ACIT 25(2), MUMBAI V. SURESH R. SHAH, MUMBAI

ITA 6267/MUM/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3751 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 27-09-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 04-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DR P DANIEL
• Keywords: Business income; Speculation loss; Capital Gains
• Section: 143(3)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H, MUMBAI BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER I.T.A. NO. 6267/MUM/2009. ASSESSMENT YEAR : 2006-07. ASSTT. COMMISSIONER OF INCOME-TAX, SHRI SURESH R. SHAH, 25(2), MUMBAI. VS. 3 RD FLOOR, LAXMI PALACE, R.C.PATEL ROAD, OFF. CHANDAVARKA R ROAD, BORIVALI (W), MU MBAI-92. PAN AAGPS0752H APPELLANT. RESPONDENT. APPELLANT BY : SHRI SANDEEP GOEL. R ESPONDENT BY : DR. P. DANIEL. O R D E R PER J. SUDHAKAR REDDY, A.M. : THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED A GAINST THE ORDER OF THE CIT(APPEALS) -35, MUMBAI DATED 17-09-2009 FOR THE A SSESSMENT YEAR 2006-07. 2. FACTS OF THE CASE ARE BROUGHT OUT AT PARA 2 PAG E 1 OF THE CIT(APPEALS) ORDER WHICH ARE EXTRACTED BELOW FOR R EADY REFERENCE. 2 THE APPELLANT IS ENGAGED IN THE TEXTILE BUSINESS IN THE NAME AND STYLE OF M/S TREND CREATIONS. FOR THE RELEVANT ASSESSMENT YEAR, THE APPELLANT FILED HIS RETURN OF INCOME ON 03.07.2006 ADMITTING TOTAL INCOME OF RS.36,213/- ALONGWITH SHORT TERM CAPITAL GAIN OF RS.1,71,08,298 /-. THE A.O. SELECTED THE CASE FOR SCRUTINY AND COMPLETED THE ASSESSMENT U/S 143(3) DETERMINING THE TOTAL INCOME AT RS.1,92,00,510/-. 3. THE AO ASSESSED THE INCOME OF THE ASSESSEE UNDE R THE HEAD BUSINESS INCOME AFTER REJECTING THE CLAIM OF THE ASSESSEE T HAT THE INCOME EARNED FROM PURCHASE AND SALE OF SHARES, SHOULD BE ASSESSED UND ER THE HEAD CAPITAL GAINS. THE AO SUMMARIZED HIS FINDINGS AT PAGE 16 PARA 10 O F HIS ORDER WHICH ARE EXTRACTED BELOW FOR READY REFERENCE: THUS, TO SUMMARISE, THE ASSESSEE IS UNDOUBTEDLY D EALING IN LARGE VOLUME OF SHARES. THE FREQUENCY OF PURCHASE AND SALE IS EXTRE MELY HIGH./ NUMBER OF TRANSACTIONS ENTERED FOR 59 SCRIPS DEALT WITH IN TH E YEAR IS MORE THAN RUPEES FIFTEEN CRORES. THE HOLDING PERIOD FOR MOST OF THE SCRIPS RANGES FROM A FEW DAYS TO FEW MONTHS. IN CERTAIN CASES, HOLDING PERIO D IS MORE THAN ONE MONTH, HOWEVER, THE SCRIPS HAVE BEEN REPEATEDLY TRANSACTED INTO. IT MEANS THAT THE ASSESSEE HAS REPEATEDLY PURCHASED AND SOLD TO EARN QUICK PROFITS. THE DIVIDEND EARNED IS ONLY INCIDENTAL AND VERY LESS CO MPARED TO THE EARNING FROM AND PURCHASE OF SHARES. THE DIVIDEND EARNED BY THE ASSESSEE IS RS.4,22,483/-. IT CLEARLY SHOWS THAT THE INTENTION OF THE ASSESSEE IS NOT TO EARN CAPITAL GAINS, BUT TO EARN QUICK PROFITS THROUGH HI S BUSINESS. THEREFORE, HE CAN NOT TREAT PROFITS ARISING OUT OF SHARE TRANSACT IONS AS CAPITAL GAINS. THUS IN VIEW OF THE DISCUSSION IN THE ABOVE PARAS I HAVE NO HESITATION IN STATING THAT THE ASSESSEE IS ENGAGED IN ONLY ONE ACTIVITY I.E. A CTIVITY OF EARNING PROFIT THROUGH SALE AND PURCHASE OF SHARES AND NOT INVESTM ENT IN SHARES LEADING TO STCG AND LTCG. I ACCORDINGLY HOLD THAT THE ASSESSEE HAS WRONGLY CLASSIFIED HIS INCOME UNDER INCOME FROM SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN INSTEAD OF BUSINESS INCOME. THERE FORE, THE ENTIRE PROFIT ARISING OUT OF PURCHASE AND SALE OF SHARES SHOWN AS STCG AND LTCG IS 3 HEREBY ASSESSED UNDER THE HEAD INCOME FROM BUSINES S AND PROFESSION. THE TRADING ACCOUNT OF THIS BUSINESS IS SHOWN AS BELOW : PARTICULARS AMOUNT (RS.) PARTICULARS AMOUNT(RS.) CLOSING STOCK 95,54,035 SALES 9,19,46,597 PURCHASES 8,19,50,699 CLOSING STOCK 1,87,22,43 5 GROSS PROFIT 1,91,64,298 __________ ___________ 110669032 110669032 __________ __________ AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEA L. 4. THE FIRST APPELLATE AUTHORITY CONSIDERED THE IS SUE AND ALLOWED THE CLAIM OF THE ASSESSEE FOR THE VARIOUS REASONS GIVEN AT PAR 5.1 TO 5.5 OF HIS ORDER. AGGRIEVED, THE REVENUE IS IN APPEAL ON THE FOLLOWIN G GROUNDS : (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, WHETHER THE LD. CIT(A) IS RIGHT IN HOLDING THAT THE ASSESSE E INDULGED IN INVESTMENT IN SHARES NOT IN SHARE TRADING BUSINESS WITHOUT CONSID ERING THE FACTS BROUGHT ON RECORD BY THE A.O. THAT THE VOLUME AND NUMBER OF TR ANSACTIONS IN SHARES IS VERY HIGH. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, WHETHER THE LD. CIT(A) IS RIGHT IN HOLDING THAT THE ASSESSE E INDULGED IN INVESTMENT IN SHARES WITHOUT CONSIDERING THE FACT THAT THE ASSESS EE HAS DEVOTED MOST OF HIS TIME IN SHARE TRADING ACTIVITY AND HAS UTILIZED LIT TLE TIME FOR OTHER ACTIVITIES. 5. THE LEARNED DR, MR. SANDEEP GOEL, RELIED HEAVIL Y ON THE ORDER OF THE AO AND SUBMITTED THAT THE ASSESSEE CLAIMED THAT HE HAS RECEIVED SHORT TERM CAPITAL GAINS AT RS.1,71,72,085/- AND LONG TERM CAPITAL GAI NS OF RS.19,97,449/- AND HAD 4 CLAIMED EXEMPTION OF BOTH THESE AMOUNTS U/S 10(38) OF THE ACT. HE SUBMITTED THAT THE ASSESSEE HAS SHOWN SPECULATION LOSS FROM SHARE TRADING DURING THE YEAR AMOUNTING TO RS.13,484/- AS WELL AS DIVIDEND INCOME OF RS.4,22,483/-. HE POINTED OUT THAT THE ASSESSEE HAS DIVIDED HIS SHARE TRANSAC TIONS INTO TWO CATEGORIES I.E. I) DELIVERY BASED TRANSACTION AND B) NON DELIVERY BASE D TRANSACTION. HE TREATED THE INCOME OF THE FIRST CATEGORY AS INCOME FROM CAPITAL GAINS AND OF THE SECOND CATEGORY AS