DCIT RG 2(2), MUMBAI V. JAI GURUDEV CONSULTANCY SERVICES P. LTD, MUMBAI

ITA 6658/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8803 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 17-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 16-09-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K G KUTTY
• Keywords: Business income; Question of law

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH I , MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 6658/MUM/2010 ASSESSMENT YEAR : 2007-08 DY. COMMISSIONER OF INCOME TAX , CIRCLE-2(2) AAYAKAR BHAVAN ROOM NO.545, 5 TH FLOOR M.K. ROAD MUMBAI-400 020. VS. M/S. JAI GURUDEV CONSULTANCY SERVICES P. LTD. 152, MITTAL COURT, C-WING NARIMAN POINT MUMBAI-400 021. PAN NO. AABCJ 1759 R (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.G. KUTTY RESPONDENT BY : NONE DATE OF HEARING : 17.9.2012 DATE OF PRONOUNCEMENT : 26.09.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDE R DATED 7.7.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. THE ONLY DISPUTE RAISED IN THIS APPEAL IS REGARDING NATURE OF INCOME EAR NED BY THE ASSESSEE FROM PURCHASE AND SALE OF SHARES. 2. THE FACTS IN BRIEF ARE THAT THE AO DURING THE ASSESSM ENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD DECLARED TOTAL INCO ME OF ITA NO.6658/MUM/2010 A.Y. 07-08 2 RS.55,19,125/- FROM PURCHASE AND SALE OF SHARES OUT OF WH ICH A SUM OF 47,26,479/- HAD BEEN DECLARED AS SHORT TERM CAPITAL GAIN AND A SUM OF RS.7,18,908/- AS BUSINESS INCOME FROM SALE OF SHARES. TH E AO ALSO NOTED THAT TOTAL EQUITY CAPITAL OF ASSESSEE COMPANY WAS ON LY RS.1.00 LACS BUT THE ASSESSEE HAD ENTERED INTO LARGE NUMBER OF T RANSACTIONS IN SHARES INVOLVING 90 DIFFERENT COMPANIES. THE TRANSACTIONS HAD BEEN CARRIED OUT IN AN ORGANIZED MANNER, MAINLY WITH THE HELP OF BORROWED FUNDS. THE TRANSACTION HAD HIGH VOLUME AS WELL AS HIG H FREQUENCY AND AVERAGE PERIOD OF HOLDING RANGED FROM FEW DAYS TO FE W MONTHS. THE AO, THEREFORE ASKED THE ASSESSEE TO EXPLAIN THE REASONS FO R SHOWING PART OF PROFIT AS BUSINESS PROFIT AND OTHER PART AS SHORT TERM CAPITAL GAIN. AS PER AO, ASSESSEE ADMITTED THAT THE ONLY DISTINCT IVE FEATURE IN THE TWO TYPES OF TRANSACTIONS WAS THE MANNER OF SHOWING THEM AS TRADING STOCK AND INVESTMENTS. NO PROMINENT DISTINCTIVE FEATURE WAS CITED BY THE ASSESSEE BETWEEN TWO TYPES OF TRANSACTIONS I. E. TRADE AND INVESTMENTS. THE ASSESSEE ALSO SUBMITTED THAT THE TRANSACTION S RESULTING INTO SHORT TERM CAPITAL GAIN WERE DELIVERY BASED. THE AO OBSERVED THAT MERELY BECAUSE ASSESSEE HAD TAKEN DELIVERY O F SHARES, IT COULD NOT BE A CONCLUSIVE GROUND TO HOLD THAT THE PU RCHASES WERE INVESTMENTS AND NOT FOR THE PURPOSE OF TRADE. THE ASSESSE E HAD SOLD THE SHARES WITHIN A FEW DAYS TO LESS THAN THREE MONTHS OB VIOUSLY WITH THE INTENTION OF EARNING QUICK PROFIT. THE INTENTIO N WAS NOT TO EARN ITA NO.6658/MUM/2010 A.Y. 07-08 3 DIVIDEND INCOME AS DIVIDEND INCOME EARNED WAS MEAGRE SUM OF RS.73,469/-. THE ASSESSEE HAD SHOWN THE TRANSACTIONS AS SHORT TERM CAPITAL GAIN TAKING ADVANTAGE OF SECTION 111A AS PER WH ICH RATE OF TAX IN RESPECT OF SHORT TERM CAPITAL GAIN WAS ONLY 10% AGAIN ST 30% IN CASE OF BUSINESS. THE AO THEREFORE REJECTED CLAIM OF ASSESSEE OF SHORT TERM CAPITAL GAIN AND ACCORDINGLY TREATED THE ENTIRE I NCOME AS BUSINESS INCOME. 2.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE WAS SHOWING ALL DELIVERY BASED P URCHASES AS INVESTMENT ACTIVITY AND ALL INTRA-DAY TRANSACTIONS, DER IVATIVE FUTURE AND OPTIONS AS BUSINESS TRANSACTIONS. SINCE IN THIS YEAR, M OST OF THE TRANSACTIONS WERE DELIVERY BASED, THE ASSESSEE HAD DECLARED INCOME AS SHORT TERM CAPITAL GAIN. THE ASSESSEE ALSO SUBMITTED THAT 7 0% OF SHORT TERM CAPITAL GAIN HAD ARISEN FROM SALE OF SHARES WHICH HA D BEEN HELD FOR MORE THAN 3 MONTHS ON AVERAGE. THESE SHARES HAD BEE N SHOWN AS INVESTMENT IN BALANCE SHEET AND HAD BEEN VALUED AT COST. THE ASSESSEE ALSO SUBMITTED THAT VOLUME OF TRANSACTION AND FREQ UENCY COULD NOT BE DECISIVE IN CONCLUDING THAT THE TRANSACTIONS WERE INVESTMENT OR TRADING TRANSACTIONS. THE ASSESSEE ALSO SUBMI TTED THAT THOUGH IT HAD BORROWED MONEY THE SAME WAS ONLY FROM S ISTER CONCERN AND THAT TOO INTEREST FREE. THE CIT(A) AFTER CONSIDER ING THE SUBMISSION OF THE ASSESSEE OBSERVED THAT IT WAS POSSIBLE FOR THE ASSESSEE TO HAVE ITA NO.6658/MUM/2010 A.Y. 07-08 4 TWO PORTFOLIOS INVESTMENT PORTFOLIO AND TRADING POR TFOLIO. THE CIT(A) OBSERVED THAT, IN THE EARLIER YEARS, SHARES PURCHASED AS INVESTMENT AND SHOWN AS INVESTMENT IN THE BOOKS HAD BEEN ACCEPTED B Y THE AO. THE AO ALSO REFERRED TO THE DECISION OF THE MUMBAI BEN CH OF THE TRIBUNAL IN CASE OF GOPAL PUROHIT VS. JCIT (29 SOT 117 ), IN WHICH DELIVERY BASED TRANSACTIONS HAD BEEN ACCEPTED AS INVESTMEN T BY THE TRIBUNAL AND ORDER WAS UPHELD BY THE HON'BLE HIGH COUR T OF BOMBAY AS REPORTED IN (336 ITR 287). CIT(A) HOWEVER OBSERVED THAT OUT OF TOTAL SHORT TERM CAPITAL GAIN OF RS.47,26,479/- A SUM OF RS.43 ,27,651/- HAD BEEN EARNED FROM SHARES HELD FOR OVER ONE MONTH. THE SE TRANSACTIONS AS PER CIT(A) HAD BEEN ENTERED INTO WITH THE INTENTI ON OF INVESTMENT WITH AN EYE TO EARN DIVIDEND AND CAPITAL APPRECIATION . CIT(A) ALSO OBSERVED THAT THE TRANSACTIONS WHICH HAD MATERIALIZED WI THIN A PERIOD OF ONE MONTH FROM PURCHASES HAD TO BE TREATED AS BUSINES S TRANSACTIONS. AGGRIEVED BY THE DECISION OF CIT(A), REVEN UE IS IN APPEAL BEFORE THE TRIBUNAL. 2.2 AT THE TIME OF HEARING OF THE APPEAL, NO ONE AP PEARED ON BEHALF OF THE ASSESSEE TO REPRESENT THE CASE, THOUGH NOTICE OF HE ARING HAD BEEN GIVEN WELL IN ADVANCE. NEITHER SOMEONE APPEARED NOR HAD ANY ADJOURNMENT APPLICATION BEEN RECEIVED. WE, THEREFORE PROCEED TO DECIDE THE APPEAL ON THE BASIS OF MATERIAL AVAILABLE ON RECORD AND AFTER ITA NO.6658/MUM/2010 A.Y. 07-08 5 HEARING THE LD. DR WHO SUPPORTED THE ORDER OF THE AO AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE ASSESSMENT ORDER. 