ADDL CIT 2(3), MUMBAI V. SWEET SOLUTIONS LTD, MUMBAI

ITA 6019/MUM/2009

• Counselvise Citation: 601919914 RSA 2009
• Duration Of Justice: 2 year(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 14-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 12-11-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B JAYA KUMAR
• Assessee Lawyers: R C JAIN; MURLIDHAR
• Keywords: Capital asset; Business income; Depreciation; Rule of consistency; Advance ruling; Question of law; Speculation loss; Deemed dividend; Unabsorbed depreciation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E , MUMBAI BEFORE SHIRI N.V. VASUDEVAN, JM AND SHRI R.K. PANDA , AM ITA NO. : 6019/MUM/2009 ASSESSMENT YEAR : 2006-07 DCIT-2(3), R.NO.555, AAYAKAR BHAVAN, MUMBAI SWEET SOLUTIONS LTD., (NOW KNOWN AS M/S. SUBHKAM VENTURES (I) P. LTD.), THE INTERNATIONAL HOUSE 4 TH FLOOR, NEW MARINE LINES CROSS ROAD NO.1, NEAR AMERICAN CENTRE, 16 M.K. ROAD, CHURCHGATE, MUMBAI-400 020. PAN : AADCS 0992F (APPELLANT) VS. (RESPONDENT) DEPARTMENT BY : SHRI B. JAYA KUMAR ASSESSEE BY : S/SHRI MURLIDHAR & R.C. JAIN DATE OF HEARING : 14.09.2011 DATE OF PRONOUNCEMENT : 30.11.2011 ORDER PER R. K. PANDA (AM) : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 28.08.2009 OF THE COMMISSIONER OF INCOME TAX (A)- X XX, MUMBAI RELATING TO ASSESSMENT YEAR 2006-07. 2. THE GROUNDS OF APPEAL NO. 1 AND 5 BY THE REVENUE ARE GENERAL IN NATURE AND HENCE DISMISSED. ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 2 3. IN GROUNDS OF APPEAL NO. 2 (I), (II) AND (III) T HE REVENUE HAS CHALLENGED THE ORDER OF THE LD. CIT(A) IN DIRECTING THE AO TO TREAT THE PROFIT OF RS. 2,09,86,204/- ARISING OUT OF SALE OF SHARES, WHICH WERE HELD BY THE ASSESSEE AS ON 31.3.2005 AS SHORT TERM CAPIT AL GAIN. SIMILARLY, IN GROUNDS OF APPEAL NO.3 (I), (II) AND (III) THE REVE NUE HAS CHALLENGED THE ORDER OF THE LD. CIT(A) IN DIRECTING THE AO TO TREA T THE PROFIT OF RS. 10,10,29,672/- ARISING OUT OF THE SALE OF SHARES PU RCHASED DURING THE YEAR AS SHORT TERM CAPITAL GAIN. FOR THE SAKE OF CO NVENIENCE, BOTH THESE GROUNDS ARE CONSIDERED TOGETHER. 3.1 THE BRIEF FACTS LEADING TO THE ABOVE GROUNDS AR E AS UNDER :- THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF DEALING IN SHARES AND SECURITIES. IT FILED ITS R ETURN OF INCOME ON 27.11.2006 DECLARING TOTAL INCOME OF RS 12,78,98,31 1/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT THE ASSESSEE HAS SHOWN SHORT TERM CAPITAL GAIN OF RS.12,70,35,823/- WHICH WAS ADJUSTED AGAINST THE BROUGHT FORWARD UNABSORBED DEPRECIATION LOSS FOR THE ASSESSMENT YEAR 2002-03 OF RS. 45,12,141/-, FOR THE ASSESSMENT YEAR 2003-04 OF RS. 5,79,112/-/- AND FOR THE ASSESSMENT YEAR 2004-05 OF RS. 408,825/-AND SHORT TERM CAPITAL LOSS OF RS. 5,54,94 3/- FOR A.Y. 2004-05 AND RS. 1,23,448/- FOR A.Y. 2005-06. THIS RESULTED INTO SHORT TERM CAPITAL GAIN OF RS. 12,08,52,354/- ON WHICH THE ASS ESSEE APPLIED TAX RATE OF 10%. THE ASSESSEE HAS ALSO SHOWN LONG TERM CAPIT AL GAIN OF ` 27,80,39,738/- AND CLAIMED THE SAME AS EXEMPT U/S.1 0(38) OF THE I.T. ACT. 3.2 THE A.O. NOTED THAT THE ASSESSEE WAS DOING TRAD ING, SPECULATION, INVESTMENT AND ALSO THE TRANSACTION FROM THE DERIVA TIVE MARKET. THE TAX ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 3 AUDIT REPORT DATED 28.08.2006 SHOWS ASSESSEES BUSI NESS AS DEALING IN SHARES AND SECURITIES. THE TAX AUDIT REPORT AS WELL AS ANNUAL REPORT SHOWS DETAILS ABOUT QUANTITATIVE DETAILS OF ITEMS TRADED DURING THE YEAR I.E. SHARES AND SECURITIES WHICH THE A.O. REPRODUCED IN THE BODY OF THE ASSESSMENT ORDER WHICH IS AS UNDER:- NARRATION QUANTITY(NOS) AMOUNT OPENING STOCK 2714146 (1764234) 185235799 (118351479) PURCHASE BEING BONUS 20000 (13415988) NIL (929900753) SALES 2734146 (12465556) 204425617 (880688345) CLOSING STOCK NIL (2714666) NIL (185235799) 3.3 FROM THE ABOVE DETAILS THE A.O. NOTED THAT THE ASSESSEE HAS NOT MADE ANY PURCHASES DURING THE PREVIOUS YEAR IN RESP ECT OF TRADING. HE NOTED THAT DURING THE PREVIOUS YEAR RELEVANT TO A.Y . 2005-06, THE SCRIP- WISE LIST SHOWING STOCK IN TRADE HAD SHARES OF THE VARIOUS LISTED COMPANIES WHICH IS ALSO THERE IN A HUGE LIST SHOWN AS INVESTMENT. THE DETAIL OF SUCH INVESTMENT THROUGH COMPUTER ITSELF S HOWS THAT ASSESSEE SMARTLY BUT INTENTIONALLY SWITCHED OVER ITS TRADING BUSINESS TO THE INVESTMENT BUSINESS TO HAVE UNDUE ADVANTAGE OF LOWE R TAX RATE PROVIDED FOR SHORT TERM CAPITAL GAIN. 4. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESS EE, THE AO NOTED THAT THE ASSESSEE HAS UTILISED BORROWED MONEY FOR T HE HUGE INVESTMENTS MADE DURING THE YEAR. HE NOTED THAT THE ASSESSEE HA S MADE AN APPLICATION IN THE INITIAL PUBLIC OFFER OF M/S. SHO PPER SHOP LTD. AMOUNTING TO RS. 20 CRORE BY A SINGLE APPLICATION U TILIZING THE FINANCIAL FACILITIES FROM L&T LTD. AND PAID INTEREST OF RS.10 ,36,120/-. SIMILARLY, THE ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 4 ASSESSEE MADE AN APPLICATION FOR YES BANK IPO FOR R S. 19.99 CRORES BY OBTAINING FINANCE FROM KOTAK MAHINDRA INVESTMENT LT D. AND PAID INTEREST OF `RS.10,35,594/-. WHATEVER SHARES ACQUIRED BY THE ASSESSEE THROUGH THESE TWO IPOS WERE SOLD AS SHORT TERM INVESTMENT A ND THE INTEREST SO PAID WAS REDUCED FROM THE WORKING OF SUCH GAIN. ACC ORDING TO THE AO, THE APPLICATION IN THE IPO FOR SUCH A HUGE AMOUNT INCUR RING HUGE INTEREST COST CANNOT BE TREATED AS SHORT TERM INVESTMENT BY ANY PRUDENT BUSINESSMAN. THIS CLEARLY SHOWS THE ASSESSEES INTE NTION OF DOING BUSINESS WITH A CAMOUFLAGE OF SHOWING THE SAME AS I NVESTMENT ACTIVITY. 4.1 THE AO FURTHER NOTED THAT THE ASSESSEE IS MAINT AINING A RUNNING LEDGER WITH THE SHARE BROKER THROUGH WHOM SUCH INVE STMENTS ARE ARRANGED. THE ASSESSEE IS HAVING RUNNING LEDGER ACC OUNT IN REFERENCE TO LOAN AND ADVANCES TO VARIOUS ASSOCIATES AND GROUP C ONCERNS WHICH SHOWS HUGE AMOUNT OF LOAN TAKEN AND REPAID FOR THE SO CAL LED ACTIVITY OF INVESTMENT WITHOUT ANY INTEREST HAVING BEEN PAID. T HESE ACCOUNTS ARE GENERALLY SQUARED UP AT THE END OF THE YEAR SO AS T O AVOID THE REFLECTION IN THE BALANCE SHEET AS BORROWED LOANS. FROM THE VARIO US DETAILS FURNISHED BY THE ASSESSEE HE NOTED THAT THE ASSESSEES ACCOUN T WITH M/S. SUBHKAM STOCKS AND SHARES UNDER THE HEAD ADVANCES SHOWS V ARIOUS ENTRIES FOR SUCH KIND OF AMOUNT BEING TAKEN AND GIVEN BACK TOTA LLING TO RS. 9,68,25,000/-, BUT ULTIMATELY SHOWING NIL BALANCE D UE TO SQUARED UP OF THE AMOUNT. 4.2 SIMILARLY IN THE CASE OF M/S. KHAZANA TRADELINK S LTD., THE AMOUNT INVOLVED WAS RS. 59,05,25,000/-. ACCORDING TO THE A O, THE FREQUENCY AND THE AMOUNT OF SUCH BORROWING ITSELF SHOWS THE INTEN TION OF THE ASSESSEE THAT PRIMARILY ASSESSEE WAS DOING A BUSINESS IN THE TRADING OF SHARES AND SECURITIES ON A DAY TO DAY BASIS. ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 5 4.3 FROM THE SCRIP-WISE SUMMARIES FILED BY THE ASSE SSEE IN RESPONSE TO THE QUERY, THE AO NOTED THAT THE SAME SHOW THE SPEC ULATIVE TRANSACTION RESULTING INTO SPECULATION LOSS/SPECULATION GAIN. T HE DISTINCTION BETWEEN THE TWO TYPES OF TRANSACTIONS IS ONLY RELATED TO PH YSICAL DELIVERY OF THE SHARES. HE NOTED THAT THE ASSESSEE ENTERS ON DAY TO DAY BASIS IN THE TRANSACTION OF PURCHASE AND SALE OF SHARES AND THE TRANSACTIONS IN WHICH THE CONTRACT FOR PURCHASE IS SQUARED UP ON THE SAME DAY WITHOUT TAKING DELIVERY IS CONSIDERED AUTOMATICALLY THROUGH THE SO FTWARE USED BY THE COMPUTER OF ASSESSEE AS SPECULATION TRANSACTION WHI LE IN THE SAME SCRIPS IF THE CONTRACT FOR PURCHASE IS SQUARED UP AFTER TA KING DELIVERY IN FEW DAYS, THEN THE SAME IS TREATED AS SHORT TERM CAPITA L GAIN. THE SCRIP-WISE ANALYSIS FOR EVERY LISTED COMPANY SHARE ON DAY TO D AY BASIS SHOWS THAT ONLY IN FEW CASES THE ASSESSEE HAS SQUARED UP THE C ONTRACT OF PURCHASE AND SALE FOR MORE THAN ONE MONTH. THIS INTER-ALIA I NDICATES THE FREQUENCY BY WHICH THE ASSESSEE IS ENTERING IN THE PURCHASE A ND SALE OF SECURITY. THIS ALSO INDICATES THAT ASSESSEE HAS NO OTHER BASI S TO SUPPORT ITS GENUINE INTENTION FOR INVESTMENT OTHER THAN TRADING . NORMAL TRADING OPERATIONS ARE BEING CARRIED OUT ON DAY TO DAY BASI S AND IT IS AT THE END OF THE DAY AS PER THE SOFTWARE SO UTILIZED BY THE ASSE SSEE THAT BIFURCATION IS MADE BETWEEN SPECULATION ACTIVITY AND INVESTMENT AC TIVITY. THESE SUMMARIES ALSO SHOW THE QUANTITATIVE AND AMOUNT WIS E DETAIL ABOUT PURCHASE AND SALE OF THE SHARES AND SECURITY WHICH THE A.O. SUMMARISED IN THE ASSESSMENT ORDER AT PARA 4.1.7. WHICH IS AS UNDER:- DURING THE PREVIOUS YEAR THE ASSESSEE PURCHASED 653 21873 NOS. OF SHARES AND SOLD 60779958 NUMBER OF SHARES WITH A PR ICE CONSIDERATION UNDER INVESTMENT AT RS. 232,55,21,447 /- AND SALE OF RS. 218,19,50,537/- RESULTING INTO PROFIT OF RS. 16 ,28,67,205/- AND LOSS OF RS. 3,52,79,295/- THEREBY THE NET PROFIT IS OF RS. 12,70,35,548/-. AFTER TAKING INTO CONSIDERATION TH E MISCELLANEOUS EXPENSES IN RESPECT OF MISTAKE IN THE CALLS TO THE BROKERS AND ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 6 ROUNDING OFF FIGURE, THE SHORT TERM CAPITAL GAIN IS SHOWN AT RS. 12,70,35,823/-. THE ASSESSEE REDUCED THE INTEREST P AID ON TWO IPO AS DISCUSSED IN PREVIOUS PARA OF RS. 20,71,714/- TO ARRIVE AT THE SHORT TERM CAPITAL GAIN OF RS. 12,70,35,823/-. IT HAS BEEN CERTIFIED THAT THE NUMBER OF QUANTITY SHOWN UNDER THE HEAD PU RCHASE ALSO INCLUDE THE OPENING BALANCE IN RESPECT OF INVESTMEN T. IN RESPECT OF TRADING SUMMARY, OUT OF TOTAL OPENING AND FURTHER P URCHASES OF SHARES IN 2734 146 NOS. VALUED AT RS. 18,52,35,803/ - THE SHARES IN 2734146 NOS VALUED AT RS. 20,44,44,438/- WERE SOLD RESULTING INTO PROFIT OF RS. 2,17,74,887/- AND LOSS OF RS. 25,66,2 52/- THEREBY THE NET PROFIT OF TRADING AT RS. 1,92,08,635/-. THE SA ME DETAIL ALSO HAS SPECULATION INCOME DETAIL WHICH SHOWS THAT FOR 3801 388 NOS. OF SHARE FOR THE PURCHASE CONSIDERATION OF RS. 37,50,5 3,312/- THE ASSESSEE SQUARED UP AND SOLD THE SAME AT RS. 37,54, 81,917/- WHICH HAS RESULTED INTO PROFIT OF RS. 4,28,605/-. THE TW O IMPORTANT ASPECT REQUIRED CONSIDERATION HERE. A. VARIOUS SCRIP IN WHICH ASSESEE IS TRADING AND ALSO DOING SPECULATION ACTIVITY ARE FEATURING IN THE LIST OF I NVESTMENT ALSO. B. THE VOLUME OF SPECULATION ACTIVITY WITH HUGE AMOUNT CLEARLY SHOWS THAT ASSESSEE IS DOING TRADING ACTIVITY INCLU DING SPECULATION AND WHATEVER RESIDUAL REMAINS IS SHIFTE D TO INVESTMENT ACTIVITY. ANY PRUDENT PERSON DOING SUCH ACTIVITY ON SUCH A SCALE WITH VOLUME CANNOT JUSTIFY TAKING A DE CISION AFTER THE COMPLETION OF TRANSACTION THAT OUT OF SUCH TRANSACT ION A PART IS INVESTMENT ACTIVITY AND ANOTHER PART IS TRADING AND SPECULATION ACTIVITY. THIS VIEW WILL BE FURTHER SUPPORTED BY T HE FACT THAT THE ASSESSEE ALSO DOING TRADING IN DERIVATIVE MARKET WI TH A HUGE VOLUME ON ALMOST DAY TO DAY BASIS. 4.4 IN VIEW OF THE ABOVE FINDINGS/OBSERVATIONS THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE TRANSACTION IN R ESPECT OF SHORT TERM INVESTMENT AND THE GAIN DERIVED FROM THEM SHOULD NO T BE TREATED AS BUSINESS INCOME AS AGAINST SHORT TERM CAPITAL GA IN SHOWN BY IT. 4.5 IT WAS EXPLAINED BY THE ASSESSEE THAT WHETHER A N ASSESSEE IS A TRADER OR INVESTOR THE INTENTION AT THE TIME OF MAK ING AN INVESTMENT IS TO BE SEEN. IN THIS CASE, THE SHARES WERE PURCHASED WI TH THE INTENTION OF HOLDING THEM AS INVESTMENT AND NOT TO DEAL IN THEM. FURTHER, THE SHARES ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 7 HAVE BEEN HELD TO GAIN ADVANTAGE OF APPRECIATION AN D TO VARY THE INVESTMENTS SO AS TO OBTAIN MAXIMUM SURPLUS ON ACCO UNT OF APPRECIATION IN THE SHARE PRICES AS INVESTOR. IT WAS SUBMITTED T HAT THE ASSESSEE CAN ALWAYS BE AN INVESTOR AS WELL AS A TRADER SINCE BEI NG OPERATING IN THE FIELD OF SHARES AND SECURITIES, MAKING SOUND INVESTMENT D ECISIONS WILL BE EASY AND WOULD BE COMFORTABLE TO MAKE INVESTMENTS ALSO I N THE AREAS OF ITS COMPETENCE. IN THE BOOKS OF ACCOUNT ALSO THE ASSESS EE HAS TREATED THE TRANSACTIONS AS INVESTMENT. REFERRING TO VARIOUS TESTS LAID DOWN BY THE APEX COURT AND OTHER HIGH COURTS AND TRIBUNAL IT WA S SUBMITTED THAT THE ASSESSEE FULFILS ALL THE CONDITIONS SO AS TO BE TRE ATED AS AN INVESTOR. 4.6 IT WAS SUBMITTED THAT DURING THE YEAR THE ASSES SEE HAS TOTALLY BEEN AN INVESTOR HAVING INVESTMENT OF RS. 6218.12 LAKHS AND THERE IS NOT EVEN A SINGLE TRANSACTION OF TRADING ENTERED INTO. THE T RADING PROFIT HAS ARISEN DURING THE YEAR ONLY OUT OF SALE MADE FROM THE OPEN ING STOCK OF EARLIER YEAR. FROM THESE IT CAN BE INFERRED THAT THE ASSESS EE HAD A CONSCIOUS DECISION TO BE AN INVESTOR. REFERRING TO VARIOUS DE CISIONS IT WAS SUBMITTED THAT ON IDENTICAL FACTS AND CIRCUMSTANCES THE PROFI T FROM PURCHASE AND SALE OF SHARES HAS BEEN ACCEPTED AS SHORT TERM CAP ITAL GAIN AS AGAINST BUSINESS INCOME TREATED BY THE LOWER AUTHORITIES. IT WAS ACCORDINGLY SUBMITTED THAT IN THE TOTALITY OF THE FACTS OF THE CASE THE ASSESSEE SHOULD NOT BE TREATED AS TRADER IN SHARES. 5. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLA NATION GIVEN BY THE ASSESSEE FOR THE FOLLOWING REASONS WHICH HE HAS SUM MARISED AT PARA 4.1.9 OF HIS ORDER AND WHICH ARE AS UNDER :- 1. THE INVESTMENT ACTIVITY OF THE ASSESSEE IS NOT AN INCIDENTAL OR OCCASIONAL ACTIVITY BUT A SIMULTANEOU S AND CONTINUOUS ACTIVITY. ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 8 2. THE INTENTION OF THE INVESTMENT BY THE ASSESSEE IS NOT TO HOLD THEM FOR A LONG TERM APPRECIATION BUT TO SELL THEM AT A PROFIT AS EVIDENT FROM THE TRANSACTIONS OF M/S. SYNDICATE BANK AND M/S. SHOPPERS STOP SHARES SHOWN AS INVESTMENT ACTIVITY. 3. THE ASSESSEE IS OPERATING ON A BIG SCALE IN THE ACTIVITY OF TRADING, INVESTMENT, SPECULATION. 4. ASSESSEES TRANSACTIONS ARE CONTINUOUS AND REGUL AR THROUGHOUT THE PREVIOUS YEAR. EVEN THE PURCHASES IN THE SAME SCRIP ON THE SAME DAY IS DIVIDED INTO SPECULAT ION AND INVESTMENT. 5. THE ASSESSEE IS MAKING PURCHASES OUT OF BORROWIN G. 6. THE ASSESSEES HOLDING PERIOD IN RESPECT OF CURR ENT INVESTMENT IS NOT SUBSTANTIAL. 7. IF THE RATIO IS DERIVED BETWEEN THE SALES TO PU RCHASES, AND ALSO TO HAVE A PERCENTAGE NUMBER OF SHARES KEPT AS HOLDING THEN IT IS EVIDENT THAT THE ASSESSEE IS SEL LING ITS CURRENT INVESTMENT ALMOST LIKE TRADING. 5.1 RELYING ON THE DECISIONS OF HON'BLE SUPREME COU RT IN THE CASE OF G. VENKATSWAMI NAIDU & CO. VS. CIT REPORTED IN 35 I TR 594 AND IN THE CASE OF SARDAR INDRA SINGH AND SONS LTD. REPORTED I N 24 ITR 415, THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF H. MOHAMED & CO. VS. CIT REPORTED IN 107 ITR 637 AND VARIOUS OTHER D ECISIONS AS PER PAGE 11 AND 12 OF THE ASSESSMENT ORDER AND FOLLOWING THE TESTS LAID DOWN BY THE CBDT VIDE INSTRUCTION NO.1827 DATED 31.08.1989 THE AO CAME TO THE CONCLUSION THAT THE ASSESSEES TRANSACTIONS SHOWN A S INVESTMENT AND CONSIDERED UNDER THE HEAD SHORT TERM CAPITAL GAIN CANNOT BE ACCEPTED AS INVESTMENT TRANSACTIONS. HE TREATED THE SAME A S TRADING TRANSACTIONS AND TREATED THE INCOME DERIVED FROM THESE TRANSACTI ONS AS BUSINESS INCOME OF THE ASSESSEE. 6. BEFORE THE LD. CIT(A) IT WAS SUBMITTED THAT IN T HE SCRUTINY ASSESSMENT FOR THE ASSESSMENT YEARS 2004-05 AND 200 5-06 THE SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN DECLAR ED BY THE ASSESSEE HAS BEEN ACCEPTED. IT WAS SUBMITTED THAT THE NET WORTH OF THE COMPANY AS ON ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 9 31.03.2005 WAS RS. 39.91 CRORES AS AGAINST INVESTME NT IN SHARES AT RS.18.41 CRORES. THE NET WORTH OF THE COMPANY AS ON 31.03.2004 WAS RS. 33.90 CRORES AND THE INVESTMENT IN SHARES WERE RS. 14.29 CRORES. SIMILARLY AS AGAINST NET WORTH OF RS. 80.81 CRORES AS ON 31.03.2006, THE INVESTMENTS MADE IN SHARES WERE RS. 62.18 CRORES. A LL THESE FACTS EMANATE FROM THE BALANCE SHEETS WHICH WERE ON THE R ECORDS OF THE INCOME TAX DEPARTMENT. IT WAS ACCORDINGLY SUBMITTED THAT THE ASSESSEE COMPANY HAD SUFFICIENT FUNDS IN ALL THE YEARS AND I NVESTMENTS IN SHARES HAVE BEEN MADE OUT OF OWN FUNDS. 7. THE ASSESSEE SUBMITTED COMPLETE DETAILS OF STCG WHICH ACCORDING TO IT IS OUT OF THREE CATEGORIES AND THE DETAILS OF WHICH ARE AS UNDER : 1. STCG ON SHARES ALLOTTED IN IPO RS.50,59,857/- 2. STCG OUT OF SHARES HELD AS INVESTMENT AS ON 31.03.05 RS.2,09,86,204/- 3. STCG ON SHARES PURCHASED & SOLD DURING THE YEAR RS.10,10,29,762/- TOTAL STCG RS.12,70,35,823/- 8. ATTENTION OF THE LD. CIT(A) WAS INVITED TO THE BOARD RESOLUTION PASSED ON 25.03.2005, WHEREIN IT WAS UNANIMOUSLY DE CIDED THAT DELIVERY OF SHARES TAKEN ONLY IN RESPECT OF SHARES TO BE HEL D AS INVESTMENT AND NOT IN RESPECT OF TRADING IN SHARES. TRADING IN SHA RES, IF AT ALL TO BE DONE, IS DONE IN FUTURES & OPTIONS SEGMENT OF NSE AND ALS O BY WAY OF DAY TRADING WHERE PURCHASE AND SALE IS CARRIED OUT ON T HE SAME DAY AND NO DELIVERY IS EFFECTED. IT WAS SUBMITTED THAT AS ON 3 1.03.2006 THE UNSECURED LOAN WAS NIL AND AGAINST THE NET WORTH OF THE COMPA NY AT RS.80.84 CRORES THE INVESTMENT IN SHARES WERE AT RS. 62.18 CRORE. T HIS PROVES BEYOND DOUBT THAT THE ENTIRE INVESTMENT WAS MADE OUT OF OW N FUNDS AND NO BORROWING HAS BEEN DONE. ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 10 8.1 IT WAS CLAIMED THAT THE AO HIMSELF WAS CONFUSED ABOUT THE TREATMENT OF DELIVERY BASED SHARE TRANSACTION, AS A T ONE PLACE HE HAS ACCEPTED THE CONTENTION OF THE ASSESSEE WHEREBY SHA RES HELD FOR MORE THAN A YEAR IS TREATED AS LTCG AND THOSE HELD FOR L ESS THAN A YEAR WAS TAXED AS BUSINESS. IT WAS FURTHER ARGUED THAT IF THE SAME SCRIP IS HELD FOR 90 DAYS, IT IS TAXED AS BUSINESS WHEREAS IF I TS IS HELD FOR 380 DAYS, THE SAME IS ACCEPTED AS CAPITAL GAIN. IT WAS SUBMIT TED THAT IN ORDER TO DECIDE WHETHER A TRANSACTION IS CAPITAL GAIN OR BUS INESS INCOME WHAT IS RELEVANT IS INTENTION AT THE TIME OF PURCHASE. IT W AS SUBMITTED THAT THE ONLY INTENTION AT THE TIME OF PURCHASE OF SHARES WH ERE DELIVERY HAS BEEN TAKEN WAS TO HOLD THE SAME AS INVESTMENT. THE INTEN TION IS PROVED BEYOND DOUBT IN THE LINE OF THE BOARD RESOLUTION DATED 25 TH MARCH, 2005. 8.2 RELYING ON A COUPLE OF DECISIONS INCLUDING THE CBDT CIRCULAR NO.4 OF 2007 DATED 15.06.2007 IT WAS ARGUED THAT THE PRO FIT FROM SALE OF SHARES HAS TO BE TREATED AS SHORT TERM CAPITAL GAIN AS A GAINST BUSINESS INCOME TREATED BY THE AO. 8.3 IN APPEAL THE LD. CIT(A) TREATED THE SHORT TERM CAPITAL GAIN ON SHARES ALLOTTED IN IPO AMOUNTING TO RS. 50,19,857/- AS BUSINESS INCOME. THE ASSESSEE IS NOT IN APPEAL AGAINST THE ABOVE FIN DING OF THE LD. CIT(A). THEREFORE THE FINDING OF THE LD. CIT(A) ON THIS ISS UE IS NOT CONSIDERED. 8.4 SO FAR AS THE STCG OUT OF SHARES HELD AS INVEST MENT AS ON 31.03.05 OF RS. 2,09,86,204/- IS CONCERNED HE NOTED THAT THE SAME IS ON ACCOUNT OF SALE OF SHARES OF SAREGAMA INDIA LTD. AND GENUS OVE RSEAS ELECTRONICS LTD. WHICH WERE ACQUIRED BY THE ASSESSEE IN F.Y. 20 04-05. THE ASSESSMENT FOR A.Y. 2005-06 WAS COMPLETED UNDER SEC TION 143(3) AS PER ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 11 ORDER DATED 05.12.07. IN THE BALANCE SHEET AS ON 31 .03.2005 THE INVESTMENT MADE IN SHARES HAS BEEN DISCLOSED AS IN VESTMENT AND ACCEPTED AS SUCH AND THERE IS NO CONTRARY FINDING I N THE ASSESSMENT. 8.5 HE NOTED THAT THE SHARES WERE ACQUIRED BY THE A SSESSEE OUT OF ITS OWN FUNDS AS NO LOAN WAS OUTSTANDING AS ON 31 .03.0 6. FURTHER THE NET WORTH OF THE ASSESSEE IS ALSO SUBSTANTIAL ENOUGH TO COVER INVESTMENT. THE BOARD OF DIRECTORS IN THE RESOLUTION PASSED ON 25.0 3.2005 HAS DECIDED THAT ALL THE TRANSACTIONS RELATING TO DELIVERY BASE D SHARES SHALL BE CARRIED OUT ONLY ON INVESTMENT ACCOUNT. 8.6 THE LD. CIT(A) WAS OF THE OPINION THAT IN VIEW OF CBDT CIRCULAR NO. 4 OF 2007 DATED 15.06.07 THERE CAN BE TWO PORTFOLIOS I.E. ONE AS INVESTMENT PORTFOLIO AND THE OTHER AS TRADING POR TFOLIO. THEREFORE, THERE CAN TWO TYPES OF INCOME, I.E. INVESTMENT INCOME W HICH IS TO BE TAXED AS CAPITAL GAIN AND THE OTHER ONE IS TRADING INCOME W HICH IS TO BE TAXED AS BUSINESS INCOME. SINCE IN THE PRESENT CASE, THE B ALANCE SHEET OF THE ASSESSEE COMPANY AS ON 31.03.05 WAS ACCEPTED IN THE SCRUTINY ASSESSMENT AND THERE WAS NO ADVERSE FINDING, HE HEL D THAT THE STCG EARNED ON SHARES AMOUNTING TO RS. 64,62,293/- CANNO T BE TAXED AS BUSINESS. HE ACCORDINGLY DIRECTED THE A.O. TO TAX THE INCOME OF RS.64,62,293/- AS INCOME FROM SHORT TERM CAPITAL GAIN ONLY AND SUBJECT TO TAX THE SAME AT 10% UNDER SECTION 111A O F THE INCOME TAX ACT, 1961. 8.7 AS REGARDS THE STCG ON SHARES PURCHASED & SOLD DURING THE YEAR OF RS.10,10,29,762/- HE NOTED THAT THE ASSESSEE HAS CA RRIED OUT TRANSACTIONS IN 35 SCRIPS. HE ACCEPTED THE CLAIM OF THE ASSESSEE THAT AT ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 12 THE TIME OF PURCHASE, THE ONLY INTENTION WAS TO MAK E INVESTMENT WHICH IS EVIDENT FROM THE BOARD RESOLUTION DATED 25.03.2005. FURTHER, THE ENTIRE INVESTMENT HAS BEEN MADE OUT OF OWN FUNDS AND NO IN TEREST BEARING FUND HAS BEEN UTILIZED BY THE ASSESSEE. HE NOTED THAT TH E A.O. HIMSELF HAS PARTIALLY AGREED WITH THE ASSESSEE THAT PROFIT EARN ED ON SHARES HELD FOR MORE THAN A YEAR HAS TO BE TAXED AS LONG TERM CAPIT AL GAIN. ACCORDING TO HIM, ONCE THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE IS ACCEPTED AS THAT OF INVESTMENT, IT IS IMMATERIAL WH ETHER THE ASSESSEE HOLDS THE SAME FOR 90 DAYS OR 380 DAYS AND IT CANNO T ALTER THE NATURE OF TRANSACTION. RELYING ON VARIOUS DECISIONS, THE LD. CIT(A) DIRECTED THE A.O. TO TREAT THE PROFIT OF RS. 10,10,29,762/- AS SHORT TERM CAPITAL GAIN. 9. AGGRIEVED WITH SUCH ORDER OF THE LD. CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 9.1 THE LD. D.R. WHILE SUPPORTING THE ORDER OF THE A.O. SUBMITTED THAT THE A.O. IN THE BODY OF THE ASSESSMENT ORDER HAS GI VEN A CLEAR FINDING THAT THE ASSESSEE HAS BORROWED MONEY FOR INVESTMENT IN S HARES. THE FREQUENCY AND AMOUNT OF SUCH BORROWINGS AND THE MAGNITUDE OF THE TRANSACTION JUSTIFY THE INCOME AS BUSINESS INCOME AS AGAINST SHORT TERM CAPITAL GAIN TREATED BY THE ASSESSEE. REFERRING TO THE DE CISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF IMMORTAL FINAN CIAL SERVICES (P.) LTD. V. DCIT REPORTED IN 44 SOT 88[2010] HE SUBMITTED TH AT THE TRIBUNAL AFTER CONSIDERING VARIOUS DECISIONS AND CBDT CIRCULAR NO. 4/2007 DTD. 15 TH JUNE 2007 HAS HELD THAT THE ACTIVITY OF FREQUENT BU YING AND SELLING OF SHARES OVER A SHORT SPAN OF PERIOD HAS TO BE TREATE D AS BUSINESS BEING ADVENTURE IN NATURE OF TRADE AND INCOME HAS TO BE T REATED AS BUSINESS INCOME AND NOT AS CAPITAL GAIN AS CLAIMED BY THE AS SESSEE. HE SUBMITTED THAT SINCE THE FACTS OF THE IMPUGNED APPEAL ARE IDE NTICAL TO THE FACTS IN ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 13 THE CASE CITED ABOVE, THEREFORE, THE PROFIT FROM PU RCHASE AND SALE OF SHARES SHOULD BE CONSIDERED AS BUSINESS INCOME. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE LD. CIT(A) SHOULD B E SET ASIDE AND THAT OF THE A.O. BE RESTORED. 9.2 THE LD. COUNSEL FOR THE ASSESEE REFERRING TO TH E COMPUTATION OF INCOME PLACED AT PAPER BOOK PAGE 1 SUBMITTED THAT T HE LONG TERM CAPITAL GAIN OF RS. 27.80 CRORES HAS BEEN ACCEPTED BY THE A .O. THE ONLY DISPUTE IS REGARDING THE TREATMENT OF SHORT TERM CAPITAL GA IN OF RS. 12.70 CRORES . HE SUBMITTED THAT THE SECURITY TRANSACTION TAX OF R S. 73,47,980/- PAID BY THE ASSESSEE HAS BEEN DISALLOWED BY THE ASSESSEE ITSELF. REFERRING TO COPY OF THE BALANCE SHEET (PAPER BOOK PAGE 9) HE DR EW THE ATTENTION OF THE BENCH TO THE OWN FUNDS AND FREE RESERVES AT RS. 80.80 CRORRES WHICH IS MUCH MORE THAN THE INVESTMENTS. HE SUBMITTED TH AT NO BORROWED FUNDS HAVE BEEN UTILIZED. REFERRING TO PAGE 11 OF THE PAPER BOOK HE SUBMITTED THAT THE INVESTMENTS ARE SHOWN IN THE BAL ANCE SHEET UNDER THE HEAD INVESTMENT AND ARE SHOWN AT COST. HE SUBMIT TED THAT THE ASSESSE HAS RECEIVED DIVIDEND OF RS. 29,93,084/- DURING THE YEAR AS AGAINST RS. 93,49,761/- DURING THE PRECEDING YEAR. REFERRING T O THE COMPUTATION STATEMENT FOR A.Y. 2004-05 PLACED AT PAPER BOOK PAG E 25 HE SUBMITTED THAT THE LONG TERM CAPITAL GAIN OF RS. 852401/- AND SHORT TERM CAPITAL LOSS OF RS. 14,07,344/- HAS BEEN ACCEPTED BY THE A. O. U/S 143(1). REFERRING TO THE COMPUTATION STATEMENT FOR A.Y. 200 5-06 PLACED AT PAPER BOOK PAGE 28 HE SUBMITTED THAT THE A.O. IN THE ORDE R PASSED U/S 143(3) (PAPER BOOK PAGE 31) HAS ACCEPTED THE SHORT TERM CA PITAL GAIN OF RS. 1,59,683/- AND LONG TERM CAPITAL GAIN OF RS. 4,09,1 0,094/- AND THERE IS NO DISALLOWANCE. REFERRING TO THE SUBMISSIONS MADE BEFORE THE LD. CIT(A) (PAPER BOOK PAGE 36-62) HE SUBMITTED THAT GIVEN THE SIZE OF PORTFOLIO HOLDING PERIOD OF 1 DAY OR SO IS NOT UNUSUAL. REFE RRING TO CIRCULAR NO. ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 14 4/2007 DTD. 15 TH JUNE, 2007 ISSUED BY THE CBDT, HE SUBMITTED THAT THE ASSESSEE CAN HAVE TWO PORTFOLIOS OF SECURITIES, ONE FOR INVESTMENTS AND THE OTHER FOR STOCK-IN-TRADE AND HOW THE SHARES ARE VAL UED IN THE BOOKS OF ACCOUNT I.E. WHETHER THEY ARE VALUED AS STOCK-IN-TR ADE OR HELD AS INVESTMENT IN CAPITAL ASSETS, HAS AN IMPORTANT BEAR ING IN THE MATTER. REFERRING TO THE DECISION IN THE CASE OF JANAK S. R ANGWALA V. ACIT (MUM) REPORTED IN [2007] 11 SOT 627 (MUM) HE SUBMITTED TH AT MERE VOLUME OF TRANSACTIONS DOES NOT MEAN THAT ASSESSEE IS A TRADE R. INTENTION WITH WHICH PURCHASE HAD BEEN MADE HAS TO BE SEEN. HE SUB MITTED THAT IF IN THE EARLIER YEAR DEPARTMENT HAS TREATED THE ASSESSE E AS AN INVESTOR, IT CANNOT TAKE A DIFFERENT VIEW IN SUBSEQUENT YEAR. RE FERRING TO THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. GOPAL PUROHIT REPORTED IN 228 CTR 582 HE SUBMITTED THAT THE DELIV ERY BASED TRANSACTION SHOULD BE TREATED AS INVESTMENT TRANSACTION AND THE PRINCIPLE OF CONSISTENCY SHOULD BE FOLLOWED. HE SUBMITTED THAT T HE SLP FILED BY THE REVENUE HAS BEEN DISMISSED BY THE HONBLE SUPREME C OURT. REFERRING TO A SERIES OF DECISIONS, HE SUBMITTED THAT MERE VOLUM E OF TRANSACTIONS IS NOT THE SOLE CRITERIA TO HOLD THE ASSESSEE TO BE A TRADER. THE MANNER OF SHOWING SHARES IN ACCOUNTS IS ALSO RELEVANT. HE SU BMITTED THAT SINCE THE A.O. IN THE PRECEDING ASSESSMENT YEAR HAS ACCEPTED THE SHORT TERM CAPITAL GAIN, THEREFORE, IN VIEW OF RULE OF CONSIST ENCY THE SAME SHOULD HAVE FOLLOWED. HE SUBMITTED THAT THE BOOKS OF ACCO UNT SHOWS THE SHARES AS INVESTMENT AND THE DEPARTMENT IN THE PAST HAS AC CEPTED THE SAME AS SHORT TERM CAPITAL GAIN, THEREFORE, THE ORDER OF TH E LD. CIT(A) WHICH IS IN CONSONANCE WITH THE VARIOUS DECISIONS CITED SHOULD BE UPHELD. REFERRING TO THE DECISION OF THE TRIBUNAL IN THE CASE OF IMMO RTAL FINANCIAL SERVICES (P.) LTD. RELIED ON BY THE LD. D.R., HE SUBMITTED T HAT THE SAME IS DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AND THE CASE HAS TO BE DECIDED ON THE BASIS OF ITS OWN MERI TS. HE FURTHER RELIED ON THE FOLLOWING DECISIONS:- ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 15 1. SHANTILAL M. JAIN V. ACIT CIR 12(3) ITAT, MUMBAI . 2. ACIT V. VINOD K. NEVATIA, ITAT, MUMBAI. 3. ACIT 25(3) V. NAISHADH V. VACHHARIAJANI, ITAT , MUMBAI. 4. ACIT CIR. 4(1) V. J.M. SHARES AND STOCK BROKERS LT, ITAT MUMBAI. 5. CIT V. ESCORTS LTD. (HIGH COURT NEW DELHI) 6. MANAGEMENT STRUCTURES & SYSTEMS P. LTD. V. ITO (ITAT MUMBAI) 7. DCIT 13(3) V. SHRI RAVINDRAKUMAR AGGARWAL,(ITAT MUMBAI) 8. ACIT 25(3) V. CHETAN K. MEHTA (ITAT MUMBAI) 9. SHRI RAMESH BABU RAO V. ACIT -17, (ITAT MUMBAI) 10. NAGINDAS P. SHETH (HUF) V. ACIT 21(3) (ITATMUM BAI) 11. ITO 19(2) V. RADHA BIRJU PATEL (ITAT MUMBAI) 12. HITESH SATISHCHANDRA DOSHI V. JCIT (ITAT MUMBA I. 10. THE LD. D.R. IN HIS REJOINDER SUBMITTED THAT DU RING A.Y. 2004-05 THERE WAS SHORT TERM CAPITAL LOSS WHICH WAS ACCEPTE D U/S 143(1). IN A.Y. 2005-06THE AMOUNT OF SHORT TERM CAPITAL GAIN WAS VE RY NOMINAL. HE SUBMITTED THAT PRINCIPLES OF RES JUDICATA DO NOT AP PLY TO INCOME TAX PROCEEDINGS. FURTHER, THIS IS THE FIRST YEAR WHERE VOLUME AND FREQUENCY ARE MORE AND HOLDING PERIOD IS LESS. THE COPY OF B OARD RESOLUTION JUST BEFORE THE YEAR END WHICH COINCIDES WITH THE CHANGE OF LAW AND OTHER FACTORS SUCH AS SHOWING THE STOCK-IN-TRADE AS INVES TMENT SHOWS THAT THE INTENTION WAS TO PAY LESS TAX I.E. @ 10% AS AGAINST 30%. HE SUBMITTED THAT HERE IN THE CASE OF THE ASSESSEE IT IS THE COM PUTER WHICH DECIDES THE SHARE AS FOR BUSINESS OR FOR INVESTMENT. THEREFORE , THE BOARD RESOLUTION BECOMES INSIGNIFICANT. REFERRING TO VARIOUS DECISI ONS RELIED ON BY THE LD. ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 16 COUNSEL FOR THE ASSESSEE HE SUBMITTED THAT THESE AR E DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 11. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF A.O. AND CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE SERIE S OF DECISION RELIED ON BY BOTH THE PARTIES. THERE IS NO DISPUTE TO THE FAC T THAT THE ASSESSEE DURING THE YEAR HAS CLAIMED SHORT TERM CAPITAL GAIN OF RS.12,70,35,823/- .OUT OF THE ABOVE, SHORT TERM CAPITAL GAIN ON PROFI T ON SALE OF SHARES ALLOTTED IN IPO AMOUNTING TO RS. 5059857/- HAS BEEN HELD AS BUSINESS INCOME BY THE LD. CIT(A) FOR WHICH THE ASSESSEE IS NOT IN APPEAL. THEREFORE, THE ISSUE TO BE DECIDED BY US IS REGARDI NG THE TREATMENT OF THE PROFIT OF RS. 2,09,82,204/- ON SALE OF SHARES WHICH WERE HELD AS ON 31.3.2005 AND PROFIT OF RS. 10,10,29,762/- ON SHARE S PURCHASED AND SOLD DURING THE YEAR AS BUSINESS INCOME AS HELD BY THE A .O. OR SHORT TERM CAPITAL GAIN AS TREATED BY THE ASSESSEE AND UPHELD BY THE CIT(A). 11.1 ACCORDING TO THE A.O. THE NATURE OF ACTIVITY, FREQUENCY AND MAGNITUDE SUGGEST THAT THE PROFIT DECLARED BY THE A SSESSEE ON ACCOUNT OF TRANSACTIONS IN PURCHASE AND SALE OF SHARES HAS TO BE TREATED AS BUSINESS INCOME. ACCORDING TO THE ASSESSEE THE SHARES WHICH WERE SOLD ARE TREATED AS INVESTMENT IN THE BOOKS OF THE ASSESSEE SUPPORTE D BY THE BOARD RESOLUTION AND THEREFORE HAS TO BE TREATED AS SALE OF INVESTMENT AND THE PROFIT OF THE SAME HAS TO BE TREATED AS SHORT TERM CAPITAL GAIN WHICH HAS BEEN UPHELD BY THE CIT(A). WE FIND THE CBDT VIDE CI RCULAR NO. 4/2007 DT. 15.6.2007 HAS ACCEPTED THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASES OF CIT (CENTRAL), CALCUTTA V/S. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. (P.) LTD., 82 ITR 586 AS WELL AS IN CIT V/S. H HOLSCK LARZEN, 160 ITR 67 (SC). IN THE ABOVE REFERRED CIRC ULAR, THE BOARD HAS ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 17 ISSUED CERTAIN GUIDELINES TO THE A.O. THE BOARD HAS ACCEPTED THAT THE ASSESSEE CAN HAVE TWO PORTFOLIOS SIMULTANEOUSLY- (1 ) AN INVESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSET AND (2) TRADING PORTFOLIO COMPRISING OF STOCK AND T RADE WHICH ARE TO BE TREATED AS TRADING ASSET. 11.2 WE FIND THE OPERATIVE PART OF THE CIRCULAR NO. 4/2007 DT. 15.6.2007 READS AS UNDER : 4. THE CENTRAL BOARD OF DIRECT TAXES (CBDT) THROUG H INSTRUCTION NO. 1827 DATED AUGUST 31, 1989 HAD BROU GHT TO THE NOTICE OF THE ASSESSING OFFICERS THAT THERE IS A DI STINCTION BETWEEN SHARES HELD AS INVESTMENT (CAPITAL ASSET) A ND SHARES HELD AS STOCK-IN-TRADE (TRADING ASSET). IN THE LIGH T OF A NUMBER OF JUDICIAL DECISIONS PRONOUNCED AFTER THE ISSUE OF THE ABOVE INSTRUCTIONS, IT IS PROPOSED TO UPDATE THE ABOVE IN STRUCTIONS FOR THE INFORMATION OF ASSESSEES AS WELL AS FOR GUIDANC E OF THE ASSESSING OFFICERS. 5. IN THE CASE OF COMMISSIONER OF INCOME TAX (CENTR AL), CALCUTTA VS. ASSOCIATED INDUSTRIAL DEVELOPMENT COMP ANY (P) LTD (82 ITR 586), THE SUPREME COURT OBSERVED THAT: WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK-IN-TRADE IS A MATTER WHI CH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION T O PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAIN TAINED ANY DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOC K-IN-TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT. 6. IN THE CASE OF COMMISSIONER OF INCOME TAX, BOMBA Y VS. H. HOLCK LARSEN (160 ITR 67), THE SUPREME COURT OBSERV ED : THE HIGH COURT, IN OUR OPINION, MADE A MISTAKE IN O BSERVING WHETHER TRANSACTIONS OR WHETHER THESE WERE IN THE N ATURE OF INVESTMENT WAS A QUESTION OF LAW. THIS WAS A MIXED QUESTION OF LAW AND FACT. ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 18 7. THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE ABOVE TWO CASES AFFORD ADEQUATE GUIDANCE TO THE ASSESSING OFFICERS. 8. THE AUTHORITY FOR ADVANCE RULINGS (AAR) (288 ITR 641), REFERRING TO THE DECISIONS OF THE SUPREME COURT IN SEVERAL CASES, HAS CULLED OUT THE FOLLOWING PRINCIPLES :- (I) WHERE A COMPANY PURCHASES AND SELLS SHARES, IT MUST BE SHOWN THAT THEY WERE HELD AS STOCK-IN-TRADE AND THA T EXISTENCE OF THE POWER TO PURCHASE AND SELL SHARES IN THE MEM ORANDUM OF ASSOCIATION IS NOT DECISIVE OF THE NATURE OF TRA NSACTION; (II) THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MA NNER OF MAINTAINING BOOKS OF ACCOUNTS, THE MAGNITUDE OF PUR CHASES AND SALES AND THE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS; (III) ORDINARILY THE PURCHASE AND SALE OF SHARES WI TH THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRANSACTIO N BEING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE; B UT WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE PROFITS ACC RUING BY CHANGE IN SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT. 10. CBDT ALSO WISHES TO EMPHASISE THAT IT IS POSSIB LE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS, I.E., AN INVESTMENT P ORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRADING PORTFOLIO COMPRISING OF STOCK- IN-TRADE WHICH ARE TO BE TREATED AS TRADING ASSETS. WHERE AN ASSESSEE HAS TWO PORTFOLIOS, THE ASSESSEE MAY HAVE INCOME UN DER BOTH HEADS I.E., CAPITAL GAINS AS WELL AS BUSINESS INCOM E. 11. ASSESSING OFFICERS ARE ADVISED THAT THE ABOVE P RINCIPLES SHOULD GUIDE THEM IN DETERMINING WHETHER, IN A GIVE N CASE, THE SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT (AND THEREFORE GIVING RISE TO CAPITAL GAINS) OR AS STOCK-IN-TRADE (AND THEREFORE GIVING RISE TO BUSINESS PROFITS). THE ASSESSING OFF ICERS ARE FURTHER ADVISED THAT NO SINGLE PRINCIPLE WOULD BE D ECISIVE AND THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CO NSIDERED TO DETERMINE WHETHER, IN A GIVEN CASE, THE SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT OR STOCK-IN-TRADE. ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 19 11.3 WE FIND THE LEGAL PRINCIPLES AS LAID DOWN BY V ARIOUS COURTS ON ACCOUNT OF TREATMENT OF AN INCOME AS BUSINESS INCO ME OR CAPITAL GAIN CAN BE SUMMARISED AS UNDER: (A) IT IS POSSIBLE FOR AN ASSESSEE TO BE BOTH AN INVEST OR AS WELL AS DEALER IN SHARES. (B) WHETHER A TRANSACTION OF SALE AND PURCHASE OF SHARE S IS A TRADING OR INVESTMENT TRANSACTION IS A MIXED QUESTI ON OF LAW AND FACT. (C) WHETHER A PARTICULAR HOLDING IS BY WAY OF INVESTMEN T OR OF STOCK IN TRADE IS A MATTER WITHIN THE KNOWLEDGE OF THE ASSESSEE AND IT IS FOR THE ASSESSEE TO PRODUCE EVID ENCE FROM THE RECORDS AS TO WHETHER HE MAINTAINED ANY DISTINC TION BETWEEN SHARES HELD AS INVESTMENTS AND THOSE HELD A S STOCK IN TRADE. (D) THE TREATMENT IN THE BOOKS OF AN ASSESSEE IS NOT CO NCLUSIVE AND IF THE VOLUME, FREQUENCY AND REGULARITY AT WHIC H TRANSACTIONS ARE CARRIED OUT INDICATE SYSTEMATIC AN D ORGANIZED ACTIVITY WITH PROFIT MOTIVE, THEN IT BECO MES BUSINESS PROFIT AND NOT CAPITAL GAIN. (E) PURCHASE WITH INTENTION TO RESELL CAN CONSTITUTE CA PITAL GAIN OR BUSINESS PROFIT DEPENDING ON CIRCUMSTANCES LIKE QUANTITY OF PURCHASE AND NATURE OF ACTIVITY. (F) NO SINGLE FACT HAS ANY DECISIVE SIGNIFICANCE AND TH E QUESTION MUST BE ANSWERED DEPENDING UPON SELECTIVE EFFECT OF ALL RELEVANT MATERIALS BROUGHT ON RECORD. 11.4 FROM THE VARIOUS DETAILS FURNISHED BY THE ASSE SSEE IN THE PAPER BOOK FILED WE FIND , THE SHARES ARE HELD FOR A FEW DAYS AND IN A VERY FEW CASES FOR A FEW WEEKS OR FEW MONTHS. IN OUR OPINIO N, PURCHASE OF SHARES DURING THE YEAR AND SELLING THEM FREQUENTLY IN SHOR T PERIOD DO INDICATE THAT THE ASSESSEE HAS PURCHASED THE SHARES WITH A M OTIVE TO EARN PROFIT IN A SHORT PERIOD. THEREFORE THE FACTS OF THE INSTANT CASE DO NOT PERSUADE US TO HOLD THAT THE SHARES WERE HELD AS INVESTMENT SIN CE THESE ARE NOT HELD ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 20 FOR SUCH A LONGER PERIOD SO AS TO TREAT THE SAME AS INVESTMENT. THE FREQUENCY AND VOLUME OF THE TRANSACTIONS IN THE INS TANT CASE GIVE AN IMPRESSION THAT THE ASSESSEE DO NO INTEND TO ACQUIR E THE SHARES WITH INVESTMENT MOTIVE. IN THE CASE OF AN INVESTMENT A P ERSON USUALLY WATCHES THE MARKET OVER A LONGER PERIOD OF TIME BEFORE SELL ING OF THE SHARES. THE EARNING OF DIVIDEND AND THE APPRECIATION OF THE SHA RES IS THE PRIMARY CONSIDERATION. IT IS ONLY A TRADER WHO WOULD LOOK FOR SHORT-TERM GAINS FROM PURCHASE AND SALE OF SHARES. THEREFORE, THE T REATMENT GIVEN BY THE ASSESSEE TO THE SAID TRANSACTIONS IN THE BOOKS OF A CCOUNT, IN OUR OPINION, CANNOT BE THE ONLY DETERMINATIVE FACTOR ABOUT THE N ATURE OF THE TRANSACTIONS. THE SUBMISSION OF THE LD. COUNSEL FO R THE ASSESSEE THAT THE SHARES WERE DISCLOSED AS INVESTMENT IN THE BALANCE SHEET WAS CERTAINLY A FACTOR TO BE RECKONED WITH BUT WHEN THERE WERE OTHE R FACTORS OR CIRCUMSTANCES WHICH THROW SOME DOUBT ON THE MOTIVE OF THE ASSESSEE IN ACQUIRING THE SHARES, AS IN THE INSTANT CASE, THE E NTRIES IN THE BOOKS OF ACCOUNT OR BALANCE SHEET CANNOT OVERRIDE THEM AND B E TAKEN AS DECISIVE OF THE INTENTION OF THE ASSESSEE. FURTHER THE SUBMI SSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN THE PRECEDING TWO ASSESSME NT YEARS THE SHORT TERM CAPITAL GAIN HAS BEEN ACCEPTED BY THE REVENUE IN SCRUTINY/SUMMARY ASSESSMENT AND THEREFORE THE SAME SHOULD BE FOLLOWE D IN THIS YEAR, IN OUR OPINION, IS WITHOUT MUCH FORCE SINCE IT IS THE SETT LED PROPOSITION OF LAW THAT PRINCIPLES OF RES JUDICATA DO NOT APPLY TO INC OME TAX PROCEEDINGS AND EVERY ASSESSMENT IS INDEPENDENT AND SEPARATE. FURTH ER IN THE PRECEDING A.Y. THE ASSESSEE WAS TRADING IN SHARES AND ONLY TO WARDS THE END OF THE FINANCIAL YEAR (25.3.2005) THE ASSESSEE PASSED A RE SOLUTION TO TREAT THE DELIVERY BASED SHARES AS INVESTMENT. IN OUR OPINIO N, THE ENTIRE EXERCISE DONE BY THE ASSESSEE WAS WITH A MOTIVE TO REDUCE TH E TAX LIABILITY WHICH IS 10% FOR STCG AND 30% FOR BUSINESS INCOME. THEREFORE NOT WITHSTANDING THE FACT THAT THE SHARES WERE SHOWN AS INVESTMENT I N THE BALANCE SHEET AS ON 31.3.2005 WHICH WERE EARLIER A PART OF STOCK IN TRADE, SALE OF THE SAME, ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 21 IN OUR OPINION, CANNOT BE CONSIDERED AS SALE OF INV ESTMENT AND CONSEQUENTLY THE PROFIT HAS TO BE TREATED AS BUSINE SS INCOME. 11.5 FROM THE VARIOUS DETAILS FURNISHED BY THE ASSE SSEE WE FIND IT IS THE COMPUTER WHICH DECIDES WHETHER THE SHARE IS DELIVER Y BASED OR NON- DELIVERY BASED AND WHETHER IT IS FOR TRADING OR INV ESTMENT. THEREFORE THE BOARD RESOLUTION, IN OUR OPINION, LOOSES ITS SIGNIF ICANCE. THE OTHER SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT NO BORROWED FUNDS HAVE BEEN UTILIZED AND THE ENTIRE INVESTMENT IS OUT OF OWN FUNDS IS ALSO WITHOUT MUCH FORCE SINCE THE A.O. HAS GIVEN A CATEG ORICAL FINDING THAT THE ASSESSEE USED BORROWED MONEY FROM GROUP CONCERNS AN D ASSOCIATES AND TOWARDS THE END OF THE YEAR THE SAME WERE SQUARED U P SO AS TO GIVE AN IMPRESSION THAT NO BORROWED FUNDS HAVE BEEN UTILIZE D FOR THE PURPOSE OF INVESTMENT IN SHARES. 11.6 THE VARIOUS DECISIONS RELIED ON BY THE LD. COU NSEL FOR THE ASSESSEE ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE . IT MAY BE MENTIONED HERE THAT EVERY CASE DEPENDS ON ITS OWN SETS OF FAC TS. THE DECISION IN ONE PARTICULAR CASE CANNOT BE APPLIED TO THE FACTS OF A NOTHER CASE. IT DEPENDS ON A COMBINATION OF FACTORS. THERE IS NO DISPUTE TO THE LEGAL PROPOSITION THAT THE ASSESSEE CAN HAVE TWO PORTFOLIOS I.E ONE F OR INVESTMENT AND ONE FOR TRADING. THERE IS ALSO NO DISPUTE TO THE LEGAL PROPOSITION THAT MERE VOLUME OF TRANSACTION DOES NOT MEAN THAT ASSESSEE I S A TRADER. IT IS THE INTENTION WITH WHICH PURCHASE HAS BEEN MADE HAS TO BE SEEN. HOWEVER, IN THE INSTANT CASE, THE INTENTION OF THE ASSESSEE APPEARS TO BE WHIMSICAL. PURCHASES IN THE SAME SCRIP ON THE SAME DAY HAS BEE N DIVIDED INTO SPECULATION AND INVESTMENT. ALTHOUGH THE LD. COUNSE L FOR THE ASSESSEE FILED A SERIES OF DECISIONS IN ITS FAVOUR, WE FIND THERE ARE EQUAL NUMBER OF DECISIONS AGAINST THE ASSESSEE. THEREFORE, THE RATI O OF ONE DECISION CANNOT BE APPLIED TO THE FACTS OF THE CASE OF THE ASSESSEE . IT HAS BE DECIDED ON ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 22 THE BASIS OF ITS OWN SET OF FACTS AND CIRCUMSTANCES . AS HAS BEEN MENTIONED EARLIER WE FIND THE ONLY INTENTION OF THE ASSESSEE IN THE IMPUGNED CASE IS JUST TO REDUCE THE TAX LIABILITY B Y TREATING A PART OF THE PROFIT AS SHORT TERM CAPITAL GAIN. 11.7 AS REGARDS THE DECISION OF THE TRIBUNAL IN TH E CASE OF GOPAL PUROHIT (SUPRA) WHICH HAS SINCE BEEN UPHELD BY THE JURISDIC TIONAL HIGH COURT AND AS RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSE E, WE FIND THE SAME IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. I N THAT CASE THE TRIBUNAL HAS GIVEN A FINDING THAT THE ASSESSEE WAS CONSISTEN TLY INVESTING IN SHARES AND THE RATIO OF SALES TO INVESTMENT WAS VERY LESS. THE ASSESSEE WAS INVESTING FOR A LONG PERIOD AND OFFERING THE LONG T ERM CAPITAL GAIN WHICH IS MORE THAN SHORT TERM CAPITAL GAIN AND THE PERIOD OF HOLDING OF THE SHARES VARIED FROM ONE YEAR TO FIVE YEARS. HOWEVER, NO SU CH FACTS EXIST IN THE PRESENT CASE. THE HOLDINGS OF SHARES VARY BETWEEN O NE DAY TO FEW WEEKS ONLY. THEREFORE, THE DECISION IN THE CASE OF GOPAL PUROHIT (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE VA RIOUS OTHER DECISIONS RELIED ON BY THE ASSESSEE , IN OUR OPINION, ARE DIS TINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN TH IS VIEW OF THE MATTER WE HOLD THAT THE PROFIT ON ACCOUNT OF PURCHASE AND SAL E OF SHARES BY THE ASSESSEE IN THE INSTANT CASE HAS TO BE TREATED AS I NCOME FROM BUSINESS AS HELD BY THE A.O. WE THEREFORE SET ASIDE THE ORDER O F THE LD. CIT(A) AND RESTORE THE ORDER OF A.O. THE GROUNDS RAISED BY TH E REVENUE ARE ACCORDINGLY ALLOWED. 12. IN GROUNDS OF APPEAL NO. 4(1)(I), THE REVENUE H AS CHALLENGED THE ORDER OF THE LD. CIT(A) IN DELETING THE ADDITION OF RS. 34,08,608/- ADDED BY THE A.O. BY WAY OF DEEMED DIVIDEND U/S 22(2) OF THE I.T. ACT. ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 23 12.1 FACTS OF THE CASE IN BRIEF ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE A.O. NOTED THAT SHRI RAKESH S. KATH OTIA IS ONE OF THE MAIN SHAREHOLDER IN THE ASSESSEE COMPANY AS WELL AS M/S SUBHKAM STOCK & SHARES LTD. (SSSL). HE NOTED THAT SHRI RAK ESH S. KATHOTIA IS HOLDING 51.33% SHARES IN SSSL AND 46.33% IN THE ASS ESSEE COMPANY. THUS SHRI KATHOTIA IS HOLDING MORE THAN 20% SHARES IN BOTH THE COMPANIES. FROM THE VARIOUS DETAILS FURNISHED BY T HE ASSESSEE THE A.O. NOTED THAT THE ASSESSEE HAS RECEIVED ADVANCE FROM M /S SUBHKAM STOCKS & SHARES LTD. ON VARIOUS DATES DURING THE PREVIOUS YEAR AND TOTAL OF SUCH ADVANCE COMES TO RS. 9,68,25,000/-. FROM THE FINAN CIAL ACCOUNTS OF SSSL HE NOTED THAT AS PER AUDITED BALANCE SHEET DTD . 1.9.2006 THE RESERVES AND SURPLUSES AS ON 31.3.2005 WAS RS. 34,0 8,608/-. BY INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, THE A.O. MADE ADDITION OF RS. 34,08,608/- AS DEEMED DIVIDEND IN T HE HANDS OF THE ASSESSEE COMPANY. IN APPEAL, THE LD. CIT(A) FOLLOW ING THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V . BHAUMIK COLOUR PVT. LTD. REPORTED IN 313 I TR 147 (AT) DELETED THE ADDITION. AGGRIEVED WITH SUCH ORDER OF THE LD. CIT(A) THE REVENUE IS IN APPE AL BEFORE US ON THE GROUND THAT THE DEPARTMENT HAS NOT ACCEPTED THE DEC ISION OF THE SPECIAL BENCH OF THE TRIBUNAL. 12.2 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF A.O. AND CIT(A) AND THE VARIO US DECISIONS CITED BEFORE US. WE FIND THE SUBMISSION OF THE ASSESSEE BEFORE THE LD. CIT(A) THAT THE ASSESSEE IS NOT A SHARE HOLDER OF SSSL COU LD NOT BE CONTROVERTED BY THE LD. D.R. WE FIND THE SPECIAL BENCH OF THE T RIBUNAL IN THE CASE OF BHAUMIK COLOUR PVT. LTD. (SUPRA) HAS HELD THAT THE DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTH ER THAN A ITA NO. 6019/M/2009 M/S. SUBHKAM NENTURES (I) PVT. LTD. 24 SHAREHOLDER. WE FIND THE ABOVE VIEW OF THE TRIBUNA L HAS BEEN APPROVED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. UNIVERSAL MEDICAP P. LTD. REPORTED IN 324 ITR 263. MERELY BEC AUSE THE REVENUE HAS NOT ACCEPTED THE DECISION OF THE SPECIAL BENCH OF T HE TRIBUNAL CANNOT BE A GROUND TO TAKE A CONTRARY VIEW OTHER THAN THE VIEW TAKEN BY THE SPECIAL BENCH OF THE TRIBUNAL WHICH HAS SINCE BEEN APPROVED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF UNIVERSAL MEDICAP P. LTD. ACCORDINGLY, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) DELETING THE ADDITION AND UPHOLD THE SAME. THE GROUND RAISED BY THE REVENUE I S DISMISSED. 13. IN THE RESULT , THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 30 TH DAY OF NOVEMBER, 2011. SD/- - SD/- ( N.V. VASUDEVAN ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT: 30.11.2011 COPY FORWARDED TO : 1. THE APPELLANT, 2. THE RESPONDENT, 3. THE C.I.T. 4. CIT (A) 5. THE DR, - BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ROSHANI/RK