SPECULATION INCOME. HE POINTED OUT THAT THE AO HAS CONSIDERED ALL THE ARGUMENTS OF THE ASSESSEE AND , BASED ON JUDGMENTS OF VARIOUS COURTS AND CIRCULARS OF CBDT HAD COME TO A CONCLUSION THAT THE INCOME IN QUESTION IS INCOME FROM BUSINESS AND NOT INCOME FROM CAPITAL GAINS. HE POINTED OUT THAT THE ASSESSEE HAD OPENING STOCK OF SHARES OF RS.95,54,035/- AND T HAT HE HAS PURCHASED SHARES WORTH RS.8,34,41,699/- AND HAS SOLD SHARES OF RS.9, 19,46,597/- AND THAT HE HAD CLOSING STOCK AND SHARES VALUED AT RS.1,87,22,436/- . HE SUBMITTED THAT THE MAGNITUDE OF PURCHASE AND SALES INDEPENDENTLY IS EX TREMELY HIGH AND THAT WHEN BOTH ARE TAKEN TOGETHER, THE VOLUME IS RS.17,71,97, 432/-. THE RATIO OF THE PURCHASE AND SALE, AS PER THE DR IS LESS THAN ONE. HE SUBMIT TED THAT THE MOTIVE OF THE ASSESSEE IS TO EARN PROFIT AND THE FIGURES ALSO DEM ONSTRATE THAT THE HOLDING PERIOD OF SCRIPS RANGE FROM A FEW DAYS TO A FEW MONTHS. HE RE LIED ON PARA 9.3 PAGE 14 OF THE ORDER OF THE AO AND SUBMITTED THAT THE ASSESSEE IN DULGED IN MORE THAN 100 TRANSACTIONS ON THE WORKING DAYS OF THE STOCK EXCHA NGE DURING THE YEAR, WHICH COMES TO AN AVERAGE OF ONE TRANSACTION ON EVERY AL TERNATE DAY. ON THESE FACTS AND CIRCUMSTANCES, THE LEARNED DR ARGUED THAT THE AO WA S RIGHT IN HOLDING THAT THE INCOME ON THE PURCHASE AND SALE OF SHARES SHOULD BE ASSESSED UNDER THE HEAD BUSINESS AND NOT UNDER THE HEAD CAPITAL GAINS. 6. THE LEARNED COUNSEL FOR THE ASSESSEE, MR. P. DA NIEL, ON THE OTHER HAND, RELIED ON THE ORDER OF THE FIRST APPELLATE AU THORITY. HE SPECIFICALLY DREW THE 5 ATTENTION OF THE BENCH TO PARA 5.1 OF THE CIT(APPEA LS) ORDER. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS : I) JANAK S. RANGWALLA VS. ACIT (2007) 11 SOT 627 ( MUM.) II) CIT VS. GOPAL PUROHIT 228 CTR (BOM) 582. III) GOPAL PUROHIT VS. JCIT (2009) 122 TTJ (MUM.) 87. HE SUBMITTED THAT THIS IS A FACTUAL ISSUE AND THE A SSESSEE WAS BASICALLY A TEXTILE CONSULTANT EARNING INCOME IN THE FORM OF COMMISSION ON BROKERAGE. HE SUBMITTED THAT THE ASSESSEE IS ALSO AN INVESTIGATOR AND HE MA INTAINED HIS FUNDS IN FDS, SHARES IN COMPANIES AND PPFS. ETC. HE DREW THE ATTENTION O F THE BENCH TO THE BALANCE SHEET FILED BY THE ASSESSEE. HE POINTED OUT THAT T HE SHARES WERE HELD BETWEEN 1 AND 11 YEARS AND THAT THESE WERE LONG TERM INVESTMENT A ND DUE TO BOOM IN THE SHARE MARKET, THE ASSESSEE ENCASHED THE INVESTMENTS. HE P OINTED OUT THAT THE ASSESSEE SOLD ONLY FOUR SCRIPS DURING THE YEAR. HE SUBMITTED THAT EXCEPT FOR ONE SCRIP I.E. KARNATAKA BANK LTD., ALL THE SHARES WERE HELD FOR A PERIOD BETWEEN 5 TO 12 YEARS. HE TOOK THIS BENCH TO PAGES 5 AND 6 OF THE CIT(APPE ALS)S ORDER AND POINTED OUT THE FACTUAL ERRORS COMMITTED BY THE AO IN HIS ORDER . FOR SHORT TERM CAPITAL GINS THE LEARNED COUNSEL SUBMITTED THAT HE HAD TRANSACTED ON LY IN SEVEN SHARES. HE POINTED OUT THAT THE ASSESEE WANTED TO MOVE HIS INVESTMENTS FROM ONE CLASS OF ASSETS TO ANOTHER CLASS OF ASSETS. HE SUBMITTED A BREAKUP OF INVESTMENT IN REAL ASSETS, EQUITY SHARES AS ON 31-3-2005 AS WELL AS ON 31-3-2006 AND POINTED OUT THAT AS INVESTMENT IN SHARES WAS HIGH, THE ASSESSEE SHIFTED THOSE INVE STMENTS INTO OTHER CATEGORIES OF INVESTMENTS. HE POINTED OUT THAT IN THE CASE OF A T RADER, THE MARGINS WOULD BE 3% TO 5% OF THE VOLUME AND WHEREAS AN INVESTOR LOOKS F OR AN INCOME OF 15% TO 20% 6 ANNUALLY ON VALUE OF INVESTMENT AND NOT ON THE VOLU ME OF TRANSACTION. HE PRAYED FOR RELIEF. 7. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD AS FOLLOWS. 8. THE ISSUE WHETHER AN ASSESSEE CAN BE CONSIDERED AS AN INVESTOR OR AS A TRADER IN SHARES, DEPENDS ON THE FACTS AND CIRCUMST ANCES OF EACH CASE. IT IS WELL SETTLED THAT AN ASSESSEE CAN BE HELD AS AN INVESTOR AS WELL AS A TRADER WHEN HE HOLDS DIFFERENT CLASS OF ASSETS. IN THIS CASE THE ASSESSE E IS IN TEXTILE BUSINESS. IT CAN BE SEEN FROM THE BALANCE SHEET THAT THE ASSESSEE IS NO T ONLY INVESTING IN SHARES BUT HAS MAINTAINED FUNDS AND FIXED DEPOSITS AS WELL AS PPF. INVESTMENTS IN SHARES ARE 75% OF THE TOTAL INVESTMENTS. THE SHARES SOLD, THE INCO ME OF WHICH WAS DECLARED AS LONG TERM CAPITAL GAIN, WAS HELD BY THE ASSESSEE FOR TH E PERIOD OF 1 TO 11 YEARS AND THEY CONSISTED OF FOUR SCRIPS. THE SHARES OF THREE COMP ANIES WERE HELD FOR THE PERIOD RANGING FROM 5 TO 12 YEARS AND ONLY IN THE CASE OF KARNATKA BANK THE PERIOD OF HOLDING WAS MORE THAN ONE YEAR. AS PER THE SHORT TE RM CAPITAL GAIN IS CONCERNED, TRANSACTIONS WERE DONE ONLY IN THE CASE OF 7 SCRIPS AND 93% OF THE SHORT TERM CAPITAL GAINS AROSE FROM THESE SCRIPS. ON THESE FA CTS AT PARA 5.1 PAGE 8 AND 9 THE LEARNED CIT(APPEALS) HELD AS FOLLOWS : 5.1 I HAVE CONSIDERED THE SUBMISSIONS OF THE REPRE SENTATIVE AND THE STAND TAKEN BY THE AO. IT IS SEEN THAT THE APPELLANT IS H AVING HIS OWN TEXTILE BUSINESS IN THE NAME AND STYLE OF M/S TREND CREATIO NS. IT IS FURTHER SEEN FROM THE BALANCE SHEET OF THE APPELLANT THAT HE HAD VARIOUS INVESTMENTS IN F.DS., PPF AND SHARES OF COMPANIES AND AS PER THE B ALANCE SHEET AS ON 7 31.03.2005, THE INVESTMENT IN EQUITIES WAS HEAVIER AT 71% AND THE APPELLANT DECIDED TO CHANGE THE PORTFOLIO OF INVESTMENT SO HA T THERE IS FIR DISTRIBUTION OF ASSETS IN F.D., BANK DEPOSITS, PPF & SHARES. AS CONTENDED BY THE REPRESENTATIVE, AS A PRUDENT INVESTOR, THE APPELLAN T DISTRIBUTED HIS INVESTMENT IN ALL MODES OF INVESTMENT BY SELLING A PORTION OF THE SHARES CONSIDERING THE FAVORABLE SHARE MARKET WHICH DOES NOT MEAN THAT THE APPELLANT IS A TRADER DURING THIS YEAR. FURTHER, AS CONTENDED BY THE REPR ESENTATIVE, THE SHARES WERE SHOWN AS INVESTMENT IN THE BALANCE SHEET IN THE EAR LIER YEARS AND THEY WERE TRANSFERRED IN THE NAME OF THE APPELLANT AS PER THE DEMAT ACCOUNT PRODUCED BEFORE THE A.O. AND SUBSEQUENTLY SOLD. FURTHER, THE APPELLANT PAID STT AT THE RATE APPLICABLE TO INVESTMENT. A PERUSAL OF WORKING OF LONG TERM CAPITAL GAIN SHOWS THAT THE SHARES WERE HELD FOR A LONG PERIOD AND IN FACT THE APPELLANT SOLD ONLY 4 SCRIPS DURING THIS YEAR AND EXCEPT THE SHARES OF KARNATAKA BANK LIMITED, ALL THE OTHER SHARES WERE HELD FOR 5-12 YE ARS AND THEREFORE, THERE IS NO REASON TO ASSESS THE LONG TERM CAPITAL GAIN UNDE R THE HEAD BUSINESS. FURTHER IT IS SEEN FROM THE SHORT TERM CAPITAL GAIN WORKING THAT 7 SCRIPS WERE PURCHASED IN THE EARLIER YEAR AND SOLD DURING THE C URRENT YEAR. THE APPELLANT HAS SOLD BONUS SHARES OF SUBROS LIMITED RECEIVED IN OCTOBER, 2004 IN THE MONTH OF JUNE, 2005 AND THE A.O. ASSESSED THE SAME UNDER THE HEAD BUSINESS. FURTHER AS CONTENDED BY THE REPRESENTATIV E, 93% OF SHORT TERM CAPITAL GAIN AROSE FROM SALE OF 7 SCRIPS ONLY AS GI VEN IN PARA 4.2 OF THIS ORDER ABOVE AND MAJOR PORTION OF THE SHARES WERE HELD FOR MORE THAN ONE MONTH AND NEARLY 50% OF THE SHARES WERE HELD FOR MORE THA N 6 MONTHS. FURTHER, THE APPELLANT HAS NOT TAKEN ANY BORROWED LOAN FOR THE P URPOSE OF INVESTING IN SHARES. IT IS TRUE THAT THE APPELLANT HAS CLAIMED S PECULATION LOSS FROM SHARES AT RS.13,484/- BUT THE AMOUNT INVOLVED AND TRANSACT IONS ARE VERY LESS. AS HELD BY THE HONBLE HYDERABAD TRIBUNAL IN THE CASE OF SHAH-LA INVESTMENTS AND FINANCIAL CONSULTANTS PVT. LTD. VS. DY. CIT (2 SOT 371, THERE IS NO BAR FOR THE SAME ASSESSEE TO DO BUSINESS IN SHARES AND ALSO HOLD SOME SHARES AS INVESTMENT. THUS, MERELY BECAUSE THE APPELLANT CLAI MED SPECULATION LOSS OF RS.13,484- FROM SHARES, SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN ADMITTED BY THE APPELLANT CANNOT ASSESSED UNDER THE HEAD BUSINESS. 8. THESE FACTS, AS STATED BY THE CIT(APPEALS), ARE NOT DISPUTED BY THE REVENUE. IN THE LIGHT OF THE ABOVE FACTS, WE APPLY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GOPAL PURO HIT (SUPRA) AND UPHOLD THE ORDER OF THE FIRST APPELLATE AUTHORITY. 8 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH NOV. , 2010. SD/- SD/- (N.V. VASUDEVAN) (J. SUDHA KAR REDDY) JUDICIAL MEMBER. ACCOUNTANT MEMBER MUMBAI, DATED: 10 TH NOV., 2010. WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, H-BENCH (TRUE COPY) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI B ENCHES, M UMBAI.