HITESH SATISCHANDRA DOSHI, MUMBAI V. JCIT 21(3), MUMBAI

ITA 6497/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49128 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 25-05-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 18-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VIJAY MEHTA
• Keywords: Capital asset; Business income; Question of law; Cost of acquisition; Speculation loss; Tax effect
• Section: 143(3); 54F; 2(14); 43(5)

Judgement Text

1 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI MUMBAI MUMBAI MUMBAI H HH H BENCH BENCH BENCH BENCH MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI J JJ J SUDHAKAR REDDY, AM SUDHAKAR REDDY, AM SUDHAKAR REDDY, AM SUDHAKAR REDDY, AM & & & & SHRI SHRI SHRI SHRI VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM ITA NO. ITA NO. ITA NO. ITA NO. 6497/MUM/2009 6497/MUM/2009 6497/MUM/2009 6497/MUM/2009 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR 2003 2003 2003 2003- -- -04 0404 04) )) ) & && & ITA NO.6603/MUM/2009 ITA NO.6603/MUM/2009 ITA NO.6603/MUM/2009 ITA NO.6603/MUM/2009 (ASST YEAR 2006 (ASST YEAR 2006 (ASST YEAR 2006 (ASST YEAR 2006- -- -07) 07) 07) 07) MR HITESH SATISHCHANDRA DOSHI ETEMIA A/1602 HIRANANDANI GARDEN MAIN STREET, POWAI MUMBAI 76 VS THE JT COMMR OF INCOME TAX 21(3), MUMBAI ( (( (APPELLANT APPELLANT APPELLANT APPELLANT) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO.AACPD8612R AACPD8612R AACPD8612R AACPD8612R ITA NO. ITA NO. ITA NO. ITA NO. 148/MUM/20 148/MUM/20 148/MUM/20 148/MUM/201 11 10 00 0 (ASST YEAR 2003 (ASST YEAR 2003 (ASST YEAR 2003 (ASST YEAR 2003- -- -04) 04) 04) 04) & && & ITA NO. ITA NO. ITA NO. ITA NO. 812 812 812 812/MUM/20 /MUM/20 /MUM/20 /MUM/2010 1010 10 (ASST YEAR 2006 (ASST YEAR 2006 (ASST YEAR 2006 (ASST YEAR 2006- -- -07) 07) 07) 07) THE JT COMMR OF INCOME TAX 21(3), MUMBAI VS MR HITESH SATISHCHANDRA DOSHI ETEMIA A/1602 HIRANANDANI GARDEN MAIN STREET, POWAI MUMBAI 76 (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ITA NO. ITA NO. ITA NO. ITA NO. 3231/MUM/2009 3231/MUM/2009 3231/MUM/2009 3231/MUM/2009 (ASST YEAR 2004 (ASST YEAR 2004 (ASST YEAR 2004 (ASST YEAR 2004- -- -05) 05) 05) 05) THE JT COMMR OF INCOME TAX 21(3), MUMBAI VS MR HITESH SATISHCHANDRA DOSHI ETEMIA A/1602 HIRANANDANI GARDEN MAIN STREET, POWAI MUMBAI 76 (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) CO NO. 239/MUM/2009 CO NO. 239/MUM/2009 CO NO. 239/MUM/2009 CO NO. 239/MUM/2009 IN ININ IN ITA NO.3231/MUM/2009 MR HITESH SATISHCHANDRA DOSHI ETEMIA A/1602 HIRANANDANI GARDEN MAIN STREET, POWAI MUMBAI 76 VS THE JT COMMR OF INCOME TAX 21(3), MUMBAI ( (( ( CROSS OBJECTOR CROSS OBJECTOR CROSS OBJECTOR CROSS OBJECTOR ) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) 2 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 ITA NO. ITA NO. ITA NO. ITA NO. 6495/MUM/2009 6495/MUM/2009 6495/MUM/2009 6495/MUM/2009 (ASST YEAR 2004 (ASST YEAR 2004 (ASST YEAR 2004 (ASST YEAR 2004- -- -05) 05) 05) 05) SMT PRATIKSHI D DOSHI ETEMIA A/1602 HIRANANDANI GARDEN MAIN STREET, POWAI MUMBAI 76 VS THE JT COMMR OF INCOME TAX 21(3), MUMBAI (APPELL (APPELL (APPELL (APPELLANT) ANT) ANT) ANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. AAEPD8993K PAN NO. AAEPD8993K PAN NO. AAEPD8993K PAN NO. AAEPD8993K ITA NO. ITA NO. ITA NO. ITA NO. 150/MUM/20 150/MUM/20 150/MUM/20 150/MUM/2010 1010 10 (ASST YEAR 2004 (ASST YEAR 2004 (ASST YEAR 2004 (ASST YEAR 2004- -- -05) 05) 05) 05) THE JT COMMR OF INCOME TAX 21(3), MUMBAI VS SMT PRATIKSHI D DOSHI ETEMIA A/1602 HIRANANDANI GARDEN MAIN STREET, POWAI MUMBAI 76 (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) A SSESSEE BY SHRI VIJAY MEHTA REVENUE BY SHRI GOLI SRINIWAS RAO PER PER PER PER VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO, , , , JM JMJM JM THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE RE VENUE EXCEPT FOR THE AY 2004-05 FOR WHICH THE ASSESSEE SHRI HITESH S DOS HI HAS FILED CROSS OBJECTION AGAINST THE RESPECTIVE ORDERS OF THE CIT(A) FOR THE ASSESSMENT YEARS 2003-04, 04-05 AND 06-07. THE APPEALS IN ITA NO.6497/MUM/200 9 AND 150/MUM/2010 ARE ALSO CROSS APPEAL BY ANOTHER ASSESSEE SMT PRATIKSHI D DOSHI AS WELL AS REVENUE AGAINST THE ORDER DATED 21.10.2009 FOR THE AY 2004- 05. 2 THE FIRST COMMON ISSUE ARISES IN ALL THE APPEALS AND CROSS OBJECTION AND ASSESSEE IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE CIT(A) IS JUSTIFIED IN TREATING THE SURPLUS/LOSS OF SHARES H ELD FOR LESS THAN 30 DAYS IN RESPECT OF SECONDARY MARKET PURCHASE AND SALES AS B USINESS INCOME/LOSS. 3 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 3 THE SOLITARY COMMON ISSUE ARISES IN ALL THE REVEN UE APPEAL IS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN TREATING THE BUSINESS INCOME ON ACCOUNT OF TRADING IN SHARES AS SHORT TERM CAPITAL GAIN BY APPLYING THE S HARE HOLDING PERIOD FOR SHORT TERM CAPITAL GAIN AS MORE THAN 30 DAYS BUT LE SS THAN 1 YEAR. 4 THUS, THE FIRST ISSUE RAISED IN THE ASSESSEES AP PEAL AS WELL AS IN THE REVENUES APPEAL IS CONNECTED AND RELATED TO THE AS SESSMENT OF INCOME FROM SALE AND PURCHASE OF SHARES CLAIMED BY ASSESSEE AS SHORT TERM CAPITAL GAIN. 5 THE BRIEF FACTS REGARDING THE ISSUE ARE EMERGED A S UNDER: 5.1 THE ASSESSES ARE INDIVIDUAL AND ENGAGED IN THE BUSINESS OF SHARE TRADING AND INVESTMENTS. THE ASSESSEE MR HITESH S DOSHI DEC LARED HIS INCOME IN THE RETURN OF INCOME FILED FOR ALL THE ASSESSMENT YEARS UNDER CONSIDERATION ARE AS UNDER: FOR AY 2003 FOR AY 2003 FOR AY 2003 FOR AY 2003- -- -04: 04: 04: 04: I) BUSINESS INCOME RS. 42,71,139/- II) SHORT TERM CAPITAL GAIN RS. 51,59,160/- III) LONG TERM CAPITAL GAIN (LOSS) RS. 3,74,297/- FOR AY 2004 FOR AY 2004 FOR AY 2004 FOR AY 2004- -- -05: 05: 05: 05: I) BUSINESS INCOME RS. 2,11,62,245/- II) SHORT TERM CAPITAL GAIN RS. 4,28,87,519/- III) LONG TERM CAPITAL GAIN R S. 2,11,45,423/- FOR AY 2006 FOR AY 2006 FOR AY 2006 FOR AY 2006- -- -07: 07: 07: 07: I) BUSINESS INCOME (LOSS) RS. 28,74,982/- II) SHORT TERM CAPITAL GAIN RS. 18,60,42,317/- III) LONG TERM CAPITAL GAIN RS . 13,54,85,264/- 5.2 THE ASSESSEE MRS PRATIKSHA DOSHI FILED HER RETU RN OF INCOME FOR AY 2004- 05 AND DECLARED THE INCOME AS UNDER: 4 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 I) SHORT TERM CAPITAL GAIN RS. 10,45,067/- II) SHORT TERM CAPITAL GAIN RS. 9,65,918/- III) OTHER SOURCES RS. 11,857/- 5.3 APART FROM THE INCOME UNDER THE HEAD BUSINESS AND CAPITAL GAINS, THE ASSESSEE HAS ALSO SHOWN INCOME FROM INTEREST AND DI VIDEND. THE CLAIM OF THE ASSESSEE REGARDING SHORT TERM CAPITAL GAIN AS WELL AS LONG TERM CAPITAL GAIN WAS NOT ACCEPTED BY THE ASSESSING OFFICER AND THE SAME WAS TREATED AS BUSINESS INCOME BY GIVING THE FOLLOWING REASONS: I) THE ASSESSEE IS INVOLVED IN SYSTEMATIC AND REGUL AR COURSE OF SHARE TRADING ACTIVITY FOR WHICH REGULAR BOOKS ARE MAINTA INED. THE SCALE OF ACTIVITY IS FREQUENT AND HUGE. THERE IS CLEAR PROFI T MOTIVE. QUANTITY PURCHASED AND SOLD ARE HUGE AND REPETITIVE. II)CBDT INSTRUCTION NO.1827 DATED 31.8.1999 AND SUP PLEMENTARY INSTRUCTION WERE APPLIED. III)THE EXPENSES CLAIMED AGAINST SHORT TERM CAPITAL GAIN ARE SUCH WHICH ARE NECESSARY FOR CARRYING OUT THE BUSINESS. IV)THE RATIO OF PURCHASE TO OPENING BALANCE AND SAL ES TO CLOSING BALANCE MAKES THE ASSESSEE A TRADER IN SHARES AND NOT INVES TOR IN SHARES. THE RATIO OF TURNOVER TO CLOSING STOCK IS ALSO AN IMPOR TANT INDICATOR TO LOOK AT THE MOTIVE OF THE ASSESSEE. 5.4 THE ASSESSING OFFICER, THEREFORE, HELD THAT THE ASSESSEE IS ENGAGED IN THE ONE ACTIVITY ONLY I.E. ACTIVITY OF EARNING PROFIT T HROUGH DEALING IN SHARES WITHIN A SHORT PERIOD OR LONG PERIOD. HE ACCORDINGLY TREATE D THE ENTIRE INCOME AS BUSINESS INCOME. FOR THE AY 2004-05, THE ASSESSING OFFICER ALSO DENIED THE DEDUCTION U/S 54F OF THE ACT. 6 ON APPEAL, THE CIT(A) ASKED THE ASSESSEES TO FIL E THE STATEMENT OF SHORT TERM CAPITAL GAINS AND LONG TERM CAPITAL GAINS. THE ASSESSEES WERE ALSO REQUIRED 5 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 TO BIFURCATE THE SHORT TERM CAPITAL GAIN INTO TWO P ARTS NAMELY; SHARES SOLD WITHIN 30 DAYS OF PURCHASE AND SHARES SOLD AFTER 30 DAYS O F PURCHASE. THE ASSESSES, ACCORDINGLY FILED THE DETAILS OF LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAINS AND ALSO DETAILS OF BIFURCATED SHORT TERM AS PER TH E PERIOD OF HOLDING LESS THAN 30 DAYS AND MORE THAN 30 DAYS. 6.1 THE CIT(A) IN PARA NOS 4.3.1 (A) & (B) HELD TH AT AS PER CBDTS CIRCULAR, THE ASSESSEE CAN BE AN INVESTOR AS WELL AS TRADER AND C AN HAVE BOTH PORTFOLIOS. VARIOUS FACTORS, WHICH MAKE THE ASSESSEE AN INVESTO R, ARE THAT; THE ASSESSEE HAS MADE INVESTMENT IN LISTED SHARES AND ALSO IN IPOS. THE SHARES ARE SHOWN IN THE BALANCE SHEET AS INVESTMENT AND VALUED AT COST. THE ASSESSEE DID NOT HAVE ANY OFFICE AND/OR ADMINISTRATIVE SET UP AND THERE ARE N O COMMERCIAL FIXED ASSETS. THE SOURCE OF ACQUISITION ARE OUT OF OWN FUNDS AND FAMI LY FUNDS. THE RATIO OF INVESTMENT TO SALE AND PURCHASE IS VERY HIGH AND TH ERE IS NOT A SINGLE INSTANCE WHERE THE ASSESSEE HAD SQUARED OFF THE TRANSACTIONS ON THE SAME DATE WITHOUT TAKING DELIVERY OF THE SHARES. THESE FACTS MAKES IT CLEAR THAT THE ASSESSEE IS MAINLY AN INVESTOR BUT THE FACTORS LIKE; TURNOVER OF SHARES IN LESS THAN 30 DAYS IN RESPECT OF SECONDARY MARKET TRANSACTIONS POINTS THE ASSESSEE AS A TRADER. HE ACCORDINGLY, HELD THAT THE SURPLUS/LOSS ON SALE OF SHARES HELD FOR LESS THAN 30 DAYS BE TREATED AS BUSINESS INCOME AND FROM THOSE S HARES HELD FOR MORE THAN 30 DAYS AS SHORT TERM CAPITAL GAIN/LOSS. THE LONG TERM CAPITAL GAIN HAS BEEN ACCEPTED AS SUCH. 7 THE ASSESSEE AS WELL AS THE REVENUE ARE IN FURTHE R APPEAL BEFORE US ON THE ISSUE OF SHORT TERM CAPITAL GAIN OR BUSINESS INCOME . HOWEVER, THERE IS NO DISPUTE 6 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 BEFORE US AS REGARDS LONG TERM CAPITAL GAIN ACCEPTE D BY THE CIT(A) BECAUSE THE REVENUE HAS NOT CHALLENGED THE FINDINGS OF THE CIT( A) ON LONG TERM CAPITAL GAIN. 8 THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT; I) THE ASSESSEE STARTED INVESTMENT IN SHARES EVERY SINCE 2000. ALL ALONG THESE SHARES ARE TREATED AS INVESTMENT IN THE ACCOUNTS MAINTAINED BY THE ASSESSEE. II) SECTION 2(14) DEFINES THE WORD CAPITAL ASSET. AS PER THE DEFINITION, CAPITAL ASSET MEANS, PROPERTY OF ANY KIND HELD BY A N ASSESSEE WHETHER OR NOT CONNECTED WITH HIS BUSINESS BUT DOES NOT INCLUD E ANY STOCK IN TRADE AND CERTAIN OTHER ASSETS. THEREFORE, AS PER THE DEF INITION OF THE PHRASE CAPITAL ASSET, SHARES HELD BY THE ASSESSEE AND TR EATED AS INVESTMENT IN ITS ACCOUNTS WILL BE CAPITAL ASSET. III) SECTION 2(29A) DEFINES THE PHRASE LONG TERM CAPITAL ASSET MEANS A CAPITAL ASSET WHICH IS NOT A SHORT TERM CAPITAL A SSET. IV) SECTION 2(42A) DEFINES THE PHRASE SHORT TERM CAPITAL ASSET MEANS A CAPITAL ASSET HELD BY AN ASSESSEE FOR NOT MORE THAN 36 MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSFER BUT IN RESPECT OF SHARES HELD IN A COMPANY LISTED IN A RECOGNIZED STOCK EXCH ANGE, THE WORDS 30 MONTHS ARE SUBSTITUTED FOR 12 MONTHS. THEREFORE, TH E STATUTE ITSELF RECOGNIZES THE DIFFERENCE BETWEEN SHORT TERM & LONG TERM CAPITAL ASSET AND ALSO DIFFERENCE BETWEEN CAPITAL ASSET BEING SHA RES OF A LISTED COMPANY AND OTHER CAPITAL ASSET. 7 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 V) LAW RELATING TO DIFFERENTIAL TREATMENT TO SHORT TERM AND LONG TERM CAPITAL GAINS CAME INTO EFFECT WITH EFFECT FROM THE DATE ON WHICH CHAPTER VII OF THE FIN.N.(2) ACT, 2004 COME INTO FORCE. T HIS DATE IS 1.10.2004 ON WHICH THE LEVY OF SECURITIES TRANSACTION TAX CAME I NTO EFFECT. HE HAS REFERRED THE SPEECH OF THE FINANCE MINISTER ON THE SECURITIES TRANSACTION TAX. VI) ONCE THE ASSESSEE IS CALLED UPON TO PAY THE SEC URITIES TRANSACTION TAX BASED ON THE NATURE OF TRANSACTION, IT WILL BE UNFA IR TO GIVE A DIFFERENT TREATMENT IN RESPECT OF SAME TRANSACTION FOR LEVY O F TAX UNDER DIFFERENT TAX LAW. AS PER THE INTENTION OF LEGISLATURE, MANIFESTE D BY THE SPEECH OF THE MINISTER, IT IS UNFAIR NOT TO HONOUR HIS WORDS AND LEVY TAX TWICE FOR SAME TRANSACTION. THIS CONTENTION IS JUDICIALLY ACCEPTED BY THE TRIBUNAL IN THE CASE OF GOPTAL PUROHIT REPORTED IN 29 SOT 117. THER E IS NO PROVISION TO REFUND THE SECURITIES TRANSACTION TAX, AND HAVING A CCEPTED SUCH TAX, THE LAW MAKERS CANNOT TAKE A U-TURN AND ASK THE ASSESS EE TO PAY TAX DOUBLY. VII) THE INTENTION OF THE ASSESSEE AS INVESTOR IS MANIFESTED BY FOLLOWING : A) LONG HOLDING PERIOD AS PER CHART OF INVESTMENT B) IN SPITE OF MANI-FOLD INCREASE IN MARKET VALUE, THE ASSESSEE PREFERRED TO HOLD THE SHARES THEN TO SELL THE SHARE S. THIS CLEARLY SHOWS THAT ASSESSEE IS AN INVESTOR. THIS CONTENTIO N HAS BEEN ACCEPTED BY THE TRIBUNAL IN THE CASE OF NEHAL V SHA H 8.1 THE LD AR FURTHER SUBMITTED THAT THE ASSESSEE H AS BEEN CONSISTENTLY AND CONTINUOUSLY SHOWING THE INCOME/LOSS FROM SHARES UN DER THE HEAD CAPITAL GAINS. HE HAS REFERRED THE DETAILS OF VARIOUS YEA RS REGARDING THE INCOME PLACED AT PAGE 86 OF THE PAPER BOOK AND SUBMITTED THAT EXC EPT THREE YEARS UNDER 8 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 CONSIDERATION FOR ALL OTHER YEARS THE STAND OF THE ASSESSEE HAS BEEN ACCEPTED BY THE REVENUE. THEREFORE, THE LD AR OF THE ASSESSEE H AS PLEADED THAT THE ISSUE IS COVERED BY THE DECISION OF THE HONBLE JURISDICTION AL HIGH COURT IN THE CASE OF CIT VS GOPAL PUROHIT REPORTED IN 228 CTR 582/188 TAXMA N 140. 8.2 THE LD AR OF THE ASSESSEE HAS REFERRED THE DECI SION OF THE HONBLE SUPREME COURT IN THE CASE OF RAMKUMAR AGGARWAL & BR OS REPORTED IN 205 ITR 251 AND SUBMITTED THAT WHEN THE ASSESSEE HAS TREATE D THE SHARES AS CAPITAL ASSET ALL ALONG; IT IS NOT PERMISSIBLE EITHER FOR THE ASSESSEE OR FOR THE ASSESSING OFFICER TO TREAT THE SAME AS STOCK-IN-TRADE. ONCE THE INTENTION OF THE ASSESSEE IS CLEAR FROM THE RECORD, THE ASSESSING OFFICER CANNOT SUBSTITUTE THE SAME. THE ASSESSEE HAS GIVEN A PARTICULAR TREATMENT I.E INVES TMENT OF THE SHARES; THE ASSESSING OFFICER CANNOT CHANGE THE NATURE OF THE A SSET. THUS, WHAT WAS A CAPITAL ASSET WILL REMAIN A CAPITAL ASSET UNLESS TH E PERSON HOLDING THE ASSET HIMSELF CHANGES THE NATURE BY A SPECIFIC ACTION LIK E CONVERSION OF CAPITAL ASST INTO STOCK-IN-TRADE. 8.3 HE HAS FURTHER POINTED OUT THAT MANY OF THE SHA RES SOLD DURING THE FINANCIAL YEAR, RELEVANT TO THE ASSESSMENT YEAR UND ER CONSIDERATION, FROM WHICH THE LONG TERM/SHORT TERM CAPITAL GAINS AROSE WERE P URCHASED IN EARLIER YEARS AND TREATED BY THE ASSESSEE AS INVESTMENT. ONCE THE T REATMENT OF THE SHARES AS INVESTMENT WAS ACCEPTED BY THE REVENUE IN THE EARLI ER YEARS THEN THE ASSESSING OFFICER CANNOT BE ALLOWED, TREATING THE SAME DIFFER ENTLY WHEN THE SHARES ARE SOLD. THE SHARES ARE CAPITAL ASSET WITHIN THE MEANI NG OF SEC. 2(14) OF THE ACT, ANY GAIN OR LOSS ON TRANSFER OF THE SHARES ALWAYS TAXED UNDER THE HEAD CAPITAL GAIN. 9 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 8.4 THE LD AR VEHEMENTLY CONTENDED THAT TREATMENT G IVEN BY THE CIT(A) IS CONTRARY TO THE PROVISIONS OF SECTION 2(42A) OF TH E ACT. UNDER THE PROVISIONS OF THE ACT, SHORT TERM CAPITAL ASSET MEANS A CAPITAL A SSET HELD BY AN ASSESSEE FOR NOT MORE THAN 36 MONTHS/12 MONTHS DEPENDING UPON TH E NATURE OF THE ASSET. WHEN THERE IS NO CONCEPT OF HOLDING THE SHARES LESS THAN 30 DAYS TO CHANGE THE NATURE OF ASSET AND CONSEQUENTLY, THE INCOME FROM S ALE OF SHARES WOULD BE TREATED AS BUSINESS INCOME AND NOT CAPITAL GAIN. A CAPITAL ASSET IS ALWAYS A CAPITAL ASSET AND CANNOT BE TREATED DIFFERENTLY AT THE TIME OF SALE. HE REFERRED TO CBDT CIRCULAR NO. 4 OF 2007 DATED 15.3.2007 AND SUBMITTED THAT CBDT HAS ALSO EMPHASISED THAT IT IS POSSIBLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS I.E. AN INVESTMENT PORTFOLIO 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 T WO PORTFOLIOS, THE ASSESSEE MAY HAVE INCOME UNDER BOTH HEADS I.E. CAPITAL GAINS AS WELL AS BUSINESS INCOME. SINCE THE CBDT CIRCULAR IS BINDING ON THE ASSESSING OFFICER BUT NOT BINDING ON THE ASSESSEE; THEREFORE, THE GUIDELINES OF THE CBDT CIR CULAR SO FAR AS IT IS BENEFICIAL TO THE ASSESSEE HAS TO BE STRICTLY FOLLOWED BY THE REVENUE AUTHORITIES. 8.5 THE ASSESSING OFFICER OBSERVED THAT THE ACTIVIT Y OF THE ASSESSEE IS CONTINUOUSLY CARRIED OUT SINCE LONG IN AN ORGANIZED AND SYSTEMATIC WAY WITH THE INTENTION TO MAKE PROFITS AND SUBSEQUENTLY TREATED THE SAME AS TRADING ACTIVITY. THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THE IN VESTMENT IS ALWAYS BE WITH THE INTENTION TO MAKE PROFIT. NO PRUDENT PERSON WIL L EVER INVEST IF SUCH INVESTMENT IS LIKELY TO RESULT INTO LOSES. THEREFOR E, THE INVESTMENT WITH AN INTENTION TO MAKE PROFITS IS A NORMAL HUMAN TENDENC Y AND CANNOT CHANGE THE 10 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 NATURE OF TRANSACTION OF INVESTMENT AS A BUSINESS. HE FURTHER SUBMITTED THAT THE NATURE OF TRANSACTION IS DETERMINED AS PER THE INTE NTION ON THE DATE OF ACQUIRING THE ASSET AND NOT ON THE BASIS OF SUBSEQUENT EVENT WHICH LEAD THE ASSESSEE TO SELL THE ASSET. THERE MAY BE SEVERAL FACTORS WHIC H AN INFORMED INVESTOR WILL CONSIDER BEFORE SALE OF ANY ASSET. THEREFORE, THE S ALE WITHIN A SHORT PERIOD OR WITHIN A PERIOD OF 30 DAYS OF ACQUISITION WILL NOT CHANGE THE NATURE OF TRANSACTION ON THE DATE OF ACQUISITION. HE HAS REFERRED THE D ECISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF SAR INVESTMENT P LTD VS DCIT REPORTED IN 40 SOT 566 (AHD) AND SUBMITTED THAT THE TRIBUNAL IN TH E SAID CASE HAS HELD THAT WHETHER THE ASSET ACQUIRED IS INVESTMENT OR STOCK I N TRADE IN THE HANDS OF THE ASSESSEE DEPENDS UPON THE INTENTION OF THE ASSESSEE AT THE TIME OF THE ACQUISITION OF THE SAID ASSET I.E. WHETHER IT WAS I NTENDED TO BE ACQUIRED AS INVESTMENT OR AS A TRADING ASSET. 8.6 THE LD AR THEN REFERRED TO PAGES 89 TO 94 OF T HE PAPER BOOK AND SUBMITTED THAT MAJORITY OF THE INVESTMENT HAS BEEN MADE BY THE ASSESSEE FOR THE LAST 11 YEARS ONLY IN TOP TEN SCRIPS. HE HAS A GAIN POINTED OUT THAT FOR THE AY 2000-01, THE ASSESSEES INVESTMENT WAS ABOUT 45% IN THE TOP TEN SCRIPS WHICH HAS BEEN GRADUALLY INCREASED AND FOR THE AY 2003-0 4, IT WAS 61% AND SUBSEQUENT YEARS, THE INVESTMENT HAS BEEN INCREASED TO 77% AND 87%. FOR THE AY 2010-11 IT WAS MORE THAN 78%. THUS, THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THE INTENTION OF THE ASSESSEE IS ALW AYS INVESTMENT ONLY IN THE SELECTED SCRIPS AND MORE THAN 75% OF THE TOTAL INVE STMENT IS IN THE TOP TEN SCRIPS WHICH SHOWS THAT THE INTENTION OF THE ASSESSEE WAS NOT TRADING BUT ONLY INVESTMENT LATTERLY. HE HAS SUMMARISED HIS CONTE NTION AS UNDER: 11 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 I) THAT THE ASSESSEE RECORDED THE INVESTMENTS IN TH E BOOKS OF ACCOUNT SEPARATELY AND CONSISTENTLY FOR VERY YEAR AND THE ASSESSEE HAS PROVED HIS INTENTION AT THE TIME OF PURCHASE OF AS INVESTMENT; II) THE ASSESSEE ALWAYS VALUED THE INVESTMENT AT C OST AND NEVER VALUED AT MARKET PRICE OR REALIZED VALUE; III) THE ASSESSEE ADMITTED CAPITAL LOSS AND NEVER C LAIMED AS BUSINESS LOSS OUT OF SALE OF INVESTMENT IN SHARES WHICH SHOWS F ROM THE BEGINNING AND THE ASSESSEE WAS TREATED THE INVESTMENT SEPARATELY; III) THE ASSESSEE CONSISTENTLY TREATING THE INVESTM ENT SEPARATELY IN THE LAST MANY YEARS, WHICH HAS BEEN ACCEPTED BY THE REV ENUE EXCEPT FOR THE YEAR UNDER CONSIDERATION. EVEN IN THE SUBSEQUENT YE AR, THE CLAIM OF THE ASSESSEE HAS BEEN ACCEPTED THROUGH U/S 143(1). THE AMOUNT OF INVESTMENT IS BOOKED THROUGH NUMBER OF SCRIPS TO AVOID THE RISK BECAUSE IT IS NOT ADVISABLE TO INVEST HUGE AMOUNTS IN FEW S CRIPS. THE ASSESSEE IS USING HIS OWN FUNDS. THE TRANSACTIONS OF PURCHASE A ND SALE ARE RS. 4.57% OF THE FUNDS AVAILABLE AND THEREFORE, PORTFOLIO CHU RNING WAS NOT SO HIGH FOR A PRUDENT INVESTOR. THE LONG TERM CAPITAL GAIN H AS BEEN ACCEPTED BY THE REVENUE; THEREFORE, THE REVENUE HAS ACCEPTED THE ST ATUS BUT BEING TRADER AS WELL AS INVESTOR. HE HAS REFERRED THE FOLLOWING DECISIONS: I) CIT VS GOPAL PUROHIT 188 TAXMAN 140 (BOM) II) GOPAL PUROHIT VS JCIT 122 TTJ 87(MUM) III) JANAK S RANGWALA (ITA NO.1163/MUM/2004 DT 19. 12.2006) IV) ACIT VS SUNDAR IYER (ITA NO.295/MUM/2001 DT 15 .10.2002) V) ACIT VS MOTILAL OSWAL (ITA NO.3861/MUM/2001 DT 28.8.6) VI) MANAGEMENT STRUCTURE & SYSTEMS P LTD VS ITO (ITA NO.6966/MUM/2007DT 30.4.2 010) VII WALFORT FINANCIAL SERVICES LTD VS ACIT (ITA NO.847/MUM/209 DT 30.6.2010) VIII) JM SHARE & STOCK BROKERS LD VS JCIT (ITA NO.28010/MUM/2000 DT 30.11.2007 ) 12 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 8.7 THE LD DR HAS RELIED ON THE ORDER OF THE ASSE SSING OFFICER AND SUBMITTED THAT THE QUANTITY OF THE SHARES AND QUANTUM OF SAL ES GO TO PROVE THE INTENTION OF THE ASSESSEE AS TRADER. THE TRANSACTIONS ENTERE D INTO FOR PURCHASE AND SALE OF SHARES SHOW THAT THE ASSESSEE IS ENGAGED IN AN O RGANIZED ACTIVITY OF PURCHASE AND SALE OF SHARES WITH PROFIT MOTIVE. HE HAS FURT HER CONTENDED THAT IN SOME INSTANCES, THE ASSESSEE IS SELLING SHARES ON THE NE XT DAY OF PURCHASE AND CLAIMING THE TRANSACTION AS INVESTMENT AND SHORT TE RM CAPITAL GAIN WHEREAS THE NATURE OF ACTIVITY CLEARLY SHOWS THAT THE ASSESSEE IS ENGAGED IN CONTINUOUS SALE AND PURCHASE OF SOME SCRIPS IN A SINGLE DAY. THE A SSESSEE HAS ALSO ENTERED INTO THE TRANSACTIONS WHICH ARE ACCEPTED AS SPECULATIVE IN NATURE. THEREFORE, FROM THE VOLUME OF TRANSACTIONS, FREQUENCY OF TRANSACTIO N AND SHORT PERIOD OF HOLDING OF SHARES ESTABLISHED THAT THE ASSESSEE IS ENGAGED IN THE PROFIT EARNING ACTIVITY THROUGH DEALING IN SHARES IN THE ORGANIZED WAY AND THEREFORE, THE ACTIVITY OF PURCHASE AND SALE IS CLEARLY TRADING IN NATURE. H E HAS RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF SMT SADHANA NABERA VS A CIT AND SUBMITTED THAT THE TRIBUNAL, AFTER CONSIDERING THE DECISION IN THE CAS E OF GOPAL PUROHIT HAS LAID DOWN VARIOUS PRINCIPLES. 8.8 HE HAS REFERRED SOME PRINCIPLES AS HELD IN THE SAID DECISION THAT; THE TREATMENT IN THE BOOKS OF AN ASSESSEE IS NOT CONC LUSIVE AND IF THE VOLUME, FREQUENCY AND REGULARITY AT WHICH TRANSACTIONS ARE CARRIED OUT INDICATE SYSTEMATIC AND ORGANIZED ACTIVITY WITH PROFIT MOTIV E THEN IT BECOMES BUSINESS PROFIT NOT CAPITAL GAIN; PURCHASE WITH INTENTION T O RESALE CAN CONSTITUTE CAPITAL GAINS OR BUSINESS PROFIT DEPENDING ON CIRCUMSTANCES LIKE QUANTITY OF PURCHASE AND NATURE OF ACTIVITY; NO SINGLE FACT HAS ANY DEC ISIVE SIGNIFICANCE AND THE 13 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 QUESTION MUST BE ANSWERED DEPENDING ON THE COLLECTI VE EFFECT OF ALL RELEVANT MATERIAL BROUGHT ON RECORD. 8.9 HE HAS FURTHER SUBMITTED THAT IN THE SAID CASE, THE TRANSACTION OF PURCHASE AND SALE OF SHARE WERE ONLY ABOUT 32 SCRIPS. SINCE THE HOLDING PERIOD WAS ONLY 6 MONTHS, THE TRIBUNAL HAS TREATED THE TRANSACTION AS BUSINESS AND NOT INVESTMENT. HE HAS REFERRED THE BALANCE SHEET OF THE ASSESSEE A T PAGE 22 OF THE PAPER BOOK AND SUBMITTED THAT THE ASSESSEE HAS SHOWN THE LOANS OF RS. 118 LACS. THEREFORE, THE ASSESSEE WAS USING THE BORROWED FUNDS FOR THE P URPOSE OF PURCHASE AND SALE OF SHARES. THE ASSESSEE WAS DOING DERIVATIVE TRANS ACTIONS IN SHARES. THE MOTIVE OF THE ASSESSEE TO PURCHASE AND SALE IS TO EARN PRO FIT IN SHORT PERIOD. HE HAS RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF M/S SYNTHETIC FIBRES TRADING CO IN ITA NO.3022/MUM/2009 DATED 29.9.2009; IN THE CAS E OF SMT REKHA KHANDELWAL IN ITA NO.785/MUM/2009 DATED 17.3.2010 AND IN THE C ASE OF RAKESH J SANGHVI IN ITA NO.4607/MUM/2008 DATED 31.8.2010. 9 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERU SED THE RELEVANT RECORDS. THE ASSESSING OFFICER TOOK THE RATIO OF PU RCHASE AND SALE TO THE OPENING AND CLOSING BALANCE TO SUPPORT HIS VIEW OF TREATMEN T OF THE TRANSACTION INCLUDING THE TRANSACTION RESULTING LONG TERM CAPITAL GAINS A S TRADING ACTIVITY AND CONSEQUENTLY ASSESSED INCOME HAS BUSINESS INCOME. T HE CIT(A), THOUGH, ADMITTED LONG TERM CAPITAL GAINS AND THE TRANSACTIO N OF PURCHASE AND SALE RESULTING LONG TERM CAPITAL GAINS AS INVESTMENT; HO WEVER, HE HAS BIFURCATED THE TRANSACTIONS OF SALE AND PURCHASE RESULTING SHORT T ERM CAPITAL GAINS ON THE BASIS OF HOLDING PERIOD ON THE CRITERIA OF MORE THAN 30 D AYS AND LESS THAN 30 DAYS. IT IS 14 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 PERTINENT TO NOTE THAT THERE IS A CRITERIA PROVIDE D U/S 2(42A) WHICH DEFINES THE SHORTER CAPITAL ASSET AS CAPITAL ASSET HELD BY AN ASSESSEE FOR NOT MORE THAN 12 MONTHS IN THE CASE OF SHARES AND OTHER SECURITIES. SECTION 2(42B) FURTHER DEFINES THE SHORT TERM CAPITAL GAIN MEANS CAPITAL GAIN ARIS ING FROM THE TRANSFER OF SHORT TERM CAPITAL ASSET. THUS, STATUTE PRESCRIBED CRITE RIA FOR TREATING THE CAPITAL ASSET EITHER AS LONG TERM CAPITAL ASSET OR SHORT TERM CA PITAL ASSET ON THE BASIS OF THE HOLDING PERIOD BUT NO SUCH CRITERIA OF TREATING THE SHORT TERM CAPITAL ASSET AND TREATING THE ASSET HAS BEEN PRESCRIBED UNDER THE S TATUTE. EVEN, THERE IS NO INDICATION OF HOLDING PERIOD OF 30 DAYS FIND PLACE EITHER IN THE STATUTE OR IN THE CIRCULAR/INSTRUCTIONS AS WELL AS JUDICIAL PRONOUNCE MENTS ON THE ISSUE. EVEN OTHERWISE, HOLDING PERIOD IS ONE OF THE VARIOUS CRI TERIA AND PRINCIPLES TO DETERMINE THE NATURE OF THE TRANSACTION I.E. TRADIN G OR INVESTMENT, NO SINGLE FORMULA OR PRINCIPLE CAN BE THE DETERMINATIVE FACT OR FOR DECIDING THE NATURE OF THE TRANSACTION I.E. AS TRADING TRANSACTION OR INVESTMENT. A BUNDLE OF CRITERIA/ FACTORS/PRINCIPLES ARE TO BE TAKEN INTO ACCOUNT IN ORDER TO DETERMINE THE NATURE OF TRANSACTION. 10 THE HONBLE SUPREME COURT IN THE CASE OF CIT VS ASSOCIATED INDUSTRIAL DEVELOPMENT CO P LTD REPORTED IN 82 ITR 586 AS WELL AS IN THE CASE OF CIT VS H HOLSCK LARZEN REPORTD IN 160 ITR 67 HAS LAID DOWN V ARIOUS PRINCIPLES, WHICH HAS BEEN CONSIDERED BY THE CBDT FOR ISSUING THE CIRCULA R NO.4/2007 DATED 15.6.2007. IN SHORT, THE PRINCIPLES LAID DOWN IN THOSE CASES FOR DECIDING THE QUESTION OF NATURE OF THE TRANSACTION AS TRADING OR INVESTMENT , MAINLY/BROADLY ARE;- WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PUR CHASE OF SHARES; WHETHER THE ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID IN TEREST THEREON; WHAT IS THE FREQUENCY OF SUCH PURCHASE AND DISPOSAL IN THAT PARTICULAR ITEM; WHETHER THE 15 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 PURCHASE AND SALE IS FOR REALIZING PROFIT OR PUR CHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE; HOW THE VALUE OF ITE MS HAS BEEN TAKEN IN THE BALANCE SHEET. THUS, NO SINGLE FACTOR CAN BE SAID TO BE DECISIVE FACTOR AND NO SINGLE PRINCIPLE CAN BE LAID DOWN TO DETERMINE THE NATURE OF THE TRANSACTION I.E. TRADING ACTIVITY OR INVESTMENT. EACH CASE HAS TO BE DECIDED BASED ON THE PARTICULAR FACTS OF THE SAID CASE. THEREFORE, THERE CANNOT BE ANY PRECEDENT IN THE MATTER OF ADJUDICATION OF THE ISSUE OF NATURE OF TR ANSACTION WITH REGARD TO PURCHASE AND SALE OF SHARES AND SECURITIES. THE ISS UE CAN BE DETERMINED ONLY BY TAKING INTO ACCOUNT ALL THE RELEVANT FACTS AND PRIN CIPLES AS LAID DOWN BY THE HONBLE SUPREME COURT AND OTHER HIGH COURTS. THUS, PRINCIPLES ARE TAKEN AS GUIDELINES TO BE APPLIED IN THE FACTS OF EACH CASE AND CANNOT BE TAKEN AS STRICT JACKET/FORMULA. THEREFORE, THE BIFURCATION OF THE SHORT TERM CAPITAL GAIN AND TREATING THE TRANSACTION AS INVESTMENT IN THE CASES WHERE THE HOLDING PERIOD OF MORE THAN 30 DAYS AND AS BUSINESS TRANSACTION IN TH E CASE WHERE THE HOLDING PERIOD IS LESS THAN 30DAY, IN OUR CONSIDERED OPINIO N, IS NOT JUSTIFIED ON THE PART OF THE CIT(A). SINCE THERE CANNOT BE A SINGLE CRITERI A FOR JUDGING THE TRANSACTION AS CAPITAL ASSET OR TRADING ASSET; THE CIT(A) ADOPTED ONLY HOLDING PERIOD AS A SOLE CRITERIA FOR BIFURCATING THE TRANSACTIONS RELATIN G TO THE SHORT TERM CAPITAL GAIN, WHICH IS NEITHER PROPER AND NOR JUSTIFIED. 10.1 MOREOVER, WHEN THE ASSESSEE HAS TREATED THE IN VESTMENT TRANSACTION IN THE BOOKS OF ACCOUNT, WHICH INCLUDES THE LONG TERM CAPITAL GAINS AS WELL AS SHORT TERM CAPITAL GAINS, THEN AFTER ACCEPTING THE LONG T ERM CAPITAL GAINS, THE TRANSACTION REPRESENTING SHORT TERM CAPITAL GAINS AS CLAIMED BY THE ASSESSEE CAN BE NEITHER TREATED AS AN INVESTMENT OR TRADING IN NATURE. THERE CANNOT BE A SUB-DIVISION OF TRANSACTION RELATING TO SHORT TER M CAPITAL GAIN. HENCE, IN OUR 16 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 CONSIDERED OPINION, IN THE CASE IN HAND, THE CIT(A ) HAS COMMITTED AN ERROR IN BIFURCATING THE TRANSACTIONS OF PURCHASE AND SALE OF SHARES ON THE BASIS OF HOLDING PERIOD OF 30 DAYS AND THE INCOME ARISING FR OM THE SAME CLAIMED BY THE ASSESSEE AS SHORT TERM CAPITAL GAIN HAS BEEN SUB-DI VIDED AS SHORT TERM CAPITAL GAINS AND BUSINESS INCOME. 11 NOW, WE WILL ANALYSIS THE FACT OF THE PRESENT CA SE IN THE LIGHT OF THE PRINCIPLES LAID DOWN BY THE JUDICIAL PRONOUNCEMENTS FOR DETERMINING THE NATURE OF THE TRANSACTION OF SALE AND PURCHASE OF SHARES. INTENTION OF THE ASSESSEE AT THE TIME OF PUR INTENTION OF THE ASSESSEE AT THE TIME OF PUR INTENTION OF THE ASSESSEE AT THE TIME OF PUR INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE O F SHARES: CHASE OF SHARES: CHASE OF SHARES: CHASE OF SHARES: 12 UNDISPUTEDLY, THE ASSESSEE HAS TREATED THE TRANS ACTION AS INVESTMENT BY RECORDING IN THE BOOKS OF ACCOUNT BEING INVESTMENT AND NOT AS STOCK-IN-TRADE. THE ASSESSEE HAS SHOWN INVESTMENT IN SHARES IN THE BEGINNING AND CLOSING OF THE YEAR ONLY AN INVESTMENT AND NOT AS STOCK-IN-TRADE. FURTHER, THE ASSESSEE HAS BEEN MAINTAINING SEPARATE PORTFOLIOS FOR INVESTMENT AND TRADING TRANSACTIONS. IT IS NOW SETTLED PROPOSITION OF LAW THAT AN ASSESSEE CAN HAVE TWO SEPARATE PORTFOLIOS ONE FOR INVESTMENT AND OTHER FOR TRADING TRANSACTIONS AND THE INCOME FROM THESE TWO PORTFOLIOS IS ASSESSABLE UNDER THE D IFFERENT HEADS I.E. CAPITAL GAIN AND BUSINESS. THE CLAIM OF THE ASSESSEE IS FURTHER STRENGTHEN BY THE FACT THAT EVEN PRIOR TO THE DIFFERENTIAL TAX EFFECT W.E.F 1.10.2004, THE ASSESSEE HAS BEEN TREATING THE INVESTMENT SEPARATELY AND AD MITTING CAPITAL GAIN AS WELL AS CAPITAL LOSS. THIS CONSISTENT TREATMENT OF THE ASSESSEE HAS NOT BEEN DISPUTED RATHER HAS BEEN ACCEPTED BY THE REVENUE PRIOR TO TH E ASSESSMENT YEAR UNDER CONSIDERATION. THUS, FROM THE FACTS AND MATERIALS O N RECORDS, IT IS CLEARLY 17 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 ESTABLISHED THAT THE INTENTION OF THE ASSESSEE, AT THE TIME OF ACQUIRING THE SHARES, WHICH ARE CLAIMED AS INVESTMENT WAS FOR INV ESTMENT AND NOT FOR TRADING SO FAR AS REPRESENTING THE LONG TERM CAPITAL GAIN S AND SHORT TERM CAPITALS GAINS. OWN FUNDS OWN FUNDS OWN FUNDS OWN FUNDS OR OR OR OR BORROWED FUNDS USED FOR PURCHASE OF SHARES AND P AYMENT OF BORROWED FUNDS USED FOR PURCHASE OF SHARES AND PAYM ENT OF BORROWED FUNDS USED FOR PURCHASE OF SHARES AND PAYM ENT OF BORROWED FUNDS USED FOR PURCHASE OF SHARES AND PAYM ENT OF INTEREST: INTEREST: INTEREST: INTEREST: 13 AS PER THE BALANCE SHEET OF THE ASSESSEE AT PAGE 22 OF THE PAPER BOOK, FOR THE ASSESSMENT YEAR 2003-04, THE ASSESSEE IS HAVING ITS OWN FUNDS OF RS. 3.71 CRORES AND INVESTMENT OF RS. 3.91 CRORES, WHICH CLE ARLY SHOWS THAT THE ASSESSEE WAS HAVING ITS OWN FUNDS TO THE EXTENT OF 95% OF T HE INVESTMENT. THEREFORE, WE DO NOT FIND ANY SUBSTANCE IN THE CONTENTION OF THE LD DR THAT THE ASSESSEE HAS USED BORROWED FUNDS FOR THE PURPOSE OF INVESTMENT. THE POSITION IS ALMOST THE SAME IN THE SUBSEQUENT YEARS. MOREOVER, THE CIT(A) IN PARA 4.3.1 (A) HAS RECORDED THE FINDING THAT THE SOURCE OF ACQUISITION ARE OUT OF OWN FUNDS AND FAMILY FUNDS. FREQUENCY OF PURCHASE AND SALE OF SHARES: FREQUENCY OF PURCHASE AND SALE OF SHARES: FREQUENCY OF PURCHASE AND SALE OF SHARES: FREQUENCY OF PURCHASE AND SALE OF SHARES: 13.1 AS REGARDS THE FREQUENCY OF PURCHASE AND SALE OF SHARES, THE ASSESSEE HAS TRANSACTED ALL TRANSACTIONS OF SALES AND PURCHASES; THROUGH D-MAT ACCOUNT IN THE ELECTRONIC SYSTEM OF STOCK EXCHANGE. A SINGLE ORDER PLACED BY THE PURCHASER MAY BE COMPLETED BY WAY OF VARIOUS SMALL QUANTITIES OF SHARES AVAILABLE FOR SALE TO MEET OUT THE DEMAND OF THE PURCHASER. THEREFORE, A SINGLE ORDER IS NOT NECESSARY BE COMPLETED BY A SINGLE TRANSACTION OF T HE ENTIRE QUANTITY OF SHARES. 18 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 13.2 SIMILARLY IN THE CASE OF SALE, THE SAME MAY BE DIVIDED AS PER THE REQUIREMENT OF THE PURCHASER AND IN THIS WAY; SINGL E TRANSACTION IS REFLECTED AS NUMBER OF TRANSACTIONS. FOR INSTANCE, THE SHARES OF JINDAL SCRIP PURCHASED BY THE ASSESSEE ON 3.6.2002, THE ORDER WAS FOR 10000 S HARES, WHICH WAS COMPLETED BY 4 DIFFERENT LOTS OF SHARES OF 4000, 2500, 2500 A ND 1000. THEREFORE, THE SAID ORDER OF PURCHASE OF JINDHAL SCRIPS ON 3.6.2002 HAS BEEN REPORTED AS FOUR TRANSACTIONS OF PURCHASES, WHICH IS OTHERWISE ONE T RANSACTION. THUS, IT APPEARS THAT THE NUMBERS OF TRANSACTIONS ARE TAKEN AS PER T HE DIFFERENT LOTS AVAILABLE FOR EXECUTION OF THE ONE ORDER AND ACCORDINGLY, IT GIVE S UNREALISTIC FIGURE OF THE NUMBER OF TRANSACTIONS. MO MOMO MOTIV TIVTIV TIVE EE E OF PURCHASE AND OF PURCHASE AND OF PURCHASE AND OF PURCHASE AND SALE SALE SALE SALE OF OF OF OF S SS SHARE: HARE: HARE: HARE: 13.3 FROM THE DETAILS OF THE SHORT TERM CAPITAL GAI NS, WE FIND THAT THE TOTAL SHORT TERM CAPITAL GAINS ARISING FROM THE SHARES SO LD WITHIN 30 DAYS OF PURCHASE IS RS.15,19,938/- AND A TOTAL AMOUNT OF SHORT TERM CAPITAL GAINS FROM THE SHARES SOLD AFTER 30 DAYS BUT BEFORE ONE YEAR IS RS. 37,76 ,143/-, WHICH SHOWS THAT THE ASSESSEES INTENTION WAS TO HOLD THE SHARES FOR A LONGER PERIOD AND TO EARN INCOME OF APPRECIATION OF THE VALUE OF THE SHARES AND NOT EARN THE PROFIT IN THE SHORT PERIOD CHANGE IN THE PRICE OF THE SHARES. AP ART FROM THE ABOVE, THE ASSESSEE HAS BEEN REGULARLY EARNING DIVIDEND INCOME . PROFIT MOTIVE IS INHERENTLY EMBEDDED IN THE TRANSACTION OF PURCHASE AND SALE. T HE IMPORTANT ASPECT IS THE INTENTION TO EARN PROFIT FROM APPRECIATION OF VALUE OF CAPITA ASSET OR BY WAY OF TRANSFER OF TRADING ASSET. 19 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 VALUATION OF ITEMS IN BALANCE SHEET: VALUATION OF ITEMS IN BALANCE SHEET: VALUATION OF ITEMS IN BALANCE SHEET: VALUATION OF ITEMS IN BALANCE SHEET: 14 UNDISPUTEDLY, THE ASSESSEE VALUED THE SHARES UND ER INVESTMENT PORTFOLIO AT COST AND NEVER VALUED THE BALANCE AT THE BEGINNI NG AS WELL AS AT THE END OF THE YEAR OF MARKET PRICE OR REALIZATION VALUE. 15 IN THE CASE OF ASSOCIATED INDUSTRIAL DEVELOPMEN T CO P LTD REPORTED IN 82 ITR 586, THE HONBLE SUPREME COURT HAS OBSERVED AS UNDER: WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK IN TRADE IS A MATTER WHICH IS WIT HIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARE AND IT SHOULD, IN NORM AL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHI CH ARE ITS STOCK-IN- TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT . 15.1 IN THE CASE IN HAND, THE ASSESSEE HAS TREATED THE SHARES AS INVESTMENT IN THE BOOKS OF ACCOUNT AND VALUES THE SAME AT COST IN THE BALANCE SHEET AND NOT AT THE MARKET VALUE OR REALIZABLE VALUE. THEREFORE, W HEN THE ASSESSEE IS MAINTAINING THE DISTINCTION BETWEEN THE SHARES, W HICH ARE HELD AS INVESTMENT FROM THE SHARES, WHICH ARE HELD AS STOCK-IN-TRADE T HEN, KEEPING IN VIEW OF THE OTHER FACTS AND APPLYING THE PRINCIPLES AS DISCUSSE D ABOVE, WE HAVE NO HESITATION TO SAY THAT THE ASSESSEE HAS BEEN MAINTA INING TWO SEPARATE DISTINCT PORTFOLIOS RIGHT FROM THE BEGINNING AND THE REVENUE HAS FAILED TO BROUGHT OUT ANY MATERIAL TO SHOW THAT ANY CHANGE IN THE PRACTICE OF ACCOUNTING METHOD OF THE ASSESSEE AS WELL AS IN THE ACTIVITY OF THE ASSESSEE IN PURCHASE AND SHARES OF SHARERS UNDER TWO SEPARATE AND DISTINCT PORTFOLIO. IT IS AN ACCEPTED FACT AND PRACTICE THAT IN ORDER TO REDUCE THE RISK OF LOSS O F CAPITAL OR INCOME, THE INVESTOR 20 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 MAY TRY TO DIVERSIFY THE INVESTMENT; THEREFORE, THE RE MAY BE A CASE OF RESHUFFLING PORTFOLIOS BY SELLING OF SOME SCRIPS AND BUYING OF SOME OTHER SCRIPS TO MITIGATE THE SCOPE OF LOSS OF CAPITAL OR INCOME. THEREFORE, THE RESHUFFLING IN A SHORT PERIOD IS NOT NECESSARY BE TAKEN AS AN ACTIVITY OF TRADING WHEN THE INTENTION WAS TO REDUCE THE RISK OF LOSS OF CAPITAL. 