ACIT CIR 16(1), MUMBAI V. ROOPA V KAPOOR, MUMBAI

ITA 6176/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6219 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 27-11-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Futures and options
• Section: 143(3)

Judgement Text

ITA NO.: 6176/MUM/09 ASSESSMENT YEAR: 2006-07 PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH, MUMBAI [CORAM : PRAMOD KUMAR AM, AND ASHA VIAJAYRAGHVAN JM ] ITA NO.: 6176/MUM/09 ASSESSMENT YEAR: 2006-07 ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 16(1), MUMBAI .. APPELLANT VS. ROOPA KAPOOR .. RESPONDENT C/O KIRAN KAPADIA & CO., CA 330, SAMUEL STREET, 1 ST FLOOR, VADGADI, MUMBAI 400 003 PAN : AADPK9221G APPEARANCES: JITENDRA YADAV, FOR THE APPELLANT P K PARIDA, ALONG WITH SANJUKTA CHOWDHURY, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. THIS IS AN APPEAL FILED BY THE ASSESSING OFFICER AND IS DIRECTED AGAINST THE ORDER DATED 18 TH SEPTEMBER 2009 PASSED BY THE CIT(A), IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE IN COME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2006-07. 2. GRIEVANCES RAISED BY THE ASSESSING OFFICER ARE A S FOLLOWS : 1. THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESS ING OFFICER TO TREAT RS 2,91,91,934 AS INCOME UNDER THE HEAD LONG TERM CAPITAL GAIN AND RS 4,02,51,185 AS INCOME FROM SHORT TERM CAPITAL GAIN, INSTEAD OF TREATING IT AS BUSINESS INCOME. 2. THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESS ING OFFICER TO TREAT THE SALE AND TRANSFER OF EQUITY SHARES AS CAP ITAL GAINS INSTEAD OF BUSINESS INCOME, WITHOUT APPRECIATING THE FACT T HAT THE ASSESSEE HAS FREQUENTLY TRADED IN SHARES AND SECURITIES IN L ARGE VOLUMES BY DISPOSING OF THE INVESTMENTS TO MAKE PROFIT FROM ST OCK MARKET ITA NO.: 6176/MUM/09 ASSESSMENT YEAR: 2006-07 PAGE 2 OF 5 WHICH CLEARLY SHOWS THAT INCOME IS UNDER THE HEAD BUSINESS INCOME. 3. THE LEARNED CIT(A) ERRED IN NOT CONSIDERING THE ASSESSEES TURNOVER TO AVAILABLE CAPITAL RATIO OF 1:4 WHICH IS TOO HIGH FOR INVESTMENT AND THE FREQUENCY OF TRANSACTIONS WHICH INDICATES ASSESSEES INTENTION TO SELL AT PROFITS AND THUS SU GGESTS BUSINESS. 4. THE LEARNED CIT(A) ERRED IN NOT FOLLOWING THE BO ARD CIRCULAR NO. 4/2007, INSTRUCTION NO. 1827 AND RATIO OF DALMI A CEMENT LTD VS CIT (105 ITR 633) AND G VENKATSWAMI N BAIDU & CO VS CIT (35 ITR 594) 3. AS CLEARLY DISCERNABLE FROM THE ABOVE GROUNDS OF APPEAL, WHICH ARE IN FACT NO MORE THAN ARGUMENTS IN SUPPORT OF THE GRIEV ANCE OF THE ASSESSING OFFICER, THE ACTUAL GRIEVANCE OF THE ASSESSING OFFI CER IS THAT THE CIT(A) ERRED IN HOLDING THAT PROFIT ON SALE OF SHARES IS TAXABLE UNDER THE HEAD INCOME FROM CAPITAL GAINS AS AGAINST ASSESSING OFFICERS FINDI NG THAT THE PROFITS SO EARNED BY THE ASSESSEE ARE TAXABLE UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS AND PROFESSION. WE WILL, THEREFORE, TAKE UP ALL T HESE GROUNDS OF APPEAL TOGETHER AND ADDRESS OURSELVES TO THIS CORE ISSUE. 