AMAR H. PATEL, MUMBAI V. DCIT RG 17(3), MUMBAI

ITA 6568/MUM/2010

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4285 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 23-03-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 08-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income
• Section: 143(3)

Judgement Text

INCOME TAX APPELLATE TRIBUNAL,MUMBAI- A,BENCH , , BEFORE S/SHRI JOGINDER SINGH,JUDICIAL MEMB ER & RAJENDRA,ACCOUNTANT MEMBER ./ITA NO./6568/MUM/2010, / ASSESSMENT YEARS: 2007-08 SHRI AMAR H. PATEL 601/B, AMRUT VILLA, DR. AMBEDKAR ROAD, MATUNGA(E), MUMBAI-400 019. PAN:AADPP 0653 R VS. DCIT-17(3) MUMBAI. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI ARVIND KUMAR ASSESSEE BY: SHRI NISHIT GANDHI / DATE OF HEARING: 05.04.2016 / DATE OF PRONOUNCEMENT: 05.04.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA A.M. - CHALLENGING THE ORDER,DATED 30.06.2010,OF CIT (A) 29, MUMBAI, THE ASSESSEE HAS FILED THE PRESENT APPEAL. ASSESSEE,AN INDIVIDUAL,FILED HIS RE TURN OF INCOME ON 31.07.2007, DECLARING INCOME OF RS. 94,46,168/-. THE ASSESSING OFFICER (A O) COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT ON 30.11.2009,DETERMINING THE INCOME OF THE ASSESSEE AT RS.94,46,170/-. 2. EFFECTIVE GROUND OF APPEAL IS ABOUT TREATING THE SH ORT TERM CAPITAL GAIN ON SALE OF SHARES, AMOUNTING TO RS. 94.46 LACS, AS BUSINESS INCOME. DU RING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT ASSESSEE WAS ENGAGED IN THE ACTIVITY OF PURCHASE AND SALE OF SHARES, THAT HE HAD EARNED MOST OF ITS INCOME BY WAY OF INVESTMENT IN S HARES WHICH WERE TAKEN ON LOAN FROM VARIOUS PARTIES, IPO FUNDING AND INVESTMENT IN MUTU AL FUNDS, THAT MOST OF THE SHARE TRANSACTIONS WERE EITHER SQUARED UP IN A VERY SHORT DURATION OF TIME. CONSIDERING THE FACTS OF THE CASE, THE AO HELD THAT TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WERE NOT IN THE NATURE OF INVESTMENT, THAT HE HAD EARNED SHORT TERM CAPITAL G AIN THROUGH HIS BUSINESS ACTIVITIES.. HE CALLED FOR AN EXPLANATION FROM THE ASSESSEE IN THAT REGARD AND AFTER CONSIDERING THE SAME HE HELD THAT MOST OF THE INVESTMENTS HAD BEEN MADE OUT OF THE BORROWED FUNDS, THAT THE LOANS HAD BEEN INVESTED IN THREE COMPANIES, THAT HE WAS H OLDING THE SHARES FOR A VERY SHORT DURATION, THAT FREQUENCY OF SUCH TRANSACTIONS WAS E XTREMELY HIGH, THAT THE MOTIVE OF THE ASSESSEE WAS TO EARN QUICK PROFIT,THAT INCOME OF TH E ASSESSEE HAD TO BE TAXED UNDER THE HEAD BUSINESS/ADVENTURE IN NATURE OF BUSINESS AND NOT UN DER THE HEAD SHORT TERM CAPITAL GAIN, AS CLAIMED BY HIM. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM, IT WAS ARGUED THAT THE ASSESSEE WAS AN INVESTOR, THAT IN EARLIER YEARS SIMILAR INCOME BY SHOWN UNDER THE HEAD SHORT TERM CAPITAL GAIN, THAT HE HAD MADE APPLICATION IN IPO AS A RETAIL INVESTOR, THAT HE HA D MADE INVESTMENTS WITH BORROWED FUNDS KNOWING THAT THE INVESTMENT WILL GIVE GOOD RETURN. AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBMISSION OF THE ASSESSEE, THE FAA HELD TH AT THE ASSESSEE HAD PURCHASED THE SHARES WITH BORROWED FUNDS FOR QUICKENS, THAT THE IPO APPL ICATIONS WERE MADE WITH BORROWED FUNDS AND THE SHARES WERE OFFLOADED AFTER LISTING, THAT M AJOR PROFIT HAD BEEN EARNED ON TRADING OF 6568/M/10-AMAR HPATEL 2 ONE SCRIP ONLY, THE HOLDING PERIOD OF THE SCRIPS WA S ONLY FOR A FEW DAYS AND MOSTLY BELOW 30 DAYS, THAT THE ASSESSEE WAS ENGAGED IN A STRUCTURED AND ORGANISED BUSINESS ACTIVITY. FINALLY, HE UPHELD THE ORDER OF THE AO. 4. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE(AR)STATED THAT INVESTMENT THROUGH IPOS SHOWED THAT INTENTION OF TH E ASSESSEE WAS TO MAKE INVESTMENT, THAT UTILISATION OF BORROWED FUNDS WAS NO BAR TO MAKE IN VESTMENT IN A CAPITAL ASSETS, THAT FREQUENCY OF SHARE TRANSACTIONS WAS VERY LOW, THAT THE AVERAGE PERIOD OF HOLDING WAS APPROXIMATELY 40 DAYS, THE ASSESSEE WAS AN INVESTOR IN SHARES SINCE THE PAST MANY YEARS AND HAD BEEN ASSESSED AS SUCH.HE FURTHER STATED THAT TH E IDENTICAL ISSUE HAD BEEN DECIDED BY THE TRIBUNAL WHILE ADJUDICATING THE APPEAL OF THE BROTH ER OF THE ASSESSEE NAMELY DHRUV H PATEL (ITA/7857/MUM/2010,DATED 05/12/2014).THE DEPARTMENT AL REPRESENTATIVE (DR) SUPPORTED THE ORDER OF THE FAA. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US WE FIND THAT IN CASE OF DHRUV H. PATEL (SUPRA THE TRIBUNAL HAS DELIBERAT ED THE ISSUE AND HAS DECIDED THE SAME AS UNDER: 3. THE RETURN FOR THE YEAR WAS FILED ON 28.7.2006 DECLARING TOTAL INCOME OF RS. 14,54,100/-. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT. DU RING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS,THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN OF RS. 17,26,855/-.THE AO FURTHER NOTICED THAT 90% OF THE INCOME HAS BEEN DERIVED FROM ONE TRANSACTION WHICH WAS ON ALLOTMENT OF SHARES IN IPO OF FCS SOFTWARES SOLUTIONS LTD. THE AO ALSO NOTICED THAT THE APPLICATION IN THE IPO WAS MADE OUT OF BORROWED FUNDS AND THE SHARES WERE SOLD WITHIN 5 DAYS FROM THE DATE OF ALL OTMENT. THE AO WAS OF THE FIRM BELIEF THAT THE ASSESSEE HAS CARRIED OUT BUSINESS ACTIVITIES. T HE ASSESSEE WAS ASKED TO EXPLAIN WHY THE SHORT TERM CAPITAL GAIN SHOULD NOT BE TREATED AS BU SINESS PROFIT. IT WAS EXPLAINED THAT THE ASSESSEE IS AN INVESTOR AND WAS INVESTOR IN PAST YE ARS ALSO. THE PROFIT WAS BOOKED ON THE ALLOTMENT OF THE SHARES OF FCS SOFTWARES SOLUTIONS LTD AS THE ASSESSEE HAS TAKEN CAUTIOUS VIEW LIKE A PRUDENT INVESTOR. THE EXPLANATION OF TH E ASSESSEE DID NOT FIND FAVOUR WITH THE AO. THE AO OBSERVED THAT THE ASSESSEE HAS APPLIED FOR T HE IPO OF FCS SOFTWARES SOLUTIONS LTD., BY TAKING FINANCE FROM M/S. MERIT CREDIT CORPN. LTD . AND ALSO FROM MASAT TEXTURISERS & TWISTING PVT. LTD. THE APPLICATION AMOUNT WAS FOR 3 5 LAKHS SHARES AMOUNTINTO RS. 8.75 LAKHS. THE ASSESSEE WAS ALLOTTED 12971 SHARES ON 17.9.2005 AND THE SHARES WERE SOLD ON 22.9.2005 AND 23.9.2005 AT THE AVERAGE RATE OF RS. 228/- AS A GAINST THE PURCHASE PRICE OF RS. 50/- PER SHARE. THE AO PROCEEDED BY CONSIDERING THE CBDT CIR CULAR QUA INSTRUCTION NO. 1827 DT. 31.8.1989 AND INSTRUCTION DT. 16.5.2006 AND TREATED THE SHARE TRANSACTION OF THE ASSESSEE AS BUSINESS INCOME. 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) BUT WITHOUT ANY SUCCESS. 5. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE CLAI MED THAT THE ASSESSEE WAS AN INVESTOR AND DURING THE YEAR UNDER CONSIDERATION HE HAS APPLIED FOR THE SHARES OF FCS SOFTWARES SOLUTIONS LTD THROUGH IPO. THE ASSESSEE EXPLAINED THAT AFTER HE HAS SOLD THE SHARES AT AN AVERAGE RATE OF RS. 228/- PER SHARE THE SHARE PRICE CAME DOWN TO RS. 93.60 WITHIN ONE MONTH AND THEREFORE BEING A PRUDENT INVESTOR, THE ASSESSEE'S DECISION F OR SELLING THE SHARES AT THE RIGHT TIME HAS EARNED HIM SHORT TERM CAPITAL GAINS. THE LD. COUNSE L FURTHER STATED THAT UTILIZATION OF BORROWED FUNDS IS NO BAR TO MAKE AN INVESTMENT IN C APITAL ASSET. THE LD. COUNSEL FURTHER STATED THAT THE ASSESSEE HAS DEALT ONLY IN 19 SCRIP S THEREFORE CONSIDERING THE FACTS OF THE CASE, THE FINDINGS OF THE LD. CIT(A) ARE ERRONEOUS AND DE SERVES TO BE REVERSED. 6. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 7. WE HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER A ND THE ORDER OF THE FIRST APPELLATE AUTHORITY. IT IS AN ADMITTED FACT THAT AROUND 90% O F THE TOTAL GAINS IS FROM SALE OF THE SHARES OF FCS SOFTWARES SOLUTIONS LTD. IT IS ALSO AN UNDIS PUTED FACT THAT THE ASSESSEE HAD APPLIED IN THE SHARES OF THE IPO OF THE SAID COMPANY FROM BORR OWED CAPITAL. MERELY BECAUSE THE SHARES 6568/M/10-AMAR HPATEL 3 WERE APPLIED THROUGH BORROWED CAPITAL CANNOT BE A G ROUND FOR TREATING THE CAPITAL GAINS AS BUSINESS INCOME. THE IPO FUNDING AVAILED BY THE ASS ESSEE WAS TO GET MORE ALLOTMENT BUT THE FACT OF THE MATTER IS THAT THE ASSESSEE WAS AN INVE STOR AND THE SOLE INTENTION OF APPLYING IN THE SHARES THROUGH IPO WAS TO GET HIGHER ALLOTMENT OF S HARES. WE ALSO FIND THAT THERE ARE NO REPETITIVE PURCHASE AND SALE OF THE SAME SCRIPT WHI CH MEANS THAT THERE IS NO CHURNING OF SHARES. THE TOTAL NUMBER OF DAYS UTILIZED BY THE AS SESSEE FOR INVESTMENT IN SHARES IS 32 DAYS. CONSIDERING ALL THESE FACTS IN TOTALITY, WE DO NOT FIND ANY REASON TO TREAT THE ASSESSEE AS A TRADER. WE, THEREFORE SET ASIDE THE FINDINGS OF THE LD. CIT(A) AND DIRECT THE AO TO TREAT THE SHORT TERM CAPITAL GAIN ON SALE OF SHARES AMOUNTING TO RS. 17,26,855/- AS DECLARED BY THE ASSESSEE. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. WE FIND THAT THE FACTS OF THE ABOVE MENTIONED CASE ARE MORE ARE LESS SIMILAR TO THE FACTS OF THE CASE UNDER CONSIDERATION-THE AMOUNTS INVOLVED ARE D IFFERENT.SO,FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL,WE DECIDE THE EFFECTIVE GROUND OF APPE AL IN FAVOUR OF THE ASSESSEE. AS A RESULT ,APPEAL FILED BY THE ASSESSEE STANDS ALLOWED. . ORDER PRON OUNCED IN THE OPEN COURT ON 5 TH ,APRIL, 2016. 5 , 2016 SD/- SD/- /JOGINDER SINGH) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 05.04.2016. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , A , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.