ADDL CIT RG 20(2), MUMBAI V. MOHAN K. JAIN, MUMBAI

ITA 748/MUM/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75679 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 18-03-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 01-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S C TIWARI; NATASHA MANGAT
• Keywords: Capital asset; Business income; Business expenditure; Rule of consistency; Transactions in derivatives; Source of fund; Question of law; Cost of acquisition
• Section: 45(2); 143(3)

Judgement Text

SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 1 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL F , BENCH MUMBAI LOZJH VKJ - LH - 'KEKZ] YS[KK LNL; ,OA JH VFER 'KQDYK] U;KF;D LNL ; BEFORE SHRI R.C.SHARMA, AM AND SHRI AMIT SHUKLA, JM ITA NO.1033/MUM/2010 ( ASSESSMENT YEAR :2006 - 07) SHRI MOHAN K. JAIN, C/4, JEEVAN SUDHA, S D BARFIWALA MARG, JUHU LANE, ANDHERI WEST, MUMBAI - 400 058 VS. AD CIT, 20(2), MUMBAI PAN/GIR NO. : AABPJ7629 P ( ASSESSEE ) .. ( RESPONDENT ) AND ITA NO.748/MUM/2013 ( ASSESSMENT YEAR :2006 - 07) ADCIT, 20(2), MUMBAI VS. SHRI MOHAN K. JAIN, C/4, JEEVAN SUDHA, S D BARFIWALA MARG, JUHU LANE, ANDHERI WEST, MUMBAI - 400 058 PAN/GIR NO. : AABPJ7629P ( ASSESSEE ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI S.C.TIWARI AND NATASHA MANGAT /REVENUE BY : SHRI RAVI PRAKASH DATE OF HEARING : 23 RD JANUARY, 2014 DAT E OF PRONOUNCEMENT : 21 ST FEBRUARY , 2014 SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 2 2 O R D E R PER R.C.SHARMA (A.M.) : THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A) DATED 27 TH NOVEMBER, 2009, FOR THE ASSESSMENT YEAR 2006 - 07 IN THE MATTER OF ORDER PASSED U/S 143(3) OF THE INCOME - TAX ACT, 1961. 2 . COMMON GROUND FOR ASSESSEE AND REVENUE RELATES TO TREATMENT OF SHORT TERM CAPITAL GAIN ON SALE OF SHARES, WHOLE OF WHICH WERE TREATED BY THE ASSESSING OFFICER AS BUSINESS INCOME WHEREAS THE LD. CIT(A) HAS PARTLY ALLOWED ASSESSEES CLAIM AND PARTLY CONFIRMED THE ACTION OF THE ASSESSING OFFICER. BOTH ASSESSEE AND REVENUE ARE IN APPEAL BEFORE US. 3 . RIVAL CONTENTIONS HA VE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS AN INDIVIDUAL IS A PARTNER IN M/S. INDOPLAST, A PARTNERSHIP FIRM . DURING THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION , THE ASSESSEE HAS SHOWN INCOME FROM FUTURES AND OPTIONS OPERATIONS AND INTRA - DAY SHARE TRANSACTIONS WHICH WERE DECLARED BY HIM AS HIS BUSINESS INCOME. THE ASSESSEE HAS ALSO SHOWN SHORT TERM CAPITAL AND LONG TERM CAPITAL GAIN ON PURCHASE AND SALE OF SHARES AND UNITS OF MUTUAL FUNDS DEPENDING UPON THE PERIOD OF HOLDING. THE SHORT - TERM CAPITAL GAINS DECLARED TOR THE RELEVANT ASSESSMENT YEAR IS AMOUNTING TO RS 1,64,14,957/ - . BESIDES, THE ASSESSEE HAS ALSO SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 3 3 SHOWN INCOME FROM OTHER SOURCES BEING INTEREST ON FDRS, BANK INTEREST , DIVIDEND ETC. IN THE SCRUTINY ASSESSMENT, THE AO HAS OBSERVED THAT THE ASSESSEE HAS HIMSELF SHOWN NET SURPLUS FROM THE FUTURES AND OPTION - AND INDEX FUTURES IN THE STOCK MARKET AS HIS BUSINESS INCOME. THIS INCOME IS CREDITED TO HIS PROFIT AND LOSS ACCOU NT AND AGAINST THAT VARIOUS EXPENSES ARE CLAIMED TO ARRIVE AT THE NET PROFIT FROM THIS ACTIVITY. THE VARIOUS SOURCES OF INCOME OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR WAS AS UNDER: SHARE FROM PARTNERSHIP FIRM ( - ) 8,601 BUSINESS INCOME FROM F & O & SPECULATION 28,29,423 SHORT - TERM CAPITAL GAINS 1,64,14,957 LONG TERM CAPITAL GAINS 55,21,535 INTEREST FROM BANKS & OTHERS 1,87,217/ - DIVIDEND INCOME 19,21,917 4 . DURING THE COURSE OF SCRUTINY OF ASSESSMENT, IN ORDER TO ASCERTAIN THE AUTHENTICITY OF SHORT TERM CAPITAL GAINS ON SALE OF SHARES, THE AO CALLED FOR VARIOUS DETAILS VIZ. STATEMENTS GIVING THE BROKER WISE POSITION OF SCRIPTS ALONG WITH NECESSARY ORIGINAL EVIDENCES I.E. BROKER'S NOTES, BILLS, DE - MAT AC COUNT STATEMENTS, PURCHASES AND SALES VOUCHERS ETC, WHICH WERE EXAMINED BY HIM. AS A RESULT THEREOF, THE AO HAS OBSERVED THAT THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR HAS ENTERED INTO NUMEROUS TRANSACTIONS HAVING ENORMOUS VOLUME, PERIODICITY, FREQUENC Y AND MULTIPLICITY IN PURCHASE AND SALE OF SHARES AND SECURITIES, WHICH SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 4 4 SIGNIFY THAT THE ASSESSEE IS A TRADER AND NOT AN INVESTOR OF THESE SHARES/MUTUAL FUNDS. IT WAS FURTHER OBSERVED THAT THESE SHARES HAD BEEN HELD BY THE ASSESSEE NOT AS AN INVESTOR BUT A S A TRADER SO AS TO MAXIMIZE HIS PROFITS FROM REPEATED AND MULTIFARIOUS TRANSACTIONS BY MERELY USING THE CLOAK OF INVESTMENT ACTIVITY. T HE ASSESSING OFFICER, ALSO OBSERVED. THAT AT THE VERY OUTSET OF THESE TRANSACTIONS AS PER THE DETAILS SUBMITTED, IT APPE ARS THAT THE SHORT - TERM CAPITAL GAINS SHOWN BY THE ASSESSEE , HAVE PROXIMATE AND REAL TRAPPINGS OF BUSINESS INCOME, DUE TO NATURE OF ASSESSEE 'S ACTIVITY AND HIS INTIMATE PROXIMITY WITH A VARIETY OF STOCK MARKET OPERATIONS. THEREAFTER, APPLYING THE VARIOUS P ARAMETERS OF THE CBDT CIRCULAR NO.4 OF 2007, VIZ. NUMBER OF SCRIPTS DEALT WITH, VOLUME OF TRANSACTIONS, FREQUENCY OF TRANSACTIONS, THEIR SYSTEMATIC AND PERIODIC NATURE, HOLDING PERIOD AND QUANTUM OF PURCHASES AND SALES. SOURCE OF ACQUISITION OF SHARES ETC. , THE AO HAS HELD THAT THE ENTIRE SHORT - TERM CAPITAL GAINS ARE, IN FACT, IN THE NATURE OF HIS INCOME FROM BUSINESS. IN THIS REGARD HE HAS, DULY REBUTTED THE SUBMISSIONS OF THE ASSESSEE MAKING ELABORATE DISCUSSION, AS PER PARAGRAPHS 3.2 TO 3.6 OF THE ASSESS MENT ORDER. THE CONTENTIONS OF THE ASSESSEE IN THIS REGARD SUBMITTED BEFORE THE AO ARE MAINLY ON THE FOLLOWING LINES: I) OUT OF TOTAL SHORT - TERM CAPITAL GAINS OF APPROXIMATELY RS. 1.64 CRORES APPROXIMATELY RS. 86.80 LAKHS PERTAIN TO INVESTMENT MADE IS IMMEDI ATELY PRECEDING ASSESSMENT YEAR. THE SHARES ARE SHOWN AS HIS INVESTMENT IN BALANCE SHEET PREPARED AS ON 31.03.2005, AND THE ASSESSEE 'S STATUS AS INVESTOR WAS ACCEPTED FOR THE ASSESSMENT YEAR 2005 - 06, II ) ONLY APPROXIMATELY RS. 8.52 LAKHS OF SHORT - TERM CAPITAL GAINS IS IN RELATION TO HOLDING PERIOD OF LESS THAN 30 DAYS AND THE REST OF THE SHORT - TERM CAPITAL GAINS ARE FAR MORE THAN 30 DAYS TO ONE YEAR SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 5 5 PERIOD, III) THE AVERAGE HOLDING PERIOD OF SHARES IS 1 36 DAYS AND THEREFORE, IN ORDER TO CONSIDER SHORT - TERM CAPITAL GAINS AS BUSINESS INCOME, IT MUST BE DEMONSTRATED THAT THE INTENTION OF THE ASSESSEE WAS NOT TO HOLD THE SHARES AS HIS ASSETS, AND IV) DIFFERENT TYPES OF RATIOS VIZ. CAPITAL GAIN RATIO, QUANTI TY RATIO, NUMBER OF TRANSACTION RATIO, PURCHASE COST RATIO HAD BEEN GIVEN IN THE REPLY SO AS TO ESTABLISH THAT THE SHORT - TERM CAPITAL GAINS MAY BE ASSESSED AS SUCH, V) THE SHORT - TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN ON SALE OF SHARES/MUTUAL FUNDS ARE IN RESPECT TO HIS DELIVERY BASED TRANSACTIONS AND DEPENDING UPON THE PERIOD OF HOLDING DULY FOLLOWING THE VARIOUS PROVISIONS OF THE ACT., VII) THE ASSESSEE HAS SEPAR ATE PORTFOLIO OF HIS DELIVERY BASED TRANSACTIONS AND NON - DELIVERY BASED TRANSACTIONS. SEPARATE LEDGER ACCOUNTS ARE MAINTAINED FOR THIS PURPOSE. THE RESPECTIVE LEDGER ACCOUNT ARE POSTED IMMEDIATELY ON PURCHASE OF RELEVANT SHARES, WHETHER IT IS FOR INVESTMEN T PURPOSES, OR TRADING PURPOSES THIS PATTERN IS CONSISTENTLY FOLLOWED BY THE ASSESSEE FOR THE LAST NUMBER OF YEARS, WHICH IS DULY ACCEPTED BY THE AO. THIS ACCORDING TO THE A R, SHOWS THAT THE ASSESSEE HAD INTENDED TO HOLD THE SHARES FOR HIS INVESTMENT PURP OSE RIGHT FROM THE BEGINNING OF THE TRANSACTION, VIII) THE SAME TREATMENT GIVEN IN HIS EARLIER ASSESSMENT YEARS ARE ACCEPTED BY THE DEPARTMENT, NO MATERIAL CHANGE IN THE METHOD OF ACCOUNTING AND MANNER OF EARNING OF THE INCOME IS TAKEN AS DURING THE RELEV ANT ASSESSMENT YEAR IN COMPARISON TO HIS EARLIER ASSESSMENT YEARS, AND IX) THE SHARES HELD UNDER INVESTMENT PORTFOLIO ARE VALUED AT COST PRICE AND SHARES HELD UNDER TRADING PORTFOLIO ARE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LOWER, WHILE PREPARING HIS FINAL ACCOUNTS. 2.1.3. HOWEVER, THE AO HAS NOT ACCEPTED, THE ABOVE MENTIONED SUBMISSIONS OF THE ASSESSEE ; AND HELD THAT THE ASSESSEE IS A TRADER IN THESE SHARES AND ACCORDINGLY, THE RESULTANT SURPLUS IS HIS BUSINESS INCOME WHICH IS NOT TO BE ASSESSED AS THE SHORT - TERM CAPITAL GAIN, AS CLAIMED BY THE ASSESSEE BUT AS HIS BUSINESS INCOME. 5 . THERE AFTER, ON EXAMINATION AND VERIFICATION OF THE PORTFOLIO OF SHORT - TERM CAPITAL GAINS OF THE ASSESSEE , THE AO HAS FURTHER OBSERVED THAT THE ASSESSEE HAS ENTERED INTO NUMEROUS, PERIODIC, REPETITIVE, VOLUMINOUS TRANSACTIONS WITH GREAT AMOUNT OF REGULARITY. HE HAS UNDERTAKEN 45 TRANSACTIONS INVOLVING 19 SCRIPTS IN WHICH HOLDING PERIOD IS LESS THAN 30 DAYS. NUMBER OF SHARES/UNITS OF MUTUAL FUNDS PURCHASE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 6 6 AND SOLD ARE SUBSTANTIALLY LARGE. THE PURCHASE COST INCURRED IS IN THE VICINITY OF APPROXIMATELY RS.92.36 LAKHS AND SALE PROCEEDS OBTAINED ARE APPROXIMATELY RS.100.88 LAKHS. HE HAS FURTHER OBSERVED THAT IN CASE OF MUTUAL FUNDS UNITS OF PHILLIPS CARBON BLAC K LTD, THERE ARE 8 TRANSACTIONS IN ONE MONTH INVOLVING APPROXIMATELY 11,313 UNITS THE PURCHASE COST OF APPROXIMATELY RS.9.69 . IT IS FURTHER OBSERVED THAT DURING THE YEAR THERE ARE ABOUT 107 SCRIPTS INVOLVING 533 TRANSACTIONS WHICH CLEARLY DEMONSTRATE THE E XTENSIVE TRANSACTIONS AND THEREBY NEGATING THE CLAIM OF SO - CALLED SHORT TERM CAPITAL GAINS. IT WAS ALSO OBSERVED THAT FOR THE ENTIRE YEAR THE NUMBER OF SHARES/UNITS DEALT IN ARE ALMOST TO THE TUNE OF 813519, THE PURCHASE COST OF APPROX. RS. 8.18 CRORES AN D SALE PROCEEDS OF APPROX. RS.9.82 CRORES. THE AO HAS ALSO OBSERVED THAT FREQUENCY OF TRANSACTIONS ARE AS HIGH AS 34 TRANSACTIONS FOR DHARANI SUGARS AND CHEMICALS LTD, 25 TRANSACTIONS FOR DREDGING CORPORATION, 19 TRANSACTIONS FOR B.O.C INDIA, 13 TRANSACTIO NS FOR CADILA HEALTH CARE AND 15 TRANSACTIONS FOR COROMANDEL FERTILIZERS LTD. IT WAS FURTHER OBSERVED THAT THE VERY FACT THAT A WIDE RANGE OF SCRIPTS ARE INVOLVED AND FREQUENCY OF TRANSACTIONS IN THEM IS VERY SUBSTANTIAL, GOES ON TO SHOW THAT THEY COULD NO T HAVE BEEN HELD AS ASSETS FOR ANY KIND OF APPRECIATION AT ALL, WHETHER IN THE NEAR FUTURE OR OTHERWISE. THE A.O. HAS ALSO OBSERVED THAT THE ANALYSES OF THE PORTFOLIO OF THE SHORT TERM CAPITAL GAINS OF THE ASSESSEE SHOWS THAT THERE ARE 31 TRANSACTIONS OF L ESS THAN 15 DAYS, 48 TRANSACTIONS OF LESS THAN 30 DAYS, 122 SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 7 7 TRANSACTIONS OF LESS THAN 60 DAYS AND 193 TRANSACTIONS OF LESS THAN 90 DAYS, UNDERTAKEN DURING THE RELEVANT ASSESSMENT YEAR. HE IS ALSO OBSERVED THAT ON PERUSAL OF THE PORTFOLIO OF HIS SHARES HELD AS SHORT - TERM CAPITAL GAINS, SHOWS THAT THERE ARE MULTIPLE TRADES DONE IN RESPECT OF SHARES/MUTUAL FUND UNITS OF SINGLE COMPANY OR ALTERNATIVELY REGULAR, MULTIPLE AND FREQUENT TRANSACTIONS ACROSS THE BOARD I.E. CRISS - CROSS TRANSACTIONS. ACCORDING TO THE A .O., WHENEVER AN ACTIVITY OR TRANSACTION IS PERIODIC, SYSTEMATIC AND REGULAR WITH A CLEAR PROFIT MOTIVE, IT CAN CERTAINLY ASSUME THE CHARACTER OF THE BUSINESS ACTIVITY OR TRANSACTION AND THESE FEATURES ARE ABUNDANTLY PRESENT IN THE CASE OF THE ASSESSEE , IN RESPECT TO ALL THOSE SHARE TRANSACTIONS, ON WHICH HE HAS SHOWN SHORT TERM CAPITAL GAINS FOR THE RELEVANT ASSESSMENT YEAR. THEREAFTER, THE A.O. HAS DISCUSSED AT LENGTH THE VARIOUS PARAMETERS AS LAID DOWN BY THE CBDTS CIRCULAR NO. 4 OF 2007 DATED 15.06.200 7 (AT PAGES 10 TO 13 OF THE ASSESSMENT ORDER) AND ACCORDINGLY, HELD THAT DUE TO THE FOLLOWING PARAMETERS THE ASSESSEE IS A TRADER IN THESE SHARES: I) THE SUBSTANTIAL QUANTUM OF TRANSACTIONS UNDERTAKEN, II) IMMENSE NUMBER OF FREQUENCY, VOLUME AND MULTIPLICITY, III) C RISS - CROSSING OF TRANSACTIONS (I.E. MULTIPLE TRADES DONE IN RESPECT OF SHARES/MUTUAL FUND UNITS OF A SINGLY COMPANY OR ALTERNATIVELY REGULAR, MULTIPLE AND FREQUENT TRANSACTIONS ACROSS THE BOARD,) IV) THE FACT THAT ASSESSEE IS HEAVILY RELYING ON BORROWED FUNDS, V) THE FACT THAT ASSESSEE 'S PRIMARY ACTIVITY IS ONE OF FUTURE AND OPTION AND HE IS INTEGRALLY CONNECTED WITH ALL KIND OF OPERATIONS IN THE STOCK MARKET, VI) THE HUGE AGGREGATE AMOUNT OF PURCHASES AND SALES, SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 8 8 VII) THE HUGE NUMBER OF SCRIPTS AND SUBSTANTIAL NUMBER OF SCRIPTS WITH FREQUENT TRANSACTIONS WITHIN 90 DAYS HOLDING PERIOD, AND VIII) THE BASIC MOTIVE AND INTENT IS ONE OF BUSINESS/ADVENTURE FOR MAXIMIZATION OF PROFIT. IN VIEW OF THE ABOVE OBSERVATION, THE ASSESS ING OFFICER HELD THAT THE ASSESSEE HAS EARNED BUSINESS INCOME OUT OF SALE OF SHARES AND ASSESSEES CLAIM OF SHORT TERM CAPITAL GAIN WAS DECLINED. 6 . BEFORE THE CIT(A) , IT WAS ARGUED THAT T HE ASSESSEE WAS CONSISTENTLY ENGAGED IN THE ACTIVITY OF SHARE TRANSACTION FOR LAST NUMBER OF YEARS AND HE HAS CONSISTENTLY DISCLOSED SHORT TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN IN RESPECT OF HIS SHARE TRANSACTION IN WHICH PROPER DELIVERY WAS TAKEN, D EPENDING UPON THE PERIOD OF HOLDING. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE WAS CONSISTENTLY HAVING TWO PORTFOLIOS OF THE SHARE TRANSACTION ONE FOR HIS INVESTMENT PURPOSES, WHICH IS CALLED INVESTMENT PORTFOLIO AND ANOTHER FOR HIS TRADING PURPOSES, WH ICH IS CALLED TRADING PORTFOLIO. AS PER LD. AUTHORIZED REPRESENTATIVE, THE ASSESSEE WAS MAINTAINING SEPARATE LEDGER ACCOUNT AND OTHER DETAILS IN RESPECT OF HIS TRANSACTIONS SHOWN AS INVESTMENT PURPOSES AND TRADING PURPOSES. IT WAS FURTHER HIGHLIGHTED THA T THE ASSESSEE HAS ENTERED THESE TRANSACTIONS IN THE RESPECTIVE LEDGER ACCOUNT, RIGHT FROM INCEPTION OF THE TRANSACTION, WHICH SHOWS THAT THE ASSESSEE HAS ALWAYS INTENDED TO HOLD THOSE SHARES FOR THE PURPOSE OF HIS TRADING PORTFOLIO OR INVESTMENT PORTFO LIO. ATTENTION WAS ALSO INVITED TO THE SCRUTINY ASSESSMENT ORDER OF SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 9 9 ASSESSEE FRAMED U/S 143(3) FOR THE ASSESSMENT YEAR 2005 - 06, WHEREIN ASSESSEES CLAIM OF SHORT TERM CAPITAL GAIN AS WELL AS BUSINESS INCOME WAS ACCEPTED. 7 . AFTER CONSIDERING THE OBSERVATIONS MADE BY THE ASSESSING OFFICER VIS - - VIS, THE CONTENTION OF LD. AUTHORIZED REPRESENTATIVE, THE LD. CIT(A) PARTLY DIS ALLOWED ASSESSEES CLAIM TO THE EXTENT OF RS. 18,41,027/ - WHEREAS BALANCE O F SHORT TERM CAPITAL GAIN WAS D IRECTED TO BE TREATED AS SUCH . PRECISE OBSERVATION OF THE CIT(A) WAS AS UNDER : - IN APPEAL, THE AR OF THE ASSESSEE SHRI NIKHIL GANDHI, CA STRONGLY CONTESTED THAT THE AO HAS NOT APPRECIATED THE CORRECT FACTS AVAILABLE IN THE CASE OF THE ASSESSEE WHILE DEC IDING THE ISSUE OF SHORT - TERM CAPITAL GAINS OR BUSINESS INCOME, IN RESPECT TO HIS SHARE TRADING ACTIVITY. IN THIS REGARD IT WAS FURTHER ARGUED THAT ASSESSEE IS CONSISTENTLY ENGAGED IN THE ACTIVITY OF SHARE TRANSACTIONS FOR THE LAST NUMBER OF YEARS. IT WAS SUBMITTED THAT THE ASSESSEE HAS CONSISTENTLY DISCLOSED SHORT TERM CAPITAL GAINS OR LONG - TERM CAPITAL GAINS IN RESPECT TO HIS SHARE TRANSACTIONS IN WHICH PROPER DELIVERY IS TAKEN, DEPENDING UPON THE PERIOD OF HOLDING. SIMILARLY, IT WAS ARGUED THAT THE ASSES SEE HAM HAS DISCLOSED THIS INCOME, IN RESPECT TO ALL HIS TRANSACTIONS, IN WHICH NO DELIVERY IS TAKEN. THEREFORE, ACCORDING TO THE AR THE ' ASSESSEE IS CONSISTENTLY HAVING TWO PORTFOLIOS OF THE SHARE TRANSACTIONS I.E. ONE FOR HIS INVESTMENT PURPOSES, WHICH I S CALLED' INVESTMENT PORTFOLIO', AND ANOTHER FOR HIS TRADING PURPOSES, WHICH IS CALLED ' TRADING, PORTFOLIO'. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE IS MAINTAINING SEPARATE LEDGER ACCOUNTS AND OTHER DETAILS IN RESPECT TO HIS TRANSACTIONS SHOWN AS INVES TMENT PURPOSES AND TRADING PURPOSES. IT WAS ALSO ARGUED THAT THE ASSESSEE HAS ENTERED THESE TRANSACTIONS UNDER THE RESPECTIVE LEDGER ACCOUNTS, RIGHT FROM THE INCEPTION OF THE TRANSACTION, WHICH SHOWS THAT THE ASSESSEE HAD ALWAYS INTENDED TO HOLD THOSE SHAR ES FOR THE PURPOSE OF HIS 'TRADING PORTFOLIO' OR 'INVESTMENT PORTFOLIO'. IT WAS ALSO ARGUED THAT SIMILAR TREATMENT GIVEN IN HIS OWN CASE UNDER IDENTICAL FACTS AND CIRCUMSTANCES IS ALREADY ACCEPTED BY THE AO, IN SCRUTINY ASSESSMENT U/S 143 (3) OF THE ACT. F OR THE ASSESSMENT YEAR 2005 - 06. A COPY OF THE RELEVANT ASSESSMENT ORDER PRODUCED BY THE ASSESSEE IS PLACED ON RECORD. ACCORDING TO THE AR, MERELY BASED ON HIS VOLUME OF TRANSACTIONS', ITS FREQUENCY, HOLDING PERIOD AND REPETITIVE TRACTIONS IN CERTAIN SCRIPT S WILL NOT MAKE THE ASSESSEE A TRADER OF THESE SHARES. IN THIS REGARD IT WAS FURTHER SUBMITTED THAT THE NUMBER OF TRANSACTIONS ARE NOT HIGH AS OBSERVED BY THE AO BECAUSE, THE NUMBER OF TRANSACTIONS OF A PARTICULAR SCRIPT ON GIVEN DATE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 10 10 BUT CARRIED ON DIFFERENT LOTS ARE CONSIDERED AS SEPARATE TRANSACTIONS BY THE A.O. INSTEAD OF TREATING THE SAME AS A SINGLE TRANSACTION. IT WAS FORCEFULLY SUBMITTED THAT DUE TO MARKET CONSTRAINTS IT IS NOT FEASIBLE TO EXECUTE THE BIGGER LOTS OF SALE AND PURCHASE ORDERS IN A SINGLE LOT ON A GIVEN DATE, THEREFORE, SUCH TRANSACTION ARE ALWAYS UNDERTAKEN THROUGH DIFFERENT LOTS AS PER THE AVAILABILITY OF THE STOCK ON A GIVEN DATE OF SALE OR PURCHASE. IT WAS ALSO SUBMITTED THAT SEPARATE DETAILS AND ACCOUNTS ARE MAINTAINED IN CAS E OF SHARES PURCHASED AND SOLD ON WHICH THE' ASSESSEE HAS SHOWN STCG OR LTCG DEPENDING UPON THE PERIOD OF HOLDING, AND INVARIABLY IN ALL SUCH TRANSACTIONS DELIVERY IS TAKEN, PAYMENTS ARE MADE FROM HIS BANK ACCOUNTS AND THE SHARES ARE CREDITED AND DEBITED I N HIS DE - MAT ACCOUNT. THE STOCK OF SHARES HELD AT THE END OF THE YEAR IS VALUED ON 'COST PRICE' IN CASE OF HIS INVESTMENT PORTFOLIO AND ON 'COST OR MARKET PRICE WHICHEVER IS LOWER' IN CASE OF HIS TRADING PORTFOLIO. THE SAME PATTERN OF METHOD OF ACCOUNTING FOR DISCLOSING HIS STCG OR LTCG ON IDENTICAL FACTS AND CIRCUMSTANCES IS ALREADY ACCEPTED AND ASSESSED BY THE AO IN HIS EARLIER ASSESSMENT YEARS. IT WAS ALSO ARGUED THAT THE CLOSING STOCKS OF ALL SUCH SHARES ARE CONSISTENTLY VALUED ON COST PRICE WHILE FINAL IZING HIS FINAL ACCOUNTS. 2.2.1 ACCORDING TO THE AR NO INTEREST IS PAID ON BORROWED FUNDS, SINCE THE SAME IS PRIMARILY TAKEN FROM HIS RELATED CONCERNS. IT WAS ALSO SUBMITTED THAT THE INTENTION OF THE ASSESSEE ON PURCHASE OF THESE SHARES WAS TO MAKE INVES TMENT AND NOT TO HOLD THESE SHARES FOR TRADING PURPOSES SINCE ALL THESE SHARES ARE ENTERED SEPARATELY IN HIS BOOKS OF ACCOUNT AND IN ALL CASES DELIVERY WAS OBTAINED BEFORE ITS SALE TOOK PLACE. HIS DETAILED WRITTEN SUBMISSIONS MADE AND ELABORATING HIS ARGUM ENTS ON EACH ISSUE RAISED BY THE AO IS REPRODUCED AS UNDER: 3.1 THE ASSESSEE SUBMITS THAT HE IS NOT TRADING IN SHARES, BUT HE IS ONLY AN INVESTOR IN SHARES, AND THEREFORE THE PROFIT THAT AROSE ON SALE OF SHARES SHOULD BE ASSESSED AS CAPITAL GAINS, AND NOT AS BUSINESS INCOME. 3.2 IN RESPECT OF THE SHARES HELD AS INVESTMENTS AS ON 31/3/2005, WHICH POSITION HAS BEEN ACCEPTED BY THE REVENUE IN THE EARLIER YEAR, IT IS SUBMITTED LEARNED A.O. ERRED IN REJECTING THE ASSESSEE S CONTENTION THAT QUA THOSE SHARES, THE INVESTMENT STATUS CANNOT BE CHANGED UNLESS THE ASSESSEE HIMSELF EITHER CON VERTS THOSE SHARES INTO, OR TREATS THE SAME AS, HIS STOCK - IN - TRADE, AS CONTEMPLATED U/S. 45(2), AND THAT TOO AFTER FOLLOWING THE MANDATE OF THAT SECTION. IN THE ABSENCE OF ANY SUCH ACTION ON THE PART OF THE ASSESSEE , THE A.O. WAS LEGALLY NOT JUSTIFIED IN U NILATERALLY DISTURBING THE INVESTMENT STATUS/CHARACTER OF THOSE SHARES, AND THEREBY TAXING THE RESULTANT GAINS AS BUSINESS INCOME. IT IS IMPORTANT TO NOTE THAT OUT OF THESE VERY SHARES, THE A.O. HAS ACCEPTED THE INVESTMENT STATUS FOR THOSE SHARES WHERE TH E GAIN WAS LONG TERM GAIN OWING TO THOSE SHARES HAVING BEEN HELD FOR MORE THAN 12 MONTHS BEFORE THEIR SALE. IT IS RESPECTFULLY SUBMITTED THAT THE CHARACTER OF SHARES WOULD NOT SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 11 11 UNDERGO CHANGE DEPENDING UPON WHETHER THE SAME ARE SOLD WITHIN 12 MONTHS OR BEYO ND. IF SHARES ARE HELD ON INVESTMENT ACCOUNT, THEN MERELY BECAUSE THE SAME WERE SOLD WITHIN 12 MONTHS CANNOT BY ITSELF TRANSFORM THEM INTO STOCK - IN - TRADE. SUCH AN INFERENCE WOULD CLEARLY RUN CONTRARY TO THE VERY CONCEPT OF THE SHORT TERM CAPITAL GAIN, WHIC H IS ENSHRINED IN THE ACT. 3.3 WHILE REJECTING THE ASSESSEE S CONTENTION QUA THE SHARES HELD AS ON 31/03/2005, THE LEARNED, A0 HAS ARGUED THAT PRINCIPLES OF 'ESTOPPEL' OR 'RES JUDICATA' DO NOT APPLY TO TAX PROCEEDINGS. THERE CAN BE NO QUARREL WITH THIS B ASIC PROPOSITION OF LAW, BUT AT THE SAME TIME IT IS WELL SETTLED THAT THE RULE OF CONSISTENCY CANNOT HE IGNORED IN TAX PROCEEDINGS. THIS RULE IS AN EXCEPTION TO THE ABOVE RULE, AND HAS BEEN WELL RECOGNIZED IN VARIOUS JUDICIAL RULINGS CITED BELOW: RADHASOA MI SATSANG VS. CIT /1991/ 193 ITR 321 (SC) SARDAR KEHAR SINGH CIT /1991/ 195 ITR 769 (RAJ.) CIT VS. NEO POLY PACK (P) LTD.[2000/245 ITR 492 (DELHI) CIT VS. BELPAHAR REFRACTRORIES LTD., [1981/128/ITR 610(ORI) M.A. NAMAZIE ENDOWMENT VS. CIT /1988/174 ITR 58 (MAD) CIT VS. SHREE NIRMAL COMMERCIAL LTD./1994/213 ITR 361 (BOM)(FB) TURABEN RAMANBHAI PATEL & ANR. VS. ITO [1995] 215 ITR 323 (GUJ) DHANSIRAM AGARWALLA VS. CIT /1996/217 ITR 4 (GAU) IN THE CONTEXT OF THE DI SPUTE WHETHER THE SHARE TRANSACTIONS RESULTED IN TRADING PROFIT OR CAPITAL GAINS, THE RULE OF CONSISTENCY HAS BEEN APPLIED IN THE FOLLOWING TWO DECISIONS OF THE HONBLE TRIBUNA, MUMBAI BENCHSE: .(GOPAL PUROHIT VS.JT. CIT/2009/20 DTR 99(MUMBAI TRIB.) .JANAK S. RANGWALA VS. ACIT /2007] 11 SOT 627 (MUMBAI) FOLLOWING THE RULE OF CONSISTENCY. TILE HON'BLE TRIBUNAL IN ABOVE CASES, ACCEPTED THE ASSESSEE'S CONTENTION THAT HE WAS INVESTOR IN SHARES AND NOT TRADER BECAUSE IN THE EARLIER YEARS, THE REVENUE HAD ACCEPTED THAT THE ASSESSEE WAS INVESTOR. IN JANAK RANGAWALAS CASE (SUPRA), THE TRIBUNAL QUOTED THE FOLLOWING PASSAGE FROM THE JUDGEMENT IN RADHASOAMI SATSANG (SUPRA): ...... STRICTLY SPEAKING, RES JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS - THOUGH , EACH ASSESSMENT YEAR BEING A UNIT, WHAT WAS DECIDED IN ONE YEAR MIGHT NOT AP PLY IN THE FOLLOWING YEAR; WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT ONE WAY OR THE OTHER AND PARTIES HAVE ALLOWED THAT PO SITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WOULD NOT BE AT ALL APPROPRIATE TO ALLOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. 3.4 IN VIEW OF THE SETTLED LEGAL POSITION ABOUT THE RULE OF CONSISTENCY, IT IS SUBMITTED THAT THE ASSESSEE S STATUS OF INVESTOR SHOULD HAVE BEEN ACCEPTED BY THE A.O. 3.5 FURTHER, THE SHARES HELD AS ON 31/03/2005 AS INVESTMENTS AND ACCEPTED BY THE REVENUE CANNOT BE UNILATERALLY CONVERTED INTO SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 12 12 SOCK - IN - TRADE BY THE A.O. THE PREROGATIVE TO EFFECT SUCH CONVERSION LIES WITH THE ASSESSEE, AND IT HAS BEEN DULY RECOGNIZED BY THE STATUTE IN S. 2(47)(IV) READ WITH S.45(2). THE LEARNED A.O., THEREFORE, CLEARLY ERRED IN SUO MOTU CHANGING THE STATUS OF THOSE SHARES FROM CAPITAL ASSET INTO STOCK IN TRADE AND TOO WITHOUT FOLL OWING THE MANDATE OF S. 45(2). 3.6 IN VIEW OF ABOVE, IT IS SUBMITTED THAT AS FAR THE SHARES HELD AS ON 31/3/2005 ARE CONCERNED, THE PROFITS THAT AROSE ON THEIR SALE OUGHT TO HAVE BEEN ASSESSED AS CAPITAL GAINS NOTWITHSTANDING THE POSITION THAT WAS EMERGE D IN THE FINANCIAL YEAR 2005 - 06. 3.7 AS REGARDS THE SHARES PURCHASED AND SOLD DURING THE FINANCIAL YEAR 2005 - 06, THE ASSESSEE SUBMITS THAT ALL THOSE TRANSACTIONS WERE MADE IN THE CAPACITY OF INVESTOR AND NOT AS A TRADER. THEREFORE, THE RESULTANT PROFIT O N SALE OF THOSE SHARES OUGHT TO BE ASSESSED AS SHORT TERM CAPITAL GAIN AND NOT AS BUSINESS INCOME. 3.8 THE LEARNED A.O. HAS GIVEN VARIOUS REASONS FOR HOLDING THESE TRANSACTIONS AS TRADING TRANSACTIONS, AND THE ASSESSEE SUBMITS THAT IF ALL THE FACTS AND C IRCUMSTANCES OF THE CASE ARE LOOKED IN PROPER PERSPECTIVE, THEM IT WOULD BE CLEAR THAT THERE WAS NO TRADING ACTIVITY. THE QUESTION WHETHER A PARTICULAR ACTIVITY IS IN THE NATURE OF INVESTMENT OR TRADING WOULD DEPEND UPON A NUMBER OF FACTORS, AND THERE IS N O PRECISE UNIVERSAL FORMULA TO DETERMINE THE SAME. THEREFORE, IT IS A MIXED QUESTION OF LAW AND FACT TO BE DECIDED ON THE FACTUAL MATRIX OF EACH CASE. VARIOUS PARAMETERS LIKE VOLUME, FREQUENCY, REGULARITY, MOTIVE/INTENTION, PERIOD OF HOLDING, ACCOUNTING TR EATMENT, SURROUNDING CIRCUMSTANCES, ETC. ARE CONSIDERED IN THIS REGARD THOUGH NO ONE FACTOR IS DECISIVE. THE FACTS OF THE CASE ARE NECESSARILY TO BE CONSIDERED IN THE BACKGROUND OF THESE PARAMETERS. HOWEVER, IN THE PRESENT DAY SCENARIO IF MUST ALSO BE APPR ECIATED THAT HAVING REGARD TO THE DEPTH, BREADTH AND GROWTH OF T HE STOCK MARKETS IN INDIO, THE LINE OF DEMARCATION BETWEEN TRADING AND INVESTMENT IS GETTING MORE AND MORE BLURRED, WHICH LEADS TO A TENDENCY OF BRANDING AN INVESTMENT ACTIVITY AS TRADING MERE LY BECAUSE VOLUME IS MORE OR THERE ARE MORE FREQUENT TRANSACTIONS, ETC. 2.2.2 THEREFORE, ON ACCOUNT OF THE ABOVE, THE AR HAS SUBMITTED THAT IN ADDITION TO THE VARIOUS CASE LAWS DISCUSSED ABOVE, THIS ISSUE IS NOW COVERED BY THE ORDER OF THE HON'BLE ITAT. MUMBAI IN THE CASE OF SH. GOPAL PUROHIT (SUPRA), DECIDED IN FAVOUR OF THE ASSESSEE AND ACCORDINGLY THE AO MAY BE DIRECTED TO TREAT INCOME REALIZED ON SALE OF ALL DELIVERY BASED SHARE TRANSACTIONS AND MUTUAL FUND UNITS AS HIS STCG OR L TCG, DEPENDING UPON THE PERIOD OF HOLDING. FINALLY, IT WAS FURTHER SUBMITTED THAT THE CAPITAL G AIN ON SALE OF SHARES CLAIMED MAY BE ACCEPTED AND ACCORDINGLY ENTIRE ADDITION MADE ON THIS ACCOUNT MAY BE DELETED. 2.3 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDER AS WELL AS THE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 13 13 ABOVE NOTED SUBMISSIONS AND ARGUMENTS OF THE AR FOR DECIDING THIS ISSUE. AS PER THE UNDISPUTED FACTS OF THE CASE, THE ASSESSEE HAS DISCLOSED INCOME FROM SHARE TRANSACTIONS CARRIED OUT IN F & O (IN WHICH NO DELIVERY IS TAKEN), AS HIS BUSINESS INCOME AND GAI NS ON PURCHASE AND SALE OF SHARES (IN WHICH DELIVERY IS TAKEN), AS HIS STCG OR LTCG, DEPENDING UPON THE PERIOD OF HOLDING. OR IN OTHER WORDS, THE ASSESSEE HAS SHOWN BUSINESS INCOME IN RESPECT OF HIS NON - DELIVERY BASED SHARES OR DERIVATIVE TRANSACTIONS; WHE REAS, HE HAS SHOWN STCG/LTCG ON HIS DELIVERY BASED SHARE TRANSACTIONS. THE ASSESSEE HAS MAINTAINED SEPARATE ACCOUNTS OF THE RESPECTIVE SHARE TRANSACTIONS IN HIS BOOKS OF ACCOUNT. HE HAS MAINTAINED SEPARATE PORTFOLIO OF SHARES HELD AS INVESTMENT AND AS STOC K IN TRADE. THE CLOSING TOCK OF SHARES HELD IN INVESTMENT ARE VALUED AT COST PRICE; WHEREAS, THE SHARES HELD IN STOCK IN TRADE ARE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER. THE ASSESSEE HAS SHOWN THE SAME PATTERN OF INCOME IN HIS PRECEDING ASSESSM ENT YEARS, WHICH IS DULY ACCEPTED AND ASSESSED, AS SUCH BY THE AO IN THOSE RELEVANT ASSESSMENT YEARS. 2.3.1 THE FREQUENCY AND THE VOLUME OF THE SHARES PURCHASED AND SOLD ARE FOUND TO BE SUBSTANTIALLY HIGHER IN THE RELEVANT ASSESSMENT YEAR AS IN COMPARISO N TO HIS EARLIER A SSESSMENT YEARS. IT IS FURTHER OBSERVED THAT ALL THE SHARES IN WHICH STCG IS SHOWN ARE COVERED U/S. 111A OF THE ACT AND ACCORDINGLY THE ASSESSEE HAS TAKEN THE DELIVERY AFTER PAYING NECESSARY SECURITY TRANSACTION TAX. ACCORDING TO THE AR, ALTHOUGH LOAN IS TAKEN BUT NO INTEREST IS PAID ON BORROWED FUNDS UTILIZED FOR HIS SHARE TRADING ACTIVITY. IT WAS EXPLAINED THAT MOST OF THE LOAN IS TAKEN FROM HIS OWN ASSOCIATE CONCERNS I.E. M/S INDOPLAST, A FIRM IN WHICH ASSESSEE IS PARTNER AND MOHAN K. J AIN, AN HUF IN WHICH ASSESSEE IS THE KARTA. THEREFORE, ACCORDING TO THE AR, ASSESSEE 'S CASE CANNOT BE COMPARED TO A CASE WHERE A PERSON BORROWS LOAN ON INTEREST AND INVESTS IT IN SHARES. IT IS ALSO OBSERVED THAT THE VOLUME OF TRANSACTION FOR THE RELEVANT A SSESSMENT YEAR IS SUBSTANTIALLY HIGHER, WITH FREQUENT, REPETITIVE AND CONSISTENT TRANSACTIONS UNDERTAKEN ON VARIOUS SCRIPTS PURCHASED AND SOLD, ON WHICH STCG IS SHOWN BY THE ASSESSEE . 2,3.2 FROM THESE SPECIFIC FACTS BROUGHT ON RECORD AS DISCUSSED ABOVE, I FIND THAT THE CASE OF THE ASSESSEE IS MORE OR LESS IDENTICAL TO THE FACTS REPORTED IN THE CASE OF SHRI. GOPAL PUROHIT (SUPRA) RELIED ON BY THE AR, EXCEPT THAT IN THE CASE OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR, HE HAS ENTERED INTO SHARE TRANSACT IONS IN CERTAIN SCRIPTS QUITE FREQUENTLY, CONSISTENTLY AND REPEATEDLY I.E. THE ASSESSEE HAS BOUGHT A PARTICULAR SHARE, THEN SOLD IT TO REALIZE THE GAIN IN A SHORT PERIOD, THEREAFTER AGAIN PURCHASED THE SAME SHARE AND AGAIN SOLD IT TO REALIZE THE GAIN, AS T ABULATED BY THE AO AT PAGE NOS. 9 & 10 OF THE ASSESSMENT ORDER. THIS PATTERN OF PURCHASE AND SALE IS FOUND TO BE UNDERTAKEN REPEATEDLY IN CERTAIN SCRIPTS I.E. FOR MORE THAN 4 TIMES IN THE SAME SHARES DURING THE RELEVANT ASSESSMENT YEAR. THEREFORE, DUE TO T HIS PARTICULAR FACT NOTICED IN THIS YEAR I.E. THE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 14 14 ASSESSEE CONSISTENTLY TRANSACTED IN ONE PARTICULAR SHARE THAT TOO MORE THAN FOUR TIMES I.E. MORE THAN ONE TRANSACTION IN A QUARTER, DURING THE RELEVANT ASSESSMENT YEAR, TO MY CONSIDERED OPINION IS THE NATUR E OF A TRADING TRANSACTION. IN NORMAL CIRCUMSTANCES, A GENUINE INVESTOR WILL NOT ENTER INTO REPETITIVE TRANSACTIONS THAT TOO IN THE SAME SCRIPT OVER AND OVER AGAIN FOR MORE THAN F OUR T IMES IN A YEAR. THEREFORE, DUE TO A REPETITIVE TRANSACTIONS ENTERED IN SHARES COUPLED WITH THE FACTS THAT THE VOLUME OF TRANSACTIONS ARE VERY HIGH, THEY ARE UNDERTAKEN VERY FREQUENTLY AND CONSISTENTLY, ALTHOUGH INTEREST IS NOT PAID DIRECTLY BUT ADVANCES AR E TAKEN FOR THIS PURPOSE AND OTHER UNDISPUTED FACTORS POINTED OUT BY THE AO AS DISCUSSED ABOVE, SHOWS THAT ASSESSEE IS A TRADER IN ALL THOSE SHARES. THEREFORE, RESPECTFULLY FOLLOWING THE RECENT ORDER OF THE HON'BLE JURISDICTIONAL ITAT IN THE CASE OF SHRI G OPAL PUROHIT (SUPRA), IN WHICH IT IS HELD THAT PROFIT OR LOSS ON DELIVERY BASED TRANSACTIONS SHALL BE ASSESSED AS STCG OR LTCG , DEPENDING UPON ITS PERIOD OF HOLDING, AND THE BOARDS CIRCULAR NO. 4 OF 2007, IN WHICH IT IS CLARIFIED THAT A PERSON CAN HAVE A T RADING PORTFOLIO AND INVESTMENT PORTFOLIO OF SHARES AT A GIVEN POINT OF TIME, STILL DUE TO THIS UNIQUE FEATURE OR FACTS NOTICED IN THE CASE IN HAND; WHEREBY UNDISPUTEDLY, IT IS FOUND THAT THE ASSESSEE HAS DEALT IN OR TRANSACTED IN THE SHARES OF SAME COMPA NY REPEATEDLY OR MORE THAN FOUR TIMES DURING THE YEAR, THE SURPLUS THEREON, TO MY CONSIDERED OPINION CANNOT BE TREATED AS HIS CAPITAL GAIN OR LOSS; RATHER THE SAME IS HELD TO BE IN THE NATURE OF HIS BUSINESS INCOME. EVEN IF THE SUBMISSIONS MADE BY THE AR A S DISCUSSED ABOVE ARE TAKEN IN TO CONSIDERATION VIS - A - VIS THE CASE LAWS CITED, I FIND THAT A PERSON CANNOT BE HELD AS INVESTOR OF A PARTICULAR SHARE OR UNIT OF A MUTUAL FUND IF HE/ SHE CONSISTENTLY KEEPS ON PURCHASING AND SELLING THE SAME SHARE FOR REALIZI NG PROFITS MORE THAN FOUR TIMES IN A YEAR IN AN ORGANIZED MANNER, USING HIS BORROWED FUNDS. IN THE CASE OF THE ASSESSEE AS PER ANNEXURE - A ENCLOSED TO THIS ORDER, HE HAS DEALT IN FOUR SUCH SHARES AND IN BOTH THESE SHARES THE REPETITIVE TRANSACTIONS ARE CARR IED OUT FOR MORE THAN 4 TIMES DURING THE RELEVANT ASSESSMENT YEAR. THIS FACT PROVES HIS INTENTION OF EARNING PROFIT BEYOND DOUBT AS HELD BY THE HON'BLE APEX COURT IN THE CASE OF HOLOCK AND LARSEN (SUPRA), EVEN IF HE HAS TAKEN DELIVERY IN THOSE SHARES, AND THEREFORE, TO MY CONSIDERED OPINION THE ASSESSEE IS A TRADER IN ALL THOSE SHARES IN WHICH HE HAS MADE REPETITIVE PURCHASE AND SALE FOR MORE THAN FOUR TIMES DURING THE RELEVANT ASSESSMENT YEAR I.E. PRECISELY MORE THAN ONE TRANSACTION IN A QUARTER OF THE REL EVANT ASSESSMENT YEAR. IT IS ALSO NOTICED THAT IN CERTAIN INSTANCES THE ASSESSEE HAS SOLD THESE SHARES INCURRING LOSS, ONLY TO MINIMIZE HIS FURTHER LOSS, WHEN HE VISUALIZED THE MARKET IS GOING DOWN AND AGAIN PURCHASED THE SAME SCRIPT LATER ON, WHEN HE EXPE CTED THAT THE MARKET IS IMPROVING OR GOING UP. THIS UNIQUE FEATURE OR THE FACTUAL ASPECT NOTICED IN THE CASE OF THE ASSESSEE AND NOT DENIED BY THE AR, TO MY CONSIDERED OPINION IS RELATED TO HIS BUSINESS CARRIED OUT IN THESE SHARES AND THEREFORE, THE LOSS O R PROFIT REALIZED ON THESE TRANSACTIONS CANNOT BE HELD AS HIS STCG OR LTCG. THE SCRIPT WISE DETAILS OF ALL SUCH SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 15 15 TRANSACTIONS CARRIED OUT BY THE ASSESSEE ARE ENCLOSED AS ANNEXURE - A TO THIS ORDER. THEREFORE, IN VIEW OF THE SAME A NET PROFIT OR SURPLUS OF RS. 6,00,917/ - PERTAINING TO SUCH SHARE TRANSACTIONS UNDERTAKEN IN THE SHARES/UNITS OF VARIOUS COMPANIES VIZ. COROMANDEL FERTILIZERS LTD., DHARANI SUGAR & CHEMICALS LTD., DEWAN HOUSING FINANCE LTD & HERITAGE FOODS LTD. TO MY CONSIDERED OPINION IS IN THE NATUR E OF HIS BUSINESS INCOME. SINCE, THESE SHARES WERE PURCHASED AND SOLD AND AGAIN PURCHASED AND SOLD ON NUMEROUS TIMES ( I.E. MORE THAN FOUR TIMES DURING THE YEAR) BY THE ASSESSEE DURING THE RELEVANT ASSESSMENT YEAR, THE SURPLUS REALIZED THEREON, HAS ALL THE CHARACTERISTICS OR TRAITS OF BECOMING A BUSINESS INCOME INSTEAD OF STCG AS CLAIMED BY THE ASSESSEE . 2.3.3. THEREFORE, BASED ON THESE FACTS AVAILABLE IN THE CASE OF THE ASSESSEE AND RESPECTFULLY CONSIDERING THE VARIOUS CASE LAWS RELIED ON BY THE AR, I FIND THAT THESE PECULIAR FACTS ARE DISTINGUISHABLE TO THE FACTS REPORTED IN THE RECENT CASE OF SH. GOPAL PUROHIT (SUPRA), HEAVILY RELIED ON BY THE AR. AS PER THE FACTS REPORTED IN T HE SAID CASE, THE ISSUE BEFORE THE HON'BLE ITAT WAS TO DECIDE WHETHER THE ASSESSEE 'S INCOME ON ACCOUNT OF SALE OF SHARES ARE IN THE NATURE OF SHORT TERM CAPITAL GAIN OR BUSINESS INCOME. IN THE SAID CASE, THE ASSESSEE HAS DISCLOSED INCOME OUT OF HIS DELIVER Y BASED TRANSACTIONS AS HIS SHORT TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN DEPENDING UPON THE PERIOD OF HOLDING, WHEREAS THE INCOME OR LOSS ON ACCOUNT OF NON DELIVERY BASED TRANSACTION ARE SHOWN AS BUSINESS INCOME. THE ASSESSEE HAS ALSO TAKEN LOAN ON WH ICH INTEREST IS PAID BUT THE DIRECT NEXUS OF ITS UTILIZATION FOR FINANCING THE SHARES ON WHICH STCG IS SHOWN IS NOT PROVED AND THE MAGNITUDE OF SHARE TRANSACTION UNDER TAKEN ARE FOUND TO BE SUBSTANTIAL AS AVAILABLE IN THE CASE OF THE ASSESSEE . ON ACCOUNT O F THESE FACTS, THE HON'BLE ITAT AFTER TAKING INTO CONSIDERATION VARIOUS CITATIONS, BOARD'S CIRCULAR AND THE ARGUMENTS OF THE PARTIES CONCERNED HAS DECIDED THE ISSUE IN FAVOR OF THE ASSESSEE RELYING ON THE ORDER OF HONBLE ITAT LUCKNOW IN THE CASE OF SARNAT H INFRASTRUCTURE PVT. LTD. VS. ACIT (2008) 16 DTR 97(LUCKNOW), AND HELD THAT AS PER THE FACTS OF THE CASE, THE ASSESSEE 'S CLAIM OF STCG AND LTCG ON SHARE TRANSACTION, WHERE THE DELIVERY HAS BEEN TAKEN OR GIVEN AND THE SECURITY TRANSACTION TAX HAS BEEN PAID IS TO BE ACCEPTED. THE HON' BLE ITAT HAS HELD THAT CONSIDERING THE NATURE OF ACTIVITIES, MODUS OPERANDI OF THE ASSESSEE , PAST HISTORY, MANNER OF KEEPING RECORDS AND PRESENTATION OF SHARES AS INVESTMENT AT THE YEAR END IS SAME IN ALL THE EARLIER YEARS AS SH OWN IN THE RELEVANT ASSESSMENT YEAR, THEREFORE, APPARENTLY, THERE APPEARS NO REASON AS TO WHY THE CLAIM OF THE ASSESSEE IS REJECTED BY THE DEPARTMENTAL AUTHORITIES. THE ITAT HAS FURTHER OBSERVED THAT THE AO HAS TAKEN A DIFFERENT VIEW IN THE RELEVANT ASSESS MENT YEAR HOLDING THAT THE PRINCIPLE OF RES - JUDICATA IS NOT APPLICABLE TO THE INCOME - TAX PROCEEDINGS. ACCORDING TO THE ITAT, THERE CANNOT BE ANY DISPUTE ON THIS ASPECT, BUT AT THE SAME TIME, THERE IS ALSO ANOTHER JUDICIAL THOUGHT, THAT THERE SHOULD BE UNIF ORMITY IN TREATMENT AND CONSISTENCY UNDER THE SAME FACTS AND CIRCUMSTANCES AND ACCORDINGLY SINCE THE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 16 16 SAME FACTS AND CIRCUMSTANCES ARE FOUND TO BE IDENTICAL IN THE CASE OF THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR AS IN COMPARISON TO ITS EARLIER ASSESSME NT YEARS, THE DIFFERENT STAND TAKEN BY THE AO IS NOT FOUND TO BE TENABLE. THE HON'BLE ITAT HAS FURTHER OBSERVED THAT AS PER THE FACTS AVAILABLE ON RECORD IT IS APPARENT THAT THE AO HAS TAKEN A DIFFERENT STAND MAINLY BECAUSE THERE WAS A CHANGE IN THE SCHEM E OF TAXATION RELATING TO STCG AND LTCC MADE EFFECTIVE THROUGH THE FINANCE ACT, 2004, THE LEGISLATURE HAS IMPOSED SECURITY TRANSACTION TAX ON THE SALE AND PURCHASE OF SHARES AND OTHER DERIVATIVE TRANSACTIONS AND, SIMULTANEOUSLY, THE LEGISLATURE EXEMPTED L TCG UNDER SECTION 10(38) OF THE ACT FROM THE LEVY OF TAXATION AND ON STCG, A CONCESSIONAL RATE OF TAX AT THE RATE OF 10% WAS INTRODUCED SUBJECT TO THE CONDITION THAT THE TRANSACTIONS RESULTING INTO THESE TYPE OF GAIN MUST HAVE SUFFERED THE BURDEN OF SECURI TIES TRANSACTIONS TAX. THIS ACCORDING TO THE HON'BLE ITAT HAS PROMPTED THE AO TO TAKE A DIFFERENT VIEW ON THE SAME SET OF FACTS AND TYPES OF TRANSACTIONS ENTERED INTO BY THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR AND AS FOUND IN THE ITS EARLIER ASSESSMEN T YEARS. THEREFORE ON ACCOUNT OF THESE FACTS, THE HON'BLE ITAT HAS CONCLUDED THAT ON THE GIVEN SET OF FACTS AND IDENTICAL TRANSACTIONS, MERELY ON ACCOUNT OF CHANGE IN LAW, THE ADVANTAGE PROVIDED TO THE ASSESSEE CANNOT BE TAKEN AWAY BY THE AO IN THE MANNER AND IN THE CIRCUMSTANCES AS HELD IN THE ASSESSMENT ORDER. THEREAFTER, THE HON'BLE ITAT HAS BRIEFLY DISCUSSED AND RELIED ON THE CASE OF SARNATH INFRASTRUCTURE P.LTD. VS. ACIT (SUPRA) DECIDED BY THE HON'BLE ITAT, LUCKNOW BENCH AND ON ACCOUNT OF IDENTICAL FAC TS REPORTED IN BOTH THE CASES, HAS HELD THAT ALL DELIVERY BASED TRANSACTIONS ARE IN THE NATURE OF INVESTMENT AND ALL NON DELIVERY BASED TRANSACTIONS UNDER TAKEN BY THE ASSESSEE ARE IN THE NATURE OF BUSINESS TRANSACTION. THE SPECIFIC FINDINGS OF THE HON'BLE ITAT AS RECORDED PARAS 8.3 TO 9 RELEVANT FOR THIS PURPOSE ARE REPRODUCED AS UNDER : - 8.3. W HEN WE COMPARE THE FACTS OF THIS CASE WITH THAT CASE, WE FIND THAT FACTS OF BOTH ARE ALMOST IDENTICAL. IN THE PRESENT CASE, THE ASSESSEE IS ALSO MAINTAINING SEPAR ATE RECORD FOR BOTH TYPES OF TRANSACTIONS. FURTHER, IN THE PRESENT CASE. IT IS IMPORTANT TO NOTICE THAT THE ASSESSEE HAS ENTERED INTO TWO DIFFERENT TYPES OF TRANSACTIONS WHERE BOTH ACTIVITIES ARE ENTIRE DIFFERENT IN NATURE I.E. ONE ACTIVITY IS OF INVESTMEN T IN NATURE ON THE BASIS OF DELIVERY AND SECOND ACTIVITY IS PURELY OF JOBBING ( WITHOUT DELIVERY), WHICH PUTS THE ASSESSEE'S CASE ON A MORE STRONG FOOTING. HENCE, IN OUR VIEW, THE RATIO OF THIS DECISION IS SQUARELY APPLIES TO THE F ACTS OF THE PRESENT CASE. ACCORDINGLY, WE HOLD THAT THE DELIVERY BASED TRANSACTION SHOULD BE TREATED AS OF THE NATURE OF INVESTMENT TRANSACTION AND PROFIT THERE FROM SHOULD BE TREATED AS SHORT TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN DEPENDING UPON THE PERIOD OF HOLDING. 8.4. TH E REVENUE HAS ALSO HELD THAT PRESENTATION IN THE BOOKS OF ACCOUNT WAS NOT CONCLUSIVE WHICH MAY BE TRUE TO SOME EXTENT, BUT IT IS THE MOST CRUCIAL SOURCE OF GATHERING INTENTION OF THE ASSESSEE AS REGARD TO THE NATURE OF TRANSACTION AND IN LAW, IT IS ALSO SO I.E. SUCH PRESENTATION REFLECTS, PRIMA FACIE, A VIEW OF THE ASSESSEE ON A SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 17 17 PARTICULAR SUBJECT AND THIS PRINCIPLE IS EFFECTIVELY APPLICABLE IN A SITUATION LIKE THIS AS COMPARED TO AS SITUATION WHERE NATURE OF EXPENDITURE OR INCOME IS DIFFERENT IN THE BOOKS OF ACCOUNT AND IN THE RETURN OF INCOME FILED BY THE ASSESSEE WHEREIN THE SPECIFIC PROVISIONS OF I.T.ACT HAVE TO BE CONSIDERED OVER SUCH PRESENTATION AND IF THERE EXISTS NO SPECIFIC PROVISIONS, IT IS THE COMMERCIAL PROFITS WHICH HAVE TO BE TAXED AND EVEN IN THAT SITUATION, THE ASSESSEE MAY BE FOUND TO BE JUSTIFIED IN GIVING DIFFERENT TREATMENT IN THE BOOKS OF ACCOUNT AS COMPARED TO RETURN OF INCOME BECAUSE OF COMMERCIAL CONSIDERATIONS OR ACCOUNTING REQUIRE MENTS. IN THE CASE OF KARAM CHAND T HAPAR & BROS(P)LTD VS. CIT (1971) 82 ITR 899 (SC), THE HON'BLE SUPREME COURT HAS HELD THAT CIRCUMSTANCES THAT THE ASSESSEE HAD SHOWN CERTAIN SHARES AS INVESTMENT IN ITS BOOKS AS WELL AS ITS BALANCE SHEET WAS BY ITSELF MIG HT NOT BE A CONCLUSIVE CIRCUMSTANCE BUT IT WAS IRRELEVANT CIRCUMSTANCE. HENCE, WE DO NOT FIND MUCH SUBSTANCE IN THIS FINDINGS OF THE REVENUE AUTHORITIES IN THE FACTS OF THE PRESENT CASE. T HE REVENUE AUTHORITIES HAVE ALSO HELD THAT BORROWED FUNDS WERE UTILI ZED FOR MAKING SUCH INVESTMENTS WHEREAS IN EARLIER YEARS, INTEREST ON SUCH LOANS HAS BEEN ALLOWED AS BUSINESS EXPENDITURE AGAINST PROFIT ON SHARES TRADING TRANSACTIONS SHOWN AS BUSINESS INCOME AND IN THE YEAR UNDER CONSIDERATION ALSO, NO NEXUS BETWEEN TILE INTEREST BEARING FUNDS AND INVESTMENT HAS BEEN ESTABLISHED, HENCE, FOR THIS REASON ALSO, WE FIND NO MERIT IN TREATING THE LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN A S BUSINESS PROFITS. 8.5 THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO CONTENDED THAT INVESTMENT COULD BE AN ORGANIZED ACTIVITY ALSO AND WE FIND SOME SUBSTANCE IN THIS CONTENTION BECAUSE NOW THE STAKES ARE HIGH AND NOBODY WANTS TO LOOSE MONEY AS THERE ARE GREAT CAPITAL LOSS IN RESPECT OF SHARES AS COMPARED TO FIXED INTEREST EARNINGS SECURITIES WHERE THE PRINCIPLE MONEY REMAIN SECURED AND ALSO EVERYONE WANTS TO MAXIMIZE WEALTH AND MINIMIZE RISK, HENCE, A PERSON INVESTING IN SHARES IS BOUND TO STUDY THE NEWSPAPERS, BUSINESS MAGAZINES, WATCH THE BUSINESS CHANNELS AND USE WEBSITES AND OTH ER TOOLS TO KEEP A TRACT OF THE DEVELOPMENTS WHICH ARE HAPPENING ON DAY TO DAY BASIS AND WHICH MAY HAPPEN IN THE NEAR FUTURE AND FOR THIS, HE MAY HAVE ASSISTANCE OF THE FINANCIAL PLANNER OR INVESTMENT CONSULTANT, OR MAY BY HIS OWN EXPERTISE AND CAPABILITIE S TO DO IT ON HIS OWN, HENCE, IN OUR VIEW, EMPLOYMENT OF SUCH INFRASTRUCTURE CANNOT TURN AN INVESTMENT ACTIVITY INTO A BUSINESS ACTIVITY. WE MAY ALSO ADD THAT ASSESSEE HAS ALSO RAISED VARIOUS OTHER CONTENTIO N S, WHICH, IN OUR OPINION, NEED NOT BE ADJUDICATED AT THIS ST AGE IN VIEW OF OUR DECISION FOR THE ABOVE REASONS, HENCE, WE REFRAIN OURSELVES FROM DELIBERATING ON THOSE CONTENTIONS. 9. TO CONCLUDE, WE HOLD THAT, IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, THE ASSESSEE'S CLAIM OF SHORT TERM CAPITAL AND LONG TERM CAPITAL GAIN ON SHARE TRANSACTIONS WHERE THE DELIVERY HAS BEEN TAKEN OR GIVEN AND SECURITIES TRANSACTIONS TAX HAS BEEN PAID IS LIABLE TO BE ACCEPTED. ACCORDINGLY WE REVERSE THE ORDERS OF REVEN UE AUTHORITIES. SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 18 18 2.3.4. SIMILARLY, IN THE CASE OF ADDL. CIT VS. SHRI. SUNDER IYER IN ITA NO. 295(MUM.) OF 2001, THE HONBLE JURISDICTIONAL ITAT HAS HELD UNDER SIMILAR FACTS AND CIRCUMSTANCES AS UNDER: - 'THE ASSESSEE MIGHT HAVE GOOD KNOWLEDGE OF THE SHARE MARKET AS A BROKER BUT, IN OUR OPINION, THIS DOES NOT LEAD TO THE CONCLUSION THAT THE ASSESSEE WOULD ONLY BE PURCHASING SHARES AS STOCK - IN - TRADE FOR THE PURPOSE OF CARRYING ON BUSINESS. THERE IS NO LAW WHICH PREVENTS THE SHARE BROKER FROM MA K ING INVESTMENT S IN SHARES. W E HOLD THAT NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE ASSESSING OFFICER TO SUBSTANTIATE HIS FINDING THAT THE ASSESSEE HAD BEEN TRADING IN SHARES IN HIS INDIVIDUAL CAPACITY. THE ASSESSING OFFICER HAS ALSO FAILED TO SPECIFICALLY POINT OUT THAT THE BORROWINGS WERE UTILIZED FOR MAKING INVESTMENTS IN SHARES. THE ASSESSEE HAD ENOUGH CAPITOL OF HIS OWN TO ENABLE HIM TO MAKE THE INVESTMENTS IN SHARES. 2.3.5. IN THE CASE OF CIT VS. ASSOCIATED INDU STRIAL DEVELOPMENT COMPANY (P) LTD. 82 ITR 586, THE HONBLE SUPREME COURT HAS OBSERVED ON THIS ISSUE 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 WITHIN THE KNOWLEDGE O F THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ONLY DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOCK - IN - TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT.'(EMPHASIS SUPPLIED) 2.3.6. LIKEWISE, AGAIN THE HON'BLE JURISDICTIONAL ITAT ON IDENTICAL FACTS IN THE CASE OF SHRI JANAK S. RANGWALA VS. ACIT HAS HELD IN THIS REGARD AS UNDER: - 'IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE IS HOLDI NG THE SHORES AS INVESTMENT FROM YEAR TO YEAR. IT IS THE INTENTION OF THE ASSESSEE WHICH IS TO BE SEEN TO DETERMINE THE NATURE OF TRANSACTION CONDUCTED BY THE ASSESSEE. THOUGH THE INVESTMENT IN SHARES IS ON A LARGE MAGNITUDE BILL THE SAME SHALL NOT DECIDE THE NATURE OF TRANSACTION. SIMILAR TRANSACTIONS OF SALE AND PURCHASE OF SHARE IN THE PRECEDING YEARS HAVE BEEN HELD TO BE INCOME FROM CAPITAL GAINS BOTH ON LONG TERM AND SHORT TERM BASIS. THE TRANSACTION IN THE YEAR UNDER CONSIDERATION ON ACCOUNT OF SALE A ND PURCHASE OF SHARES IS SAME AS IN THE PRECEDING YEARS AND THE SAME MERITS TO BE ACCEPTED AS SHORT TERM CAPITAL GAINS. THERE IS NO BASIS FOR TREATING THE ASSESSES AS A TRADER IN SHARES, WHEN HIS INTENTION WAS TO HOLD THE SHORES IN INDIAN COMPANIES AS AN I NVESTMENT AND NOT AS STOCK IN TRADE. THE MORE MAGNITUDE OF THE TRANSACTION DOES NOT CHANGE THE NATURE OF TRANSACTION, WHICH ARE BEING ASSESSED AS INCOME FROM CAPITAL GAIN IN THE POST SEVERAL YEARS. THE ASSESSING OFFICER IS DIRECTED TO SET OFF THE LONG TERM CAPITAL LOSS AGAINST THE SHORT TERM CAPITAL GAIN OF THE YEAR UNDER CONSIDERATION . SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 19 19 2.3.7. THE HONBLE S.C IN THE CASE OF H. HOLCK LARSEN 160 ITR 67 AFTER TAKING INTO CONSIDERATION VARIOUS ENGLISH AND INDIAN DECISIONS ON THE SUBJECT HAS HELD THAT FOR DETERMINING WHETHER THE PERSON WAS A DEALER OR INVESTOR IN SHARES, THE REAL QUESTION WAS WHETHER THE FIRST STEP I.E. PURCHASE OF SHARES WAS TAKEN AS IN THE C ASE OF A TRADING TRANSACTION. IF THAT BE SO, THE PROFIT THERE FROM WOULD BE OF THE NATURE OF BUSINE SS PROFIT AND IF NOT SO, THE PROFIT THERE FROM WOULD NOT BE TREATED AS EARNED BY THE TRADER. THEREFORE, ACCORDING TO THE HON'BLE SUPREME COURT, THE BASIC INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF THE SHARE IS THE GUIDING FACTOR FOR DECIDING WHET HER THE TRANSACTION UNDERTAKEN IS IN THE NATURE OF A TRADING TRANSACTION OR AN INVESTMENT TRANSACTION. 2.3.8 IT IS FURTHER NOTED THAT THE SCHEME OF TAXATION OF CAPITAL GAINS RELATED TO SHARES HAS UNDERGONE SUBSTANTIAL CHANGES BY FINANCE ACT 2004. FROM THE ASSESSMENT YEAR 2005 - 06 (W.E.F. 01.10.2004), SECURITY TRANSACTION TAX (STT) IS IMPOSED ON SALE AND PURCHASE OF SHARES AND OTHER DERIVATIVE TRANSACTIONS BUT AT THE SAME TIME, LONG TERM CAPITAL GAINS ON SALE OF SHARES IS EXEMPTED FROM TAX U/S. 10(38) OF THE INCOME - TAX ACT, 1961, AND SHORT TERM CAPITAL GAIN ON SALE OF SHARES IS SUBJECTED TO A CONCESSIONAL RATE OF TAX I.E.@10%. THE PAYMENT OF SECURITY TRANSACTION TAX IS MADE MANDATORY IRRESPECTIVE OF THE PROFIT OF THE ASSESSEE OR LOSS SUFFERED BY THE ASSESSEE . TO APPRECIATE THE NEW CONCEPT OF STT AND CONSEQUENT CHANGES BROUGHT IN TAXATION OF CAPITAL GAINS, IT WOULD BE PERTINENT TO REPRODUCE THE SPEECH OF THE HON BLE FINANCE MINISTER MADE IN THE PARLIAMENT, WHILE INTRODUCING THE NEW PROVISIONS, WHICH READ AS UND ER: EXTRACT OF FINANCE MINISTERS SPEECH WHILE INTRODUCING NEW CAPITAL GAIN TAX REGIME: CAPITA! GAINS TAX IS ANOTHER VEXED ISSUE. WHEN APPLIED TO CAPITAL MARKET TRANSACTIONS, THE ISSUE BEC OMES MORE COMPLEX. QUESTIONS HAVE BEEN RAISED ABOUT THE DEFINITION S OF LONG - TERM AND SHORT - TERM, AND THE DIFFERENTIAL TAX TREATMENT METED TO THE TWO KINDS OF GAINS. THERE ARE NO EASY ANSWERS, BUT I HAVE DECIDED TO MAKE A BEGINNING BY REVAMPING T A XES ON SECURITIES TRANSACTIONS. OUR FOUNDING FATHERS HAD WISELY INCLUDED ENT RY 90 IN THE UNION LIST IN THE SEVENTH SC HEDULE OF CONSTITUTION OF INDIA. TAKING A CUE FROM THAT ENTRY, I PROPOSE TO ABOLISH THE TAX ON LONG - TERM CAPITAL GAINS FROM SECURITIES TRANSACTIONS ALTOGETHER. INSTEAD, I PROPOSE TO LEVY A SMALL TAX ON TRANSACTIONS IN SECURITIES ON STOCK EXCHANGES. THE RATE WILL BE 0.15 PER CENT. OF THE VALUE OF SECURITY. THUS, A TRANSACTION INVOLVING SECURITIES VALUED AT, SAY, RS.1,00,000 WILL NOW BEAR A SMALL TAX OF RS.150. THE TAX WILL BE LEVIED ON THE BUYER. IN THE CASE OF SHORT - TERM CAPITAL GAINS FROM SECURITIES, I PROPOSE TO REDUCE THE RATE OF TAX TO A FLAT RATE OF 10 PERCENT. MY CALCULATION SHOWS THAT THE NEW TAX REGIME WILL BE A WIN - WIN SITUATION FOR ALL CONCERNED. 2.3.9. THE ABOVE BUDGET SPEECH OF THE HON'BLE FM, CLEARLY BRI NGS OUT THE INTENTION OF THE GOVERNMENT. THE TAXATION OF CAPITAL GAINS RELATED TO SHARES WAS REVAMPED BY IMPOSING STT ON VALUE OF SHARE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 20 20 TRANSACTION, EXEMPTING LONG TERM CAPITAL GAINS AND IMPOSING FLAT TAX RATE OF 10% ON SHORT - TERM CAPITAL GAINS. THE REVENU E LOST BY EXEMPTION OF LONG - TERM CAPITAL GAINS AND CONCESSIONAL TAXATION OF SHORT - TERM CAPITAL GAINS WAS MORE THAN MADE UP BY LEVY OF STT. THEREFORE, BY IMPOSITION OF SUCH TAX, THE LEGISLATURE HAS NOT GIVEN ANY BENEFIT TO A CLASS OF TRANSACTION AS A WHOLE THOUGH IT MAY RESULT INTO AN APPARENT BENEFIT TO INDIVIDUALS DERIVING LONG - TERM OR SHORT - TERM CAPITAL GAINS. IT IS WORTHWHILE TO MENTION THAT PRIOR TO THE AMENDMENT IN TAXATION OF CAPITAL GAINS AND IMPOSITION OF SECURITY TRANSACTION TAX, THE A.O. DID NOT Q UESTION THE TAXABILITY OF SHORT TERM CAPITAL GAINS AND THE ISSUE OF BUSINESS INCOME VS. SHORT TERM CAPITAL GAINS' WAS NOT OF MUCH RELEVANCE BECAUSE THERE WAS NO CONCESSIONAL TAXATION IN CASE OF SHORT TERM CAPITAL GAINS. THE HONBLE JURISDICTIONAL ITAT IN THE CASE OF SH.GOPAL PUROHIT (SUPRA), HAS FURTHER OBSERVED THAT AS PER THE IDENTICAL FACTS REPORTED IN THE SAID CASE IT IS APPARENT THAT THE AO HAS TAKEN A DIFFERENT STAND MERELY BECAUSE THERE WAS A CHANGE IN THE SCHEME OF TAXATION RELATING TO STCG AND L TCG MADE EFFECTIVE THROUGH THE FINANCE ACT, 2004, THE LEGISLATURE HAS IMPOSED SECURITY TRANSACTION TAX ON THE SALE AND PURCHASE OF SHARES AND OTHER DERIVATIVE TRANSACTIONS AND, SIMULTANEOUSLY, THE LEGISLATURE EXEMPTED LTCG UNDER SECTION 10(38) OF THE ACT F ROM THE LEVY OF TAXATION AND ON STCG, A CONCESSIONAL RATE OF TAX AT THE RATE OF 10% WAS INTRODUCED SUBJECT TO THE CONDITION THAT THE TRANSACTIONS RESULTING INTO THESE TYPE OF GAIN MUST HAVE SUFFERED THE BURDEN OF SECURITIES TRANSACTIONS TAX. THIS ACCORDING TO THE HON'BLE ITAT HAS PROMPTED THE AO TO TAKE A DIFFERENT VIEW ON THE SAME SET OF FACTS AND TYPES OF TRANSACTIONS ENTERED INTO BY THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR AND AS FOUND IN THE ITS EARLIER ASSESSMENT YEARS. THEREFORE ON ACCOUNT OF THESE FACTS, THE HON'BLE ITAT HAS CONCLUDED THAT ON THE GIVEN SET OF FACTS AND IDENTICAL TRANSACTIONS, MERELY ON ACCOUNT OF CHANGE IN LAW, THE ADVANT AGE PROVIDED TO THE ASSESSEE CANNOT BE TAKEN AWAY BY THE AO IN THE MANNER AND IN THE CIRCUMSTANCES AS HELD IN THE ASSESSMENT ORDER. 2.3.10. AS REGARDS THE RELIANCE PLACED BY THE AO ON VARIOUS CASES DISCUSSED IN THE ASSESSMENT ORDER, IT IS NOW SETTLED THAT NO UNIVERSAL CRITERIA CAN BE LAID DOWN TO DECIDE THE CONTROVERSY OF CAPITAL GAINS VS. BUSINESS INCOME ON SALE OF SHARES. THERE ARE SEVERAL J UDGMENTS FOR AND AGAINST THE ASSESSEE . EACH OF THESE JUDGMENTS IS DECIDED ON THE INDEPENDENT SET OF FACTS AVAILABLE IN THAT PARTICULAR CASE. THESE JUDGMENTS AS EXPLAINED IN THE CBDT'S CIRCULAR, MERELY LAID DOWN SEVERAL BROAD AND GENERAL GUIDELINES ON THE B ASIS OF WHICH ONE HAS TO DECIDE WHETHER THE GAIN SHOULD BE ASSESSED AS CAPITAL GAINS OR BUSINESS INCOME. THE RATIO LAID DOWN IN THESE JUDGMENTS, INCORPORATED IN THE CIRCULAR ISSUED BY THE CENTRAL BOARD OF DIRECT T AXES HAS BEEN DISCUSSED IN DETAIL IN THE F OREGOING PARAGRAPHS OF THIS ORDER. THE HONBLE BOMBAY BENCH OF ITA.T. IN THE CASE OF J.M.SHARE & STOCK BROKERS LTD. VS . J.C.I.T. (I.T.A. NO.2801/MUM/2000), HAS HELD THAT AN ASSESSEE CAN BE AN INVESTOR AS WELL AS A BROKER AND SHARES - TRADER. SO LONG AS THE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 21 21 ACCOUNT OF THE SHARES HELD AS STOCK - IN - TRADE AND SHARES HELD AS INVESTMENT ARE RECORDED SEPARATELY, PROFIT/LOSS THERE FROM IS CLEARLY AND DISTINCTLY IDENTIFIABLE AND THE PRACTICE OF HOLDING SOME SHARES AS STOCK - IN - TRADE AND SOME SHARES AS INVESTMENT IS CON SISTENTLY FOLLOWED, THE PROFIT FROM SHARES TRADING AND SHARE BROKERAGE SHALL BE ASSESSED AS BUSINESS INCOME AND GAINS FROM SHARES HELD AS INVESTMENT SHALL BE BROUGHT TO TAX UNDER THE HEAD 'CAPITAL GAINS' ONLY. THE HON'BLE CHANDIGARH BENCH OF ITAT, IN THE C ASE OF VESTA INVESTMENT & TRADING CO. PVT. LTD. (70 ITD 200) HAS HELD THAT A COMPANY CAN BE ENGAGED IN THE BUSINESS OF TRADING IN SHARES AND ALSO CAN PURCHASE SHARES PREDOMINANTLY FOR THE PURPOSE OF INVESTMENT. THE HONBLE MUMBAI BENCH OF ITAT IN THE CASE OF SH. JANAK S. RANGWALA( SUPRA), AS DISCUSSED ABOVE HAS HELD THAT MERE LARGE VOLUME OF SHARES CANNOT BE THE SOLE CRITERIA FOR DECIDING IF THE GAINS SHOULD BE ASSESSED AS BUSINESS INCOME OR CAPITAL GAINS. THE HON'BLE SUPREME COURT IN THE CASE OF C.I.T. VS. H. HOLCK LARSEN (160 ITR 67), AS DISCUSSED ABOVE H AS HELD THAT THERE IS NOTHING IN AN INVESTOR FREQUENTLY CHURNING HIS PORTFOLIO TO PROTECT HIS INVESTMENT AND REALIZE APPRECIATION. THE HONBLE MUMBAI BENCH OF I.T.A.T. IN THE CASE OF GOPAL PUROHIT VS . .J. C.I.T (SUPRA) AS DISCUSSED ABOVE HAS HELD THAT THE DELIVERY BASED TRANSACTIONS SHOULD BE TREATED AS OF THE NATURE OF INVESTMENT AND PROFIT THERE FROM SHOULD BE TREATED AS SHORT - TERM CAPITAL GAIN OR LONG - TERM CAPITAL GAINS DEPENDING UPON THE PERIOD OF HOLDI NG. THE DEPLOYMENT OF INFRASTRUCTURE OR FREQUENT CHURNING OF INVESTMENT CANNOT TURN GAINS FROM INVESTMENT INTO BUSINESS INCOME. IN THE ASSESSEE 'S CASE, AS PER THE PAST HISTORY, IT IS EVIDENT THAT THE ASSESSEE HAD BEEN ENGAGED IN SHARE TRADING AS WELL AS SH ARE INVESTMENT. THE PROFITS FROM TRADING OPERATION WERE ASSESSED AS BUSINESS INCOME AND THE GAINS FROM INVESTMENT WERE BROUGHT TO TAX AS CAPITAL GAINS. 2.3.11. THEREFORE, IN VIEW OF THE AFORESAID DISCUSSION, THE FOLLOWING POINTS OR FACTS EMERGE IN THE CAS E OF THE ASSESSEE : (I) THE ASSESSEE HAS MAINTAINED TWO PORTFOLIOS OF SHARE TRANSACTIONS I.E DELIVERY BASED SHARE TRANSACTIONS AND NON - DELIVERY BASED SHARE TRANSACTIONS (F&O AND INTRA - DAY SHARE TRANSACTIONS), AND HAS SHOWN PROFIT OR LOSS EARNED IN RESPECT TO HIS DELIVERY BASED SHARE TRANSACTIONS AS HIS STCG OR LTCG, DEPENDING UPON THE PERIOD OF HOLDING; WHEREAS, PROFIT OR LOSS EARNED ON NON DELIVERY BASED TRANSACTIONS ARE SHOWN AS HIS BUSINESS INCOME. (II) HE HAS CARRIED OUT THESE ACTIVITIES SEPARATELY MAINTAINING SEPARATE LEDGER ACCOUNTS AND RECORDING THESE ENTRIES SEPARATELY AT THE TIME OF PURCHASE OF THE SHARES. (III) THE CLOSING STOCK HELD AT THE END OF THE RESPECTIVE ASSESSMENT YEAR IS ALWAYS VALUED AT COST PRICE IN RESPECT OF THE SHARES HELD IN HIS INVESTMENT PORT FOLIO AND AT THE LOWER OF COST OR MARKET PRICE, IN CASE OF THE SHARES HELD IN HIS TRADING PORTFOLIO, (IV) DURING THE RELEVANT ASSESSMENT YEAR, HIS MAIN BUSINESS IS DEALING IN VARIOUS STOCK MARKET RELATED ACTIVITIES OF PURCHASE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 22 22 AND SALE OF SHARES, MUTUAL F UND UNITS, DERIVATIVES, SPECULATION IN SECURITIES, INVESTMENTS IN VARIOUS SECURITIES ETC' (V) THE PROFITS/SURPLUS/LOSS REALIZED ON SALE OF SHARES IS ASSESSED ACCEPTING THE SAME PATTERN AND THE METHOD OF ACCOUNTING OF THE ASSESSEE AS HIS STCG/LTCG, IN HI S EARLIER ASSESSMENT YEARS, (VI) THE SHARE TRANSACTIONS PARTICULARLY ON ACCOUNT OF VOLUME AND NUMBER OF TRANSACTIONS HAVE SUBSTANTIALLY INCREASED IN THE RELEVANT ASSESSMENT YEAR IN COMPARISON TO HIS EARLIER ASSESSMENT YEARS, IN TANDEM WITH THE INCREASE AN D GROWTH WITNESSED IN THE INDIAN STOCK MARKET, BOTH IN RESPECT OF DELIVERY AND NON - DELIVERY BASED SHARE TRANSACTIONS, (VII) AS DISCUSSED ABOVE IT IS NOTICED THAT CERTAIN SHARES/UNITS VIZ. COROMANDEL FERTILIZERS LTD, AND DHARANI SUGAR & CHEMICALS LTD., DEW AN HOUSING FINANCE LTD & HERITAGE FOODS LTD. IN WHICH THE ASSESSEE HAS SHOWN STCG ARE FREQUENTLY AND REPEATEDLY TRANSACTED, AS IF THE ASSESSEE IS A TRADER OF THESE SHARES, AND (VIII) CONSIDERING ALL OTHER FACTS AS SEEN AND DISCUSSED ABOVE, THE FACTS AVAILA BLE IN THE CASE OF THE APPEL1ANT ARE FOUND TO BE MORE OR LESS IDENTICAL TO THE FACTS REPORTED IN THE CASE OF SH. GOPAL PUROHIT (SUPRA), DECIDED BY THE HON'BLE JURISDICTIONAL ITAT, EXCEPT THAT IN THE CASE OF THE ASSESSEE AS POINTED OUT BY THE AO, THE ASSESS EE HAS UNDERTAKEN FREQUENT AND REPEATED TRANSACTIONS CONSISTENTLY IN CERTAIN SPECIFIC SCRIPTS AS DISCUSSED ABOVE. (IX ) THE ASSESSEE HAS UTILIZED BORROWED FUNDS BUT NO INTEREST IS PAID SINCE MOSTLY THE LOANS ARE TAKEN FROM HIS OWN GROUP/RELATED CONCERN - FOR THE RELEVANT ASSESSMENT YEAR. (X) LONG TERM CAPITAL GAIN SHOWN BY THE ASSESSEE IS ACCEPTED AND ASSESSED AS SUCH. 2.3.12 WITH THIS BACKGROUND AND FURTHER CONSIDERING TO THE FACTS OF THE CASE AND THE POSITION OF LAW AS DISCUSSED ABOVE, I AM OF THE CONSIDERED OPINION THAT TO A LARGE EXTENT THE FACTS AVAILABLE IN THE CASE OF THE ASSESSEE , ARE IDENTICAL TO THE FACTS REPORTED IN THE CASE OF SH. GOPAL PUROHIT (SUPRA) DECIDED BY THE HON'BLE JURISDICTIONAL ITAT. HOWEVER, DUE TO THE UNIQUE OR DISTINGUISHABLE FACTS PARTICULARLY ON ACCOUNT OR HIS REPETITIVE TRANSACTIONS OF SALE AND PURCHASE OF THE SAME SHARES AS DISCUSSED ABOVE, WHICH ARE N OT IN DISPUTE, I FIND THAT THE RULE OF CONSISTENCY AS ARGUED BY THE AR BASED ON THE VARIOUS CITATIONS RELIED ON BY THE AR AS MENTIONED ABOVE WILL NOT APPLY IN THE INSTANT CASE IN HAND. THE REPEATED PURCHASE AND SALE OF SHARES OF THE SAME COMPANY FOR MORE T HAN FOUR TIMES DURING THE RELEVANT YEAR AS ENCLOSED AS ANNEXURE - A TO THIS ORDER, TO MY CONSIDERED OPINION PROVES THAT THE RULE OF CONSISTENCY WILL NOT APPLY FOR THE RELEVANT ASSESSMENT YEAR. DUE TO LARGE VOLUME AND FREQUENCY OF SHARE TRANSACTIONS UNDERTAKE N IN THIS YEAR AS DISCUSSED ABOVE RESULTING INTO THESE REPETITIVE SHARE TRANSACTIONS OF A PARTICULAR COMPANY FOR MORE THAN FOUR TIMES, CONSIDERING THE AMOUNT OF CAPITAL EMPLOYED TO MY CONSIDERED OPINION IS A CLEAR - CUT CASE OF TRADING IN THOSE SHARES SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 23 23 IRRESP ECTIVE OF THE FACT THAT DELIVERY IS TAKEN IN THESE SHARES. IT CANNOT HE SAID THAT THE ASSESSEE IS AN INVESTOR IN THESE SHARES, MERELY BECAUSE HE HAS TAKEN DELIVERY OF THESE SHARES; BECAUSE, THE ASSESSEE HAS PERSISTENTLY AND REPEATEDLY PURCHASED AND SOLD TH E SAME SHARES FOR MORE THAN FOUR TIMES (I.E. MORE THAN A TRANSACTION PER QUARTER), DURING THE RELEVANT ASSESSMENT YEAR. THIS UNIQUE FACT, TO MY CONSIDERED OPINION MAKES THE ASSESSEE A TRADER OF THESE SHARES, AND THEREFORE, THE RESULTANT LOSS OR GAIN, CAN O NLY BE CONSIDERED AS HIS BUSINESS INCOME/LOSS. IT IS NOW SETTLED THAT THIS ISSUE IS TO BE DECIDED BASED ON THE BROAD PARAMETERS LAID DOWN BY THE CBDT CIRCULAR MENTIONED ABOVE, WHICH IN TURN IS BASED ON THE RATIO DECIDED BY THE HONBLE SUPREME COURT, TO TH E PECULIAR FACTS AVAILABLE IN EACH CASE TO BE DECIDED. IT IS ALSO SETTLED THAT A SINGLE CRITERIA WILL NOT DECIDE THE ISSUE BUT THE OVERALL EFFECT THEREOF IS TO BE CONSIDERED AND APPLIED ACCORDINGLY. FURTHER, IT IS ALSO SETTLED THAT A PERSON CAN HOLD TWO P ORTFOLIOS OF SHARES TRANSACTIONS FOR HIS INVESTMENT AND TRADING PURPOSES AT THE SAME POINT OF TIME. THEREFORE, ON ACCOUNT OF THE SAME AND TRADING PURPOSES AT THE SAME POINT OF TIME. THEREFORE, ON ACCOUNT OF THE SAME AND APPLYING THE RATIO DECIDED BY THE VA RIOUS JUDICIAL AUTHORITIES, PARTICULARLY BY THE HONBLE JURISDICTIONAL ITAT IN THE CASE OF GOPAL PUROHIT (SUPRA), VARIOUS PARAMETERS OF THE BOARD, IT IS HELD THAT THE GAIN OR LOSS ARISING OUT OF HIS DELIVERY BASED SHARE TRANSACTIONS ARE IN THE NATURE OF ST CG/LTCG AND NOT IN THE NATURE OF BUSINESS INCOME, EXCEPT SUCH GAINS OR LOSSES REALIZED IN RESPECT TO THOSE TRANSACTIONS UNDERTAKEN REPEATEDLY AND CONSISTENTLY, FOR MORE THAN FOUR TIMES DURING THE YEAR, AS DISCUSSED ABOVE. ACCORDINGLY, AS PER ANNEXURE - A ENC LOSED TO THIS ORDER, STCG SHOWN BY THE ASSESSEE ON THIS ACCOUNT IS DIRECTED TO BE ASSESSED AS HIS BUSINESS INCOME AND THE BALANCE CAPITAL GAINS ASSESSED BY THE A.O. AS BUSINESS INCOME IS DIRECTED TO BE ASSESSED AS HIS STCG OR LTCG DEPENDING UPON THE PERIOD OF HOLDING. 2.3.13. THEREFORE, ON ACCOUNT OF THE ABOVE, THE CLAIM OF THE ASSESSEE TO CONSIDER THE GAINS/SURPLUS ON PURCHASE AND SALE OF SHARES HELD AS INVESTMENT PERTAINING TO HIS DELIVERY BASED SHARE TRANSACTIONS, UNDER THE HEAD STCG/L TCG AND NOT UNDER THE HEAD BUSINESS INCOME, IS PARTLY ALLOWED, AS DISCUSSED ABOVE. OR IN OTHER WORDS, THE PROFIT/LOSS INCURRED BY THE ASSESSEE IN RESPECT TO HIS VARIOUS SHARE TRANSACTIONS UNDERTAKEN FOR MORE THAN FOUR TIMES DURING THE YEAR AS WORKED OUT AS PER ANNEXURE - A, A S ENCLOSED TO THIS ORDER IS HELD AS HIS BUSINESS INCOME. THE ADDITION MADE TO THE EXTENT OF GAINS OR PROFIT REALIZED ON ACCOUNT OF HIS REPETITIVE SHARE TRANSACTIONS AMOUNTING TO RS.18,41,027/ - IS CONFIRMED, AND THE BALANCE ADDITION MADE IS DIRECTED TO BE D ELETED. THE AO IS ACCORDINGLY, DIRECTED TO REWORK OUT THE STCG/BUSINESS INCOME OF THE ASSESSEE , AS DISCUSSED ABOVE. 2.3.14 DURING THE COURSE OF APPEAL, THE AR, AS DISCUSSED ABOVE HAS RAISED AN ALTERNATIVE GROUND SUBMITTING THAT IN CASE HIS MAIN GROUND OF APPEAL IS NOT FULLY CONSIDERED, THE ASSESSEE MAY BE GIVEN THE BENEFIT OF RE - CASTING OF HIS TRADING ACCOUNT PERTAINING TO HIS SHARE TRANSACTIONS ON WHICH STCG IS DISCLOSED; WHEREBY, HE MAY BE ALLOWED TO VALUE HIS CLOSING STOCK OF SHARES HELD AT THE END OF T HE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 24 24 YEAR ON THE BASIS OF 'COST OR MARKET VALUE WHICHEVER IS LOWER', HE MAY ALSO BE ALLOWED THE CREDIT OF THE SECURITY TRANSACTION TAX PAID AND FURTHER HE MAY ALSO BE ALLOWED TO RE - CAST HIS OPENING STOCK - IN - TRADE BY INVOKING THE PROVISIONS OF SECTION 45(2) OF THE ACT, IN RESPECT TO ALL THOSE SHARES WHICH ARE TREATED AS PART OF HIS TRADING SHARES. AS DISCUSSED ABOVE, I FIND IT REASONABLE TO ACCEPT THE SAID ALTERNATIVE GROUND OF THE ASSESSEE , IN RESPECT TO THESE SHARES OF COROMANDEL FERTILIZERS LTD. AND DHARA NI SUGAR & CHEMICALS LTD. DEWAN HOUSING FINANCE LTD & HERITAGE FOODS LTD., THE GAIN THEREOF IS ASSESSED AS HIS BUSINESS INCOME. THE AR'S DEMAND FOR RECASTING OF THE TRADING AND P&L ACCOUNT, IS THEREFORE, FOUND TO BE REASONABLE AND JUSTIFIED AS WELL AS WITH IN THE PROVISION OF THE ACT. ACCORDINGLY, WHILE GIVING EFFECT TO THIS ORDER, THE AO IS DIRECTED TO RE - COMPUTE THE BUSINESS INCOME AS WELL AS STCG/LTCG OF THE ASSESSEE AS UNDER: A) THE CLOSING STOCK OF SHARES, IF ANY IN CASE OF THESE SHARES (ANNEXURE - A) HELD AT THE END OF THE RELEVANT ASSESSMENT YEAR, SHALL BE WORKED OUT ON THE BASIS OF COST OR MARKET VALUE WHICHEVER IS LOWER, B) ALLOW THE CREDIT/REBATE FOR THE PAYMENT OF SECURITY TRANSACTION TAX PAID BY THE ASSESSEE IN RESPECT OF THESE SHARES (ANNEXURE - A), WHILE COMPUTING HIS BUSINESS INCOME, AFTER ITS DUE VERIFICATION, C) THE PROFIT ON SALE OF THESE SHARES, AS SHOWN IN ANNEXURE - A, IF HELD AS PART OF HIS OPENING STOCK AS ON 31.03.2005, SHALL BE COMPUTED BY INVOKING THE PROVISIONS OF SECTION 45(2) OF THE ACT, AT THE TIME OF ITS SALE, TREATING THAT THE ASSESSEE HAS CONVERTED THESE SHARES FROM HIS INVESTMENT PORTFOLIO TO STOCK - IN - TRADE AS ON 01.04.2005, I.E, AT THE BEGINNING OF THE RELEVANT ASSESSMENT YEAR. OR IN OTHER WOR DS AT THE TIME OF SALE OF THESE SHARES CAPITAL GAINS WILL BE WORKED OUT ADOPTING THE MARKET VALUE OF THE RESPECTIVE SHARES AS ON 01.04.2005 AND THE BALANCE AGAIN SHALL BE ASSESSED AS HIS BUSINESS INCOME, D) THE GAIN OF RS.18,41,027/ - AS PER ANNEXURE - A IS TO BE ASSESSED AS HIS BUSINESS INCOME INSTEAD OF STCG, AS CLAIMED BY THE ASSESSEE , SUBJECT TO (C) ABOVE, E) THE LTCG CLAIMED IS TO BE ALLOWED IF THE SURPLUS SHOWN THEREIN IS NOT PERTAINING TO THE SHARES AS APPEARING AT ANNEXURE - A TO THIS ORDER. HOWEVER, IF THE L TCG DISCLOSED IS ON THE VERY SHARES TABULATED AS PER ANNEXURE - A TO THIS ORDER, THE ENTIRE SURPLUS IRRESPECTIVE OF THE FACT, WHETHER THE SAME IS LTCG OR STCG, SHALL BE ASSESSED AS HIS BUSINESS INCOME, AND 2.3.15 THEREFORE, ON ACCOUNT OF THE AFORESAID DISCU SSION, THE ACTION OF THE AO TREATING THE STCG OF THE ASSESSEE AMOUNTING TO RS.18,41,027/ - AS HIS BUSINESS INCOME IS CONFIRMED, AND T HE BALANCE CAPITAL GAINS ASSESSED AS BUSINESS INCOME IS DIRECTED TO BE ASSESSED AS HIS STCG INSTEAD OF BUSINESS INCOME, FOR THE RELEVANT ASSESSMENT YEAR. THE ADDITION MADE TO THIS EXTENT ON ACCOUNT OF BUSINESS INCOME AS AGAINST ITS CLAIM OF STCG, IS DIRECTED TO BE DELETED. AT THE SAME TIME, ALLOWING THE ALTERNATIVE GROUND AND THE SUBMISSIONS OF THE ASSESSEE , THE A.O. IS FURTHER DIRECTED RE - WORKOUT THE BUSINESS IN INCOME AND THE STCG AS DISCUSSED IN PARAS 2.3.13 AND 2.3.14 ABOVE OF THIS ORDER. THIS GROUND OF APPEAL, AS DISCUSSED ABOVE IS THEREFORE, PARTLY ALLOWED. SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 25 25 8 . AGAINST THE ABOVE ORDER OF CIT(A), BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL BEFORE US. 9. IT WAS ARGUED BY THE LD. AUTHORIZED REPRESENTATIVE THAT THE ASSESSEE WAS CONSISTENTLY DISCLOS ING SHORT TERM CAPITAL GAINS OR LONG TERM CAPITAL GAINS IN RESPECT OF HIS DELIVERY BASED SHARE TRANSACTIONS, DEPENDING UPON THE PERIOD OF HOLDING. SIMILARLY, THE ASSESSEE HAS DISCLOSED BUSINESS INCOME IN RESPECT OF SHARES ACQUIRED WITH THE INTENTION OF TRADING THEREIN. THUS, AS PER LD. AUTHORIZED REPRESENTATIVE, THE ASSESSEE WAS CONSISTENTLY H AVING TWO PORTFOLIOS OF SHARE TRANSACTION ONE FOR HIS INVESTMENT PURPOSES AND ANOTHER FOR HIS TRADING PURPOSES. OUR ATTENTION WAS ALSO INVITED TO THE LEDGER ACCOUNT, WHEREIN SHARES WERE ENTERED WHICH WERE DULY AUDITED. IN VIEW OF THE TRANSACTIONS HAVING BE EN ENTERED FOR INVESTMENT PURPOSES, IT WAS ARGUED THAT RIGHT FROM INCEPTION OF THE TRANSACTION, THE ASSESSEE HAD ALWAYS INTENDED TO HOLD THOSE SHARES FOR THE PURPOSES OF INVESTMENT PORTFOLIO. SIMILARLY, OTHER SHARES INTENDED FOR TRADING WAS ENTERED IN TH E LEDGER ACCOUNT AS TRADING PORTFOLIO. THE RULE OF CONSISTENCY WAS ALSO ARGUED IN VIEW OF THE FACT THAT SIMILAR TREATMENT WAS GIVEN IN THE EARLIER ASSESSMENT YEAR 2005 - 06, UNDER SCRUTINY ASSESSMENT, WHEREIN FACTS WERE SAME AS IN THE INSTANT ASSESSMENT YE AR UNDER CONSIDERATION. AS PER LD. AUTHORIZED REPRESENTATIVE, MERELY BASED ON VOLUME OF TRANSACTION S AND ITS FREQUENCY WILL NOT MAKE THE ASSESSEE A TRADER OF THESE SHARES. OUR ATTENTION WAS INVITED TO THE FACT THAT NUMBER OF TRANSACTION OF A PARTICULAR SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 26 26 SCR IPT ON A GIVEN DATE, IT CARRIED ON DIFFERENT LOTS WERE CONSIDERED AS SEPARATE TRANSACTION BY THE ASSESSING OFFICER INSTEAD OF TREATING THE SAME AS SINGLE TRANSACTION. IT WAS FURTHER SUBMITTED THAT DUE TO MARKET CONSTRAINTS IT WAS NOT FEASIBLE TO EXECUTE TH E BIGGER LOT OF SALE AND PURCHASE ORDER IN A SINGLE LOT ON A GIVEN DATE, THEREFORE, SUCH TRANSACTIONS WERE ALWAYS UNDERTAKEN THROUGH DIFFERENT LO T S AS PER AVAILABILITY OF STOCK ON A GIVEN DATE OF SALE OR PURCHASE. RELIANCE WAS PLACED ON DIFFERENT JUDICIAL PRONOUNCEMENTS, WHICH COMPRISES OF HIGH COURTS ORDER AS WELL AS TRIBUNAL ORDER. 10 . ON THE OTHER HAND, LEARNED SR. DR CONTENDED THAT THERE WAS HIGH VOLUME AND FREQUENCY OF TRANSACTION AND CONTINUITY IN THE PURCHASE AND SALES OF SHARES, THE AO JUSTIFIED BY TREATING THE GAIN AS BUSINESS INCOME. HE FURTHER RELIED UPON THE DECISION OF ITAT MU MBAI BENCH IN THE CASE OF SMT. SADHANA NAVERA, 41 DTR 393 . RELIANCE WAS ALSO PLACED BY LEARNED DR ON THE DECISION OF COORDINATE BENCH OF ITAT IN THE CASE OF JAYSHREE PRADEEP SHAH, 131 ITD 326 . 1 1 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. WE HAVE ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY THE LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS DECISION CITED BY LEARNED AR AND DR DURING THE COURSE OF HEARING BEFORE US IN THE CONTEXT OF FACTUAL MATRIX OF THE CASE . THE QUESTION AS TO WHETHER THE ASSESSEE HAS EARNED CAPITAL GAIN OR BUSINESS PROFITS ON THE SHARES SOLD BY HIM DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE. SUCH DECISION IS SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 27 27 TO BE ARRIVED AT BY TAKING INTO ACCOUNT THE INTENTION OF THE ASSESSEE WHILE PURCHASING THE SHARES, AS TO WHETHER THE SAME WAS ACQUIRED FOR HOLDING AS INVESTMENT OR FOR DOING BUSINESS THEREIN. THE TREATMENT GIVEN BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT IS ALSO ONE OF THE DECISIVE FACTORS TO FIND OUT WHETHER THE SHARES WERE HELD AS INVESTMENT OR STOCK IN TRADE. IF THE SHARES ARE BOUGHT WITH THE INTENTION OF EARNING CAPITAL GAINS THEREON AND ALSO DIVIDEND INCOME BY KEEPING THE SAME AS INVESTMENT, THE GAIN ARISING THERE FROM IS REQUIRED TO BE TREATED AS CAPITAL GAINS. ON THE OTHER HAND , IF THE SHARES ARE PURCHASED WITH THE INTENTION TO EARN PROFIT THEREON AND THE SAME IS TREATED AS STOCK IN TRADE IN THE BOOKS OF ACCOUNT, THE PROFIT ARISING OUT OF SALE OF SUCH SHARES ARE LIABLE TO BE TREATED AS BUSINESS INCOME. VOLUME AND FREQUENCY OF TR ANSACTION IS ALSO ONE OF THE GUIDING FACTORS TO FIND OUT WHETHER THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SHARES OR MAKING INVESTMENT TO HAVE CAPITAL GAINS THEREON. IN THE INSTANT CASES BEFORE US, WE FOUND THAT THE ASSESSEE HAS INVES TED IN SHARES OF INDIAN COMPANIES IN EARLIER ASSESSMENT YEARS, WHICH IS CLEAR FROM THE STATEMENT OF SHAREHOLDING OF THE ASSESSEE , SUCH TREATMENT OF CAPITAL GAINS WAS ACCEPTED BY THE DEPARTMENT AND THERE IS NO MATERIAL CHANGE IN THE METHOD OF ACCOUNTING AND MANNER OF EARNING OF INCOME DURING THE YEAR UND ER CONSIDERATION AS COMPARED T HIS EARLIER YEARS. THUS, THE FACT OF THE ASSESSEE INVESTING IN SHARES IN EARLIER YEARS IS NOT IN DISPUTE. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS TREATED THE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 28 28 EQUITY SHARES OF INDIAN COMPANIES AS INVESTMENT I.E. CAPITAL ASSET ALL ALONG. THE ASSESSEE HAS ALSO VALUED THE SHARES AT COST THUS GIVEN A PARTICULAR TREATMENT TO THE SHARES HELD AS INVESTMENT, THEREFORE, WITHOUT BRINING ON RECORD CONTRARY MATERIAL, THE AO CANNOT CHANGE THE INTENTION AND MANNER OF INVESTMENT BEING MADE BY THE ASSESSEE. HAD THE ASSESSEE VALUED THE SHARES AT COST OR MARKET PRICE WHICHEVER IS LOWER, THE GAIN ARISING OUT OF SALE OF SHARES COULD EASILY BE TREATED AS BUSINESS INCOME. ASSESSEE H AD NOT VALUED THE SHARES AS STOCK BUT VALUED THE SAME AS INVESTMENT. THUS, WHAT WAS A CAPITAL ASSET WILL REMAIN A CAPITAL ASSET UNLESS A PERSON HOLDING THE ASSET HIMSELF CHANGES THE NATURE BY A SPECIFIC ACTION LIKE CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE. IN THE INSTANT CASES BEFORE US, THE ASSESSEE HAS NOT TREATED THE INVESTMENT IN EQUITY SHARES OF INDIAN COMPANIES AS STOCK IN TRADE. IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF RAM KUMAR AGARWAL & BROTHERS, 205 ITR 251, THE AO AN D THE LD. CIT(A) WAS NOT JUSTIFIED IN TREATING THE CAPITAL GAIN EARNED FROM SALE OF THESE SHARES, AS BUSINESS PROFITS, WHICH WERE ENTERED BY THE ASSESSEE AS INVESTMENT IN BOOKS OF ACCOUNT. THERE IS ALSO NO DISPUTE TO THE WELL SETTLED LEGAL PROPOSITION THAT RES JUDICATA DO NOT STRICTLY APPLY TO THE INCOME TAX PROCEEDINGS, BUT AT THE VERY SAME TIME, IT IS WELL SETTLED THAT PRINCIPLE OF CONSISTENCY UNDER THE SAME FACTS AND CIRCUMSTANCES IS THE FUNDAMENTAL OF JUDICIAL PRINCIPLE, WHICH CANNOT BE BRUSHED ASIDE WI THOUT PROPER REASONING. IN THIS REGARD, RELIANCE CAN BE PLACED ON THE DECISION IN CASE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 29 29 OF S.M.K. SHARES AND STOCK BROKING PRIVATE LIMITED, I.T.A.NO. 799/MUM/09 ORDER DATED 24.11.2010 . FOR THIS PROPOSITION, THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF GOPAL PUROHIT, 228 CTR 582 , IS VERY MUCH RELEVANT AND IMPORTANT. FROM THE RECORD, WE FOUND THAT ASSESSEE WAS INVESTING IN SHARES AS WELL AS TRADING IN SHARES . HE HAS MAINTAINED TWO PORTFOLIOS OF SHARE TRANSACTIONS I.E DELIVERY BASED SHARE TRANSACTIONS AND NON - DELIVERY BASED SHARE TRANSACTIONS. THE NON - DELIVERY BASED SHARE TRANSACTIONS WERE IN RESPECT OF F&O AND INTRA - DAY SHARE TRANSACTIONS , PROFIT OF WHICH HAS BEEN SHOWN UNDER THE HEAD INCOME FROM BUSINESS. IN RESPECT OF DELIVERY BASED SHARE TRANSACTION , PROFIT HAS BEEN SHOWN AS STCG OR LTCG, DEPENDING UPON THE PERIOD OF HOLDING . HOWEVER, PROFIT OR LOSS EARNED ON NON DELIVERY BASED TRANSACTIONS ARE SHOWN AS HIS BUSINESS INCOME. THE ASSESSEE HAS MAINTAINED SEPARATE LEDGER ACCOUNTS. TRANSACTIONS WERE RECOR DED SEPARATELY AT THE TIME OF PURCHASE OF SHARES. IN RESPECT OF SHARES HELD AS INVESTMENT ASSESSEE HAD VALUED THE SAME AT THE YEAR END AT COST AND IN RESPECT OF SHARES HELD IN IS TRADING PORTFOLIO, HE HAS VALUED THE SAME AT COST OR MARKET PRICE, WHICHEVER IS LOWER. IN THE ASSESSMENT YEAR UNDER CONSIDERATION THE ASSESSEE HAD CONSISTENTLY FOLLOWED THE SAME SYSTEM OF ACCOUNTING AS FOLLOWED IN PRECEDING YEARS . THE PROFIT EARNED ON INVESTMENT WAS DISCLOSED AS STCG/LTCG, DEPENDING UPON PERIOD OF HOLDING. IN THE S CRUTINY ASSESSMENT, THE AO HAS ACCEPTED ASSESSEES STATUS AS INVESTOR IN THE ASSESSMENT YEAR 2005 - 06. ONLY SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 30 30 DURING THE YEAR UNDER CONSIDERATION BY REFERRING TO VOLUME OF TRANSACTION, NUMBER OF SHARES, FREQUENCY OF TRANSACTION, THE AO DISALLOWED ASSESSEES C LAIM OF CAPITAL GAINS AND TREATED THE SAME AS BUSINESS INCOME. THE CIT(A) HAS ANALYZED THE FREQUENCY OF TRANSACTIONS IN RESPECT OF EACH AND EVERY SHARE AND FOUND THAT IN RESPECT OF TRANSACTIONS IN SHARES OF COROMANDEL FERTILIZERS LTD., DHARANI SUGAR & CHEMICALS LTD., DEWAN HOUSING FINANCE LTD & HERITAGE FOODS LTD. , FREQUENCIES WERE MORE AND TRANSACTIONS WERE ENTERED REPEATEDLY AS IF THE ASSESSEE WAS A TRADER IN SHARES. THE CIT(A) DISCUSSED VARIOUS JUDICIAL PRONOUNCEMENTS AND THE GUIDELINES LAID DOWN THE REIN WITH REGARD TO TREATMENT OF GAINS ARISING OUT OF SALE OF SHARES. THE CIT(A) APPLIED TO THE FACTS AND CIRCUMSTANCES AS FOUND DURING THE YEAR , THE PROPOSITION LAID DOWN IN VARIOUS JUDICIAL PRONOUNCEMENTS AND REACHED TO THE CONCLUSION THAT PROFIT EARNED IN RESPECT OF SHARES OF THE COMPANIES DISCUSSED ABOVE, AMOUNTING TO RS. 18,41,027/ - WERE BUSINESS INCOME AND LIABLE TO BE TAXED AS SUCH, IN PLACE OF ASSESSEES CLAIM FOR TREATING THE SAME AS CAPITAL GAINS. THE CIT(A) ALSO DISCUSSED THE AMENDMENT BROUGHT IN BY FINANCE ACT, 2004, INTRODUCTION OF SECURITY TRANSACTION TAX(S T T) ON THE SALE & PURCHASE OF SHARES AND OTHER DERIVATIVE TRANSACTIONS. THE CIT(A) ALSO DISCUSSED THE EXEMPTION BROUGHT IN UNDER SECTION 10(38) IN RESPECT OF LTCG AND LEVY OF TAXATION ON STCG AT THE CONCESSIONAL RATE OF TAX OF 10% BY THIS FINANCE ACT. THE CIT(A) OBSERVED THAT ALONG WITH THESE AMENDMENTS, THE REVENUE HAS ALSO SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 31 31 LEVIED SECURITY TRANSACTION TAX TO THE EFFECT THAT ONLY AFTER A SUFFERIN G THE BURDEN OF SECURITY TRANSACTION TAX, SUCH GAIN WAS HELD TO BE EXEMPT OR LIABLE TO LOWER RATE OF TAX. BY REFERRING TO THE DECISION IN THE CASE OF GOPAL PUROHIT (SUPRA) , WHICH WAS AFFIRMED BY THE HONBLE JURISDICTIONAL HIGH COURT AND THE SLP FILED AGAIN ST THE SAME BY THE REVENUE WAS ALSO DISMISSED BY THE HON BLE SUPREME COURT, HELD THAT THE AO WAS PROMPTED TO TAKE A DIFFERENT VIEW ON THE SAME SETS OF FACTS AND TYPES OF TRANSACTIONS ENTERED INTO BY THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR AND AS FOUND IN ITS EARLIER ASSESSMENT YEAR. THE CIT(A) ALSO ELABORATELY DEALT WITH THE CONSISTENCY IN THE TREATMENT OF PROFIT AROSE ON SIMILAR TRANSACTION OF SALE AND PURCHASE OF SHARES. THE CIT(A) ALSO CONSIDERED VOLUME , FREQUENCY AND CONTINUITY OF TRANSACTIONS , AVE RAGE HOLDING PERIOD IN RESPECT OF EACH AND EVERY SHARES ENTERED INTO BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THE CIT(A) FOUND THAT NO INTEREST WAS PAID ON THE AMOUNT BORROWED FROM ASSOCIATES. THE CIT(A) HAD ALSO CONSIDERED DIFFERENT RATIOS VIZ . CAPITAL GAIN RATIO, QUANTITY RATIO, NUMBER OF TRANSACTION RATIO, PURCHASE COST RATIO, SO AS TO ESTABLISH THAT GAINS ON SALE OF SHARES IS TO BE ASSESSED AS CAPITAL GAINS OR BUSINESS PROFITS. SO FAR AS FREQUENCY OF PURCHASES AND SALE OF SHARES IS CONCERNED , THE SAME IS DUE TO THE ELECTRONIC SYSTEM OF STOCK EXCHANGE. A SINGLE ORDER PLACED FOR PURCHASES MAY BE COMPLETED BY WAY OF SMALL EQUITIES OF SHARES AVAILABLE FOR SALE TO MEET OUT THE DEMAND OF THE PURCHASER. THEREFORE, A SINGLE ORDER IS NOT NECESSARY TO BE COMPLETED SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 32 32 BY A SINGLE TRANSACTION OF ENTIRE QUANTITY OF SHARES. LIKEWISE, IN THE CASE OF SALES, THE SAME MAY BE DIVIDED AS PER THE REQUIREMENT OF THE PURCHASER AT STOCK EXCHANGE; THE FACT THAT IN ALL THE PRECEDING YEARS, WHERE THE ASSESSEE HAD LIQUIDATE D HIS INVESTMENT IN EQUITY SHARES IN INDIAN COMPANIES, THE DEPARTMENT HAS ACCEPTED THE POSITION EXCEPT THE ASSESSMENT YEAR IN QUESTION, WHEREIN THE DEPARTMENT TREATED THE GAIN FROM PURCHASE AND SALE OF SHARES AS BUSINESS INCOME. THE DECISION TO DISPOSE OF INVESTMENT AT A SHORT INTERVAL IS BEING TAKEN BY THE ASSESSEE KEEPING IN VIEW THE EVENTUALITY OF DOWN TREND IN THE MARKET SENTIMENTS OVER A PARTICULAR SCRIPT. MERELY BECAUSE THE ASSESSEE WAS ABLE TO REALIZE BETTER PRICES OF ITS INVESTMENT AT A SHORT INTERV AL, CANNOT BE SOLITARY YARDSTICK FOR TREATING SUCH ACTION AS AN ADVENTURE IN THE NATURE OF TRADE, GIVING RISE TO BUSINESS PROFITS, WHEN ALL THE SURROUNDING CIRCUMSTANCES, INDICATE OTHERWISE. NO WHERE THE AO HAS INDICATED ANY TRANSACTION OF PURCHASE OF SHAR ES WITHOUT TAKING DELIVERY AND MAKING FULL PAYMENT OF SUCH INVESTMENT. EVEN IN THE CASE OF INVESTMENT IT IS FOR THE ASSESSEE TO DECIDE WHEN TO DISPOSE THEM OFF SO AS TO HAVE A MAXIMUM RETURN OUT OF THEM. THERE IS NO THEORY THAT THE SHARES HELD AS INVESTMEN T SHOULD BE DISPOSED OF ONLY AT THE TIME OF NEED OR IN EMERGENCY. THE ASSESSEE HAD ALL THE RIGHTS TO DISPOSE THE INVESTMENT TO REAP THE MAXIMUM BENEFIT WHEN THE PRICES OF SCRIPTS ARE HIGH SO AS TO EARN BETTER GAIN. IT IS TRUE THAT FREQUENCY AND VOLUME OF T RANSACTION IS ONE OF A GUIDING FACTORS TO FIND OUT AS TO WHETHER SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 33 33 ASSESSEE DEAL IN SHARES AS TRADING ASSET OR HOLD SHARES AS INVESTOR, BUT CERTAINLY NOT A CRITERIA. A PRUDENT INVESTOR ALWAYS KEEPS A WATCH ON THE MARKET TREND AND, THEREFORE, NOT BARRED UNDER LAW FROM LIQUIDATING HIS INVESTMENT IN SHARES. THE LAW ITSELF HAS RECOGNIZED THIS FACT BY TAXING THESE TRANSACTIONS UNDER THE HEAD SHORT TERM CAPITAL GAINS BEING SHARES WHICH ARE SOLD WITHIN 1 2 MONTHS OF ITS ACQUISITION. UNDER THESE CIRCUMSTANCES, IF THE CONTENTION OF THE AO IS ACCEPTED, THEN IT WOULD BE AGAINST THE LEGISLATIVE INTENT ITSELF. HERE, IT IS PERTINENT TO MENTION THE INTENTION OF GOVERNMENT FOR INTRODUCING THE SECURITY TRANSACTION T AX AND EXEMPT THE LONG TERM CAPITAL GAIN EARNED FROM SALE OF SHARES AND LEVYING 10 % TAX ON SHORT TERM CAPITAL GAIN AND EARNED ON SALE OF SHARES. I T IS NOTED THAT UNDER THE OLD PROVISIONS OF THE INCOME - TAX ACT, PROFITS OR GAINS ARISING TO AN INVESTOR FROM THE TRANSFER OF SECURITIES WERE CHARGED TO TAX EITHER AS LONG TERM CAPITAL GAINS OR SHORT TERM CAPITAL GAINS DEPENDING ON THE PERIOD OF HOLDING OF THE SAID SECURITIES; SHORT - TERM CAPITAL GAINS ARISING FROM TRANSFER OF SECURITIES WERE TAXED AT THE APPLICABL E RATES (NORMAL RATE) AND LONG - TERM CAPITAL GAINS WERE TAXED @ 20%, AFTER ADJUSTING FOR INFLATION BY INDEXING THE COST OF ACQUISITION. FOR LISTED SECURITIES, THE TAXPAYER HAD AN OPTION TO PAY TAX ON LONG - TERM CAPITAL GAINS @ 10% BUT WITHOUT INDEXATION. FOR FOREIGN INSTITUTIONAL INVESTORS (FIIS), THE LONG - TERM CAPITAL GAINS AND SHORT - TERM SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 34 34 CAPITAL GAINS WERE TAXED AT THE RATE OF 10% (WITHOUT INDEXATION) AND 30% RESPECTIVELY. IN CASE OF A TRADER IN SECURITIES, HOWEVER, THE GAINS WERE TAXED AS ANY OTHER NORMAL BUSINESS INCOME. THUS TAX LIABILITY ON THE INCOME FROM PURCHASE & SALE OF SHARES AS REGARDS TO THE STCG & BUSINESS INCOME WAS AT PAR. HOWEVER, THE ISSUE OF TREATMENT OF INCOME FROM SHARE TRANSACTION AS CAPITAL GAIN OR BUSINESS INCOME HAS IN - FACT ARISEN AFT ER THE AMEND MENT BROUGHT WITH FINANCE ACT - 2004 BY INSERTION OF PROVISIONS OF SECTION 111A AND 10(38) AS REGARDS TO LEVY OF TRANSACTION TAX AND EXEMPTION/ CONCESSION ON CAPITAL GAIN ARISING FROM SECURITIES ENTERED IN A RECOGNIZED STOCK EXCHANGE. WITH A VIEW TO SIMPLIFY THE TAX REGIME ON SECURITIES TRANSACTIONS, A TAX AT THE RATE OF 0.015 PER CENT. (SEE: CHANGE IN RATES ON SECURITIES TRANSACTIONS, BY FINANCE ACTS, AT APPROPRIATE HEAD) IS LEVIED ON THE VALUE OF ALL THE TRANSACTIONS OF PURCHASE OF SECURITIES THA T TAKE PLACE IN A RECOGNIZED STOCK EXCHANGE IN INDIA. THIS TAX IS COLLECTED BY THE STOCK EXCHANGE FROM THE PURCHASER OF SUCH SECURITIES AND PAID TO THE EXCHEQUER. THE PROVISIONS RELATING TO THE SECURITIES TRANSACTIONS TAX ARE CONTAINED IN CHAPTER VII OF TH E FINANCE (NO.2) BILL, 2004, AND CAME INTO EFFECT FROM 01.10.2004. FURTHER, CLAUSE (38) HAS BEEN INSERTED IN SECTION 10 OF THE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 35 35 INCOME - TAX ACT, SO AS TO PROVIDE EXEMPTION FROM LONG - TERM CAPITAL GAINS ARISING OUT OF SECURITIES SOLD ON THE STOCK EXCHANGE. A N EW SECTION 111A HAS ALSO BEEN INSERTED AND SECTION L15AD IS AMENDED, SO AS TO PROVIDE THAT SHORT - TERM CAPITAL GAINS ARISING FROM SALE OF SUCH SECURITIES TO AN INVESTOR INCLUDING FIIS SHALL BE CHARGED AT THE RATE OF TEN PER CENT. THESE AMENDMENTS APPLY TO A SSESSMENT YEAR 2005 - 2006 AND SUBSEQUENT YEARS. THROUGH FINANCE ACT, 2008, SECTIONS 111A AND 115AD HAVE FURTHER BEEN AMENDED WHEREBY THE RATE OF TAX ON SUCH SHORT - TERM CAPITAL GAIN HAS BEEN RAISED TO FIFTEEN PERCENT. THUS, W.E.F. 01.10.2004; ON THE SHARE T RANSACTIONS SUBJECTED TO STT; CONCESSIONAL TAX RATE OF 10% (WHICH HAS BEEN INCREASED TO 15% FROM AY 2009 - 10) ARE APPLICABLE IN RESPECT OF STCG WHEREAS NO TAX IS CHARGEABLE IN RESPECT OF LTCG. IT IS ALSO NOTED THAT THE CBDT VIDE ITS CIRCULAR NO.4/2007, DATE D 15.06.2007 HAS ALSO RECOGNIZED POSSIBILITY OF TWO PORTFOLIOS, I.E. ONE 'INVESTMENT PORTFOLIO' COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND THE OTHER 'TRADING PORTFOLIO' COMPRISING OF STOCK IN TRADE WHICH ARE TO BE TREATED AS TRA DING ASSETS. 11.1 WE HAVE GONE THROUGH THE ORDER OF THE TRIBUNAL IN THE CASE OF SMT. SADHANA NAVERA (SUPRA) AS RELIED BY LEARNED DR AND FOUND THAT SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 36 36 ON THE BASIS OF FINDING OF BOTH THE LOWER AUTHORITIES THAT MOST OF THE SHARES WERE PURCHASED AND SOLD IMMEDIATELY AND THERE WERE NO SHARES WHICH WERE ACQUIRED PRIOR TO 1 ST APRIL, 2004 AND HELD AFTER 31 ST JANUARY, 2005, THE GAIN ARISING OUT OF SALE OF SUCH SHARES WERE HELD TO BE BUSINESS INCOME. HOWEVER, IN THE INSTANT CASE BEFORE US, THE CIT(A) HAS APPRECI ATED NOT ONLY FREQUENCY OF TRANSACTION BUT ALSO PERIOD OF HOLDING AND THEREAFTER RECORDED A FINDING TO THE EFFECT THAT EXCEPT TRANSACTION IN CASE OF FOUR COMPANIES THE PROFIT SO AROSE WERE LIABLE TO TAX AS CAPITAL GAINS KEEPING IN VIEW THE HOLDING PERIOD, FREQUENCY OF TRANSACTION ETC. THUS, THE FACTS OF THE CASE CITED BY THE LEARNED DR ARE DISTINGUISHABLE FROM THE FACTS OF THE INSTANT CASE. 1 1 . 2 WE HAVE GONE THROUGH DECISION IN THE CASE OF JAYSHREE PRADEEP SHAH (SUPRA) AS RELIED BY LEARNED DR AND FOUND THAT ON THE BASIS OF FINDINGS RECORDED BY BOTH THE LOWER AUTHORITIES TO THE EFFECT THAT THERE WERE HIGH NUMBER OF TRANSACTION IN SHARES WITH BORROWED FUNDS AND THE SALE OF SHARES WAS THE ONLY ACTIVITY OF THE ASSESSEE WITHI N A VERY SHORT HOLDING PERIOD, IT WAS HELD THAT THE PROFIT AROSE ON SALE OF SUCH SHARES WERE LIABLE TO TAX AS BUSINESS INCOME. HOWEVER, THE FACTS IN THE INSTANT CASE BEFORE US ARE DISTINGUISHABLE AND THE CIT(A) HAS APPRECIATED NOT ONLY FREQUENCY AND CONTIN UITY OF TRANSACTIONS IN EACH SHARES DEALT WITH BY THE ASSESSEE VIS - - VIS ANTECEDENTS OF THE ASSESSEE AND THE STAND TAKEN BY THE DEPARTMENT IN EARLIER YEAR AND REACHED TO THE CONCLUSION SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 37 37 THAT EXCEPT TRANSACTION IN SHARES OF FOUR COMPANIES, AS DISCUSSED IN HI S APPELLATE ORDER, THE BALANCE GAIN WAS LIABLE TO BE TAXED AS CAPITAL GAINS. 1 1 . 3 AFTER CONSIDERING THE FINDINGS RECORDED BY THE CIT(A) , WE FOUND THAT SINGLE CRITERIA WILL NOT DECIDE THE ISSUE BUT THE TOTAL EFFECTS I.E. FREQUENCY AND VOLUME OF TRANSACTION , INTENTION OF ASSESSEE WHILE PURCHASING AND HOLDING THE SHARES ETC. ARE TO BE CONSIDERED FOR ARRIVING AT A CONCLUSION. THUS, IT IS A MIXED QUESTION OF LAW AND FACT TO FIND OUT AS TO WHETHER THE ASSESSEE HAS EARNED CAPITAL GAIN OR BUSINESS INCOME. THE GAIN ARISING ON DELIVERY BASED SHARE TRANSACTION ARE ESSENTIALLY IN THE NATURE OF STCG AND LTCG A ND NOT IN THE NATURE OF BUSINESS INCOME, EXCEPT WHERE SUCH GAINS OR LOSSES REALIZED IN RESPECT OF THOSE TRANSACTIONS UNDERTAKEN REPEATEDLY AND CONSISTENTLY FOR MORE THAN FOUR TIMES DURING THE YEAR, AS DISCUSSED BY THE CIT(A). AFTER DISCUSSING ALL THE FACTO RS, THE CIT(A) HAS RECORDED A CATEGORICAL FINDING THAT IN RESPECT TO NUMBER OF TRANSACTIONS AND FREQUENTLY TRANSACTION IN RESPECT OF SHARES OF THESE FOUR SHARES AS PER ANNEXURE - A ENCLOSED WITH HIS APPELLATE ORDER, WHICH WAS DIRECTED TO BE ASSESSED AS BUSIN ESS INCOME. IN RESPECT OF BALANCE OF GAIN ARISING ON DELIVERY BASED TRANSACTIONS WERE TREATED AS STCG OR LTCG DEPENDING ON THE PERIOD OF HOLDING. EVEN IN RESPECT OF TRANSACTION IN RESPECT OF THESE FOUR COMPANIES, THE CIT(A) GIVEN A SPECIFIC DIRECTION FOR R ECOMPUTING THE PROFIT OR LOSS AFTER REVALUING THE CLOSING STOCK HELD THEREIN AT COST OR MARKET PRICE, WHICHEVER IS LOWER. I F THE CONCLUSION DRAWN IN THE SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 38 38 IMPUGNED ORDERS, OBSERVATIONS MADE FROM THE ASSESSMENT ORDERS, ASSERTIONS MADE BY RESPECTIVE COUNSEL A ND THE MATERIAL AVAILABLE ON RECORD ARE KEPT IN JUXTAPOSITION AND ANALYZED, WE FIND THAT THE ASSESSEE HAD BEEN CONSISTENTLY INVESTING IN SHARES AND INCOME ARISING FROM DELIVERY BASED TRANSACTION OF SALE AND PURCHASE OF SHARES HAD BEEN SHOWN AS CAPITAL GAIN S I.E. LTCG AND STCG DEPENDING UPON PERIOD OF HOLDING. ANALYSIS OF BALANCE SHEET OF ASSESSEE REFLECTS HOLDING OF SHARES AS INVESTMENT. IN THE CASE OF GOPAL PUROHIT, 228 CTR 528 (BOM), SLP WAS FILED BY THE DEPARTMENT AGAINST THE DECISION OF BOMBAY HIGH COUR T AND THE SAME WAS DISMISSED BY HON'BLE APEX COURT VIDE ORDER DATED 15.11.2010. IN THE SPEECH BY HON'BLE FINANCE MINISTER REGARDING DIRECT TAX CASES (UNION BUDGET 2004 - 05), ESPECIALLY CLAUSE 111, THE INTENTION OF GOVERNMENT FOR INTRODUCING THE SECURITY T RANSACTION TAX AND EXEMPTING THE LONG TERM CAPITAL GAIN FROM SALE OF SHARE AND LEVYING 10% TAX ON SHORT TERM CAPITAL GAIN ALSO SUPPORTS THE CASE OF ASSESSEE. THE IDEA BEHIND INTRODUCTION OF SECURITY TRANSACTION TAX IS TO END THE LITIGATION ON THE ISSUE, WH ETHER THE PROFIT EARNED FROM DELIVERY BASED SALE OF SHARES IS CAPITAL GAINS OR BUSINESS PROFIT. 1 2 . EVEN THE HON'BLE APEX COURT IN THE CASE OF K.P. VERGHESE V S I TO, 131 ITR 597 (SC) OBSERVED AS UNDER: - SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 39 39 THE TASK OF INTERPRETATION OF A STATUTORY ENACTMENT IS NOT MECHANICAL TASK. IT IS MORE THAN A MERE READING OF MATHEMATICAL FORMULAE BECAUSE FEW WORD POSSESSES THE PRECISION OF MATHEMATICAL SYMBOLS. IT IS AN ATTEMPT TO DISCOVER THE INTENT OF THE LEGISLATURE FROM THE LANGUAGE USED BY IT AND IT MUST ALWAYS B E REMEMBERED THAT LANGUAGE IS AT BEST AN IMPERFECT INSTRUMENT FOR THE EXPRESSION OF HUMAN THOUGHT AND, AS POINTED OUT BY LORD DENNING, IT WOULD BE IDLE TO EXPECT EVERY STATUTORY PROVISIONS TO BE DRAFTED WITH DIVINE PRESCIENCE AND PERFECT CLARITY. WE CAN DO BETTER THAN REPEAT THE FAMOUS WORDS OF JUDGE LEARNED HAND WHEN HE SAID. THE ABOVE OBSERVATIONS OF HON'BLE JUDGES OF THE APEX COURT WAS REITERATED BY HON'BLE APEX COURT IN THE CASE OF KERALA STATE INDUSTRIAL CORPORATION, 259 ITR 51 (SC) HOLDING AS UNDER: - THAT THE FINANCE MINISTERS SPEECH CAN BE RELIED UPON TO THROW LIGHT ON THE OBJECT AND PURPOSE OF THE PARTICULAR PROVISIONS INTRODUCTION BY THE FINANCE BILL HAS BEEN RECOGNIZED BY THIS COURT IN K.P. VERGHESE VS ITO 1981), 131 ITR 59 7 (SC), AT 609. AGAIN IN THE CASE OF R & B FALCON (A) PVT. LTD VS CIT (2008) 301 ITR 309 (SC), IT WAS HELD THAT (PAGE 323): - RULES OF EXECUTIVE CONSTRUCTION IN A SITUATION OF THIS NATURE MAY ALSO BE APPLIED. WHERE A REPRESENTATION IS MADE BY THE MAKERS O F LEGISLATION AT THE TIME OF INTRODUCTION OF BILL OR CONSTRUCTION THEREUPON IS PUT BY THE EXECUTIVE UPON ITS COMING INTO FORCE, THE CARRIES GREAT WEIGHT. 1 3 . THE HON'BLE DELHI HIGH COURT IN ARJ SECURITY PRINTERS, 264 ITR 276 AND NEO POLLYPACK PVT LTD. 245 ITR 492 (DEL.) HELD THAT EVEN WHEN THE DOCTRINE OF RES JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS, WHERE A ISSUE HAS BEEN DECIDED CONSISTENTLY IN EARLIER ASSESSMENT YEARS IN PARTICULAR MANNER, THE SAME VIEW SHOULD PREVAIL IN SUBSEQUENT YEARS UN LESS THERE IS A MATERIAL CHANGE IN FACTS, MEANING THEREBY, THERE MUST BE MATERIAL CHANGE IN THE FACTS. SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 40 40 1 4 . THE INDORE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS OM PRAKASH SURI (SUPRA) HELD AS UNDER: - 3. WE HAVE CONSIDERED THE SUBMISSIONS PUT FORTH BY THE LEARNED SENIOR DR AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. BRIEF FACTS ARE THAT IN THE PAST THE ASSESSEE WAS ENGAGED IN ROAD BUILDING CONTRACTOR AND WAS DERIVING INCOME FROM CONTRACT RECEIPTS AS WELL AS FROM SALE OF GITTI AND DURING THE IMPU GNED YEAR, VENTURED INTO INVESTMENT IN SHARE MARKET. THE INCOME ARISING FROM F&O TRANSACTIONS AND DAILY TRADING IN SHARES (WITHOUT PHYSICAL DELIVERY) REFLECTED AS SPECULATIVE BUSINESS WHEREAS THE INCOME ON DELIVERY BASED TRANSACTIONS OF SALE AND PURCHASE OF SHARES, INCOME WAS SHOWN FROM CAPITAL GAINS. THE LEARNED AO CONSIDERED THE INCOME WHICH WAS BASED ON PURCHASE AND SALE OF SHARES AS BUSINESS INCOME ON THE GROUNDS AS NARRATED IN THE ASSESSMENT ORDER AS WELL AS AT PAGES 3 AND 4 OF THE APPELLATE ORDER. BROADLY, THE LEARNED AO WAS OF THE VIEW THAT THE INTENTION OF THE ASSESSEE SINCE BEGINNING WAS SALE OF SHARES AS TRADING ACTIVITIES, AS EVIDENT FROM AUDITED PROFIT AND LOSS ACCOUNT BY NOT SHOWING THE SAME AS SHORT TERM CAPITAL GAIN AND ALSO IN FORM 3CD TH E ASSESSEE HAS MENTIONED THE NATURE OF BUSINESS AS TRADING/DEALING IN SHARES/SECURITIES AND MUTUAL FUNDS. THE FREQUENCY OF TRANSACTIONS WAS ALSO CONSIDERED, CONSEQUENTLY HE TREATED THE AMOUNT OF RS.49,81,915/ - AS BUSINESS INCOME FROM SHARE TRADING. HOWEV ER, BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) THE BASIS OF ADDITIONS WAS EXPLAINED AS EVIDENT FROM PARA 3.1.1 ONWARDS. THE CRUX OF CLAIM OF THE ASSESSEE IS THAT IN THE AUDITED ACCOUNTS, THE SALE OF SHARES AMOUNTING TO RS. 9.43 CRORES IN WHIC H DELIVERY HAD BEEN TAKEN, STT WAS PAID AND THE SHARES WERE SOLD AFTER HOLDING FOR A FEW DAYS/FEW WEEKS. THE MUTUAL FUNDS OF RS. 2.91 LACS WERE SOLD AND WERE TREATED AS INCOME FROM SHORT TERM CAPITAL GAINS. BEFORE THE LEARNED COMMISSIONER OF INCOME TAX ( APPEALS) THE ASSESSEE ALSO FILED A DETAILED NOTE ON THE PURCHASE PROCESS FOR DELIVERY BASE SHARES, DETAILS OF DIVIDEND RECEIVED ON THE BASIS OF RELEVANT STATEMENTS BY PLACING RELIANCE ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF JM SH ARES & STOCK BROKERS V. JCIT DATED JANUARY, 2009. BRIEFLY, THE CLAIM OF THE ASSESSEE BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WAS THAT THE DELIVERY BASED TRANSACTIONS WERE MADE WITH AN INVESTMENT MOTIVE AND AS SUCH THE INCOME THEREFROM WAS IN THE NATURE OF SHORT TERM CAPITAL GAINS WHEREAS THE INCOME AROSE FROM F&O TRANSACTIONS AND DAILY TRADING IN SHARES WERE WITH THE BUSINESS MOTIVE WHICH WERE SHOWED AS BUSINESS INCOME ONLY WHICH WAS MAINLY THROUGH STOCK BROKER, ARIHANT CAPITAL MARKETS LIM ITED, REGISTERED WITH NSC, NSE AND BSE. IT IS ALSO SEEN THAT IN THE IMPUGNED ORDER THE BOARD CIRCULAR NO. 4/2007 DATED 15.6.2007 WHEREIN IT WAS EMPHASIZED THAT IT IS POSSIBLE FOR A TAX SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 41 41 PAYER TO HAVE TWO PORT FOLIOS I.E. AN INVESTMENT PORT FOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSET AND TRADING PORT FOLIO COMPRISING STOCK IN TRADE WHICH ARE TO BE TREATED AS TRADING ASSET, WAS CONSIDERED. THE BOARD FURTHER CLARIFIES THAT NO SINGLE PRINCIPLE WOULD BE DECISIVE AND THE TOTAL PROPOSIT ION NEEDS TO BE CONSIDERED. THE ASSESSEE HAS MAINTAINED ONLY ONE PORT FOLIO AND CLAIMED THAT TO BE AN INVESTMENT FOLIO. UNDISPUTEDLY, THE PERIOD OF HOLDING IS LESS THAN ONE YEAR, CONSEQUENTLY, THERE IS NO INFIRMITY IN HOLDING THAT THESE TRANSACTIONS WOUL D BE TREATED AS SHORT TERM CAPITAL GAIN ON WHICH THE APPLICABLE TAX IS @ 10% ONLY. IN VIEW OF THIS UNCONTROVERTED FACT, THERE IS NO MERIT IN THE APPEAL OF THE REVENUE AND THE SAME IS DISMISSED. ORD ER PRONOUNCED IN OPEN COURT ON 4 TH AUGUST, 2010. 1 5 . THE AFORESAID DECISION WAS AFFIRMED BY THE HON'BLE M.P. HIGH COURT AND REPORTED IN (2012) 19 ITJ 326 ( M.P) . THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SHANTILAL M JAIN VS ACIT VIDE ORDER DATED 27 - 04 - 2011 (ITA NO. 269/MUM/2010) HELD THAT DESPITE LARGE VOLUME OF SHARES TRANSACTIONS, THE ASSESSING OFFICER CANNOT IGNORE THE RULE OF CONSISTENCY TO TREAT THE GA INS ON SALE OF SHARES AS STCG. IN THAT CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING IN SHARES AND ALSO INVESTMENT IN SHARES AND SECURITIES OFFERED RS. 1.54 CRORES AS SHORT TERM CAPITAL GAIN AND RS. 2.91 CRORES FROM LONG TERM CAPITAL GAIN. THE LONG TERM CAPITAL GAIN WAS ACCEPTED WHEREAS SHORT TERM CAPITAL GAIN WAS HELD TO BE BUSINESS PROFIT. SINCE IN EARLIER ASSESSMENT YEARS THE CLAIM OF THE ASSESSEE WAS CONSISTENTLY ACCEPTED AS SHORT TERM CAPITAL GAIN, IT WAS HELD THAT THE RULE OF CONSISTEN CY AS PROPOUNDED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF GOPAL PUROHIT (SUPRA), IT IS FAIRLY APPLICABLE AND THE INCOME HAS TO BE TREATED AS SHORT TERM CAPITAL GAIN. IDENTICALLY IN THE CASE OF NAGINDAS P SETH (ITA SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 42 42 NO.961/MUM/2010) IT WAS HELD THAT DESPITE LARGE NUMBER OF TRANSACTIONS IN SHARES, THE PROFIT CAN BE ASSESSED AS CAPITAL GAINS UNDER THE FACTS OF THE CASE. THE CASE OF THE ASSESSEE IS FURTHER FORTIFIED BY THESE DECISIONS MORE SPECIFICALLY WHEN THE ASSESSEE HOLD S THE SHARES IN HIS BOOKS AS INVESTOR, NO INTEREST WAS PAID ON THE FUNDS . THE DECISION IN THE CASE OF JANAK S RANAWALA, 11 SOT 627 (MUM.) FURTHER SUPPORTS THE CASE OF THE ASSESSEE. LIKEWISE, THE DECISION FROM HON'BLE MADRAS HIGH COURT IN CIT VS N.S.S. INVESTMENT PVT LTD. 227 ITR 149 (MAD), CIT VS ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY, 82 ITR 526 (SC) SUPPORTS THE CASE OF THE ASSESSEE. IN THE PRESENT APPEAL, WE NOTE THAT THE ASSESSEE MADE INVESTMENT IN SHARES WITH INTENTION TO EARN DIVIDEND INCOME ON APPRECIATION OF PRICE OF SHARES. THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE WAS DOING BUSINESS. MORE SPECIFICALLY WHEN, THE ASSESSEE EITHER UTILISED HIS OWN FUNDS/ FAMILY FUNDS /ASSOCIATES FUNDS AND DID NOT PAY ANY INTEREST AND DEPICTED THE TRANSACTIONS IN SHARES UNDER INVE STMENT PORTFOLIO. DURING HEARING, IT WAS ALSO EXPLAINED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT ACCOUNTS WERE MAINTAINED BY THE ASSESSEE IN TWO SEPARATE CAPACITIES I.E. TRADER AND INVESTOR AND NEVER TREATED THE SAME AS HOLDINGS OF SHARES AS STOCK IN TRADE WHICH CLARIFIES THE INTENTION OF THE ASSESSEE. THIS ASSERTION WAS NOT CONTROVERTED BY THE REVENUE. 1 6 . THE BOARD CIRCULAR NO. 4.2007 DATED 15 - 06 - 207 ALSO EMPHASIZES THAT IT IS POSSIBLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS NAMELY, AN SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 43 43 INVESTMENT PORTFOLIO, COMPRISING OF SECURITIES, WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND TRADING PORTFOLIO COMPRISING OF STOCK IN TRADE WHICH ARE TO BE TREATED AS TRADE ASSETS. NO SINGLE PRINCIPLE WOULD BE DECISIVE AND THE FACT HAS TO BE CONSIDERED IN ENTIRETY . THE TOTALITY OF FACTS PLAINLY INDICATE THAT THE LD. FIRST APPELLATE AUTHORITY RIGHTLY DIRECTED THE ASSESSING OFFICER TO TREAT THE SHORT TERM CAPITAL GAIN AS EARNED FROM INVESTMENT IN SHARES. INSTRUCTION NO.1827 DATED 31 ST AUGUST, 1989 WAS SUPPLEMENTED BY CBDT CIRCULAR NO. F.NO.149/287/2005 - TPL [REPORTED IN 210 CTR 29 (ST.)], ADVISING THE ASSESSING OFFICERS THAT THE PRINCIPLES CONTAINED IN THE CIRCULAR SHOULD GUIDE THEM IN DETERMINING WHETHER, IN GIVEN CASES, THE SHARES ARE HELD BY THE ASSESSEE AS INVE STMENT (AND THEREFORE, GIVING RISE TO CAPITAL GAINS) OR STOCK - IN - TRADE (AND THEREFORE, GIVING RISE TO BUSINESS PROFIT) BY FURTHER OPINING THAT NO SINGLE PRINCIPLE WOULD BE DECISIVE AND TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSIDERED. IF THE NUMBER OF TRANSACTIONS ARE ANALYSED, WE NOTE THAT, IN A COMPUTER BASED TRADING SYSTEM/ E - FILING, THE FIGURES, BEING SPLIT UP, GIVE MISLEADING HIGH FIGURES, REFLECTING THE INDIVIDUAL COMPONENT OF THE TRANSACTION BUT REALLY, IF THESE FIGURES ARE SYNCHRONISED THEN CLEAR PICTURE OOZES OUT. THE ASSESSEE HAD ALSO EARNED DIVIDEND INCOME OF RS. 19,21,917/ - WHICH FURTHER FORTIFY ASSESSEES INTENTION OF INVESTING IN SHARES FOR EARNING FIX INCOME. 1 7 . THE CIT(A) AFTER APPLYING THE PROPOSITION LAID DOWN IN THE VARIOUS DECISIONS AS DISCUSSED ABOVE WITH RESPECT TO THE FACTS OF THE INSTANT SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 44 44 CASE AND ALSO KEEPING IN VIEW FREQUENCY AND CONTINUITY OF TRANSACTIONS, IT RECORDED CATEGORICAL FINDING TO THE EFFECT THAT PROFIT EARNED IN RESPECT OF FOUR COMPANIES AS DI SCUSSED ABOVE AMOUNTING TO RS. 18,41,027/ - WAS LIABLE TO BE TAXED AS BUSINESS INCOME RATHER THAN CAPITAL GAIN. HOWEVER, IN RESPECT TO BALANCE OF TRANSACTIONS, THE CIT(A) HAS CATEGORICALLY RECORDED A FINDING THAT THESE WERE DELIVERY BASED TRANSACTIONS, THEREFORE, KEEPING IN VIEW THE FREQUENCY, CONTINUITY AND VOLUME OF TRANSACTIONS, PROFIT AROSE THEREF ROM ARE LIABLE TO BE TAXED AS SHORT TERM OR LONG TERM CAPITAL GAINS DEPENDING ON THE PERIOD OF HOLDING. THE FINDINGS RECORDED BY THE CIT(A) ARE AS PER MATERIAL ON RECORD , T HEREFORE, THE SAME DO NOT REQUIRE ANY INTERFERENCE. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A), WHICH IS BEING UPHELD. 1 8 . IN THE RESULT, BOTH THE APPEAL S FILED BY THE ASSESSEE AS WELL AS REVENUE ARE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 21 ST FEBRUARY .2014. 21 ST FEB ,2014 SD/ - SD/ - ( ) ( AMIT SHUKLA ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED 21 /0 2 /2014 PKM , PS SHRI MOHAN K.JAIN, MUMBAI I.T.A.NO. 1033 & 748/MUM/2010 A.Y.2006 - 07 45 45 COPY OF THE ORDER FORWARDED TO : / BY ORDER, (ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE ASSESSEE 2. / THE RESPONDENT. 3. / THE CIT(A) - X, MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//