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTE R CAREFULLY. THE DISPUTE IS REGARDING NATURE OF INCOME F ROM SALE AND PURCHASE OF SHARES. THE ASSESSEE HAD DECLARED INCOME FROM ALL DELIVERY BASED PURCHASES AND SALES AS CAPITAL GAIN IRRESPECTI VE OF THE PERIOD FOR WHICH THE SHARES WERE HELD. THE AO HAS NOT A CCEPTED THE CLAIM AND HAS NOTED THAT THE ASSESSEE HAD ENTERED INTO VO LUMINOUS TRANSACTIONS INVOLVING 90 DIFFERENT COMPANIES WITH HIGH FREQUENCY AND AVERAGE HOLDING PERIOD RANGED FROM FEW DAYS TO FEW M ONTHS. THE INTENTION OF THE ASSESSEE WAS TO EARN PROFIT AND NOT TO EARN DIVIDEND WHICH WAS INSIGNIFICANTLY LOW AT RS.73,469/-. THE AO NOT ED THAT THE ASSESSEE DECLARED PART OF THE INCOME FROM SHARE TRANSACTION AS BUSINESS TRANSACTION AND PART AS CAPITAL GAIN WITHOUT ANY CLEAR DISTINCTIVE FEATURE. THE AO THEREFORE, TREATED THE E NTIRE INCOME AS BUSINESS INCOME. CIT(A) HAS HELD THAT TRANSACTION IN WHICH SHARES WERE SOLD WITH HOLDING PERIOD FOR MORE THAN ONE MON TH HAD TO BE CONSIDERED AS INVESTMENT ACTIVITY WITH THE INTENTION OF EARNING DIVIDEND AND CAPITAL APPRECIATION AND REMAINING TRANSA CTION SOLD WITHIN ONE MONTH HAS TO BE TREATED AS BUSINESS INCOME. CIT(A) H AS ALSO REFERRED TO THE DECISION OF THE MUMBAI BENCH OF THE TR IBUNAL IN THE CASE OF GOPAL PUROHIT VS. JCIT (SUPRA) IN WHICH DELIVERY BASED ITA NO.6658/MUM/2010 A.Y. 07-08 6 TRANSACTIONS HAVE BEEN ACCEPTED AS INVESTMENT ACTIVITY. IN OUR VIEW, ORDER OF CIT(A) TREATING THE TRANSACTIONS WITH HOLDIN G PERIOD OF OVER A MONTH AS INVESTMENT ACTIVITY AND THOSE WITHIN A MONTH AS TRADING ACTIVITY CAN NOT BE SUSTAINED. ASSESSEE HAD SHOWN ALL TRANSA CTIONS UNDER INVESTMENT PORTFOLIO AND, THEREFORE, PART OF T RANSACTION CAN NOT BE CONSIDERED AS BUSINESS TRANSACTION AND PART AS INVESTMENT ACTIVITY. THE ISSUE WHETHER THE SHARE TRANSACTIONS IN A PARTICULAR PHASE SHOULD BE TREATED AS INVESTMENT ACTIVITY OR TRADING ACTIVITY HAS BEEN A HIGHLY DEBATABLE ISSUE AND THERE ARE DECISIONS OF THE TRIBUNAL ON BOTH THE SIDES. EACH CASE HAS TO BE DECIDED BASED ON OWN FACTS AFTER CONSIDERING THE FREQUENCY, VOLUME, HOLDING PERIOD ETC. THE CUMULATIVE EFFECT OF ALL THESE FACTORS HAS TO BE CONSIDERED AS NO SINGL E FACTOR IS CONCLUSIVE IN DECIDING THE TRUE NATURE OF TRANSACTIONS. TH E MOST IMPORTANT FACTOR IS INTENTION OF THE ASSESSEE AT THE T IME OF PURCHASES WHICH HAS TO BE GATHERED FROM THE ACTUAL CONDUCT OF THE ASSESSEE WHILE DEALING WITH THE SHARES AND NOT THE ENTRY IN TH E BOOKS AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MAD AN GOPAL RADHEY LAL (73 ITR 642). THE ACTUAL CONDUCT HAS TO BE EVALUATED BY ANALYZING HOLDING PERIOD ETC. AN INVESTOR MAKES PURCHA SES WITH LONG TERM GOAL OF EARNING INCOME FROM THE INVESTMENT AND H E IS NOT TEMPTED TO SELL THE SHARES ON EVERY RISE AND FALL IN TH E MARKET WHICH ARE THE ATTRIBUTES OF A TRADER. SINCE INCOME FROM INV ESTMENT IN SHARES ITA NO.6658/MUM/2010 A.Y. 07-08 7 WHICH IS IN THE FORM OF DIVIDEND WHICH IS RECEIVED ANNU ALLY, NORMALLY AN INVESTOR IS EXPECTED TO HOLD THE SHARES FOR MORE THAN A YEAR. HOWEVER THERE MAY BE SITUATIONS WHEN THE INVESTOR MAY A LSO SELL THE SHARES AFTER SHORT HOLDING IN ORDER TO RESHUFFLE PORTFO LIO WHEN PRICES ARE FALLING OR TO ENCASH INVESTMENT IN CASE OF EXCEPTIONA L GAIN OR FOR SOME PERSONAL EXIGENCIES. EACH CASE IS REQUIRED TO BE EXAM INED INDEPENDENTLY AND CAREFULLY TO ASCERTAIN THE TRUE NAT URE OF TRANSACTIONS. IN THIS CASE THE DIVIDEND EARNED IS QUITE I NSIGNIFICANT I.E. JUST RS.73,469/- COMPARED TO THE GAIN FROM THE SALE OF SHARES AND APPEARS ONLY INCIDENTAL TO PURCHASE OF SHARES. THE FIGU RE OF AVERAGE RETURN FROM SALE OF SHARES IS NOT AVAILABLE WHICH WILL DEFINITELY GIVE AN IDEA AS TO WHETHER ASSESSEE WAS TEMPTED TO SELL SHARES FOR SM ALL GAIN IN PRICES OR FOR SOME OTHER REASONS. THE MATTER IN OUR V IEW REQUIRES FRESH EXAMINATION. 2.4 THE LD. AR FOR THE ASSESSEE HAS RELIED ON THE DECISI ON OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT (29 SOT 171) T O ARGUE THAT INCOME FROM ALL DELIVERY BASED TRANSACTIONS HAS TO BE ASSESSE D AS INCOME AS HELD BY THE TRIBUNAL IN THE SAID CASE. WE HAV E CAREFULLY PERUSED THE ORDER OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT (SUPRA), BUT WE FIND THAT THERE IS NO UNIVERSAL FINDING IN THA T CASE THAT ALL DELIVERY BASED TRANSACTIONS HAVE TO BE TREATED AS INVESTM ENT. IT IS PERTINENT TO NOTE THAT THE TRIBUNAL IN CASE OF GOPAL PUROHIT (SUPRA), ITA NO.6658/MUM/2010 A.Y. 07-08 8 HAD DECIDED THE CASE FOLLOWING THE DECISION OF TRIBUNAL IN CASE OF SARNATH INFRASTRUCTURE PVT. LTD VS. ACIT (2009) 120 T TJ 216 HOLDING THAT FACTS IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LT D (SUPRA), WERE IDENTICAL. HOWEVER, IT IS NOTED THAT IN CASE OF SARNATH INFRASTRUCTURE PVT. LTD (SUPRA), THE SHARES SOLD OUT OF INVESTMENT ACCOUN T HAD BEEN HELD FOR 2-3 YEARS AND REVENUE COULD NOT SHOW ANY SHARE S SOLD WHICH HAD BEEN PURCHASED DURING THE YEAR OR IN THE IMMEDIAT ELY PRECEDING YEAR. THEREFORE, ONLY IN RESPECT OF SUCH CASES, THE DECISION IN CASE OF GOPAL PUROHIT (SUPRA), COULD BE APPLIED. THE HONBLE HIGH COURT OF DELHI HAD UPHELD THE DECISION OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT (SUPRA), ON THE GROUND THAT THERE WAS NO SUBSTA NTIAL QUESTION OF LAW INVOLVED. EVEN BEFORE HONBLE HIGH COURT, THE RE WAS NO QUESTION RAISED THAT ALL DELIVERY BASED TRANSACTIONS HAVE ALWAYS TO BE TREATED AS INVESTMENT ACTIVITY. THUS THE DECISION OF THE TRIBUNAL AS WELL AS THE HONBLE HIGH COURT IN CASE OF GOPAL PUROHIT ( SUPRA), CANNOT BE CONSIDERED AS A PRECEDENT FOR THE PROPOSITION THAT AL L DELIVERY BASED SHARES HAVE TO BE TREATED AS INVESTMENT ACTIVITY. THE ASSESSEE CAN ALSO BE A TRADER IN CASE OF DELIVERY BASED PURCHASES AND SALES, WHICH IS A NORMAL FEATURE OF ANY TRADING ACTIVITY. THEREFOR E, IN OUR VIEW RELIANCE PLACED BY THE LD. AR ON THE DECISION IN THE CAS E OF GOPAL PUROHIT IS MISPLACED. ITA NO.6658/MUM/2010 A.Y. 07-08 9 3. IN OUR VIEW AS INDICATED EARLIER MATTER REQUIRES F RESH EXAMINATION TO ARRIVE AT A FRESH CONCLUSION REGARDING T RUE NATURE OF TRANSACTIONS. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE MATTER BACK TO HIM FOR PASSING A FRESH ORDE R AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE IN THIS ORDER AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSE SSEE. 4. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED FO R STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26.09.2012 SD/- SD/- (VIJAY PAL RAO ) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 26.09.2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.