4. BRIEFLY STATED, MATERIAL FACTS OF THE CASE, SO F AR AS RELEVANT FOR ADJUDICATING UPON THIS APPEAL, ARE AS FOLLOWS. THE ASSESSEE IS AN INDIVIDUAL AND HAS DISCLOSED INCOME FROM HOUSE PROPERTY, INCOM E FROM OTHER SOURCES, INCOME FROM BUSINESS OF TRADING IN FUTURES AND OPTI ONS, AND INCOME FROM CAPITAL GAINS. THE PROFITS ON SALE OF SHARES HAVE BEEN TREATED AS LONG TERM CAPITAL GAINS OR AS SHORT TERM CAPITAL GAINS, D EPENDING ON THE PERIOD OF HOLDING THESE SHARES, BUT THE ASSESSING OFFICER WAS NOT REALLY SATISFIED WITH THIS TREATMENT BY THE ASSESSEE. HE WAS OF THE VIEW THAT THE ASSESSEE HAS ENTERED INTO A NUMBER OF TRANSACTIONS, WHICH INDICA TE THAT THE ASSESSEE WAS INFACT TRADING IN SHARES, AND THAT THE ASSESSEE HAS ENTERED INTO A NUMBER OF TRANSACTIONS IN WHICH SHARES HAVE BEEN SOLD ALMOST IMMEDIATELY AFTER BUYING THE SHARES WITHOUT EVEN TAKING DELIVERY OF SHARES. HE ALSO NOTED THAT OUT OF ENTIRE SALE OF SHARES OF 33,42,93,513, AS MUCH AS 7 2 % OF SALES WAS IN RESPECT OF THE SHARES PURCHASED DURING THAT VERY PREVIOUS Y EAR WHICH ALSO SHOWS THAT ITA NO.: 6176/MUM/09 ASSESSMENT YEAR: 2006-07 PAGE 3 OF 5 THE TOTAL PURCHASES OF SHARES WERE MORE THAN FOUR T IMES THE AVAILABLE CAPITAL. THE ASSESSING OFFICER WAS OF THE VIEW THAT THIS RAT IO WAS INHERENTLY INAPPROPRIATE FOR INVESTMENT BUSINESS, AND SHOWED T HAT THE ASSESSEE WAS INFACT IN TRADING OF SHARES. IT WAS ALSO NOTED THA T THE ASSESSEE HAS LIQUIDATED ALL HIS INVESTMENTS IN THE MUTUAL FUND UNITS AND IN VESTED THE SAME IN THE INVESTMENTS IN SHARES WHICH SHOWS HIGHER RISK APPET ITE OF THE ASSESSEE AS IS GENERALLY FOUND IN TRADING BUSINESS. A NOTE WAS AL SO TAKEN OF THE FACT THAT THE ASSESSEE IS ALSO ENGAGED IN SPECULATION BUSINESS AN D IN FUTURES AND OPTIONS TRADING, WHICH ALSO INDICATE THAT THE ASSESSEE IS E NGAGED IN TRADING ACTIVITY. AS REGARDS ASSESSEES CONTENTION THAT SHE WAS TREAT ED AS AN INVESTOR IN EARLIER ASSESSMENT YEARS, THE ASSESSING OFFICER NOT ED THAT THERE IS NO RES JUDICATA IN THE INCOME TAX PROCEEDINGS AND THAT, IN ANY EVE NT, THERE WERE SIGNIFICANT VARIATIONS IN SCALE OF OPERATIONS CHANG ING THE VERY NATURE OF ASSESSEES ACTIVITY. AS FOR THE QUANTUM OF DIVIDEN D, WHICH WAS HIGHLIGHTED BY THE ASSESSEE, IT WAS NOTED BY THE ASSESSING OFFICER THAT A DIVIDEND OF RS 33.47 LAKHS ON SHARE PURCHASES OF RS 44,11,49,953 WAS NOT HING BUT A SMALL INCIDENTAL RECEIPT AND CANNOT BE SOLE MOTIVATION FO R PURCHASES. THE ASSSSING OFFICER THEN DEALT WITH ASSESSEES CONTENTION THAT IN VIEW OF CIRCULAR NO. 4/2007 THE ASSESSEE SHOULD BE DEALT WITH AS AN INVE STOR AND NOT AS A TRADER, AND HELD THAT, IF ANYTHING, THE TESTS LAID DOWN IN THIS CIRCULAR GO AGAINST THE ASSESSEES CONTENTION OF BEING AN INVESTOR. IT WAS IN THIS BACKDROP THAT THE ASSESSING OFFICER CAME TO BE OF THE OPINION THAT TH E ASSESSEE IS ENGAGED IN THE ACTIVITY OF TRADING AND, ACCORDINGLY, PROFITS O N SALE OF THESE SHARES ARE REQUIRED TO BE TAXED UNDER THE HEAD PROFITS AND GA INS FROM BUSINESS AND PROFESSION. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A), AND THE CIT(A) REVERSED THE SAID ACTION OF THE ASSESSING OFFICER. LEARNED CIT(A) WAS OF THE VIEW THAT THE FACTS SET O UT BY THE ASSESSING OFFICER WITH REGARD TO THE PERIOD OF HOLDING THE SHARES, WI TH REGARD TO THE FACT THAT THE SHARES WERE ALLEGED TO HAVE BEEN SOLD EVEN WITH OUT TAKING PHYSICAL DELIVERY AND ALSO WITH REGARD TO THE CLAIM REGARDIN G NUMBER OF DAYS ON WHICH ASSESSEE CARRIED OUT THE TRANSACTIONS IN MARKET, AR E INCORRECT. HE WAS ALSO OF THE VIEW THAT QUANTUM OF DIVIDEND WAS A SIGNIFICANT MOTIVATION FOR INVESTMENT. IT WAS ALSO NOTED THAT EVEN THOUGH THER E MAY NOT BE ANY RES ITA NO.: 6176/MUM/09 ASSESSMENT YEAR: 2006-07 PAGE 4 OF 5 JUDICATA IN INCOME TAX PROCEEDINGS, CONSISTENCY PRINCIPLE M UST BE FOLLOWED. LEARNED CIT(A) ALSO HELD THAT THE MAGNITUDE OF TRAN SACTIONS IS NOT REALLY IMPORTANT TO DETERMINE THE PURPOSE OF PURCHASES OF SHARES. IT WAS ALSO NOTED THAT MF UNITS WERE SOLD BECAUSE THESE WERE AT THE H IGHEST NAV AT THE RELEVANT POINT OF TIME, AND THAT THE PROFITS ON SALE OF MF U NITS, WHICH WERE HELD FOR MORE THAN ONE YEAR, COULD NOT BE TREATED AS BUSINE SS INCOME, AS HAS BEEN DONE BY THE ASSESSING OFFICER. IT WAS FURTHER NOTED THAT JUST BECAUSE THE ASSESSEE HAS MADE SOME CHANGES IN THE PORTFOLIO SO AS TO MAXIMIZE THE VALUE OF PORTFOLIO, IT COULD NOT BE SAID THAT THE ASSESSE E WAS ENGAGED IN SHARE TRADING. ON THE BASIS OF THIS REASONING AND THESE A RGUMENTS, CIT(A) HELD THAT THE ASSESSEE WAS AN INVESTOR AND NOT A DEALER IN SH ARES. THE ASSESSING OFFICER WAS ACCORDINGLY DIRECTED TO THE TREAT THE INCOME ON SALE OF SHARES AS CAPITAL GAIN, AND NOT AS BUSINESS INCOME. AGGRIEVED BY THE STAND SO TAKEN BY THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 6. WE HAVE NOTED THE ASSESSEES STAND BROADLY HAS B EEN THAT SHE WAS IS ONLY AN INVESTOR AND THE PORTFOLIO WAS RESHUFFLED O NLY SO AS TO MAXIMIZE THE VALUE OF THE PORTFOLIO AND NOT WITH A VIEW TO BOOK PROFITS ON SALE OF SHARES. IT IS THIS BASIC ARGUMENT WHICH HAS BEEN ACCEPTED BY T HE CIT(A) AS WELL, AND WHICH HAS BEEN EMPHASIZED BEFORE