15.2 THERE ARE VARIOUS DECISIONS OF THE TRIBUNAL ON THIS POINT AND EACH HAS BEEN DECIDED ON THE FACTS OF EACH CASE. SOME OF THE DECISIONS ARE IN FAVOUR OF THE ASSESSEE WHERE SOME OTHER CASES ARE IN FAVOUR O F THE REVENUE. IN THE LATEST DECISION OF THE TRIBUNAL IN THE CASE OF SHRI MAHEND RA C SHAH VS ACIT IN ITA NO.6289/MUM/208 DATED 18 MAY 2011 HAS HELD IN PARAS 14 TO 21 AS UNDER: 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 BUSINES S INCOME AS CLAIMED BY THE ASSESSING OFFICER IS A QUESTION OF FACT TO BE DECID ED ACCORDING TO THE CUMULATIVE EFFECT OF SEVERAL FACTS AND CIRCUMSTANCES OF THE CA SE. THE INTENTION OF THE ASSESSEE, THE NATURE OF THE COMMODITY SOLD, WHETHER THE ASSESSEE HAS USED HIS OWN FUNDS OR BORROWED FUNDS, THE TREATMENT GIVEN TO THE ASSET IN THE BOOKS OF ACCOUNT, THE CONSISTENT STAND TAKEN BY THE REVENUE AUTHORITIES IN RESPECT OF THE SALE PROCEEDS OF THE ASSET IN THE EARLIER YEARS, TH E FREQUENCY AND VOLUME OF THE TRANSACTIONS, THE PERIOD OF HOLDING THE SHARES, WHE THER THE ASSESSEE TOOK OR GAVE DELIVERY OF THE SHARES, ARE ALL QUESTIONS WHICH HAV E TO BE CONSIDERED BEFORE A DECISION IS TAKEN AS TO WHETHER THE ASSESSEE HELD T HE SHARES AS CAPITAL 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-TRADE AND ANOTHER PORTFOLIO AS INVESTMENT. THIS POSITION HAS BEEN RECOGNIZED BY THE CBDT IN ITS CIRCULAR NO: 665 DATE D 05.10.1992. 15 IN THE PRESENT CASE THE COMMODITY IN QUESTION IS SHARES WHICH ARE GENERALLY TRADED. BUT THAT IS NOT CONCLUSIVE BECAUSE IT IS C OMMON KNOWLEDGE THAT SHARES ARE ALSO HELD AS INVESTMENT PARTICULARLY SHARES OF BLUE CHIP COMPANIES WHICH MAY YIELD CONSISTENT DIVIDEND AND MAY ALSO APPRECIATE I N VALUE OVER A PERIOD OF YEARS, THE APPRECIATION BEING SIMILAR TO THE APPRECIATION IN THE VALUE OF OTHER INVESTMENTS SUCH AS FIXED DEPOSITS WITH BANKS, REAL ESTATE, GOLD AND OTHER PRECIOUS METALS, ETC. IT IS A FACT THAT IN THE PRE SENT CASE THE ASSESSEE HAS SHOWN THE SHARES AS INVESTMENT IN HIS BALANCE SHEETS. TH E RELEVANT DETAILS ARE GIVEN IN PARA 2.2(C) OF THE ORDER OF THE CIT(A) FOR THE ASSE SSMENT YEAR 2006-07. THE SAME IS SET OUT BELOW: - 21 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 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 ASSESSEE RE MAINED MORE OR LESS CONSTANT AND IN FACT AS ON 31.03.2006 IT ACTUALLY F ELL TO 131 FROM THE EARLIER HIGH OF 159. IT APPEARS TO US THAT BASICALLY THE N UMBER OF SHARES OF A PARTICULAR COMPANY PURCHASED BY THE ASSESSEE HAD IN CREASED WHICH SUBSTANTIALLY CONTRIBUTED TO THE INCREASE IN THE VA LUE OF THE INVESTMENT. THE ABOVE ANALYSIS PRIMA FACIE SHOWS THAT THE ASSESSEE IS BASICALLY AN INVESTOR MORE THAN A SHARE DEALER. THE STAND OF THE ASSESSE E HAS BEEN ACCEPTED BY THE REVENUE AUTHORITIES IN THE ASSESSMENT YEARS 200 1-02 AND 2004-05 IN ASSESSMENT ORDERS PASSED UNDER SECTION 143(3) OF TH E ACT. THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2001-02 IS AT PAGE 34 35 OF THE PAPER BOOK. IT IS SEEN THEREFROM THAT THE ASSESSING OFFICER HA S ACCEPTED THE SHORT TERM CAPITAL LOSS AND THE LONG TERM CAPITAL GAINS SHOWN BY THE ASSESSEE ON SALE OF SHARES. THE ASSESSMENT ORDER FOR THE ASSESSMENT YEA R 2004-05 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 ASSESSING O FFICER. THERE IS ALSO NO DISPUTE THAT THE ASSESSEE HAS BEEN DECLARING THE CO ST OF THE SHARES AS INVESTMENT IN HIS 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 LT D., BALAJI TELEFILM LTD., CENTURY TEXTILES INDIA LTD., CIPLA LTD., GAIL INDIA LTD., PENNAR ALUMINIUM CO.LTD., RELIANCE CAPITAL LTD., TATA STEEL LTD. AND VISUAL SOFTWARE LTD. THE HOLDING PERIOD IN RESPECT OF THESE SHARES RANGES FR OM 533 DAYS TO 3981 DAYS. THE DETAILS OF SALE OF SHARES IN RESPECT OF THE SEC OND PERIOD SHOW SHARES OF AVERY INDIA LTD., BALLARPUR INDUSTRIES LTD., COLGAT E PALMOLIVE (INDIA) LTD., HDFC BANK LTD., ICICI BANK LTD., LARSEN & TOUBRO LT D., CEAT LTD., TATA STEEL, VOLTAS LTD. THE HOLDING PERIOD RANGES FROM 3 87 DAYS TO 9016 DAYS. IT IS SEEN THUS THAT THE ASSESSEE HAS HELD THE SHARES FOR QUITE A LONG PERIOD. FOR EXAMPLE, THE SHARES OF GREAVES COTTON LTD. WERE HEL D FOR ALMOST 27 YEARS (9016 DAYS). THE SHARES OF AVERY INDIA LTD. WERE HE LD FOR 7493 DAYS. THE SHARES OF PCS INDUSTRIES LTD. WERE HELD FOR 5674 DA YS. MANY OF THE SHARES WERE HELD FOR 3000 TO 4000 DAYS (9 YEARS TO 12 YEA RS). SIMILAR DETAILS HAVE BEEN FILED FOR THE ASSESSMENT YEAR 2006-07 ALSO. FO R THIS YEAR IN RESPECT OF SUBSTANTIAL NUMBER OF SALE OF SHARES THE HOLDING PE RIOD WAS MORE THAN ONE 22 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 MONTH AND IN RESPECT OF SHARES WHICH WERE HELD FOR LESS THAN A PERIOD OF TWELVE MONTHS, THE SURPLUS WAS SHOWN AS SHORT TERM CAPITAL GAINS. IN RESPECT OF THE SURPLUS SHOWN AS LONG TERM CAPITAL GAINS, TH E PERIOD OF HOLDING IN ALL THE SHARE TRANSACTIONS WAS SEVERAL YEARS. IT IS SIGNIFI CANT THAT THE REVENUE HAS NOT FILED ANY APPEAL AGAINST THE FINDING OF THE CIT(A) THAT THE LONG TERM CAPITAL GAINS DECLARED BY THE ASSESSEE FOR THE ASSESSMENT Y EAR 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 UNDER SEC TION 143(3) OF THE ACT BY ORDER DATED 13.11.2009, THE ASSESSING OFFICER HA S ACCEPTED THE SHORT TERM CAPITAL LOSS OF RS.69,43,821/- ON SALE OF THE SHARE S 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 IN SHARES AND THER EFORE 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 A S BUSINESS INCOME. 19. BUT THEN THE CONTENTION OF THE DEPARTMENT IS TH AT THE ASSESSEE IS ALSO CARRYING ON F & O TRANSACTIONS AS SPECULATION BUSI NESS IN SHARES AND THAT THE INVESTMENT IN F & O TRANSACTION AS PER THE BALANCE SHEET AS ON 31.03.2005 IS RS.1,03,01,657/- 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 ACCEPT THE CONTENT ION BECAUSE THE CIRCULAR ISSUED BY THE CBDT REFERRED TO SUPRA HAS ITSELF RE COGNIZED THAT A PERSON CAN HAVE TWO PORTFOLIOS, ONE FOR INVESTMENT AND THE OTH ER AS STOCK-IN-TRADE. THE HONBLE BOMBAY HIGH COURT HAS ALSO ACCEPTED THIS PO SITION IN ITS JUDGEMENT IN THE CASE OF CIT VS. GOPAL PUROHIT (34 DTR 52) DE LIVERED ON 6 TH JANUARY, 2010. IT IS THEN POINTED OUT THAT THE ASSESSEE HAS BORROWED FROM INDIA BULLS FOR THE PURPOSE OF BUYING SHARES AND THIS IS A STRO NG INDICATION THAT THE ASSESSEE INTENDED TO DO BUSINESS IN SHARES AND NOT MERELY INVEST IN THEM. THE LEARNED COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO AN ORDER OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF S.BAL AN @ SHANMUGAM BALKRISHNAN CHETTIAR VS. DCIT., (2009) 120 ITD 469, TO SUBMIT THAT THERE IS NO THUMB RULE THAT A PERSON CANNOT BORROW MONEY FOR THE PURPOSE OF MAKING INVESTMENT. WE HAVE EXAMINED THE POSITION WITH REFE RENCE TO THE ORDER OF THE PUNE BENCH TO WHICH ONE OF US (THE ACCOUNTANT MEMBE R) WAS PARTY. IN THIS CASE THE ASSESSEE HAD BORROWED MONIES FOR ACQUIRING SHARES. THE SURPLUS ON THE SALE OF SHARES WAS DECLARED UNDER THE HEAD C APITAL GAINS AND FOR THE PURPOSE OF COMPUTING THE GAINS, THE INTEREST COST W AS ALSO CAPITALIZED AND REDUCED FROM THE SALE PRICE. THE INTEREST HAS NEVE R BEEN CLAIMED AS REVENUE DEDUCTION. ON THESE FACTS IT WAS HELD THAT THERE WA S NO RULE THAT INTEREST COST CANNOT BE CAPITALIZED AND ESPECIALLY ON THE FACTS O F THE CASE OF THE ASSESSEE BEFORE THE PUNE BENCH IT WAS HELD THAT THE RIGHT CO URSE WOULD BE TO CAPITALIZE THE INTEREST COST AND DEDUCT THE WHOLE COST FROM T HE SALE PRICE WHILE COMPUTING THE CAPITAL GAINS. IT WAS OBSERVED THAT T HE INTEREST COST CANNOT BE 23 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 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 PA ID BY THE ASSESSEE ON MONIES BORROWED FOR THE PURCHASE OF AN OPEN PLOT OF LAND WOULD FORM PART OF THE ACTUAL COST OF THE ASSESSEE FOR THE PURPOSE OF DETERMINING THE CAPITAL GAINS DERIVED FROM THE SALE OF THE PLOT. THIS DECI SION CERTAINLY LENDS SUPPORT 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 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 THA T DATE WHICH STOOD AT RS.3,24,59,391/- AND THEREFORE IT CAN BE PRESUMED T HE 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 O RDER FOR THE 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 ASSESSMENT YEAR 2006-07 . IN THAT YEAR THE ASSESSEE HAD PAID INTEREST OF RS.15.73 LAKHS AND T HAT WAS PUT AS ONE OF THE POINTS AGAINST THE ASSESSEES CONTENTION THAT HE WA S AN INVESTOR IN THE SHARES. THE CIT(A) HELD THAT THE ASSESSEE S OWN CA PITAL WAS RS.5.15 CRORES IN THAT YEAR OUT OF WHICH THE INVESTMENT OF RS.3.32 CRORES IN SHARES COULD HAVE COME AND THUS IT CANNOT BE SAID THAT THE ASSES SEE WAS DEPENDING 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 BORROWINGS SHOULD BE HELD AGAINST HIM, PARTICULARLY WHEN THERE ARE OTHER PREDOMINATING FEA TURES IN THE CASE WHICH GIVE CLEAR IMPRESSION THAT THE ASSESSEE INTENDED ON LY 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 T HE CORRECT VIEW OF THE MATTER AND APPLIED THE APPROPRIATE PRINCIPLES CORRE CTLY IN HOLDING THAT THE ASSESSEE WAS AN INVESTOR IN SHARES. 21. FOR THE ABOVE REASONS, WE ALLOW THE FIRST GROUN D TAKEN BY THE ASSESSEE IN HIS APPEAL. THE GROUNDS TAKEN BY THE DEPARTMENT IN ITS APPEAL FOR THE ASSESSMENT YEAR 2006-07 ARE REJECTED. 15.3 IN THE ABOVE SAID CASE, THE TRIBUNAL OBSERVED THAT THE INVESTMENT VALUE INCREASED SUBSTANTIALLY FROM YEAR TO YEAR. THE NUMB ER OF COMPANIES WHOSE SHARES WERE HELD BY THE ASSESSEE REMAINED MORE OR L ESS CONSTANT, WHICH PRIMA FACIE SHOW THAT THE ASSESSEE IS BASICALLY AN INVEST OR MORE THAN A SHARE DEALER. IN THE CASE IN HAND ALSO, THE INVESTMENT VALUE HAS INC REASED SUBSTANTIALLY FROM YEAR TO YEAR BUT THE NUMBER OF COMPANIES REMAIN A LMOST THE SAME. AS WE 24 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 HAVE ALREADY DISCUSSED IN THE FOREGOING PARA THAT IN THE TOP TEN SCRIPS, THE INVESTMENT OF THE ASSESSEE HAS BEEN INCREASING FROM YEAR TO YEAR AND GOES UPTO 87% TO THE TOTAL INVESTMENT FROM 45% IN THE A SSESSMENT YEAR 2000-01. THE VALUE OF THE INVESTMENT ALSO INCREASED FROM RS. 81,59,140/- IN THE YEAR 2000-01 TO RS. 1,66,32,000/- IN THE ASSESSMENT YEAR 2006-07. THEREFORE, HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND APPLYING THE VARIOUS PRINCIPLES AND GUIDELINES LAID DOWN BY THE HONBLE SUPREME COURT, THE SURPLUS OF SALE AND PURCHASE OF THE SHARES HELD BY THE ASSESSEE AS INVESTMENT IN THE BOOKS OF ACCOUNT CANNOT BE TREATED AS BUSINESS INCOME. EVEN OTHERWISE, WHEN IN THE IMMEDIATE PRECEDING YEAR RIGHT FROM A SSESSMENT YEAR 1999-00 TO ASSESSMENT YEAR 2002-03 AND SUBSEQUENT YEAR 2007-0 8, THE CLAIM OF THE ASSESSEE REGARDING CAPITAL GAIN AND INVESTMENT SHO WN UNDER THE HEAD INVESTMENT IN THE BALANCE SHEET HAS BEEN ACCEPT ED BY THE REVENUE AND WHEN THERE IS NO SUBSTANTIAL CHANGE IN THE ASSESSMENT YE AR UNDER CONSIDERATION WITH RESPECT TO THE TREATMENT OF THE SHARES BY THE ASSES SEE AND THE PATTERN OF THE PURCHASE AND SALE AS WELL AS AVAILABILITY OF ASSESS ES OWN FUNDS THEN THERE SHOULD BE UNITY IN THE TREATMENT AND CONSISTENCY IN THE SAME FACT AND CIRCUMSTANCES AND THE ASSESSING OFFICER CANNOT TREA T THE SAME INCOME UNDER DIFFERENT CHARACTER AND HAD ONLY BECAUSE OF CHANGE IN THE PROVISION OF INCOME TAX ACT AND ALLOWED DIFFERENTIAL TAX ON THE CAPITAL GAIN IN COMPARISON TO BUSINESS INCOME. THE DEPARTMENT CANNOT BE ALLOWED TO CHANGE TREATMENT TO BE GIVEN TO THE SURPLUS OR LOSS OF SALES OF THE SHARES FROM SHO RT TERM CAPITAL GAIN TO PROFIT OR GAIN OF BUSINESS OR PROFESSION WHEN THERE IS CONSIS TENCY IN FACT AND CIRCUMSTANCES RELATING TO THE TRANSACTION. THE PRIN CIPLE OF RES JUDICATA IS NOT ATTRACTED SINCE EACH ASSESSMENT YEAR IS SEPARATE UN IT IN ITSELF; HOWEVER, WHEN THE FACTS AND CIRCUMSTANCES ARE IDENTICAL THEN UNIF ORMITY IN TREATMENT AND CONSISTENCY HAS TO BE MAINTAINED. 25 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 15.4 SIMILAR VIEW WAS TAKEN BY THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT REPORTED IN 29 SOT 117 WHICH IS IN CONFORMITY WITH THE DECISION OF THE HONBLE BOMBAY HIGH COURT REPORTED IN 228 /CTR 582 WHEREIN THE HONBLE HIGH COURT HAS OBSERVED IN PARAS 2 & 3 AS UNDER: 2. THE TRIBUNAL HAS ENTERED A PURE FINDING OF FACT THAT THE ASSESSEE WAS ENGAGED IN TWO DIFFERENT TYPES OF TRANSACTIONS. THE FIRST SET OF TRANSACTIONS INVOLVED INVESTMENT IN SHARES. THE SECOND SET OF TR ANSACTIONS INVOLVED DEALING IN SHARES FOR THE PURPOSES OF BUSINESS (DES CRIBED IN PARA 8.3 OF THE JUDGMENT OF THE TRIBUNAL AS TRANSACTIONS PURELY OF JOBBING WITHOUT DELIVERY). THE TRIBUNAL HAS CORRECTLY APPLIED THE P RINCIPLE OF LAW IN ACCEPTING THE POSITION THAT IT IS OPEN TO AN ASSESS EE TO MAINTAIN TWO SEPARATE PORTFOLIOS, ONE RELATING TO INVESTMENT IN SHARES AND ANOTHER RELATING TO BUSINESS ACTIVITIES INVOLVING DEALING I N SHARES. THE TRIBUNAL HELD THAT THE DELIVERY BASED TRANSACTIONS IN THE PR ESENT CASE, SHOULD BE TREATED AS THOSE IN THE NATURE OF INVESTMENT TRANSA CTIONS AND THE PROFIT RECEIVED THEREFROM SHOULD BE TREATED EITHER AS SHOR T-TERM OR, AS THE CASE MAY BE, LONG-TERM CAPITAL GAIN, DEPENDING UPON THE PERIOD OF THE HOLDING. A FINDING OF FACT HAS BEEN ARRIVED AT BY THE TRIBUN AL AS REGARDS THE EXISTENCE OF TWO DISTINCT TYPES OF TRANSACTIONS NAM ELY, THOSE BY WAY OF INVESTMENT ON ONE HAND AND THOSE FOR THE PURPOSES O F BUSINESS ON THE OTHER HAND. QUESTION (A) ABOVE, DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. 3. INSOFAR AS QUESTION (B) IS CONCERNED, THE TRIBUN AL HAS OBSERVED IN PARA 8.1 OF ITS JUDGMENT THAT THE ASSESSEE HAS FOLLOWED A CONSISTENT PRACTICE IN REGARD TO THE NATURE OF THE ACTIVITIES, THE MANNER OF KEEPING RECORDS AND THE PRESENTATION OF SHARES AS INVESTMENT AT THE END OF THE YEAR, IN ALL THE YEARS. THE REVENUE SUBMITTED THAT A DIFFERENT VIEW SHOULD BE TAKEN FOR THE YEAR UNDER CONSIDERATION, SINCE THE PRINCIPLE O F RES JUDICATA IS NOT APPLICABLE TO ASSESSMENT PROCEEDINGS. THE TRIBUNAL CORRECTLY ACCEPTED THE POSITION THAT THE PRINCIPLE OF RES JUDICATA IS NOT ATTRACTED SINCE EACH ASSESSMENT YEAR IS SEPARATE IN ITSELF. THE TRIBUNAL HELD THAT THERE OUGHT TO BE UNIFORMITY IN TREATMENT AND CONSISTENCY WHEN THE FACTS AND CIRCUMSTANCES ARE IDENTICAL, PARTICULARLY IN THE CA SE OF THE ASSESSEE. THIS APPROACH OF THE TRIBUNAL CANNOT BE FAULTED. THE REV ENUE DID NOT FURNISH ANY JUSTIFICATION FOR ADOPTING A DIVERGENT APPROACH FOR THE ASSESSMENT YEAR IN QUESTION. QUESTION (B), THEREFORE, DOES NOT ALSO RAISE ANY SUBSTANTIAL QUESTION. 26 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 16 IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CA SE AND DECISIONS OF THE TRIBUNAL AS WELL AS THE JURISDICTIONAL HIGH COURT, WE HOLD THAT THE INCOME ARISING FROM PURCHASE AND SALE OF SHARE HELD BY THE ASSESSE E AS INVESTMENT CANNOT BE TREATED AS BUSINESS INCOME. 17 NEXT GROUND IN THE ASSESSEES APPEAL FOR THE ASS ESSMENT YEAR 2006-07 AS PER THE REVISED ROUNDS OF APPAL IS AS UNDER: THE LD CIT(A) HAS ERRED IN FACTS AND IN LAW IN HO LDING THE LOSS FROM DERIVATIVE TRANSACTION AS SPECULATIVE LOSS INSTEAD OF BUSINESS LOSS. 18 WE HAVE HEARD THE LD AR AND THE LD DR AND CONSID ERED THE RELEVANT RECORDS. THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THE INCOME FROM DERIVATIVE HAS BEEN TREATED BY THE CIT(A) AS INCOME FROM BUSINESS W.E.F 25.1.2006 WHEN THE NOTIFICATION WAS ISSUED FOR ALLO WING TRANSACTIONS IN THE RECOGNISED STOCK EXCHANGE. WHEREAS, ONCE THE APPRO VAL IS GRANTED IN THE RELEVANT PREVIOUS YEAR, THE SAME HAS TO BE TAKEN AS EFFECTIVE FROM THE BEGINNING OF THE RELEVANT YEAR. THUS, THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THE TRANSACTION IN THE DERIVATIVE CANNOT BE TR EATED AS SPECULATIVE IN NATURE FOR THE ASSESSMENT YEAR 2006-07. THE LD AR HAS P OINTED OUT THAT THIS ISSUE IS COVERED BY THE ORDER OF THE TRIBUNAL IN THE CASE OF PREM ASSOCIATES ADVERTISING & MARKETING IN ITA NO.6547/MUM/2009 DATED 17.9.20 10 AS WELL AS IN THE CASE OF NIPRA FINANCIAL SERVICES P LTD IN ITA NO.4605/M /2009 DATED 30.9.2010. 27 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 18.1 THE LD DR ON THE OTHER HAND, SUPPORTED THE ORD ERS OF THE AUTHORITIES BELOW. 19 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND REL EVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSING OFFICER HELD THAT THE DER IVATIVE TRANSACTION PRIOR TO 25.1.2006 ARE SPECULATIVE IN NATURE AND FROM 25.1.2 006 TO 31.3.2006 ARE AS BUSINESS INCOME. THE ASSESSING OFFICERS VIEW IS BA SED ON THE NOTIFICATION ISSUED BY THE CBDT ON RECOGNIZING STOCK EXCHANGE W.E.F 25. 1.2006 FOR CARRYOUT THE DERIVATIVE TRADING AS PER THE PROVISIONS OF SEC. 43 (5)(D). THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER BY TREATING THE DE RIVATIVE TRANSACTION AS SPECULATIVE IN NATURE UP TO 25.1.2006 AND THEREAFTE R, AS BUSINESS INCOME. 20 AS POINTED OUT BY THE LD AR, WE FIND THIS ISSUE HAS BEEN CONSIDERED AND DECIDED BY THE TRIBUNAL IN THE CASE OF PREM ASSOCIA TES ADVERTISING & MARKETING (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER: 7. WE FIND THAT I T IS UNDISPUTED POSITION THAT THE STOCK EXCHANGES, ON WHICH THE IMPUGNED TRANSACTIONS WERE CARRIED OUT , WERE D ULY NOTIFIED ON 25 TH JANUARY 2006, AND THAT IN ACCORDANCE WITH THE VIEWS OF THE CO-ORDINATE BENCH IN THE CASE OF ANAND BUILDWEL L (SUPRA), AS ALSO WI TH THE VIEWS OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CLARIS LIFE SCIEN CES (SUPRA), ONCE THE APPROVAL IS GRANTED IN THE RELEVANT PREVIOUS YEAR, AND IN THE ABSENCE OF ANYTHING INDICATED TO THE CONTRARY, THE APPROVAL HA S TO BE TAKEN AS EFFECTIVE FROM THE BEGINNING OF THE RELEVANT YEAR. THE ISSUE IS THUS COVERED, IN FAVOUR OF THE LINE OF REASONING ADOPTED BY THE ASSESSEE, BY D ECISION OF THE COORDINATE BENCH IN THE CASE OF ANAND BROTHERS (SUPRA) AND BY HONBLE GUJARAT HIGH COURT S JUDGMENT IN THE CASE OF CLARIS LIFE SCIENC ES (SUPRA). RESPECTFULLY FOLLOWING THESE DECISIONS, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND HOLD THAT THE DERIVATE TRANSACTIONS, ENTERED INTO BY THE ASSESSEE AT THE RECOGNIZED STOCK EXCHANGES EVEN PRIOR TO THE DATE OF NOTIFICAT ION IN THE RELEVANT PREVIOUS YEAR, ARE TO BE TREATED AS COVERED BY THE EXCLUSION CLAUSE SET OUT IN SECTION 43(5)(D). THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 28 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 20.1 FURTHER, THE TRIBUNAL IN THE CASE OF NIPRA FIN ANCIAL SERVICES P LTD (SUPRA AGAIN HAD AN OCCASION TO CONSIDER AND ADJUDICATE TH E SAME ISSUE IN PARAS 8 & 9, WHICH ARE AS UNDER: 8. IN THE CASE OF G.K. ANAND BROS. BUILDWELL (P.) LTD G.K. ANAND BROS. BUILDWELL (P.) LTD G.K. ANAND BROS. BUILDWELL (P.) LTD G.K. ANAND BROS. BUILDWELL (P.) LTD VS. I.T.O. [200 9] 34 [2009] 34 [2009] 34 [2009] 34 SOT 439 (DELHI) SOT 439 (DELHI) SOT 439 (DELHI) SOT 439 (DELHI) IT HAS BEEN HELD AS FOLLOWS FOR THE ASSESSMENT YEAR 2006- 07 WITH RESPECT TO SPECULATIVE TRANSACTIONS THE QUE STION WHETHER THE LOSS ARISING IN FUTURE AND OPTION TRANSACTION CARRIED OU T IN A RECOGNIZED STOCK EXCHANGE IS TO BE TREATED AS A BUSINESS LOSS AND NO T AS LOSS IN SPECULATION BUSINESS HAS BEEN AFFIRMATIVE. FURTHER IT HAS BEEN HELD AS FOLLOWS: SECTION 43(5) DEFINES SPECULATIVE TRANSACTION WH ICH MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PUR CHASE OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES I S PERIODICAL OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR THE TRANSFER OF COMMODITY OR SCRIPS. P ROVISO BELOW SECTION 43(5) CARVES OUT EXCEPTIONS TO SECTIO N 43(5). AS PER CLAUSE (D) OF THE SAID PROVISO AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. CLAUSE (D) IN THE PROVI SO WAS INSERTED BY THE FINANCE ACT, 2005 WITH EFFECT FROM 1-4-2006. THEREFORE, IF A TRANSACTION FALLS WITHIN CLAUSE (D) OF THE PROVISO, A TRANSACTION IT WILL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION IN RESPECT OF TRANSACTION P ERTAINING TO ASSESSMENT YEAR 2006-07. UNDER CLAUSE (D) OF TH E PROVISO, A TRANSACTION IS NOT A SPECULATIVE TRANSAC TION PROVIDED IT IS AN ELIGIBLE TRANSACTION WITHIN THE M EANING OF CLAUSE (1) OF THE EXPLANATION AND IT IS CARRIED ON AT THE RECOGNIZED STOCK EXCHANGE AS EXPLAINED IN CLAUSE (I I) OF THE SAID EXPLANATION BELOW PROVISO TO SECTION 43(5)(D). THE RECOGNIZED STOCK EXCHANGE MEANS A RECOGNIZED STOCK EXCHANGE AS NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE. THEREFORE, EVEN IF THE NOTIFICATION IS F ROM 25.01.2006 AS PER CLAUSE (D) INSERTED, THE SAME WIL L APPLY TO ALL THE TRANSACTION IN RELATION TO THE ASSESSMENT Y EAR 2006- 07 AND ONWARDS. CLAUSE (D) DOES NOT MENTION THAT UNLESS THE RECOGNIZED STOCK EXCHANGE IS NOTIFIED, THE TRAN SACTION WILL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. THE POWER TO NOTIFY THE STOCK EXCHANGE IS GRANTED UNDER THE STATUE AND, HENCE, ONCE THE RECOGNIZED STOCK EXCHAN GE IS NOTIFIED, THE SAME WILL APPLY IN RESPECT OF ALL ELI GIBLE TRANSACTIONS CARRIED OUT IN RELATION TO THE FINANCI AL YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07 AND ONWARDS . 29 ITA NO.6497,6603,148,182,3231,CO 239. 6495 & 150/10 THE NOTIFICATION DATED 25.01.06 IS BY WAY OF A SUBO RDINATED LEGISLATION BUT CANNOT OVER RIDE THE PRINCIPAL LEGI SLATION ENACTED BY THE PARLIAMENT. IT ONLY CLARIFIES BUT W ILL NOT OVERRIDE UNLESS STATUTORILY SO PRESCRIBED. SINCE T HERE WAS NO DISPUTE TO THE FACT THAT THE TRANSACTIONS, IN TH E INSTANT CASE, IN FUTURE AND OPTION SEGMENT WERE THE ELIGIBL E TRANSACTIONS CARRIED OUT IN A RECOGNIZED STOCK EXCH ANGE, LOSS IN SUCH TRANSACTIONS COULD NOT BE DEEMED TO BE LOSS IN THE SPECULATION BUSINESS. THEREFORE, THE LOSS-IN-Q UESTION WAS TO BE TREATED AS A BUSINESS LOSS AND NOT AS LOS S IN SPECULATIVE BUSINESS. (PARA 5) 9. FOLLOWING THE RATIO OF THE DECISION REPORTED IN 34 SOT 439 (DELHI) (SUPRA) WE CONFIRM THE ORDER OF THE CIT(A) IN DELET ING THE ADDITION OF RS.22,74,113/- ON ACCOUNT OF SPECULATION LOSS AND E STIMATED EXPENSES INCURRED FOR THE SAME OF RS.15,99,813/-. THEREFORE, RESPECTFULLY FOLLOWING THE EARLIER ORDER S OF THE TRIBUNAL, WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 21 IN THE RESULT, THE APPEALS/CROSS OBJECTION FILED BY THE ASSESSEE ARE ALLOWED WHEREAS THE APPEALS FILED BY THE REVENUE ARE DISMIS SED. ORDER PRONOUNCED ON THE 15 TH , DAY OF JUNE 2011. SD/- SD/- ( (( ( J SUDHAKAR J SUDHAKAR J SUDHAKAR J SUDHAKAR REDDY REDDY REDDY REDDY ) )) ) ACCOUNTANT MEMBER ( (( ( VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO ) )) ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: JUNE 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI