SHRI. KALPESH C. SHAH, MUMBAI V. JT.C.I.T.-25(3), MUMBAI

ITA 6539/MUM/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8553 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 21-01-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 11-11-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHRAVAN KUMAR
• Assessee Lawyers: B V JHAVERI
• Keywords: Capital asset; Business income; Share purchase agreement
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH A,MUMBAI BEFORE SHRI R.S. SYAL (AM) & SMT. ASHA VIJAYARAGHA VAN (JM) I.T.A. NO. 6539/MUM/2008. (A.Y. 2005-06) SHRI KALPESH C. SHAH, 14, TURAKHIA PARK, M.G. ROAD, KANDIVLI (W), MUMBAI-400 067. PAN: AAJPS8488R. VS. JT. COMMR. OF INCOME-TAX-25(3), BANDRA-KURLA COMPLEX, BANDRA (E), MUMBAI. APPELLANT RESPONDENT APPELLANT BY SHRI B.V. JHAVERI. RESPONDENT BY SHRI S HRAVAN KUMAR. O R D E R PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER PASSED BY THE CIT(A) ON 29-08-2008 IN RELATION TO THE ASSTT. YEAR 2005-06. 2. THE ASSESSEE HAS FILED REVISED GROUNDS. THE ONL Y ISSUE RAISED AND ARGUED BEFORE US IS ABOUT THE TREATMENT GIVEN TO PROFITS F ROM TRANSFER OF SHARES, CLAIMED BY THE ASSESSEE AS LONG-TERM/SHORT-TERM CAPITAL GAI NS, AS AGAINST THE DIRECTION OF THE LD. CIT(A) TO TREAT THEM AS BUSINESS INCOME. 3. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE A SSESSEE, AN INDIVIDUAL, CARRIED ON THE BUSINESS AS SUB-BROKER, APART FROM TRADING I N SHARES, SECURITIES AND DERIVATIVES. IN THE RETURN, BUSINESS INCOME WAS SHO WN AT RS.22.42 LAKHS FROM HIS PROPRIETORSHIP CONCERN CALLED ATASH INVESTMENT; INC OME FROM SPECULATIVE BUSINESS AND TRADING IN DERIVATES AT RS.70.54 LAKHS ; INCOME FROM SHORT-TERM CAPITAL GAINS AT RS.13.45 LAKHS AND LONG-TERM CAPIT AL GAINS AT RS. NIL AFTER CLAIMING EXEMPTION U/S.54D AT RS.20.67 LAKHS. DURIN G THE COURSE OF ASSESSMENT ITA 6539/M/08. 2 PROCEEDINGS, IT WAS NOTED BY THE AO THAT THE ASSESS EE WAS MAINTAINING FULL- FLEDGED OFFICE AND INFRASTRUCTURE FOR THE PURPOSE O F CARRYING OUT THE BUSINESS OF SHARE TRADING IN HIS ABOVE-NAMED PROPRIETORSHIP CON CERN. THE AO NOTED THAT THE ASSESSEE HAD SHOWN LONG-TERM CAPITAL GAINS TAXABLE AT 10% AT RS.20,88,106/- AND LONG-TEM CAPITAL GAINS EXEMPT AT RS.24,07,983/- . OUT OF TOTAL TAXABLE LONG- TERM CAPITAL GAINS OF RS.20.88 LAKHS, GAINS TO THE TUNE OF RS.20,67,010/-AROSE OUT OF SALE OF 4,20,000 SHARES OF SHAKUN CONSTRUCTI ON. ON INVESTIGATION OF THE FACTS, IT WAS NOTICED THAT THIS SCRIP WAS STATED TO HAVE BEEN PURCHASED ON 02-04- 2003. SUBSEQUENTLY, THE FACE VALUE OF THESE SHARES WAS REDUCED BY THE COMPANY FROM RS10 PER SHARE TO RE.1/- PER SHARE, THEREBY CO NVERTING THE SHAREHOLDING OF THE ASSESSEE INTO 4,23,000 SHARES. THE AO OBSERVED THAT THE ASSESSEE DID NOT FILE ANY PROOF OF DELIVERY OF THE SHARES IN PHYSICA L FORM. HE NOTICED THAT 4,23,000 SHARES WERE CREDITED TO THE ASSESSEES DEMAT ACCO UNT ON 14-07-2004. IT WAS, THEREFORE, OPINED THAT THE ASSESSEE ACTUALLY PURCHA SED THESE SHARES ON 14-07- 2004. CONSIDERING THE DATE OF SALE OF SUCH SHARES W ITH REFERENCE TO THE DEEMED DATE OF PURCHASE ON 14-07-2004, THE AO HELD THAT TH E HOLDING OF THIS SCRIP WAS ONLY FOR A PERIOD OF 15 DAYS TO 45 DAYS. IT WAS, TH EREFORE, OBSERVED THAT THESE SHARES WERE NOT INTENDED TO BE KEPT AS LONG-TERM CA PITAL ASSET. THE AO CAME TO HOLD THAT THIS INCOME CLAIMED BY THE ASSESSEE AS LO NG-TERM CAPITAL GAINS WAS LIABLE TO BE CONSIDERED AS BUSINESS INCOME. OUT OF LONG-TERM CAPITAL GAINS CLAIMED AT RS.24.07 LAKHS, THE AO OBSERVED THAT A S INGLE SCRIP OF M/S ELGI EQUIPMENTS WAS CLAIMED TO HAVE FETCHED LONG-TERM CA PITAL GAINS OF RS.23.75 LAKHS. THIS SCRIP WAS PURCHASED ON 01-03-2002 AND S OLD ON 21-03-2005. AS THE ASSESSEE WAS ALSO ENGAGED IN THE BUSINESS OF PURCHA SE AND SALE OF SHARES, THE AO HELD THAT THE ENTIRE LONG-TERM CAPITAL GAIN WAS TO BE CONSIDERED AS BUSINESS INCOME. ITA 6539/M/08. 3 4. COMING TO THE ASSESSEES CLAIM OF SHORT-TE RM CAPITAL GAIN FROM THE TRANSFER OF SHARES, THE AO NOTED THAT MOST OF THE SCRIPS WERE HELD ONLY FOR A FEW DAYS AND THE ASSESSEE HAD DIVIDED HIS SHARE TRANSA CTIONS INTO TWO CATEGORIES VIZ. FIRSTLY, WHERE SHARES WERE TO BE DELIVERED T O THE ASSESSEE AND, SECONDLY, WHERE NO DELIVERY WAS REQUIRED TO BE TAKEN. IN THE OPINION OF THE AO, THE ASSESSEE HAD CLAIMED PROFIT ARISING FROM THE TRANSF ER OF SHARES, WHERE DELIVERY WAS TAKEN, AS CAPITAL GAIN AS AGAINST THE PROFIT FR OM THE OTHER SEGMENT AS BUSINESS INCOME. CONSIDERING THESE FACTS, THE LD. A O CAME TO HOLD THAT THE ASSESSEE WAS ENGAGED IN ONLY ONE ACTIVITY OF EARNIN G PROFIT THROUGH SALE AND PURCHASE OF SHARES, BE IT DERIVATIVES, INTRA-DAY TR ADING OR PURCHASE AND SALE WITHIN SHORT PERIOD OR LONG PERIOD. ACCORDINGLY, TH E ASSESSEES CLAIM OF HAVING EARNED SHORT TERM AND LONG TERM CAPITAL GAINS WAS NEGATIVED AND THE ENTIRE AMOUNT WAS HELD TO BE TAXABLE UNDER THE HEAD PROFI TS AND GAINS OF BUSINESS OR PROFESSION. NO RELIEF WAS ALLOWED IN THE FIRST APP EAL. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. STATEMENT OF LONG-TERM CAPITAL GAIN HAS BE EN PLACED ON RECORD. IT CONTAINS A TOTAL NUMBER OF 8 SCRIPS. THE AO HAS DE ALT WITH THE SHARES OF M/S. SHAKUN CONSTRUCTION AND M/S.ELGI EQUIPMENTS LTD ON LY AND ON THAT BASIS HE HELD THE ENTIRE LONG TERM CAPITAL GAIN AS BUSINESS INCOM E. LET US SEE THE FACTS OF THESE TWO SHARE. THE SHARES OF M/S. SHAKUN CONSTRU CTION WERE CLAIMED TO HAVE BEEN PURCHASED BY THE ASSESSEE ON 02-04-2003 FOR R S.1,39,098/- AND WERE SOLD ON 30-08-2004 FOR A SUM OR RS.22,06,108. THE AO HAS HELD THAT SINCE THESE SHARES WERE DE-MATERIALIZED ON 14-07-2004, HENCE T HIS DATE WAS TO BE CONSIDERED AS THE DATE OF PURCHASE. AS AGAINST THAT , THE ASSESSEE KEPT ON ARGUING THAT THESE SHARES WERE PURCHASED ON 02-04-2 003. PAGE 24 OF THE PAPER BOOK IS CERTIFICATE DATED 28-04-2003 ISSUED BY THE COMPANY M/S. SHAKUN ITA 6539/M/08. 4 CONSTRUCTION LTD., CERTIFYING THAT 42,300 SHARES W ERE TRANSFERRED IN THE NAME OF THE ASSESSEE. PAGES 25 & 26 ARE COPIES OF SHARE CER TIFICATES. ON THE BACK SIDE OF THESE SHARE CERTIFICATES, THERE IS A MEMORANDUM OF TRANSFER OF SHARES, WHICH DULY CONTAINS THE NAME OF THE ASSESSEE AS `TRANSFEREE AND THE DATE OF SUCH TRANSFER HAS BEEN NOTED AS 28-04-2003. THE BALANCE-SHEET OF THE ASSESSEE FOR THE YEAR ENDING 31-03-2004, THAT IS EARLIER YEAR, IS AVAILAB LE AT PAGE 124 OF THE PAPER BOOK. FROM THIS BALANCE SHEET, IT CAN BE SEEN THAT THE ASSESSEE HAS INDICATED SHARES AND DEBENTURES AT RS.2,197,541.57 UNDER THE HEAD INVESTMENT. PAGES 125 & 126 ARE THE DETAILS OF `INVESTMENTS AS APPE ARING IN THE BALANCE-SHEET FOR THE YEAR ENDING 31-03-2004. THE NAME OF SCRIP M/S. SHAKUN CONSTRUCTION WITH THE AMOUNT OF PURCHASE IS DULY REFLECTED THEREIN. THESE DOCUMENTS INDICATE THAT THOUGH THE DEMATERIALIZATION OF THE SHARES WAS DONE ON 14-07-2004, THE ASSESSEE, IN FACT, PURCHASED SUCH SHARES, TOOK DELI VERY AND GOT THEM TRANSFERRED TO HIS NAME IN APRIL 2003. IT WAS ONLY DURING THE A SSTT. YEAR 2005-06, WHICH IS UNDER CONSIDERATION, THAT SUCH SHARES BECAME THE SU BJECT MATTER OF SALE. THESE FACTS INDICATE THAT THE VIEWPOINT OF THE AO ON THE SHARES OF M/S. SHAKUN CONSTRUCTION, IS WHOLLY UNSUBSTANTIATED. THE SECON D SCRIP DISCUSSED BY THE AO IN THE BODY OF THE ORDER IS THAT OF M/S. ELGI EQUIPME NTS. THESE SHARES WERE PURCHASED BY THE ASSESSEE ON 01-03-2002 AND WERE SO LD IN THIS YEAR ON 17-03- 2005. THIS INDICATES THAT THESE SHARES WERE RETAINE D BY THE ASSESSEE FOR OVER A PERIOD OF 3 YEARS. THE BALANCE-SHEETS OF THE ASSESS EE FOR THE INTERVENING YEARS DO REFLECT THE HOLDING OF SHARES OF M/S. ELGI EQUIP MENTS. UNDER SUCH CIRCUMSTANCES, THERE CANNOT BE ANY DOUBT OVER THE H OLDING BY THE ASSESSEE OF THESE SHARES AS LONG-TERM CAPITAL ASSET. THE OTHER UNDISCUSSED SHARES, WHICH WERE CLAIMED BY THE ASSESSEE AS LONG-TERM CAPITAL ASSET AND BECAME SUBJECT MATTER OF SALE IN THIS YEAR, HAVE ALSO BEEN INDICAT ED IN THE STATEMENT OF LONG- TERM CAPITAL GAINS. THE SHARES OF UNITED PHOSPHORO US WERE PURCHASED BY THE ITA 6539/M/08. 5 ASSESSEE ON 18-04-1997 AND SOLD ON 30-04-2004. THE SHARES OF M/S. AVANTEL SOFTECH WERE PURCHASED ON 18-10-2000 AND SOLD ON 2 5-02-2005. SIMILARLY, THE OTHER SHARES WERE PURCHASED IN THE YEAR 1995, 199 7, 1999 AND 2003 WHICH CAME TO BE SOLD IN THE YEAR ENDING 2005. FROM THIS STATEMENT OF LONG-TERM CAPITAL GAINS, THERE REMAINS NO DOUBT WHATSOEVER TH AT THE ASSESSEE HELD THESE SHARES AS INVESTMENT, REFLECTED THE SAME IN THE BAL ANCE-SHEET OVER THE YEARS ACCORDINGLY AND THE ASSESSMENTS MADE FOR THE PRECED ING TWO YEARS U/S 143(3) ACCEPTING SUCH SHARES AS LONG-TERM CAPITAL ASSET, INDICATE THAT THE PROFIT ARISING FROM THEIR TRANSFER WAS RIGHTLY CLASSIFIED AS LON G-TERM CAPITAL GAINS. 6. THERE IS NO DOUBT ABOUT THE FACT THAT THE ASSESS EE WAS ENGAGED IN THE BUSINESS OF SALE AND PURCHASE OF SHARES. FROM THE D ETAILS OF SUCH SALE AND PURCHASE TRANSACTIONS, IT IS SEEN THAT SUBSTANTIAL BUSINESS WAS DONE BY THE ASSESSEE. NOW, THE QUESTION ARISES WHETHER A PERSON DEALING IN SHARES AS STOCK, CAN RETAIN ANY SHARES AS INVESTMENT ? CIRCULAR NO. 4/2007 DATED 15-06-2007 IS ANSWER TO THIS QUESTION, WHICH STATES THAT IT IS PO SSIBLE FOR A TAXPAYER TO HAVE TWO DERIVATIVES I.E. INVESTMENT PORTFOLIO COMPRISIN G OF SECURITIES WHICH ARE TREATED AS CAPITAL ASSETS AND A TRADING PORTFOLIO C OMPRISING OF STOCK IN TRADE WHICH HAVE TO BE CALLED AS TRADING ASSETS. IN PARA 10, IT HAS BEEN ADVISED THAT WHERE THE ASSESSEE HAS TWO PORTFOLIOS, HE MAY HAVE INCOME UNDER BOTH HEADS I.E. CAPITAL GAIN AS WELL AS BUSINESS INCOME. IN TH E LIGHT OF THIS CIRCULAR, IT BECOMES ABUNDANTLY CLEAR THAT SIMPLY BECAUSE A PERS ON IS HOLDING THE SHARES OR SECURITIES AS STOCK IN TRADE, THERE IS NO INHIBITIO N IN HOLDING CERTAIN OTHER SHARES AND SECURITIES AS CAPITAL ASSETS AS WELL. 7. COMING TO THE SECOND SEGMENT, BEING THE PROFIT WHICH WAS CLAIMED BY THE ASSESSEE AS SHORT-TERM CAPITAL GAIN AND ASSESSED BY THE AO AS BUSINESS INCOME, ITA 6539/M/08. 6 WE FIND THAT THERE HAS BEEN FILED A STATEMENT OF S HORT-TERM CAPITAL GAINS FOR THE YEAR UNDER CONSIDERATION. IN ALL, THE ASSESSEE DEAL T IN SCRIPS OF 13 COMPANIES. THE SHARES OF BHEL, THOMAS COOK, MAHINDRA & MAHINDR A AND SESA GOA WERE, IN FACT, RETAINED BY THE ASSESSEE FOR A PERIOD EXCEEDI NG ONE YEAR BUT INADVERTENTLY CONSIDERED AS SHORT-TERM CAPITAL ASSETS INSTEAD O F LONG TERM CAPITAL ASSETS. THE SHARES OF UCO BANK WERE PURCHASED BY THE ASSESSEE O N 04-10-2003 WHICH WERE SOLD ON 14-06-2004. THE SHARES OF DREDGING CORPORAT ION WERE PURCHASED ON 18- 03-2004 AND SOLD ON 22-09-2004. SIMILAR IS THE POS ITION IN RESPECT OF OTHER SHARES WHERE THE PERIOD OF HOLDING IS SUBSTANTIAL, EXCEPT 2 SCRIPS MENTIONED AT SERIAL NOS.12 & 13. FIRST ARE 14 NO. OF SHARES OF JET AIRWAYS, WHICH WERE PURCHASED BY THE ASSESSEE ON 14-03-2005 AND SOLD ON 15-03-2005 GIVING A PROFIT OF RS.2,579/- IN JUST ONE DAY. THE SECOND ITEM ARE THE SHARES OF BANNARI AMAN WHICH WERE PURCHASED ON 22-03-2005 AND SOLD ON 17-0 3-2005. THE PURCHASE DATE IN THIS CASE IS LATER THAN THAT OF THE SALE DA TE BECAUSE OF NON-DELIVERY OF THE SHARES AND THE SUBSEQUENT AUCTION GIVING LOSS OF RS .19/- ONLY ON THIS TRANSACTION. WHEN WE CONSIDER THE PERIOD OF HOLDING IN RESPECT O F THESE SHARES ALONG WITH OTHER ATTENDING CIRCUMSTANCES , EXCEPT THOSE OF JET AIRWAYS, IT BECOMES CLEAR THAT THE INTENTION OF THE ASSESSEE AT THE TIME OF P URCHASING THESE SHARES WAS TO HOLD THEM AS CAPITAL ASSET AND NOT AS STOCK IN TRAD E. WE, THEREFORE, HOLD THAT THE ASSESSEE WAS JUSTIFIED IN CLAIMING PROFIT FROM SUCH SHARES AS SHORT-TERM CAPITAL GAIN. HOWEVER THE PROFIT FROM THE SALE OF SHARES OF JET AIRWAYS CANNOT BE CLAIMED AS SHORT TERM CAPITAL GAIN. AS THESE SHARES WERE PU RCHASED AND SOLD AT THE GAP OF ONE DAY, IN OUR CONSIDERED OPINION, PROFIT OF RS2 ,579 ON TRANSFER OF SUCH SHARES HAS TO FALL UNDER THE `BUSINESS INCOME AND CANT B E CONSIDERED AS SHORT TERM CAPITAL GAIN. ITA 6539/M/08. 7 8. TO SUM UP, IT IS HELD THAT THE ASSESSEE HAD RIGHTLY LODGED A CLAIM FOR LONG- TERM AND SHORT-TERM CAPITAL GAIN, EXCEPT FROM TRANS FER OF SHARES OF JET AIRWAYS, AND THE AUTHORITIES WERE NOT JUSTIFIED IN CONSIDER ING SUCH PROFIT AS BUSINESS INCOME. 9. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON THE 09 TH DAY OF FEBRUARY, 2011. SD/- SD/- (SMT. ASHA VIJAYARAGHAVAN) (R.S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 09TH FEBRUARY , 2011. NG: COPY TO : 1. ASSESSEE. 2. DEPARTMEN. 3 CIT(A)-XXV, MUMBAI. 4 CIT, MUMBAI CITY-25, MUMBAI. 5.DR,A BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST.REGISTRAR, ITAT, MUMBAI. ITA 6539/M/08. 8 DETAILS DATE INITIALS DESIGN ATION 1. DRAFT DICTATED ON 02-02- 2011 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 03-02- 2011 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER *