ACIT 13(2), MUMBAI V. DILIP V BHATIA, MUMBAI

ITA 777/MUM/2010

• Counselvise Citation: 77719914 RSA 2010
• Duration Of Justice: 2 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 27-03-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 02-02-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: C G K NAIR
• Assessee Lawyers: H N MOTIWALA
• Keywords: Business income; Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI BEFORE SHRI B.R. MITTAL, J.M AND SHRI RAJENDRA SING H, A.M. ITA NO. : 777/MUM/2010 ASSESSMENT YEAR : 2006-07 ASSTT. COMMISSIONER OF INCOME TAX -13(2) 477, AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. DILIP V. BHATIA 223, LOHA BHAVAN P.DMELLO ROAD CARNAC BUNDER MUMBAI-400 009. PAN NO: AELPB 7096 J (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI C.G.K. NAIR RESPONDENT BY : SHRI H.N. MOTIWALA DATE OF HEARING : 27.3.2012 DATE OF PRONOUNCEMENT : 10.4.2012 O R D E R PER RAJENDRA SINGH (AM) THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDE R DATED 18.11.2009 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-07. T HE ONLY DISPUTE RAISED IS REGARDING NATURE OF INCOME EARNED BY THE ASSESSEE FROM SALE AND PURCHASE OF SHARES I.E. WHETHER IT SHOULD B E ASSESSED AS BUSINESS INCOME OR CAPITAL GAIN. ITA NO.777/M/2010 A.Y.06-07 2 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WHO WAS ENGAGE D IN THE BUSINESS OF TRADING IN IRON AND STEEL, HAD DECLARED SHOR T TERM CAPITAL GAINS OF RS.35,26,233/- FROM SALE AND PURCHASE OF SHARES I N ADDITION TO INCOME FROM HOUSE PROPERTY, DERIVATIVE TRADING AND SPECULATION. CONSIDERING THE LARGE NUMBER OF SCRIPS IN WHICH THE ASSE SSEE HAD DEALT IN AND THE VOLUME OF TRANSACTIONS, THE AO ASKED THE ASSESSE E TO EXPLAIN AS TO WHY THE SHARE TRANSACTIONS SHOULD NOT BE TREATED AS TRADING ACTIVITY. THE ASSESSEE EXPLAINED THAT HE WAS AN I NVESTOR IN SHARES AND PURCHASES HAD BEEN SHOWN AS INVESTMENT IN THE B OOKS OF ACCOUNTS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD TAKEN DELIVERY OF SHARES IN ALL CASES WHERE CAPITAL GAIN HAD BEEN DECLARE D. THE ASSESSEE HAD DECLARED SPECULATION INCOME/LOSS IN CASES WHERE NO DELIVERY HAD BEEN TAKEN. THE AO WAS HOWEVER NOT SATI SFIED BY THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT THE A SSESSEE WAS REGULARLY PURCHASING AND SELLING SHARES IN THE SECURITY MA RKET. IN MANY CASES, THE SHARES PURCHASED HAD BEEN SOLD WITHIN A FE W DAYS. THE ASSESSEE HAD RECEIVED ONLY NOMINAL DIVIDEND INCOME OF RS.1,38,158/- COMPARED TO THE VOLUME OF PURCHASES MADE A ND PROFIT MADE FROM PURCHASES AND SALES. IN CASE, THE OBJECT OF TH E ASSESSEE WAS TO PURCHASE THE SHARES AS INVESTMENT TO EARN DIVIDEND, THE ASSESSEE WOULD NOT HAVE SOLD SHARES WITHIN FEW DAYS OF PURCH ASE AT NOMINAL PROFIT IN MANY CASES. CONSIDERING THE HIGH FRE QUENCY, LOW ITA NO.777/M/2010 A.Y.06-07 3 HOLDING PERIOD, HUGE VOLUME OF TRANSACTIONS, AO CONCLUD ED THAT THE ASSESSEE WAS TRADING IN SHARES AND ACCORDINGLY HE TREATED T HE SHORT TERM CAPITAL GAIN OF RS.35,26,233/- DECLARED BY THE ASSE SSEE AS BUSINESS INCOME. 3. THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED B EFORE CIT(A) THAT THE ASSESSEE WAS HOLDING THE SECURITIES AS INV ESTMENT WHICH HAD ALSO BEEN SHOWN AS INVESTMENT IN THE BOOKS OF ACCOUNT. ASSESSEE HAD MADE PURCHASES FROM OWN FUNDS AND NO BORROWIN GS WERE INVOLVED. THE ASSESSEE HAD TAKEN DELIVERY IN ALL CASES AND SECURITY TRANSACTION TAX (STT) HAD ALSO BEEN PAID. I T WAS ACCORDINGLY URGED THAT THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CIT(A) OBSERVED THAT FREQUENCY AND VOLUME OF TRANSACTIONS WAS NOT THE DECIDI NG FACTOR ABOUT THE NATURE OF TRANSACTIONS. IT WAS ALSO OBSERVED B Y HIM THAT THE ASSESSEE HAD DECLARED THE PURCHASES AS INVESTMENTS. HE, THERE FORE, HELD THAT THE CLAIM OF THE ASSESSEE THAT THE INCOME WAS SH ORT TERM CAPITAL GAINS IN CASES WHERE DELIVERY OF SHARES HAD BEEN TAKEN HAS TO BE ACCEPTED. CIT(A) PLACED RELIANCE ON THE DECISION OF T HE TRIBUNAL IN CASE OF GOPAL PUROHIT VS. CIT (29 SOT 171) AND SOME OTH ER DECISIONS IN SUPPORT OF THE FINDING. CIT(A) ACCORDINGLY DIRECTED THE AO TO ACCEPT ITA NO.777/M/2010 A.Y.06-07 4 THE INCOME DECLARED AS SHORT TERM CAPITAL GAIN. AGGRIEVE D BY THE SAID DECISION, REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 4. BEFORE US THE LD. DR APPEARING FOR THE REVENUE ASSA ILED THE ORDER OF CIT(A). IT WAS ARGUED THAT THE ASSESSEE WAS REG ULARLY PURCHASING AND SELLING SHARES IN LARGE NUMBER OF SCRIPS AND IN SEVERAL CASES THERE WERE REPETITIVE PURCHASES AND SALE IN THE SAME SCRIP. IN THIS CONTEXT, HE REFERRED TO DATE-WISE PURCHASE AND SALE OF TRANSACTIONS PLACED AT PAGE 11 TO 25 OF THE PAPER BOOK. FROM THE DETAILS, HE POINTED OUT THAT THERE WERE MANY CASES WHE RE SHARES HAD BEEN SOLD WITHIN A FEW DAYS OF PURCHASE AND LARGE NUMBE R OF CASES WHERE THESE WERE SOLD WITHIN A MONTH. IT WAS POINTED OUT THAT THESE DETAILS CLEARLY SHOWED THAT THE ASSESSEE WAS REGULARLY TRA DING IN SHARES AND IT WAS NOT AN INVESTOR. IT WAS FURTHER POINT ED OUT THAT ENTRIES IN THE BOOKS OF ACCOUNT WERE NOT CONCLUSIVE AND CU MULATIVE EFFECT OF ALL FACTORS HAD TO BE SEEN TO UNDERSTAND THE TRUE NATURE OF TRANSACTIONS. 4.1 THE LD. AR FOR THE ASSESSEE ON THE OTHER HAND ARGUE D THAT THE ASSESSEE WAS AN INVESTOR IN SHARES AND SHARES WERE ALWAYS SHOW N AS INVESTMENT IN THE BOOKS OF ACCOUNT IN THE PERSONAL BALAN CE SHEET OF THE ASSESSEE WHICH WAS SEPARATELY PREPARED IN ADDITION TO THE TRADING BUSINESS ACCOUNT. IT WAS ALSO SUBMITTED THAT CAPITAL GAIN DECLARED BY ITA NO.777/M/2010 A.Y.06-07 5 THE ASSESSEE IN THE EARLIER YEARS HAD BEEN ACCEPTED. IT W AS ACCEPTED IN ASSESSMENT YEAR 2003-04 IN SCRUTINY ASSESSMENT UNDER SECTION 143(3) AND IN ASSESSMENT YEARS 2004-05 AND 2005-06, IT W AS ACCEPTED UNDER SECTION 143(1). IT WAS ALSO POINTED OUT TH AT IN ASSESSMENT YEAR 2007-08, INVESTMENTS WERE ACCEPTED UNDER SECT ION 143(3). IT WAS ACCORDINGLY URGED THAT THE CLAIM OF THE ASSESSEE SHOULD BE ACCEPTED. RELIANCE WAS PLACED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT VS. CIT (SUPRA). IT WAS POINTED OUT THAT THE ORDER OF THE TRIBUNAL WAS UPHELD BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. GOPAL PUROHIT (228 ITR 582). I T WAS FURTHER SUBMITTED THAT SLP FILED AGAINST THE SAID JUDGMENT HAS BEEN DISMISSED BY THE HON'BLE SUPREME COURT AS REPORTED IN (336 ITR 287). THE LD. AR ALSO REFERRED TO THE DECISION OF THE TRIBUNAL IN T HE CASE OF MAHENDRA C. SHAH VS. ACIT IN ITA NO.6289/M/2008 DATE D 18.5.2011 AND ANOTHER DECISION OF THE TRIBUNAL IN THE CASE OF HI TESH SATISHCHANDRA JOSHI VS. JCIT IN ITA NO.6497/M/2009 15. 7.2011 DATED IN SUPPORT OF THE CASE. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVA L CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING NATURE O F INCOME FROM SHARE TRANSACTIONS ENTERED INTO BY THE ASSESSEE. THE ISSUE WH ETHER THE SHARE TRANSACTIONS IN A PARTICULAR CASE SHOULD BE TREATED AS INVESTMENT ACTIVITY OR TRADING ACTIVITY HAS BEEN HIGHLY A DEBATAB LE ISSUE. THERE ARE ITA NO.777/M/2010 A.Y.06-07 6 DECISIONS OF THE TRIBUNAL ON BOTH THE SIDES. EACH CASE WILL DEPEND ON ITS OWN FACTS AND CIRCUMSTANCES. THERE ARE VARIOUS FACTORS SUCH AS FREQUENCY, VOLUME, ENTRY IN THE BOOKS OF ACCOUNTS, NATUR E OF FUNDS USED, HOLDING PERIOD ETC. WHICH ARE RELEVANT IN DECIDIN G THE TRUE NATURE OF TRANSACTIONS AND NO SINGLE FACTOR IS CONCLUSIVE. THE MOST IMPORTANT FACTOR IS THE INTENTION OF THE ASSESSEE AT THE TIME OF P URCHASE WHICH HAS TO BE GATHERED FROM THE ACTUAL CONDUCT OF THE ASSESSE E WHILE DEALING WITH THE SHARES SUBSEQUENTLY AND NOT ONLY ON T HE BASIS OF ENTRY IN THE BOOKS OF ACCOUNT OR THE OBJECTS IN THE MEMO RANDUM OF ASSOCIATION. THIS VIEW IS SUPPORTED BY THE JUDGMENT OF T HE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MADANGOPAL RADHE YLAL (73 ITR 642). THE ACTUAL CONDUCT HAS TO BE EVALUATED BY ANALYZ ING THE HOLDING PERIOD ETC. AN INVESTOR MAKES PURCHASES WITH LONG TERM G OAL OF EARNING INCOME FROM THE INVESTMENT AND HE IS NOT TEMPT ED TO SELL THE SHARES ON EVERY RISE AND FALL IN THE MARKET WHICH ARE T HE ATTRIBUTES OF A TRADER. SINCE INCOME FROM INVESTMENT IN SHARES WHICH I S IN THE FORM OF DIVIDEND IS RECEIVED ANNUALLY, NORMALLY AN INVESTOR IS EXPECTED TO HOLD THE SHARES FOR MORE THAN A YEAR. HOWEVER THERE M AY BE SITUATIONS WHEN THE INVESTOR MAY ALSO SELL THE SHARES AFTER SHORT H OLDING IN ORDER TO RESHUFFLE PORTFOLIO WHEN PRICES ARE FALLING OR TO E NCASH INVESTMENT IN CASE OF EXCEPTIONAL GAIN OR FOR SOME PERSONAL EXIGENCIES. EACH CASE IS ITA NO.777/M/2010 A.Y.06-07 7 REQUIRED TO BE EXAMINED CAREFULLY TO ASCERTAIN THE TRU E NATURE OF TRANSACTIONS. 5.1 IN THIS CASE, THE DETAILS OF SHARE TRANSACTIONS, HOLDI NG PERIOD-WISE HAVE BEEN GIVEN BY THE ASSESSEE AT PAGE-11 T O 25 OF THE PAPER BOOK. A PERUSAL OF THESE TRANSACTIONS SHOWS THAT T HE ASSESSEE HAD DEALT IN PURCHASE OF LARGE NUMBER OF SCRIPS TOTALING TO 269. FURTHER, THERE ARE SEVERAL TRANSACTIONS IN THE SAME SCRIP FOR E.G., THERE ARE 89 TRANSACTIONS OF SALES AND PURCHASES IN THE SCRIPS OF TC S AND 33 TRANSACTIONS IN TATA STEEL. SIMILARLY THERE ARE MANY OTHER SCRIPS IN WHICH THERE ARE MULTIPLE TRANSACTIONS OF PURCHASE AND SA LE. CONSIDERING THESE FACTORS, THE TOTAL NUMBER OF TRANSACTIO NS DURING THE YEAR ARE VERY LARGE RUNNING INTO 15 PAGES. MOST OF TH E SHARES HAVE BEEN SOLD WITHIN A PERIOD OF ONE MONTH AND IN MANY CA SES WITHIN A FEW DAYS. THE ASSESSEE HAS BEEN REGULARLY PURCHASING AND SELLI NG SHARES WITH MULTIPLE TRANSACTIONS OF PURCHASE AND SALE IN THE SA ME SCRIP. NO SHARE HAS BEEN HELD FOR MORE THAN A YEAR. IN FACT NUM BER OF SALES AFTER SIX MONTHS ARE SUBSTANTIALLY LESS COMPARED TO SHARES SO LD WITHIN SHORT PERIOD. THE PATTERN OF TRANSACTIONS CLEARLY SHOWS T HAT THE ASSESSEE IS TRADING IN SHARES AND IS NOT AN INVESTOR. AN INV ESTOR WOULD LIKE TO HOLD THE SHARES FOR LONGER PERIOD SO AS TO EARN DIVIDEND AND IS NOT TEMPTED TO SELL THE SHARES ON EVERY SMALL RISE. THE FREQUENCY AND VOLUME IN THIS CASE IS VERY HIGH MAKING THE INTENTION VERY CLEAR THAT ITA NO.777/M/2010 A.Y.06-07 8 THE ASSESSEE WAS TRADING IN SHARES. THERE ARE ALSO REPETI TIVE TRANSACTIONS IN THE SAME SCRIPS. THE DIVIDEND EARNED IS ONL Y RS.1,38,158/- WHICH AS A PERCENTAGE OF TOTAL PURCHASES D URING THE YEAR OF RS.3.48 CRORES IS MUCH LESS THAN 0.5%. NO INVESTOR WILL MAKE INVESTMENT FOR SUCH SMALL RETURN. THE DIVIDEND INCOME IS ONLY INCIDENTAL BECAUSE EVEN IN CASE OF TRADING IN SHARES ASSESSEE WIIL BE ENTITLED TO DIVIDEND IN CASES IN WHICH SHARES REMAINED UN SOLD ON THE RECORD DATE. 5.2 THE LD. AR FOR THE ASSESSEE HAS RELIED ON THE DECI SION OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT (29 SOT 171 ) TO ARGUE THAT INCOME FROM ALL DELIVERY BASED TRANSACTIONS HAS TO BE ASSESSE D AS INCOME AS HELD BY THE TRIBUNAL IN THE SAID CASE. WE HAV E CAREFULLY PERUSED THE ORDER OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT (SUPRA), BUT WE FIND THAT THERE IS NO UNIVERSAL FINDING IN THA T CASE THAT ALL DELIVERY BASED TRANSACTIONS HAVE TO BE TREATED AS INVESTM ENT. IT IS PERTINENT TO NOTE THAT THE TRIBUNAL IN CASE OF GOPAL PUROHIT (SUPRA), HAD DECIDED THE CASE FOLLOWING THE DECISION OF TRIBUNAL IN CASE OF SARNATH INFRASTRUCTURE PVT. LTD VS. ACIT (2009) 120 T TJ 216 HOLDING THAT FACTS IN THE CASE OF SARNATH INFRASTRUCTURE PVT. LT D (SUPRA), WERE IDENTICAL. HOWEVER, IT IS NOTED THAT IN CASE OF SARNATH INFRASTRUCTURE PVT. LTD (SUPRA), THE SHARES SOLD OUT OF INVESTMENT ACCOUN T HAD BEEN HELD FOR 2-3 YEARS AND REVENUE COULD NOT SHOW ANY SHARE S SOLD WHICH ITA NO.777/M/2010 A.Y.06-07 9 HAD BEEN PURCHASED DURING THE YEAR OR IN THE IMMEDIAT ELY PRECEDING YEAR. THEREFORE, ONLY IN RESPECT OF SUCH CASES, THE DECISION IN CASE OF GOPAL PUROHIT (SUPRA), COULD BE APPLIED. THE HONBLE HIGH COURT OF BOMBAY HAD UPHELD THE DECISION OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT (SUPRA), ON THE GROUND THAT THERE WAS NO SUBSTA NTIAL QUESTION OF LAW INVOLVED. EVEN BEFORE HONBLE HIGH COURT, THE RE WAS NO QUESTION RAISED THAT ALL DELIVERY BASED TRANSACTIONS HAVE ALWAYS TO BE TREATED AS INVESTMENT ACTIVITY. THUS THE DECISION OF THE TRIBUNAL AS WELL AS THE HONBLE HIGH COURT IN CASE OF GOPAL PUROHIT ( SUPRA), CANNOT BE CONSIDERED AS A PRECEDENT FOR THE PROPOSITION THAT AL L DELIVERY BASED SHARES HAVE TO BE TREATED AS INVESTMENT ACTIVITY. THE ASSESSEE CAN ALSO BE A TRADER IN CASE OF DELIVERY BASED PURCHASES AND SALES, WHICH IS A NORMAL FEATURE OF ANY TRADING ACTIVITY. THEREFOR E, IN OUR VIEW RELIANCE PLACED BY THE LD. AR ON THE DECISION IN THE CAS E OF GOPAL PUROHIT IS MISPLACED. EACH CASE HAS TO BE DECIDED BASED ON ITS OWN FACTS. CONSIDERING THE FACTS OF THIS CASE, WE HOLD THAT T HE SHARE TRANSACTIONS FROM WHICH THE ASSESSEE HAS SHOWN SHORT TERM CAPIT AL GAIN WERE OF THE NATURE OF TRADING ACTIVITY OF THE A SSESSEE AND ACCORDINGLY WE SET ASIDE THE ORDER OF THE CIT(A) AND UP HOLD THE ORDER OF AO IN THIS RESPECT. 5.3 THE ASSESSEE HAS ALSO PLACED RELIANCE ON THE DECISION OF TH E TRIBUNAL IN THE CASE OF MAHENDRA C. SHAH VS. ACIT (SU PRA), AND IN ITA NO.777/M/2010 A.Y.06-07 10 CASE OF HITESH SATISHCHANDRA JOSHI VS. JCIT (SUPRA). TH ESE CASES ARE ALSO DISTINGUISHABLE. IN THESE CASES, ASSESSEES HAD SOLD MANY S HARES AFTER HOLDING FOR MORE THAN ONE YEAR AND LONG TERM CAPITAL GAIN HAD ALSO BEEN DECLARED. IN CASE OF THE ASSESSEE, NO SHARES OF TH E ASSESSEE HAD BEEN HELD FOR MORE THAN A YEAR AND SHARES HAVE MO STLY BEEN SOLD WITHIN A PERIOD OF ONE MONTH. THESE CASES ARE, THEREF ORE, OF NO HELP TO THE ASSESSEE. THE LD. AR ALSO SUBMITTED THAT IN ASSESSEE S CASE IN ASSESSMENT YEAR 2003-04 AND IN AGAIN IN ASSESSMENT YEAR 200 7-08 SHARES HAD BEEN ACCEPTED AS INVESTMENT ACTIVITY AFTER SCRUT INY UNDER SECTION 143(3). WE HAVE PERUSED THE ORDERS OF AO, PLACE D ON RECORD. WE FIND THAT THE AO HAD NOT MADE ANY EXAMINATION OF THE NATURE OF THE TRANSACTIONS AND SIMPLY ACCEPTED THE INCOME DECLARE D BY THE ASSESSEE AS CAPITAL GAIN. THE AO HAS NOT PLACED ON RECORD T HE FREQUENCY, VOLUME AND HOLDING PERIOD WISE DETAILS OF SH ARES AND THEREFORE, NO COMPARISON IS POSSIBLE. THE NATURE OF TR ANSACTION VARIES FROM YEAR TO YEAR AND IT HAS TO BE DECIDED BASED ON TH E FACTS AVAILABLE FOR A PARTICULAR YEAR. CONSIDERING THE FACTS OF THE PRE SENT ASSESSMENT YEAR, WE HAVE NO DOUBT, THAT THE SHARE TRANSACTIONS FR OM WHICH ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN WERE OF THE N ATURE OF TRADING ACTIVITY AND INCOME HAS BEEN RIGHTLY TREATED BY AO AS BUSINESS INCOME. THE ORDER OF CIT(A) ACCEPTING THE CLAIM OF THE ASSESSEE CAN ITA NO.777/M/2010 A.Y.06-07 11 NOT THEREFORE, BE SUSTAINED. WE ACCORDINGLY SET ASIDE T HE ORDER OF CIT(A) AND ALLOW THE APPEAL OF THE REVENUE. 6. IN THE RESULT APPEAL OF THE REVENUE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 10.4.2012. SD/- SD/- ( B.R. MITTAL ) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 10.4.2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.