US. NO DOUBT WHEN AN ASSESSEE IS RESHUFFLING THE PORTFOLIO JUST TO MAXIMIZE ITS VALU E AND PICK UP THE SHARES WHICH HAVE GREATER POTENTIAL IN TIMES TO COME, EVEN IF THERE IS A PROFIT ON SALE OF THE SHARES SOLD, SUCH GAINS CANNOT BE TAXED AS B USINESS INCOME BUT ONLY AS CAPITAL GAINS. HOWEVER, IN SUCH A SITUATION, WHEN YOU DECIDE TO SELL A SHARE IT IS WITH A VIEW TO DISCARD THE SAME FROM THE PORTFOL IO AND THERE CANNOT BE ANY GOOD REASONS TO BUY THE SAME SHARES AGAIN. IN A SIT UATION IN WHICH AN ASSESSEE SELLS A PARTICULAR SHARE, AND YET BUYS THE SAME SHARE AGAIN WITHIN A SHORT SPAN OF TIME, SUCH A SALE CANNOT BUT BE FOR T HE PURPOSE OF TRADING IN THE SAME. THERE IS NO FINDING BY ANY OF THE AUTHORITIES BELOW WHETHER THE SAME SHARES ARE NOT SOLD AND PURCHASED AGAIN WITHIN THAT SHORT PERIOD. IN OUR ITA NO.: 6176/MUM/09 ASSESSMENT YEAR: 2006-07 PAGE 5 OF 5 CONSIDERED VIEW, THAT IS A VERY IMPORTANT ASPECT OF THE MATTER AND IN CASE IT IS INDEED A CASE OF MERE PORTFOLIO ADJUSTMENT, ALL THE SE GRIEVANCES RAISED BY THE ASSESSING OFFICER ARE MERELY ACADEMIC. WE MUST ALS O ADD THAT AS LONG AS IT IS A GENUINE RESHUFFLING OF PORTFOLIO, WHICH ESSENTIAL LY INVOLVES THAT A SHARE DISCARDED FROM PORTFOLIO IS NOT BOUGHT AGAIN UNLESS THINGS CHANGE MATERIALLY OR AFTER LONG INTERVENING PERIOD, THE PROFIT ON SAL E OF SHARES, IRRESPECTIVE INDEED OF THE NUMBER OF TRANSACTIONS IN THE PROCESS OF THIS RESHUFFLING OF PORTFOLIO, IS REQUIRED TO BE TAXED UNDER THE HEAD C APITAL GAINS, AND NOT UNDER THE HEAD BUSINESS INCOME. IN THIS VIEW OF THE MATT ER, WE DEEM IT FIT AND PROPER TO REMIT THE MATTER TO THE FILE OF THE CIT(A ) FOR FRESH EXAMINATION OF THE MATTER ON THE ABOVE LINES. AS WE ARE REMITTING THE MATTER, WITH THE CONSENT OF THE PARTIES, ON THIS LIMITED SHORT ISSUE , WE SEE NO NEED TO DEAL WITH OTHER ASPECTS OF THE MATTER WHICH THE ASSESSEE CAN VERY WELL LEAN UPON, IF AT ALL NEEDED, IN THE EVENT OF AN ADVERSE FINDIN G BY THE CIT(A). THOSE ISSUES ARE LEFT OPEN, THOUGH, IN CASE THE PLEA OF THE ASSE SSEE REGARDING RESHUFFLE OF PORTFOLIO IS HELD TO BE CORRECT, ALL THOSE ISSUES A RE NOT OF ANY CONSEQUENCE. WITH THESE OBSERVATIONS, THE MATTER STANDS RESTORED TO THE FILE OF THE CIT(A). 7. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 30 TH DAY OF NOVEMBER, 2010. SD/- SD/- (ASHA VIJAYRAGHAVAN) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTAN T MEMBER MUMBAI; 30 TH DAY OF NOVEMBER, 2010 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER -CITY XVI , MUMBAI 4. COMMISSIONER (APPEALS) - 27 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, D BENCH, MUMBAI 6. GUARD FILE TRUE COPY BY O RDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI