SHRI. MAHENDRA C. SHAH, MUMBAI V. ADDL.C.I.T.,RANGE13(1), MUMBAI

ITA 6289/MUM/2008

• Counselvise Citation: 628919914 RSA 2008
• Duration Of Justice: 2 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 09-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 24-10-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R S SRIVASTAV
• Assessee Lawyers: R G TRALSHAWALA
• Keywords: Capital asset; Business income; Cost of acquisition; Speculation loss
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, H, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER I T A NO: 6289/MUM/2008 (ASSESSMENT YEAR: 2005-06) SHRI MAHENDRA C SHAH, MUMBAI APPELLANT (PAN: AADPS4812K) VS ADDITIONAL COMMISSIONER OF INCOME TAX RESPONDENT RANGE 13(1), MUMBAI I T A NO: 4932/MUM/2009 (ASSESSMENT YEAR: 2006-07) ADDITIONAL COMMISSIONER OF INCOME TAX APPELLANT RANGE 13(1), MUMBAI VS SHRI MAHENDRA C SHAH MUMBAI RESPONDENT ASSESSEE BY: MR R G TRALSHAWALA REVENUE BY: MR R S SRIVASTAV O R D E R R V EASWAR, PRESIDENT: THESE ARE TWO APPEALS, ONE BY THE ASSESSEE WHICH R ELATES TO THE ASSESSMENT YEAR 2005-06 AND THE OTHER BY THE RE VENUE WHICH RELATES TO THE ASSESSMENT YEAR 2006-07. SINCE THEY WERE HEARD TOGETHER, THEY ARE DISPOSED OF BY A COMMON ORDER FO R THE SAKE OF CONVENIENCE. 2. THE ASSESSEE IS AN INDIVIDUAL DERIVING INCOME IN FUTURES AND OPTIONS, SPECULATION IN SHARES, COMMISSION AGENCY A ND FROM PARTNERSHIP IN TRADING FIRMS, SHARE DEALINGS, ETC. ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 2 3. IN RESPECT OF THE ASSESSMENT YEAR 2005-06, THE F IRST GROUND TAKEN BY THE ASSESSEE IS THAT THE CIT(A) ERRED IN T REATING THE SHORT TERM CAPITAL GAIN OF ` 38,11,620/- AND THE LONG TERM CAPITAL GAIN OF ` 11,53,849/- ON SALE OF SHARES AS BUSINESS INCOME. THIS GROUND IS CONNECTED WITH THE GROUND RAISED BY THE DEPARTMENT IN ITS APPEAL. IN THE SAID GROUND THE DEPARTMENT HAS QUESTIONED TH E ORDER OF THE CIT(A) FOR THE ASSESSMENT YEAR 2006-07, IN WHICH HE HAD DIRECTED THE ASSESSING OFFICER TO TREAT THE SURPLUS OF ` 79,92,714/- ARISING ON SALE OF SHARES AS SHORT TERM CAPITAL GAINS INSTEAD OF BUSINESS INCOME AS HELD BY THE ASSESSING OFFICER. WE THUS H AVE TWO CONTRARY DECISIONS TAKEN BY THE CIT(A) FOR THE TWO YEARS UNDER APPEAL ON THE SAME ISSUE. THESE GROUNDS CAN BE TAK EN UP TOGETHER FOR DECISION. 4. IN THE RETURN FOR THE ASSESSMENT YEAR 2005-06, T HE ASSESSEE DECLARED LOSS OF ` 14,37,338/- FROM FUTURES AND OPTIONS IN THE SHARE MARKET AND CLAIMED THE SAME TO BE BUSINESS LO SS. LOSS FROM SPECULATIVE BUSINESS WAS SHOWN AT ` 3,87,616/-. THE ASSESSEE ALSO DECLARED SHORT TERM CAPITAL GAINS OF ` 38,11,627/- AND LONG TERM CAPITAL GAINS OF ` 1,68,863/- ON SALE OF SHARES. THESE DETAILS WERE EXAMINED BY THE ASSESSING OFFICER. HE FIRST P ROCEEDED TO EXAMINE THE NATURE OF THE SHARE TRANSACTIONS. FROM THE DETAILS FILED BY THE ASSESSEE, HE NOTED THAT THERE WERE EXTENSIVE SHARE TRANSACTIONS INCLUDING SPECULATIVE DEALINGS AND FUT URES AND OPTIONS TRANSACTIONS. HE THEREFORE CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY HE SHOULD NOT BE TREATED AS A PERSON DEALING IN SHARES AS AGAINST THE CLAIM OF THE ASSESSEE THAT HE WAS AN ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 3 INVESTOR IN THE SHARES. THE ASSESSEE SUBMITTED THA T HE WAS AN ACTIVE WORKING PARTNER OF SEVERAL PARTNERSHIP FIRMS AND PROPRIETOR OF A FIRM DEALING IN YARN AND HE WAS NOT A TRADER IN S HARES, THAT HE HAS BEEN MAKING INVESTMENT IN SHARES WITH THE SPECIFIC OBJECT OF MAKING PROFIT, THAT THE SHARES BOUGHT AND SOLD ARE TAKEN D ELIVERY OF AND PASSED THROUGH THE ASSESSEES DEMAT ACCOUNT, THAT A NY PROFIT AND LOSS ARISING ON SALE OF SHARES WITHIN A YEAR FROM T HE DATE OF PURCHASE IS SHOWN AS SHORT TERM CAPITAL GAIN AND AN Y PROFIT ARISING ON SALE OF SHARES AFTER ONE YEAR FROM THE DATE OF P URCHASE IS SHOWN AS LONG TERM PROFIT, THAT EVERY PURCHASE AND SALE O F SHARES IS DELIVERY BASED AND THEREFORE HE WAS ONLY AN INVESTO R. THE ASSESSING OFFICER CONSIDERED THE ASSESSEES SUBMISS IONS FROM THE FOLLOWING POINTS OF VIEW, NAMELY (I) MOTIVE FOR PURCHASE OF SECURITIES; (II) PERIOD OF HOLDING; (III) FREQUENCY OF TRANSACTIONS; (IV) SOURCE OF ACQUISITION; (V) INFRASTRUCTURE EMPLOYED; AND (VI) CO-RELATION WITH OTHER ACTIVITIES OF THE ASSESSEE. SO FAR AS THE MOTIVE IS CONCERNED, HE NOTED THAT TH E ASSESSEE WAS CARRYING ON BUSINESS IN FUTURES AND OPTIONS AND ALS O SPECULATIVE TRANSACTIONS. HE FURTHER NOTED THAT A MAJORITY OF THE TRANSACTIONS WERE SETTLED IN A SHORT SPAN OF 30 DAYS. THUS, ACC ORDING TO THE ASSESSING OFFICER, THE BASIC INTENTION OF THE ASSES SEE WAS TO EARN QUICK PROFITS. AS FAR AS THE PERIOD OF HOLDING IS CONCERNED, HE NOTED ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 4 FROM AN ANALYSIS OF THE DETAILS FURNISHED BY THE AS SESSEE, THAT MORE THAN 30% OF THE PROFIT IS FROM TRANSACTIONS WHERE T HE PURCHASE AND SALES TOOK PLACE WITHIN THE PERIOD OF ONE MONTH. W ITH REGARD TO FREQUENCY OF TRANSACTIONS, THE ASSESSING OFFICER NO TED FROM THE SCRIP-WISE DETAILS FILED BY THE ASSESSEE THAT BEFOR E 01.10.2004 7,78,100 SHARES WERE TRANSACTED FOR A GAIN OF ` 4,06,79,566/- AND AFTER THE ABOVE DATE 8,82,879 SHARES WERE TRANSACTE D FOR A GAIN OF ` 5,47,31,228/-. ACCORDING TO THE ASSESSING OFFICER SUCH HUGE FREQUENCY OF THE TRANSACTIONS WOULD HAVE TAKEN CONS IDERABLE TIME OF THE ASSESSEE WHICH MAKES HIM A DEALER IN SHARES RATHER THAN AN INVESTOR. AS REGARDS THE SOURCE OF ACQUISITION OF THE SHARES, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD BORRO WED ` 1,10,16,076/- AS ON 31.03.2005 FROM INDIA BULLS SEC URITIES LIMITED AND HAS CLAIMED THE INTEREST AS DEDUCTION. THE OUT GO OF INTEREST WAS ALMOST 30% OF THE SHORT TERM CAPITAL GAINS. TH E ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE HAD OWN CAP ITAL OF ` 4,00,00,000/- BUT APPARENTLY THIS WAS NOT SUFFICIEN T FOR THE SHARE DEALINGS AND THEREFORE HAD TO RESORT TO THE BORROWI NGS. AS REGARDS THE INFRASTRUCTURE EMPLOYED BY THE ASSESSEE AND ITS CO-RELATION WITH THE OTHER ACTIVITIES OF THE ASSESSEE, THE ASSESSING OFFICER REITERATED THAT THE ASSESSEE WAS DEEPLY ENGAGED IN SHARE SPECU LATION BUSINESS AND FUTURES AND OPTIONS TRANSACTIONS AND W AS ALSO UTILIZING SUBSTANTIAL BORROWED FUNDS AND THE INVEST MENT IN SHARES AND DEBENTURES AND THE BALANCES WITH BROKERS WERE A LMOST 75% OF THE ASSESSEES TOTAL FUNDS. REFERRING TO THE ABOVE ASPECTS OF THE ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 5 CASE, THE ASSESSING OFFICER SUMMED UP THE POSITION IN THE FOLLOWING WORDS IN PARA 3.11 OF HIS ORDER: - 3.11 IN THE LIGHT OF THE AFORESAID ANALYSIS, I HAV E NO DOUBT IN MY MIND OF WHATSOEVER NATURE THAT THE ASSESSEE CANNOT BE TREATED AS AN INVESTOR IN SHARES BUT HE IS CLEARLY A TRADER IN SHARES AND AS SUCH THE ENTIRE SHORT TERM CAPITAL GAINS / LONG TERM CAPITAL GAIN SHOWN BY HIM WOULD ALSO BE LIABLE TO BE TREATED AS BUSINESS INCOME CONSIDERING THE BACKGROUND DISCUSSED HEREINABOVE. THE SUBSTANTIAL USE OF BORROWED FUNDS VOLUME OF THE TRANSACTIONS, INTENTION OF THE ASSESSEE TO MAKE QUICK MONEY BY MAKING DEALINGS IN SHARES AS A CAREER, SUPPORTS THE AFORESAID FINDING. IN FACT THE CONTENTION OF THE ASSESSEE THAT HE IS BASICALLY A TRADER AND DEALING IN SHARES IS HIS INVESTMENT ACTIVITY IS QUITE CONTRARY TO THE ANALYSIS OF HIS BALANCE SHEET. 5. IN THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2006-07, THE ASSESSING OFFICER TOOK THE SAME VIEW AND FOR AL MOST THE SAME REASONS. THE ASSESSEE FILED AN APPEAL TO THE CIT(A ) FOR BOTH THE YEARS. IN THE APPEAL FOR THE ASSESSMENT YEAR 2005- 06 THE CIT(A) ENDORSED THE DECISION OF THE ASSESSING OFFICER AND HIS FINDINGS MAY BE SUMMED UP AS FOLLOWS: - (A) THE PURCHASE AND SALE OF SECURITIES WERE NOT AN OCCASIONAL INDEPENDENT ACTIVITY, BUT THE ASSESSEE WAS ENGAGED IN SOME REAL, SUBSTANTIAL AND SYSTEMATIC BUSINESS ACTIVITY. (B) THE WORD BUSINESS WHICH IS DEFINED IN SECTION 2(13) OF THE INCOME TAX ACT, 1961, IS A WORD OF LARGE AND INDEFINITE IMPORT. THE ASSESSEE PURCHASED THE SHARES WITH THE INTENTION TO RESELL THEM AT A PROFIT. ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 6 (C) A SUBSTANTIAL NUMBER OF SHARES WERE PURCHASED OUT OF BORROWED FUNDS. THE ASSESSEE BORROWED FROM M/S INDIA BULLS, M/S SHAH ENTERPRISES AND M/S CHANDRA SALES CORPORATION. (D) THE ASSESSEE HAS DEVOTED SUBSTANTIAL TIME IN THE PURCHASE AND SALE OF SHARES AND ALSO EARNED SUBSTANTIAL PROFITS. IN SUPPORT OF THE AFORESAID FACTUAL FINDINGS, THE C IT(A) REFERRED TO THE GUIDING PRINCIPLES LAID DOWN IN THE FOLLOWING J UDGMENTS OF THE SUPREME COURT: - (1) RAJA BAHADUR VISHESHWARA SINGH (DECEASED) VS. CIT (1961) 41 ITR 685 (SC) (2) DALHOUSIE INVESTMENT TRUST CO. LTD. VS. CIT (1968) 68 ITR 486 (SC) (3) CIT VS. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD. (1975) 100 ITR 706 (SC) BY ADOPTING THE ABOVE LINE OF REASONING, THE CIT(A) CONCLUDED THAT THE ASSESSEE WAS ENGAGED IN BUSINESS ACTIVITY AS FA R AS SHARE PURCHASE AND SALES WERE CONCERNED AND HE WAS NOT AN INVESTOR BUT A TRADER. 6. IN RESPECT OF THE ASSESSMENT YEAR 2006-07, THE A PPEAL TO THE CIT(A) WAS DECIDED BY A DIFFERENT INCUMBENT. HE HE LD ON AN ANALYSIS OF THE FACTS AND CIRCUMSTANCES BROUGHT ON RECORD THAT (A) THE ASSESSEE WAS A PARTNER IN THREE PARTNERSHIP FIRMS WHICH WERE CARRYING ON THE ACTIVITY OF TRADING IN YARN AND COMMISSION AGENCY. THE ASSESSEE WAS THE ONLY MALE ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 7 PARTNER IN THESE FIRMS AND HAD TO LOOK AFTER THE ENTIRE BUSINESS FOR THE PAST SEVERAL YEARS. THE AGGREGATE TURNOVER OF THESE FIRMS WAS AROUND ` 33.00 CRORES. IN RESPECT OF THE ASSESSEES INDIVIDUAL BUSINESS WHICH IS THAT OF COMMISSION AGENCY IN YARN, THE TURNOVER WAS AROUND ` 13.56 CRORES ON WHICH THE ASSESSEE DERIVED COMMISSION OF ` 8.21 LAKHS. THE ASSESSEE THUS WAS LEFT WITH NO TIME TO ENGAGE IN THE BUSINESS OF SHARES. (B) EVEN GOING BY THE VOLUME OF TRANSACTIONS, WHICH IN ANY CASE IS NOT DECISIVE OF THE QUESTION, THE TRANSACTIONS ARE NOT VOLUMINOUS. THE SHORT TERM CAPITAL GAINS AROSE FROM SALE OF 57 SCRIPS AND THE TOTAL TRANSACTIONS WERE AROUND 120. THIS IS A SMALL NUMBER AND IT CANNOT BE SAID THAT THERE WAS HUGE FREQUENCY OF SHARE TRANSACTIONS. THE AVERAGE COMES TO LESS THAN ONE TRANSACTION PER DAY. (C) AS AGAINST THE TOTAL TURNOVER OF AROUND ` 84.00 CRORES BOTH IN THE PROPRIETARY AND PARTNERSHIP FIRMS CARRYING ON YARN BUSINESS, THE TURNOVER IN SHARE TRANSACTIONS WAS ONLY ` 12.00 CRORES. (D) OUT OF THE TOTAL OF 128 TRANSACTIONS, THE HOLDI NG PERIOD WAS WITHIN ONE MONTH IN RESPECT OF 27 TRANSACTIONS AND IT WAS WITHIN ONE TO TWO ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 8 MONTHS IN RESPECT OF 35 TRANSACTIONS. IN RESPECT OF THE BALANCE, THE HOLDING PERIOD WAS MORE THAN TWO MONTHS. THUS THE SHARES HELD BY THE ASSESSEE WERE SHORT TERM CAPITAL ASSETS AND THEIR SALE GAVE RISE TO SHORT TERM CAPITAL GAINS. (E) THOUGH THERE IS SOME FORCE IN THE ARGUMENT OF THE ASSESSING OFFICER THAT THE ASSESSEE WAS INDULGING IN FUTURES AND OPTIONS TRANSACTIONS AND THEREFORE CANNOT BE SAID TO BE AN INVESTOR, IN LAW THERE IS NO PROHIBITION ON AN ASSESSEE FROM BOTH BEING AN INVESTOR AND A DEALER IN SHARES AND THIS POSITION HAS BEEN RECOGNIZED EVEN BY THE CBDT IN CIRCULAR NO: 665 DATED 05.10.1992. (F) IT IS TRUE THAT A PERSON ENGAGED IN INVESTMENT ACTIVITY WOULD NOT LIKE TO TAKE THE RISK OF INVESTING OUT OF BORROWED FUNDS AND PAY HUGE INTEREST. HOWEVER, IN LAW THERE IS NO PROHIBITION ON A PERSON FROM BORROWING FUNDS FOR THE PURPOSE OF MAKING INVESTMENT, JUST AS A TRADER IN SHARES CAN ALSO USE BORROWED FUNDS AS WELL AS OWNED FUNDS IN THE BUSINESS ACTIVITY. FURTHER THE ASSESSEES OWN CAPITAL WAS ` 5.15 CRORES WHICH WAS SUFFICIENT TO COVER THE INVESTMENT OF ` 3.32 CRORES IN THE SHARES. ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 9 (G) IN THE PAST MANY YEARS THE ASSESSEE WAS SHOWING THE TRANSACTIONS AS INVESTMENT IN HIS BOOKS OF ACCOUNT AND THIS STAND WAS ALSO ACCEPTED BY THE DEPARTMENT EXCEPT IN THE ASSESSMENT YEAR 2005-06. THE ASSESSEE ALWAYS TOOK DELIVERY OF THE SHARES AND THE TRANSACTIONS WERE ROUTED THROUGH DEMAT ACCOUNT. THE HOLDING PERIOD OF MORE THAN ONE MONTH SATISFIES SECTION 2(42A), WHICH DEFINES A SHORT TERM CAPITAL ASSET. (H) EVEN IN RESPECT OF THE LONG TERM CAPITAL GAINS DECLARED BY THE ASSESSEE, THOUGH THE ASSESSING OFFICER HAS TREATED THEM AS BUSINESS INCOME, HE IS NOT RIGHT IN DOING SO SINCE THE PERIOD OF HOLDING IN ALL THE SHARE TRANSACTIONS WAS SEVERAL YEARS. THUS THE SURPLUS ON SALE OF SHARES HELD FOR MORE THAN ONE YEAR HAS TO BE TREATED AS LONG TERM CAPITAL GAINS ONLY AND NOT AS BUSINESS INCOME. 7. IN ADDITION TO THE AFORESAID FINDINGS WHICH WERE ALL IN FAVOUR OF THE ASSESSEE, THE CIT(A) ALSO DISTINGUISHED HIS PREDECESSORS ORDER FOR THE ASSESSMENT YEAR 2005-06 IN THE FOLLOW ING WORDS: - 2.3(N) I HAVE CONSIDERED THE FACTS OF THE YEAR UND ER CONSIDERATION AND ALSO OF THE IMMEDIATELY PRECEDING YEAR INCLUDING THE APPEAL ORDER OF MY PREDECESSOR FOR AY 2005-06. IN THE YEAR UNDER CONSIDERATION THE AO HAS FORMED AN INDEPENDENT OPINION ON THE BASIS OF FACTS AND FIGURES OF THE YEAR UNDER CONSIDERATION ONLY. EXCEPT MENTIONING THE STAND TAKEN IN EARLIER ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 10 YEAR, THE AO HAS NOT UTILIZED ANY FACTS AND FIGURES OF PRECEDING ASSESSMENT YEAR 2005-06. ON THE BASIS OF FACTS OF THE YEAR UNDER CONSIDERATION I AM OF THE CONSIDERED OPINION THAT THE APPELLANT WAS ENGAGED IN SHARE INVESTMENT ACTIVITIES AND NOT IN SHARE TRADING ACTIVITIES. DURING THE YEAR UNDER CONSIDERATION THE PURCHASE AND SALE OF SHARES WERE NOT AN INDEPENDENT ACTIVITY AS THE AVERAGE TRANSACTIONS OF SHARE WAS NOT EVEN ONE TRANSACTION PER DAY. THERE IS NO DENIAL OF THE FACT THAT EVERY ECONOMIC / FINANCIAL ACTIVITY IS CARRIED OUT WITH THE INTENTION OF PROFIT ONLY AND NOT WITH THE INTENTION OF LOSS. THUS IF THE SHARES WERE PURCHASED WITH THE INTENTION OF RE- SALE AT A PROFIT, THE PROFIT WOULD BE ASSESSABLE AS CAPITAL GAIN ON SALE OF SHARES HELD AS INVESTMENT. THOUGH, APART FROM HIS OWN CAPITAL, APPELLANT HAS ALSO UTILIZED BORROWED CAPITAL ON WHICH INTEREST WAS PAID AT RS.15.73 LAKHS BUT DURING THE YEAR NO NEW BORROWINGS WERE MADE BY THE APPELLANT. DURING THE YEAR THE APPELLANT MADE REPAYMENT OF LOAN TAKEN IN EARLIER YEARS. THE LOAN AMOUNT AS AT 31.03.2005 AMOUNTING TO RS.1.10 CRORES WAS REDUCED TO RS.49 LAKHS ONLY AS ON 31.03.2006. THUS KEEPING IN VIEW THE ENTIRETY OF FACTS AND CIRCUMSTANCES AND IN VIEW OF ABOVE DISCUSSION, I AM OF THE CONSIDERED OPINION THAT THE APPELLANT WAS ENGAGED IN INVESTMENT ACTIVITY. THE SURPLUS EARNED ON SALE OF SHARES HELD FOR LESS THAN 1 YEAR WAS ASSESSABLE AS A SHORT TERM CAPITAL GAIN WHEREAS SURPLUS EARNED ON SHARES HELD FOR MORE THAN 1 YEAR WAS ASSESSABLE AS LONG TERM CAPITAL GAIN. THE AO IS DIRECTED TO TREAT THE APPELLANTS INCOME ON SALE OF SHARES AS SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN ACCORDINGLY. FOR THE ABOVE REASONS THE CIT(A) HELD THAT THE SHOR T TERM CAPITAL GAINS AND LONG TERM CAPITAL GAINS DECLARED BY THE A SSESSEE IN THE AMOUNTS OF ` 79,92,714/- AND ` 15,04,211/- HAVE TO BE ASSESSED AS SUCH AND NOT AS BUSINESS INCOME AS HELD BY THE ASSE SSING OFFICER. IT MAY BE CLARIFIED AT THIS JUNCTURE THAT THE DEPAR TMENTS APPEAL DOES NOT QUESTION THE DECISION OF THE CIT(A) FOR THE ASS ESSMENT YEAR ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 11 2006-07 THAT THE LONG TERM CAPITAL GAINS SHOULD BE ASSESSED AS SUCH AND NOT AS BUSINESS INCOME. THE GROUND BEFORE US REFERS ONLY TO THE SHORT TERM CAPITAL GAINS OF ` 79,92,714/-. 8. BOTH THE ASSESSEE AS WELL AS THE DEPARTMENT HAVE ADDRESSED ELABORATE ARGUMENTS IN SUPPORT OF THEIR P OSITIONS. THE MAIN CONTENTION OF THE LEARNED COUNSEL FOR THE ASSE SSEE WAS THAT IN ALL THE ASSESSMENT YEARS STARTING FROM 2001-02 TO 2 004-05 THE ASSESSEES STAND THAT THE SHARES WERE HELD AS INVES TMENT WAS ACCEPTED BY THE REVENUE AND IT WAS POINTED OUT THAT FOR THE ASSESSMENT YEARS 2001-02 AND 2004-05 THE ASSESSMENT S WERE COMPLETED AFTER A SCRUTINY UNDER SECTION 143(3) OF THE ACT. IN THESE YEARS THE ASSESSEE DECLARED BOTH SHORT TERM AND LON G TERM CAPITAL GAINS AND HELD 42 SCRIPS WHICH WERE SHOWN AT ` 98,35,984/-. IN RESPECT OF THE ASSESSMENT YEAR 2004-05 THE ASSESSEE DECLARED SHORT TERM CAPITAL GAIN WHICH WAS ACCEPTED BY THE A SSESSING OFFICER. THE INVESTMENT IN SHARES WAS SHOWN AT ` 1,69,96,403/-. IT WAS POINTED OUT THAT IN THE BALANCE SHEET AS ON 31. 03.2004 THE ASSESSEE HAD SHOWN OUTSTANDING LIABILITY OF ` 18,49,862/- IN FAVOUR OF ORBIS SECURITIES PRIVATE LIMITED AND ` 1,55,654/- IN FAVOUR OF ORBIS SECURITIES INDICATING BORROWINGS USED FOR THE INVESTMENT, BUT STILL THE ASSESSING OFFICER HAS ACCEPTED THE ASSESS EES CLAIM THAT HE WAS AN INVESTOR IN SHARES IN THE SCRUTINY ASSESS MENT MADE FOR THAT YEAR. IT WAS THUS CONTENDED THAT THE ASSESSEE HAS BEEN CONSISTENTLY TREATED AS AN INVESTOR IN SHARES AND N OT AS A DEALER. 9. IN RESPECT OF THE ASSESSMENT YEAR 2005-06, IN WH ICH THE ASSESSEE IS IN APPEAL, IT HAS BEEN SUBMITTED BY THE LEARNED COUNSEL ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 12 FOR THE ASSESSEE THAT THE INVESTMENTS WERE SHOWN AT ` 3,24,59,391/-. HOWEVER, THE ASSESSEE STARTED FUTUR ES AND OPTIONS DEALINGS THIS YEAR AND IT WAS ONLY IN RESPE CT OF THIS ACTIVITY THAT THE ASSESSEE HAD BORROWED FUNDS FROM M/S INDIA BULLS. IT WAS AGAIN POINTED OUT THAT THE CAPITAL ACCOUNT BALANCE OF ` 4,19,60,788/- WAS MORE THAN THE INVESTMENT IN SHARES AND OUR ATTE NTION WAS DRAWN TO PAGE 149 OF THE PAPER BOOK TO THE STATEMEN T SET OUT THEREIN SHOWING THE NUMBER OF TRANSACTIONS AND THE NUMBER OF SCRIPS, GIVING RISE TO SHORT TERM CAPITAL GAINS, LO NG TERM CAPITAL GAINS, SPECULATION INCOME AND FUTURES AND OPTIONS I NCOME FOR THE ASSESSMENT YEARS 2005-06 TO 2007-08. 10. IT WAS FURTHER CONTENDED ON BEHALF OF THE ASSES SEE AS FOLLOWS:- (A) THE ASSESSEES MAIN BUSINESS ACTIVITY HAS ALWAYS BEEN TRADING IN YARN OR COMMISSION AGENCY, EITHER AS PROPRIETOR OR AS A PARTNER. SO FAR AS THE SHARES ARE CONCERNED, HE HAS ALWAYS BEEN AN INVESTOR FOR THE PAST 40 YEARS. (B) FOR THE ASSESSMENT YEAR 2006-07, FOR WHICH YEAR THE DEPARTMENT IS IN APPEAL, THEY HAVE NOT CHALLENGED THE FINDING OF THE CIT(A) THAT THE LONG TERM CAPITAL GAINS DECLARED BY THE ASSESSEE HAVE TO BE ASSESSED AS SUCH AND NOT AS BUSINESS INCOME. THE CONDUCT OF THE DEPARTMENT IN NOT CHALLENGING THIS FINDING IS ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 13 CONSISTENT WITH THE ASSESSEES CLAIM THAT HE IS ONLY AN INVESTOR IN SHARES. (C) THE CHART SET OUT BY THE CIT(A) IN PARA 2.2(C) OF HIS ORDER FOR THE ASSESSMENT YEAR 2006-07 SHOWING THE NUMBER OF COMPANIES WHOSE SCRIPS WERE HELD BY THE ASSESSEE, THE NUMBER OF SHARES AND THE TOTAL VALUE THEREOF AS SHOWN IN THE BALANCE SHEET AS INVESTMENT ALSO SUPPORTS THE ASSESSEES CLAIM THAT HE HAS ONLY BEEN AN INVESTOR AND NOT A TRADER IN SHARES. (D) IN THE ASSESSMENT YEAR 2007-08, EVEN THOUGH THE DEPARTMENT WAS AWARE OF THE STAND IT TOOK IN THE EARLIER YEARS, IT ACCEPTED THE ASSESSEES CLAIM THAT THE SURPLUS ON SALE OF SHARES WAS ASSESSABLE ONLY AS SHORT TERM CAPITAL GAINS. 11. THE LEARNED DR PUT FORTH THE FOLLOWING CONTENTI ONS: - (A) THE ASSESSEE IS CARRYING ON FUTURES AND OPTIONS TRANSACTIONS AS WELL AS SPECULATION TRANSACTIONS AND A MAJOR PART OF HIS ACTIVITY IS CONSTITUTED BY THESE TRANSACTIONS. (B) THE BALANCE SHEET OF THE ASSESSEE AS ON 31.03.2005 (PAGE 4 OF THE PAPER BOOK) SHOWS THE INVESTMENT IN FUTURES AND OPTIONS TRANSACTIONS AT ` 1,03,01,657/- WHICH CONSTITUTES ALMOST 1/3 RD OF THE INVESTMENT OF ` 3,24,59,391/- IN SHARES. IT IS INCONCEIVABLE ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 14 THAT A PERSON WHO HAS INDULGED IN FUTURES AND OPTIONS TRANSACTIONS TO SUCH A LARGE EXTENT WOULD ALSO BE INCLINED TO HOLD THE SHARES AS INVESTMENT (C) THE ASSESSEE HAS UTILIZED HUGE BORROWINGS FROM M/S INDIA BULLS IN ACQUIRING THE SHARES AND IN LAW IT HAS BEEN HELD THAT IF A PERSON BORROWS MONEY FOR THE PURPOSE OF ACQUIRING AN ASSET, IT IS A STRONG INDICATION OF A BUSINESS MOTIVE, PROVIDED THE ASSET IS ONE WHICH IS NORMALLY TRADED. AN AVERAGE INVESTOR WOULD INVEST HIS OWN FUNDS RATHER THAN BORROW FOR INTEREST WHICH INVOLVES A HUGE RISK. (D) THE FACT THAT THE ASSESSEE INITIALLY STARTED AS A YARN TRADER DOES NOT MEAN THAT HE CAN NEVER BE CAPABLE OF DOING SHARE BUSINESS. (E) IN PAGE 6 OF THE ASSESSMENT ORDER THE ASSESSING OFFICER HAS ADOPTED A VERY IMPORTANT TEST IN PARAGRAPH 3.9.1. THIS IS THE TEST OF EMPLOYMENT OF INFRASTRUCTURE AND ITS CO- RELATION WITH THE OTHER ACTIVITIES OF THE ASSESSEE. THE ASSESSEE WAS DEEPLY ENGAGED IN SHARE SPECULATION TRANSACTIONS AND FUTURES AND OPTIONS. THERE IS A HEAVY BEARING OF THE BORROWED FUNDS TOWARDS THE CARRYING ON OF THESE ACTIVITIES. IF THE PPF BALANCE AND THE ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 15 INVESTMENT IN GOLD AND IN HOUSE PROPERTIES ARE EXCLUDED FROM THE TOTAL OF THE INDIVIDUAL ASSETS IN THE BALANCE SHEET, IT WOULD BE CLEAR THAT THE INVESTMENT IN SHARES AND DEBENTURES AND BALANCES WITH BROKERS WAS ALMOST 75% OF THE ASSESSEES FUNDS. THUS THE INFRASTRUCTURE EMPLOYED BY THE ASSESSEE IS HEAVILY ORIENTED TOWARDS THE SHARE TRANSACTIONS AND THIS IS A STRONG INDICATION THAT THE SHARE TRANSACTIONS AMOUNT TO A BUSINESS. (F) SO FAR AS THE ASSESSMENT YEAR 2006-07 IS CONCERNED, THOUGH THE CIT(A) HAS REFERRED TO THE CORRECT PRINCIPLES TO BE APPLIED, BUT HE HAS NOT PROPERLY APPLIED THEM TO THE FACTS OF THE CASE. FOR INSTANCE, THE TIME DEVOTED TO THE SHARE TRANSACTIONS IS A WRONG TEST TO ADOPT AND IT IS OUT OF TUNE WITH THE TECHNOLOGY AVAILABLE TODAY WHERE SHARE TRANSACTIONS CAN BE ENTERED INTO AND MANAGED ONLINE WITH THE AID OF COMPUTER TECHNOLOGY. THE CIT(A) HAS ALSO ADOPTED CRITERIA WHICH ARE NOT VERY IMPORTANT SUCH AS FREQUENCY AND VOLUME OF TRANSACTIONS. THUS THE WRONG APPLICATION OF THE SETTLED PRINCIPLES TO THE FACTS AND THE INAPPROPRIATE CRITERIA ADOPTED BY THE CIT(A) HAS VITIATED HIS FINDINGS FOR THE ASSESSMENT YEAR 2006-07. ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 16 12. IN HIS REPLY THE LEARNED COUNSEL FOR THE ASSESS EE MADE THE FOLLOWING POINTS: - (A) THE FIGURES OF TURNOVER IN THE SHARE TRANSACTIONS ARE MORE INDICATIVE OF THE NATURE OF THE TRANSACTIONS WHETHER IT IS BY WAY OF INVESTMENT OR BY WAY OF BUSINESS. HE REFERRED TO THE CORRECT FIGURES OF TURNOVER OF THE DIFFERENT BUSINESSES CARRIED ON BY THE ASSESSEE AND SET OUT IN PAGE 17 OF THE PAPER BOOK. (B) THERE CAN BE NO THUMB RULE THAT A PERSON CANNOT BORROW MONIES FOR THE PURPOSE OF MAKING INVESTMENTS, AS LAID DOWN BY THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF B BALAN ALIAS SHANMUGAM BALAKRISHNAN CHETTIAR VS. DCIT (2009) 120 ITD 469 (PUNE). (C) THE FACT THAT THE ASSESSEE BORROWED MONIES FOR INTEREST AND UTILIZED THE SAME FOR MAKING INVESTMENT IN SHARES DOES NOT IPSO FACTO MEAN THAT THE PURCHASE OF SHARES WAS FOR THE PURPOSE OF TRADING THEREIN. IT IS NOT A CONCLUSIVE FACTOR. EVEN THE INCOME TAX DEPARTMENT HAS ACCEPTED THE ASSESSEES CLAIM THAT THE INTEREST COST SHOULD BE ADDED TO THE COST OF THE INVESTMENT. IN THIS BEHALF THE LEARNED COUNSEL FOR THE ASSESSEE FILED TWO SETS OF ACCOUNTS WITH M/S INDIA BULLS WHICH SHOW ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 17 THAT M/S INDIA BULLS FINANCIAL SERVICES LIMITED HAS PAID THE MONIES TO M/S INDIA BULLS SECURITIES LIMITED ON BEHALF OF THE ASSESSEE FOR ACQUIRING THE SHARES. IT IS ADMITTED THAT THE BORROWING IS IN EFFECT BY THE ASSESSEE. 13. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO PUT F ORTH AN ALTERNATIVE PLEA THAT EVEN IF THE ASSESSMENT ORDERS ARE TO BE UPHELD AND THE ASSESSEE IS TO BE TREATED AS A DEALER IN SH ARES, HE MUST BE GIVEN THE OPTION OF VALUING THE CLOSING STOCK OF SH ARES ON ANY OF THE RECOGNIZED METHODS AS WAS HELD BY THE MUMBAI BENCH J IN THE CASE OF M/S J M SHARES AND STOCK BROKERS LIMITED IN ITA NOS: 2801 AND 2802/MUM/2000 AND ITA NO: 5488/MUM/2001, D ATED 30.11.2007 (COPY OF THE ORDER FILED). 14. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS. THE QUESTION WHETHER THE SURPLUS ON THE SALE OF SHARES IS TO BE ASSESSED AS CAPITAL GAINS (SHORT TERM OR LONG TERM) AS CLAIMED BY THE ASSESSEE OR AS BUSINESS INCOME AS CLAIMED BY TH E ASSESSING OFFICER IS A QUESTION OF FACT TO BE DECIDED ACCORDI NG TO THE CUMULATIVE EFFECT OF SEVERAL FACTS AND CIRCUMSTANCE S OF THE CASE. THE INTENTION OF THE ASSESSEE, THE NATURE OF THE CO MMODITY SOLD, WHETHER THE ASSESSEE HAS USED HIS OWN FUNDS OR BORR OWED FUNDS, THE TREATMENT GIVEN TO THE ASSET IN THE BOOKS OF AC COUNT, THE CONSISTENT STAND TAKEN BY THE REVENUE AUTHORITIES I N RESPECT OF THE SALE PROCEEDS OF THE ASSET IN THE EARLIER YEARS, TH E FREQUENCY AND VOLUME OF THE TRANSACTIONS, THE PERIOD OF HOLDING T HE SHARES, WHETHER THE ASSESSEE TOOK OR GAVE DELIVERY OF THE S HARES, ARE ALL ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 18 QUESTIONS WHICH HAVE TO BE CONSIDERED BEFORE A DECI SION IS TAKEN AS TO WHETHER THE ASSESSEE HELD THE SHARES AS CAPIT AL ASSETS (INVESTMENT) OR AS STOCK-IN-TRADE. IT IS ALSO RECO GNIZED BY THE REVENUE THAT THE SAME ASSESSEE CAN HOLD THE SHARES IN TWO DIFFERENT PORTFOLIOS ONE PORTFOLIO FOR STOCK-IN-T RADE AND ANOTHER PORTFOLIO AS INVESTMENT. THIS POSITION HAS BEEN RE COGNIZED BY THE CBDT IN ITS CIRCULAR NO: 665 DATED 05.10.1992. 15. IN THE PRESENT CASE THE COMMODITY IN QUESTION I S SHARES WHICH ARE GENERALLY TRADED. BUT THAT IS NOT CONCLU SIVE BECAUSE IT IS COMMON KNOWLEDGE THAT SHARES ARE ALSO HELD AS INVES TMENT PARTICULARLY SHARES OF BLUE CHIP COMPANIES WHICH MA Y YIELD CONSISTENT DIVIDEND AND MAY ALSO APPRECIATE IN VALU E OVER A PERIOD OF YEARS, THE APPRECIATION BEING SIMILAR TO THE APP RECIATION IN THE VALUE OF OTHER INVESTMENTS SUCH AS FIXED DEPOSITS W ITH BANKS, REAL ESTATE, GOLD AND OTHER PRECIOUS METALS, ETC. IT IS A FACT THAT IN THE PRESENT CASE THE ASSESSEE HAS SHOWN THE SHARES AS I NVESTMENT IN HIS BALANCE SHEETS. THE RELEVANT DETAILS ARE GIVEN IN PARA 2.2(C) OF THE ORDER OF THE CIT(A) FOR THE ASSESSMENT YEAR 200 6-07. THE SAME IS SET OUT BELOW: - F.Y. ENDING ON NO.OF COMPANIES NO. OF SHARES VALUE 31.03.2003 147 143323 98,22,424/- 31.03.2004 159 302243 1,69,96,403/- 31.03.2005 149 490237 3,24,59,391/- 31.03.2006 131 541377 3,32,72,973/- ONE ASPECT WHICH IS THROWN UP BY THE ABOVE TABLE IS THAT THOUGH THE INVESTMENT VALUE INCREASED SUBSTANTIALLY FROM YEAR TO YEAR, THE NUMBER OF COMPANIES WHOSE SHARES WERE HELD BY THE A SSESSEE ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 19 REMAINED MORE OR LESS CONSTANT AND IN FACT AS ON 31 .03.2006 IT ACTUALLY FELL TO 131 FROM THE EARLIER HIGH OF 159. IT APPEARS TO US THAT BASICALLY THE NUMBER OF SHARES OF A PARTICULAR COMP ANY PURCHASED BY THE ASSESSEE HAD INCREASED WHICH SUBSTANTIALLY C ONTRIBUTED TO THE INCREASE IN THE VALUE OF THE INVESTMENT. THE A BOVE ANALYSIS PRIMA FACIE SHOWS THAT THE ASSESSEE IS BASICALLY AN INVESTOR MORE THAN A SHARE DEALER. THE STAND OF THE ASSESSEE HAS BEEN ACCEPTED BY THE REVENUE AUTHORITIES IN THE ASSESSMENT YEARS 2001-02 AND 2004-05 IN ASSESSMENT ORDERS PASSED UNDER SECTION 1 43(3) OF THE ACT. THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2001-02 IS AT PAGE 34 35 OF THE PAPER BOOK. IT IS SEEN THEREFRO M THAT THE ASSESSING OFFICER HAS ACCEPTED THE SHORT TERM CAPI TAL LOSS AND THE LONG TERM CAPITAL GAINS SHOWN BY THE ASSESSEE ON SA LE OF SHARES. THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2004-0 5 IS AT PAGES 61 & 62 OF THE PAPER BOOK. IN THIS YEAR ALSO THE SH ORT TERM CAPITAL GAINS OF RS.13,94,013/- HAS BEEN ACCEPTED BY THE AS SESSING OFFICER. THERE IS ALSO NO DISPUTE THAT THE ASSESSE E HAS BEEN DECLARING THE COST OF THE SHARES AS INVESTMENT IN H IS BALANCE SHEETS IN ALL THE YEARS. 16. FOR THE ASSESSMENT YEAR 2005-06, THE ASSESSEE H AS FURNISHED THE DETAILS OF THE SALE OF SHARES FOR TWO PERIODS I.E. FROM 01.04.2004 TO 30.09.2004 AND FROM 01.10.2004 TO 31. 03.2005. IT IS SEEN THAT IN RESPECT OF THE FIRST PERIOD THE SHARES SOLD ARE THOSE OF BHARAT EARTH MOVERS LTD., BALAJI TELEFILM LTD., CEN TURY TEXTILES INDIA LTD., CIPLA LTD., GAIL INDIA LTD., PENNAR ALUMINIUM CO.LTD., RELIANCE CAPITAL LTD., TATA STEEL LTD. AND VISUAL SOFTWARE L TD. THE HOLDING ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 20 PERIOD IN RESPECT OF THESE SHARES RANGES FROM 533 D AYS TO 3981 DAYS. THE DETAILS OF SALE OF SHARES IN RESPECT OF T HE SECOND PERIOD SHOW SHARES OF AVERY INDIA LTD., BALLARPUR INDUSTRI ES LTD., COLGATE PALMOLIVE (INDIA) LTD., HDFC BANK LTD., ICICI BANK LTD., LARSEN & TOUBRO LTD., CEAT LTD., TATA STEEL, VOLTAS LTD. THE HOLDING PERIOD RANGES FROM 387 DAYS TO 9016 DAYS. IT IS SEEN THUS THAT THE ASSESSEE HAS HELD THE SHARES FOR QUITE A LONG PERIO D. FOR EXAMPLE, THE SHARES OF GREAVES COTTON LTD. WERE HELD FOR ALM OST 27 YEARS (9016 DAYS). THE SHARES OF AVERY INDIA LTD. WERE HE LD FOR 7493 DAYS. THE SHARES OF PCS INDUSTRIES LTD. WERE HELD F OR 5674 DAYS. MANY OF THE SHARES WERE HELD FOR 3000 TO 4000 DAYS (9 YEARS TO 12 YEARS). SIMILAR DETAILS HAVE BEEN FILED FOR THE ASS ESSMENT YEAR 2006-07 ALSO. FOR THIS YEAR IN RESPECT OF SUBSTANTI AL NUMBER OF SALE OF SHARES THE HOLDING PERIOD WAS MORE THAN ONE MONT H AND IN RESPECT OF SHARES WHICH WERE HELD FOR LESS THAN A P ERIOD OF TWELVE MONTHS, THE SURPLUS WAS SHOWN AS SHORT TERM CAPITAL GAINS. IN RESPECT OF THE SURPLUS SHOWN AS LONG TERM CAPITAL G AINS, THE PERIOD OF HOLDING IN ALL THE SHARE TRANSACTIONS WAS SEVERA L YEARS. IT IS SIGNIFICANT THAT THE REVENUE HAS NOT FILED ANY APPE AL AGAINST THE FINDING OF THE CIT(A) THAT THE LONG TERM CAPITAL GA INS DECLARED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2006-07 SHOULD BE ASSESSED AS SUCH AND NOT UNDER THE HEAD BUSINESS. 17. IT IS FURTHER SEEN THAT EVEN IN RESPECT OF THE ASSESSMENT YEAR 2007-08 IN WHICH YEAR AN ASSESSMENT WAS COMPLETED U NDER SECTION 143(3) OF THE ACT BY ORDER DATED 13.11.2009, THE AS SESSING OFFICER ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 21 HAS ACCEPTED THE SHORT TERM CAPITAL LOSS OF RS.69,4 3,821/- ON SALE OF THE SHARES AND THE SAME HAS NOT BEEN CONSIDERED AS BUSINESS. 18. IT WOULD THUS APPEAR THAT PRIMA-FACIE THERE IS ENOUGH EVIDENCE TO SHOW THAT THE ASSESSEE IS AN INVESTOR I N SHARES AND THEREFORE THE SURPLUS ARISING ON THE SALE OF SHARES SHOULD BE ASSESSED AS SHORT TERM OR LONG TERM CAPITAL GAINS, DEPENDING ON THE PERIOD OF HOLDING AND NOT AS BUSINESS INCOME. 19. BUT THEN THE CONTENTION OF THE DEPARTMENT IS TH AT THE ASSESSEE IS ALSO CARRYING ON F & O TRANSACTIONS AS SPECULATION BUSINESS IN SHARES AND THAT THE INVESTMENT IN F & O TRANSACTION AS PER THE BALANCE SHEET AS ON 31.03.2005 IS RS.1,03,0 1,657/- AS AGAINST THE INVESTMENT IN THE SHARES OF RS.3,24,59, 391/-. THE POINT MADE IS THAT ALMOST 1/4 TH OF THE TOTAL INVESTMENT OF THE ASSESSEE IS IN SPECULATION AND F & O BUSINESS AND WITH THIS KI ND OF BACKGROUND IT WOULD BE DIFFICULT TO BELIEVE THAT THE ASSESSEE CAN ALSO BE TREATED AS INVESTOR IN SHARES. WE FIND IT DIFFICULT TO ACC EPT THE CONTENTION BECAUSE THE CIRCULAR ISSUED BY THE CBDT REFERRED T O SUPRA HAS ITSELF RECOGNIZED THAT A PERSON CAN HAVE TWO PORTFO LIOS, ONE FOR INVESTMENT AND THE OTHER AS STOCK-IN-TRADE. THE HON BLE BOMBAY HIGH COURT HAS ALSO ACCEPTED THIS POSITION IN ITS J UDGEMENT IN THE CASE OF CIT VS. GOPAL PUROHIT (34 DTR 52) DELIVERED ON 6 TH JANUARY, 2010. IT IS THEN POINTED OUT THAT THE ASS ESSEE HAS BORROWED FROM INDIA BULLS FOR THE PURPOSE OF BUYING SHARES AND THIS IS A STRONG INDICATION THAT THE ASSESSEE INTENDED T O DO BUSINESS IN SHARES AND NOT MERELY INVEST IN THEM. THE LEARNED C OUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO AN ORDER OF THE PUNE BENCH OF ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 22 THE TRIBUNAL IN THE CASE OF S.BALAN @ SHANMUGAM BAL KRISHNAN CHETTIAR VS. DCIT., (2009) 120 ITD 469, TO SUBMIT THAT THERE IS NO THUMB RULE THAT A PERSON CANNOT BORROW MONEY FOR TH E PURPOSE OF MAKING INVESTMENT. WE HAVE EXAMINED THE POSITION WI TH REFERENCE TO THE ORDER OF THE PUNE BENCH TO WHICH ONE OF US ( THE ACCOUNTANT MEMBER) WAS PARTY. IN THIS CASE THE ASSESSEE HAD BO RROWED MONIES FOR ACQUIRING SHARES. THE SURPLUS ON THE SA LE OF SHARES WAS DECLARED UNDER THE HEAD CAPITAL GAINS AND FOR THE P URPOSE OF COMPUTING THE GAINS, THE INTEREST COST WAS ALSO CAP ITALIZED AND REDUCED FROM THE SALE PRICE. THE INTEREST HAS NEVE R BEEN CLAIMED AS REVENUE DEDUCTION. ON THESE FACTS IT WAS HELD TH AT THERE WAS NO RULE THAT INTEREST COST CANNOT BE CAPITALIZED AND E SPECIALLY ON THE FACTS OF THE CASE OF THE ASSESSEE BEFORE THE PUNE B ENCH IT WAS HELD THAT THE RIGHT COURSE WOULD BE TO CAPITALIZE THE IN TEREST COST AND DEDUCT THE WHOLE COST FROM THE SALE PRICE WHILE COM PUTING THE CAPITAL GAINS. IT WAS OBSERVED THAT THE INTEREST CO ST CANNOT BE SEGREGATED FROM THE COST OF ACQUISITION AND FOR THI S PURPOSE RELIANCE WAS PLACED ON THE JUDGEMENT OF THE DELHI HIGH COURT IN CIT VS. MITHLESH KUMARI (1973) 92 ITR 9 WHERE IT WAS HELD THAT INTEREST PAID BY THE ASSESSEE ON MONIES BORROWED FOR THE PUR CHASE OF AN OPEN PLOT OF LAND WOULD FORM PART OF THE ACTUAL COS T OF THE ASSESSEE FOR THE PURPOSE OF DETERMINING THE CAPITAL GAINS DE RIVED FROM THE SALE OF THE PLOT. THIS DECISION CERTAINLY LENDS SU PPORT TO THE CONTENTION OF THE ASSESSEE BEFORE US. EVEN IN THE PRESENT CASE THE DEPARTMENT HAS NO OBJECTION TO THE CAPITALIZATION O F THE INTEREST. THE ALTERNATIVE SUBMISSION OF THE ASSESSEE HOWEVER WAS THAT IN ANY ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 23 CASE THE BALANCE IN HIS CAPITAL ACCOUNT AS ON 31.03 .2005 WAS RS.4,19,60,788/- WHICH IS MORE THAN THE INVESTMENT IN THE SHARES AS ON THAT DATE WHICH STOOD AT RS.3,24,59,391/- AND THEREFORE IT CAN BE PRESUMED THE BORROWED MONIES WERE UTILIZED ONLY FOR THE PURPOSE OF CARRYING ON THE F & O BUSINESS. IN FACT THIS CONTENTION HAS BEEN ACCEPTED BY THE CIT(A) IN HIS ORDER FOR TH E ASSESSMENT YEAR 2006-07. REFERENCE MAY BE MADE IN THIS CONNECT ION TO PARA 2.3(I) OF THE ORDER OF THE CIT(A) FOR THE ASSESSMEN T YEAR 2006-07. IN THAT YEAR THE ASSESSEE HAD PAID INTEREST OF RS.15.7 3 LAKHS AND THAT WAS PUT AS ONE OF THE POINTS AGAINST THE ASSESSEES CONTENTION THAT HE WAS AN INVESTOR IN THE SHARES. THE CIT(A) HELD T HAT THE ASSESSEE S OWN CAPITAL WAS RS.5.15 CRORES IN THAT YEAR OUT OF WHICH THE INVESTMENT OF RS.3.32 CRORES IN SHARES CO ULD HAVE COME AND THUS IT CANNOT BE SAID THAT THE ASSESSEE WAS DE PENDING TOTALLY ON BORROWED FUNDS. IN THE LIGHT OF THIS FINDING AL SO IT CANNOT BE SAID THAT THE FACT THAT THE ASSESSEE PAID INTEREST ON BO RROWINGS SHOULD BE HELD AGAINST HIM, PARTICULARLY WHEN THERE ARE OT HER PREDOMINATING FEATURES IN THE CASE WHICH GIVE CLEAR IMPRESSION THAT THE ASSESSEE INTENDED ONLY TO INVEST IN SHARES AND NOT HOLD THEM AS STOCK-IN-TRADE. 20. IT THUS APPEARS TO US THAT THE CIT(A) TOOK AN I NCORRECT VIEW OF THE MATTER IN THE ASSESSMENT YEAR 2005-06 AND THAT THE CIT(A) WHO DEALT WITH THE APPEAL FOR THE ASSESSMENT YEAR 2006- 07 HAS TAKEN THE CORRECT VIEW OF THE MATTER AND APPLIED THE APPR OPRIATE PRINCIPLES CORRECTLY IN HOLDING THAT THE ASSESSEE WAS AN INVES TOR IN SHARES. ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 24 21. FOR THE ABOVE REASONS, WE ALLOW THE FIRST GROUN D TAKEN BY THE ASSESSEE IN HIS APPEAL. THE GROUNDS TAKEN BY THE DE PARTMENT IN ITS APPEAL FOR THE ASSESSMENT YEAR 2006-07 ARE REJECTED . 22. IN THE ASSESSEES APPEAL FOR THE ASSESSMENT YEA R 2005-06 THE SECOND GROUND IS AS UNDER:- 2. ON THE FACTS, CIRCUMSTANCES AND LEGALITY OF THE CASE, THE CIT(A) ERRED IN CONFIRMING THE COST OF THE BONUS SHARES AS BUSINESS INCOME ON PRESUMPTION I.E. I) COST OF 46 SHARES OF INFOSYS TECHNOLOGIES ISSUED AND RECEIVED AS BONUS SHARES. II) COST OF 543 SHARES OF TISCO ISSUED AND RECEIVED AS BONUS SHARES 23. THE BRIEF FACTS IN THIS CONNECTION ARE AS FOLL OWS:- THE ASSESSEE PURCHASED 471 EQUITY SHARES OF INFOSY S TECHNOLOGY ON 27.02.2004 @ RS.4896/- PER SHARE. THE TOTAL COST WAS RS.23,06,114/-. THE COMPANY DECLARED BONUS SHAR ES OF 1 : 3 AS ON 2.7.2004 AND ACCORDINGLY THE ASSESSEE GOT 141 3 EQUITY SHARES AS BONUS SHARES. HE THUS BECAME THE OWNER OF 471 + 1413 = 1884 SHARES. OUT OF THE SHARES, HE SOLD 1000 SHAR ES IN JULY, 2004 AT RS.14,85,953/- AND CLAIMED A LOSS OF RS.8,20,161 /-. HE FURTHER SOLD 700 SHARES FOR RS.14,19,838/- AND OFFERED THE ENTIRE AMOUNT AS SHORT TERM CAPITAL GAINS UNDER SECTION 111A. THE ASSESSEE ALSO HAD 1187 EQUITY SHARES OF TATA STEEL AT A COST OF R S.1,40,113/-. THESE SHARES WERE PURCHASED IN JULY, 2000. THEY WER E SOLD ON ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 25 8.7.2004, 10.12.2004 AND 31.03.2005. IN THE ASSESSM ENT ORDER THE PROFIT AND SALE OF THE ABOVE SHARES, BOTH INFOSYS T ECHNOLOGY AND TATA STEEL, WAS TREATED AS BUSINESS INCOME. 24. THE ARGUMENT BEFORE THE CIT(A) WAS THAT THE CO ST OF BONUS SHARES WAS RS.NIL SINCE THE ASSESSEE IS AN INVESTO R. THIS DISPUTE IS ALSO AN OFFSHOOT OF OUR DECISION WITH REGARD TO GROUND NO.1. THE SHARES WHICH REMAINED WITH THE ASSESSEE AS AT THE C LOSE OF THE PREVIOUS YEAR WERE 184 IN RESPECT OF INFOSYS TECHNO LOGY AND 543 IN RESPECT OF THE TATA STEEL. THE ENTIRE TATA STEEL SH ARES REPRESENTED BONUS SHARES. IN RESPECT OF INFOSYS SHARES, 46 SHAR ES WERE ORIGINAL SHARES AND THE BALANCE SHARES WERE BONUS SHARES. SI NCE THE ASSESSING OFFICER HAD TREATED THE ASSESSEE AS A SHA RE DEALER, HE VALUED 184 SHARES OF INFOSYS TECHNOLOGY AT RS.4896. 21 PER SHARE. THIS INCLUDED 46 ORIGINAL SHARES WHICH WERE VALUED AT RS.2,25,217/- . THE AVERAGE COST OF 543 BONUS SHARES OF TATA STEE L WAS VALUED AT RS.68,526/-. THE ASSESSING OFFICERS REASONING WOUL D HAVE HELD GOOD IF HIS DECISION TO TREAT THE ASSESSEE AS A DEA LER IN SHARES IS UPHELD. HOWEVER WE HAVE HELD THAT THE ASSESSEE IS A N INVESTOR IN SHARES. THE BONUS SHARES CANNOT THEREFORE BE VALUE D AS IF THEY ARE STOCK-IN-TRADE. WE THEREFORE DELETE THE ADDITION OF RS.2,25,217/- AND RS.68,526/-. 25. GROUND NO.3 IS AS UNDER:- 3. ON THE FACTS, CIRCUMSTANCES AND LEGALITY OF THE CASE, THE CIT(A) ERRED IN CONFIRMING THE LOSS OF FU TURE AND OPTION TRANSACTION (DERIVATIVES) FOR RS. 14,37,338/- AS SPECULATIVE LOSS AS AGAINST THE LOSS ITA NO: 6289/MUM/2008 ITA NO: 4932/MUM/2009 26 UNDER THE HEAD OTHER INCOME AS CLAIMED AND SHOWN BY THE APPELLANT. 26. THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY STA TED THAT THIS GROUND IS COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE KOLKATA SPECIAL BENCH IN THE CASE OF SHREE CAPITAL SERVICES LTD. VS.ACIT., 121 ITD 498(SB). RESPECTFULLY FOLLOWING THE SAID OR DER, WE DISMISS THE GROUND. 27. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED WHEREAS THE DEPARTMENTS APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH MAY 2011. SD/- SD/- ( PRAMOD KUMAR ) ( R.V. EASWAR ) ACCOUNTANT MEMBER PRESI DENT MUMBAI, DATED 18 TH MAY 2011 SALDANHA COPY TO: 1. MR. MAHENDRA C.SHAH, 14, HANUMAN BUILDING, NAKHO DA STREET, PYDHONIE, MUMBAI 2. THE ADDL. CIT., RANGE-13(1), AAYAKAR BHAVAN, MAR INE LINES, MUMBAI-400 020. 3. CIT-13, MUMBAI. 4. CIT(A)-XIII, MUMBAI. 5. DR H BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI