ADDL CIT RG 19(1), MUMBAI V. HARSHA L. TAHILRAMANI, MUMBAI

ITA 5931/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54845 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 08-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 06-11-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S C TIWARI
• Keywords: Capital asset; Business income; Depreciation

Judgement Text

1 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI H BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI J SUDHAKAR REDDY, AM & SHRI VIJAY PA L RAO, JM ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) THE ADDL COMMR OF INCOME TAX RANG 19(1), MUMBAI VS SMT HARSHA L TAHILRAMANI 1003/1102 VINAYAK HEIGHTS NARGIS DUTT ROAD PALI HILL, BANDRA (W) MMBAI 50 (APPELLANT) (RESPONDENT) PAN NO. AAOPT6988Q ASSESSEE BY SHRI S C TIWARI REVENUE BY SHRI SHRI GOLI SRINIWAS RAO DT OF HARING 15 TH JULY.2011 DT OF PRONOUNCEMENT 10 TH AUG 2011 ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 31.8.2009 OF THE CIT(A) FOR ASSESSMENT YEAR 2006-07 . 2 THE REVENUE HAS RAISED THE FOLLOWING GROUND IN TH IS APPEAL: 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 O F RS. 2,01,14,491/- AS A STC GAIN INSTEAD OF BUSINESS INCOME MADE BY ASSESSING O FFICER IN HIS ASSESSMENT ORDER, IGNORING THE FACT THAT; A) THE ASSESSEE HAS DEPLOYED HIS FUND WITH AN INTEN TION OF EARNING PROFIT OF SUCH FUNDS AND THERE WAS NO INTE4NTION OF THE ASSESSEE TO APPRECIATE THE INVESTMENT SO MADE DURING THE YEAR. B) THE ASSESSEE HAD NO INTENTION TO HOLD HER HARES 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 LD CIT(A) HAS FAILED TO APPRECIATE THE IN DEPTH ANALYSIS MAD E BY THE ASSESSING OFFICER BEFORE TREATING THE GAINS AS BUSINESS INCOME AND TH AT CIRCULAR NO.4 OF 2007 2 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) HAS BEEN TAKEN INTO CONSIDERATION TO DECIDE WHETHER T HE GAINS ARE TO BE TREATED AS SUCH OR AS BUSINESS. 3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ALSO ERRED IN IGNORING THE FACT THAT TH E ASESSEES AVERAGE PERIOD OF HOLDING OF SHARES IS LESS THAN ONE MONTH AND ALSO THAT THE ASSESSEE HAS ENTERED INTO 100 TRANSACTIONS OF PURCHASE AND SALE OF SHARES DURING THE CURRENT YEAR. 4 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) FAILED TO APPRECIATE THE FACT THAT THE TRANSACTION I SHOWN WHETHER BY HIMSELF OR THROUGH HIS AGENT HAS TO BE TREATED AS ASSESSEE S OWN TRANSITION AND THE MOTIVE BEHIND SUCH TRANSACTION WAS TO EARN MAXIMUM P ROFIT AND NOT INVESTMENT. 5 THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A O N THE ABOVE GROUNDS BE SET ASIDE AND THE T OF THE ASSESSING OFFICER BE RESTORED. 3 THE ONLY ISSUE ARISES FROM THE GROUNDS OF APPEAL OF THE REVENUE IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) IS JUSTIFIED IN HOLDING THAT THE INCOME ARISING FROM SALE AND PURCHASE OF SHARES AS SHORT TERM CAPITAL GAINS (STCG) INSTEAD OF BUSINESS INCOME ASSESSED BY THE ASSESSIN G OFFICER. 3.1 THE BRIEF STATED FACTS OF THE CASE ARE THAT THE ASSESSEE, DURING THE RELEVANT ASSESSMENT YEAR HAS SHOWN INCOME FROM HOUSE PROPERT Y, BUSINESS INCOME FROM TRADING IN DERIVATIVE SEGMENTS AND FUTURE OPTION AS WELL AS SHORT TERM CAPITAL GAINS (STCG) AND LONG TERM CAPITAL GAINS (LTCG) ON SALE O F EQUITY SHARES. THE INCOME OFFERED BY THE ASSESSEE TO TAX UNDER DIFFERENT HEAD S IS AS UNDER: PARTICULARS AMOUNT INCOME FROM HOSE PROPERTY RS. 8,80,794/- BUSINESS INCOME (FROM TRADING IN DERIVATIVE SEGMENTS) RS. 1,81,90,519/- STCG (ON SALE OF EQUITY SHARES) RS.2,01,14,419/- LTCG (ON SALE OF EQUITY SHARES) RS.1,21,81,611/- INCOME FROM OTHER SOURCES(BANK INTEREST/INTEREST IN BONDS) RS 841/- 3 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) 3.2 THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HA D OPENING STOCK OF RS. 5,07,20,923/- AND CLOSING STOCK OF RS. 9,66,48 ,292/-. DURING THE PERIOD, THE ASSESSEE SOLD SHARES OF RS. 17,01,79,977/- AND PURC HASED SHARES OF RS. 15,00,65,485/-. ON THESE FACTS OF OPENING STOCK, CLOSING STOCK, SAL E AND PURCHASE TRANSACTIONS, THE ASSESSING OFFICER OBSERVED THAT THE MAGNITUDE OF TH E TRANSACTION WAS VERY LARGE AND THE ASSESSEE ENTERED INTO 1900 TRANSACTIONS OF PURC HASE AND SALE OF SHARES OUT OF WHICH, THE HOLDING PERIOD IN CASE OF 570 TRANSACTIO NS IS LESS THAN A MONTH AND IN CASE OF ANOTHER 750 TRANSACTIONS, IT WAS LESS THAN THREE MONTHS. THE ASSESSING OFFICER ALSO OBSERVED THAT THE ASSESSEE CARRIED OUT REPETIT IVE TRANSACTIONS ON SALE AND PURCHASE IN CASE OF 24 SCRIPTS, WHICH SHOWS THAT TH E ASSESSEE IS A TRADER AND NOT AN INVESTOR OF SHARES. THE ASSESSING OFFICER HAS AL SO TAKEN NOTE OF THE FACT THAT THE ASSESSEE TOOK BOTH UNSECURED LOANS AND OVERDRAFT FA CILITY FROM THE BANK FOR SHARE TRADING ACTIVITY. THE ASSESSEE HAS SEVERAL D-MAT A CCOUNTS AND HAS DEALT WITH THREE DIFFERENT BROKERS DURING THE RELEVANT PERIOD. TH E ASSESSEE WAS ALSO ACTIVELY PARTICIPATING IN DERIVATIVE BASED TRADING AND HAVIN G TOTAL TURNOVER OF RS. 215 CRORES DURING THE RELEVANT YEAR. ON THE BASIS OF THESE F ACTS AND CIRCUMSTANCES, THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE ENTIRE STCG ON SALE AND PURCHASE OF SHARES SHOULD NOT BE TREATED AS HE R BUSINESS INCOME. 3.3 THE ASSESSEE EXPLAINED BEFORE THE ASSESSING OFF ICER THAT SHE HAS UNDERTAKEN TWO DIFFERENT ACTIVITIES WHICH ARE DELIVERY BASED T RANSACTIONS IN THE SHARES AND ARE SHOWN AS STCG/LTCG AND NON DELIVERY BASED TRANSACTI ONS WHICH ARE SHOWN AS HER BUSINESS INCOME. THE ASSESSEE RELIED UPON THE CBDT CIRCULAR DATED 15.6.2007 AND MAINLY CONTENDED THAT THE ASSESSEE HAS VALUED HER I NVESTMENT AT COST BASIS 4 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) WHEREAS THE STOCK IN TRADE IS VALUED AS COST OR MAR KET RATE, WHICHEVER IS LOWER. IT WAS FURTHER SUBMITTED BEFORE THE ASSESSING OFFICER THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS EXECUTED THE MAJORI TY OF HER TRANSACTIONS RELATING TO INVESTMENT IN SHARES THROUGH PMS I.E. M/S MOTILAL O SSWAL SECURITIES LTD AND MR RAVI CHADHA. 3.4 AFTER REFERRING VARIOUS CLAUSES OF RESPECTIVE A GREEMENTS WITH PMS, THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THA T THE ENTIRE PROFIT REALISED BY THE ASSESSEE IS ON ACCOUNT OF HER INVESTMENT IN SHARE T RANSACTIONS UNDER PMS AND SHARE HELD IN STOCK ON KEPT AS AN INVESTMENT WITH PMS. 3.5 HOWEVER, THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE AND AFTER CONSIDERING VARIOUS PARAMETERS/G UIDELINES ISSUED BY THE CBDT AS WELL AS CASE LAWS ON THE POINT HAS HELD THAT THE AS SESSEE IS A TRADER IN SHARES AND NOT AN INVESTOR IN SHARES IN RESPECT OF SHARES IN WHICH SHE HAS SHOWN STCG FOR THE RELEVANT ASSESSMENT YEAR. IN SUPPORT OF HIS FINDIN GS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE RECEIVED DIVIDEND OF RS. 6,02,315 /-, WHICH IS QUITE LOW IN COMPARISON OF THE RATE OF INTEREST PAID BY THE ASSE SSEE. THE ASSESSEE DEVOTED SUBSTANTIAL TIME AND ENERGY IN THE AREA OF STOCK MA RKET AND NO OTHER INDEPENDENT ACTIVITY WAS CARRIED OUT. THE ASSESSING OFFICER RE LIED UPON AS MANY AS 27 DECISIONS IN SUPPORT OF HIS VIEW. 5 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) 4 ON APPEAL, THE CIT(A) ALLOWED THE CLAIM OF THE AS SESSEE BY FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT V JCIT 122 TTJ 87 5 BEFORE US, THE LD DR HAS SUBMITTED THAT THE ASSES SEE HAS CARRIED OUT HIGH FREQUENCY OF TRANSACTIONS OF SALE AND PURCHASE OF S HARES. THE MAGNITUDE OF TRANSACTIONS IS ALSO VERY LARGE. HE HAS REFERRED T HE ASSESSMENT ORDER AND SUBMITTED THAT THE ASSESSEE HAS SHOWN CAPITAL GAINS IN CASE O F 2000 TRANSACTIONS OF SALE OF SHARES. HE HAS FURTHER SUBMITTED THAT AS STATED BY THE ASSESSING OFFICER, IN 570 TRANSACTIONS, THE HOLDING PERIOD IS LESS THAN A MON TH AND ANOTHER 760, THE HOLDING PERIOD IS LESS THAN THREE MONTHS. THE LD DR HAS FOR CEFULLY CONTENDED THAT THE ASSESSEE CARRIED OUT REPETITIVE TRANSACTIONS IN TH E SAME SCRIPT AND SUCH TRANSACTIONS HAVE BEEN CONDUCTED IN AS MANY AS 24 SCRIPTS, WHICH CLEARLY SHOW THE INTENTION OF THE ASSESSEE IS TO EARN THE PROFIT FROM QUICK SALE OF SHARES AND NOT TO EARN THE GAIN IN THE VALUE OF INVESTMENT. THE LD DR HAS FURTHER SUB MITTED THAT THE ASSESSEE HAS CARRIED OUT TRADING IN DERIVATIVE (FUTURE AND OPTIO N) TO THE TUNE OF RS. 214.65 CRORES. THUS, THE LD DR SUBMITTED THAT THE HOLDING PERIOD IS SHORT, SALE AND PURCHASE OF SHARES IN A SYSTEMATIC AND ORGANIZED MANNER, MAGNIT UDE OF TRANSACTIONS AS WELL AS REPETITIVE NATURE OF TRANSACTIONS IN THE SAME SCRIP TS, CLEARLY ESTABLISH THAT THE ASSESSEE IS ENGAGED IN THE TRADING ACTIVITY AND NOT INVESTMENT OF SHARES. HE HAS REFERRED THE ORDER OF THE ASSESSING OFFICER AND SUB MITTED THAT THE ASSESSING OFFICER HAS ANALYSED THE RELEVANT FACTS AND GUIDELINES AS P ER THE CBDT CIRCULAR NO.4 OF 2007 DATED 15.6.2007 IN PARA NO.7 OF THE ASSESSMENT ORDE R. WHEN THE ASSESSEE HAS SOLD MOST OF THE SHARES WITHIN A PERIOD OF 1 3 MONTHS AND THE MOTIVE WAS TO EARN QUICK PROFIT AS THERE IS NO MOTIVE SEEMS TO EARN ANY DIVI DEND OR APPRECIATION IN THE VALUE OF THE INVESTMENT. THE ASSESSEE CARRIED OUT SALE AND PURCHASE TRANSACTIONS ALMOST ON DAILY BASIS. WHEN THE ASSESSEE HERSELF HAS ADMIT TED THE BUSINESS INCOME FROM 6 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) TRADING IN DERIVATIVE AND UTILIZED THE BORROWED FUN DS FOR THE PURPOSE OF PURCHASE OF SHARES, THEN, THE MOTIVE OF THE ASSESSEE IS CLEARLY VISIBLE FROM THE FACTS AND THE MANNER IN WHICH THE TRANSACTIONS ARE CARRIED OUT. THE LD DR HAS SUBMITTED THAT IN THE BEGINNING OF THE YEAR, THE ASSESSEE WAS HAVING LOAN OF RS. 2,75,60,717/- AND BANK OVERDRAFT OF RS. 17,60,610/- WHEREAS THE INVES TMENT IN SHARES HAS BEEN SHOWN AS RS. 5,07,20,923/-. THE ASSESSEE WAS HAVING HER OWN CAPITAL OF RS. 2,81,73,712/-; THEREFORE, IT IS CLEAR THAT THE ASSESSEE HAS UTILIZ ED THE BORROWED FUNDS FOR THE PURPOSE OF INVESTMENT. THE LD DR HAS POINTED OUT THAT AT T HE END OF THE YEAR, THE ASSESSEE WAS HAVING LOAN OF RS. 54,81,686/- AND CURRENT LIAB ILITY OF RS. 3,57,91,308/- WHICH INCLUDES THE FUNDING/CREDIT FACILITIES FROM MOTILAL OSWAL OF RS. 3,26,16,665/-. THE LD DR FURTHER POINTED OUT THAT THE ENTIRE FUNDING OF MO TILAL OSWAL IS ONLY REGARDING THE PURCHASE OF SHARES SHOWN BY THE ASSESSEE AS INVESTM ENT. THEREFORE, THE ASSESSEE UTILIZED THE BORROWED FUNDS FOR THE PURPOSE OF SHAR E TRADING ACTIVITY. THE NUMBER OF D-MAT ACCOUNTS MAINTAINED BY THE ASSESSEE AND UTILI SED FOR THE PURPOSE OF SALE AND PURCHASE OF SHARE TRADING ACTIVITIES AND THE EXPEND ITURE CLAIMED BY THE ASSESSEE ON ACCOUNT OF CAR DEPRECIATION, AUDIT, AND LEGAL EXPEN DITURE ETC., SHOW THAT THE ASSESSEE IS IN THE REGULAR TRADING ACTIVITY IN SHAR ES IN A SYSTEMATIC AND ORGANIZED MANNER. HE HAS HEAVILY RELIED UPON THE OBSERVATION S AND THE FINDINGS OF THE ASSESSING OFFICER. 5.1 ON THE OTHER HAND, THE LD AR OF THE ASSESSEE HA S SUBMITTED THAT THE ASSESSING OFFICER HAS NOT MENTIONED THE CORRECT NUMBER OF SCR IPTS WITH REGARD TO THE CAPITAL GAINS OF THE ASSESSEE. HE HAS SUBMITTED THAT ONLY 143 SCRIPTS HAVE BEEN PURCHASED AND SOLD BY THE ASSESSEE FOR CLAIMING THE CAPITAL G AINS. THE LD AR HAS EXPLAINED THAT THE ASSESSING OFFICER HAS TAKEN INTO CONSIDERA TION THE NUMBER OF TRANSACTIONS IN RESPECT OF ONE ORDER WHICH HAS BEEN COMPLETED BY VA RIOUS LOTS; THEREFORE, IN SUCH A 7 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) WAY, EVEN ONE TRANSACTION HAS BEEN COUNTED BY THE A SSESSING OFFICER AS NUMBER OF TRANSACTION DEPENDING ON THE LOTS IN WHICH THE SING LE ORDER HAS BEEN EXECUTED ON THE ELECTRONIC SYSTEM OF STOCK EXCHANGE. THE LD AR HAS SUBMITTED THAT THE ASSESSEE CARRIED OUT ONLY 763 TRANSACTIONS WITH RESPECT TO T HE CAPITAL GAINS. HE HAS FURTHER SUBMITTED THAT EVEN THE ASSESSING OFFICER HAS MENTI ONED IN THE ASSESSMENT ORDER THAT THE OPENING STOCK OF THE ASSESSEE IS LESS THAN THE CLOSING STOCK WHICH SHOWS THAT THE ASSESSEE HAS PURCHASED MORE SHARES THEN SHE HAS SOLD DURING THE YEAR. THE LD AR HAS POINTED OUT THAT THE ASSESSEE HAS MAINTAINED SE PARATE PORTFOLIOS FOR INVESTMENT AND TRADING PURPOSES. THE SHARES KEPT FOR INVESTMEN T ARE VALUED AT COST WHEREAS THE SHARES IN STOCK IN TRADE ARE VALUED AT COST OR MARK ET PRICE, WHICHEVER IS LESS. 5.2 AS REGARDS REPETITIVE TRANSACTIONS IN FEW SCRIP TS, THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT KEEPING IN VIEW OF THE VOLUME OF TRA NSACTIONS SUCH CASES OF REPETITIVE TRANSACTIONS ARE UNAVOIDABLE. THE VALUE OF INVESTM ENT DEPENDING ON THE PERFORMANCE OF THE COMPANY, WHOSE SCRIPTS ARE PURCH ASED AND THEREFORE, IT IS A PERFORMING ASSET. THE LD AR HAS SUBMITTED THAT ONLY IN THE CASE OF 24 SCRIPTS, THE ASSESSEE HAS CARRIED OUT REPETITIVE TRANSACTIONS OF PURCHASE AND SALE. HE HAS FURTHER POINTED OUT THAT EXCEPT IN TWO SCRIPT, THE NUMBER O F REPETITION IS ONCE OR TWICE IN CASE OF OTHER SCRIPTS. HE HAS FURTHER SUBMITTED TH AT THE LOAN WAS REDUCED AT THE END OF THE YEAR WHICH SHOWS THAT THE ASSESSEE HAS REPAI D THE LOAN, WHICH WAS STANDING AT THE BEGINNING OF THE YEAR AND THEREFORE, THE ASS ESSEE DID NOT UTILISE THE BORROWED FUNDS FOR THE PURPOSE OF INVESTMENT IN SHARES DURIN G THE ASSESSMENT YEAR UNDER CONSIDERATION. 8 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) 5.3 AS REGARDS THE CURRENT LIABILITIES, THE SAME AR E WITH THE PORTFOLIO MANAGEMENT SCHEME (PMS) M/S MOTILAL OSWAL SECURITIES LTD., WHO PROVIDED CREDIT FACILITY TO THE ASSESSEE. SINCE THE ASSESSEE IS A TRADER AS WELL A S INVESTOR; THEREFORE, FUTURE OPTION CARRIED OUT BY THE ASSESSEE HAS BEEN SHOWN AS TRADI NG ACTIVITY AND THE INCOME HAS BEEN OFFERED AS BUSINESS INCOME. HE HAS REFERRE D THE DETAILS OF STCG TRANSACTIONS AND SUBMITTED THAT 75% OF STCG EARNED OUT OF THE SH ARES HELD BY THE ASSESSEE FOR MORE THAN THREE MONTHS. THEREFORE, THE HOLDING PERI OD IN THE MAJORITY OF THE TRANSACTIONS IS MORE THAN THREE MONTHS. THE ASSESS EE TREATED THE STCG TRANSACTIONS AS INVESTMENT IN THE BOOKS OF ACCOUNT AND VALUED AT COST. THE PROFIT SEEKING WOULD NOT AUTOMATICALLY CHANGED THE NATURE OF TRANSACTION , IF THE INTEND OF THE ASSESSEE AT THE TIME OF PURCHASE OF SHARES IS INVESTMENT. EVEN , AN INVESTOR IS BOUND TO CONTEMPLATE THE PROFIT DUE TO RISE IN THE VALUE OF THE SHARES AND IS EXPECTED TO HOPE FOR RISE IN THE VALUE. THEREFORE, EVEN IN THE TRANS ACTION OF INVESTMENT, THE BASIC EXPECTATION OF THE INVESTOR IS TO EARN THE PROFIT D UE TO RISE IN THE VALUE AND THE SAME CANNOT BE A DECISIVE FACTOR FOR DETERMINING THE REA L NATURE OF THE TRANSACTION. HE HAS FURTHER SUBMITTED THAT IN THE AYS 2004-05 AND 2 005-06, THE ASSESSING OFFICER HAS ACCEPTED THE STCG ADMITTED BY THE ASSESSEE IN THE S IMILAR CIRCUMSTANCES. HE HAS POINTED OUT THAT THE ASSESSING OFFICER MADE A SPECI FIC ENQUIRY ABOUT THE NATURE OF TRANSACTION FOR ASSESSMENT YEAR 2005-06. HE HAS REF ERRED THE SHOW CAUSE NOTICE DATED 2.11.2006 FOR THE ASSESSMENT YEAR 2004-05 W HEREBY THE ASSESSING OFFICER ASKED THE ASSESSEE AS TO WHY THE STCG SHOULD NOT B TREATED AS BUSINESS INCOME. THE ASSESSEE FILED ITS REPLY DATED 8.11.2006 AND AF TER CONSIDERING THE REPLY OF THE ASSESSEE, THE ASSESSING OFFICER ACCEPTED THE CLAIM OF THE ASSESSEE REGARDING STCG WHILE PASSING THE ASSESSMENT ORDER DATED 30.11.2006 FOR THE ASSESSMENT YEAR 2004- 05 WHEREAS IN THE ASSESSMENT YEAR 2005-06, THE ASSE SSING OFFICER, AFTER DETAILED 9 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) DISCUSSION, VERIFICATION AND EXAMINATION OF THE ISS UE ACCEPTED THE CLAIM OF THE ASSESSEE REGARDING STCG. THUS, THE LD AR OF THE AS SESSEE HAS SUBMITTED THAT WHEN IN THE IDENTICAL CIRCUMSTANCES, THE ASSESSING OFFICER ACCEPTED THE CLAIM OF THE ASSESSEE FOR THE EARLIER YEAR, THE SAME CANNOT BE D ENIED FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. IN SUPPORT OF THE CONTENTION , THE LD AR OF THE ASSESSEE HAS RELIED UPON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS GOPAL PUROHIT REPORTED IN 228 CTR 582 (BOM) 5.4 HE HAS FURTHER CONTENDED THAT THE SALE WITHIN A SHORT PERIOD IS ONLY RESHUFFLING OF PORTFOLIO AND NOT FOR REALIZATION OF PROFIT ON L IQUIDATION OF THE INVESTMENT IN SHARES. THE LD AR HAS SUBMITTED THAT WHEN THE ASSESSEE AFTE R SALE OF ONE LOT OF SHARES HAS PURCHASED ANOTHER LOT OF SHARES THEN, IT IS NOT FOR REALIZATION OF ANY PROFIT BUT RESHUFFLING OF PORTFOLIO. HE HAS RELIED UPON THE FO LLOWING DECISION: I) CIT V ASSOCIATED INDUL DEVELOPMENT CO LTD 82 ITR 586 (SC) II)CIT VS HOLCK LARSEN 150 ITR 67(SC) III FIDELITY NORTH STAR FUND & ORS 288 TR 641 (AAR) IV) SARNATH INFRASTRUCTURE LTD V ACIT 120 TTJ 216(L UCK) V) CIT VS S RAMAAMIRTHAM 306 ITR 239 VI CIT VS RLIANCE UTILITIES & POWER LTD 313 ITR 340 VI) CIT VS PUB FINANCE INDUSTRIES ITA NO.306//DEL 2 010 5.5 THE LD AR HAS ALSO REFERRED THE CIRCULAR NO. 4 OF 2007 DATED 15.6.2007 AND SUBMITTED THAT THE CBDT IN THE SAID CIRCULAR ACCEPT ED THAT THE ASSESSEE CAN HAVE TWO PORTFOLIOS I.E AN INVESTMENT PORTFOLIO COMPRI SING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSET AND A TRADING PORTFOLIO CO MPRISING OF STOCK-IN-TRADE WHICH ARE TO BE TREATED S TRADING ASSETS. WHEN THE ASSES SEE HAS TREATED SEPARATELY CAPITAL ASSET AND TRADING ASSET IN THE BOOKS OF ACCOUNT, TH EN, THE ASSESSING OFFICER CANNOT SUBSTITUTED THE TERMS OF THE SAME. 10 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) 5.6 HE HAS REFERRED THE DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF CIT VS ASSOCIATED INDUSTRIAL DEVELOPMENT CO LTD (SUPRA) AND SUBMITTED THAT WHEN A PARTICULAR HOLDING OF SHARE IS BY WAY OF INVESTMENT AND IT IS EVIDENT FROM THE RECORD THAT THE ASSESSEE IS MAINTAINING DISTINCTION BETWEE N THE INVESTMENT AND STOCK IN TRADE THEN, THE SHARES HELD BY THE ASSESSEE CANNOT BE TREATED AS STOCK IN TRADE. THE LD AR FURTHER CONTENTED THAT EVEN AN INVESTOR C AN FACE AN UNKNOWN AND UNCERTAIN FUTURE AND TRY TO DIVERSIFY THE INVESTMEN T. THE ASSESSEE AVAILED THE SERVICES OF PORTFOLIO MANAGEMENT BY ENTERING INTO A GREEMENT WITH MOTILAL OSWAL SECURITIES LTD AND RAVI CHADA. THE LD AR HAS CONTE NDED THAT AS A GENERAL RULE, GROWTH OF CAPITAL IS DESIRABLE OBJECT OF THE PORTFO LIO MANAGEMENT AND ONCE THE TRANSACTION IS CARRIED BY THE PORTFOLIO MANAGER THE N IN VIEW OF THE AGREEMENT BETWEEN THE ASSESSEE AND THE PORTFOLIO MANAGEMENT S CHEME, THE TRANSACTION CANNOT BE TREATED AS TRADING IN NATURE. HE HAS REL IED UPON THE DECISION OF THE TRIBUNAL IN THE CASE OF ITO VS RADHA BIRJU PATEL IN ITA NO.5382/MUM/2009 DATED 30TH NOV 2010 AND SUBMITTED THAT IN THE SAID CASE THE CO ORDINATE BENCH OF THE TRIBUNAL HAS TAKEN A VIEW THAT THE VERY NATURE OF PORTFOLIO MANAGEMENT SCHEME IS SUCH THAT THE INVESTMENTS MADE BY THE ASSESSEE ARE PROTECTED AND ENHANCED AND IN SUCH A CIRCUMSTANCES, IT CANNOT BE SAID THAT PORTFOLIO MAN AGEMENT IS SCHEME OF TRADING IN SHARES. 5.7 AS REGARDS THE BORROWED FUNDS, THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE DID NOT PURCHASE ANY SHARE BY TAKING L OAN OR BORROWED FUNDS BUT PORTFOLIO MANAGEMENT SCHEME M/S MOTILAL OSSWAL HAS GIVEN THE FACILITY OF CREDIT AND UNPAID PURCHASE PRICE OF SHARES CANNOT BE TAKEN AS USED OF BORROWED FUNDS BY 11 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) THE ASSESSEE. HE HAS FURTHER SUBMITTED THAT EVEN O THERWISE MERELY BECAUSE THE ASSESSEE PURCHASED THE SHARES FROM BORROWED FUNDS W OULD NOT CHANGE THE NATURE OF TRANSACTION FROM INVESTMENT TO THE NATURE OF TR ADING. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF THE HONBLE GUJA RAT HIGH COURT IN THE CASE OF CIT VS NIRAJ AMIDHAR SURTI IN TAX APPEAL NO.836 OF 2009 DATED 21.10.2010. HE HAS ALSO RELIED UPON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF SHRI MAHENDRA C SHAH, IN ITA NO.6289/MUM/2008 AND 4932/ MUM/2009 DATED 18.5.2011 6 WE HAVE CONSIDERED THE RIVAL CONTENTION AND THE R ELEVANT MATERIAL ON RECORD. FIRSTLY, WE WILL DEAL WITH THE ASPECT OF U NIFORMITY IN FACTS AND CONSISTENCY IN DECISION FOR VARIOUS YEARS IN VIEW OF THE DECISION OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GOPAL PUROHIT. 6.1 AT THE OUTSET, WE FIND THAT IN THE EARLIER YEAR S, THE ASSESSEE CLAIMED THE STCG AND THE ASSESSING OFFICER ACCEPTED THE CLAIM OF THE ASSESSEE FOR THE AYS 2004-05 AND 2005-06. HOWEVER, THE FACTS ARE NOT IDENTICAL IN ENTIRETY IN THOSE AYS AND THE ASSESSMENT UNDER CONSIDERATION. THE DISTINGUISHABL E FACTS IN THIS YEAR ARE REPETITIVE NATURE OF TRANSACTIONS AS FAR AS IN 24 SCRIPTS AND THE VARIATION IN HOLDING PERIOD IN RESPECT OF THE SHARES CLAIMED AS STCG. IT IS TO BE NOTED THAT FOR THE ASSESSMENT YEAR 2004-05, THE NUMBER OF TRANSACTIONS AND THE MAGNITU DE OF THE TRANSACTIONS SHOWING STCG WAS VERY LESS. SIMILARLY, IN THE ASSESSMENT Y EAR 2005-06, THE ASSESSING OFFICER TREATED THE TRANSACTION OF SALE AND PURCHASE ON WHI CH THE ASSESSEE CLAIMED STCG AS TRADING PROFIT. HOWEVER, ON APPEAL, THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT FOR THE ASSESSMENT YEAR 2004-05, THE ASSESSING OFFICER ACCEPTED THE CLAIM OF THE ASSESSEE. THE MAGNITUDE AND FREQUE NCY OF TRANSACTIONS ARE VERY 12 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) HIGH IN THE YEAR UNDER CONSIDERATION THAN THE TRANS ACTION IN THE ASSESSMENT YEAR 2004-05. MOREOVER, THERE ARE AS MANY AS 24 TRANSACT IONS OF REPETITIVE NATURE IN THE SAME SCRIPTS AND THE ASSESSEE AVAILED THE CREDIT FA CILITY FROM THE PORTFOLIO MANAGER TO THE TUNE OF RS. 3,26,16,665/-. THEREFORE, THE F ACTS ARE CLEARLY DIFFERENT AND DISTINGUISHABLE IN THE ASSESSMENT YEAR UNDER CONSID ERATION FROM THE FACTS IN THE EARLIER YEARS AND HENCE, THE PRINCIPLES OF CONSIST ENCY AND RES-JUDICATE WOULD NOT APPLY IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 6.2 EVEN OTHERWISE, EACH ASSESSMENT EACH ASSESSMENT YEAR IS SEPARATE ACCOUNTING YEAR AND WHEN THE FACTS ARE NOT IDENTIC AL THEN PRINCIPLE OF RESJUDICATE IS NOT APPLICABLE. SINCE THE ASSESSEE HAS AVAILE D THE SERVICES OF PORTFOLIO INVESTMENT MANAGEMENT AND IN VIEW OF THE ORDER OF T HE TRIBUNAL IN THE CASE OF VS RADHA BIRJU PATEL (SUPRA), IF THE TRANSACTIONS ARE CARRIED OUT THROUGH PORTFOLIO MANAGEMENT SCHEME THEN THE SAME CANNOT BE SAID AS TRADING IN SHARE AND STOCK BUT THE SCHEME IS FOR INVESTMENT. THE COORDINATE B ENCH OF THE TRIBUNAL IN THE SAID CASE HAS OBSERVED IN PARA 5 AS UNDER: 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E RECORD OF THE CASE. WE HAVE NOTED THAT SO FAR AS THE PRESENT TRANSACTIONS ARE CONCERNED, THESE TRANSACTIONS ARE UNDISPUTEDLY CARRIED OUT BY THE ASS ESSEES PORTFOLIO MANAGER AND, THEREFORE, THESE ITEMS ARE CLEARLY IN THE NATURE OF TRANSACTIONS MEANT FOR MAXIMIZATION OF WEALTH RATHER EN-CASHING THE PROFITS ON APPRECIATION IN VALUE OF SHARES. THE VERY NATURE OF PORTFOLIO MANAGEMENT SCHEME IS SUCH THAT THE INVESTMENTS MADE BY THE ASSESSEE ARE PROTECTED AND EN HANCED AND IN SUCH A CIRCUMSTANCE, IT CANNOT BE SAID THAT PORTFOLIO MANA GEMENT IS SCHEME OF TRADING IN SHARES AND STOCK. WHETHER, THE ASSESSEE I S ENGAGED IN THE BUSINESS OF DEALING IN SHARES OR INVESTMENT IN SHARES IS ESSE NTIALLY A QUESTION OF FACT AND IT HAS TO BE DETERMINED WITH REGARD TO THE ENTIRETY OF THE CIRCUMSTANCES. IN OUR CONSIDERATION VIEW, IN CIRCUMSTANCE, IN WHICH THE ASSESSEE IS ENGAGED IN A SYSTEMATIC ACTIVITIES OF HOLDING PORTFOLIO THROUG H A PMS MANAGER, IT CANNOT, BY ANY STRETCH OF IMAGINATION, BE SAID THAT THE MAI N OBJECT OF HOLDING THE PORTFOLIO IS TO MAKE PROFIT BY SALE OF SHARES DURING THE COURSE OF MAINTAINING THE PORTFOLIO INVESTMENT OVER THE PERIOD. AS REGARDS THE HIGH NUMBER OF 13 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) TRANSACTIONS, WHICH HAVE BEEN REFERRED TO BY THE ASSE SSING OFFICER, WE HAVE NOTED, ON A PERUSAL OF STATEMENT FILED BEFORE US, TH AT THE NUMBER OF TRANSACTION REFLECTED IN THE STATEMENT DO NOT CONSTI TUTE INDEPENDENT TRANSACTION IN AS MUCH AS WHEN, IN A COMPUTER BASED TRADING SYSTEM, LET US SAY THE ASSESSEE BUY 1000 SHARES AND THIS PURCHASE I S SPLIT OVER 10 TRANSACTIONS FROM DIFFERENT PERSONS , WHILE OVER ALL TRANSACTIONS IS OF ONLY ONE PURCHASE 100 SHARES, THE STATEMENT REFLECT OF THE INDIVIDUAL COMPO NENT OF THE TRANSACTION AND WILL THUS SHOW A MISLEADING HIGH FIGURE. KEEPING IT IN MIND ALL THESE FACTORS AS ALSO THE ENTIRETY OF THE CASE, WE ARE IN CONSIDERE D AGREEMENT WITH THE CONCLUSIONS ARRIVED BY THE CIT (A) WHICH NEEDS NO IN TERFERENCE. GRIEVANCES RAISED BY THE ASSESSING OFFICER ARE THUS REJECTED. 6.3 IN THE GIVEN FACTS AND CIRCUMSTANCES, IF THE PU RCHASE AND SALE OF SHARES ARE CARRIED OUT UNDER THE SCHEME OF PORTFOLIO MANAGEMEN T THEN THE SAME CANNOT BE TREATED AS TRADING IN SHARE; HOWEVER, IN THE PRESEN T CASE, THE PORTFOLIO MANAGER HAS ALSO PROVIDED THE CREDIT FACILITY TO THE ASSESSEE A ND THERE IS NOTHING STIPULATED IN THE TERMS AND CONDITIONS OF THE AGREEMENT ABOUT THE S AID CREDIT FACILITY AVAILED BY THE ASSESSEE FROM THE PORTFOLIO MANAGER. THEREFORE, TH E TRUE NATURE OF ARRANGEMENTS/TRANSACTIONS OF CREDIT FACILITY BETWEE N THE ASSESSEE AND THE PORTFOLIO MANAGER HAS TO BE VERIFIED AND EXAMINED. IT IS NEC ESSARY TO FIND OUT AS TO HOW AND WHAT TERMS THE CREDIT FACILITY WAS PROVIDED BY THE PORTFOLIO MANGER AND WHETHER THE REPAYMENT WAS MADE BY THE ASSESSEE ON THE BASIS OF FIXED DURATION OR THE PORTFOLIO MANAGER HAS ADJUSTED THE SALE PROCEEDS AGAINST THE CREDIT FACILITY PROVIDED BY IT AS WELL AS THE INTEREST CHARGED ON THE SAME AT THE TIM E OF LIQUIDATION/SALE OF THE SHARES/STOCK HELD IN THE NAME OF THE ASSESSEE. IN CASE THE PORTFOLIO MANAGER IS USING ITS OWN FUNDS IN THE NAME OF THE ASSESSEE AND RECEI VING BACK THE MONEY ON THE SALE OF THE STOCK AND SHARES AND, AFTER ADJUSTING/RECOVE RING ITS OWN MONEY FROM THE SALE PROCEEDS, THE BALANCE IS TRANSFERRED TO THE ACCOUNT OF THE ASSESSEE; THEN, THE SAID ARRANGEMENT CANNOT BE TERMED AS INVESTMENT THROUGH PORTFOLIO MANAGEMENT SCHEME. RATHER, THERE IS NO FUND OF THE ASSESSEE T O BE MANAGED BY PMS. ACCORDINGLY, THE MATTER IS REQUIRED A PROPER VERIFI CATION AND EXAMINATION TO 14 ITA NO. 5931/MUM/2009 (ASST YEAR 2006-07 ) ASCERTAIN THE TRUE NATURE OF THE ARRANGEMENT BETWEE N THE ASSESSEE AND THE PORTFOLIO MANAGER ABOUT THE CREDIT FACILITY AT THE LEVEL OF THE AO. HENCE, THE MATTER IS SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH AS PER LAW AND IN THE LIGHT OF OUR ABOVE OBSERVATION AND A FTER CONSIDERING THE CONTENTION OF THE ASSESSEE. 7 IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOW ED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON THE 10 TH DAY OF AUG 2011. SD/ S D/- (J SUDHAKAR REDDY ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 10 TH AUG 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI