED UNDER THE HEAD INCOME FROM BUSINESS AS CLAIMED BY THE REVENUE OR INCOME UNDER THE HEAD CAPITAL GAIN AS CONTENDED B Y THE ASSESSEE. BEFORE WE DEAL WITH THE FACTS OF THE CASE OF THE ASSESSEE, WE WILL BRIEFLY NARRATE THE PRINCIPLES APPLICABLE IN DECIDING THE ABOVE ISSUE AS LAID DOWN IN SEVERAL JUDICIAL PRONOUNCEMENTS :- (A) WHETHER A TRANSACTION OF SALE AND PURCHASE OF SHARE S WERE TRADING TRANSACTIONS OR WHETHER THEY WERE IN THE NATURE OF INVESTMENTS IS MIXED QUESTION OF LAW AND FACT. CIT VS. HOLCK LARSEN, 60 ITR 67 (SC). (B) IT IS POSSIBLE FOR AN ASSESSEE TO BE BOTH AN INVEST OR AS WELL AS A DEALER IN SHARES. WHETHER A PARTICULAR HOLDING IS BY WAY OF I NVESTMENT OR FORMED PART OF STOCK IN TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE AND IT IS FOR THE ASSESSEE TO PRODUCE EVID ENCE FROM HIS RECORDS AS TO WHETHER HE MAINTAINED ANY DISTINCTION BETWEEN SHARES WHICH WERE HOLD BY HIM AS INVESTMENTS AND THOSE HOLD AS STOCK IN TRADE. (CIT VS. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. LTD., 82 ITR 586 (SC). (C) TREATMENT IN THE BOOKS BY AN ASSESSEE WILL NOT BE C ONCLUSIVE. IF THE VOLUME, FREQUENCY AND REGULARITY WITH WHICH TRANSAC TIONS ARE CARRIED OUT INDICATE SYSTEMATIC AND ORGANIZED ACTIVITY WITH PRO FIT MOTIVE, THEN IT WOULD BE A CASE OF BUSINESS PROFITS AND NOT CAPITAL GAIN. CIT VS. MOTILAL HIRABHAI SPG. AND WVG. CO. LTD., 113 ITR 173 (GUJ); RAJA BAHADUR VISWSHWARA SINGH VS. CIT, 41 ITR 685 (SC). (D) PURCHASE WITHOUT AN INTENTION TO RESELL WHERE THEY ARE SOLD UNDER CHANGED CIRCUMSTANCES WOULD BE CAPITAL GAINS. CIT V S. PKN, 60 ITR 65 (SC). PURCHASE WITH AN INTENTION TO RESELL WOULD RE NDER THE GAIN PROFIT ON SALE BUSINESS PROFIT DEPENDING ON THE CIRCUMSTANCES OF THE CASE LIKE NATURE AND QUANTITY OF ARTICLE PURCHASED, NATURE OF THE OPERATION INVOLVED. SAROJ KUMAR MAZUMDAR VS. CIT, 37 ITR 242 (SC). (E) NO SINGLE FACT HAS ANY DECISIVE SIGNIFICANCE AND TH E QUESTION MUST DEPEND UPON THE COLLECTIVE EFFECT OF ALL THE RELEVANT MATE RIALS BROUGHT ON RECORD. JANKI RAM BAHADUR RAM VS. CIT, 57 ITR 21 (SC). 12. THE ABOVE TESTS HAVE AGAIN BEEN REITERATED BY THE CBDT IN ITS CIRCULAR REFERRED TO BY THE AO IN THE ORDER OF ASSESSMENT. KEEPING I N MIND, THE ABOVE BROAD ITA NO.5662/MUM/2009(A.Y. 2006-07) 11 PRINCIPLES, WE SHALL NOW EXAMINE THE CASE OF THE AS SESSEE. THE ASSESSEE DURING THE PREVIOUS YEAR HAD ENTERED INTO TRANSACTIONS OF PURC HASE OF SHARES OF ABOUT 38 COMPANIES TOTALING TO RS. 31,51,52,676 AND ALL THOS E SHARES WERE SOLD FOR A VALUE OF RS.37,89,50,348. THE ABOVE TRANSACTIONS WERE EFFECT ED BY ACTUAL DELIVERY OF SHARES AT THE TIME OF PURCHASE AND SALE. BESIDES SUCH TRAN SACTIONS, THE ASSESSEE HAD ALSO ENTERED INTO TRANSACTIONS OF PURCHASE AND SALE OF S HARES WHERE THERE WAS NO ACTUAL DELIVERY. THE NET PROFIT AFTER EXPENSES ON SUCH TRA NSACTIONS WAS RS.40,77,711. BOTH THE AFORESAID TRANSACTIONS WERE IN RESPECT OF TRANSACTION OF PURCHASE AND SALE OF SHARES WHERE THE HOLDING PERIOD WAS LESS THAN 12 MONTHS. THE PROFIT ON TRANSACTION AND SALE OF SHARES WHERE THERE WAS NO D ELIVERY WAS OFFERED TO TAX BY THE ASSESSEE AS SPECULATIVE INCOME UNDER THE HEAD BUSIN ESS INCOME. THE INCOME FROM OTHER TRANSACTIONS WHERE THERE WAS ACTUAL DELIVERY WAS CLAIMED BY THE ASSESSEE TO BE STCG. SUCH TRANSACTIONS WERE ABOUT 142 IN NUMBER DURING THE PREVIOUS YEAR. THE NUMBER OF SHARES DEALT WITH BY THE ASSESSEE WAS 30,79,124. THE HOLDING PERIOD WAS AS FOLLOWS: NO. OF SHARES HOLDING PERIOD % OF TOTAL 770317 UPTO 1 WEEK 25% 874619 UPTO 1 MONTH 28% 1275061 UPTO 6 MONTHS 42% 159127 MORE THAN 6 MONTHS 5% THE FACTORS WHICH GO IN FAVOUR OF THE ASSESSEE THAT THE INCOME IN QUESTION IS SHORT TERM CAPITAL GAIN (STCG) ARE AS FOLLOWS: 1. THE FACT THAT IN THE EARLIER AY I.E., AY 05-06, ON IDENTICAL VOLUME OF TRANSACTION, THE AO IN ASSESSMENT U/S.143(3) OF THE ACT, ACCEPTED THE CASE OF THE ASSESSEE THAT INCOME FROM PURCHASE AND SALE OF SHARES IS STCG AND NOT BUSINESS INCOME. THE FACTS AS IT PREVAILED IN THE EARLIER YEAR WERE AS FOLLOWS: AY 05-06 AY 06-07 (A) NO.OF SCRIPTS DEALT WITH BY THE ASSESSEE 23 38 (B) NO.OF DAYS ON WHICH TRANSACTIONS WERE CARRIED OUT 92 DAYS 96 DAYS (C) VOLUME NO. OF SHARES 6,18,984 30,79,124 (D) PURCHASE VALUE 4,29,24,768 31,51,52,676 (E) SALE VALUE 4,73,44,028 37,89,50,348 ITA NO.5662/MUM/2009(A.Y. 2006-07) 12 (F) GAIN 44,19,260 6,37,97,673 (G) NO. OF TRANSACTIONS 128 148 2. THE ASSESSEE IN AY 05-06 HAD USED BORROWED FUNDS TO MAKE INVESTMENT IN SHARES. 3. THE ASSESSEE CARRIED OUT TRANSACTION OF PURCHASE AN D SALE OF SHARES WITHOUT DELIVERY IN AY 05-06 ALSO. 4. THE VOLUME AND FREQUENCY OF THE TRANSACTIONS ARE SU BSTANTIALLY THE SAME AS IT WAS IN AY 05-06 EXCEPT FOR THE VALUE, WHICH HAS GONE UP SUBSTANTIALLY AND WHICH HAS BEEN EXPLAINED BY THE ASSESSEE AS OWING T O RAISE IN THE SENSEX. WHICH WERE ABOUT 800 IN NUMBER WHERE THE HOLDING PE RIOD WAS BETWEEN MINIMUM OF 1 DAY TO MAXIMUM OF 6 MONTHS. 5. PURCHASE AND SALE OF SHARES WAS NOT THE ONLY ACTIVI TY OF THE ASSESSEE. 6. THE PERIOD OF HOLDING ON AN AVERAGE WAS 24 DAYS IN AY 05-06 WHEREAS IN AY 06-07 IT WAS 86 DAYS. 7. THE ASSESSEE ALSO INVESTED SHARES OF PRIVATE LIMITE D COMPANIES AND UNLISTED COMPANIES. 8. THE ASSESSEE DID RECEIVE SUBSTANTIAL DIVIDEND INCOM E ON SHARES. 9. THE ASSESSEE HELD THE SHARES AS INVESTMENT IN ITS B OOKS OF ACCOUNTS AND NOT AS STOCK-IN-TRADE. FACTORS WHICH MAY GO AGAINST THE ASSESSEE IN ACCEPT ING THE PLEA THAT THE INCOME IS QUESTION IS STCG AND THE REPLY OF THE ASSESSEE ON T HE SAME ARE AS FOLLOWS: 1. THE CONDUCT OF THE ASSESSEE IN SHOWING INCOME FROM DELIVERY BASED TRANSACTIONS AS STCG AND NON-DELIVERY BASED TRANSAC TION AS BUSINESS INCOME ONLY SHOWS THAT BUT FOR ACTUAL DELIVERY EVEN INCOME FROM THOSE TRANSACTIONS WOULD HAVE BEEN CONSIDERED AS SPECULAT IVE INCOME AND BUSINESS INCOME. THE INCOME FROM DELIVERY BASED TRA NSACTIONS ARE SOUGHT TO BE PROJECTED AS STCG ONLY BECAUSE THERE WAS ACTU AL DELIVERY AND BECAUSE THEY WERE SHOWN AS INVESTMENTS IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. THE SUBMISSION OF THE ASSESSEE ON THIS A SPECT IS THAT ON THE SAME SET OF FACTS, THE REVENUE IN AY 05-06 ACCEPTED THE PLEA OF ASSESSEE THAT GAIN ON PURCHASE AND SALE OF SHARES IS STCG TH OUGH IN THAT YEAR ALSO, THE ASSESSEE INDULGED IN NON-DELIVERY BASED TRANSAC TIONS. 2. THE HOLDING PERIOD BEING VERY SHORT IT IS REASONABL E TO PRESUME THAT THE PURCHASE WAS MADE WITH AN INTENTION TO RESELL. THE SUBMISSION OF THE ASSESSEE ON THIS ASPECT IS THAT THE HOLDING PERIOD IS MUCH LONGER THAN AY 05-06 3. THE SCALE OF ACTIVITY IS SUBSTANTIAL. THE SUBMISSI ON OF THE ASSESSEE IS THAT THE SAME IS BECAUSE OF INCREASE IN SENSEX FROM 6000 POINTS TO 11000 POINTS. 4. THE TRANSACTIONS WERE CONTINUOUS AND REGULAR BESIDE S BEING SYSTEMATIC. THE SUBMISSION OF THE ASSESSEE IS THAT THERE WERE O NLY 148 TRANSACTIONS CARRIED OUT ON 96 DAYS DURING THE PREVIOUS YEAR. 5. BORROWED FUNDS HAD BEEN USED FOR PURCHASE OF SHARES . THE SUBMISSION OF THE ASSESSEE HAS BEEN THAT THERE IS NO BAR TO USE B ORROWED FUNDS TO MAKE ITA NO.5662/MUM/2009(A.Y. 2006-07) 13 INVESTMENTS. BESIDES THE ABOVE, ON THE SAME SET OF FACTS, THE REVENUE ALLOWED THE CLAIM OF THE ASSESSEE IN AY 05-06. 6. SUBSTANTIAL TIME DEVOTED BY THE ASSESSEE TO THE ACT IVITY OF PURCHASE AND SALE. THE ASSESSEE DID NOT DEVOTE TIME BECAUSE THE KNOWLEDGE WHICH GAINED IN THE COURSE OF HIS SERVICE WAS USED. 7. THE SHARES SOLD AND PURCHASED ARE OF LISTED COMPANI ES. THE ASSESSEE ALSO HELD SHARES OF PRIVATE LIMITED COMPANIES AND UNLIST ED COMPANIES. 8. COMPOSITION OF THE DIVIDEND INCOME IS MEAGER, WHICH GOES TO SHOW THAT THE ASSESSEE NEVER LOOKED FOR RETURNS FROM INVESTMENTS. AS AN INVESTOR ONE NEED NOT LOOK ONLY FOR RETURNS IN THE FORM OF DIVID END BUT ALSO APPRECIATION OF CAPITAL. 13. IN THE LIGHT OF THE ABOVE CIRCUMSTANCES PREVAI LING IN THE CASE OF THE ASSESSEE, WE ARE OF THE VIEW THAT THE CONCLUSION OF THE CIT(A ) THAT THE INCOME FROM SALE OF SHARES DECLARED BY THE ASSESSEE AS STCG HAS TO BE A CCEPTED IS CORRECT AND CALLS FOR NO INTERFERENCE. 14. IN CIT VS. GOPAL PUROHIT 228 CTR 582 (BOM), THE QUE STION OF LAW RAISED WAS REGARDING WHETHER STCG DECLARED BY THE ASSESSEE WAS TO BE ASSESSED AS BUSINESS INCOME OR NOT. QUESTION (B) CONSIDERED BY THE HONBLE BOMBAY HIGH COURT WAS AS FOLLOWS: (B) WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE ITAT WAS JUSTIFIED INHOLDING THAT PRINC IPLE OF CONSISTENCY MUST BE APPLIEDHERE AS AUTHORITIES DID NOT TREAT TH E ASSESSEE AS A SHARE TRADER IN PRECEDING YEAR, IN SPITE OF EXISTEN CE OF SIMILAR TRANSACTION, WHICH CANNOT IN ANY WAY OPERATE AS RES JUDICATA TO PRECLUDE THE AUTHORITIES FROM HOLDING SUCH TRANSACT IONS AS BUSINESS ACTIVITIES IN CURRENT YEAR? THE HONBLE BOMBAY HIGH COURT HELD AS FOLLOWS: 3. IN SO FAR AS QUESTION (B) IS CONCERNED, THE TRI BUNAL HAS OBSERVED IN PARAGRAPH 8.1 OF ITS JUDGMENT THAT THE ASSESSEE HAS FOLLOWED A CONSISTENT PRACTICE IN REGARD TO THE NATURE OF THE ACTIVITIES, THE MANNER OF KEEPING RECORDS AND THE PRESENTATION OF SHARES A S INVESTMENT AT THE END OF THE YEAR, IN ALL THE YEARS. THE REVENUE SUBM ITTED THAT A DIFFERENT VIEW SHOULD BE TAKEN FOR THE YEAR UNDER CONSIDERATI ON, SINCE THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE TO ASSESSMENT PROCEEDINGS. THE TRIBUNAL CORRECTLY ACCEPTED THE POSITION, THAT THE PRINCIPLE OF RES JUDICATA IS NOT ATTRACTED SINCE EACH ASSESSMENT YEAR IS SEPA RATE IN ITA NO.5662/MUM/2009(A.Y. 2006-07) 14 ITSELF. THE TRIBUNAL HELD THAT THERE OUGHT TO BE UN IFORMITY IN TREATMENT AND CONSISTENCY WHEN THE FACTS AND CIRCUMSTANCES AR E IDENTICAL, PARTICULARLY IN THE CASE OF THE ASSESSEE. THIS APPR OACH OF THE TRIBUNAL CANNOT BE FAULTED. THE REVENUE DID NOT FURNISH ANY JUSTIFICATION FOR ADOPTING A DIVERGENT APPROACH FOR THE ASSESSMENT YE AR IN QUESTION. QUESTION (B), THEREFORE, DOES NOT ALSO RAISE ANY SU BSTANTIAL QUESTION. 15. THE ABOVE DECISION OF THE HONBLE BOMBAY HIGH COURT IS CLEARLY APPLICABLE IN THIS CASE. AS WE HAVE ALREADY SEEN THAT THE AO IN AY 05-06 RAISED A SPECIFIC QUERY ON THE ISSUE WHETHER THE STCG DECLARED BY THE ASSES SEE HAS TO BE ASSESSED AS BUSINESS INCOME AND THE AO AFTER DISCUSSION ACCEPTE D THE PLEA OF THE ASSESSEE AND ASSESSED INCOME DECLARED ON PURCHASE AND SALE OF SH ARES AS GIVING RAISE TO STCG. WE HAVE ALSO SEEN THAT THE FACTS AND CIRCUMSTANCES IN THE AY 05-06 ARE IDENTICAL. THOUGH THE RULE OF RES JUDICATA IS NOT APPLICABLE B UT THE PRINCIPLE OF CONSISTENCY WILL DEFINITELY APPLY AND ON THAT BASIS THE CLAIM OF THE ASSESSEE SHOULD BE HELD TO BE PROPER. IF AT ALL THE ONLY FACTOR WHICH MAY GO AGA INST THE ASSESSEE IS THE FACT THAT THE VOLUME OF SHARES TRANSACTED AND THEIR VALUE IS HIGH IN THE PRESENT A.Y. ON THIS ASPECT, WE FIND THAT THE CIT(A) HAD RELIED ON THE D ECISION OF THE HONBLE ITAT MUMBAI BENCH DECISION IN THE CASE OF JANAK S.RANGWA LA VS. ACIT 11 SOT 627 (MUM) WHEREIN IT HAS BEEN HELD THAT MAGNITUDE OF TH E TRANSACTION DOES NOT ALTER THE NATURE OF THE TRANSACTION. 16. FOR THE REASONS GIVEN ABOVE, WE CONFIRM THE OR DER OF CIT(A) AND DISMISS THE APPEAL BY THE REVENUE. 17. IN THE RESULT, THE APPEAL BY THE REVENUE IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 23RD DAY OF MARCH, 2011. SD/- SD/- (RAJENDRA SINGH) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 23RD MARCH.2011 ITA NO.5662/MUM/2009(A.Y. 2006-07) 15 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RC BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.5662/MUM/2009(A.Y. 2006-07) 16 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 8/3/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 8/3/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER